Food Methods - What to Include in Cost of Goods Calculations

Cost of Goods

One key piece of information that every food product maker should know is how much it costs to manufacture one unit of product. Cost of Goods. Unit Cost. COGS. Cost of Goods Manufactured. Whatever you call it, determining (as accurately as possible) how much it costs to produce the food products you sell is essential for success in the food business. In this article we'll just call it "cost of goods".

Your cost of goods will include all costs your business incurs to produce the product and get it completely ready to sell. This includes the cost to purchase raw materials and the cost of processing them into a finished, saleable product. It can also include the cost of storage until sold and transporting finished products to the buyer.

Judgement and Estimates

When you go about determining your cost of goods, two concepts to keep in mind are judgement and estimates. Judgement is needed to decide what costs to include in your calculations. Estimates are required because one cannot possibly know, down to the penny, the exact amount of every single cost involved.

It's important to remember that we're talking estimating your cost of goods to the best of your ability. You can then use that information to make better business decisions such as setting your prices at profitable levels. Keeping tabs on your cost of goods is also helpful in managing costs and identifying savings opportunities as well as forecasting profit margins and break-even point.

Knowing your Cost of Goods is the starting point for a range of important business decisions such as setting prices, calculating profits, and determining your break-even point.

What to Include

Generally speaking, your cost of goods will include all materials (ingredients and other materials), labor, and, if possible, manufacturing overhead. In practice, cost of goods calculations may be easier to talk about than to do in real life. But it’s always better to estimate the cost of something and be slightly off than to ignore it altogether.

What Not to Include

When calculating cost of goods, don't include such things as marketing, administrative expenses, or anything else that's not used in manufacturing and packaging the product. Cost of goods should only include those things that are required to make the product and get it ready to sell.

Checklist

Use this checklist as a starting place for what costs should be included when calculating your of cost of goods.

Ingredient Costs

Product ingredients
Processing ingredients (including water)

Packaging Costs

Consumer package (primary packaging and lid)
Safety seal
Label
Glue
Packaging insides (trays, separators, etc.)
Product display package
Shipping box or case/carton box
Tape
Ink

Labor Costs

Line setup and preparation for processing
Processing
Production supervision & management
Quality control
Laboratory analysis
Product shipping
Purchasing labor

Variable Manufacturing Overhead
These are costs that change in proportion to the quantity of goods manufactured.

Production supplies
Electricity and gas used in product manufacturing
Sanitation service

Fixed Manufacturing Overhead
These are costs that are not dependent on the quantity of goods manufactured.

Rent or cost of the manufacturing facility
Equipment and machinery
Depreciation

Other Costs

Breakage
Storage & warehousing
Shipping & handling

Here are some additional notes that may be helpful as you work through the above list:

Your product cost of goods may not include every item in the list.
Remember to include a cost for labor even if you aren't paying for it yet. That way when you actually do start paying for labor, you will have already factored it in to your cost of goods.
Manufacturing overhead may be difficult to determine without expert help. It may be appropriate to calculate cost of goods without including overhead if it proves too challenging.
If you're new to calculating cost of goods, you may want to start start with a general estimate and refine it as you go.

Last Updated: 04/24/2020