Gross Profit Method Calculator

The gross profit method is one way of estimating the cost of inventory at the end of an accounting period. This gross profit method calculator works out the historical gross profit percentage of a business and then uses this to estimate the cost of the ending inventory for the current accounting period.

Gross Profit Method Calculator

The gross profit method of estimating inventory is a method of calculating the ending inventory of a business in the absence of a physical inventory count at the end of an accounting period.

Gross Profit Method Calculator

It is similar to the retail inventory method and sometimes indicates as the gross margin method.

Gross Profit Method Procedure

The gross profit method relates the following for steps.

  1. Calculate the historical gross profit percentage
  2. Calculate the cost of goods available for sale
  3. Estimate the cost of goods sold
  4. Calculate the ending inventory

Gross Profit Method Example

Calculate the Historical Gross Profit Percentage

The gross profit percentage sometimes referred to as the gross margin, is calculated using the following formula.

Gross profit % = Gross profit / Revenue

 

For example, suppose the historical accounts of a business show revenue of 120,000 and a gross profit of 72,000, then the gross profit percentage is given as follows:

Gross profit % = Gross profit / Revenue

Gross profit % = 72,000 / 120,000

Gross profit % = 60%

 

Calculate the Cost of Goods Available for Sale

The cost of goods available for sale is the beginning inventory plus any goods purchased during the accounting period.

Goods available for sale = Beginning inventory + Purchases

 

Suppose, if the beginning inventory is 18,000, and the purchases during the period are 65,000, then the cost of goods available for sale is as follows:

Goods available for sale = Beginning inventory + Purchases

Goods available for sale = 18,000 + 65,000

Goods available for sale = 83,000

 

All the amounts used in this step are at cost.

Estimate the Cost of Goods Sold

The cost of goods sold can now be calculated by applying the gross profit percentage to the revenue for the period using the following formula:

Amount of goods sold = Revenue x (1 – Gross profit %)

 

In our example, suppose the revenue for the accounting period was 150,000, with an estimated 60% gross profit percentage, the cost of goods sold is estimated as follows:

Ending inventory = Cost of goods available for sale – Cost of goods sold

Ending inventory = 83,000 – 60,000

Ending inventory = 23,000

 

The four steps used in the gross profit method are summarized in the table below.

Gross profit method example summary

1. Calculate Historical Gross Profit %

Revenue                                     120,000

Gross profit                               72,000

Gross profit %                           60%

2. Calculate Goods Available for Sale

Beginning inventory               18,000

Purchases                                  65,000

Available for sale                       83,000

3. Estimate Cost of Goods Sold

Revenue                                     150,000

Gross profit %                           60%

Cost of goods sold                    60,000

4. Calculate Ending Inventory

Available for sale                       83,000

Cost of goods sold                     60,000

Ending inventory                       23,000

 

Our gross profits method calculator is useful for estimating the ending inventory using the four steps described above.

Gross Profit Method Formula

Associate the four steps above results in the gross profit method formula which can be stated as follows:

Ending inventory = Beginning inventory + Purchases – Revenue x (1 – Gross profit %)

 

Using the data from the previous example and the gross profit method formula, the ending inventory is calculated as follows:

Ending inventory = Beginning inventory + Purchases – Revenue x (1 – Gross profit %)

Ending inventory = 18,000 + 65,000 – 150,000 x (1 – 60%)

Ending inventory = 23,000

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