Gross profit is calculated by subtracting which two costs from revenue?

Gross profit is the difference between revenue and the direct costs associated with producing goods or services sold by a business. It specifically accounts for the costs of materials and labor, which are the primary direct expenses incurred in the production process.

When calculating gross profit, a business subtracts the cost of goods sold (COGS) from its total revenue. COGS typically includes the costs of raw materials used in production and any direct labor costs required to manufacture the products. This means that option A – subtracting the costs of material and labor from revenue – accurately reflects the way gross profit is defined and calculated in accounting.

By contrast, labor and overhead, material and taxes, and overhead and administration are not direct costs of production in the same way. For example, overhead often includes indirect costs that don't directly contribute to production, such as rent, utilities, and administrative expenses, which means they aren't factored into the calculation of gross profit. Thus, focusing on material and labor costs provides the correct basis for understanding gross profit as it pertains to a business's financial performance.