on the other hand, was usually less concerned with bookkeeping.
With the different materials coming in and products going out,
tools needed, and time used, it would have been difficult to keep
track of it all. Historic manufacturers probably used more of a
gut-feeling approach and experience to set their prices. Besides,
their goal was often not profit maximization, but merely to have a
good life. As Daniel Defoe observed: “There’s nothing more
frequent, than for an Englishman to work till he has got his pocket
full of money, and then go and be […] drunk, till, tis all
manufacturing product each item has a specific COG required to
complete. this incudes the raw material to create,(direct
cost), plus the gases, and labor(indirect costs)
part of this issue is whether or not we should determine the waste
left after the manufacturing process of said item. Whether you pull
points or attach blowpipes, there will be material that is scrap
and considered waste. In some fields scrap
is considered reusable so for this chat I will be
referring to the leftovers as waste which is unable to be reused
and therefor sold.
to use the food industry for an example they have plenty of waste
associated with the manufacturing of meals. for example, If
broccoli is on the menu then a bulk order of broccoli is
needed. say each head of broccoli weighs 1lb and comes in a
10lb box that cost $20.00. . this would mean the cost of each
unit of broccoli costs $2.00 Now when
the broccoli is being processed to cook a portion
of the broccoli is removed and would
be considered waste. lets use 50% as how much of
the broccoli is removed which would mean 50% is left.
this would bring the true cost of each unit to $4.00 per
headof broccoli since technically we just removed 50% of the weight
but it still cost us $20.00 total.
we can use the same concept when it comes to calculating cost of
goods manufactured. say for example a 2lb.- 3" wrap and rake
spoon costs .50 to make in direct cost (raw material)and
an additional indirect cost(overhead) of .50.
this unit would initially cost $1.00 to manufacture. after
the item is made you are left with a little bit of waste which for
the sake of this example lets call it 1/2 lb of
material. when weestimated our baseline costs for each item
we figured a 3"w/r spoon weighs 2lbs (chunky spoon) which costs
$1.00 to make, so if we do the math and break down the cost,
we can determine that the waste costs (.50/lb=.25 in waste)
now if you work for a week and manufacture 100- 3'wrap and
rakes you will have an estimated amount of waste at $25.00
multiply that by 12- months and you'll see that theres approx
$300.00 in waste. this is one way to look at it..
100/week=$25.00 in waste
perspective is to increase the direct cost to manufacture each item
by adding the waste back into the peice. We figured to waste
cost .25 and the actual item when complete weighs 1.5lbs. so
you can then add the .25 back into the cost to manufacture the item
which would mean the 1.5lbs of material costs $1.00.
in the end talk
to your accountant and ask them what they recomend you do to keep
track of this info. whether A- you seperate the true cost to
manufacture from waste. or B. you ignore the waste but increase the
cost of goods by the amount of the value you predetermined for the
before you begin adding new items to your catalog, estimate the
direct cost(raw material) to manufacture as well as
Overhead(indirect cost) when figuring out costs per item made. this
will not only give you a baseline cost of your new products it will
also give you a base line number to price your item to be sold at
both wholesale and retail.