Cost Accounting

The True Cost of Handmade Products

Most artisans only count material costs when pricing—then wonder why they're barely breaking even. The truth? You're ignoring 60-70% of your actual costs: labor, overhead, utilities, insurance, and platform fees.

The Material-Only Pricing Trap

Many artisans follow this logic: "Materials cost $5, so I'll sell it for $15 (3x markup)." But this ignores:

Labor: Your production time, design, setup, quality control
Overhead: Studio rent, utilities, insurance, equipment depreciation
Platform Fees: Etsy (6.5%), Shopify (2.9%), Stripe (2.2%) eat profits

The Four Categories of Product Costs

Direct Materials

40-60%

Fabric, thread, dyes, clay, wood, metal, beads, packaging

Labor

20-40%

Production, design, setup, quality control, packing

Overhead

10-20%

Studio rent, utilities, insurance, tool depreciation

Platform & Processing

5-15%

Etsy/Shopify, Stripe/PayPal, shipping integrations

Real Example: Hand-Sewn Tote Bag

Let's calculate the actual cost most makers miss:

Materials (canvas, thread, label)	$2.50
Labor (2 hours @ $20/hr)	$40.00
Overhead allocation	$5.00
Packaging & supplies	$2.00
Platform & payment fees (5%)	$2.45
Total True COGS	$51.95

If You Price at $125:

Profit: $73.05 (58% margin) ✓ Sustainable

If You Use "3x Material" ($2.50 × 3 = $7.50):

Loss: -$44.45 per bag 💥

If You Charge $30 (typical "competitive"):

Loss: -$21.95 per bag. After 100 sales: -$2,195

The Complete COGS Formula

SBA provides COGS guidance that confirms this approach. Once you calculate your true COGS, use profit analysis to identify which products are worth your time.

Direct Materials$X.XX

+ Labor (hours × hourly rate)$X.XX

+ Overhead (allocated per unit)$X.XX

+ Platform & Processing Fees$X.XX

= Your True COGS$X.XX

Key: Your minimum price must be COGS + desired profit margin. If competitors charge less, they're either underpricing or have different cost structures. Focus on YOUR profitability.

Deep Dive: Overhead Allocation Methods

Method 1: Percentage of Materials - If overhead is 15% of materials. Materials $10 → overhead $1.50. Simple but doesn't scale.

Method 2: Per-Unit Annual Allocation - Annual overhead ÷ annual units. Overhead $6,000/yr, make 500 items/yr = $12 per unit. Best method.

Method 3: Labor-Hour Based - $6,000 overhead ÷ 1,000 labor hrs/yr = $6/hr overhead. 2-hour product = $12 overhead. Ties to effort.

Most makers underallocate overhead (treat it as 0% or negligible). Reality: overhead is 10-30% of true cost depending on industry.

Real Case Study: Tom's $6,400/Year Pricing Mistake

The Problem

Tom: Custom leather belts. Priced at "$80 per belt" logic: materials $15, labor $30, profit $35 per belt. Made 100 belts/year = $3,500 profit. But had $6,000 annual overhead (rent $300/mo, utilities $100/mo, tools $600/yr). Never allocated it to products.

The Discovery

True COGS per belt: $15 materials + $30 labor + $60 overhead ($6k ÷ 100 belts) + $3 fees = $108. At $80 selling price = LOSING $28 per belt.

The Fix

Raised price to $165 (true cost $108 + $57 profit = 53% margin). Concerned about losing customers. Lost only 15% of volume (100 → 85 belts/year).

The Results

Before: -$2,500/year (losing money). After: $2,445/year profit on 85 belts. Swing: +$4,945/year from same business. All from pricing correctly.

Comparison: Cost Accounting Methods

Materials Only (WRONG) - Cost $0 to calculate. Result: underpriced by 50-200%. For hobbyists only.

Materials + Labor (Incomplete) - Cost free/low. Still misses overhead 10-30%. Partial solution.

Full Absorption (Materials + Labor + Overhead) ✓ RECOMMENDED - Accurate. Requires allocation method. Standard for all professional makers.

Edge Cases

Work from home (no rent)? Calculate "imputed rent" for home office space. IRS allows $5/sq ft or actual rent%. Still $300-600/year.

Low overhead period (studio paid off)? Don't zero out. Equipment needs replacement. Maintenance costs. Keep overhead allocation.

Variable production (not 100 units/year)? Use conserva estimate. If make 50-150 items/year, use 100 as baseline. Adjust as you scale.

Custom one-offs (hand-made jewelry commissions)? Allocate overhead per order based on actual hours worked that month.

TrueCraft: Automatic COGS Calculation

Material Cost Database: Log materials once (cost per unit). System multiplies by BOM quantity. "Leather $12/sq ft × 2 sq ft for wallet = $24 material cost."
Labor Hour Tracking: Log hours per product. System multiplies by your burdened labor rate ($25/hr → $32.50 with taxes/downtime).
Automatic Overhead Allocation: Enter annual overhead. System divides by planned annual production. "100 belts/year, $6k overhead = $60/belt overhead automatically calculated."
Platform Fee Modeling: "If selling on Etsy (6.5% fee): product COGS $100, fees $6.50, total true cost $106.50."
Real-Time Profitability: Every product shows: Sale Price - COGS = Profit with % margin. "Leather belt: $165 - $108 = $57 profit (35% margin)."

Example: Jewelry maker using TrueCraft. Discovered 30% of products were "loss leaders" (priced below COGS). Discontinued 3 SKUs, repriced 5 others. Revenue flat (+2%) but profit +42% ($18k → $25.5k annually) from removing hidden losses.

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