help with figuring out correct costing of production
Thank you for your help in advance... I'm using a nice spreadsheet found online to calculate the cost of baking a loaf. I'm terrible at math and need your help.
I'm adding my variable costs to calculate my cost of sales:
| -Ingredients cost |
| -Baker wages |
| -Service cost |
| -Distribution cost |
I'm then adding my fixed costs to calculate my total fixed costs:
| -Rent |
| -Business rates |
| -Utilities |
| -Equipment |
| -Insurance |
| -Cleaning & sundries |
| -Finance |
| -Packaging |
the next step is a calculation of my average fixed cost per loaf.
This is done by dividing the total fixed cost by my estimated production quantity (800 per month).
totalFixedCost / 800 = average fixed cost per loaf
The total cost of baking the loaf is then calculated by adding my Cost of sales + average fixed cost per loaf
Now, all this makes sense to me and I now have my total fixed cost of producing this ONE specific loaf of bread. But how do I calculate other loaves and products? I'm really bad at math and I'm trying to understand how to calculate the total cost with multiple products.
If I use the same formula for every product, I'm calculating my total fixed costs every time right? Is that the wrong approach? Lets say on one given day I can produce 5-6 various products I should be calculating my fixed costs to reflect this somehow, rather than the fixed costs just covering a single product?
I hope this makes sense, at this point I'm confusing even myself. Honestly I'm just awful with numbers and just want to be sure I'm doing this right.
here's the formula directly from excel:
| Direct costs: | |||
| Ingredients | 0.76 | ||
| Baker | 0.57 | ||
| Service | 0.55 | ||
| Distribution | 0.02 | ||
| Oven | 0.00 | ||
| Cost of sales | 1.91 | ||
| Monthly fixed costs: | |||
| Rent | 2000 | ||
| Business rates | 100 | ||
| Utilities | 150 | ||
| Equipment | 0 | ||
| Insurance | 200 | ||
| Cleaning & sundries | 50 | ||
| Finance | 235 | ||
| Packaging | 100 | ||
| Total fixed costs: | 2835 | ||
| Estimated production quantity | 800 | ||
| Average fixed costs per bread | 3.54 | ||
| Total costs | 5.45 | ||
Hi Verved,
I think the easiest solution is to think about each type of loaf in terms of % of total number of loaves produced each month. That % should be applied to the fixed costs for an accurate figure of total costs for that one type of bread.
In the above example, if the 800 loaves are made up equally of two types - ingredients of which will be different and thus change direct costs of each type - then you should calculate direct costs and fixed costs per type of 400. This means that the fixed costs for 400 out of total production of 800 loaves is 2835/2 = 1417.5.
Note that your absolute fixed costs should generally be unchanging regardless of your output - this means that the more you produce, the lower the fixed cost/loaf. Suppose you scale up and produce 1,200 loaves by adding a third type, 400 as well. In this case, your fixed cost per type of 400 will become 2835/3 = 945. This increases your profit margin if you keep the retail price of your loaves the same as before scaling up.
Of course, if you scale up significantly, your fixed costs will start changing (e.g. rent a bigger place).
-Lin
It would probably be good to speak with a small-business accountant. I'm not that person, but I question whether some of those items are really fixed cost. For example, isn't there a variable part to the cost of firing the oven? Also, your assets, like the oven, will depreciate and you need to take that into account, especially for tax purposes. Speaking of tax, you don't show any items for paying or preparing taxes.
The government will expect your business to make a certain percentage of profit. If you don't, they won't be thinking "Oh, another person who's not good at business". No, they will suspect you of concealing revenue. Another reason to have an accountant.
You also don't have any provisions for damaged, lost, or unsold goods. Maybe the mice get into a 50lb sack of flour and you have to throw it away. Maybe you have two dozen rolls unsold and you donate them to a food bank.
In manufacturing businesses I have worked for (not in the food production area), they use an overhead basis for assigning costs. IOW, they consider that a product, if it has $X direct cost of production, then the real cost to the company is $X * (1 + OH). They have learned over time what a good value for the OH is. Let's say the OH rate is 150% (i.e., a factor of 1.5). If you proposed to produce a new type of bread that has a direct cost of $1, you would expect the total cost to your business to be $1 * (1 + 1.5) = $2.50. You would have to price it higher than that to make a profit. Part of running the business is controlling and reducing the overhead rate.
You don't have the experience yet to know what your overhead rate will be. But there must be trade associations or the like for small bakeries and they should be able to give you some guidance. You should really have an accountant, and the right one might provide some leads and ideas.
TomP