# Unit Cost Article byNiti Gupta ## Unit Cost Meaning

Unit Cost is the total cost (fixed as well as 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 expense and dividing it with the total number of units produced.

### Formula

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

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 related to the production and dividing the total cost of production by the number of units produced.  When the company is aware of its , it can decide its pricing accordingly by keeping a reasonable margin for profit. Thus, it gives the company a fair idea of how to make decisions with respect to price and analyze its current cost structure. If the cost of the product is high 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

• =(\$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

Variable Cost = Raw Material Cost + Wages

• = \$5,000 + \$8,000
• = \$13,000

Fixed Cost = Factory Rent + Equipment Rent

• = \$10,000 + \$1,000
• =\$11,000
• =(\$11000+\$13000)/\$1000
• = \$24

• It helps the management in taking 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 are being incurred by the company.
• 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.