Determine your actual product costs

1. Identify the direct material costs related to your product and track them using an inventory management system.

Direct materials are the raw materials used to create a finished product. These are items that manufacturing workers physically interact with during production. Direct materials for a candle-making company: Wax. Jars or containers to hold the cooled wax. Wicks. Warning labels. Dye. Fragrance oil for scented candles. For businesses without physical products, such as SaaS companies, the direct materials look different because they’re typically delivered over the internet. Examples of direct materials for a SaaS business:  Cloud storage. Hosting and monitoring costs. Subscription costs. Licensing fees. Development and support costs for your website.

2. Calculate the direct labor costs of your product by calculating the hourly costs for a set level of production.

Direct labor is identified by any worker who performs critical tasks to create the final product. Direct labor examples: Wages or salaries for employees performing a specific task for the product’s creation. Direct employee benefits. Determine the number of workers required and the number of hours it takes to produce finished units over a set production period. For example, if you have 50 employees working on the production or assembly line and each employee works 8 hours a day, 5 days a week, it will take 8,000 hours each month to produce your products.

3. Identify overhead costs related to the production of your product.

Overhead costs are indirectly related to the final product. They are indirect expenses related to the manufacturing of your products that don’t fall under the labor or direct materials categories. Examples: Utilities. Facility rent or mortgage. Depreciation. Equipment maintenance. Quality assurance. Building insurance. Oils or glues used to maintain machines during production. Facility cleaning supplies.

4. Calculate total product costs by adding together the direct material costs, direct labor costs, and overhead costs during the production period.

For example, if your production period is one 8-hour shift, calculate the direct materials costs, labor costs, and overhead costs for the one shift.

5. Divide the total product costs by the number of units produced to calculate your product's cost per unit.

After you calculate your total costs for the production period, divide that number by the number of units produced during that time. For example, if your total product cost for one 8-hour shift is $2,500 and 125 units were completed during that time, you’ll divide 2,500 by 125 for a $20 per unit cost.

6. Create a spreadsheet to determine actual product costs by listing all costs involved and the production volume over a specific period.

Track the per-unit product costs regularly. To create a tracking spreadsheet with formulas:  In the first row, add production over a specified time with the total number of units produced in the column beside it.  Add one row for direct and indirect materials and labor, with each cost for the specific period listed in the column beside each title.  Use the SUM function to determine the total product cost by adding a new cell to the column with the direct material costs, direct labor costs, and overhead costs. Click AutoSum in this cell added underneath the costs to automatically add the numbers directly above the cell and obtain the total product cost. In a second cell, calculate individual product costs using the formula total product costs/number of units produced. For example, if total product cost is calculated in cell C9, and total number of units produced is listed in cell B2, your spreadsheet formula would look like: =C9/B2.