Unit Cost

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Unit Cost Meaning

Unit Cost is the total cost (fixed and variable) incurred by the company to produce, store and sell one unit of a product or service. This concept is most commonly used in the manufacturing industry and is calculated by adding fixed and variable expenses and dividing it by the total number of units produced.

Formula

Unit-Cost
Unit Cost = Variable Cost + Fixed Cost / Total Units Produced

The unit cost of a product is calculated by adding the total variable cost related to the production of the goods as well as a fixed cost related to the production of the goods and a fixed cost related to the production and dividing the total cost of production by the number of units produced. When the company is aware of its cost of production,  it can decide its pricing accordingly by keeping a reasonable margin for profit. Thus, it gives the company a fair idea of making decisions concerning price and analyzing its current cost structure. If the product's cost is higher than the usual, then the company shall analyze the root cause for the same and take corrective action.

Examples of Unit Cost

Example #1

A company had incurred the following expenses during the year on its production and produced 10,000 units of the final product.

Solution

Unit Cost Example 1
  • =($20000+$60000)/$10000
  • = $8

Example #2

A company had provided the details of expenses incurred during the year on the production of 1,000 units of product.

Solution

Unit Cost Example 1.1

Variable Cost = Raw Material Cost + Wages

  • = $5,000 + $8,000
  • = $13,000

Fixed Cost = Factory Rent + Equipment Rent

  • = $10,000 + $1,000
  • =$11,000
Unit Cost Example 2.1
  • =($11000+$13000)/$1000
  • = $24

Advantages

  • It helps the management make pricing decisions since the unit cost works as a base.
  • It indicates the breakup point, below which the company shall not sell its product to avoid losses.
  • It helps track and monitor the costs that the company is incurring.
  • A comparison can be made using cost sheets of two periods to analyze the trend in change of costs to find out possible reasons for the same.
  • This costing is helpful for filing tenders since prices can be quoted only when the cost is known.

Disadvantages

  • It is useful for manufacturing industries and may not be useful for services industries.
  • For those manufacturing companies that produce different kinds of products, it may be difficult to allocate some costs to every product, and calculation may not be possible.
  • The information-based calculation of unit costing is of the previous period, for which expense is already incurred. The same might not be useful if the prices of inputs to a product are of fluctuating nature.
  • It is not a sufficient tool for supervision and control over costs.