Table of Contents
< All Topics

All Cost-Related Terms

Disclaimer: I am NOT professional accountant, tax preparer, or lawyer or anything in the finance or legal worlds. This information is what I use for my personal business, and I share in an effort to help others find information to spark discusssions with their own finanace and legal professionals. Use at own risk, modify to suit, and verify things with your peeps!
Here’s how I have classified and defined the cost related terms to work for me. Maybe they’ll work for you, too! These definitions might be helpful to have up in a separate tab while you’re reading through the Costs to Pricing article.

Category Area Type Name Description LearnMore
Business Direct Cost Direct Cost

Costs directly related to materials, design, selling, and sale of a single unit of a single product,.

Business Direct Cost Cost of Design Cost of Design Costs involved in designing one unit of one finished product, such as a design fee, set-up costs, use of a pattern or template, etc.
Business Direct Cost Cost of Design SetUp Fee e.g. outsourcing image creation for use within item creation, fee charged by casting company for their set-up, etc.
Business Direct Cost Cost of Design Template or Pattern Use Cost e.g. a share of the cost of a multi-use template. NOTE: If a pattern or template is single-use for whatever reason (durability, license agreement, digital rights, etc), then it goes in Cost of Materials instead.
Business Direct Cost Cost of Design xTra, Other Design Cost Other design-related costs for one unit of one finished product not otherwise included above.
Business Direct Cost Cost of Design {{varies}} Any design cost directly attributable to a single unit of a single product.
Business Direct Cost Cost of Labor Cost of Labor Time-related costs directly attributable to making, packaging, or fulfilling one unit of one finished product. NOTE: if you have someone else doing your manufacturing, packaging, shipping, etc. and you pay them for their time and that time covers more than one unit of one product, then that costs goes into Overhead, Administrative, not here.
Business Direct Cost Cost of Labor Hourly, Own The hourly rate you are charging for the work that you do on one unit of one finished product. DO plan to charge for your time in some manner!

Do this regardless of whether this amount just 'folds back into the business', or if you plan to actually pay yourself from each sale.
Business Direct Cost Cost of Labor Hourly, Paid out to Others The hourly rate you are charging for the labor someone else does to make one unit of one finished product. (This might be different from -- if so, then typically higher than -- the actual hourly rate that you are paying them.)
Business Direct Cost Cost of Labor Per Piece, Paid out to Others The per piece rate you are charging for the labor someone else does to make one unit of one finished product. This might be different from -- if so, then typically higher than -- the actual rate you may be paying them.
Business Direct Cost Cost of Labor xTra, Doing Cost This weird little labor option is my way of avoiding the 'what hourly rate do I pay myself as an hourly rate decision'.

For each material or process that I use, I add a 'Doing Cost' charge per unit. e.g. for each install of a hardware rivet I might charge $0.25. So if I install 10 rivets the labor charge is $2.50, and that's regardless of whether or not I mess 10 up getting 1 installed or how long it takes me to remove and replace, etc.

Then, as I get better, faster, more error-free, the time to install will shorten so my effective 'hourly rate' will go up without me having to change anything in my calculations (or even have to know what it is, track time, etc.).
Business Direct Cost Cost of Labor {{varies}} Any labor cost directly attributable to a single unit of a single product.
Business Direct Cost Cost of Material Cost of Material Cost of materials (raw or component) cost, plus apportioned costs, plus usability factor as calculated for one unit of one finished product. See Material Cost Calculations section for more detail.
Business Direct Cost Cost of Material Packaging, Integral to Product Packaging without which the product is not a discreet unit. e.g. a container to hold lotion if you're selling a lotion
Business Direct Cost Cost of Material {{varies}} Any material cost directly attributable to a single unit of a single product.
Business Direct Cost Cost of Sale Cost of Sale

Costs incurred making a single unit of a single product available for sale, regardless of whether or not the unit ever sells.

Business Direct Cost Cost of Sale Sales Channel, Listing Fee If you track your sales channels listing fees to a single unit of a single product, you can include that cost here as a cost making it available for sale. If you prefer to lump all your sales channels listing fees and not track them to a particular unit, then that falls under the Indirect Costs / Overhead, Administrative bucket.
Business Direct Cost Cost of Sale xTra, Other Available Cost Other 'For Sale'-related costs for one unit of one finished product not otherwise included above.
Business Direct Cost Cost of Sold Cost of Sold

Costs incurred after the sale of a single unit of a single product. These are the costs required to complete a sale. They include, but are not limited to, things such as fees and commissions paid to sales channels and payment gateways along with getting unit from the business to the customer.

Learn More
Business Direct Cost Cost of Sold Offsite Ad Fees Some sales channels charge an "Offsite Ad Fee", such as 12-15%, upon sale of an item. Because this is only charged when an single unit of a single product sells, it can be attributed to the cost of this item if you elect to track it to the individual unit of a specific product. Alternately, you can lump these costs under Indirect Cost / Overhead, Administrative as advertising or marketing costs.
Business Direct Cost Cost of Sold Packaging, Non-Integral Packaging required to get the right product to the right customer. e.g. box, box filler (peanuts, air bags, etc.), packing slip printout, invoice printout, shipping label printout
Business Direct Cost Cost of Sold Packing Add-Ons, Integral to Product Instructions, product information, etc. that your customer needs in order to properly utilize the product.
Business Direct Cost Cost of Sold Packing Add-Ons, Non-Integral Incidental additional items you include in shipments of this product, or shipments in general. e.g. Logo sticker, free sample, bonus material, catalog, etc. NOTE: these might be considered marketing, and if so more likely fall under Indirect Costs / Overhead, Administrative than here.
Business Direct Cost Cost of Sold Payment Gateway, Fee on Sale Some payment gateways charge a flat fee per sale. e.g. Payment Gateway X charges $0.30 flat fee per sale, plus 2.9% of the sale price; Include that $0.30 flat fee here.
Business Direct Cost Cost of Sold Payment Gateway, Percentage on Sale Some payment gateways charge a percentage fee per sale. e.g. Payment Gateway X charges $0.30 flat fee per sale, plus 2.9% of the sale price; Include that 2.9% fee here. This gets tricky if you're wanting to include this in the price of your product before putting it for sale -- as you add the fee cost to the price, the price goes up, in turn the fee will go up. Just make stab at it and at least you'll have recouped the bulk of the fee.
Business Direct Cost Cost of Sold Sales Channel, Fee on Sale Some sales channels charge a flat fee per sale. e.g. Sales Channel Y charges $0.50 flat fee per sale, plus 3.5% of the sale price; Include that $0.50 flat fee here.
Business Direct Cost Cost of Sold Sales Channel, Percentage on Sale Some sales channels charge a percentage fee per sale. e.g. Sales Channel Y charges $0.50 flat fee per sale, plus 3.5% of the sale price; Include that 3.59% fee here. This gets tricky if you're wanting to include this in the price of your product before putting it for sale -- as you add the fee cost to the price, the price goes up, in turn the fee will go up. Just make stab at it and at least you'll have recouped the bulk of the fee.
Business Direct Cost Cost of Sold Shipping OUT, Included in Cost Actual shipping costs to get the product to your customer, per unit of product. NOTE: DO NOT add anything here if you are either (a) charging shipping as a separate fee paid directly by your customer (because that would then be a separate invoice item), or (b) actually eating the cost of shipping the product to your customer (in which case that would come out of your profits but would not be recouped in any way).
Business Direct Cost Cost of Sold xTra, Other Actual Sale Cost Other 'Actual Sale'-related costs for one unit of one finished product not otherwise included above.

Category Area Type Name Description LearnMore
Business Indirect Cost Indirect Cost

Costs indirectly related to a single unit of a single product, but without which you wouldn't be able to make this item. e.g. Non-inventoriable items consumed, utilities, etc. This is a rather large area of any business, and not recovering these costs as part of your product markup in your pricing strategy might have you scratching your head about not making any financial headway despite selling lots. Something to consider!

Business Indirect Cost Overhead Administrative Costs not attributable to a single unit of a single product, and not consumed in the making of one or more products. This is the {seemingly} endless list of items that do not fall into the other three categories (direct costs, labor costs, and indirect manufacturing costs). e.g. lights on, utilities, professional services, software, memberships, taxes, licenses, repairs, tools, equipment, advertising, insurance, etc., etc., etc., ad nauseum.

This is often an envelope-to-the-forehead prediction when first getting started. A decent rule of thumb is 70% markup on total materials cost for Administrative Overhead.
Business Indirect Cost Overhead Manufacturing Costs of manufacturing not attributable to a single unit of a single product such as a can of liver of sulphur that 'lasts forever' but really is eventually fully consumed after you make enough products, or costs of specialty containers for storing raw materials, etc.

This is often an envelope-to-the-forehead prediction when first getting started. A decent rule of thumb is 30% markup on total materials cost for Manufacturing Overhead.
Business Indirect Cost Overhead Overhead Costs not attributable to a single unit of a single product, and not consumed in the making of one or more products.

Category Area Type Name Description LearnMore
Business Calculation Material 0 - Invoice
EXAMPLE INVOICE
LI #
Item
$ Each
QTY
Ext Total
1
Leather Hide, Side, 20 sq ft
$149.00
1
$149.00
Subtotal
$149.00
Sales Tax
$12.68
Shipping
$35.00
Invoice Total
$196.68
Business Calculation Material 1 - Base

Base cost is calculated with no adjustments. Take the cost per unit as per invoice line item amount. Final cost is almost always going to be more, once you add landing costs and adjust units available for usability.

Using Example Invoice:

  1. Number of Use-As Units: We bought 1 side, and we'll use that based on sq ft, so 20 sq ft
  2. Cost Per Unit: Divide the cost ($149.00) by the units (20 sq ft) to get the per unit base cost. $149.00 / 20 sq ft ==> $7.45 per sq ft.
Business Calculation Material 2 - Landed

Landing costs are ones you pay to get the material to you to work with, e.g. shipping, import and/or duty fees, sales tax, etc. Your landed cost is almost always going to be more than your invoice line item cost.

Using Example Invoice: In this simple example since we only have one line item the total invoice cost is equal to landed costs. We'll still step through the calculations for form's sake.

  1. Number of Use-As Units: We bought 1 side, and we'll use that based on sq ft, so 20 sq ft
  2. Landing Rate (costs per dollar spent): Divide the landing costs total ($47.68) by the total for all line items ($149.00) to get the amount to add per dollar spent, which would be $0.32 giving us a landing rate of 1.32
  3. Landed Cost: Multiply the line item dollars spent ($149.00) by the landing rate (1.32) to get landed total for that item. $149.00 + 47.68 ==> $196.68.
  4. Cost Per Unit: Divide the landed cost ($196.68) by the units (20 sq ft) to get the per unit landed cost. $196.68 / 20 sq ft ==> $9.83 per sq ft.
Business Calculation Material 3 - Final

Final cost takes into account Landed Cost plus adjusts for a usability factor. Usability factor relates to how much of a particular material will be useable in your manufacturing process, and reduces how many units are actually available for use.

Using Example Invoice:

  1. Number of Use-As Units, Base: We bought 1 side, and we'll use that based on sq ft, so 20 sq ft
  2. Number of Use-As Units, Adjusted: With leather hide (especially whole or side; less so with smaller precut portions like squares, so adjust accordingly) it is considered standard to expect 25% waste, so 75% usable. So, 20 sq ft x 0.75 ==> 15 sq ft actually usable.
  3. Landed Cost: Multiply the line item dollars spent ($149.00) by the landing rate (1.32) to get landed total for that item. $149.00 + 47.68 ==> $196.68.
  4. Cost Per Unit: Divide the landed cost ($196.68) by the actual units available (15 sq ft) to get the per unit landed cost. $196.68 / 15 sq ft ==> $13.11 per sq ft.
Business Calculation Material 4 - Comparison

As you can see, taking into account the landing costs and the usability factor significantly increases our per unit cost for this example.

Cost Approach Comparison, Per SQ FT
 
Base
Landed
Final
Units available
20
20
15
All Units Cost
$149.00
$196.68
$196.68
Per Unit Cost
$7.45
$9.83
$13.11

Previous All Business Terms