Measure the time the product actually requires
Start with hands-on production, then consider setup, finishing, and packing when those activities belong to each unit. Administrative or customer work may belong in overhead, another allocation, or a dedicated custom-order model depending on how the business tracks it. The key is to avoid counting the same time twice or leaving recurring work nowhere.
Convert the relevant minutes to hours and multiply by the labor rate. A rate is an input to the planning model, not a claim about what every maker should earn. Production Capacity can help when batching, setup, efficiency, or weekly nonproduction time makes a per-item estimate too simple.
Choose an allocation method you can explain
One maker might divide relevant monthly overhead by expected monthly units. Another might allocate costs by labor hour or by product line. No single approach is universally correct. The method should match how the cost is incurred, use a realistic activity assumption, and be reviewed when volume or operations change.
Three conceptual approaches
- Per-unit: divide a defined pool of operating costs by expected saleable units.
- Per-labor-hour: spread costs across the productive hours expected to support them.
- Direct assignment: allocate a product-specific tool or subscription to the products that use it.
Worked example
A product that looks profitable on materials alone
This fictional example uses illustrative assumptions. It is not a recommendation or an industry benchmark.
Assumptions
- $18.00 materials and $2.00 packaging for a fictional woven wall hanging
- 90 minutes of production time at $22.00 per hour
- $7.00 of overhead allocated to one saleable item
- No selling fees in this deliberately channel-neutral example
- 20% illustrative target profit margin
- $45.00 current price used for comparison
Calculation and result
- Visible materials and packaging$20.00
- Labor compensation$33.00
- Allocated overhead$7.00
- True entered cost$60.00
- Profit at the $45 price−$15.00
- Break-even price$60.00
- Minimum 20% target price$75.00
Looking only at $20 of materials and packaging makes the $45 price appear to leave $25. After $33 of labor and $7 of overhead, the full entered cost is $60 and the same price produces a $15 loss.
Watch for undercounting and double-counting
- Timing only the central making step while omitting setup, finishing, or packing.
- Treating labor compensation as the profit target.
- Allocating overhead with a sales volume the business cannot reasonably reach.
- Putting the same expense in direct cost and overhead.
- Using production capacity as if every saleable unit will sell.