- Gross Profit Percentage. (GPP) is the gross profit of a business divided by total sales. "Gross profit" = total sales less all direct or variable costs of making the sales for the period in question. The essence of this percentage is that amount from each $1 of sale available for application against fixed costs (and, hopefully, left over as profit). See expanded definition of CPP.
- Direct Costs. The direct variable costs incurred to complete the sales for the period in question. "Cost of goods sold" and direct labor are subsets of direct costs. On this web site, we mean "cost of goods sold" plus "other variable costs" when referring to "direct costs".
- Cost of Goods Sold (COGS). For a manufacturing business, COGS is the raw material cost, direct labor, direct manufacturing costs, and all other associated direct costs that went into producing the products that were sold during the period in question. If your business is a retailer or wholesaler, your COGS are your costs of acquiring the products sold. For a restaurant or bar, COGS are the food and beverage costs. Unless a business sells products from inventory, it has no cost of goods sold (COGS). Thus, all businesses in the service industry and those that broker product sales (such as a manufacturer's representative) have zero COGS. See expanded definition of COGS.
- Direct labor. Direct labor is part of COGS. It is all labor that goes into producing the product sold. Thus, for the most part, only manufacturing operations have direct labor costs. It does not include sales expenses, thus, your salaries / commissions of the sales personnel are not included within the COGS calculation. Managerial, legal, accounting, marketing are examples of labor categories that are NOT "direct labor".
- Variable Costs. These are costs that vary based upon the level of sales. COGS are variable costs and are traditionally views as the bulk of variable costs within a cost accounting analysis. Other Variable Costs: These are costs which are not part of traditional COGS but increase in proportion to your sales. Examples are sales commissions, shipping paid by the seller, and advertising. Marketing expenses have traditionally been placed in the category of fixed costs; however, common sense admits that advertising has a variable component. If sales do not go up with additional advertising dollars spent, why bother to advertise? For purposes of our online tool to calculate the breakeven point, we shall treat advertising dollars spent on media buys (in any form) or direct mail as a variable cost of sale. However, labor costs associated with marketing shall be treated as a fixed cost.
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