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
Lin,
Thank you so much. that was piece I was struggling to get my head around and now it makes total sense! for the calculation I posted, 800 loaves would be the monthly production of one product. Now I understand, that if I'm adding, say 800 focaccia to this monthly schedule, my fixed cost per type of loaf will be 2835/2= 1417.5
thank you that makes sense. what about if im not baking equal amounts of each product? example:
800 loaves of bread
200 focaccia
1000 cookies
sorry I know this is basic for most people but i'm just a bit dyslexic with numbers :-/
Hi Verved,
I think Tom is giving you much better advice so I'll keep this short. I'm just going to answer your question above.
To find the number to divide your fixed costs by for each type of product, you:
1) Find the total number of products = 800+200+1000 = 2000
2) Take this number and divide it by the number of units sold for one type of product (e.g. focaccia) = 2000/200 = 10
3) To approximate fixed costs for all focaccia, take 2835 and divide it by the number above = 2835/10 = 283.5
4) To approximate fixed cost for one focaccia = 283.5/200 = 1.4175
Please take note that ideally your units for each type of product are comparable in terms of how they affect aspects of fixed costs. For example 1 cookie unit is not really comparable to 1 focaccia unit in terms of their impact on utilities costs, maintenance, equipment. To make focaccia and cookies more comparable you might decide to treat 1000 cookies as 100 bags of 10 cookies (perhaps the baking time and energy consumption of 10 cookies is = to that of 1 focaccia). In that case, you should treat your total output to be = 800 bread, 200 focaccia and 100 cookie bags and readjust calculations above.
You quickly see that we run into more trouble very quickly. But for the purposes of your quick and very rough estimation here this is hopefully useful.
-Lin
Lin thanks a million, that's exactly what I was after. And it makes perfect sense. Thank you so so much.
Yes Tom's advice is amazing. I bloody love this forum!!!
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
thanks Tom!
This calculation is still very basic and im just starting out. Yes I will take into account waste, loss, taxes etc once I'm more in depth. I just couldnt get my head around how to do this calculation with various products all of which have varying ingredients/costs... that part is confusing me
I think your spreadsheet looks like a good start. Let's see what your projected overhead would be.
OH = indirect cost/direct cost = 3.54/1.91 = 1.85 or 185% overhead.
I don't know bakeries but for small manufacturing businesses something in the vicinity of 230% isn't unusual (or wasn't back when I was still in that kind of business). So you are in the ballpark. There will always be unknowns - e.g., daily number of loaves produced, you aren't going to bake and sell 7 days a week, etc., etc. Just taking into account being open 6 days instead of 7 would take the OH number up to 216%. You also want to have a reserve for maintenance and essential absences (doctor visits, jury duty, whatever).
All in all, I'd suggest starting out assuming an overhead rate of maybe 240%. As you gain experience you can make adjustments. Remember, though, that in all these numbers there has been no provision for paying yourself. You really need to include something for that.
You asked:
Just figure total cost = direct cost + overhead for each product. Using an overhead rate of 250%, the total unit cost to the bakery of the foccacia would be (direct unit cost of production) * (1 + 2.5) = 3.5 * (direct unit cost of production). No, it's not perfect but it will come pretty close. Since you don't know any of the supporting numbers very well, there's no way you will be able to get a better estimate at this time.
If you were a bigger company you might have a different overhead rate for each department. Cookies, laminated goods, and catering might each have their own rates. But you will never get to that point, I image.
thank you this is very helpful! as for your last sentence regarding paying myself, doesnt my BAKER value in direct cost include this? I am the baker after all. I'm starting off as just myself before I hire anyone.
It does, but remember that you will be doing many other things besides spending time directly making dough and baking loaves. All that other time shouldn't be charged as part of the direct cost of unit production. It's all overhead.
You can decide not to charge for your services at all and pay yourself out of the net profits. You can decide to consider yourself a paid hourly or salaried employee. There are probably legal and tax benefits and disadvantages for each, and I'm not sure what they are. Another reason to consult with an accountant.
We have many members on TFL who run or have run bakeries of different sizes. They know much more than I and I'm a little surprised they haven't spoken up yet.
i didnt even consider not having a salary employee at all (myself) and just taking out money from the profits. good point. And yes, accountant is on the way :) but the more advice I can get from all you experienced lovely people on here the better for me :)
One nice benefit (in the US, at least) is that with your Sole Proprietorship business, you should be able to charge your health insurance as a business expense. That's if I understand things correctly. That could save some money. Ask the accountant.
I assume a sole proprietorship in the US works the same as in Canada. There is no baker's wage, or salary to the owner, so no expense to the company for a baker. You are not an employee, you are the business. The net profit of the business is your income. A business loss means no income for you.
If the company is incorporated, the owner can draw a salary and the profit is retained by the company and taxed at the corporate tax rate, which is lower than the personal tax rate.. There are advantages & disadvantages to sole proprietorship vs incorporation and even a one-man show is not too small to incorporate.
So, more to discuss with the accountant.