If you’re like me, you’re probably thinking about how to figure out what your average cost per unit of something is. This is where product costing comes into play.
Product costing is a service that estimates the cost per unit of a product, and the most obvious way to do this is to just take the price of the item and divide it by the number of units. However, this method is only valid for a single product. If you buy one item of clothing, for example, you will only be able to do this with one single price, and that price will reflect the cost per unit of that item only.
If you want to do product costing for multiple items, it is possible to use a slightly more complicated method that uses the price of each item. For example, let’s say that you buy two different boxes of coffee and the cost of each item is 10 units. You can calculate that the cost of the boxes individually is 20 units. However, since only 20 units of coffee cost 10 units, then you can calculate the cost of all the coffee as 20 units.
If the unit cost is higher than the price per unit, you can use the “unit cost will be the price per unit” approach. This is an example for the case where multiple units are sold in the same box. If the unit cost is higher than the price per unit, then the unit cost will be the price per unit.
It can be easy to get lost in the details and not pay attention to the actual unit cost, even when it’s the price per unit.
As a rule of thumb, it is very rarely the case that a product’s unit cost is higher than the price per unit. I’m sure you’re thinking, “But I just bought that coffee.” The problem is that the unit cost is not the actual cost. A unit cost is the price of a single cup of coffee (or similar unit) in an average, standard retail coffee shop. In other words, the unit cost is the cost of the whole box of coffee.
What is the unit cost of a single cup of coffee or similar unit in an average, standard retail coffee shop? Let’s look at a few examples.
1 cup of coffee has a unit cost of $4.00 (or $4.50), even though the cost of a cup of coffee in the average, standard retail coffee shop is $1.50.
This is a great example of something that the real world doesn’t take into consideration. Like I said, the unit cost is the cost of the whole box of coffee. While there may be a cost per serving, in reality, a single cup has a value of one, not four. This is important because it allows you to break down the cost of a single cup of coffee in a retail coffee shop.
Remember, a box of coffee is a box, a cup is a cup, a milliliter of water is a milliliter, a tablespoon is a tablespoon, and a milligram of caffeine is a milligram. It’s a unit of measure, not a cost.