Sunday, November 16, 2008

Costing and Pricing Navigational Tips Part 4

We’re going to round up this series today by taking a look at adding up materials and estimating production times: With all this info over the past weeks you should be able to get a grip on the financial implications of producing your own work both from the end of budgeting your life needs and from the end of costing the details of what goes into your product.

Remember that these are just Navigational Tips – I don’t pretend to be a real expert on this but this is how I’ve worked it out over time, partly by trial and error, partly by research in texts and on the Internet. If you have other ways of doing things that you’ve found work – short cuts, software, tips for areas I haven’t covered – please do share them here. Despite this series not having attracted any comments, this is an area a lot of us need help and re-assurance in, so it’s a good area to share your experiences.

Okay, let’s get down to it:

Resources
When making a product you use up resources – materials that are included in the final product as well as intangible resources like your time, electricity, wear and tear on equipment. In costing your product, you try to allocate a $ and c value for all of these things –when you’re working on a small scale though, it’s sometimes more appropriate to estimate things that are not easily measured rather than invest large amounts of your time (which always has a $ value) in figuring out the minute details. To make it real, I’ll use an example that I’m used to:

Handmade Bouncy Necklaces

Materials

  • Cold Porcelain Clay for beads
  • Fishing Line / monofilament
  • Leather Cord
  • Resin
  • Label

There are actually 2 production processes in this example – the first being costing making the cold porcelain, but for simplicity sake, lets just assume I’ve already done that and it costs $25 / lb

So, I’m not going to cost 1 item alone – in this case, I am making batches (small groups) of one design – so lets say I make 20 of the one design – same colour, same decorative effects, same number of beads per necklace

20 necklaces have
  • 5 big, double beads each – total of 100 big beads
  • 5 closure beads each – total of 5 closure beads
  • 6 spacer beads each – total of 120 spacer beads

How much clay does this take? How do you find out?

Take enough of your clay to more than do this amount
  • Weigh it
  • Make all the beads and
  • Weigh the balance left –
  • The difference is your weight of clay.

NOTE – this is more accurate than weighing the finished beads because in this case 1) the clay dries, becoming lighter, 2) the beads include a piece of monofilament – light but it could affect your final outcome if you were making say, 100 necklaces for the costing.

So, having done this, we will know the clay used in making 20 necklaces – 6 oz of clay

Cost of clay is: 6/16 x $25 = $9.375 round up to $9.40

Now, in making the beads I have to add in other costs – my time, and wear and tear on my equipment – this last being very difficult to pin down, so usually you include an overall cost in your overheads, which is what we did last post (how long will it be before you replace your drill, clay sculpting tools etc – usually you estimate this when starting out)

So let’s look at the next material cost with these beads I use monofilament:
Monofilament – easy – measure the amount you use – I used 20 in per necklace, that’s .56 of a yard, so for 20 necklaces, I’ll use 11.2 yd. My spool cost $18 for 110 ys,

Cost of monofilament is: 18/110 x 11.2 = $1.83 – round up to $1.85

Time it takes to make these beads?

Get a timer of some sort – if you have a watch or clock that cannot do stop-watch or timer functions, decide to start at a certain time and write it down before you start – that way you won’t risk forgetting (this is one tip I learned from experience!)

So, when it’s start time, just start making, don’t rush, just work as you normally would. The only thing I would say you should stop the clock for, is if you are interrupted for a phone call or such where you have to stop for a few minutes or more; but you decide, you can stop the clock for smaller disturbances if you wish – write down the time elapsed whenever you have to stop and of course, when your are finished all your items.

So, lets say it took me 3hrs and 20 minutes to make all my beads (yes, they take time!)

I go back to my hourly pay rate which is $30 according to the Matchmaking Ins and Outs method we used in Part 2

Salary costs for making 20 sets of necklace beads is $30 x 3 1/3 = $100.

You’ve probably noticed this is by far the biggest cost, as is often the case. This is also a cost a lot of people forget, or don’t allow enough for, so you can see the problems you would run into if you don’t consider it properly.

Now, note here, I would normally just make a note of the time taken for the beadmaking and then time the other things I need to do and add them all up at the end and then work out my time cost – but it seemed appropriate to introduce the method here.

Leather cord is easy too – do it just like the monofilament – I allow 18” (0.5yd) per necklace, the 110 yd spool cost $80

Cost of leather cord: 0.5 x 20 x 80/110 = $7.27 round up to $7.30

We have to resin the beads – this is time consuming – takes about 2hrs total – we’ll add that into our time totals

To cost the resin, you normally have to measure exact amounts of resin to mix, so this makes it easy – say I used 3 fl oz and 16oz costs me $52

Cost of resin: 3/16 x 52 = $9.75

And we have to assemble the necklaces – that takes about 1hr – add that in too

Labels – for simplicity sake, let’s say I have my labels printed at a service bureau and I get 49 per page (7 across, 7 down) so they charge me $6 (I have nice labels) per page

Labels cost: 6/49 x 2 0= $2.45

I have to add nice string to attach them – 5” per label, 100 yrd spool cost $10,

Cost of Label string: 10/100 x 5/36 x 20 = $2.78 – round up to $2.80

Total cost of labels $2.45 + $2.80 = $5.25 ( note how expensive labelling is)

Time to label them all 20 minutes ( cutting out from printed sheet, puching holes and stringing the label and the whole thing onto the necklace) – add into total time

Summary of costs:
Cold Porcelain Clay for beads $9.40

Fishing Line / monofilament $1.85
Leather Cord $7.80

Resin $9.75

Labels $5.25

TOTAL MATERIALS $34.05


Now at this point we add in our labour / salary costs Total time to make the 20 necklaces: 6hrs 40 mins Labour cost: 6 2/3 x 30 = $190

Overheads
Now we have to allow for our overheads and I know we didn’t put figures to them in the last post, but let’s do that here working on a months costs:


1) Rent $300
2) Studio Furniture, fittings, equipment, vehicle (Hire Purchase, loans, etc) $1000
3) Phone & Internet $250
4) Electricity $100
5) Water $20

6) Gas $ 10
7) Salaries –

It’s worth taking a moment to look at this, - for costing production; you’re counting the salary cost of the productive hours, so this here has to be the administrative portion of your salary – all your non-productive hours. You could go through a month noting all the time you spend not working or working and you’d get a fairly good idea. For ease of our calculations , lets say 3.5 hrs a day is non-productive (lunch, short breaks and admin) - that makes the cost per month 3.5 x $30 x 5(days/wk) x 50(work weeks) / 12(months) = $2187.50 8) Administration – if you pay someone else add this in. (we wish we had someone!)
9) Advertising and promotion $ 250 (I have a classified ad and use fliers)

10) Insurance $100
11) Savings $ 150

TOTAL MONTHLY OVERHEADS COST : $4267.50

What Portion do we Count?
The hours it took to make these necklaces add up to 6 2/3 (6.67)– plus the 3.5 admin allowed for makes 10.17 – close enough to our normal work day for us to just do a simple calculation to work out how much our overhead cost for our 20 necklaces (1 day’s work)

Now, while we could go into an incredibly complicated calculation if for instance we were costing based on 1/3 of a days productive work, I strongly advise that you aim to cost a full days work at least; it’s already complicated enough, don’t you think?

So, overheads cost for 1 day’s work is: 4267.50 x 12 / 50 / 5 = $204.84 – round up to $205

Therefore we can say our cost for 20 necklaces is: Materials cost $34.05 Production Labour cost $190 Overheads $205 TOTAL COST $429 – we can round up to $430

One necklace costs $21.50

Contingency
I like to add in a contingency cost to everything – in case of price raises, down times, broken machinery, etc, etc. I’d add in 20%, which would leave us at $25.80

Profit Margin
We have taken into account saving for replacement equipment, but not profit for business expansion. What you choose to take is quite personal but I’d say at least take another 20%, which would bring us up to $30.96

Wholesale Price
Now you are – finally – at your wholesale price. Some people say add in another margin to be safe, if you like to, go ahead. But at this point you could be fairly confident to know that if you have to, you can sell your product for as low as $31 and have covered cost and basic profits too.

Good and Fair Practices and Retail Mark-Ups
A fairly common mistake producers make at this point is to believe this is a price you can sell one piece at to an individual: Unless you are never going to sell quantities to another person to sell in their shop, this is not the case.

Once you involve a middleperson in your selling, you must not undercut the price they will have to sell at – they too have all their administrative costs – rental, salaries, utilities and everything else; these are covered from the mark-up they put on your goods. It will commonly be as much as 100% and often as much as 200% depending on the type of shop, its location, quality of service etc. Remember, they will be selling much more of your goods than you – unless you run your own shop and then you must cost for that also.

It is the Wholesale Price is what we have arrived at – the price you will sell to a middleperson for purchasing quantities.

It is a good idea on the whole, to put a suggested retail price (srp) on your price list. This helps keep a degree of uniformity across places that retail price your products. Keep in mind though, that retailers will probably vary the retail price from time to time, for sales, slow moving stock, etc.

It is common practice for sales made direct from a producer to be a little discounted to the shop retail price but I think that your personal retail price should be not more than 10% less than the retail prices in the shops you wholesale to. And it does not have to be that you discount at all, you could choose to keep your personal retail sales prices exactly the same as the shops and consider giving discounts only for multiple sales or old stock.

To finish off, let's just recap that there are many things that affect your costing - you may have an expansion plan that means you have to put much higher amounts for savings or profit, your pay scale may be very different, you may plan to advertise in glossy magazines or run your own shop, etc. In the end though, you do need to know your market potential also - because for instance in this case, I know I can sell my necklaces for quite a bit more than this costing - It doesn't really represent my true cost either because I have do have expansion costs and my non-productive time at this point is high and will be for a while, so there are quite different variables. And this would be the point to work a bit backwards and see if my income earning activities are sufficient to cover my dream life costs...

Well, I hope that you are now equipped with an improved understanding of the concepts and have run through the exercises - it should put you in a much more knowledgeable place in your business, but don't forget - if you do have experience in this area, suggestions, tips or remaining questions, we'd love to hear from you, drop a comment in for us!