What is Direct Margin?

Direct margin is the income percentage generated when all direct costs are subtracted from sales. Direct costs include the following items:

Direct materials. This includes all materials consumed when a product is manufactured.
Direct labor. This includes all production labor directly involved in the manufacture of a product.
Consumable production supplies. This is all ancillary production supplies consumed in the production process.
Sales commissions. This is any sales commission earned by a salesperson as a direct result of the sale of a product or service.
Credit card fees. This is the incremental fee charged by a credit card provider to the seller when a customer pays for a product with a credit card.

This margin is useful for determining the amount of earnings generated, based on the application of variable expenses to sales. This margin is higher than the gross margin, since the gross margin calculation also includes factory overhead costs.

How to Calculate Direct Margin

The formula for direct margin is to subtract direct costs from net sales, and then divide by net sales. The calculation is:

(Net sales - Direct costs) ÷ Net sales = Direct margin

Example of Direct Margin

A company records sales of $100,000, as well as direct materials expense of $20,000, direct labor expense of $15,000, and factory overhead expense of $30,000. Its direct margin is calculated as ($100,000 sales - $35,000 direct costs) ÷ $100,000 sales, or 65%.