How to estimate your preliminary cost of goods sold (COGS)

Your preliminary Cost of Goods Sold (COGS) is the total amount of money it costs you to create one single unit of your product. By identifying these direct costs early, you can ensure your selling price covers your expenses and leaves enough room for a healthy profit. If you don't know your COGS, you risk "buying your way into a job" where you work hard but the business loses money on every sale.

1. Identify your raw materials and components

Start by listing every physical item that goes into your finished product. For a preliminary estimate, you don't need a formal manufacturing blueprint yet, but you do need to be thorough. If you are making a scented candle, this includes the wax, the wick, the fragrance oil, and the glass jar.

• Unit cost: Divide the bulk purchase price by the number of units it produces. For example, if a £20 tub of wax makes 10 candles, the material cost is £2 per unit.
• Inbound shipping: Include the cost of having these materials delivered to you. If it costs £10 to ship enough materials for 100 units, add £0.10 to the cost of each unit.

2. Calculate direct labour costs

One of the most common mistakes for new UK business owners is failing to value their own time. Direct labour is the time spent specifically on making the product. Even if you aren't paying yourself a formal salary yet, you must include a labour cost in your COGS to ensure the business is viable if you were to hire someone else to do it later.

To calculate this, decide on a fair hourly rate (at least the UK National Minimum Wage) and time how long it takes to produce one batch. If you want to pay £15 per hour and it takes 20 minutes to make one unit, your labour cost is £5 per unit.

3. Factor in consumables and "the small stuff"

Consumables are items used during the production process that don't end up in the final product but are essential for making it. This might include sandpaper, disposable gloves, or cleaning agents. While these costs are small, they add up. A simple way to account for this in a preliminary estimate is to add a small percentage (e.g., 2% to 5%) to your total material cost to cover these incidentals.

4. Account for wastage

In a perfect world, every gram of raw material becomes a finished product. In reality, things break, spill, or go wrong. This is called "shrinkage" or wastage. For your preliminary estimate, it is wise to add a 5-10% "buffer" to your material costs to account for the inevitable mistakes that happen during the manufacturing process.

The Preliminary COGS Formula

Use this simple table to bring your estimate together for one unit:

Cost Category	Calculation	Example Cost
Raw Materials	Price of materials + inbound shipping	£4.50
Direct Labour	Time taken x hourly rate	£5.00
Consumables/Wastage	10% buffer on materials	£0.45
Total Preliminary COGS	Sum of the above	£9.95

Pro Tip: Keep your preliminary COGS in a simple spreadsheet. As you find cheaper suppliers or become faster at making your product, you can update the numbers to see how your profit margins improve.