When calculating gross profit, which expense is deducted from revenue?

Gross profit is calculated by subtracting the Cost of Goods Sold (COGS) from total revenue. COGS represents the direct costs associated with the production of goods that a company sells, including expenses such as materials and labor directly tied to the manufacturing of those goods. Therefore, when calculating gross profit, only costs that are directly attributable to the production of the goods are deducted from revenue to determine how much money is made from selling those goods before accounting for other indirect costs, such as operating, administrative, or interest expenses.

Operating expenses, administrative expenses, and interest expenses are not directly tied to the cost of producing goods and therefore are not included in the gross profit calculation. Instead, they are taken into account later in the income statement when calculating operating profit and net income. Thus, understanding that gross profit is focused solely on the relationship between sales revenue and the direct cost of goods sold is crucial for financial analysis and reporting.