Gross margin per product line once invoices name products
How a manufacturer reads gross margin per product line once each invoice line names its product and revenue account, and what the figure depends on.
By Achekam · · 5 min read · For Manufacturing businesses in South Africa, Nigeria, Kenya
Launching soon. The Industry CRM add-on described in this article is launching soon. This article describes it as it will work at launch.
Ask the owner of a small manufacturing business which of their products makes the most money, and the answer usually comes from memory rather than the books. The income statement shows one sales figure and one cost of sales figure for the whole business. Whether the steel gates subsidise the burglar bars, or the other way round, is a matter of opinion.
That changes when every invoice line says which product it sold and which revenue account it belongs to. Sales and their cost then arrive in the books already sorted by line. This article explains the measures involved, how the Industry CRM posts sales so that they can be read by product line, and what the resulting margin still depends on.
Gross profit and gross margin
Investopedia separates two terms that often get blurred. Gross profit is revenue less cost of goods sold, expressed as an amount. Gross margin expresses that gross profit as a percentage of sales. It defines gross margin, also called gross profit margin, as the share of revenue a company keeps after direct expenses such as labour and materials have been subtracted.
The formula Investopedia gives is:
Gross margin = (net sales − cost of goods sold) ÷ net sales × 100
What counts as cost of goods sold
Investopedia defines cost of goods sold as the direct costs of manufacturing or purchasing the products a company sells. It excludes indirect expenses such as distribution and sales force costs. It notes that the term is also called cost of sales, while later explaining a subtle difference between the two.
For a product-line view, that exclusion matters. The delivery van and the sales rep's salary do not belong in the gross margin of the gates or the burglar bars. They are real costs, but they come out lower down, after gross profit. Mixing them in makes every line look worse and hides which ones are truly weak. What belongs above the gross profit line is explored in what belongs in cost of sales.
How sales are posted per line
With the Industry CRM, each invoice line names the revenue account and the product it sells. When the invoice is issued, revenue is posted to that account, and cost of sales for the product is posted in the same journal. The sale and its cost land in the books together, line by line, rather than as a single sales total with costs estimated afterwards.
For a manufacturer with three product lines, that means three revenue accounts filling up from the invoices themselves, each with the matching cost of sales recorded at the moment of sale.
Revenue accounts added on activation
Switching on an industry pack adds that industry's revenue accounts to the business's chart of accounts, and its unpriced starter items to the catalogue. The starter items have no prices: you set those. If an account code the pack wants is already used for a different type of account, the activation is refused and names the conflict, so nothing is overwritten quietly.
Before switching it on, decide how you want product lines grouped. One revenue account per product line, such as gates, burglar bars and carports, gives a clean view. One per individual product usually gives too much detail to read.
Reading margin per line
Management accounts show an income statement for a chosen period beside the period before, and a balance sheet at period end, all added up from the business's own journals. With sales posted per revenue account, the income statement shows each product line's revenue on its own line, and it can be exported as PDF or CSV.
Cost needs one more step. Each sale's cost of sales is posted in the same journal as its revenue, so the journals behind a revenue account carry the matching cost. If your chart keeps one cost of sales account for every product, the income statement shows revenue by line but cost in total, and the per-line cost comes from those journals. Then, for each line:
- Take the line's revenue for the period.
- Add up the cost of sales posted in the same journals.
- Subtract the cost from the revenue to get gross profit.
- Divide gross profit by revenue and multiply by 100.
Compare it with the period before, which the management accounts set alongside. A line whose margin is sliding while its sales grow is the one to look at first: growth may be coming from discounts.
One setting to watch: the year-to-date preset starts on 1 January, not on the business's own year start. If your financial year starts in March, choose the dates yourself rather than relying on the preset.
What the single cost price still means
The margin is only as good as the cost behind it, and here the limit is plain. Cost of sales uses the single cost price typed on the product. There is no FIFO or weighted-average costing. When the steel price rises, the cost of each gate sold does not rise with it until someone updates the cost price on the product.
That has three consequences for reading margins:
- Keep cost prices current. Review them whenever a major input price changes, and at least before each quarter's management accounts are read.
- Expect a gap. Until the cost price is updated, a line's margin can look better or worse than the materials it really used would justify.
- Treat small movements with caution. A slight change in a line's margin may be nothing more than an out-of-date cost price.
How to arrive at a sensible cost price in the first place is covered in working out finished goods cost. If you also sell installation or repair work, posting service revenue to the ledger explains how those lines reach the books.
Before you rely on the numbers
Investopedia's explanation of gross margin works through the formula and how the measure is used. Update every product's cost price, set up one revenue account per line, and read the first quarter's margins alongside your production manager, who will know whether they look right.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
