Cost price: how to calculate what a product really costs you

What goes into cost price (and what doesn’t)

If you buy finished goods and resell them, cost price is short: what you paid, plus shipping in and any duties. The IRS treats freight-in as part of the cost of goods you sell. Our guide to reselling for profit covers that case item by item.

The moment you make something (a loaf, a candle, a dress) or sell your time, you need three blocks:

Two things stay out. Sales tax or VAT that you collect is not a cost: it passes through you to the tax authority, so work before tax if you are registered. And personal spending is not a business cost, even when it goes through the same card; our guide to separating personal and business records explains why that matters.

The accounting term you may meet is cost of goods sold (COGS). On a US Schedule C, the IRS builds it from opening inventory, purchases, cost of labour, materials and supplies and other costs, minus closing inventory. That is a year-end tax figure for the whole business. Cost price per unit is the pricing tool you use every week.

Example 1: a loaf of sourdough, in the US

Jess runs a micro-bakery from a shared commercial kitchen and sells at two weekend markets. All figures are examples, before any sales tax.

Direct costs per loaf: flour, salt and seeds $1.35, bag and label $0.25, oven energy $0.20. Total: $1.80.

Monthly overheads: kitchen hire $450, insurance $60, market fees $160, website $30, equipment set-aside $100. Total $800. In a normal month she sells 400 loaves: $800 ÷ 400 = $2.00 per loaf.

Her time: baking, packing and markets take 60 hours a month for 400 loaves. At the $20 an hour she wants to earn: $1,200 ÷ 400 = $3.00 per loaf.

COST PRICE SHEET — Sourdough loaf

Direct costs per loaf                    $1.80
Overheads: $800 ÷ 400 loaves             $2.00
Her time: 60 h × $20 ÷ 400 loaves        $3.00
FULL COST PRICE                          $6.80

Selling price                            $9.00
Profit per loaf after paying herself     $2.20

Slow month: 250 loaves, 45 hours
Overheads: $800 ÷ 250                    $3.20
Her time: 45 h × $20 ÷ 250               $3.60
FULL COST PRICE                          $8.60
Profit per loaf after paying herself     $0.40

The direct cost never moved. What changed is that the same kitchen hire and a similar number of hours were spread over fewer loaves. Jess now knows two things: $9 works in a normal month, and a quiet January is a reason to cut a market day, not to discount.

Example 2: a service, in the UK

For a service, the key becomes the billable hour. Dan is a mobile dog groomer. Figures are examples, in pounds.

Billable hours are the number people most often overestimate. Dan does not bill 40 hours a week all year: there is driving between clients, cleaning the van, booking, admin and holidays. He counts 1,200 billable hours a year.

Yearly overheads: insurance £350, equipment £600, van insurance, tax and servicing £1,500, phone and booking app £300, training £250, accountant £400. Total £3,400, or £3,400 ÷ 1,200 = £2.83 an hour.

His time: he wants £28,000 a year before tax, or £28,000 ÷ 1,200 = £23.33 an hour.

A full groom for a medium dog takes 2 hours and uses £3 of shampoo and products, £1 of towel laundry and £4 of van fuel:

• direct costs: £8.00
• overheads: 2 × £2.8333 = £5.67
• his time: 2 × £23.3333 = £46.67
• full cost price: £60.33

If Dan charges £50, he is not losing money in accounting terms, but he is paying himself (£50 − £8 − £5.67) ÷ 2 = £18.17 an hour, not £23.33. That gap is exactly what the calculation is for.

From cost price to selling price

Cost price is a floor, not a price. Once you know it, two calculations help:

• Margin on the selling price: (price − cost) ÷ price. For Jess: ($9 − $6.80) ÷ $9 = 24.4%.
• Price for a target margin: cost ÷ (1 − target margin). For a 30% margin on a $6.80 cost: $6.80 ÷ 0.70 = $9.71.

The classic mistake is to add the percentage to the cost: $6.80 × 1.30 = $8.84 gives a margin of only 23%, not 30%. That is markup, not margin. Our guide to markup vs margin explains the difference, and the profit margin calculator does the sums for you.

Then look outward: what similar products sell for, what your customers have paid so far, and what makes yours worth more or less. If the market price sits below your cost price, you have three levers: lower the direct cost, sell more units to spread the overheads, or change the product. To see how cost price feeds your whole year, read our small business budget forecast guide.

Keep your costs current

A cost price goes stale quietly. Flour goes up, a supplier changes pack sizes, kitchen hire is renegotiated. The sheet you made at launch is wrong a few months later, and nothing tells you. Two habits keep it honest:

1. Record every purchase at its real price, when you make it, in the right category (materials, packaging, overheads).
2. Redo the sheet every quarter, or as soon as a big line moves by more than about 10%.

In Binome360, the Shop module keeps your products with their cost and selling price, and purchases go into a separate business assistant in one sentence. The app prepares the record and waits for you to confirm.

You can ask your assistant to remember your recipe costing too: "remember that one batch of 20 loaves uses 10 kg of flour". It recalls it when you need it. Binome360 does not set your prices and does not connect to your bank or suppliers; it keeps your real numbers up to date so your calculation stays right.

Frequently asked questions

Is cost price the same as COGS?

They are related but used differently. Cost of goods sold is a total for a period, used in your accounts and tax return. Cost price is a per-unit figure you use to set and check prices. Summing cost price across everything you sold should land close to your COGS, apart from overheads that your accounts treat separately.

Should I include my own wages in cost price?

Yes, if you want to know whether the business pays you. Work out two floors: cost price without your time (below it you lose money) and full cost price with it (below it you pay yourself less than you planned).

How do I split overheads between different products?

Pick one simple key and stick to it: per unit if your products are similar, per hour of work if some take much longer to make, or per share of sales. Consistency matters more than precision.

What is the difference between cost price and break-even?

Cost price is a cost per unit at a given volume. Break-even is the volume you need to cover all fixed costs: fixed costs ÷ (price − variable cost per unit), the formula the SBA uses.

In short

Cost price adds up what one unit costs you directly, its share of the month’s overheads, and your time. Work it out for a normal month and a slow one: the gap tells you how far you can discount, and when you would be working for nothing.

First step: take your best-selling product or service and fill in the four-step sheet with last month’s receipts.

Sources

• Internal Revenue Service, Publication 334, "Tax Guide for Small Business", chapter on cost of goods sold: irs.gov.
• U.S. Small Business Administration, "Calculate your startup costs" (fixed and variable costs, break-even formula): sba.gov.

Also available in Français.