Your product's Cost Price is what it cost you to produce your product from the materials you use. 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 handmade 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 calculate your Cost Price you'll need to sit down with a pen and paper and list out each and every material you use to make a single quantity of the product.
Keep in mind that this should be "consumable materials" only - these are materials that are completely used up during the creation of your product.
For a soap product, you might now have a list that starts with something like this:
Once you have your material list ready, you now need to figure out how much of each you use. This should measured in the same unit you make in.
There will be items like buttons where this is quite a simple process as you can simply count how many you used. 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.
|Sodium Hydroxide||64 grams|
|Coconut Oil||112 grams|
|Lavender Oil||17 ml|
Now to the next step: you'll want to calculate your unit price for each material in your list. You can do this in a couple of ways: either by taking the last unit cost that you paid for the material, or averaging your purchase history for the material.
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.
Also don't forget to include "hidden" costs like shipping that you paid for the material into your unit prices, or you will be underestimating your costs of production. This is sometimes referred to in inventory-speak as your material's "landed cost”.
|Material||Amount Used||Unit Cost|
|Sodium Hydroxide||64 grams||$0.038|
|Coconut Oil||112 grams||$0.016|
|Lavender Oil||17 ml||$0.1635|
Once you have your landed average material unit price, calculate exactly how much you used up in producing your product and multiply this by your manufacturing unit price to arrive at the total cost per material.
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.
|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 handmade pricing formula along with your desired markup to find a price to sell your product for that makes sure you make some decent profits!