Gross Margin
Gross margin is the percentage of revenue remaining after subtracting cost of goods sold (COGS), calculated as (Revenue - COGS) / Revenue x 100. In manufacturing and supply chain, it represents the value left after direct product costs such as raw materials, direct labor, and allocated manufacturing overhead are recognized against sales. It measures the margin available to cover indirect expenses like distribution, engineering, sales, and administration.
On the shop floor, gross margin acts as a real-time report card for production profitability. A manufacturing run's margin only holds up when direct material consumption, labor, scrap, rework, and allocated overhead are correctly loaded into unit cost. In warehousing, margin reveals whether handling, receiving, and storage decisions are quietly inflating landed costs through damage, obsolescence, or mis-picks that later become write-offs. Raw material tracking depends on lot-level cost accuracy: supplier price, inbound freight, duties, inspection, and yield loss must be captured at receipt. Procurement teams compare supplier price reductions and freight consolidation against quality and lead-time risk to see whether margin improves. Inventory managers rely on accurate BOM usage, backflushing, and standard cost updates; any variance in issues or valuation distorts COGS and margin. Operations monitor gross margin by SKU, customer, plant, and period to spot mix shifts, scrap spikes, or discounting that erode contribution before they become systemic.
Is gross margin the same as gross profit?
No. Gross profit is the dollar amount Revenue minus COGS, while gross margin is that amount expressed as a percentage of revenue. They represent the same relationship, but gross profit is a currency figure and gross margin is a ratio.
Does gross margin include operating expenses such as rent and SG&A?
No. Gross margin stops after direct product costs are subtracted from revenue. It does not include rent, selling, general, administrative, or marketing expenses; those are covered by the gross margin result rather than deducted within it.
Why does landed cost matter when calculating gross margin?
Landed cost includes inbound freight, duties, inspection, and other charges directly tied to material shipments. If these costs are not captured at receipt, COGS is understated and gross margin is overstated, distorting true product profitability.