If you manufacture something from scratch this will be a vital piece of information for your business, but sometimes businesses don’t have a clue what a cost price is! In simple terms a cost price is the price it costs you to make your product. Sales may be going up and up, but if your cost price is high and also rising you may not actually be making much profit.

How can you work out a cost price? Let’s say that you make cakes: the cost price is the total cost of:

• Ingredients/Raw Materials (milk, eggs, flour, sugar etc…)
• Cost of baking the cake (electricity/gas for the oven)
• Packaging costs
• Your time – eaisly the most overlooked

All these things combine to give you the cost price of your cake. Don’t forget though that you need to apportion the ingredients accordingly. If you buy a 2kg bag of flour, only a fraction of that will go into the cake, the same for the other ingredients. If 2kg of flour costs you £5.00 but you only use 500g of flour in the cake, the cost price for the flour in the cake is £1.25 (£5/4).

The cost of the electricity/gas can be hard to work out, but if you are able to bake more than 1 cake at a time the costs will come down per cake.

Your time is easily the most overlooked aspect of a cost price. Work out how much you think that your time is work per hour, then work the cost out from how long are you physically working to make the cake. This includes making the mixture, decorating and packaging it.

Once you have calculated your cost price, you can then start to arrive at a selling price to enable to you make a profit for your product. But remember to reguarly re-evaluate your cost price as raw material prices increase and decrease regularly. When this happens you will need to make the decision to either absorb these costs yourself or pass them on to your customers.