Calculating cost per unit isn’t as simple as it seems in manufacturing situations. Manufacturing houses often have to go through a lengthy and detailed accounting over a brief period for calculating per unit cost. Sometimes, even accounting professionals have difficulty calculating these costs. This can impact a company’s productivity and efficiency. It becomes hard for companies to set appropriate prices for the goods manufactured when they are unaware of per piece cost. This is why you need to know the total costs that include both fixed and variable costs for understanding the cost per unit of the goods manufactured in your manufacturing laboratory.
Knowing Cost Per Unit Is Essential For Keeping Things On Track!
When factories or manufacturing houses make large numbers of identical goods, they need to calculate per unit cost to track their production expenses. Companies cannot simply just roughly estimate per unit cost in the professional business environment and set retail prices for the goods manufactured. This does not allow the company to know the cost per unit of the total goods manufactured. This will surely kick businesses out of the race and likely bring the production houses to a complete shutdown point. For remaining useful and earning significant returns, companies need to calculate per unit cost that will help them keep on track.
What’s more?
Certain manufacturing houses have complicated manufacturing operations. The fixed costs are not that hard to sort out, but when it comes to variable costs, this is the point where things start messing up. But one thing is obvious: companies need to accumulate total fixed and variable costs for knowing the total manufacturing costs. The point is that different products manufactured in the manufacturing setting have a different cost per unit; that’s simple mathematics. This means companies need to know the cost per unit of each product category to know whether current costs exceed budgeted costs.
The bookkeeping records need to be maintained appropriately for knowing the cost per unit of various goods produced in a manufacturing setting. Before figuring out the per piece cost of the goods manufactured, you need to know briefly about fixed and variable costs.
Fixed Costs
In simplest terms, fixed costs are the expenses that do not change over a set time. They remain the same and do not impact your production output. This may include building or factory rent, property taxes, depreciation and amortization, fixed interest payments, and mortgages. Also, you need to understand that some fixed costs change on an annual basis, as mentioned in the contract that increases your overall fixed costs. Let’s just say you renewed your insurance policy to increase your insurance premium for the next year. It will likely impact your production costs for each unit due to the additional insurance cost.
Variable Costs
In simplest terms, a variable cost is a cost that varies with the level of output. Depending on the company’s production volume, variable costs rise as the production level increases and falls when the production level decreases. This may include the cost of raw material used in production, direct labor costs, sales commission, utility costs… for knowing the cost per unit, you need to carefully examine all the variable costs. The formula for the variable cost is:
Variable Cost per Unit of Output*Quantity of Output=Total Variable Cost
Calculate Unit Costs
For figuring the total manufacturing costs per unit, you need to divide the total costs (fixed and variable) by the total number of units produced by a firm. Let’s just say that the firm produced 40,000 units of a certain product, and the total amount of fixed costs are $50,000, and the number of variable costs is $70,000, which means total production costs are $120,000. When the total production costs are divided by a total number of units, we will get $3 per unit production costs. The formula for calculating the cost per unit is
Total Fixed Costs+ Total Variable Costs/ Total Number of Units Produced=Cost Per Unit
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