Why is the cost you know probably wrong?

When you ask an entrepreneur how much their product costs, the answer usually covers materials: "The part costs me €12 in raw materials." But the real cost — the one that determines whether you're making or losing money — is much higher.

The full cost of a product includes everything needed to produce and deliver it: materials, labor, energy, machine depreciation, scrap, logistics. Ignoring these items means selling at a price that seems profitable but may not actually cover the real costs.

What goes into the full cost?

A product's cost is built by adding three main categories:

Direct costs

These are items directly attributable to the product:

Raw materials and components — the purchase cost of materials that go into the finished product
Direct labor — the hours workers spend physically producing that product, multiplied by the effective hourly cost (not just the net wage, but the full company cost)
External processing — if part of production is outsourced to subcontractors

Indirect production costs

These are items necessary for production but not attributable to a single piece:

Energy — electricity, gas, compressed air to run the plant
Machine depreciation — the machine cost spread over its useful life
Maintenance — routine and extraordinary
Scrap and rework — parts that don't pass quality control

These costs need to be allocated across products using a reasonable criterion (machine hours, labor hours, weight, or another meaningful parameter for your type of production).

General overhead

These are costs of running the business as a whole, not directly tied to production:

Indirect staff — administration, sales, management
Rent and utilities — factory, offices
Insurance, consulting, software
Logistics and shipping

The share of overhead allocated to each product depends on the method chosen. Even a simple method — like distributing overhead proportionally to revenue or production hours — is better than not doing it at all.

An example with real numbers

Take a company that produces mechanical components. A typical part — a turned and drilled steel bracket:

Cost item	Amount
Raw material	€ 12.00
Direct labor (0.5 hours × €28/h)	€ 14.00
External processing	€ 3.00
Energy and machine depreciation	€ 4.50
Scrap (3% rate)	€ 1.00
Manufacturing cost	€ 34.50
Overhead allocation (25% of manufacturing cost)	€ 8.60
Full cost	€ 43.10

If the entrepreneur was selling that part for €38 thinking they were making money ("it costs me €12 in material, I sell it for €38, I make €26"), they were actually losing €5.10 on every unit sold. Over 5,000 units per year, that's more than €25,000 in hidden losses.

This is the kind of discovery that emerges when you run a margin analysis by product. And it's why the real margin is often very different from the perceived one.

How to get started in practice

You don't need a complex system to begin. Here's a 4-step approach:

1. Start with direct costs. Identify the 5-10 products that generate 80% of your revenue (or those you produce most often). For each one, calculate material + direct labor cost. The labor hourly cost must include social contributions, severance pay, holidays, sick leave — not just the net paycheck.

2. Add indirect production costs. Take the annual total of energy, depreciation, maintenance, and scrap. Divide it by total production hours. You'll get a "machine cost per hour" to apply to each product based on processing time.

3. Allocate general overhead. Take the annual total of non-production costs. Distribute it across products proportionally to manufacturing cost (or revenue, or hours). The method matters less than consistency: the key is to do it.

4. Compare with the selling price. For each product, the real margin is: selling price – full cost. If the margin is negative or too thin, the price needs revision.

What changes when you know the real costs

Having the full cost per product isn't an academic exercise. It concretely changes three things:

You know which products make money and which make you work at a loss — you can decide where to invest and what to rethink
You can quote with confidence — no longer by gut feeling, but with a solid numerical reference
You can respond to a client asking for a discount knowing exactly how far you can go

It's also the foundation for understanding which numbers to check every week to keep the business under control.

An entrepreneur with a good accountant has the accounting data in order. But moving from accounting data to cost per product requires analytical work that goes beyond bookkeeping — it's the core of management control. A fractional controller can build this system without the cost of a full-time internal hire.

The management control guide for SMEs explains how to structure the entire journey, from cost calculation to dashboard building.

Want to understand what your products really cost? Get in touch for a no-commitment conversation, or learn about our approach to strategic consulting.