How to Calculate Gross Profit on Operations in Accounting

Costs of product manufacture are called the "Cost of Goods Sold" in accounting terminology.

Gross profit is calculated not on company operations, but using the direct costs involved in creating the product. These entail all production expenses for a manufacturing firm or all direct project expenses for a company that provides a service. Gross profit is arrived at by a simple calculation. Operating profit is the result of subtracting overhead expenses from gross profit.

Instructions

1. Gather all the necessary managerial reports. Add up the "Cost of Goods Sold," which is the costs associated with manufacturing or readying the company's product for sale. This includes product acquisition if the company is a retailer or raw materials if the company is a manufacturer. Other costs affiliated directly with the Cost of Goods Sold include direct labor costs to assemble or create the product and any ancillary costs, such as freight or packaging.

2. Add up all the gross sales and income for the period or generate a report from the company's accounting software that lists the gross income for the period.

3. Take the gross sales and income for the period and subtract the Cost of Goods Sold. The result is the gross profit for the company. The formula is Gross Sales - Cost of Goods Sold = Gross Profit.

4. Obtain the operating profit by taking the gross profit of the company and subtracting all selling, general and administrative expenses from the gross profit. Selling, general and administrative expenses are often referred to as overhead or operating expenses. The formula is: Gross Profit - SG&A = Operating Profit. To obtain net profit, add in interest income and expense and subtract any income tax.

References

• AccountingCoach; What Is The Difference Between Gross Margin And Contribution Margin?; Harold Avercamp
• AccountingCoach; Inventory and Cost of Goods Sold; Harold Avercamp
• SEC.gov: Beginner's Guide to Financial Statements