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Formula
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 cost related to the production of the goods and a fixed cost related to the production and dividing
the total cost of production by the number of units produced.
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
= $5,000 + $8,000
= $13,000
= $10,000 + $1,000
=$11,000
=($11000+$13000)/$1000
= $24
Advantages
It helps the management make 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 the company is incurring.
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 calculation of unit costing is of the previous period, for which expense is already
incurred. The same might not be useful if the prices of inputs to a product are of fluctuating nature.
It is not a sufficient tool for supervision and control over costs.