Unit Cost

What is a 'Unit Cost'

A unit cost is the total expenditure incurred by a company to produce, store and sell one unit of a particular product or service. Unit costs include all fixed costs, or overhead costs, and all variable costs, or direct material costs and direct labor costs, involved in production. Determining the unit cost is a quick way to check if companies are efficient in producing their products.

BREAKING DOWN 'Unit Cost'

Unit cost is an important metric to look at when evaluating a "unit grower" stock, or a stock that chiefly produces items that have a low fixed cost. Generally, the larger a company grows, the lower the unit cost it can achieve through economies of scale.

Companies that produce products or provide services often look at unit costs as a way of measuring profitability. Being able to produce a product at the lowest cost possible should be the goal of all companies looking to profit. The unit cost is not necessarily the retail cost of the product being produced but rather the average cost of producing one unit of a particular item. The unit cost is sometimes referred to as the breakeven point, or minimum price, a company must sell the product to not incur losses. A product with a unit cost of $10 per unit may be sold to customers at twice the price, hence, gaining profit for the company.

Variable and Fixed Costs

Successful companies always look for ways to improve the overall unit cost of their products. This is done by managing the fixed and variable costs. Fixed costs are costs that go into producing a product and are not dependent on the volume of units produced. Examples are rent, insurance and salaries. Fixed costs such as warehouses and production equipment can be managed through long-term rental agreements.

Variable costs vary depending on the level of output produced. They are further divided into direct labor costs and direct material costs. Direct labor costs are the salaries paid to those who are directly involved in making the product, while direct material costs are the cost of materials purchased and used in making the product. Variable costs can be improved by sourcing materials from the best cost supplier or by outsourcing the production process to a more efficient manufacturer, such as Apple outsourcing its iPhone production to Foxconn of China.

Computing for the Unit Cost

Unit cost is determined by combining the variable costs and fixed costs and dividing by the number of total units produced.

RELATED TERMS
  1. Production Cost

    A cost incurred by a business when manufacturing a good or producing ...
  2. Variable Cost

    A corporate expense that varies with production output. Variable ...
  3. Full Costing

    A managerial accounting method that describes when all fixed ...
  4. Cost Accounting

    A type of accounting process that aims to capture a company's ...
  5. Direct Cost

    A price that can be completely attributed to the production of ...
  6. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
Related Articles
  1. Investing

    What is Incremental Cost?

    Incremental cost is the added cost of manufacturing one more unit.
  2. Investing

    Variable Costs

    Variable costs go up when a company produces more goods or services, and go down when it produces fewer goods or services. This is compared to fixed costs, which do not change in proportion to ...
  3. Investing

    What are Fixed Costs?

    Fixed costs are business expenses that do not change as the level of production goes up or down. They are one of two types of business expense, the other being variable costs. Variable costs ...
  4. Investing

    What are Direct Costs?

    Direct costs for finished goods refer to the items and services directly used in production. Other costs such as rent and insurance for the production site are indirect costs. These costs may ...
  5. Markets

    Understanding Cost of Revenue

    The cost of revenue is the total costs a business incurs to manufacture and deliver a product or service.
  6. Investing

    What's a Break-Even Analysis?

    Most businesses have fixed costs such as rent and salaries, as well as costs for raw materials. Break-even analysis shows how many sales it takes to pay off the costs of doing business, and “break ...
  7. Investing

    Understanding Cost-Volume Profit Analysis

    Business managers use cost-volume profit analysis to gauge the profitability of their company’s products or services.
  8. Investing

    Explaining Cost Control

    For a business, cost control entails managing and reducing expenses.
  9. Investing

    The Operating Leverage And DOL

    Operating leverage tells investors about the relationship between a company's fixed and variable costs. The higher a company's fixed costs in relation to its variable costs, the greater its operating ...
  10. Investing

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
RELATED FAQS
  1. How are fixed costs treated in cost accounting?

    Learn how fixed costs and variable costs are used in cost accounting to help a company's management in budgeting and controlling ... Read Answer >>
  2. How is the marginal cost of production used to find an optimum production level?

    Understand more about production cost calculations, and specifically how the marginal cost of production is used to determine ... Read Answer >>
  3. Is it better for a company to have fixed or variable costs?

    Understand the difference between a fixed cost and a variable cost, and learn how a company benefits from having more fixed ... Read Answer >>
  4. How do fixed and variable costs each affect the marginal cost of production?

    Learn about the marginal cost of production, how to calculate the marginal cost, and how fixed costs and variable costs affect ... Read Answer >>
  5. What is the difference between direct costs and variable costs?

    Learn about variable costs and direct costs, how direct costs and variable costs are classified and the differences between ... Read Answer >>
  6. What is the difference between fixed cost and total fixed cost?

    Learn what a fixed cost is, what a variable cost is, what total fixed costs are, and the difference between a fixed cost ... Read Answer >>
Hot Definitions
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  2. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  3. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  4. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  5. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
  6. Real Rate Of Return

    The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other ...
Trading Center