New to business - how to calculate cost of product.

[Simon_Singh]

Hello,
Thank you for having me at the forums. I hope to gain some knowledge from you vets out there!

I have recently decided to start a business. I am struggling to work out how to calculate the cost of my product all inclusive of labor and material cost.

I have identified the cost of material is £130. I will have four people working for me at the following hourly rates:

Person:
A £7 5hrs/day
B £7.50 8hrs/day
C £8 8hrs/day
D £7 5hrs/ day
Total billable hours = 26hrs

Between the four people we can make 6 of the items in a day/hours they worked. How can I use this information to work out how much each product will cost inclusive of labor? Any advice is much appreciated!

 

[DWS]

If these people are employees have you considered the minimum wage?

 

[WaveJumper]

Have you taken into account the National Minimum wage, plus all the on costs

 

[Simon_Singh]

Hi, yes I did check it. Nat min for 18-20 is £6.15 if I am correct. I have agreed to pay them more. This will only be for the initial couple of months until we can complete the orders (we have them pending already). All the people working will be friends of mine so we have an understanding.

Am I doing it wrong? Sorry this is my first ever business.

 

[Mr D]

The cost of the employees includes any employer NI and any pension contributions you make.

The product requires material cost of £130 plus 26 hours staff time plus NI plus pension?
Don't forget too, staff cost you money when using annual leave but do not produce anything.

 

[Simon_Singh]

In regards to overheads there will be little to none as I have a friend who has allowed me to use some spare space at his unit.

 

[Mr D]

Hi, yes I did check it. Nat min for 18-20 is £6.15 if I am correct. I have agreed to pay them more. This will only be for the initial couple of months until we can complete the orders (we have them pending already). All the people working will be friends of mine so we have an understanding.

Am I doing it wrong? Sorry this is my first ever business.

And they are all age 20 or less?

 

[WaveJumper]

Hi, yes I did check it. Nat min for 18-20 is £6.15 if I am correct. I have agreed to pay them more. This will only be for the initial couple of months until we can complete the orders (we have them pending already). All the people working will be friends of mine so we have an understanding.

Am I doing it wrong? Sorry this is my first ever business.

https://www.gov.uk/national-minimum-wage-rate
https://www.gov.uk/employing-staff
https://www.acas.org.uk/index.aspx?articleid=1366
https://www.gov.uk/employers-workplace-pensions-rules
https://www.gov.uk/national-insurance-rates-letters

Unless of course you are paying them cash in-hand

 

[DWS]

So if I have read this right and without allowing for any additional employee/employer expenses and from the information above
26hrs at the above rates = £194/6 = £32.33 labour + £130.00 materials = Total cost of £162.33

 

[Simon_Singh]

Unless of course you are paying them cash in-hand[/QUOTE]

Hi, yes I should have mentioned that this will be cash in hand. (I have advised that each person should consider getting a UTR should they want to declare the extra income). We are all 20 and below and will be doing this little business on the weekends. Doesn't seem like I am quite ready for the business within regards to all the legal stuff.

 

[billybob99]

Cash is king.

 

[Simon_Singh]

Thanks for all the info guys. Managed to make a little excel sheet with formulas with the info provided here. Thank You!

 

[Mr D]

Unless of course you are paying them cash in-hand

Hi, yes I should have mentioned that this will be cash in hand. (I have advised that each person should consider getting a UTR should they want to declare the extra income). We are all 20 and below and will be doing this little business on the weekends. Doesn't seem like I am quite ready for the business within regards to all the legal stuff.[/QUOTE]

Are they employees?
Self employed?
Or business partners?

 

[Millerd]

The cost you are getting here is only the direct cost. In doing the costing you should also consider the cost of your your own time and resources to acquire and deliver the orders plus any other expenses.
And I’m sure you are aware that there doesn’t necessarily have to be any correlation between the cost and selling price.
Best of luck with your project.

 

[TheoNe]

There are various costs you need to factor in - some fixed costs such as salaries and some are variable costs like material costs.

This guide is a good place to start - https://www.thedesigntrust.co.uk/calculate-the-cost-price-of-your-creative-product/

 

[STDFR33]

In regards to overheads there will be little to none as I have a friend who has allowed me to use some spare space at his unit.

You still need to factor into your pricing what this would cost you.

If doing this makes the business not viable, then you don't have a business.

 

[Guy Incognito]

It's always more expensive than you think. I've certainly found that out the hard way! And don't forget VAT in the future too...

 

[TopSpek]

Using only the information given by Simon:

A receives £7.00 per hour, and works for 5hrs/day
B receives £7.50 per hour, and works for 8hrs/day
C receives £8.00 per hour, and works for 8hrs/day
D receives £7.00 per hour, and works for 5hrs/ day

So the daily rates of the workers are:

7.0 * 5 = £35.00 per day
7.5 * 8 = £60.00 per day
8.0 * 8 = £64.00 per day
7.0 * 5 = £35.00 per day

This comes to £194 per day for labour, and assuming the cost of materials, £130, is for all 6 items, then the cost of each item is given by:

( 194 / 6 ) + ( 130 / 6 ) = £54

I think your teacher should be happy enough with this answer Simon, but I do worry about what your teacher will think when your GCSE result comes in! Perhaps you'll pick up a couple of extra marks for the blagging!

David