Selling well but going broke? Because you may be 'calculating production cost' wrong without realising it! (Check these 3 blind spots now)

Ever faced this problem? Every time you close the books at month-end, the net profit figure is dishearteningly smaller than you expected — even though orders keep coming and the machines run at full capacity. So why is cash flow tight?

If you’re nodding… the cause may not be “sales,” but “the way you calculate cost.”

Many factory operators (especially SMEs) still use “rough estimate” costing formulas or basic add-and-subtract Excel. These may work back when you produced few items, but as the business grows, the complexity of production turns those numbers into a “trap” that leads you to losses without realising it.

Today I’ll take you deep into the 3 costing mistakes that make most factories “sell well yet go broke.”

1. Overlooking “hidden costs” (Hidden Overhead Costs)

This is the biggest pitfall. Many calculate product cost by looking only at:

• Direct Material
• Direct Labour

And stop there! But in reality, the factory has enormous “overhead” that must also be divided into the per-unit cost, such as:

• Machine depreciation: Every time the machine runs, there’s wear and tear.
• Electricity/water: In the production process.
• Lost time (Downtime/Setup Time): The 30 minutes a technician spends setting up the machine before production is labour cost with no output.

✅ Impact: You might set a sale price of 100 baht thinking the cost is 80 baht, but if you include the real hidden costs, the cost may already be 95 baht — meaning you worked yourself to death for just 5 baht of profit (or a loss if you hit scrap).

2. The trap of “calculating cost in arrears” (Actual Costing Trap)

Factories using traditional accounting usually only know the true cost at “month-end” (when the electricity bill arrives, or when the accounting period closes).

Imagine… suppose on the 5th the material price rose, or a machine broke and you had to run overtime (OT), but you don’t know this figure immediately. You keep selling at the old price right through to the 30th.

✅ Impact: By the time you realise the cost has spiked, you’ve already been selling at a loss for a full 25 days! This is why the modern factory must know cost in real time.

💡 Tip: If you don’t want to wait for the month-end close, look at the real-time production-costing aid from [PlanetOne, the ERP for the manufacturing industry], which lets you see profit/loss the moment a job finishes.

3. Lumping cost together with “long division” (Average Costing Mistake)

If your factory takes Made-to-Order work but uses an equal-average costing method, you’re making a grave mistake!

• Job A: Large order quantity, standard type, little setup time = low cost.
• Job B: Small order quantity, special type, long setup time = high cost.

If you sum the costs and divide by two… you’ll price Job B too low (a loss) and price Job A too high (until customers flee to competitors).

✅ Impact: You’ll attract only customers with difficult work (but low profit), while the easy, high-profit work slips through your fingers.

Conclusion

Knowing cost 100% accurately isn’t just an accounting matter — it’s a competitive “weapon.” If you know the true cost, you’ll dare to cut prices to fight competitors on low-cost products, and dare to decline work that isn’t worth the effort.

Don’t let “not knowing” keep eating your profit any longer.