What is cost price?

A small producer makes chairs. The timber, the upholstery and the screws are bought in, and then comes the work in the workshop. Only when you know what all those parts and hours cost together do you know what one chair costs you and whether the selling price leaves enough.

For a trading company it is simpler: the cost is mostly the purchase price, often plus freight and import charges. For a producer, parts and processing steps are added. For that you use a bill of materials that shows what goes in.

What goes wrong? The purchase price changes but nobody updates the cost, so your margin quietly drains away. Or you work with an average while one batch was much dearer. Then a price list looks healthy while you lose money on some items. A post-calculation shows afterwards whether the cost was right.

Pay attention to how you value stock. With FIFO you use the oldest batch first and count the price of that batch. An average price evens things out, and a fixed price is simple but can drift away from reality. Which method fits depends on your business and is worth discussing with your bookkeeper.

Check regularly that the cost still matches your latest purchase invoices. With a product made of several parts in particular, one price change from a supplier can noticeably affect the margin on the finished item. So agree who passes a price change on to the administration, so that it does not stay with the buyer alone.