If you’re running a small manufacturing business, it’s important to understand how much it costs you to produce each individual product - otherwise known as your unit cost. Knowing your product’s unit price will help you make smart decisions about pricing and how much profit you can expect to make on each item.
If this is your first time calculating your product’s unit cost, it might seem like a daunting task. But never fear - we’re here to help walk you through the process step by step.
What is a cost price?
This is the total cost of all the materials, components, packaging, labor, and overheads needed to make one unit of your product. The first step in calculating your unit cost is to add up all of these individual costs.
This can also be commonly referred to as your Base Production Cost or your Base Manufacturing Cost.
Your Cost Price for each product you make is essential to know as it is a vital part of your pricing strategy. Knowing exactly how much it cost you to make your items puts you in a much better business position as you will now know the minimum possible price you can charge a customer before you will make a loss on your product.
To get an accurate picture of your total costs, it’s important to track expenses over a period of time. This will give you a more accurate average than if you just looked at the cost of one batch of products.
How to calculate your product’s unit cost
Once you have all the necessary information, you can start to calculate your product’s unit cost using this simple formula:
Unit Cost = Total Costs / Number of Units Produced
For example, let’s say it cost you $100 to make 50 units of your product. Your unit cost would be $100/50, or $0.20 per unit.
So, how do you figure out your total cost?
This one is a little harder.
To calculate your Total Costs you’ll need to list out each and every material you use to make a single quantity of the product.
This is otherwise known as a Bill of Materials (or BoM for short). For each material, you’ll need to know how many units your product uses and how much it costs per unit.
The best way to illustrate how to calculate your unit price is with an example.
Let’s say you make and sell wooden desk lamps. To create my Wooden Desk Lamp I need several materials as below:
Product: Wooden Desk Lamp
wooden base: $0.50 per unit, used quantity = __
light bulb: $0.75 per unit, used quantity = __
lamp shade: $0.25 per unit, used quantity = __
light bulb socket: $0.15 per unit, used quantity = __
switch: $0.05 per unit, used quantity = __
power cord: $0.20 per unit, used quantity = __
paint: $0.01 per unit, used quantity = __
packaging: $0.30 per unit, used quantity = __
Your cost per unit is ideally calculated from your complete purchase history of the material, rather than the latest cost. This is because your purchase costs may fluctuate during the year and you want to create a total cost that represents your average production.
Keep in mind that the items above should be “consumable materials” only - these are materials that are completely used up during the creation of your product.
Step 1: Figure out your usage amounts
The first step is to fill in how many units of each material you need to make your product. This should be measured in the same unit of measure that you make in.
If you purchased your material in a different unit size (i.e. you purchased in jars and you measure your materials in ounces) then you’ll want to make sure that you do this conversion first before continuing.
In the example above, we know we need __ units of wood for the base, __ light bulbs, __ lamp shades etc.
For materials like glue or paint you might find this more challenging as they can be difficult to measure. In some of these cases, you might find it impossible to measure so you might be best factoring the cost into your overhead calculation instead.
Step 2: Calculate your cost per unit
Now that you know how many units of each material you need for your product, you can multiply this number by the cost per unit to find out how much each component costs.
Continuing with our example:
wooden base: $0.50 per unit, used quantity = __ x $0.50 = $
light bulb: $0.75 per unit, used quantity = __ x $0.75 = $
lamp shade: $0.25 per unit, used quantity = __ x $0.25 = $
light bulb socket: $0.15 per unit, used quantity = __ x $0.15 = $
switch: $0.05 per unit, used quantity = __ x $0.05 = $
power cord: $0.20 per unit, used quantity = __ x $0.20 = $
paint: $0.01 per unit, used quantity = __ x $0.01 = $
packaging: $0.30 per unit, used quantity = __ x $0.30 = $
Once you’ve calculated the cost of each individual component, you can add these all up to find the total cost of materials (otherwise known as your direct costs) needed to make your product.
Step 3: Calculate your total cost of production
Now, for the last step - you’ll want to add up each of your total material costs and you’ll have your Base Manufacturing Cost.
As another example, for a soap maker they may have created a bill of materials like this one:
|Material||Amount Used||Unit Cost||Total Cost|
|Sodium Hydroxide||64 grams||$0.038||$2.45|
|Coconut Oil||112 grams||$0.016||$1.90|
|Lavender Oil||17 ml||$0.1635||$2.78|
From here, you now know that it costs you $7.13 to make your soap. You can now use this amount in your pricing formula along with your desired markup to find a price to sell your product for that makes sure you make some decent profits
Using software to calculate your product’s unit cost
If all of this sounds like a bit too much work for you, or if you want to make sure that your calculations are 100% accurate, then you’ll want to use product cost calculator software. This can automate all of the steps involved in calculating how much it costs you to produce each unit of your product.
Craftybase is one such product cost calculator - it’s designed specifically for small business makers and takes into account all of the factors we’ve discussed in this post. You can start your free 14 day trial to see how it works for yourself!
Understanding how much it costs you to produce each of your products is vital for making sure that you’re pricing them correctly and making a profit. We hope that this guide has helped you to understand how to calculate your product’s unit cost with accuracy.