How to calculate cost price: formula, example and calculator

La Finance pour tous, the French financial education institute, defines it as the sum of the direct and indirect costs incurred to produce a good or provide a service, divided by the quantity produced:

Total cost price = purchases or production
                 + direct costs
                 + share of indirect costs
Unit cost price  = total cost price / quantity

In cost accounting the calculation is built in stages: the purchase cost of materials and goods, then the production cost, which adds manufacturing costs, then the cost price, which adds distribution and administration costs. The result earned on a product is its selling price minus its cost price.

The calculator reduces these stages to three amounts. Purchases are direct costs: they are shown separately because they are often the largest item.

A direct cost is linked to a product or a service without any intermediate calculation: the materials for an order, an employee's hours on a job, a subcontractor hired for a customer.

An indirect cost serves several products at once: workshop rent, insurance, software, the accountant, management time. It has to be allocated. Full costing uses cost centres; a small business can start with a single allocation key:

1. Add up the year's indirect costs, for example €60,000.
2. Choose a base that follows activity, for example 4,000 production hours.
3. Divide: 60,000 / 4,000 = €15 of indirect costs per hour.
4. Assign each order its share: 100 hours × €15 = €1,500.

The choice of key changes the cost of each product, not the total costs. Keep the same key from one calculation to the next so you can compare.

A workshop makes a batch of 500 wooden boxes:

Unit cost price          = 8,500 / 500    = €17.00
Unit selling price excl. VAT              = €25.00
Unit margin              = 25 − 17        = €8.00
Total margin             = 8 × 500        = €4,000.00
Markup rate              = 8 / 17 × 100   = 47.06%
Margin rate              = 8 / 25 × 100   = 32.00%

Without the share of indirect costs, the unit cost would drop to €14 and the margin would appear to be €11. The €3 difference, multiplied by 500 boxes, is the €1,500 of rent, insurance and administration that the batch must also pay for.

For a service, the reasoning is the same, in hours. A job with €1,200 of materials, 16 hours of labour at a €45 loaded hourly cost (€720) and a €280 share of overheads costs €2,200 excl. VAT. Sold at €3,000 excl. VAT, it earns an €800 margin, with a 1.36 multiplier.

As Bpifrance Création points out, the cost price sets the minimum selling price to avoid selling at a loss. The price is set above it, with a margin that must also cover what the cost price leaves out, such as loan interest and tax.

Three checks before settling on a price:

• A realistic quantity: the unit cost falls as the quantity rises, because indirect costs are spread over more units. Calculating on a volume that will not be sold underestimates the cost.
• A complete cost: transport, packaging, scrap and rework time are all direct costs.
• The right margin: compare the margin rate you get with your market's, then check with the break-even point that all your margins together cover your fixed costs.