What is the difference between margin and markup

Difference Between Margin and Markup

Since every coin has two sides, margin and markup are also two terms that refer to the two ways of looking at business profit. When profit is addressed as a percentage of sales, it is called Profit margin . Conversely, when profit is addressed as a percentage of cost it is referred to as Marked surcharge .

However, the mark-up is nothing more than an amount by which the cost of the product is increased by the seller in order to cover the expenses, the profit, and the selling price. On the other hand, the margin is just the percentage of the selling price, i.e. the profit. It is the difference between the selling price and the cost price of the product. The terms margin and markup are often juxtaposed by many accounting students, but they are not the same thing.

Comparison table

Basis of comparisonSpanMarkup
importanceMargin is a profit margin that measures the profitability of the company, that is, the proportion of the income remaining in the company after the cost of production is paid out of the income.Markup refers to the seller's added value at cost price to cover his ancillary costs and profits to get to his selling price.
What is it?Percentage of the sale price.Cost multiplier
The function ofsalescosts
perspectiveSellerBuyers
formula(Price - cost) / price(Price - cost) / cost
relationshipMargin = 1 - (1 / markup)Surcharge = 1 / (1 - gross margin)

Definition of margin

Margin implies the ratio of profit to the selling price. It is the difference between the manufacturing / acquisition cost of a product or service and the selling price. This is the gross profit margin for a given transaction, that is, the profit made on a product or service, expressed as a percentage of the selling price of that item.

Generally, gross margin is used when both the cost price and the selling price of the product or service are known, but you want an idea of ​​the profit you made on a particular transaction. It can be calculated as:

Margin = (Selling Price - Cost) / Selling Price

Definition of markup

Markup refers to the amount that is added to the purchase price of a product or service to cover expenses and profits. It is the difference between the cost price and the selling price. It is the percentage of the cost price that you add to make up the item's selling price.

The amount that is added to the total production costs incurred by the manufacturer to cover overhead costs such as labor, materials, taxes, interest, etc. and profit is a markup. It can be calculated as:

Cost X (1 + surcharge) = sales price
Or Surcharge = (sales price / costs) - 1
Or Markup = (Selling Price - Cost) / Cost

Key differences between margin and markup

The following points are important in relation to the difference between margin and markup:

  1. A financial metric that measures the company's profitability, that is, the proportion of income remaining in the company after paying the cost of production from income, is known as margin. The added value that a seller achieves at the cost price, to cover his ancillary costs and to achieve his selling price at his selling price is known as the mark-up.
  2. The margin is the percentage of the selling price, while the markup is a cost multiplier.
  3. The margin can be calculated based on the sales price. On the other hand, the cost price is used as the basis for calculating the surcharge.
  4. Margin is the seller's perspective of profit, while markup is the same buyer's perspective.
  5. The margin is the difference between the selling price and the cost price divided by the selling price. Conversely, the markup is the difference between the sales price and the cost price divided by the cost price.

Conclusion

So, with the above article, it's clear that margin and markup are the two different profit prospects. "The markup, as it is calculated at cost price, is always greater than the percentage of the margin". You can understand the given instruction using an example. Say you buy a product for Rs. 400 (cost price) and sell it for Rs. 500 (retail price),

Margin = (500-400) / 500 = 20%
Surcharge = (500-400) / 400 = 25%