How Do You Calculate Product and Service Costs?

Calculating cost helps you check whether your price covers the business's actual costs. If there is little cash available in the account, check both costs and cash flow: profit and the account balance differ, for example because of payment timing, inventory and loan repayments.

With goods, the situation might look like this: a company buys and sells a batch but does not update its cost calculation. Storage and delivery become more expensive, returns and write-offs increase, yet managers continue selling at the old prices. Expected profit turns out to be higher than actual profit.

Services present a similar problem: the team is busy, the calendar is full and the customer pays, while overhead and small costs gradually push the result into the red. To manage prices, profitability and workload, you first need a clear cost per product unit and per service unit.

Why calculate product and service costs separately?

Products and services often appear on the same bill. In renovation, you sell both work and materials. Retail has a similar combination: the product generates revenue, while delivery and assembly bring an additional charge. If you calculate everything as one total, you lose the answer to the question, “What do we actually earn money on?”

For a product, the main risk lies in purchasing and stock turnover: you buy at a higher cost, sell at the old price and see the margin shrink. For a service, the main risks are labour hours and rework: the tradesperson's rate stays the same, the work takes longer, some of it is provided free of charge and overhead per unit increases. Establishing the principle of keeping price and cost separate helps the team use the same terms.

A quick guide: products are usually costed per unit, such as an item, set or metre. Services are costed per measurable unit, such as an hour, m², visit or project. Both models then combine direct costs with a share of overhead.

Terms: cost, price, markup and profit

Before calculating, distinguish four concepts. Cost means the expenses allocated to a product or service under your chosen accounting rules. Price is what the customer pays per unit. Markup is an amount added to cost; it covers expenses not yet included in that cost and generates profit. Profit is revenue minus the relevant expenses. The type of profit depends on which expenses you have deducted.

A project's result depends on what its cost figure includes. If it includes direct costs and an allocated share of fixed production overhead, do not deduct that fixed overhead again. If all variable costs have been deducted from revenue, the difference is contribution margin: it first covers the business's fixed expenses, and the amount left forms profit.

Margin and markup are another common source of confusion. To settle the distinction once and avoid repeated arguments in the team chat, see the 101 article on the difference between margin and markup.

To keep “what it costs the company” separate from “what the customer pays”, you can also refer to the definitions in the 101 article on price and cost.

How do you calculate the cost of a product?

There are two basic situations for products: resale and manufacturing. Unit cost is simpler in resale; manufacturing also requires you to allocate shared workshop costs.

A hypothetical example: a small finishing company has a showroom selling light fittings and hardware. Its price list is updated once a season. By the middle of the month, a supposedly profitable light fitting turns out to make a loss: delivery from another city has become more expensive, packaging now carries a charge and some goods have been returned as defective. These costs were missing from the previous cost calculation.

The basic formula for purchased goods is: unit cost = purchase price + delivery to the warehouse + packaging + payment fees on the purchase + a share of losses (defects, mixed-up stock, returns and write-offs). Express every component for the same unit of product before adding them.

Office, accounting and advertising expenses can be tracked separately in management accounts. Gross profit is revenue minus the cost of goods sold under your chosen accounting rules. To calculate contribution margin, deduct all variable costs from revenue, including variable selling and logistics expenses. Contribution margin covers fixed expenses, and the remaining amount forms profit. Do not deduct costs already included in the cost figure a second time.

If you manufacture a product, add direct materials, direct labour, variable production expenses such as electricity and consumables, and a share of fixed production overhead such as rent and equipment depreciation. Choose an allocation base that explains how production capacity is used: standard labour hours, machine hours, m² or units.

How do you calculate the cost of a service?

The clearest way to understand service cost is through its unit of measurement. For renovation, this is m²; for installation, a visit; for an engineer, an hour; for designers, a project stage. The more precise the unit, the easier it is to maintain the price list and compare planned and actual figures.

The 101 article on service cost proposes a simple model: direct costs plus a share of overhead.

Then follow a step-by-step process. It applies across services; only the figures and the unit of measurement change.

1. Choose the service's unit of measurement: m², hour, visit or project.
2. Calculate direct costs per unit: labour, materials (if you purchase them yourself), job-specific travel and delivery.
3. Add variable expenses not yet included in direct costs: consumables, warranty visits and rework. For planning, you can estimate these as a percentage of direct costs, then check them against actual data.
4. Allocate overhead: add up the month's fixed expenses attributable to the selected services and divide by the actual volume of those services for the same month, measured in the chosen unit. Do not add direct or variable costs already counted.
5. Add direct costs, variable expenses and overhead to get the cost per service unit.

For an illustrative calculation in rubles, take the service “wallpaper hanging, m²”. The tradesperson is paid 250 ₽ per m². Variable expenses are budgeted at 10%, adding another 25 ₽. Monthly overhead is 300,000 ₽ and the volume is 1,000 m², so overhead is 300 ₽ per m². The resulting unit cost is 250 + 25 + 300 = 575 ₽ per m².

Next, compare cost with the current price and decide which pricing model fits: closed or open. In an open model, cost and price are recorded separately, with markup set as a transparent percentage.

How do you allocate overhead?

Overhead rarely causes arguments while a business is small. Then come an office, procurement, advertising, subscriptions, legal advisers and project managers. This raises a question: which service should bear these expenses?

The practical approach is to allocate overhead using the cost driver that best explains why the company incurs it. For a renovation company, floor area in m² or labour hours often work well. For manufacturing, use machine hours or batches. For retail, use the number of shipments or revenue by product group.

To explore this further, start with the definition of direct costs and the boundary of what is attributable to a project. The 101 blog has a separate article on direct costs (in Russian) that helps a team establish its rules.

How do you record calculations and keep figures up to date?

A one-off calculation provides relief for a week. Then supplier prices, tradespeople's rates and delivery terms change, while customer acquisition costs rise. Cost changes too, so the priority is to establish a cycle: calculate → record → check actual figures → update.

A practical routine is to close the period once a month, check where price is too close to cost, and update the price list and rules. At the same time, monitor the minimum volume of work needed to cover fixed expenses. A break-even calculation (in Russian) helps with this.

The next level is to track profitability by business line and project. For this, see the 101 article on calculating business profitability.

Another area that is easy to overlook is expenses that seem to be background costs and never enter the calculations. The 101 blog article on hidden business expenses (in Russian) provides a useful checklist of what to examine.

How does 101 App help keep costs under control?

Formulas are rarely the main difficulty in calculating cost. The challenge is collecting actual data: how much was really spent on tradespeople, materials, delivery, subcontracting, warranty work and the office. The later you collect it, the more gaps there are in the picture.

In 101 App, you can track money by project and enter a unit of measurement, cost and price for each price list item. This helps distinguish the company's costs from the amount charged to the customer.

Next, record project events: cash receipts, payments to tradespeople and contractors, purchases and other spending. Distinguish handing over money from reporting how it was spent so that you do not count the same amount twice. For the full cost, also check whether all other costs and a share of overhead have been included.

To see how this would work for your projects, join a free demonstration. An expert will show you where cost, markup and profit appear in the accounts.

To monitor deviations, compare planned and actual figures and review expenses by category. Check the availability of the analytical capabilities you need on PRO+ against the current plan comparison table in your account.