How is Gross Profit determined in a Manufacturing Business

Manufacturing is a large-scale type of business. It consists of a range of human activity with the primordial concern of creating new products from raw materials. The finished goods or products are then sold commercially.

There are also manufacturing companies which create finished goods for a more complex purpose. Most common of which are manufacturers of computer, appliance and car parts.

Manufacturing basically involves large scale production utilizing extensive amount of capital, heavy-duty machineries and tools, and massive labor. Importing and exporting are also a significant and inevitable aspect of a manufacturing business. Those engaged in any manufacturing business caters for a large group of clientele or market. This must necessarily be so in order to insure profit. In manufacturing, businesspersons must be assured of return of investment as well as profit. Products manufactured redound to retailers or consumers.

Determining Gross Profit

Gross profit is the revenue of profit which a company has after the cost of goods and other expenses have been deducted from the net profit. Gross profit is the residue after costs of operation, production, and sale are subtracted. It is very important for a manufacturing company to determine gross profit. This is because the amount of gross profit indicates whether the business remains in sound condition. The gross profit also tells whether the company resources and supplies are optimized during production and sale. By determining the gross profit, businesspersons will be guided on how to work out management and production issues. It also helps in improving business and thereby become more competitive. Moreover, determination of gross profit or gross income assists businesspersons in increasing profitability because it helps pinpoint the faulty aspect of the business.

There are varied ways of computing or determining gross profit. The first thing to do is to evaluate the income statement. From there, make a list of the variable costs directly involved in the manufacturing business. Among these variable costs are the costs of raw materials, transportation costs, export or import costs, processing costs, packaging costs, and cost of labor. Also include in the computation depreciating assets like company building and vehicles. In order to ascertain gross profit, the total cost of production must be known. To get the total cost of production, sum up the factory overhead and the prime cost. The aggregate amount of the costs of manufacturing comprises the factory overheads. Meanwhile, to get the prime cost, sum up the costs of labor, expenses, and raw materials.

The next step is the determination of the net sales. In getting the net sales, sum up the costs of damaged goods, discounts, missing goods, and returned goods. The result of which must be deducted from the total sale of goods. Thus, a net sale is total sale of goods subtracted by the costs of missing, returned, damaged goods, and discounts. Thereafter, deduct the total cost of production from the net sales. This will give you the gross profit. The gross profit must appear in the company books, accounts, as well as income/loss statement.

13 Comments

  • Amit Kumar said on May 9, 2013
    I want to start a LED manufacturing business or other small scale business in Meerut Uttar Pradesh India. please guide
  • Akhilesh Shaw said on May 15, 2013
    hello sir. My name is Akhilesh Shaw. i want to start my business in west Bengal. Kolkata city.please help me to guide in way of business
  • manoharan said on June 18, 2013
    we want to start the business in Mumbai, India.
  • Shanmugam said on July 29, 2013
    My business location is tamilnadu to help me better for plastic pipe manufacturing industries. Chennai,Tamilnadu, India.
  • khurshid anwer(partner) said on August 9, 2013
    we are established RO+soda water project & shortly going to launch our products with the registered name of BLUE CHEAP at RANCHI JHARKHAND, all machinaries work is done, electrification formalities with elec. board is under progress, pl. give us your valuable tips & suggestion to launch our products in market effectively & impressively.
  • sabarivasan said on October 9, 2013
    We want to like do the manufacturing medium scale business. Pls send some idea about manufacturing business.
  • Ameeralam said on October 11, 2013
    Sir I want to start a mobile charger manufacturing work in Muzaffarnagar (u.p), kindly give me some your valuable tips & suggestions. thank u
  • philip said on October 23, 2013
    I have some advice for @Amit Kumar. I am in Ghana now and my email is [email protected] my mobile is 0205022068. i speak english.
  • KK said on February 19, 2014
    HI, I want to start business of Manufacturing pampers, dipours in Pune Maharashra. Can you pls let us know the ideas
  • usjack said on March 24, 2014
    Hi Myself umesh from amravati we want to start manufacturing business so plz guide us and send us some detail of project which can be started in ainravati and suitable...
  • Sunil Kumar said on July 7, 2014
    Dear concern, I want to start candle manufacturing business on small scale please guide me.
  • saad khan said on July 17, 2014
    dear sir, I want to open carton manufacturing for shoe company.. please guide me. please rply on my mail. kind regards
  • Sam said on December 22, 2014
    Good day, I would like to start a fruit juice manufacturing company. Vaal, Gauteng, South Africa
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