Reviewed by Oct 05, 2020| Updated on
The total cost incurred by a company to manufacture, store, and sell a unit of a product or service is called the unit cost. They are synonymous with the cost of sales and cost of goods sold.
Companies work out ways to improve the overall unit cost of products by balancing between fixed and variable costs. Fixed costs are those expenses that are independent of the number of units produced, such as rent, insurance, and equipment costs. They may involve a long-term rental agreement.
On the other hand, variable costs depend on the output produced, i.e. direct labour costs and direct material costs. Direct labour costs include the wages paid to the employees who worked in the production directly. Direct material costs are the purchase costs of the raw materials and those involved in the production. Purchasing material from the cheapest supplier or outsourcing the production to an efficient manufacturer can reduce variable costs.
Unit cost is reported in the company's financial statement and acts as a great deal of information during the internal analysis. However, reporting unit cost or not depends on the type of business. It is very clear for a product-based company, while it can be vague for a service-based company.
Unit cost is a piece of information that is important even for external investors to gauge the performance of the company. Managers monitor this cost to relieve rising expenses and seek for ways to reduce the unit cost. The larger a company grows, it finds ways to lower the unit cost of production because producing units at the lowest cost can raise the profit levels.