What is the true cost of a product? (meaning, formula and example)

By Olusegun Osunrinde, Founder, Sentralbee · Published

Quick answer

The true cost of a product is everything it takes to make and deliver one piece, not just the materials. It adds up four things: materials at the price you paid, labor, overhead such as power, delivery and packaging, and waste such as offcuts or a cracked tier. Price below your true cost and you lose money on every sale.

The short version

True cost is what one piece really costs you to make and deliver. It is not just the materials.

True cost = materials + labor + overhead + waste

Most makers price from the materials and a feeling. They forget the boxes, the delivery, the offcut in the bin and their own hours. So they get busy, but the money never seems to add up.

What does true cost mean?

True cost means every cost of making one piece, added together. If you sell for less than your true cost, you lose money on that sale, even if it feels like a good price.

You may also see "true cost" used in sustainability, as in true cost accounting. That meaning adds the environmental and social costs of a product. This guide is about the business meaning: what one product costs you to make, so you can price it properly.

What goes into true cost?

PartWhat it includesExamples
MaterialsEverything that goes into the piece, at the price you paidFlour, butter, fondant, lumber, hardware, fabric, lace
LaborThe hours it takes, times what an hour costs youBaking, decorating, milling, assembly, sewing, fittings
OverheadWhat it takes to keep working, shared across piecesPower, rent share, delivery, packaging, boxes
WasteMaterials you paid for but could not useOffcuts, mis-cuts, a cracked tier, leftover icing

A worked example: a three-tier wedding cake

These are example figures. Your prices will differ.

CostTypeAmount
Flour, sugar, eggsMaterials$48
Butter and creamMaterials$62
FondantMaterials$40
Sugar flowersMaterials$85
Cake boards and boxOverhead$30
Oven and powerOverhead$25
Decorating, 9 hours at $35Labor$315
True cost$605

If the baker charged $575, it would feel like a fair price. The ingredients alone are only $150. But the true cost is $605, so this order lost $30.

Look at where the money went: more than half of it is the decorator's time. Time is the cost most makers leave out.

Why do most makers undercharge?

Because they price from what they can see:

  • Overhead is forgotten. Boxes, power and delivery don't feel like part of the product.
  • Waste is ignored. The offcut was paid for, but it is not in the finished piece.
  • Their own time is free. Many solo makers don't pay themselves in the price.
  • Prices go stale. Butter, lumber and fabric prices change, but the price list doesn't.
  • They copy a competitor. Another maker's price is based on their costs, not yours.

How do I set a price from true cost?

Price = true cost ÷ (1 − margin)

For the cake above, with a 30% margin: $605 ÷ 0.7 = $864. Round it to $865.

If you prefer adding a fixed amount on top of cost, that works too. What matters is that you start from the true cost. The glossary explains margin and markup in plain words.

How can I work out my true cost quickly?

Use the free true cost calculator. Add your materials, hours and overhead for one piece, and it shows your true cost and a fair price.

To keep it up to date for every product, Sentralbee does the math for you:

  • Materials with cost, supplier and a low-stock level
  • Product costing from a recipe of materials plus labor and extra cost lines. The cost updates when your material prices change.
  • Below-cost alerts. If a product now sells below its true cost, the Bee, our built-in AI partner, tells you and suggests a price from your margin rule, either a percentage or a fixed amount.
  • A waste log to record offcuts and spoiled batches

Costing is on the Growth plan ($90 a month) and Scale, after a 14-day free trial. See pricing. Or book a free Clarity Review and we'll cost one of your products with you in 30 minutes.

Questions

What is the difference between true cost and material cost?

Material cost is only what goes into the piece. True cost adds your labor, overhead like power and delivery, and the waste you paid for but could not use. True cost is always higher.

What is the formula for true cost?

True cost = materials + labor + overhead + waste. Work it out for one piece. Then set your price from it: price = true cost ÷ (1 − margin).

Should I count my own time if I work alone?

Yes. If you don't, your price only pays for materials and you work for free. Decide what you want to earn a month and divide it by the hours you work to get an hourly rate.

How do I include monthly costs like rent and utilities?

Add up the month's overhead and divide by the number of pieces you make in a month. Add that share to every piece. Re-check it when your volume changes.

Is there a free true cost calculator?

Yes. Sentralbee has a free true cost calculator at sentralbee.com/us/true-cost-calculator/. Add your materials, time and overhead for one piece and it shows the true cost and a fair price.

See your real numbers. Free.

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