Gross profit on sales refers to the amount of money that a business has made without figuring in costs such as taxes and various other operating expenses. The only cost that is typically figured in when calculating gross profit is the amount of money that was spent on the goods that were sold. This cost of goods sold (COGS) figure can be calculated differently depending on what type of business it is. The gross profit on sales figure can then be used to calculate net profits by subtracting all of the other operating expenses associated with the business.
When determining how much money a business has made over any given period of time, a number of different figures can be used. The initial figure is typically referred to as net sales. This number represents the total amount of money that the business took in, and it can be used to figure gross sales by subtracting the COGS. Net profit is typically the final figure, as it is determined by subtracting all operating expenses from the gross sales number. Each of these figures has its own use in the field of accounting and the figuring of sales and profits for taxation, earnings statements, and other purposes.
The way that gross profit on sales is determined can differ depending on the business involved, since the COGS figure is typically arrived at differently for manufacturing and merchandising businesses. Each of these businesses has its own unique costs in addition to some common ones. The COGS can be figured based on either the first in first out (FIFO), average cost, or specific identification method.
When figuring the gross profit on sales for a manufacturing business, a number of different factors are typically considered. The COGS for a manufacturer usually includes production labor and raw materials. Any business overhead that can be associated with the production process is usually figured into the COGS. This often includes salaries and benefits for the employees that produce the goods and also any supporting factory workers, rent or interest paid on production space, and the costs of maintaining or purchasing equipment.
The gross profit on sales for merchandising businesses is typically figured differently, since these businesses purchase inventory rather than produce it. A major cost typically associated with these businesses is wrapped up in the actual acquisition of the products. Other costs can include sales and use taxes that are not passed on to consumers, as well as any customs duties. Both types of businesses typically have warehousing or inventory costs that are figured into the gross profit on sales.