How to Calculate Cost of Goods for a Small Business, With Example

Highlights

Cost of goods (HPP in Indonesia) is the total cost to make one product ready for sale.
It has three parts: raw materials, direct labour and overhead.
Basic formula: total production cost divided by units produced.
Selling price is cost of goods plus a profit margin.
The most common mistake is not paying yourself and forgetting small costs like gas and packaging.

Plenty of small businesses feel busy yet never seem to have more money. One frequent cause is a price set without first working out the cost of goods.

Cost of goods manufactured, known in Indonesia as HPP (harga pokok produksi), is the basis of every pricing decision. Without it, owners simply copy competitors, even though every business has different costs.

This guide explains the components, the formula, a worked example and how to turn the figure into a profitable price.

Quick answer: Add up raw materials, direct labour and overhead for one production run, then divide by the number of sellable units. That is your cost per unit. Set the selling price by adding a profit margin, often 30% to 50%, on top.

What Is Cost of Goods?

Cost of goods manufactured is everything spent to make a product ready to sell. For traders, the related measure is cost of goods sold: purchase price plus the costs of getting goods ready for sale.

If your price is below this figure, every sale eats into capital. Recalculate it regularly, especially when ingredient prices rise.

The Cost Components

For a producer, there are three groups:

Component	Examples	Note
Direct materials	Flour, sugar, butter, eggs	Inputs that become the product
Direct labour	Baker's wages, including the owner's	Per hour or per batch
Production overhead	Gas, electricity, packaging, oven depreciation	Often forgotten

Standard cost-accounting grouping. Labels vary by business.

Marketing, delivery to customers and marketplace fees usually sit outside cost of goods, but they still belong in your final price.

How to Calculate It

Follow these steps:

Pick one production cycle, such as one batch or one day.
List every material used and its cost, including small items like salt.
Work out labour for that cycle, including your own time.
Add overhead: gas, electricity, packaging and equipment wear.
Total the three and divide by the number of sellable units.

Worked Example: Homemade Cookies

Say one batch yields 20 jars. Materials cost Rp600,000, labour Rp200,000 and overhead Rp200,000 for gas, electricity, jars and labels. Total cost is Rp1,000,000, so cost per jar is Rp50,000. These figures are illustrative only.

If only 19 jars are sellable, cost rises to about Rp52,600 per jar. With a 40% margin on Rp50,000, the price becomes Rp70,000. Compare with competitors, and if it is too high, cut costs rather than pricing below cost. Add marketplace fees when selling online.