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How do I calculate cost per unit in a small manufacturing business?
Cost per unit is total production cost for a period divided by good units produced in that period. Total cost includes direct materials, direct labour and an allocated share of manufacturing overhead such as machine running costs, rent and supervision.
Formula in words: (materials + direct labour + allocated overhead) divided by good units.
It matters because pricing, margin and make-or-buy decisions depend on it.
Commonly misread:
- Dividing by units started rather than good units, which hides scrap cost.
- Allocating overhead evenly by units when products use machine time very differently.
- Using an old standard cost long after material prices or yields have changed.
- Leaving out the cost of rework and downtime.
Compare actual cost per unit to standard cost each period, and investigate the variances in materials, labour and overhead separately.
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