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Understanding Fixed Costs

During the last ten years, I have seen so many comments being made about costing cakes. People assume that costing your baking products are just about the cost of the ingredients and the labor, but it is much more. No wonder some bakers with amazing skills give up, and say they just do not make enough money to sustain their passion for baking.

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Fixed costs are costs that will stay the same whatever your level of production, whether you produce on product or a hundred!

 

It includes all start-up costs of your business, such as:

  • Building or alteration to your kitchen or studio
  • Registering your business name
  • Initial domain name cost
  • Website design cost
  • Marketing costs
  • Any courses associated with your business

 

There are also ongoing fixed costs such as:

  • Website monthly fees
  • Renting of premises (even if it is at your home)
  • Insurance costs
  • Buying equipment, such as Kitchen Aids, Fridges and Stoves
  • Maintaining equipment
  • Office supplies such as printers
  • Cleaning materials
  • Electricity

 

Now your next question probably is: How do I calculate this?

 

It is important to note that all businesses will not have the same fixed costs. Some will have little investment where others, who have bakeries in a retail area will have higher expenses that needs to be recovered. Unfortunately, fixed costs is not that simple. You will have to do some estimation for certain activities such as marketing, website maintenance whereby website monthly fees, insurance is more straight forward. Bigger businesses will also need to calculate fixed costs in relation to different time periods, especially when they have large equipment such as refrigerators, commercial stoves and mixers that needs to be calculated according to their life expectancy. I am therefore not going into depth with the latter as most larger businesses already have these figures available.

 

The quickest way in calculating your fixed costs is to forecast all your expenses you have for the next year. Split up the expenses into fixed and “other variable costs”. Other variable costs are basically what it cost you to create a certain product. Things like, ingredients, labor and adhoc items such as packaging.

 

Total Fixed Cost Figure (e.g a year)  = $10 000

Total Other Variables (e.g a year)      = $55 000

 

$10 000 ÷$55 000 = $0.18 cents

 

Let’s say your product’s total cost with labor cost your $15 to make. You will need to add 18 cents for every dollar.

 

$15 x $0.18 = $8.10  Your full cost for producing your product will then be $23.10

 

This number will be the least amount you can sell your product for. It is also called your “Floor price”