Contents
Short answer
Many manufacturers sell some products at a loss because their cost price rests on a flat coefficient inherited from the past. The article rebuilds the calculation from four components (material consumed, direct labour, machine cost, overheads), lists five costly mistakes and makes the planned-versus-actual variance the only judge. Cost price sets the floor of the selling price, not the price itself.
Many manufacturers sell some products at a loss without knowing it. Not through negligence, but because their cost price rests on a flat coefficient inherited from a time when the production structure was different. Here is how to rebuild that calculation on verifiable ground.
The four components
The cost price of a manufactured product breaks down into four blocks, which must be isolated before they are added together.
Material consumed
Not the quantity listed in the bill of materials, but the one actually issued from stock, offcuts and scrap included. A part cut from a standard sheet consumes the sheet's area, not the part's. The scrap rate must appear in the bill of materials, otherwise it disappears from the calculations and reappears in inventory discrepancies.
Direct labour
Time actually spent, valued at the loaded hourly cost — gross wages, employer contributions, leave, absenteeism. The theoretical routing time is used to plan; the declared time is used to value. Confusing the two means never seeing the drifts.
Machine cost
Depreciation, energy, maintenance, tooling, brought back to the operating hour. A three-hundred-thousand-euro machine depreciated over seven years, used fifteen hundred hours a year, costs nearly thirty euros an hour before any consumption at all. Setup times must be charged to it: on short runs, they often weigh more than the machining time.
Indirect costs
Supervision, quality, methods, stores, premises. Their allocation is necessarily conventional; what matters is that the allocation key bears some relation to reality. Allocating by revenue makes expensive products carry the costs, even simple ones to make. Allocating by production hours is almost always fairer on the shop floor.
The five most costly mistakes
- Ignoring setups. On a run of ten parts, two hours of setup represent twelve minutes per part, often more than the machining itself.
- Forgetting scrap. A five-percent scrap rate means a hundred good parts cost a hundred and five.
- Freezing the material price. A steel price entered eighteen months ago skews every quote in progress.
- Applying a single coefficient. The same overhead coefficient for a standard product and a one-off part favours one and penalises the other.
- Never comparing planned and actual. Without confrontation, a wrong routing keeps distorting the rest indefinitely.
The planned-versus-actual gap, the only judge
A cost price has value only when set against reality. At the close of each work order, compare planned and consumed material, routing time and declared time. A systematic gap in the same direction is not an incident: it signals an obsolete routing that must be corrected.
This is exactly what a properly fed ERP enables: tying every consumption and every declaration to a specific order, then returning the gap with no consolidation work. See our page on production management.
From cost price to selling price
The cost price does not set the price: it sets the floor below which an order destroys value. The price comes from the market and from strategy. But you only knowingly choose to sell at a loss if you know where that floor lies.
