Costing: Understanding the true value of your product

Each product has its value based on the materials used, taxes, and other important considerations. If you are to sell the product at a profit, it is necessary to calculate your costs effectively. A lot of companies seem to be good at calculating their direct costs such as the raw materials, it can be very hard to cost components such as labor, technology, freight, and other important details that one might overlook.

For example, for clothing, some designers take the easy road by just adding 30% to 40% to the final cost of the product. That already includes the overheads or indirect costs. It can be easier this way, but that means when you have to cut costs, you really do not know which corner to cut.

Organize your costing

Using a spreadsheet program, create a table that includes both direct and indirect costs. All details of the indirect costs should be included in the chart. You can do this per product or per material or cost. Normally, it is product based. For each product, there is a unique set of direct and indirect costs. For example, you have a product that you are anticipating to be sold only to 3 people since it is a specially made product. If you had a component specially made for this, and it cost you $3000, then you would have to consider the $3000 to be divided into these items, therefore, elevating each products at $1000 each with that one component only. Add the other details and you will be able to find out the true value of your product. If the material were to be reused, though, the cost would have been spread out and the product will cost less.

Understanding your price points

With an organized costing tool, you can identify how much an item will be sold if it were retail or wholesale or if specially made. For some producers, the mark ups can range from 200% to 300% and that consists of the cost, overheads and actual profit.

Understanding these processes and tips, it will be easier for any product creator to know how many their items will cost and how they can actually repay for the cost and earn profit from the venture.