Markup is the dollar amount, or can be stated as markup percentage, on the cost of an item. Markup is most commonly used when discussing inventory formulas. It frequently gets misused in discussing margin which is a function of sales.
All hard costs are directly assignable to a job. These costs are most often tangible in nature, but there are many intangible costs that can be directly assigned to the job. Thus some intangible costs are ‘Hard’ costs. A contractor must understand the difference between hard and soft costs in order to properly markup assignable costs to determine the final sales price of the project built.
Markup has a very simple definition, it is the amount added onto costs to create a sales price. Notice something really important with that definition, it does not define profit. It merely defines how much to charge over costs so you can make a profit.
The difference between the sales price and the cost of the product or service rendered is known as gross profit margin in business. It is traditionally the amount identified on the income statement or a tax return as the amount earned after cost of sales a.k.a cost of goods sold, cost of services rendered, etc. is subtracted from sales (revenue).
Breakeven analysis is a managerial (cost) accounting tool used to examine the relationship of price to cost of a product. It also considers various sales volumes and the effect on profit given the different relationships of price to cost. The breakeven analysis is an essential tool in maximizing profit with the least amount of resources.
In the construction industry, remodelers face a different set of criteria than your traditional new home builder. Because of these issues the markup percentage on costs is generally much higher than other forms of construction. If you are a remodeler, you need to understand the impact of these issues and how to properly markup your job to cover all your indirect and overhead costs.
Simply put, ‘cost of goods sold’ equals the direct costs of materials, human resources, and equipment needed to produce the item sold. However, this can be confusing because there are many marginal cost items that affect the real cost of producing and selling the item.
It is amazing how one simple formula can be so confusing to the average business owner. The formula is markup. It is defined as the dollar amount or percentage of the cost of the item added to the item to equal its sales price. Many entrepreneurs especially those in retail confuse this simple formula with margin.
