Setting the cost price of goods you make
How a manufacturer builds a standard cost for each finished product, sets it right when the product is created, and checks margins against actual costs.
By Achekam · · 5 min read · For Manufacturing businesses in South Africa, Nigeria, Kenya
A retailer knows what a product cost: it is on the supplier's invoice. A manufacturer has to work it out. The cost of a bag of cement, a moulded chair or a carton of juice is the materials that went into it, the labour that turned them into a product, and a share of the power, maintenance and supervision that kept the line running. None of that arrives on a single invoice, and much of it changes from month to month.
When a system asks for a product's cost price, a manufacturer has to give it a deliberate answer, not a guess. In Achekam that answer matters more than usual, because a product carries one cost price and that price cannot be changed later. This article explains how the cost price is used, how to build a sensible standard cost, and how to keep an eye on whether reality has moved away from it.
One cost price per product
In Achekam, cost of sales uses the single cost price typed on the product. There is no FIFO or weighted-average costing that recalculates cost as purchase prices change. Whatever figure you enter is the figure used.
Products are created in the Item Master, in the Accounting menu, with a SKU, name, category, selling price, cost price, opening quantity and VAT treatment. The Item Master needs the Point of Sale, Warehousing or Wholesale add-on. And no screen lets a business change a product's price, cost or VAT treatment after creating it, or deactivate it.
Put those together and the conclusion is simple: the cost price you type at creation is the one you live with. It should be a standard cost you have actually worked out.
Building a standard cost
A standard cost is what one unit should cost to make under normal conditions. Build it in three layers:
| Layer | Where the figure comes from |
|---|---|
| Materials | The bill of materials: each input, the quantity per unit including normal waste, at current purchase prices |
| Direct labour | Time per unit on each process, at the cost per hour of the people doing it |
| Production overhead | Factory power, maintenance, consumables and supervision, shared across units at a normal level of output |
The bill of materials is the backbone. Investopedia's guide to the bill of materials explains what a BOM lists, the main types used in manufacturing and how it drives costing and production planning. If you do not yet have one for each product, writing it is the first job.
For overhead, use a normal month's output rather than a quiet one. Spreading a month's fixed costs over a low output inflates the unit cost and makes good products look unprofitable. Separate factory expense accounts make the overhead layer far easier to build; expense accounts a factory should keep apart covers how to set them up.
Leave out selling costs, such as freight to customers and sales commission. They are real, but they are not part of what the product cost to make.
A standard cost in words
A furniture maker costs a dining chair. The BOM lists the timber, fabric, foam, screws and finish, with an allowance for offcuts, priced from recent supplier invoices. The workshop times each stage, from cutting to upholstery, and applies the hourly cost of the people involved. A share of the workshop's power, tooling and supervision is added, based on a normal month's output of chairs. The total is the standard cost, written down with its workings, and that is the figure entered as the chair's cost price.
Getting it right at creation
Because the cost price cannot be edited, treat creating a product as a controlled step:
- Finish the standard cost and its workings before the product is created.
- Have a second person check the workings against the BOM and recent invoices.
- Create the product and confirm the cost price, selling price and VAT treatment on screen before saving.
- File the costing sheet where the accounts team can find it.
If a product's costs change so much that the standard is no longer close, talk to your accountant before creating a replacement product, because duplicates in the Item Master cause their own confusion at the till and in stock counts.
Where the cost price is used
The cost price does its work at the till. Every till sale that reaches the server posts a balanced journal in the same step: each payment method to its own account, revenue, output VAT, and cost of sales against inventory at the product's cost price. For a manufacturer with a factory shop or trade counter, that is how cost of sales and the inventory account move day to day.
It is equally important to know where the cost price is not used:
- Invoices. Invoice lines are typed in and cannot be picked from the product list, so invoices do not move stock or post cost of sales.
- Counts and adjustments. Stock counts, wastage, transfers and opening quantities do not post to the general ledger; only till sales and till returns move the inventory account.
So for sales on invoice, cost of sales and the value of finished goods are kept right by journals your accountant agrees, not by the product record. How till sales reach the ledger is explained in more depth in till sales in the ledger.
Reviewing margins against actual costs
A standard is only useful if you check it. Each quarter, compare the standard cost of your main products with what they actually cost to make:
- materials: recent purchase prices against the prices in the BOM;
- labour: actual hours and pay rates against the standard times;
- overhead: actual factory costs against the amounts you spread;
- waste: actual scrap and rework against the normal allowance.
Where actual costs have moved well away from the standard, the margin your till reports and the margin you really earn are no longer the same. That is the signal to review selling prices, renegotiate with suppliers, or fix the process, and to agree with your accountant how the difference is dealt with in the books.
A first step
Pick your five best-selling products, write a BOM and standard cost for each, and compare the result with the cost prices already in the Item Master. Any product with a large gap is the first conversation to have with your accountant.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
