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Markups and Margins – What is the Difference?

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Markups and Margins – What is the Difference?

Markups and Margins – What is the Difference?

A common misunderstanding that business and employees encounter is the difference between markups and margins. This is part of the costing of goods and services, and are not the same.

We usually start with a cost base of quantities for materials and labor, let’s say $1000. If we markup we add to the cost, let’s say 30%, then $300 is added and the sell price is $1300. But the $300 (the markup) is actually  a margin of 23% of $1300 ((300/1300) x 100), therefore the 30% margin is not achieved.

So if a manager says the margin target is 30%, just adding 30% to the cost is incorrect.

Working backwards from the final sale price to the cost price:

To show 30% margin on $1300 sell price, the result  is $390 (30% is 0.3 times $1300 gives $390).

The $390 from $1300 leaves $910 cost price to obtain a 30% margin.

$390 is 42.8% of $910.

(The calculation to achieve 30% margin is $x x 1.428 = $x)

So if costs are $910 the calculation to achieve 30% margin is $910 x 1.428 = $1299.48, round up to $1300.

If costs are $1000 the calculation to achieve 30% margin is $1000 x 1.428 = $1428.00.

Many businesses wonder why they don’t get the profit they expect, and sometimes this is the reason. So check your figures and see if your margins and markups are what you were expecting.

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Author: accountkeepingplus

Administration, bookkeeping and compliance for small business, Training, trouble-shooting, or we can do the books and payroll for you! Self Managed Superannuation Fund Service Provider, free support MYOB Certified Consultant, Reckon/QuickBooks Professional Partner.

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