What Your Product Really Costs to Make

Starting a Food Business

A small food producer works out a cost breakdown with a calculator and notebook, beside jars of finished product

Most people set the price first and work out the cost afterwards. You look at the jar of chilli sauce next to yours on the shelf, see what it sells for, and put yours slightly below it. That number tells you what shoppers here are used to paying. It tells you nothing about whether you will still have money at the end of the month. Costing is the other half of the job, and it is arithmetic, not accounting theory.

Unit cost — everything one sellable jar costs you. Not the ingredients in it. Everything: the fruit you peeled off and threw away, the gas, the label, the equipment wearing out, and your own hours.

Cost the batch, then divide

You cannot cost one jar directly. Most of what you spend arrives in batch-sized lumps. One sack of sugar. One gas cylinder. One afternoon of work. None of it splits neatly into jars until the batch is finished.

So cost a whole batch. Take one real production run and write down everything it used: every ingredient by weight, every jar, lid and label, the gas and electricity, the water, the hours worked, the transport. Then divide.

Unit cost = total batch cost ÷ jars you can actually sell.

Rule of thumb: divide by the jars you can sell, not the jars you filled. A jar that leaks, sits underfilled, or carries a crooked label cost you exactly as much to make as a good one. If 100 jars go in and 94 leave, your cost per jar is the batch cost divided by 94.

Ingredients cost what you bought, not what went in

Yield — the weight of finished product you get out of the weight of raw material you paid for.

Ten kilos of mango does not become ten kilos of anything. You pay for peel, stones, trim, and for all the water that leaves during drying. It is all on your invoice, so it all belongs in your cost.

Weigh it once, properly, and you have the number for good. Weigh the fruit as it arrives. Weigh it again after peeling and stoning. Weigh the finished product. Two divisions give you your yield, and yields hold steady enough that you only need to redo this when the season or the supplier changes.

A low yield is not a mistake by itself. It is a fact about the raw material. But it has to show up in the price.

The costs that get left out

Ingredients and packaging are easy to remember because they arrive with invoices. These usually do not:

Gas, electricity, water and ice, for the batch and for the cleaning afterwards
Cleaning and sanitising chemicals, gloves, hairnets, cloths
Your own hours, and any help you called in for the day
Transport both ways: collecting raw material, delivering finished product
Breakage, returns, and stock that comes back close to its date
Samples, tastings and jars given away
Rent, phone, licences, and anything you pay once a year
Equipment wearing out

Depreciation — spreading the cost of a piece of equipment across its working life instead of charging all of it to one batch.

Say a sealer costs you 1,000,000 riel and you expect five years of use from it. That is 200,000 riel a year. If you run 100 batches a year, the sealer adds 2,000 riel to every batch. Those figures are invented to show the method. Put your own in.

Fixed costs, variable costs, and how many jars pay for them

Variable costs change with how much you make. Ingredients, jars and gas are variable. Make half as much and you spend roughly half as much.

Fixed costs arrive whether you produce or not. Rent, licences, a loan repayment, a permanent wage. They are the reason a slow month hurts so much.

Break-even units = fixed costs for the period ÷ (selling price per unit − variable cost per unit).

Suppose your fixed costs are 600,000 riel a month. Each jar sells for 3,000 riel and carries 2,000 riel of variable cost. Every jar you sell puts 1,000 riel towards the fixed costs, so you need 600 jars a month before you make anything at all. Below that you are losing money, however good the product is. The numbers are invented again. The calculation is not.

Your own labour is a cost

Many small producers leave their own time out of the cost because no money changes hands. It works until the day you want to hire someone to do the job you have been doing for nothing, and find the price cannot carry a wage. Put an hourly figure on your time. Use whatever you would have to pay a person to replace you, and cost the batch with it in.

A price that does not pay for your own hours is not a low price. It is a discount you are quietly funding yourself.

Turning cost into price

Your cost is the floor. What shoppers will pay is the ceiling. The price lives between them, and if the floor sits above the ceiling you do not have a product yet. You have a recipe that needs reworking.

Two words get mixed up at this point, and the mix-up is expensive.

Markup and margin — markup measures profit against your cost. Margin measures the same profit against the selling price. Same money, different bottom half of the fraction.

Sell for 10,000 riel something that cost you 6,000 riel. The profit is 4,000 riel. Markup is 4,000 ÷ 6,000, which is 67 per cent. Margin is 4,000 ÷ 10,000, which is 40 per cent. A shop asking for 40 per cent margin is asking for a good deal more than a 40 per cent markup, so always check which one is being discussed.

Work backwards from the shelf

The price you charge a shop is not the price a shopper pays. The shop takes its margin out of the shelf price. If a distributor sits in between, that is another cut out of the same money.

So start at the shelf and work back. Decide what a shopper will pay. Take off the retailer’s margin. Take off the distributor’s margin if there is one. What is left is what actually reaches you, and that number, not the shelf price, is the one that has to cover your unit cost and leave a profit.

This is also why one product can carry three different prices. Selling direct at a market or by Telegram order gives you the whole shelf price, and costs you time and delivery. Selling to a shop gives you volume and takes a cut. Both can be right. Cost them separately.

Watch out: if the numbers only work when you take out a control, the price is wrong, not the control. A thinner pouch that fails on the road, a shorter heat step, less acid, less salt, a preservative below the dose that works, jars reused with tired lids. Each one saves a little per unit and puts the whole product at risk. Cost the safe process first, then decide whether the price works.

A worked example: tomato ketchup

Here is the whole method on one product. Every figure below is invented. What matters is the shape of the calculation, not the prices.

One batch makes 100 kg of ketchup, filled into 300 g bottles. That fills 333 bottles. Eight leak or come out underfilled, so 325 are sellable. The batch costs:

Ingredients, after a 3 per cent loss allowance: 310,442 riel
Packaging, charged on all 333 bottles filled: 474,525 riel
Gas, electricity and water: 38,000 riel
Labour, 24 hours at 6,000 riel an hour: 144,000 riel
Equipment wearing out, plus cleaning chemicals: 18,000 riel
Transport and samples: 40,000 riel
Total: 1,024,967 riel

Divide by 325 sellable bottles. One bottle costs 3,154 riel.

Two things are worth noticing. Packaging is the biggest line on the list, larger than everything that goes inside the bottle. And those eight lost bottles quietly added about 76 riel to every bottle that survived.

Now the price. Say a shopper pays 7,000 riel. The shop keeps 25 per cent margin, so it pays 5,250 riel. A distributor keeps 15 per cent of that, so 4,463 riel reaches you. Against a cost of 3,154 riel that leaves 1,309 riel a bottle, which is a margin of 29 per cent. The same money is a markup of 41 per cent.

If your fixed costs come to 1,300,000 riel a month, each bottle puts 1,346 riel towards them. You need 967 bottles in a month before you earn anything at all.

Sell that same bottle direct at 7,000 riel, with 400 riel of delivery cost, and you keep 3,446 riel. That is more than two and a half times as much per bottle, in exchange for a great deal more of your own time. Both routes can be right. Cost them separately and then choose.

Work through it yourself: the sheet behind this example, with the ketchup figures filled in and a blank copy for your own product, is on our Resources page.

When the numbers do not work

Buy differently. In season, in bigger lots, in a lower grade where grade does not matter, or direct from the grower.
Attack yield loss before you attack ingredient price. Trim waste, spillage and rework often move the cost more than switching supplier does.
Make bigger batches. The cost of heating, cleaning and setting up is much the same for a big batch as a small one, so it shrinks per jar as batch size grows, up to the limit of your equipment.
Work out what share of your unit cost is packaging. If it is large, a different jar or pouch is usually a faster change than reformulating a recipe.
Shorten the chain, or accept the chain and sell more volume through it.
Raise the price and give a reason for it. Shoppers pay more for a product that is visibly better made, correctly labelled, and the same every time.

What does not work is deciding to work harder for free.

The short version

Cost a whole batch, then divide by the jars you can actually sell. Put in the raw material you paid for and threw away, the gas, the equipment wearing out, and your own hours. Know your fixed costs and how many units it takes to cover them. Then set the price by working backwards from what a shopper will pay, rather than forwards from your cost alone.

Every figure in this article is invented to show the arithmetic. Use your own invoices, your own weights and your own bills. Registration, licence and tax costs depend on how your business is set up, so get current figures from the relevant Cambodian authority before you build them into a price. This is general educational information, not business or legal advice.