How to Calculate Unit Product Cost

Unit Product Cost Analysis

Managerial accountants take product costs as the costs that are incurred and are important in the manufacturing of specific products. Products costs are computed by summing up the related manufacturing overhead costs, direct material costs as well as direct labor costs. When one employs the costing method regarded as being the actual costing approach, one can establish the total product costs of given businesses and the corresponding unit product costs (Hansen, Mowen & Guan, 2009). The unit product costs are computed on the basis of the corresponding actual costs incurred in specified periods by particular businesses. When one is aware of a business’ product costs, he or she is capable of pricing the business’ products. As well, when one is aware of a business’ product costs, he or she is capable of drawing budgets for the resources, including money, which are available to the business (Wanjialin, 2004). Overall, unit product costs are the ratios of the cumulative costs of specific production runs to the corresponding numbers of the units that are generated, or produced.

By and large, manufacturing businesses produce similar, or homogenous, items in batches. Each of the batches contains a set of units. Each of the sets contains the same number of items. The businesses accumulate costs for all the batches. The businesses summarize the costs into specific cost pools. Each of the pools is consequently divided by the total number of individual items related to it generated to obtain the related unit product cost. Usually, the cost pool contains the corresponding cumulative direct labor costs, the manufacturing area’s overhead allocation as well as the corresponding cumulative direct material cost.

For instance, a widget manufacturer generates 1000 widgets in a day. The manufacturer’s cost accountant establishes that the manufacturer spends $5000 on the day’s direct material costs and $4000 on the day’s direct labor cost to produce the 1000 widgets. Besides, the accountant establishes that the manufacturer spends $3000 on the day’s factory overhead costs to produce the 1000 widgets.

Total production cost for the day = direct labor cost for the day + direct material cost for the day + factory overhead cost
Total production cost for the day = $(5000 + 4000 + 3000) = $12000

From the computation above, it is clear that the manufacturer incurs a total direct cost of $12000 to produce 1000 widgets. The cost for every widget produced would be the unit product cost for the manufacturer.

Unit product cost = Total production cost for the day ÷ number of units produced in the day
Unit product cost = $12000 ÷ 1000 widgets = $12 per widget

Notably, the preceding computation of unit product cost comes of as simple. Even then, there are several changes on the concept that add to the difficulties related to the computation of the cost. The changes may relate to abnormal costs, inclusion of overheads, and usage, or aim, of the resulting information. When businesses incur unusually high production costs in given periods, it is not advisable to consider them when computing unit production costs. The only overhead costs that are included in computing unit production costs are those directly related to manufacturing. All disparate administration-related cost ought to be excluded (Hansen, Mowen & Guan, 2009).

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