Unit Cost

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

Unit-Cost

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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 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 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 productionCost Of ProductionProduction Cost is the total capital amount that a Company spends in producing finished goods or offering specific services. You can calculate it by adding Direct Material cost, Direct Labor Cost, & Manufacturing Overhead Cost. read more, 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

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 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.

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 for calculation of unit costing is of the previous period, for which expense is already incurred. The same might not be useful if prices of inputs to a product are of fluctuating nature.
  • It is not a sufficient tool for supervision and control over costs.

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