How to Calculate Per Unit Cost of Production

Calculating the per unit cost of production involves determining the average expense a business incurs to manufacture a single product. It provides a clear picture of the financial outlay required for manufacturing, without yet considering broader business decisions or potential benefits. This calculation is essential for any entity involved in creating goods.

Key Cost Elements

Understanding the per unit cost begins with identifying and categorizing all expenses directly tied to the manufacturing process. These expenses fall into three primary categories: direct materials, direct labor, and manufacturing overhead.

Direct materials represent the raw goods that become an integral part of the finished product, such as the wood used to construct a chair or the fabric woven into a shirt. The cost of these materials is a direct and variable expense, fluctuating with the volume of production.

Direct labor includes the wages paid to employees who are physically involved in transforming raw materials into finished goods. This encompasses the pay for assembly line workers, machine operators, or artisans directly crafting a product. Like direct materials, direct labor costs typically vary with the number of units produced.

Manufacturing overhead encompasses all indirect costs associated with the production process not directly attributed to a product unit. This category divides into fixed and variable components. Fixed manufacturing overhead costs remain constant regardless of production volume, such as the rent paid for a factory building or the depreciation expense on manufacturing machinery. Variable manufacturing overhead changes with production level, including expenses like the utilities consumed by the factory or the cost of indirect materials such as lubricants and cleaning supplies. This also includes the wages of factory supervisors who oversee the overall production process but do not directly work on individual units.

Calculating the Per Unit Cost

To determine the per unit cost of production, all identified costs must be totaled and then spread across the number of units manufactured. The formula for this calculation is: (Total Direct Materials + Total Direct Labor + Total Manufacturing Overhead) / Total Number of Units Produced.

First, sum all the costs associated with direct materials used during a specific production period. Next, aggregate all direct labor costs incurred for the same period. Following this, combine all fixed and variable manufacturing overhead costs to arrive at the total manufacturing overhead.

Once these three subtotals are established, add the total direct materials, total direct labor, and total manufacturing overhead together to yield the total cost of production for the period. The final step involves dividing this total cost of production by the total number of units manufactured during that same period.

For example, consider a company that produced 1,000 units of a product in a given month.

During this period, the company incurred $10,000 in direct material costs for the raw components. Direct labor wages for the workers directly involved in production amounted to $5,000.

Additionally, fixed manufacturing overhead, including factory rent and equipment depreciation, totaled $3,000, while variable manufacturing overhead, such as factory utilities and indirect supplies, came to $2,000. The combined manufacturing overhead is $5,000.

Adding these components, the total cost of production is $10,000 (direct materials) + $5,000 (direct labor) + $5,000 (total manufacturing overhead) = $20,000. Dividing this total cost by the 1,000 units produced results in a per unit cost of $20.00.