Determining the Costs of Your Products

Determining the Cost of your Products

The cost of a product includes both direct costs, like materials and labor, and indirect costs (also known as fixed costs or overhead) which include things like rent, wages, electricity and other expenses a business might have even if they are not doing any production. Your profit margin should also be added into the total cost of the product.  Let's look at what should be included as direct and indirect costs:

1. Calculate Direct Costs:

Raw Material Costs

- Raw materials used in product (glaze, paint, clay, thread, buttons, cloth, wood for kiln)

- Labels, tags and packaging

- Cartons and packing materials

Labor Costs

- Labor to produce item - this may be calculated by either an hourly or piece rate basis

- Labor for inspection and quality control

- Labor for packaging and packing

Note:  Sometimes determining if a fair wage is being paid for the production of a product is not simple. The World of Good Development Organization has developed the Fair Wage Calculator, a tool for fair trade organizations to gauge weather a fair wage is being paid in their local context.

2. Calculate Indirect Costs (Overhead)

- Rent

- Utilities

- Communication (fax, phone, internet)

- Office supplies

- Salaries

- Professional services (like customs broker, accountant)

- Marketing expenses (trade fair, promotional materials)

- Equipment repair

- Transportation (fuel)

- Other expenses

These indirect costs can be calculated by piece or as a percentage of direct costs.

3. Calculate Profit Margin

Your profit is what you earn after all costs have been covered. Most businesses calculate a profit margin of between 10% - 15% of total costs. This margin will also help to protect you against any unexpected costs, such as a sudden increase in the cost of materials, or a change in the exchange rate.

4. Determine Selling Price

Once you have added your costs and your profit, you will have your Ex-Works price (also know as the Ex-Factory price). This is the cost of the product as it leaves the factory or warehouse. However, most export prices are quoted as F.O.B prices (Free On Board).  The F.O.B. price includes the Ex-Works price plus all additional costs related to getting the product to the port of export, such as transporting the product from the workshop to the port, export documentation costs, customs fees, bank charges, and other additional costs These charges can add an additional 10%- 25% to the price

For a more complete explanation of different export pricing terms, see the Definition of Export Pricing Terms.