Video Explaining how to Price a Product as a Manufacturer

Today, I wanted to post a video on how to price a product as a small manufacturer. Unfortunately, smaller enterprises lack the real-time tracking capabilities that comes from having an ERP or MRP system. As such, they can’t track material allocation, cycle times, costs and production throughput as easily. To help, I’ve come up with a sample excel spreadsheet that accounts for raw materials, labor, overhead and profit when pricing a product.

The Sample Excel Sheet

The pricing sheet is fairly straightforward. First, account for your raw materials. Second, define your labor costs. This second step includes accounting for the set-up times and run-times for each operation needed to manufacture the product.

Third, account for your company’s overhead. A simple calculation includes taking your indirect expenses and dividing them by your direct expenses. For a more accurate breakdown of this calculation, please go to: Calculating Overhead Rate & Percentage for Small Businesses

The fourth and final step includes inputting your desired profit. In our example, we’ve assumed the company wants to make 25% profit. Therefore, we’ve divided the $1,241.58 by 0.75. That then gives us a price of $1,655.44.

Here is the link to the sample excel sheet: Manufacturer Price Sheet: Direct Material, Direct Labor, Overhead & Profit. This link includes the video and the breakdown in excel below. 

 

It’s important to note that the first portion of the excel sheet charges a 5% indirect cost against the raw materials. Now, why is it 5%, and why charge anything at all? Ultimately, a company’s cost to manage its inventory is often 3% of the inventory amount on hand. This cost is made up of the cost of financing (cost of capital), obsolescence, damage, pilferage (theft), insurance, handling, counting, etc.

There are multiple costs to inventory and your company should charge some amount to cover your costs to manage your raw materials. In this case, the company’s carrying costs were 5% for each month. However, you can easily change this to 3% if need be. The best strategy is to define your specific carrying costs and charge accordingly. To do that, please go to: Sample Excel Sheet Calculating Inventory Holding Costs