Gross Profit Margin is a simple calculation, though the words used in it can vary. It’s simply:
(Revenue – Costs of Goods Sold) / Revenue.
In other words, subtract Costs of Goods Sold from Revenue and divide the result by Revenue.
Sometimes people will use different words to express the concepts in the calculation. Instead of “revenue”, you could use “sales”. Either way, it’s the money the business has made from selling goods and services.
“Costs of Goods Sold” is a specific term. It doesn’t mean all the costs a business faces, which is why it’s better not to simply write “costs” when explaining Gross Profit Margin. Instead “Costs of Goods Sold” specifically means those costs which are directly associated with producing the goods in question.
Most commonly this covers two types of spending: buying the raw materials used to make the goods, and paying staff for the work they do making the goods. (With services, usually only the staff costs apply.) It could also cover relevant transport costs.
“Costs of Goods Sold” excludes all sorts of other costs that aren’t directly associated with producing the goods. Examples include general operating expenses, management salaries, marketing costs and taxes.
Technically speaking, the Gross Profit Margin calculation will produce a fraction, such as 0.6. It’s almost always expressed as the corresponding percentage — in this case 60 percent.