What Does One Unit Really Cost You? A Small Maker's Pricing Walk-Through

⏱ 7 min read|Published 1 November 2026|By Dibyendu Choudhury

Ask a small manufacturer or trader what a product costs to make, and the answer arrives quickly and confidently. It is the price of the raw material, perhaps plus the wages of the person who works the machine. The number is usually correct as far as it goes. The trouble is how far it goes. Between that quick answer and the true cost of a single unit stand a dozen small items that nobody wrote down, and it is in those items that many small businesses quietly lose their margin.

This essay is a walk-through you can do with a pencil and one afternoon. It does not need an accountant or a new software package. It needs the willingness to look at what you actually spend, and to be honest about what is missing from the quick answer.

Why the quick answer is almost always too low

The quick answer counts only what is easy to see. Material is visible because you pay a supplier for it. Wages are visible because you pay them on a fixed day. Everything else arrives in smaller, scattered amounts: the electricity that runs the machine, the packing tape and cartons, the transport to the customer, the tool that wears out, the rejection that goes to the scrap heap, the hour you spent chasing a payment. None of these feels like part of the product, so none of them gets added to its cost.

When they are left out, the price you set is built on a floor that is not really there. You sell at what you believe is a healthy margin, but the margin is partly imaginary. The business appears busy and even profitable, yet cash at the end of the month is thinner than the sales would suggest. Owners often blame slow customers or rising prices of material. Sometimes the cause is simpler: they have been underpricing their own work.

Step one: choose one product and one month

Do not try to cost everything at once. Pick the single product that sells most, or the one you suspect is the weakest, and pick one recent ordinary month, not a festival month and not a failure. Gather the bank statement, the purchase bills and the wage register for that month. You are not hunting for accuracy to the last rupee. You are looking for the shape of the cost.

Write the month's total quantity of that product on top of a clean sheet. Every figure below will be divided by this quantity at the end, so make it as honest as you can. Count units that were sold and delivered, not units that were started.

Step two: the visible costs

List the material that went into the month's output, using purchase bills and not memory. If you buy in bulk and use over several months, take the amount actually consumed. Add the wages of everyone whose time went into the product, including the helper who loads and the person who packs. If a worker splits time between two products, divide the wage by the share of the hours, even if the division is rough.

Divide each by the quantity. You now have a material cost per unit and a labour cost per unit. This is the quick answer, and you will find it comfortably familiar.

Step three: the hidden costs, one by one

Now go looking for what the quick answer left out. Take your time with this part, because this is where the value of the afternoon lies.

Start with power and fuel. Look at the month's electricity bill and ask what share belongs to production as against the office, the lights and the fan. A sensible estimate is better than ignoring it. Add the cost of any generator fuel, gas or other energy the product consumed.

Next, packing and carriage. Cartons, tape, labels, bags and the transport that takes the product to the customer or the transporter's godown all belong in the unit cost, even when the customer pays freight separately in some orders. Average the actual spend across the month.

Then, wastage. Every process has scrap, rejection and returns. If you made one hundred pieces and ninety-two reached the customer in good condition, the cost of all one hundred has to be carried by the ninety-two. Ask your supervisor honestly how many pieces were spoiled, and use that figure. It will probably be higher than you had assumed.

After that, wear and replacement. Tools, dies, blades, cutters and moulds wear out. A machine needs oil, a repair and eventually a replacement. Take what you spent on repairs and spare parts over the last year, divide by twelve for the monthly figure, and include a fair share in the product's cost. If you have bought new equipment on a loan, include the instalment as well, since the product is what pays it.

Finally, the overheads that nobody likes to count: rent, the accountant's fee, phone and internet, insurance, licence renewals and your own time. Add them together, decide what share of them this product should bear, perhaps by its share of sales or its share of floor space, and take that share.

Step four: your own wage

This is the line most owners leave blank, and it deserves its own heading. If you work in the business, and in a small business you almost certainly do, your time has a value. Decide what a skilled manager would cost to do the work you do, and include a fair portion of it in the product's cost. A business that cannot pay its owner a proper wage is not yet profitable; it is merely employing the owner at a discount and calling the difference profit.

If this makes your cost per unit rise sharply, do not be alarmed. It is not that the product became more expensive today. It is that you are finally seeing what it has always cost.

Step five: add it up and compare

Add the material, the labour, the hidden costs and your share of overheads and wage. Divide by the quantity. This is your real cost per unit. Place it next to the price at which you actually sell, after discounts and after the days of delay in receiving payment. The gap between the two is your true margin.

There are three common results. In the first, the margin is healthy and the afternoon only confirms what you hoped. In the second, the margin is thin and thinner still in a month with higher wastage or slower payments. In the third, the real cost is above the selling price, and the product has been losing money while looking busy. Each result is useful. The third, though painful, is the most useful of all, because it tells you where to act before the damage grows.

What to do with the number

If the margin is thin, you have three levers, and they are not equally easy. You can reduce wastage, which is often the quickest gain because it needs discipline rather than negotiation. You can reduce purchase cost by buying in better lots or comparing suppliers, though this works only up to a point and carries its own risks. Or you can raise the price. Owners resist this lever the most, yet it is often the most honest one. A small increase explained clearly to a regular customer is usually accepted more easily than the owner fears, particularly when the quality has been steady and delivery reliable.

Build a small buffer into the price. The real cost you calculated is the cost of an ordinary month. Your price must also cover the bad one: the delayed payment, the unexpected repair, the rejection of a whole lot. A price that works only when nothing goes wrong is not a price; it is a wish.

Make it a habit, not an event

Repeat the exercise every quarter for your main products, and whenever the price of a major input changes. Keep the sheet in a folder where you can compare it with the last one. Over a year you will notice patterns: which costs creep up, which products consistently earn, which ones you keep only out of habit. The numbers do not need to be perfect. They need to be honest and regular.

The old advice to know your costs is easy to nod at and hard to follow, because costs hide in plain sight. An afternoon with a pencil brings them out. Pick one product this week, gather one month of bills, and write down what a single unit actually costs you. Then ask whether your current price is built on that number, or on the quick answer you have always given.

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Published 1 November 2026 · dibyenduchoudhury.com