Guide to Starting and Running

Pricing and production costs for your
manufactured products 
While cost accounting is important in all types of business, it 
is particularly important in manufacturing where a complex 
combination of fixed, variable, direct and indirect costs 
have significant impacts on the profitability of the enter-
prise . Tracking the wide variety of costs, and organizing and 
using the information for effective decision making is truly 
essential for manufacturers .
Cost accounting can help you develop a clear picture of 
the per item cost of production under various scenarios 
so that you can produce at the optimum level . With this 
detailed information on production costs, you’ll be able to 
properly analyze the minimum pricing of your products for 
the market .

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Cost accounting in its most basic form divides costs into 
categories based on two sets of characteristics . Costs are 
either direct or indirect in relation to the production process, 
and are either variable or fixed in relation to the quantity of 
products being produced .
• 
Direct costs
are those incurred directly in the produc-
tion of your product . Raw materials and production 
labor are the clearest examples of direct costs, along 
with the costs for the manufacturing machinery and 
equipment (or the depreciation thereon) . Some of the 
costs for power, supplies, fuel and such can also be 
classified as direct costs . 
• 
Indirect costs
relate to administrative or support 
functions rather than directly to the manufacturing 
process . Costs related to the business office, quality 
control, depreciation of facilities and equipment, and 
many other items are treated as indirect costs .
• 
Variable costs
are those costs that change as the 
volume of production is adjusted . Raw material costs 
and production labor costs typically are proportional to 
the amount of products produced . The cost of utilities 
and fuel used directly in the production process also 
tends to be variable with production levels .
• 
Fixed costs
do not vary with production levels . The 
investment in facilities and machinery and equipment 
is a fixed cost . Overhead costs generally are fixed 
rather than variable, though some aspects of overhead 
have both fixed and variable components .
In applying cost accounting to manufacturing, three combi-
nations of these characteristics are taken into account: direct 
variable costs, direct fixed costs, and indirect fixed costs . 
By blending the different types of costs together using the 
cost accounting model, you can calculate a ‘standard cost 
per unit’ which you would expect to attain for your products 
under normal production conditions .
Marketing and the market for your
manufactured products
Before you even begin to manufacture, you need to 
have a pretty good idea of who will buy your products . 
You may have a great product, but if no one wants it, 
producing it isn’t going to do anyone a favor .
Therefore, give thought to your target audience, and 
do your homework to see if your audience will really buy 
your product . Defining your target audience will help you 
to define your marketing methodology .
As with other aspects of your business, you will have 
several options to choose from when developing the 
methodology for marketing your products . The nature 
of your product will probably determine whether you 
want to sell retail or wholesale . How broad a market 
you envision will also play a role . If your target market is 
narrow, then perhaps you have the time and wherewithal 
to conduct direct sales activities yourself . But if there is a 
broad market, you may want to sell to wholesale buyers 
who will then sell to your ultimate end-customers .
Of course, you can take on the responsibility yourself for 
the sales of your product . But if selling is not a strong suit 
for you, you can hire experts . You can choose an in-house 
sales force to direct the efforts if you have sufficient 
finances . However, manufacturers in the United States 
routinely use contractual relationships with manufactur-
er’s representatives to replace or to supplement in-house 
sales operations . Using a workforce of contractual repre-
sentatives is an efficient and cost-effective way to sell 
products, hence the popularity of this model .
If you are producing consumer products, you may want 
to consider whether you want to establish either a 
wholesale or retail outlet . However, if you want keep your 
focus on production, selling to existing wholesalers or 
retailers represents a simpler path .

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Financing your manufacturing startup 
Because of the high front-end cost of starting a manufac-
turing enterprise, the issues dealing with financing are all-
important . You need to find ways to attain the financing you 
need right now even though the return on investment may 
take some time to develop . 
The sources of financing are varied, and you will likely take 
advantage of several opportunities in different combina-
tions . These financiers might be public sources, private 
sources, or the suppliers or customers with whom you 
intend to do business . 
Public Options.
To investigate financing for your new manu-
facturing enterprise, you will want to check the web site 
of the economic development department in any state 
where your business is physically located . These resources 
usually provide a wealth of useful information about the 
grant programs, loan programs and tax incentive programs 
available for new manufacturers starting a business in the 
state . You should also check the web sites of the states’ 
manufacturers’ association . They, too, are excellent 
resources on both tax matters and economic development 
financing opportunities .
Many states have small business incubator programs that 
bring new, entrepreneurial businesses together in a shared 
facility . Participation in such a program, if you can qualify, 
could help you to obtain cost-effective facilities for your 
new operation . Other state government programs may 
provide other financial support for your new business .