Direct Cost

Direct costs are those that are directly tied to manufacturing, product production, and service providing. It varies with sales and may be traced back to a particular sales unit.

There are 3 types of direct costs which are:
1) cost of sales (Cost of Sales, COS)
2) cost of goods sold (Cost of Good Sold, COGS)
3) variable costs (Variable Cost)

Example:
1) raw materials
2) packaging material
3) labels
4) merchandise/purchase

Indirect Cost

Indirect costs are those that are not directly tied to the manufacture of goods or the delivery of services. It is not affected by sales and cannot be ascribed to a particular sales unit.

There are 2 types of direct costs which are:
1) Overhead Expenses
2) Fixed Cost

Example:
1) Office rent
2) Fixed monthly salary
3) Business license
4) Electricity and water bills

Gross Profit

When sales or revenue are subtracted from direct costs, gross profit is produced. Sales that exceed direct expenses result in a gross profit, whereas direct costs that exceed sales result in a big loss. Gross profit demonstrates the effectiveness of the commercial activity. High gross profit is frequently the result of two (2) circumstances:

High sales or income - demonstrates that the company's sales staff or sales department collaborated to fulfill their jobs successfully and well. Furthermore, the given items or services are in great demand and favorably welcomed by customers. However, don't be deceived by increasing sales due to higher pricing when sales units remain the same or decrease.

Low cost of sales - as a result of well-managed direct and indirect costs. Lower expenses imply a higher gross profit margin even if the selling price stays same.

Net Profit

Net profit is determined after deducting indirect costs from gross profit. Increased net profit demonstrates a company's managerial efficiency. Sales have little effect on indirect expenses.

Tips: Identify the costs that provide the biggest percentage (%) to the business and aim to keep those costs from rising further.

Margin

Margin is a financial or accounting ratio used to evaluate the performance of a business.
- How much do you get for each penny ($) you earn?
- How efficient is your company for every penny ($) spent?

Types of Margin

Margin Calculation Formula

Sales (S): Sales
Gross Margin (GM): Percentage of Gross Profit divided by Sales
Gross Profit (GP): Difference between Sales and Direct Cost

Stage of Margin Calculation

Note: MK stands for "Margin Kasar" and Margin

Margin on Each Sales Unit: The calculation of a product or service's margin on each sales unit.

Overall Business Margin: The total business margin is calculated.

Break-Even Point

The break-even point is a figure that all businesses must understand. What is your company's break-even point?

Break-even is the minimal amount of cents ($) of sales that a business must accomplish in order to be able to cover operational costs and the costs of procuring materials for items produced in a given time. It is often represented in cents ($) of sales and can be convertible to different denominators such as quantity sold, transaction volume, number of customers, number of days, and so on.

Break-Even Calculation Formula

Break Even (BE): Break Even
Indirect Cost (IC): Total Indirect Costs of a business in a given period
Margin: The overall margin of the business (all products or services sold)

Note: BE is the bare minimum (threshold) that your business must achieve every month in order to reimburse all direct and indirect expenditures.

Break-Even Plus

Break-even plus is when the minimum sales target is calculated with the net profit.

Break-Even Plus Formula

Break Even Plus (BE+): Break Even Plus
Indirect Cost (IC): Total Indirect Costs of a business in a given period
Margin: The overall margin of the business (all products or services sold)
% Net Profit: % Your target net profit