What is cost per unit?

Cost per unit is the total cost incurred in producing a unit of a product or service. It is the cost which comprise the individual cost of materials, labor, direct expenses and overheads.

Cost per unit; cost accounting point of view

Example one

ABC has incurred the following costs to produce a unit of product A

Cost per unit; economist’s point of view

Economists have a diverse point of view on the cost per unit of a product. According to these proponents, cost per unit is the economic resources utilized to produce or manufacture a product. These include Capital, Entrepreneurship, Land and Labor (CELL).

Capital; under this perspective, the cost element is the interest paid on capital. Economists assume that a producer will borrow capital so as to acquire capital goods for production purposes. The interest paid thereof is referred to as cost of producing the product.

Entrepreneurship; under this perspective, the producer is the entrepreneur and he/she is assumed to be a risk taker for he produces for the market without being sure whether the goods or services will be demanded. So he is classified as a risk taker and therefore need to be compensated by being paid profits as premium/returns. Therefore, it is assumed that the payment paid to him/her is a cost to the organization making the payment.

Land; under this perspective, land is utilized to install the machineries for production purposes or it is used to extract the raw materials. Hence the land owners are rewarded rent, commonly referred to as economic rent.

Labor; under this perspective, workers’ efforts is a contribution towards production of goods or provision of services. In this case, the labor can either be unskilled, semi-skilled or skilled. Whichever way, they are rewarded wages .

Therefore, cost per unit from the economics point of view comprise;

About the Author - Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers.