Contribution margin is a core business concept and is often used in cost accounting to identify the amount of financial contribution a sold product provides to the company. Simply put, contribution margin is the sales price less the direct costs (sometimes referred to as variable costs).
What is ‘Cost of Goods Sold’
Cost of goods sold is an accounting formula used with the retail industry and is one section of the profit and loss statement. Several articles on this site explain the formula in detail and how it is presented on the report.
Each industry is different in determining costs of goods sold or cost of services rendered. Retail uses two distinct methods to calculate costs of goods sold. The first is called ‘Specific Identification’ whereby each item sold is specifically identified to its recorded cost. The second method is referred to as ‘Inventory Adjustment’ format. In this method, a beginning and ending balance is recorded along with the purchases throughout the year.
While I wait on family and friends to send me information on the location of ATM’s, I decided it is time to do some preliminary number crunching. My initial introduction to this illustrated a very good return. I’m really interested in determining if I can make some real money or will this be nothing more than an exercise in frustration.
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.