what is 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 are synonymous with the cost of goods sold cogs this accounting measure includes all of the fixed and variable costs associated with the production of a good or service unit cost is a crucial cost measure in the operational analysis of a company identifying and analyzing a company s unit costs is a quick way to check if a company is producing a product efficiently companies can chart their earnings or losses for products in relation to the volume of sales using a profit volume chart variable and fixed unit costssuccessful companies seek ways to improve the overall unit cost of their products by managing the fixed and variable costs fixed costs are production expenses that are not dependent on the volume of units produced examples are rent insurance and equipment fixed costs such as warehousing and the use of production equipment may be managed through long term rental agreements variable costs vary depending on the level of output produced these expenses have a further division into specific categories such as direct labor costs and direct material costs direct labor costs are the salaries paid to those who are directly involved in production while direct material costs are the cost of materials purchased and used in production sourcing materials can improve variable costs from the cheapest supplier or by outsourcing the production process to a more efficient manufacturer unit cost on financial statementsa company s financial statements will report the unit cost these reports are vital for internal management analysis the reporting of unit costs can vary by type of business companies that manufacture goods will have a more clearly defined calculation of unit costs while unit costs for service companies can be somewhat vague both internal management and external investors analyze unit costs these individual item expenses include all of the fixed and variable expenses directly associated with a product s production such as workforce wages advertising fees and the cost to run machinery or warehouse products managers closely monitor these costs to mitigate rising expenses and seek out improvements to reduce the unit cost typically the larger a company grows the lower the unit cost of production becomes this reduction is because of economies of scale production at the lowest possible cost will maximize profits accounting for unit costsprivate and public companies account for unit costs on their financial reporting statements all public companies use the generally accepted accounting principles gaap accrual method of reporting 1 these businesses have the responsibility of recording unit costs at the time of production and matching them to revenues through revenue recognition as such goods centric companies will file unit costs as inventory on the balance sheet at product creation when the event of a sale occurs unit costs will then be matched with revenue and reported on the income statement the first section of a company s income statement focuses on direct costs in this section analysts may view revenue unit costs and gross profit gross profit shows the amount of money a company has made after subtracting unit costs from its revenue gross profit and a company s gross profit margin gross profit divided by sales are the leading metrics used in analyzing a company s unit cost efficiency a higher gross profit margin indicates a company is earning more per dollar of revenue on each product sold breakeven analysisthe unit cost also known as the breakeven point is the minimum price at which a company must sell the product to avoid losses as an example a product with a breakeven unit cost of 10 per unit must sell for above that price revenue above this price is company profit the calculation of the unit cost of production is a breakeven point this cost forms the base level price that a company uses when determining its market price value overall a unit must be sold for more than its unit cost to generate a profit for example a company produces 1 000 units that cost 4 per unit and sells the product for 5 per unit the gain is 5 minus 4 or 1 per unit in revenue if a unit were priced at 3 per unit there would be a loss because 3 minus 4 cost is a loss of 1 per unit companies consider a variety of factors when determining the market offering price of a unit some companies may have a high amount of indirect costs which requires higher pricing to more broadly cover all of the company s expenses real world exampleunit cost is determined by combining the variable costs and fixed costs and dividing by the total number of units produced for example assume total fixed costs are 40 000 variable costs are 20 000 and you produced 30 000 units the total production costs are the 40 000 fixed costs added to the 20 000 variable costs for a total of 60 000 divide 60 000 by 30 000 units to get 2 per unit production cost 40 000 20 000 60 000 30 000 2 per unit 