Product cost price: the complete calculation, step by step
The cost price adds direct costs and a share of indirect costs. A worked calculation method to set a sale price that truly covers costs and yields a margin.
Expert note: This article was written by our chartered accountancy firm. Information is current as of 2026. For a personalised review of your situation, contact us.
Quick answer. A product's cost price adds its direct costs (materials, labour) and a share of indirect costs (structure charges, overheads). On a product with 12 euros of materials and 8 euros of labour, with 5 euros of allocated indirect costs, the cost price is 25 euros: it is the threshold below which selling destroys margin. The sale price is then set by adding the target margin.
Selling without knowing your cost price is steering blind. Many companies set their prices by the market or by intuition, and discover too late that some products sell at a loss. Calculating the complete cost price is the basis of healthy pricing. Here is the method, with a worked example.
Direct costs and indirect costs#
The cost price is built from two blocks: what is directly attributable to the product and what is not.
Direct costs are those tied unambiguously to a product: raw materials, components, production labour, dedicated subcontracting. Indirect costs concern the whole activity and must be allocated: rent, management, overheads, depreciation of shared equipment. It is the allocation of these indirect costs that makes the difficulty and the precision of the calculation.
Ignoring indirect costs leads to underestimating the cost price and selling products that seem profitable but do not cover the structure.
The allocation of indirect costs#
Allocating indirect costs requires a coherent allocation key.
The key can be production time, volume, the surface used or another driver representative of the product's resource consumption. Over a period, indirect costs are totalled, then allocated between products according to this key. A product that mobilises more indirect resources bears a higher share. This logic joins the analysis of the contribution margin, which sheds light on each product's contribution.
A poorly chosen key distorts the whole calculation: it must truly reflect how the product consumes shared resources.
The worked calculation, step by step#
Let us take a simple example to illustrate the mechanics.
A product consumes 12 euros of raw materials and 8 euros of direct labour, that is 20 euros of direct costs. Over the period, the indirect costs to allocate represent 5 euros per unit under the chosen key. The complete cost price is therefore 25 euros per unit. If the company sells this product at 24 euros, it loses 1 euro per sale, even if it thinks it is earning by looking only at materials. To target a 20% margin on the cost price, the sale price must reach 30 euros.
| Item | Amount per unit |
|---|---|
| Raw materials | 12 euros |
| Direct labour | 8 euros |
| Allocated indirect costs | 5 euros |
| Complete cost price | 25 euros |
| Sale price with 20% margin | 30 euros |
This calculation, repeated product by product, often reveals that the range contains products sold too low, masked by others that are more profitable.
Our view#
The complete cost price is the basic tool of profitable pricing, and yet one of the most neglected. The classic mistake is to look only at direct costs, forgetting the structure share, which gives the illusion of a margin that does not exist.
Our approach is to calculate the cost price product by product, with a coherent allocation key, then to compare this cost with the actual sale price. This analysis often reveals products sold at a loss, which must then be repriced, repositioned or dropped. The cost price is not just an accounting figure: it is a commercial decision instrument, to link to the commercial dashboard.
A common case#
A craftsman set his prices by marking up the cost of materials, without including his time or his overheads. The calculation of the complete cost price showed that his flagship products, sold at a price barely covering materials and labour, yielded no margin once structure costs were allocated. The repricing, product by product, restored healthy margins on the range, raising some prices and dropping two persistently loss-making references.
Frequently asked questions
What is the cost price?+
It is the complete cost of a product: the sum of its direct costs (materials, labour) and a share of indirect costs (overheads, structure). It is the threshold below which selling destroys margin.
What is the difference between direct and indirect costs?+
Direct costs are tied unambiguously to a product, such as materials or production labour. Indirect costs concern the whole activity (rent, management, overheads) and must be allocated under a key.
How do you allocate indirect costs?+
Under a coherent allocation key: production time, volume, surface or another driver representative of resource consumption. A product that mobilises more indirect resources bears a higher share.
How do you set the sale price from the cost price?+
By adding the target margin to the complete cost price. For a cost price of 25 euros and a 20% margin, the sale price is 30 euros. Selling below the cost price destroys margin.
Why not rely on the cost of materials alone?+
Because it ignores labour and especially structure costs. A product that seems profitable on materials alone can be sold at a loss once the share of indirect costs is included.
How often should you recalculate the cost price?+
Whenever costs change significantly, materials, wages or structure, and at least once a year. An up-to-date cost price is the condition of pricing that protects margin over time.
Key takeaways#
- The cost price adds direct costs and a share of indirect costs.
- Indirect costs are allocated under a key coherent with resource consumption.
- Looking only at materials leads to underestimating the cost and selling at a loss.
- The sale price is set by adding the target margin to the complete cost price.
- The product-by-product calculation often reveals references sold too low.
- The cost price is a commercial decision instrument, not just an accounting figure.
Article written by the Hayot Expertise firm, registered with the Order of Chartered Accountants of Ile-de-France. Updated for 2026. This article is for information purposes and does not replace an analysis of your own situation.
Article written by Samuel HAYOT
Chartered Accountant, registered with the Institute of Chartered Accountants.
Regulated French accounting and audit firm based in Paris 8, built to support companies across France with a digital and decision-oriented approach.
Sources
Official and operational sources cited for this page.
This topic is part of our service Tax accountant in Paris | CIT, VAT & tax audits
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