---
name: calculate-gross-margin
category: money
description: Calculate and explain gross profit and gross margin with a consistent revenue and direct-cost boundary. Use when evaluating product, service, customer, channel, or period profitability.
---

# calculate-gross-margin

Make the cost boundary explicit before calculating a percentage.

## When to use

- Use to compare gross profitability across products, services, channels, customers, or reporting periods.
- Do not present gross margin as contribution margin, markup, operating margin, or net margin.

## Procedure

1. Define the entity, period, currency, unit of analysis, and accounting basis.
2. Calculate net revenue after discounts, credits, refunds, and excluded sales taxes using documented recognition rules.
3. Define direct cost consistently, including only costs required by the chosen gross-margin policy.
4. Match direct costs to the same units and period as revenue, including inventory or work-in-progress adjustments where applicable.
5. Compute `gross profit = net revenue - direct cost`.
6. Compute `gross margin = gross profit / net revenue`, and label cases where net revenue is zero or negative rather than forcing a percentage.
7. Segment results by meaningful driver and calculate price, mix, volume, and cost effects when evidence supports the split.
8. Reconcile revenue and direct-cost totals to the ledger or approved source report.
9. Run sensitivity checks for disputed classifications and record the approved cost boundary.

## Worked example

A subscription service reports 78% gross margin after excluding payment fees and customer-specific hosting. The approved policy treats both as direct service costs. After matching the costs to the period, net revenue is $200,000, direct cost is $54,000, gross profit is $146,000, and gross margin is 73%. The calculation file preserves both the original and approved classifications.

## Done

- A gross-margin calculation sheet records net revenue, direct costs, formulas, segments, policy choices, and sensitivity cases
- Totals reconcile to approved source reports and the final percentage is checked against gross-profit dollars