Product costing basics for manufacturers in the UAE: know your cost per unit

Product cost has three parts. Direct materials are the inputs that end up in the product: timber, resin, flour, cartons. Direct labour is the time of people who make it, at their full cost to the business, not just basic salary. Production overhead is everything else the factory needs to run: rent, power, machine depreciation, supervisors, maintenance.

Selling and admin costs, such as sales staff and the head office, are not part of product cost under IAS 2. Keep them out of the unit cost used for stock valuation, though you will still need them when setting prices.

Labour cost per hour is often understated. Beyond basic salary and allowances, a UAE employer carries visa and Emirates ID costs, medical insurance, accommodation and transport for many workers, annual leave and air tickets where contracts provide them, and the end-of-service gratuity that builds up each year under Article 51 of the Labour Law.

A machine operator on a AED 2,800 monthly package might really cost the business AED 4,300 monthly once these are spread across the year. At 208 working hours a month, that is about AED 20.67 per hour, not the AED 13.46 a salary-only calculation suggests.

The usual approach is a predetermined overhead rate: budgeted production overhead divided by budgeted activity. If the factory expects AED 1,440,000 of overhead next year and 48,000 machine hours, the rate is AED 30 per machine hour. Every product picks up overhead in proportion to the machine hours it uses.

Choose the activity base that actually drives cost. Labour hours suit hand-finishing workshops; machine hours suit automated lines; kilograms suit bulk food processing. Our view: one well-chosen rate beats five poorly maintained ones. Activity-based costing is worth it only once a single rate is visibly distorting prices.

Materials: timber AED 620, fittings AED 85, finish AED 45, total AED 750. Labour: 9 hours at AED 20.67 = AED 186. Overhead: 3 machine hours at AED 30 = AED 90. Product cost: AED 1,026.

If the showroom sells the table for AED 1,450 before VAT, the gross margin is AED 424, or 29%. A 20% discount to a hotel buyer brings the price to AED 1,160 and the margin to AED 134. That might still be worth taking for volume, but now it is a decision made with numbers, not instinct.

• Write a bill of materials for each product with quantities and current prices
• Time a sample of jobs to set standard labour hours
• Recalculate the overhead rate at least yearly
• Compare actual to standard monthly and investigate big differences

Product costing only helps if purchases, payroll and overheads are recorded accurately and on time. HelloBooks’ AI agent reads supplier bills for raw materials, posts them to inventory, and suggests the correct account for factory overheads versus admin costs. Salary journals from HelloTime post labour cost to the ledger, and you can split production and admin staff by class.

HelloBooks does not allocate freight and duty across inventory lines automatically; add those to stock cost with a journal or keep them in a separate cost account, and the AI agent can draft that journal when you tell it the split. Manufacturers who want a custom costing report or chart of accounts can arrange it through hello@hellobooks.ai.