Unit Cost Formula Definition
The unit cost formula lets you determine the total cost required to produce, store, and sell one unit of product. It includes expenditure, fixed and variable costs associated with product manufacturing. It is similar to the cost of goods sold (COGS).
Significance of Unit Cost Formula
The unit cost formula is useful to analyze a company’s investment in producing one product and the gross profit margin.
- It also helps generate revenue for a firm
- The unit cost formula helps with determining the profitable volume of production
- Determines the difference between fixed and variable costs
- It also helps with performance analysis by observing whether the business has performed well
Application of Unit Cost Formula
Using the unit cost formula helps companies determine the base level for a market offer price. Some basic applications of unit cost formula include:
- Helps the business optimize the production cost
- Calculate marginal revenue
- You get to know about the total cost and cost per unit
- Determine the product’s selling price
Unit Cost Formula
Unit Cost Formula =
Fixed Cost + Variable Cost
Total Units Produced
TOTAL FIXED COST
It is the cost that remains constant throughout the production process.
Building rent + Direct labor costs + Other fixed costs
TOTAL VARIABLE COST
This cost changes with time. The number of units sold within a specific time duration can also impact the value of variable costs. For example, customer acquisition, packaging, delivery, handling, shipping, etc., are some variable costs.
Understanding with the help of an example
Suppose you make 3,500 cups a month. The fixed costs of the production (including space lease, equipment cost and others) are S$500.
The variable cost comes out to be S$5,000. It includes materials required, cup decoration, the hourly wage of workers, and others.
Total cost = fixed + variable = S$5,500
Unit cost = S$5,500/3,500 = S$1.57
It is always important to mention the time duration because the variable cost and the units produced could vary each month depending on the demand.
The unit cost formula helps to determine profitability and is one of the most important KPIs to consider to improve revenue.