The unit cost (also known as unit price) of output (production) is an estimation of the total cost required to produce the output. The unit cost of the output is an important cost indicator because it provides information about the cost of output, i.e. how much output costs to produce.
For example, a manufacturing company may know how much it costs to produce a widget, but it may not be able to easily figure out how much the widget costs, which is the purpose of costing.
How to Calculate Unit Costs
Unit costs are computed by dividing some amount of total costs (the numerator) by the related number of units (the denominator).
In many cases, the numerator will include a fixed cost that will not change despite changes in the denominator. It is erroneous in those cases to multiply the unit cost by activity or volume change to predict changes in total costs at a different activity or volume levels.
For example: In the production process the cost of materials is $10 per unit, the cost of labour is per unit and overheads cost per unit. The sum of the per-unit cost will be $10+$6+$4 = $20.
Normally we are not given individual costs per unit. We are given total costs at some production level, say at 1000 units of production level the total material cost is $10000, the total labour cost is 00 and total overheads are 00. Compute the per-unit cost. The solution will be as follows:
Total Cost of Production/Total number of units
= $10,000+$6,000+$4,000 / 1000 units
= $20,000/1000 units
= $20 unit
Unit cost is a component of overall cost, and it consists of a number of different costs, such as materials, labour, overheads, and so on. Unit cost is defined as the total cost required to produce a unit of output. The unit cost of output is calculated by dividing the overall cost of output by the quantity of the output. Thus, a unit of output can be represented in many ways, but one of these ways is the cost of a unit of the output. For example, one could calculate the cost of a unit of a widget as the cost per widget.