How to calculate cost per unit for a product you make in batches

Cost per unit formula

Unit cost is what it costs you to make one item. For anything made in batches, the cost per unit formula is: cost per unit = total cost of the batch divided by the number of good units it produces. Total cost of the batch is the materials, packaging, labor and overhead that went into it.

The same formula works for a month of production. Add up every cost of making goods in the month and divide by the number of units finished in that month. Working batch by batch is easier for a maker, because each pour, bake or print run has its own receipt and its own count.

IRS Publication 334 lists the same building blocks for a business that makes what it sells: materials, labor and overhead. The table shows what goes into each group for a small maker.

Freight counts too. The IRS treats Freight-in, express-in, and cartage-in on raw materials as part of the cost of goods, so the shipping you pay on a wax order belongs in materials.

How to calculate unit cost step by step

These steps use one batch. Keep the receipts for the batch together so every number has a source.

1. Total the materials for one batch

   Add what you used, not what you bought. If a 10 lb case of wax makes two batches, count half the case, plus the shipping you paid to get it.

2. Add packaging that ships with the product

   Jars, lids, labels, boxes and inserts that are part of the finished item go in. Divide bulk packs by the number of units they cover.

3. Add labor

   Multiply the hours spent on the batch by the hourly rate you pay, or the rate you want to pay yourself. Include setup, pouring, curing checks, labeling and cleanup.

4. Add a share of overhead

   Total your monthly production overhead, such as studio rent, utilities and equipment, and divide it by the units you make in a normal month. Multiply by the units in the batch.

5. Count the good units

   Count only the units you can sell. Cracked jars, sunk tops and test pieces raise the cost of the units that survive.

6. Divide

   Total batch cost divided by good units is your cost per unit. Write it down with the date, because supplier prices change.

Worked example: cost per unit for one candle from a 24-candle pour

Example: a maker pours 24 soy candles in 8 oz jars in one session. She pours four batches a month, or 96 candles. Every input below is an assumption chosen to show the method, so your own numbers will differ.

Her monthly production overhead is $288: a $150 share of studio rent, $30 of utilities, $60 for equipment spread over its working life and $48 of insurance. Divided by 96 candles, that is $3.00 a candle, or $72 for a batch of 24.

Example result: $258 divided by 24 candles is a unit cost of $10.75. Materials and packaging are $5.25 of that, labor is $2.50 and overhead is $3.00.

If two candles crack while curing, the batch still cost $258, but it now makes 22 candles. The unit cost becomes $11.73, an extra 98 cents on every candle you sell.

How batch size and monthly volume change unit cost

Materials and packaging cost about the same per unit at any batch size. Labor and overhead do not. Setup and cleanup take roughly the same time for a small pour as for a large one, so bigger batches spread that time over more units. Overhead is a monthly amount, so making fewer units in a month raises the share each one carries.

Example result: doubling the pour from 24 to 48 candles saves 42 cents a candle. Monthly volume moves the number more. If the maker makes 48 candles a month instead of 96, the same $288 of overhead adds $6.00 a candle, and the unit cost of a 24-candle batch rises to $13.75.

Bulk prices also lower the materials line, but only for supplies you will use before they go stale.

Selling fees per unit: one candle sold on three platforms

Unit cost covers making the product. Selling it adds a fee on each order, charged by the platform or card processor, so subtract it before you work out profit per unit. The same $24 candle costs a different amount to sell depending on where the buyer pays, using each platform's published rates.

How to calculate profit per unit

Profit per unit is the selling price minus the unit cost minus the selling fees on that sale. It is the answer to how to calculate profit per item, and it tells you what each sale leaves to pay for your store plan, ads and your own profit.

Example: the candle sells for $24 and costs $10.75 to make. The table works out profit per candle in each place she sells.

Example result: on her own store each candle leaves $12.25, which is 51% of the price. On Etsy the same candle leaves $10.52. Monthly costs of selling, such as a Shopify Basic plan at $39 a month or a set ad budget, come out of these amounts, so divide them by the candles you sell in a month to see what is left.

Free shipping works the same way. If you pay postage, add it to the costs for that order before you subtract.

Unit cost and cost of goods sold on your taxes

Your unit cost for pricing and your cost of goods sold for taxes use the same parts, but the tax rules decide what counts. IRS Publication 334 says that labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. In a business that makes its products, the labor that counts is both the direct and indirect labor used in fabricating the raw material into a finished, saleable product.

Labor for tax purposes means wages: the IRS describes direct labor costs as the wages you pay to those employees who spend all their time working directly on the product being manufactured. The Schedule C cost of labor line adds: Do not include any amounts paid to yourself. The value of your own unpaid hours is a pricing choice, not a cost of goods sold. Platform fees and ads are costs of selling, so this guide keeps them out of unit cost.

On Schedule C, cost of goods sold is worked out for the year: beginning inventory plus purchases, labor, materials and other costs, minus inventory at the end of the year. The worksheet's last line reads: Subtract line 41 from line 40. Rules vary with your business and state, and this page is general information, not tax advice. Check the IRS publication or a tax professional for your own return.

Keeping your unit cost current

A unit cost is only as good as its inputs. The SBA's startup cost guide says that finding your break-even point will help you price your products smarter, and a break-even point starts from an accurate unit cost.

• Recalculate when a supplier changes a price, when you change jar size or fragrance load, or when your monthly volume changes.
• Spread costs paid less often than monthly. For a cost paid each quarter, the SBA says to divide that cost by four to get the monthly amount.
• Track waste for a few batches and use the average number of good units, not the best batch.
• Calculate a unit cost for each product. A large jar and a travel tin share overhead but not materials.

Where Nation fits

Questions about cost per unit