What is markup?
Markup is the amount added to cost to set a selling price. It uses cost as its base, unlike gross margin, which uses selling price.
Definition
Markup is the amount added to cost to arrive at a selling price. It is a pricing measure built from cost, not a separate account that is debited and not cash in the drawer.
Accrual books hold an item's cost in inventory until it sells, then move that cost to cost of goods sold. The selling price includes the original cost plus the markup.
Markup is not the leftover on the Income Statement after the sale, and it is not the share of the selling price. Gross margin uses the selling price as its base; markup uses cost.
Where it shows up
P&L: Related to the gap between selling price and cost after the item sells.
Balance Sheet: Related to the inventory cost the markup is added to.
See also: Gross Margin · Pricing · Cost Of Goods Sold
The Income Statement shows revenue at the selling price and cost of goods sold at the item's cost. The dollar gap is the realized gross profit, not a separate markup account.
The Balance Sheet carries unsold items at cost, not at their tagged selling price. Markup does not itself move cash; payment and collection do.
How it works
Start with the item's cost, which may include the vendor invoice and applicable freight or duty. Add a dollar amount or a percentage of cost to reach the selling price.
The pricing flow is:
- Identify the item's cost base.
- Choose a dollar or percentage markup.
- Add the markup to set the selling price.
- Compare the realized result with gross margin after sale.
A 100 percent markup on an $80 cost produces a $160 price. That same $80 gap is 50 percent of the selling price, which is why markup and margin should not be treated as the same measure.
A discount changes the realized selling price, but it does not change the original cost. Keep the vendor invoice and pricing support together so the calculation can be explained.
Example
A sneaker boutique buys a pair for $80 and wants a 100 percent add-on. It tags the pair at $160.
The dollar markup is $80. That is 100 percent of cost and 50 percent of the selling price.
If the pair is still unsold, the $80 cost remains in inventory. The $160 tag is not an asset. When it sells, revenue records the selling price and cost of goods sold records the cost; no separate markup journal entry is needed.
Common mix-ups
Markup is not the same as gross margin. Markup is the add-on from cost; gross margin expresses the gap as a share of selling price.
Markup is not the selling price. The price is the tag; markup is only the amount added to cost.
Markup is not cost of goods sold. Cost of goods sold is the item's cost after sale; markup is the planned gap above that cost.
Related terms
- Gross Margin: Gross profit expressed as a percentage of revenue.
- Pricing: The set price charged to customers for a product or service.
- Cost Of Goods Sold: The direct cost of the products sold during the period.
- Gross Profit: Revenue minus the direct cost of delivering it.
- Landed Cost: The full cost of getting a purchased item to your door, including freight and duties.
- Revenue: The total value of goods and services the business earned in a period.
- Contribution Margin: Revenue minus variable costs, showing what is left to cover fixed costs.
- Standard Cost: A pre-set expected cost per unit used for planning and comparison.