A surface-level answer is simple: divide direct costs by kilogram or by dozen, whichever is your favourite measure of production. Done. Done? Using the resulting number for costing new orders may lead to painful losses. Remember Titanic? With its stern high up and its prow deep low,  on average titanic was still floating alright. Using average costs may have the same value.

Let’s take a closer look. Direct cost comprises raw materials, utilities and direct labour. How will these costs change when an industrial bakery switches from Small Bun, weighting 1 kilo per dozen to Big Bun, weighting 2 kilo per dozen?

 1 kg per dozen2 kg per dozenProper cost allocation metricComment
Raw materialsRM2*RMKg of productMore product needs more dough
Natural gasNG1.5*NGKg of productOven has higher temp, does not need twice the volume of gas
ElectricityEl1.2*ElKg of productConveyors and ventilation will use almost the same
WaterWa1.8*WaKg of productRecipe water doubles, cleaning is the same
Direct labourDLDLNumber of pieces of product
(number of packages)
Size of bun makes no difference

(Though numbers in this table do not represent any particular bakery or product, they are common.)

We see now that allocating direct costs neither by kilogram, nor by dozen, will result in correct product cost: allocating costs of raw material and utilities per kilogram and costs of direct labour per package will be much closer to what bakery really spends, than choosing either of these metrics for all cost categories.  And by ‘correct’ here I do not mean ‘meeting accounting rules’ or ‘following corporate procedures’, ‘correct’ here stands for bottom line: doing differently will cause lost profit up to selling below actual cost.

Proper analysis of actual costs will allow empower production manager to achieve fair profit margin while talking with CFO or with client.