## How to Calculate Cost per Unit

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. In the professional business environment, companies cannot simply just roughly estimate per unit cost 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, for knowing the total manufacturing costs, companies need to accumulate total fixed and variable costs. Well, the point is different products that are 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 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 develop an understanding of the fact 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 that will 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 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 examine all the variable costs carefully. The formula for the variable cost is:

## 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, then 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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## Most Important Steps for Calculating Work in Process

Determining per unit cost may be taken as a very common aspect in the manufacturing industry, but it is no surprise that it has to be handled professionally. No matter what one may argue, calculating work in process requires utmost brilliance and perfection in technical accounting knowledge. Obviously, determining raw material, labor and overhead costs incurred in manufacturing a certain good is no easy feat. You have to carefully examine and evaluate the costs of each and every aspect of producing a finished good at various stages of the production process before you can determine the total cost incurred on producing a good or a commodity. The term WIP (Work In Process) is usually used in production and supply chain management which bears an immense importance in the manufacturing and distribution industry.

# What Is Work in Process?

According to Investopedia, “it is the sum of all costs put into the production process to manufacture products that are partially completed”. A careful analysis has to be made at various stages of the production process in order to determine all the costs incurred on raw material, labor, and overhead costs. For determining the exact unit cost, you must have a clear picture of all the costs incurred from the raw material to the finished good.  It is important that your bookkeeping shows all of the costs in order to come up with your final cost.

As far as the calculations are concerned, the formula for calculating work in process is:

Work in process = (operating inventory goods in process + raw material used during the period + direct labor during the period + factory overhead for period) – ending inventory

## WIP–In Light Of Automation and Technology

Fortunately, we have opened our eyes in such an era of modern accounting and bookkeeping where processes have become easier than before through superior automation and technology. Now, we have access to advanced accounting software and solutions which have made calculation easier, quicker, and more accurate. This indicates that calculating work in process is now considered a piece of cake for most individuals who have command and control on these contemporary accounting and manufacturing software. Plus, we now also have access to accounting and bookkeeping professionals who make the process easier and help reduce manufacturing costs at various stages of the production process.

## Benefits of Reducing Manufacturing Work in Process

There are numerous benefits associated with reducing manufacturing work in process costs. The top benefits include better cash flows, higher liquidity, and diminished business risks. However, a brilliant execution strategy is required in order to make things go in your favor. Since the ultimate aim of every manufacturing establishment is to reduce raw material, labor and overhead costs in each unit produced, you must integrate innovative procedures and techniques to eradicate manufacturing bottlenecks. Moreover, calculating work in process may seem hard at first, but once you commence to sort things out piece by piece (costs), everything becomes relatively easier to handle.

## Strategic Forecasting and Planning and the Need for Calculating Work in Process

Undoubtedly, strategic forecasting and planning is critical to business success. The more you get yourself involved in reducing per unit costs, the more you will save at the end of the day. For determining how many units should be produced, raw material costs, labor costs, and overhead costs, you must have a clear picture in mind about your production requirements and specifications. Strategic variety usually involves realistic vision, mission and out of the box thinking for making future projections related to manufacturing and production.

Moreover, strategic planning and analyses will define where your company is heading and what the company aims to achieve in both short and long-term time periods. For attaining ideal results, machines can be added or integrated into the manufacturing process and the workforce can be educated with newer and advanced techniques for optimal utilization of resources. Calculating work in process must be handled with the utmost care because it directly influences your profitability index.

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