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.
The cost per unit in the company helps in measuring the cost incurred in order to create or produce one unit of the product and it is one of the crucial measures of cost for the purpose of company’s operation. This measure of accounting includes all the types of fixed cost as well as variable costs that are associated with the production of the 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 does not change when value of goods or the service produced is changed and all the variable cost related to the product i.e., costs that change when value of goods or the service produced is changed and then dividing the value with the total of units produced during that period.
Cost Per Unit Formula
- 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 which 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 of time.
How to Calculate Cost Per Unit?
- Firstly, the company should calculate the total amount of money spent on the fixed cost during the time period by adding all the expenditure incurred on the fixed cost for the period.
- After this, it should calculate the total amount of money spent on the variable cost during the time period by adding all the expenditure incurred on the variable cost for the period.
- Then, a value derived in step 1 should be added with the value derived in step 2 i.e., the sum of total fixed cost and total variable cost.
- After this total number of the units produced during that time is to be derived.
- 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 in order to get the figure.
For example company A ltd incurred following expenses during the one month period.
- Fixed Expenses
- Rent Expenses: $ 15,000
- Insurance expenses: $ 5,000
- Utilities expenses: $ 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.
The following are the steps that can be used in order to calculate it:
Step 1 – Calculation of Total Fixed Cost
- Total Variable Cost = $43000
Step 2 – Calculation of Total Variable Cost
- Total Variable Cost = $157000
Step 3 – Total of Fixed Costs and Variable Cost
- = $ 43,000 + $ 157,000
- Total Fixed & Variable Cost = $ 200,000
Step 5 – Calculation
- = $ 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 in order to produce goods or services whereas 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.
Calculation of the cost per unit is an important 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 important factors of the company such as its costs, revenues, and profits. So, identifying and analyzing the unit costs in the company is one of the quickest ways for knowing that whether the company is producing its product efficiently or not.
Cost per unit helps in measuring the cost of the company to create or produce one unit of the product and plays an important part in the working of the organization. It helps the company in determining its selling price along with showing the efficiency of the working of the business.
This 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 its differences from price per unit. You can learn more about from the following articles –