Most small factories price the same way: last material price + a margin. It works until material prices move, waste creeps up, or a new product has a longer production line — and then you discover products sold "at a profit" that actually lose money. This article walks through the right formula with a complete numeric example and a template you can copy.
Why "material + margin" loses money
- Materials are bought at different prices. This month's batch costs more than the last one; any product made from both batches has a true cost somewhere in between — not the latest price.
- Waste is not counted. Offcuts, damaged packaging, machine calibration: if waste is 3% and not in the cost, your real margin is 3% lower than you think.
- Labour and overheads are forgotten. Electricity, rent, maintenance and wages are paid every month — but nobody spreads them over the units.
The four parts of unit cost
- Materials at average purchase cost — every raw material keeps a running average updated with each delivery.
- Waste — a percentage per product, set from experience and reviewed regularly.
- Direct labour — the wages of the people who worked on this production order.
- Overheads — electricity, rent, maintenance and admin, allocated to orders by quantity or hours.
A worked example (illustrative)
A small detergent factory produces 1,000 bottles in one production order. Illustrative numbers, not market prices:
| Item | Calculation | Value |
|---|---|---|
| Materials issued (average cost) | chemicals + bottles + labels | 18,000 EGP |
| Material waste 3% | 18,000 × 3% | 540 EGP |
| Direct labour | 4 workers × 2 days × 750 EGP | 6,000 EGP |
| Overheads | the order's share of the month's electricity, rent and maintenance | 3,460 EGP |
| Total order cost | 28,000 EGP | |
| Unit cost | 28,000 ÷ 1,000 | 28 EGP |
Pricing by "material + margin" alone, this factory would believe a bottle costs 18 EGP and happily sell it at 25 EGP for a 39% margin — while actually losing 3 EGP on every bottle. The whole difference is the waste, labour and overheads nobody put in the formula.
A template you can copy
Create these columns for every production order: materials (average cost) · waste % · direct labour · overheads · quantity produced · unit cost. Rule: unit cost = (materials + waste + labour + overheads) ÷ quantity. Never price a product before the last column is filled.
When to review the cost
- With every material delivery at a different price (the average changes).
- When the waste rate changes after maintenance or a new supplier.
- Monthly, with the electricity and rent bills — so the overhead allocation stays real.
- Before quoting any large order.
How the software does it for you
In SOLIQ factory management you define a product once with its components and waste rate; every material delivery updates the average cost automatically. When you open a production order, the software calculates the required materials, issues them from the raw-material store and receives the finished goods at their actual cost — so the profit report compares the selling price with the real cost, not an estimate. If you only need the accounting side (invoices, suppliers, stock), see accounting & inventory. Plans are on the pricing page.