Understanding How To Cost Out Your Food Products
In order for your food business to be successful, you must know exactly how much it costs you to produce one unit for each of the products you offer. You cannot confidently set a price for your products that ensures your business will be profitable unless you know what your product costs are.
In the food industry, our product costs are those things that are directly tied to the production of the product. This includes line items such as the ingredients needed for your recipe, the product packaging, and the labor that associated with production. If you are working with a contract manufacturer, your product costs are easy to come by since that will be the cost you pay to the co-packer for your product divided by the total number of products that are produced.
For those who don’t work with a co-packer, there is a little more math involved to yield your product cost:
- Step 1a: Ingredient Unit Cost: Divide the total cost you paid for each ingredient by the total number of units bought.
- Step 1b: Product Ingredient Cost: Multiply the total number of units in your recipe by the Ingredient Unit Cost.
- Step 1c: Total Ingredient Cost: Add together all Product Ingredient Costs in your recipe.
- Step 1d: Per Piece Ingredient Cost: Divide the Total Ingredient Cost by the total number of units your recipe makes.
- Step 2: Packaging Cost: Add together any packaging costs for the product including bags, stickers, ribbons (per inch or per foot), takeout boxes, etc. to arrive at your per unit packaging cost.
- Step 3: Labor Cost: Determine how long it takes you or an employee to produce and package one unit of the product. This can sometimes be confusing as you must determine whether time allocated to things like ‘cooling’ will be counted as part of the total or not. Ultimately make the decision that is right for your business and be sure to keep this consistent throughout. Multiply the labor time with an appropriate hourly labor wage to yield your Labor Cost.
- Step 3: Total Product Cost: Multiply the number of products per package by the Total Ingredient Cost. Add that to your Total Packaging Cost and then to your Labor Cost to arrive at your final product cost.
Though these steps may look time-consuming when listed here, the math employed is basic addition and multiplication. There are also numerous food product costing tools available that can help facilitate the math if desired. The important piece is that product costing not be ignored and it is from those numbers that your prices are set. Product costing is not a one-and-done exercise either. Because food, packaging, and labor costs do typically increase over time, it’s recommended that you revisit your product costs a minimum of once a year to see how changes in the cost of inputs to your food items may impact your overall product costs.
Jennifer Lewis is the founder of Small Food Business, a website focused on providing resources and information to food entrepreneurs. The site includes hundreds of articles specific to the food industry, a podcast series which includes interviews with industry experts, white papers, and a community forum amongst other things. In addition to being a professionally trained pastry chef and having worked in the food industry from more than 20 years, Jennifer also holds an MBA from Northwestern University’s Kellogg School of Management.