Cost per unit

Unit costs denote the costs that can be allocated to an allocation object. Companies determine, unit costs within cost unit accounting. Besides cost centre accounting and cost type accounting, this is the third and last subsystem of the accounting system. While cost type accounting collects the absolute amount and the value of the costs incurred by the company for the consumed resources, in cost centre accounting these costs are allocated to the individual cost centres in the company. In cost unit accounting it is ultimately determined the amount of resources consumed by a company in relation to the goods or services produced by the company and this resulting value represents the cost per unit (Taschner, Charifzadeh 2020, p. 73).

Benefit of use cost per unite

The unit costs, which are determined within the framework of a cost accounting system, are available to the management as a basis for decisions. Furthermore, they serve as a supporting instrument for the planning and controlling activities of the management or the controlling departament with regard to the business activity or parts thereof (Vanderbeck 2010, p. 4).

Here, unit costs are used to generate important information for decision-making in the following areas:

• Information on the level of the cost per unit of a product is an essential decision-making tool in determining the selling price of the product. It should be high enough to cover all of the costs that are incurred by the allocation object. For example, the unit price is compared with the manufacturing costs of the product, but also with marketing and administration costs. At the same time, the owners of the company are usually expected to make a reasonable profit on the product, which must also be taken into account in setting the price (Vanderbeck 2010, p. 4).
• Therefore for management the interest in the cost per unit results from the fact that it is possible to derive the profit per unit produced or per service by equating the unit costs with the unit revenues (Taschner, Charifzadeh 2020, p. 73). It enables management to carry out analyses of the profitability of products and services and furthermore, this information can be used in the decision-making process to optimally allocate scarce resources according to profitability (Vanderbeck 2010, p. 4).
• Detailed unit cost information is also needed when facing competition in the market. In the market, companies compete on product prices. By using detailed unit cost information, you can analyse how you gain a price advantage over your competitor. In this way, a decision can be made about which measures need to be taken. On the one hand, an optimisation of the cost structure may be necessary, or a reduction of the sales price may solve the problem, whereby a mixture of both approaches is also possible. The goal is to ensure that the sale of the product or service generates a profit (Vanderbeck 2010, p. 4).
• In some companies or industries, it is common to submit bids for contracts. In this case, the cost per unit is essential information to determine a profitable and competitive offer price (Vanderbeck 2010, p. 4).

Determination of cost per unite

The general calculation of unit costs is carried out by means of an average calculation, which is why the term average cost is also used. As shown in the following formula, an absolute total cost amount is divided by the number of corresponding allocation objects. This makes it possible to calculate specific unit costs along the entire value chain, such as the unit production costs, the unit labour costs or also the unit costs in customer service, etc (Bhimani 2015, p. 37).

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