Unit Cost: The Daily Definition
What is unit cost?
Unit cost is the total cost associated with an individual unit or item. It’s calculated by dividing the total cost of production by the total number of units produced. Units are not always physical items — they can be resources, activities, or services as well.
If it costs your roof shingle distribution business $10,000 to procure, store, process, and sell 5,000 bundles of shingles, the unit cost of one bundle is $2. So, if you’re looking to profit from these shingles, you must sell them for more than that.
Exact calculations for unit cost vary depending on the nature of the units and what it takes for a company to sell them. At the end of the day, though, unit cost is an invaluable tool when analyzing a product’s cost effectiveness. You don’t want to waste time selling items that don’t make you any money. Calculating unit costs for your products helps you avoid this problem.
Our two cents:
When unit costs are too high, look to your processes. Is there waste happening within your operations?
Maintaining lean operations is a surefire way to keep your overhead low, which contributes to lower unit costs. For instance, if your warehousing strategy is lacking, you’re wasting money on your warehouse. If it takes an employee 15 minutes to pick an order when it could take them only five, that’s waste. When you lower the cost of warehouse operations, that translates to lower storage costs for the units inside your warehouse.
It’s easy to see how this principle can be applied to other areas of your business — are you losing money because of order processing errors? That’s going to make more than your unit costs go up. Waste management is an essential tool for companies looking to transform their operations and pursue growth. Take a look at your current operations, then look for areas to cut back on waste. Your unit costs will thank you.