Charging time and materials would seem to be the most fair way to bill, especially on one off jobs. There are some considerations however. In my experience, the first part takes twice as long as the second part and maybe three times as long as the third. There is no comparison, efficiency wise, of a large part done on a 6" lathe and and on a 15" lathe. IMO, it would be unfair to the customer to bill at the same hourly rate. Hourly rates are often assigned to machines because in a production shop, an idle machine isn't earning money. The objective is to keep the machines running as close as possible to full time operation. A large VMC might command a hourly rate in the hundreds of dollars while the small manual lathe only in the tens of dollars. Materials should be billed at a rate comparable to the cost of replacement rather than the actual cost. Most production shops stock materials in bulk in order to have stock on hand and to take advantage of volume pricing. I would think it reasonable to bill the customer what it would cost ordering the necessary material from McMaster Carr or Online Metals Don't forget to add in wear and tear on tooling. For off the wall jobs that require some experimentation or additional preparation to fulfill, that would be a legit add on. Finally, would be the "need it yesterday" jobs. Of the customer expects you to wirk through the night to meet his need, he should also expect to pay for that additional service.
As for my own situation, I am not expecting to make money from any jobs. I retired from working five years ago and do not feel compelled to re-engage. I will do jobs for friends and neighbors. When they ask me how much, I tell them,"you can't afford to pay my rate, so no charge. Pass the favor on to the next person." I look at it as building my credit so if there is a time when I need a favor from them, I don't feel guilty about asking. The exception is if there is a significant amount of materials required, I would ask them to either provide them or pay for the materials.
In the end, each individual has to decide for himself what is fair. If you are undercharging, you won't stay in business very long. If you are overcharging, customers will gradually drift away. A few years back, our company was dealing with a startup job shop. The owner didn't have much in the way of equipment and so lower operating costs and his rates were on the low side. He also took on jobs that other shops deemed too small to bother with. This would have been ten years ago. The last few times that I have stopped in, his business has been growing by better than 50% aq year. He now has three VMC's and a CNC lathe, as well as a number of manual machines and this last year, opened a second shop in California in addition to the Wisconsin operation. He took a calculated risk in pricing attrasctively and taking on jobs that weren't that profitable to build a loyal clientele base which has served him well.