Calculation of Cost

Introduction

Profitability is important to the success of both products- and service-based organisations. Companies frequently analyse if their manufacturing expenses are less than the price of each product unit they sell to determine if their firm is successful. You may alter product prices and accomplish your sales targets by understanding how to use the cost per unit calculation for this reason.

One of the fundamental indicators of the prime-cost plan and report is cost calculation. In industry and other financial sectors, it addresses in money structure the enterprise’s expenditures for the production and sale of a unit of a particular kind of output and expenditures for the performance of a unit of labour.

Cost Unit

The cost unit, otherwise called the cost per unit, is how much money a corporation spends to produce a single unit of a saleable item. The cost of unit calculation is included in the firm’s financial statement. It helps the firm decide whether its manufacturing expenses are less than its sales income and whether it is profiting from sales of the products. 

Also, the cost of capital for bonds and debentures is calculated on an after-tax basis as Interest is a tax-deductible expense and is charged to the profit & loss account. Therefore, the cost of capital for debentures bonds is calculated after-tax basis.

Cost of Goods Sold

The cost of goods sold (COGS) is any direct cost associated with the manufacture of items that are sold, as well as the cost of the inventory you purchase to sell to customers. It excludes overhead costs like rent associated with the firm’s general functioning. The cost of products sold is disclosed on the income statement.

Formula:

Starting inventory + purchases − ending inventory = cost of goods sold.

How to calculate the Cost Per Unit?

1. Determine Your Fixed Costs

Fixed costs are expenses that do not change over time. They are unaffected by your unit output. If you create fewer or more units, or if market demand for your product declines or grows, fixed costs remain constant. The rent you pay for your office space, the cost of buying or renting your equipment, the property tax you pay, and the company insurance premium you pay are all instances of fixed costs.

While fixed costs do not usually move significantly from one manufacturing cycle to the next, there are times when they do. This shift is referred to as step cost. It might happen when your manufacturing needs grow, and you’ll need to spend more money to fulfil the orders. For example, you may require additional warehouse space to store new product units. It would help calculate a new fixed cost to account for the increased costs in such circumstances.

2. Find your Variable Costs

Variable costs are expenses based on the output of a product and might fluctuate frequently. They might alter daily, weekly, monthly, quarterly, yearly, or even between productions. Variable costs are determined by the number of units produced and are subject to vary as that number fluctuates.

3. Knowledge of the Number of Units Getting Produced

You’ll have to know the exact number of units you’re producing in a given assembling cycle to decide the cost per unit. You may, for instance, make 100 cleansers consistently, 300 cleansers for each quarter, and 1200 cleansers yearly. In this way, you’re delivering 100 units each month, 300 units for every quarter, and 1200 units each year.

4. Cost per Unit Formula

To compute your expense per unit, you should add your fixed and variable costs and divide that total by the number of units you produce. It is vital to use similar units of measurement in the equation. In this way, if you calculate the cost unit for a quarter, the figures for the number of units, fixed expenses, and variable expenses should be from a comparable quarter.

Example:

For instance, a company produces 1000 units of a single product every year. The ingredients that make the product cost ₹4.50, and the equipment that makes them costs ₹1,000 to service once a year. The company also spends ₹6,000 on marketing, ₹10,000 on rent and storage, and ₹2,000 on other business expenses each year.

In this case, the cost price per unit would be:

 ₹1,000+₹6,000+₹10,000+₹2000/1,000+₹4.50

= ₹22.50

Conclusion

The desire to calculate expenses more precisely with less variation and manage costs in enterprises is growing. Calculation of cost is especially significant in manufacturing companies. As a result, it’s critical to understand expenses and apply them to product prices. The cost per unit computation is essential since it can explain its operational efficiency. Then, if required, it can take the necessary actions to enhance operations.