Unit Cost Definition, What is Unit Cost, and How Unit Cost works?

control of cost

By having a clear understanding of the costs incurred by a specific department or division, it becomes easier to make informed decisions about that department or division. Helps to identify inefficiencies and areas for cost reduction. By isolating the costs of a specific department or division, it becomes easier to identify areas where costs can be reduced. The variable cost comes out to be S$5,000. It includes materials required, cup decoration, the hourly wage of workers, and others.

production costs

what is cost unit costs are a part of the production costs or the cost of production. Cost of sales consists of cost of production plus proportionate selling and distribution expenses of the product. Selling expenses include the expenses incurred for creating demand for the product such as advertisement, salaries of salesmen, selling expenses and show room expenses. Distribution expenses are those expenses incurred in connection with the delivery of goods to the customers such as packing, carriage outwards, warehouse expenses. Utilities such as natural gas, electricity, and water are overhead costs that fluctuate with the quantity of materials being produced. The might increase or decrease depending on the demand for the product in the market.

Fixed, variable and semi-variable overheads

In one season he earns a good harvest and profits, and in the next season his crops fail. But still, he has to pay the interest of his loan rate, despite his profits or loss. He has to rent a big building for the purpose. One year his school got 1000 admission and the other year he got only 100 new admissions.

A cost sheet does not take into account goodwill written off. When a firm wants to shrink the balance sheet or if it thinks the goodwill doesn’t matter, it will write off the goodwill. Cost accounts make a record of actual costs incurred for the purpose of preparing Costing Profit and Loss Account. Cost accounts make a presentation of total amount of costs without analysis. Henry wants to set up a cup manufacturing unit. For the first month, he set a target of 1000 cups.

Calculating the cost per unit and determining the selling price of a product are carried out using a cost sheet. Management can identify inefficiencies in production, if any, by comparing cost sheets from the two periods and taking corrective action if necessary. Understanding the difference between a cost sheet and a cost account is desirable. Cost sheets represent elements of production cost incurred at different intervals of time, and are prepared at given intervals.

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This department incurs a lot of expenses while comping up with new ideas, technologies, and products. There is no revenue generated for the department because the credits are transferred to the sales department for selling the products. By adding up all the costs incurred by each cost center that are directly tied to the delivery of that specific service. Costs can be allocated to cost centers using activity-based costing or other methods. Both can be used to allocate overhead and indirect costs to specific areas or activities.

  • Contract cost is also debited with overheads which tend to be small in relation to direct costs.
  • Aunit costis a total expenditure incurred by a company to produce, store, and sell one unitof a particular product or service.
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Through comparative columns, it discloses the cost per unit of output as well as the total cost and allows comparison between a particular period and any of the preceding periods. The cost account statement is a memo and does not form part of the double entry system. By contrast, a cost account depicts the expenses actually incurred in connection with a particular job, contract or process as part of a double entry cost accounting system.

Simple example to differentiate between cost and profit centres

Cost units can be used to identify areas where costs can be reduced. It shows the costing data in an analytical manner to suit the purpose for which it is prepared. Rs for the supply of various items/components.


There is no uniformity in the flow of production from one department to another. The department through which the job has to be processed depends purely on the nature of each job. There is no uniformity in the flow of production from department to department. The production is always against customer’s orders and not for stock. They are to which expenses, incomes, and capital are ascribed. This is potentially the biggest kind of obligation community, as the supervisor will be answerable for asset subsidizing choices.

what are the elements of cost Related: Cost Centre & Cost Unit – Introduction to Cost Accounting, Cost Accounting

Both cost center and cost unit refer to the specific areas or activities within an organization that incur costs. Cost units may not be applicable to certain types of products or services that cannot be easily quantified. Cost units can be used in cost-benefit analysis to determine the profitability of a project or investment. They can also be used to determine the price at which a product or service should be sold to make a profit. Can lead to a lack of motivation and engagement. Can be time-consuming and resource-intensive to set up and maintain.

Since their usage isn’t constant, they’re included as variable overhead costs. Accountants calculate this cost for the whole facility, and allocate it over the entire product inventory. Cost centre and cost unit are two important concepts related to cost accounting. They are used for the purpose of planning, controlling and decision making in an organisation.

This means that a cost sheet can be used to control costs and reduce costs. There are various types of cost sheets, including simple cost sheets and cost sheets that account for opening and closing stock of work-in-progress and finished goods. It is clear that there is no golden rule for the sequence in which unit cost and total cost columns should appear. Cost of production or cost price or production costs can be calculated by adding all direct and indirect costs of a manufacturing unit.


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. The cost unit is defined as the unit of product, service, time, activity, or combination in relation to which cost is estimated. At the time of preparing the cost statements and accounts, a particular unit is required to be selected. It helps to identify the cost accurately and allocate the various expenses. It assists the cost measurement process of the company and promotes comparison.

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The Question and answers have been prepared according to the B Com exam syllabus. Information about What is https://1investing.in/ centre n cost unit . Covers all topics & solutions for B Com 2023 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for What is cost centre n cost unit . Difference between cost centre and cost unit. Most imp theory question for BCOM prog and hons students For Notes of this video contact via…

Indirect labor is the cost to the company for employees who aren’t directly involved in the production of the product. For example, the salaries for security guards, janitors, machine repairmen, plant managers, supervisors, and quality inspectors are all indirect labor 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.

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