# What Is Cost Price and How to Calculate It

As a business, calculating your cost price is essential for turning a profit. It helps you to set your product or service selling price, determining the minimum price needed to cover costs and achieve a solid profit margin.

Use our cost price calculator and guide to automatically determine the cost price for your products or services.

## What is Cost Price?

Cost price, or the purchase price or cost of goods, is the amount of money a company pays to acquire or produce a product or service. It represents the direct expenses incurred in obtaining or manufacturing an item, including the cost of raw materials, labor, and any additional expenses directly related to the production or acquisition process.

## Why is Calculating Cost Price Important?

Cost price is crucial to determine the profitability of a product or service. It serves as the basis for your selling price and for evaluating the margins and profitability of a business. By subtracting the cost price from the selling price, you can determine the gross profit margin.

Calculating the cost price accurately is vital for effective inventory management, financial reporting, setting effective pricing strategies, and overall business performance analysis. It helps businesses assess the cost-effectiveness of their operations, make informed decisions about pricing strategies, and evaluate the profitability of their products.

## QuickBooks Cost Price Calculator

Our cost price calculator automates the process of calculating your inventory cost price. Simply input your direct costs, allocate your indirect costs, and hit enter. You will then have your cost price! See below for a detailed breakdown of how to determine your direct and indirect costs.

Cost price

## Cost Price Calculation Formula

The formula to calculate the cost price of a product or service is easy to follow. Here is the formula:

Cost Price = Direct Costs + Indirect Costs

## How to Calculate Cost Price

To calculate the cost price of a product or service, you need to consider all the direct costs involved in acquiring or producing the item. Here's a step-by-step guide to calculating the cost price:

1. Determine direct costs by identifying and gathering all the direct costs associated with acquiring or producing the item. These costs typically include:

• Raw Materials: The cost of the materials to manufacture the product.
• Labor Costs: The wages or salaries of the employees involved in the production process.
• Manufacturing Overhead: Any additional direct costs incurred during the production process, such as utilities, equipment depreciation, or factory rent.

2. Calculate the total direct costs by adding up all the direct costs identified in the previous step to determine the total direct costs incurred in producing the item.

3. If there are indirect costs that you can allocate to the item, apply an appropriate cost allocation method. This could involve assigning a portion of overhead expenses, such as rent or administrative costs, to the item based on a predetermined allocation basis (e.g., direct labor hours, machine hours, or material costs).

4. After allocating the indirect costs, add them to the total direct costs to obtain the total cost incurred in acquiring or producing the item.

5. If calculating the cost price for a specific quantity of items produced, divide the total cost by the quantity to determine the cost price per unit.

## How QuickBooks Can Help

Working out your cost price is essential for profits. Without it, your business will struggle to determine a minimum selling price, which could result in a loss.

QuickBooks allows you to track and record direct costs from acquiring or producing items. You can create expense accounts for raw materials, labor costs, manufacturing overhead, and other direct costs. By recording these costs accurately with QuickBooks Online accounting software, you can easily track and analyze your total direct costs.

Sign up for QuickBooks Online today or start your free 30-day trial to begin using powerful cost tracking software.