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How to calculate cost per item?

The moment of unit cost estimation is of great importance while building a successful business strategy because the fast-track estimation of costs calculates the right pricing and future sales. Let's look at this issue in more detail.

Itemized estimate of costs: what is it?

The cost of a product is calculated by summing up the production cycle costs and dividing this amount by the number of units produced. Actually, this is how the calculator per item cost based on the amount made.

The production is usually launched in batches (tens, hundreds, thousands, etc.). Each batch has its own costs, such as direct and indirect labor costs, material costs, production, and supplies. Accordingly, the amount of these costs is divided by unit quantity (batch), and the final number will be a cost per item. These numbers you can get through cost estimation tools and software; some of them even provide estimated cogs cash vs. actual costs forecasts with personal suggestions on how to estimate cogs (Cost of goods sold) and how to calculate the total cost per item.

Here’s the cost estimate example in business.

So, the company produces 100 music players per month. The production of 100 music players requires $1,200 on materials, $800 expenditure on the workforce, and $1,600 for item production and storage costs. If you divide the entire amount by 100 music players, you will see that at the cost of $3,600, one music player costs $36.

Small business cost estimates: 4 tips on how to calculate fixed cost per item

1) Write down all the costs of the business

This includes at least the cost of preparation, as well as the cost of maintaining and selling products and other costs, in particular:

  • The cost of delivery of goods
  • The cost of processing goods
  • Service support, consultants, salespeople (don't include to this list of costs per item some extra costs, for example, office cleaning, snacks for the office, etc.)
  • The cost of rent per room plus utility bills
  • Property and people insurance
  • Expenses for business support and company support
  • Depreciation costs
  • Advertising costs
  • The cost of production equipment and its maintenance.

This list may include other costs, depending on the specific type of business.

2) Calculate the number of products per unit of goods

Above we provided a simple example of calculating unit cost per item, but it doesn't end there. Here are some details to look for when setting unit prices.

Unpredictable costs. It sometimes happens that a business has to invest or spend more in some periods. Still, you don't need to include these costs in your item calculation because this price will be unreasonably high in the long-run perspective.

The purpose of determining the cost. If your goal is to establish the lowest price of your product to recoup all the total costs, you should include in your calculations three main direct costs of goods (raw materials, labor, production and sales costs). If you are looking to establish a price per item in the long run, then considering all of the above costs may make sense.

Unit price is, in essence, the amount of exchange of goods between the company and consumer. It is impossible to keep the product constantly at a low price, so the lowest price estimation becomes reasonable during the sales season or as a promotion occasion. This is especially hard to keep low prices for those companies that constantly spend, so their price per item increases exponentially. Take into account that the low price determination for variable products requires calculation adaptation for each product.

3) Determine your rate of return

So, we have already selected all the necessary costs, and now it remains to calculate the final part of the profit, which will help get the final price. This part of the profit depends on the cost of the product and brand, the cost of advertising, new product creation, or its improvement.

The next step in this process is to calculate the desired profit's ballpark figure based on the price we determined earlier. This figure depends on the type of your business and the price that determines your competition. Let’s say you’d like to get a 20% of profit after the estimated unit cost.

4) Determine the total cost of the goods

The standard formula for calculating the unit cost of a product is the unit cost + profit margin. Let's use the example with music players.

The total cost of production was $3,600
Number of units - 100
Unit cost = $3,600/100 = $36 per unit.

Here are coming our 20% of the profit.
Profit margin = $36*20% = $7.2

Now we can calculate the final market price per unit:
$36 + $7.2 = $43.2

Thus, the price per unit of goods that we can put on the market is $43.2, with 20% profit included.

As a conclusion

Once the item cost estimation is done, you can estimate how many product units have to be sold during the year to cover all actual and future costs. Try to set the right price - a price that is too low and does not reflect the product's quality might be rejected by the customer because of its artificiality and "easy" accessibility.

If you’d like to estimate labor cogs or calculate food cost, shipping cost, variable cost per item, we provide software used for cost estimation called Prudentia. Check it out and get a free trial for your business today!