accounting

cheatsheet:
your costS

Fixed costs, variables costs,

overhead, cost of goods sold,
labor cost... Calculate it all!
 1 - fixed costs

Fixed costs = overhead = operating costs

The first thing you need to get clear on is how much does running your handmade business cost you
even if youre not making one single sale that month.

These costs are called fixed costs because they do not vary according to the numbers of sales you
make. In other words, no matter how many products you make or sell on any given month, there will
be expenses that you have to pay no matter what. These are your fixed business costs or costs that you
have to pay to operate your business.

Another word for it that you might have seen or heard before is overhead.

Fixed costs = Overhead = Operating costs

Fixed costs (or overhead) include things like your studio rent, insurance, monthly plan for your website
(hosting or shopify fee for example), office supplies, travel expenses to participate to markets and
craft fairs (fuel, hotel, etc.), social media tools (hootsuite, etc.), shipping software, accounting and
bookkeeping software or fees, etc

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 2 - variable costs

VARIABLE COSTS = COST OF GOODS SOLD = COGS

Variable costs are costs that vary depending on your production volume. The more products you make
and sell, the more you will have to pay in variable costs. This is because these costs are directly related
to the product creation process.
Another word for variable costs that you could have seen or heard of is Cost of Goods Sold or COGS.
This sounds complicated but dont worry, it isnt. Its just a fancy word that accountants love to use to say
variable costs.

Variable costs = Cost of goods sold = COGS

The reason for it is simple:

If every time you make and sell a product, your variable costs increase, it is like saying that there is a cost
to selling this product: something that adds up to your fixed costs and that you wouldnt have had to pay
if you didnt make and sell that product.
For that reason, variable costs are called cost of goods sold or in plain english what it costs you to sell
your products.

Variable costs include things like: shipping and packaging costs for each product, and raw materials and
supplies needed to create your products.
You can also include to your variable costs a percentage of loss for damaged supplies you received and
couldnt use or for pieces that you wont be able to sell after all because of a defect that came up during
the creation process.

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 3 - labor costs

about labor costs

Lastly, its important to understand how to account for labor costs.

As a maker, you spend a lot of time actually making your products, and you need to pay yourself for that
time. You have to account for it.

Your labor cost is:

Time spent creating a product x Hourly wage. It will be different for each product.

Labor costs are overlooked by most handmade business owners because it can be hard to know exactly
how much time you spend creating each product. But it is crucial to your business as this will affect your
pricing strategy, and ultimately your profit. Dont do the same mistake and run a test: create the same
product 5 times and record how long it takes you on average.

NB: if you follow the logic of variables VS fixed costs that I explained above, then you will want to add your
labor costs to your variable costs. After all, the more products you sell, the more time you spend producing
them, the more you should be remunerated right? Well, no.
I know it is counterintuitive to what I just told you about variables costs (COGS) but do not incorporate your
labor cost in your variable costs. Keep them separate.

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 FIxed or VAriable?
Fixed or variable costs?

If youre not sure what are your costs and if theyre fixed or variable, the best way to start is to take a look
at your bank statements and to list all your expenses. To know if its variable or fixed, simply ask yourself:
Would this expense increase everytime Id sell one more product? If yes then its most likely a variable
cost. If not, most likely a fixed one.

Date Amount Reason period /month fixed variable

12/3/15 $29 web hosting one month $29

3/4/15 $190 beads X X

15/4/15 $300 shipping software one year $25

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 Fixed and VAriable Costs
fixed costs

From the exercise you just did, write down your fixed and variable costs in the table below.

COST NAME amount/mth

web hosting $29

shipping software $25

total monthly overhead =

VAriable Costs

Variable costs vary depending on how many products you sell, but also for each product as you
probably use different materials, packaging, etc for each.

Shortcut
If youre just trying to estimate your variable costs per month, you can take the total amount of money
you spent over the year (go back to the table from the first exercise and look at the variable column)
and divide it by 12.

Eg. If you spent $3546 over the year for your materials and supplies, then your monthly variable cost
averaged out at 3546/12=$295,5.

Average monthly variable costs=

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 COGS - COST OF GOODS SOLD
variable costs

The longer, better way: your cost of good solds

The shortcut above is a good way to quickly know how much on average you spent a month on variable
costs. But the proper way to know how much creating and selling your products cost you over a period a
time (be it a month or a year) is to calculate your cost of goods sold.
You will be able to use this number in your tax return at the end of the financial year, and will also use it
to calculate your net profit.

Lets dive in! These are the steps you will need to take:

STEP 1
For each product, record the cost of materials and supplies you used in a table like this one (you can also
use the first table in the handmade pricing calculator as this is also a part of the pricing process for each
product):

Material Total: This is the total cost of the item you bought.
eg. a ball of yarn to make a glove (even if the glove wont require a the whole ball of yarn, input the cost of the whole yarn
ball.
Portion Used: How much of the item will you use to make the product? eg. if you can make 2 gloves with the yarn ball then
its 1/2 which equals 0.5.
Labels and tags, Packaging: Including shipping costs and taxes to get it delivered to you

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 COGS - COST OF GOODS SOLD
calculating your cogs

STEP 2
At the end of each period (month or year) you can calculate your COGS for that period using the results
from step 1 and this table:

product name total material cost units sold COGS/item

your product 1 $4.5 52 $234

your product 2 $6.4 34 $217.6

COST OF GOODS SOLD = $451.6

STEP 3
Thats it! Youre done!

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 COST OF LABOR
The cost of time

Estimating properly the cost of labor is essential if you dont want to end up underpaying yourself.
And this will be quite handy later on if you decide to hire someone to help with the production of your
pieces.
Rather than just guessing, I recommend you run this simple test: create the same product 5 times and
record how long it takes you on average.

product name 1 2 3 4 5 average hourly rate cost/item

your product name here 15 18 21 17 23 18.8 mins $15 $4.5

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 the end
If you ran into any issues while going through this workbook, or if
there is simply something that you do not understand or need help
with, please feel free to ask me anything at
[email protected]

I am always happy to help!

For more guides and resources to help you turn your handmade
shop into a full time gig, access the resource library at
www.tizzit.co/resource-library

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