unit cost

noun
Updated on: 13 Oct 2017

Definition of unit cost

:the cost allocated to a selected unit and commonly calculated as the cost over a period of time divided by the number of items produced

There's more!

Love words? You must — there are over 200,000 words in our free online dictionary, but you are looking for one that’s only in the Merriam-Webster Unabridged Dictionary.

Start your free trial today and get unlimited access to America's largest dictionary, with:

  • More than 250,000 words that aren't in our free dictionary
  • Expanded definitions, etymologies, and usage notes
  • Advanced search features
  • Ad free!
Already a subscriber? Log in.

Financial Definition of UNIT COST

unit cost

What It Is

Unit cost is a measure of a company's cost to build or create one unit of product.

How It Works

For example, let's assume that it costs Company XYZ $10,000 to purchase 5,000 widgets that it will resell in its retail outlets. Company XYZ's unit cost is:

$10,000 / 5,000 = $2 per unit

Often, calculating unit cost isn't so simple, especially in manufacturing situations. Usually, unit costs involve variable costs (costs that vary with the number of units made) and fixed costs (costs that don't vary with the number of units made).

For example, at XYZ Restaurant, which sells only pepperoni pizza, the variable expenses per pizza might be:

Flour: $0.50
Yeast: $0.05
Water: $0.01
Cheese: $3.00
Pepperoni: $2.00
Total: $5.56 per pizza

Its fixed expenses per month might be:

Labor: $1,500
Rent: $3,000
Insurance: $200
Advertising: $500
Utilities: $450
Total: $5,650

If company XYZ sells 10,000 pizzas, then its unit cost would be:

Unit Cost = $5.56 + ($5,650 / 10,000) = $6.125

Why It Matters

Knowing unit cost helps business owners determine when they'll begin to turn a profit and helps them price their products with that in mind. It provides a dynamic overview of the relationships among revenues, costs, and profits.

However, typical variable and fixed costs differ widely among industries. This is why comparison of break-even points is generally most meaningful among companies within the same industry, and the definition of a "high" or "low" break-even point should be made within this context.


Seen and Heard

What made you want to look up unit cost? Please tell us where you read or heard it (including the quote, if possible).

Love words? Need even more definitions?

Subscribe to America's largest dictionary and get thousands more definitions and advanced search—ad free!

WORD OF THE DAY

to praise usually to excess

Get Word of the Day daily email!

Love words? Need even more definitions?

Subscribe to America's largest dictionary and get thousands more definitions and advanced search—ad free!