Many factories price from the market rate and find out at year end whether they made money. A cost per unit, worked out properly, tells you before you quote which products and which customers pay for the plant.
01Three parts of cost
- Material. From the bill of materials: quantity, including expected loss, times the current purchase rate, less the value of scrap.
- Direct labour and machine time. Wages of the people on the line, and the hours of the machines the product uses.
- Overheads. Power, fuel, maintenance, supervision, rent, insurance and office cost, shared across products.
02Sharing overheads fairly
The easy method spreads overheads by units made. It is wrong for most plants, because a product that runs for six hours on a press uses more of the plant than one that runs for ten minutes.
Share overheads by the thing that drives them. Machine hours suit machining and moulding. Kiln hours or tonnes fired suit ceramics. Power-heavy plants should take power separately, from meter readings per line if possible, because power can be a quarter of cost or more.
03A worked example
| Per unit | ₹ |
|---|---|
| Material after scrap credit | 2,840 |
| Direct labour, 1.5 hours | 210 |
| Power, 9 units | 81 |
| Plant overhead, 0.8 machine hours at ₹180 | 144 |
| Packing and freight to dealer | 95 |
| Total cost | 3,370 |
If the dealer price is ₹3,900, the margin is ₹530, about 14% of price. Work out markup and margin separately, as the two are easily confused.
04Use it every month
- Update material rates
- when you buy. Steel, yarn and polymer move fast, and a cost based on last quarter's rate misleads.
- Compare actual with standard
- If a batch used more material or more hours than the standard, find out why that week.
- Rank products and customers
- by margin. A small number usually earn most of the profit.
In MatruOS, the cost of each product is worked out from its BOM, purchase rates and production entries, and the accountant agent flags products whose margin has fallen.