How to Calculate Unit Product Cost

by Madison Garcia; Updated September 26, 2017

To turn a profit, a business needs to sell a product for more than its original cost. This might seem like a simple concept, but it can be difficult to pinpoint which costs are part of manufacturing the product and which are general business expenses. Different product costing methodologies exist so unit product cost for financial reporting is not the same as it is for managerial accounting.

Unit Product Cost for Financial Reporting
Generally accepted accounting principles dictate that product costs are the sum of direct labor, direct material and total manufacturing overhead costs incurred during the period. This method is also referred to as absorption costing. Direct labor includes the wages, payroll taxes and benefits incurred for workers that create the product. Direct materials are the actual supplies used to create the goods. Manufacturing overhead is all the other costs the facility incurs -- like rent, utilities, equipment and supervisor salaries -- that aren't part of direct materials or direct labor.

To calculate unit product cost for financial reporting purposes, follow these steps:

  1. Sum the total direct labor, direct materials and manufacturing overhead incurred during the period.
  2. Divide the total from Step 1 by the number of units manufactured during the period.

For example, if the sum of direct labor, direct materials and manufacturing overhead is $100,000 and the business manufactured 50,000 units, the unit product cost is $2

Unit Product Cost for Managerial Accounting
While companies that follow generally accepted accounting principles must use the absorption costing method for financial reporting, they can use other methods for internal use. Many companies with a managerial accounting focus use variable costing rather than absorption costing for internal analysis and decision making.

Product costs under variable costing are identical to absorption costing with one small difference. In variable costing, only variable manufacturing overhead is counted instead of total manufacturing overhead. Fixed overhead manufacturing costs are the costs that don't tend to change, like rent, set salaries and property taxes. Variable overhead costs are items that fluctuate according to sales and production, like electricity, water, indirect machine supplies and commissions.

To calculate unit product cost for managerial accounting purposes, follow these steps:

  1. Sum the total direct labor, direct materials and manufacturing overhead incurred during the period.
  2. Subtract fixed manufacturing overhead costs.
  3. Divide the total from Step 2 by the number of units manufactured during the period.

For example, say that direct material, direct labor and manufacturing overhead amounted to $100,000 and 50,000 units were produced but $20,000 of that cost was fixed manufacturing overhead. The unit product cost for managerial accounting would be $80,000 divided by 50,000 units, or $1.60.

About the Author

Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.