Markup
Cost and management accounting.
Markup is an amount added to relevant costs, to calculate a selling price.
It is usually expressed as a percentage of relevant costs.
Relevant costs will usually, but not always, be direct costs of production.
Markup is calculated in the same way as Margin on costs, using the same inputs:
Markup = profit ÷ costs
Example 1: Markup calculation
Selling price = 100
Relevant costs = 70
The surplus (profit):
= selling price - costs
= 100 - 70
= 30.
And the markup:
= profit / costs
= 30 / 70
= 42.9%.
Note the Markup is normally used in a planning and price setting context, looking ahead. The similarly calculated Margin on costs may be seen equally in both historic accounting contexts and in planning and price setting.
Example 2: Price setting using markup
Costs = 70
Markup = 42.9%
Calculate the selling price
Required surplus (profit):
= 70 x 0.429
= 30.
Selling price:
= costs + profit
= 70 + 30
= 100.
Short cut calculation:
Selling price = costs x (1 + markup)
= 70 x (1 + 42.9%)
= 70 x 1.429
= 100 (as before).
