How to Calculate Cost of Materials
in Your Pricing Formula
Cost of materials is probably the most obvious item you have to consider in your production costs which are the materials you use to make your products.
Even the most economically naive jewelry designer is concerned about recovering out-of-pocket expenses for buying materials. By keeping detailed records, you'll be sure to regain all your outlay.
When calculating the cost of materials used in your jewelry, be sure to make an allowance for scrap and waste. Also keep track of all your finishing items such as jump rings, crimps, finishes such as paint and polishes, even the glue and thread you used. The amounts of these things used may seem insignificant per item produced, but you'll be amazed at how much they can add up to over a year or even a couple of months.
Take the time to do a careful analysis. Making a profit on your jewelry depends on it. Always figure cost of materials on a replacement basis. Even if you managed to stock up on certain materials at 75% off when a shop went out of business, you will not be able to do that the next time you need that particular item. You don't want to change the price every time you purchase materials.
Buying Supplies Retail
If you need to buy only small quantities of an item, then you will be paying the full retail price. But if you plan to shop at a retail store often, then try to make some sort of deal with them, even if its only a 10% or 15% discount. Explain that you will buy a lot of your supplies from them if they will give you a discount.
When you do buy any materials from a retail store whether at a discount or not make sure you show them your resale tax number (or vendor's permit) to avoid paying taxes. You will have to charge a retail tax on the items you make and sell, so if you don't use your tax number to purchase supplies tax free then the materials used in your products will be double taxed.
When taking your cost of materials into consideration you will save yourself 8% or whatever tax is charged in your state or province on your purchase. As long as you have your tax number retail stores cannot charge you tax as long as the products you buy are going to be resold or made into products to be resold.
For example, you cannot buy a sewing machine or a skill saw and try to avoid paying taxes because you obviously will not be reselling them. But when you buy your beads, thread, buttons, wire, glue, patterns, findings, clasps, paint, finishes, etc., these items are considered raw materials and will be taxed on the finished product once it is sold.
Many retail craft supply stores offer a 10-20 percent discount on presentation of a guild card. If you are a member of a craft guild or some other craft organization check with the store to see if they honor guild membership cards and take advantage of this discount which will help with your cost of materials.
Buying Supplies Wholesale
Your jewelry business cannot offer competitive prices or become profitable unless you are able to buy supplies and raw materials at wholesale prices
. Obtaining the materials you need when you need them, and at good prices, is vital to your pricing and your profits. You want the lowest prices for the best quality materials.
A wholesale business, which is set up very different from a retail business, aims to sell in large quantities to retail businesses which will resell the items.
You may find some manufacturers and wholesalers who will sell to stores only. Most home-based jewelry designers seem to have a hard time convincing suppliers that they qualify for wholesale prices.
If you see an ad for wholesale products sold to retail stores only, request for one of their wholesale catalogues but do not tell them that you are a home based jewelry designer. Write your request on your business stationary informing them that you are a new craft store opening up and that you would be interested in seeing one of their catalogues. If you find them over the internet then tell them that your home address is your studio where you sell your products from.
When purchasing from a wholesaler you will not be charged a Retail Sales Tax; but you must supply a tax-exemption certificate or your vendors permit number. Sales tax only needs to be collected on an item once, so the tax you collect from your customer allows you to omit paying sales tax when you buy materials wholesale. The majority of wholesalers will not give you wholesale prices unless you have your retail sales tax or vendor's permit number.
When looking at your cost of materials remember, unless you use a very small amount of a product, plan to do some comparison shopping and see where you can get the best prices for the items you will be buying in quantity. When you buy in larger quantities, look for a wholesaler from whom to buy at quantity discount. This price break on materials can determine whether your business is profitable or not; it can be all-important if you are competing closely as far as price is concerned. A wholesale supply source can mean the difference between success and failure because it can cut your material costs in half.
Buying in quantity represents an investment. Can you afford to have your money tied up in materials? It can also present storage problems. Will the material deteriorate (lose color, texture, or whatever) after sitting on the shelf for a year or more? Do you have room to store it?
Wholesale purchases are often made in minimum quantities, especially if your are purchasing raw materials for jewelry projects. If the minimum is too large for your needs, consider contacting other home-based jewelry designers or crafts people who might be willing to combine their orders with yours. Some craftspeople form cooperative buying groups for just this purpose.
When you meet the minimum quantity requirements, you then pay for your purchases. If you don't have a credit rating or a buying history with a company, it is likely that they will require prepayment. Fortunately, after you build a buying history with a company they will probably extend you credit for at least thirty days before payment is due. You can then use that company as a credit reference when establishing a new account.
In listing the cost of materials for a particular item, remember that even "found materials" cost money. "Found materials" include whatever you can obtain without cost: pine cones, sea shells, driftwood, rocks, and other natural materials which you can gather in the woods or at the seashore. Even old pieces of broken jewelry, game pieces, hardware or small house hold trinkets that you wish to incorporate into your designs are considered "found materials". While you pay nothing for them, they are not really free because your time spent in collecting them is worth money.
To estimate the cost of materials for these "found materials", figure out how many items you find or the average per hour. Set a wage for yourself and divide the number you found into this wage. For instance, you might use pieces of driftwood in your work and can usually find ten usable pieces per hour. If you are paying yourself $15.00 an hour, then these pieces of driftwood are actually costing your $1.50 each. In addition, you have to consider the time and travel expense it costs to get you there.
Let's now look at the cost of your "found materials" after spending three hours of hunting, one hour traveling each way to and from the beach and the cost of your gas and mileage for the trip:
Now you can see how important it is to estimate the cost of any "found material"; this cost of materials must be incorporated into your pricing formula in order to come up with an accurate cost of producing the finished product.
Many jewelry designers who use "found material" make the expeditions to find them a family outing. If you are one of these jewelry designers, you may not want to estimate the cost of your "found materials" so high because you are really mixing business with pleasure, but at the same time still do not consider them "free material".
Once you have discovered good sources and obtained the necessary materials, you will need to figure the cost of materials in order to work this cost into your price.
If you are pricing the materials for a one-of-a-kind item, you may have to estimate the cost for the amount of each material which went into the project. For a production item, it is easier and more accurate to figure the cost of the materials for a group. Perhaps ten is a logical number of pieces to work with. Once you have the total cost for this number, divide it by ten to arrive at the cost per item.
The following example shows the cost of materials list for a jewelry designer who makes Illusion Necklace Sets. She can conveniently work on ten at a time, so she has made out her materials list based on ten sets.
Cost of Materials
Per Ten Illusion Necklace Sets
beading wire (45' x $0.25) = $11.25
crimps (350 x $0.02) = 7.00
glass beads (100 x $0.35) = 35.00
stone beads (50 x $0.55) = 27.50
focal beads (10 x $1.85) = $18.50
bead caps (60 x $0.25) = 15.00
clasps (10 x $2.65) = 26.50
ear wires (10 pr x $1.20) = 12.00
jump rings (20 x $0.05) = 1.00
Total = $153.75
As you can see, she uses all sorts of materials in making these necklace sets. The costs are listed. To figure out the cost per set, she divides $153.75 by ten and finds that each necklace set costs her $15.37 in materials.
As you are figuring out the cost of materials for a production item, do not use the amounts you paid for materials when you are making your prototype or samples which were probably bought at retail price. When you start producing the item in quantity, you will be buying in larger, more economical amounts, and it is these economical prices which you would use in figuring your costs.
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