Cost Per Unit

Cost Per Unit Definition

Cost Per Unit can be defined as the amount of money spent by the company during a time period for producing single unit of the particular product or the services of the company which considers two factors for its calculation i.e., variable cost and the fixed cost and this number helps in determining the selling price of the product or services of company.

Explanation

The cost per unit in the company helps in measuring the cost incurred to create or produce one unit of the product, and it is one of the crucial measures of cost for the company’s operation. This measure of accounting includes all the types of fixed costFixed CostFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more and variable costs associated with the production of good or provision of the services in the company. It is calculated by adding all the fixed cost related to the product, i.e., costs that do not change when the value of goods or the service produced is changed; and all the variable cost associated with the product, i.e., costs that vary when the value of goods or the service produced is altered and dividing the value with the total of units produced during that period.

Cost Per Unit Formula

Cost Per Unit = (Total Fixed Cost + Total Variable Cost) / Total Number of the Units Produced
Cost-Per-Unit

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For eg:
Source: Cost Per Unit (wallstreetmojo.com)

Where,

  • Total Fixed Cost: Total of costs which does not change in the company when there is a change in number or amount of goods or the service produced
  • Total Variable Cost: Total of costs that changes in the company when there is a change in number or amount of goods or the service produced

A total number of the units produced: Quantity of total units produced during a particular period.

How to Calculate Cost Per Unit?

  1. Firstly, the company should calculate the total amount of money spent on the fixed cost during the period by adding all the expenditure incurred on the fixed cost for the period.
  2. After this, it should calculate the total amount of money spent on the variable cost during the period by adding all the expenditure incurred on the variable cost for the period.
  3. Then, a value derived in step 1 should be added with the value calculated in step 2, i.e., the sum of total fixed cost and total variable cost.
  4. After this total number of the units produced during that time is to be derived.
  5. Lastly, the sum of total fixed cost and total variable cost is calculated in step 3 is to be divided by the total number of the units produced during the period as calculated in step 4 to get the figure.

Example

You can download this Cost Per Unit Excel Template here – Cost Per Unit Excel Template

For example, company A ltd incurred the following expenses during the one month.
Fixed Expenses
– Rent Expenses: $ 15,000
Insurance expenses: $Insurance Expenses: $Insurance Expense, also called Insurance Premium, is the amount a Company pays to obtain an insurance contract for covering their risk from any unexpected catastrophe. You can calculate it as a fixed percentage of the sum insured & it is paid at a daily pre-specified period. read more 5,000
Utilities expensesUtilities ExpensesUtilities Expenses are the prices incurred by a Company for the usage of utilities like sewage, electricity, waste disposal, water, broadband, heating, & telephone. These are included as operating expenses in the Company’s income sheet. read more: $ 10,000
– Advertisement Expenses: $6,000
– Other fixed expenses: $ 7,000
Variable Expenses
– Material Expenses: $ 75,000.
– Labor Expenses: $55,000
– Other variable expenses: $ 27,000
During the month the company produced 10,000 units. Calculate Cost Per Unit.

  1. Calculation of Total Fixed Cost


    Cost Per Unit Example 1.1

    =$15000+$5000+$10000+$6000+$7000
    Total Fixed Cost = $43000

  2. Calculation of Total Variable Cost


    Cost Per Unit Example 1.2

    =$75000+$55000+$27000
    Total Variable Cost = $157000

  3. Total of Fixed Costs and Variable Cost


    Cost Per Unit Example 1.3

    = $ 43,000 + $ 157,000
    Total Fixed & Variable Cost = $ 200,000

  4. Calculation of cost per unit


    Cost Per Unit Example 1.4

    = $ 200,000 / 10,000
    =$ 20 per unit

Difference Between Cost Per Unit and Price Per Unit

Cost per unit can be said to be the per-unit expenses incurred by the company to produce goods or services. In contrast, the price per unit can be said to be the per-unit price that the company charges from its customer against the goods or services sold. The difference between the cost and price per unit is the profit per unit earned by the company.

Importance

Calculation of the cost per unit is an essential aspect for any company because it helps in determining the selling price that the company should charge from its customers. This is because generally, companies add up the percentage of the profits to derive the selling price.

It also shows how efficiently the business is running along with providing a dynamic overview of relationships among different essential factors of the company, such as its costs, revenues, and profits. So, identifying and analyzing the unit costsUnit CostsUnit cost is the total cost (fixed and variable) incurred to produce, store and sell one unit of a product or service. It is calculated by adding fixed and variable expense and dividing it by the total number of units produced.read more in the company is one of the quickest ways to know whether the company is producing its product efficiently or not.

Conclusion

Cost per unit helps in measuring the cost of the company to create or produce one unit of the product and plays an integral part in the working of the organization. It helps the company in determining its selling price along with showing the efficiency of the operation of the business.

This article has been a guide to Cost Per Unit and its definition. Here we discuss how to calculate cost per unit along with an example, importance, and differences from price per unit. You can learn more about from the following articles –

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