The export cost sheet: separating variable, order-specific and overhead costs per unit

Most Indian MSME exporters start by taking their domestic price list, removing GST and adding freight. The trouble is that a domestic price carries costs an export order does not have, and leaves out costs that only exports create: export packing, lab tests, pre-shipment inspection, customs broker fees, bank charges and longer credit. A proper export cost sheet tells you the lowest price you can accept and the full cost you must recover over a year, so every quotation starts from facts rather than guesswork.

What you need to know

Why the domestic cost is the wrong starting point. Your domestic price usually includes distributor and retailer margins, domestic freight and warehousing, trade schemes and GST collected on sales. None of these belong in an export price. At the same time, the domestic cost usually ignores export-only items: stronger cartons and pallets, fumigation, testing to the buyer's standard, certificates of origin, the customs broker (CHA), terminal handling, bank charges on foreign remittances, credit insurance and the interest cost of 60–120 days of buyer credit. Build the export cost sheet from the bill of materials upward, not from the domestic price downward.

Three buckets of cost. Sort every cost into one of three buckets, because each behaves differently:

• Variable cost per unit — raw material, packing material, piece-rate labour, power and consumables that rise with each unit made.
• Order-specific cost — costs incurred once per order or shipment: sample development, lab testing, third-party inspection, printing plates or moulds, pallets, fumigation, CHA and documentation. Convert these to a per-unit figure by dividing by the order quantity, not by your annual volume.
• Fixed overheads — salaries of staff not paid per piece, rent, depreciation, insurance, compliance and office costs. These are absorbed into each unit using an overhead rate.

Overhead absorption rate. Overhead rate per unit = annual fixed overheads ÷ realistic annual output. If fixed overheads are ₹60 lakh and you expect to make 1,20,000 units, the rate is ₹60,00,000 ÷ 1,20,000 = ₹50 per unit. Use realistic output, not installed capacity; using capacity understates cost and pushes you into under-pricing.

Wastage and rejection. Export buyers often specify tighter tolerances, finishes and colour matching, so rejection and process loss usually rise. Effective material cost = material cost ÷ (1 − wastage %). With a 6% loss, ₹100 of good material really costs ₹100 ÷ 0.94 = ₹106.38.

Taxes: net, not gross. When you export under a Letter of Undertaking (LUT), you do not charge IGST, and the GST paid on inputs can be claimed back as a refund of unutilised input tax credit. So material cost in the cost sheet should be net of GST if you will claim that refund. The waiting time for the refund is a finance cost (lessons 03 and 09), not a cost of goods. Confirm the current LUT and refund procedure on the GST portal with your CA.

Replacement cost, not historical cost. For volatile inputs such as brass, copper, cotton yarn, spices or polymers, cost the material at what it will cost to buy for this order, not what you paid three months ago. If the stock in your godown was bought cheaper, that gain belongs to your purchasing, not to the buyer.

Cost is the floor, not the price. The cost sheet produces two numbers. The incremental cost (variable + order-specific) is the level below which an order loses cash. The full cost (incremental + overheads) is what your prices must recover on average across the year. The price itself comes from the market (lesson 05) and your capacity situation (lesson 04).

Step-by-step method

1. Pick one export product and one pack configuration (for example, 4 pieces per master carton).
2. Build the bill of materials from recent purchase invoices, net of GST, at today's replacement price.
3. Apply a wastage and rejection allowance taken from your own production records for that product.
4. Add direct labour (piece rate, or time × wage), power and consumables per unit.
5. Add export packing per unit: inner packing, master carton ÷ units per carton, labels, and pallet or fumigation if required.
6. List every order-specific cost for a typical order and divide by that order's quantity.
7. Calculate the overhead absorption rate from last year's fixed costs and this year's realistic output.
8. Add the buckets to get incremental cost and full ex-factory cost. Do not yet add freight, port or finance costs — lessons 02, 09 and 12 add those.
9. Compare with your domestic cost for the same item and write down the reason for every difference.
10. Date the sheet and review it monthly, or whenever a key input moves by more than a few per cent.

Product: __ | Pack: units per carton | Date: | Order quantity assumed: __

• Material priced at replacement cost? Yes / No
• GST excluded where the refund will be claimed? Yes / No
• Wastage taken from actual production records? Yes / No
• Order-specific costs divided by order quantity, not annual volume? Yes / No

Common mistakes

• Starting from the domestic list price and "adjusting" it, which carries domestic margins and GST into the export price.
• Spreading a one-off lab test or inspection fee across the whole year's output instead of the order that caused it.
• Using installed capacity rather than realistic output for the overhead rate, which makes overheads look smaller than they are.
• Costing brass, copper or yarn at last quarter's purchase price when the order will be made with material bought next month.
• Leaving export packing inside "overheads" — export cartons, pallets and fumigation are real per-unit costs.
• Ignoring sample costs, courier charges for samples and rejected samples, which add up quickly with new buyers.

Ask the AI Business Tutor

• "I make [product] in [city] and plan to export [order quantity] units to [country]. My inputs are [materials, quantities and prices net of GST], labour is [₹ per unit], wastage is [%], and my annual fixed overheads are [₹] for an output of [units]. Build my export cost sheet showing variable, order-specific and full cost per unit, and list export-specific costs I may have missed."