How do I compute the product cost per unit?

Definition of Product Cost per Unit

In accounting, a product's cost is defined as the direct material, direct labor, and manufacturing overhead.

Other costs such as advertising, preparing invoices, delivery expense, office salaries, office rent and utilities, and interest on loans are examples of expenses that are not assigned to the products. Instead, these costs are described as period costs since they are expensed immediately in the accounting period in which they were incurred.

Of course for a company to be profitable, it must have sufficient sales revenues (quantity and prices) to cover both the product costs of the units sold and the other expenses of the accounting period.

Example of Product Cost per Unit

The product cost per unit is used for valuing a company's inventory and for determining the cost of goods sold.

Since some of the manufacturing overhead costs are fixed in total (manufacturing rent, depreciation, managers' salaries, repairs, etc.), the per unit cost of a product depends on the number of units manufactured during a given year. In other words, the cost of a product is not known with precision, even though accountants will compute the per unit cost to the nearest penny.