Le production cost Cash flow is one of the most important financial indicators for any company that manufactures a good or provides a service. Yet, according to a survey by the SDI published in January 2025, 78% of very small business owners experience cash flow difficulties, and a large part of these difficulties stem from poor control of actual production costs. The result: poorly calibrated prices, shrinking margins, and profitability that is impossible to manage.
This guide explains in concrete terms what the cost of production is, how to calculate it step by step, how to distinguish it from the cost price and the selling price, and how to use it to make better pricing decisions on a daily basis.
What is the cost of production?
The cost of production refers to all the expenses incurred by a company to manufacture a good or provide a service, up to the point where that good or service is ready to be sold or distributed. It is a cost accounting indicator, meaning it is not mandated by the General Chart of Accounts, but it is essential for managing your business.
In practical terms, the production cost covers all expenses related to the manufacturing or production phase: raw materials, labor, production energy, machine depreciation, and workshop costs. However, it excludes marketing expenses (advertising, delivery, sales commissions) and general administrative costs, which fall under the scope of the cost price.
This is the starting point of your entire pricing decision chain. Without it, you're setting your prices blindly.
The detailed components of the cost of production
The cost of production is broken down according to two main intersecting logics: the nature of the costs (direct or indirect) and their behavior in relation to the volume of activity (fixed or variable).
Direct costs and indirect costs
Direct costs These are expenses that you can unambiguously attribute to the production of a specific product or service. They include:
- The raw materials and consumables used to manufacture the product
- Direct labor: the working hours of the people who manufacture, assemble, or perform the service
- The energy directly consumed by the production machines
- Packaging related to the finished product
Indirect costs These are the costs related to the overall operation of the business, which cannot be attributed to a single product without using an allocation key. They include:
- The rent for the production premises
- The salaries of supervisors, administrative staff and support teams
- Depreciation allowances for shared equipment
- Maintenance and upkeep costs
- Electricity, heating and water charges for common areas
- Insurance and miscellaneous structural costs
Fixed charges and variable charges
Fixed charges These costs remain constant regardless of the volume produced: rent, permanent staff salaries, subscriptions. They weigh more heavily per unit when you produce little, and mechanically decrease when your volume increases; this is the principle of economies of scale.
Variable expenses evolve proportionally to your activity: the more you produce, the more raw materials you consume, the higher your production energy bill climbs.
The calculation formula with a complete numerical example
The basic formulas
Total production cost:
Total production cost = Direct costs (raw materials + labor) + Indirect costs allocated to production
Unit production cost:
Unit production cost = Total production cost / Quantity produced
Full example: a small artisanal soap factory
Let's take the case of Lucie's House, a very small business that manufactures artisanal soaps. It produces 500 soaps per month.
Direct charges:
| Post | Details | Amount |
|---|---|---|
| Commodities | Oils, soda, essential oils: €1,20 x 500 | 600 € |
| packaging | Kraft paper + labels: €0,30 x 500 | 150 € |
| Direct labor | 40 hours x €18/hour | 720 € |
| Total direct costs | € 1 |
Indirect costs (attributed to production for the month):
| Post | Monthly amount |
|---|---|
| Workshop rent (production share) | 350 € |
| Electricity and water (production) | 80 € |
| Equipment depreciation | 60 € |
| Care and maintenance | 30 € |
| Total indirect costs | 520 € |
Calculation of the total production cost:
€16,000 + €520 = € 1
Calculation of unit production cost:
€1,990 / 500 soaps = €3,98 per soap
Maison Lucie now knows that each soap costs them 3,98 € to produce. This is its absolute production floor. Below this threshold, it produces at a loss, even before paying its commercial or administrative costs.
Production cost, cost price, and selling price: the essential differences
These three concepts are often confused, and this confusion is one of the most costly mistakes for a very small business. Here's how to clearly distinguish between them.
The cost of production
It only covers the phase of manufacturing or productionIt ends when the product is ready to be marketed. It excludes everything related to sales, distribution, and general administration.
The cost of returns
The cost price goes further: it includes the cost of production ? All non-production costs necessary to get the product into the customer's hands. This includes:
- Marketing costs (advertising, commissions, trade shows)
- Distribution and delivery costs
- General administrative costs (accounting, structural insurance, management)
Cost price = Production cost + Non-production costs
Taking the example of Maison Lucie: if they add €0,50 for delivery and €0,30 for administrative fees per soap, their unit cost price is 4,78 €.
The sale price
The selling price is the amount charged to the customer. It must cover the cost price. et to generate a profit margin.
Selling price (excluding VAT) = Cost price + Desired margin
If Maison Lucie aims for a 40% margin on its cost price: €4,78 x 1,40 = €6,69 excluding VAT per soap.
| Indicator | What it covers | Amount (example) |
|---|---|---|
| Production cost | Manufacturing only | 3,98 € |
| Cost price | Manufacturing + non-production costs | 4,78 € |
| Selling price excluding tax | Cost price + margin | 6,69 € |
How to use production costs to set prices and profit margins
Knowing your production costs is good. Actively using them to manage your pricing is even better. Here's how to integrate them into your pricing strategy.
Set a floor price
The unit production cost is your manufacturing floor priceYou cannot sell below this price without losing money on the production phase alone, before even covering your sales costs. This threshold must be known to everyone negotiating a price within your company.
Calculate your profit margin starting from the cost price
Once the cost price is established, you can calculate your margin rate target. According to accountants, a net profit margin below 8% makes a very small business vulnerable to even the slightest unforeseen event (source: niobestrategie.fr). The usual sector benchmarks are:
- Professional services: 40 to 60% profit margin on cost price
- Artisanal production: 30 to 50%
- Trade: 20 to 40%
Monitor the volume effect on your fixed costs
The more you produce, the more your fixed costs are spread across a larger number of units, and the lower your unit cost. An average cost can thus drop from €500 to €180 depending on the volume produced, thanks to the distribution of fixed costs over a larger number of units (source: creer-entreprendre.fr). This is a powerful lever for improving your competitiveness without raising your prices.
Review regularly
Costs change: raw material prices, energy, wages. A production cost calculated a year ago may be completely obsolete today. The rule: Review your costs at least once a year, and more frequently if your sector is subject to significant variations in supply prices.
Common mistakes made by very small businesses in calculating production costs
Many small business owners set their prices based on gut feeling or by looking at what the competition is doing, without ever calculating their actual costs. This is risky. Here are the most common mistakes to avoid.
Forget about indirect costs. This is the number one mistake. Workshop rent, electricity, machine depreciation: these expenses aren't tied to any specific order, but they must be covered by every unit sold. Ignoring them creates an illusion of profitability.
Underestimating the cost of labor. Many managers only consider gross salary, without including employer contributions, paid leave, or time spent in training. The true cost of an employee is often 1,5 to 2 times their gross salary.
Confusing production cost and cost price. Setting prices based solely on production costs ignores all marketing and administrative expenses. For example, a baker could lose €0,50 per loaf of bread, amounting to over €1,500 in monthly losses (source: swapn.fr).
Never update your calculations. With persistent inflation on energy and raw materials, a cost calculated on 2022 or 2023 data can lead to selling at a loss without realizing it.
Confusing margin rate and markup rate. The profit margin is calculated on the cost price, while the markup is calculated on the selling price. These are two different figures for the same profit margin in euros. According to a study by INSEE (the French National Institute of Statistics and Economic Studies), nearly 30% of SMEs confuse these two concepts, leading to pricing errors (source: nosclientsdemain.com).
Calculating at full capacity when it is not reached. If you estimate your indirect costs based on 10,000 units produced but you only produce 7,000, your actual unit cost is much higher than expected.
Djaboo to manage your costs and cash flow
Calculating your production cost is one thing. Tracking it over time, integrating it into your invoicing and cash flow management is another. That's precisely what allows you to do. Djaboo : an all-in-one management solution designed for French micro-enterprises and SMEs, which centralizes financial management, invoicing, customer tracking and cash flow in a simple interface, without accounting skills required.
To learn more about the financial management of your micro-enterprise or SME, see our article dedicated to the accounting for very small businesses/small and medium-sized enterprises (SMEs), or discover our directly cash management module to manage your flows in real time.
FAQ: Your questions about production costs
Is it mandatory to calculate the cost of production?
No, it's not a legal requirement under the General Accounting Plan. It's a cost accounting tool, freely chosen and optional from a regulatory standpoint. But in practice, any company that produces goods or services without calculating its production cost is operating without a clear plan. It's essential for setting profitable prices and managing profit margins.
What is the difference between production cost and cost price?
The cost of production covers only the manufacturing or delivery phase of a good or service. The cost price includes all non-production expenses: marketing, distribution, and general administrative costs. The cost price should always be used as the basis for setting a selling price.
How do I calculate the cost of production if I am a service provider?
The logic is the same. Your direct costs correspond to the hours worked on the project (at the actual hourly rate, including benefits), the tools or software used for this project, and travel expenses. Your indirect costs are your overhead costs (rent, subscriptions, support staff salaries) allocated according to an hourly rate: total indirect costs divided by the number of actual productive hours over the year.
How often should I recalculate my production cost?
At least once a year, ideally twice if your sector is subject to significant price fluctuations (energy, raw materials, wages). With inflation expected to persist in 2024 and 2025, a cost calculated using the previous year's data can lead to significant pricing errors. Some experts recommend revising as soon as a key cost changes by more than 5% compared to the forecast.
