What Are Margin and Markup?
If you are a business owner who does not know accounting well, you may outsource your accounting tasks to save your time and ensure compliance (Also see Types of Audit – Compliance Audit) with the applicable standards. However, this does not mean that you do not need to understand the financial statements that the accountants in an accounting firm in Johor Bahru have generated for you. To understand the financial position of your company, you need to understand what those statements are trying to tell you. Hence, in this article, we will have a look at two important accounting terms that are related to profits (Also see Are Revenue and Profit the Same?), which are margin and markup.
When one expresses the profit in terms of the percentage of the sale, it is known as the profit margin. Contrarily, when one expresses the profit in terms of cost (Also see Introduction to Cost Accounting), it is known as the markup. Margin is the difference between the cost price and the selling price of a product, and it shows the percentage of profit to the selling price of a product or service. Markup, on the other hand, is the amount of the cost of the product that the seller has increased for him to cover the expenses and profit for him to calculate the product’s selling price.
Generally, you will use margin (Also see An Overview of Gross Margin) when you know the cost price and the selling price of a certain product or service, and you would like to know the profit that you have made on a transaction. As against, markup are the costs that you add on the total cost of production that you have incurred to cover the overheads as well as profit. These amounts may include taxes (Also see Types of Audit – Tax Audit), interests, material, labour and so on.
If you still feel confused between them, let us have a look at their respective formulas:
- To calculate margin, you need to minus the cost of a product or services from its selling price. Then, divide the resulting amount by its selling price.
- To calculate markup, you need to minus the cost of a product or services from its selling price too. The different thing is that you should divide the resulting amount by the cost.
Most of the time, the margin of a product or a service is the seller’s perspective of determining the profit earned. Contrarily, markup is often the buyer’s perspective of the profit that a seller has earned. One more thing to note is that the percentage of margin would always be smaller than the percentage of markup. This is because the margin is calculated at the selling price, and the selling price would always be higher than the cost price under normal conditions.