How to calculate unit cost

What is unit cost?

Unit cost is what a single unit of something costs you: one mug, one metre of fabric, one gram of pistachios, one bottle of olive oil. It's the first step to working out your selling price, your profit and your losses.

A shop deals with two kinds of unit cost. Purchase unit cost is the unit price of a material or item you buy: the price per kilo of a 25 kg bag of clay, the price per metre of a 40 m bolt of linen. Product unit cost is the cost that lands on each piece you make or sell: one mug, one shirt, one candle. The second is built from the first, so if your purchase unit cost is wrong, your product cost is wrong too.

What is the unit cost formula?

It's one line: divide the total you paid by the quantity you bought. The part that needs care is the unit you write the quantity in.

If a product uses 40 g of pistachios, those pistachios cost 40 × ₺1.30 = ₺52.00. Multiply grams by the price per kilo (40 × 1,300) and the answer comes out a thousand times too big; multiply kilos by the price per gram and it's a thousand times too small. Fix the unit first and the rest of the sum takes care of itself.

How do you calculate unit cost, step by step?

Take the receipt, find the total, convert the quantity to the unit you use, and divide. Five steps.

1. 1Find the totalWrite down the amount on the receipt or invoice. Add any shipping or delivery charge for that order.
2. 2Pick a VAT ruleEnter every purchase either excluding VAT or including it. Whichever you choose, use it every time.
3. 3Count the quantityWrite how many kilos, litres, metres or pieces you bought. For a case or sack, find out how many pieces or how much weight is inside.
4. 4Convert the unitIf your recipe uses grams, multiply kilos by 1,000; if it uses millilitres, multiply litres by 1,000.
5. 5Divide and note itDivide the total by the quantity. Write the result next to the material with the date, so you can compare at the next purchase.

How do you turn kilo, litre and case prices into a unit price?

Divide a price per kilo or litre by 1,000 to get the price per gram or millilitre; divide a case or pack price by the number of pieces inside to get the price per piece. The examples below come from different kinds of shops.

With cases, the only thing to watch is how many pieces are inside. When a wholesaler says “a case” it might be 12 bottles or 6; if the receipt doesn't say, open it and count. The same goes for sacks and bolts of fabric: go by the weight or length on the label, not by eye. Measuring the first bolt from a new supplier once saves a lot of arguments later.

How do you work out cost per item?

Cost per item is the quantity of each material that goes into a product, multiplied by that material's unit cost, all added up. You move from purchase unit costs to the cost of one finished piece.

Take a mug in a ceramics workshop. Clay costs ₺0.07 per g; a 2 kg tub of glaze costs ₺1,600.00, so ₺0.80 per g; a pack of 100 kraft boxes costs ₺450.00, so ₺4.50 a box. Each material is multiplied by its own unit cost:

You can do the same sum for a whole batch: materials for 20 mugs come to ₺1,780.00, divided by 20 is still ₺89.00. Glaze is the most expensive line, more than the clay itself; if you want a cheaper mug, look at the glaze before the clay. In food, this calculation is called a recipe; the step-by-step version with slices, plates and cups is in our guide to recipe costing.

Do shipping, packaging and rent go into unit cost?

Shipping and packaging do; rent doesn't. The rule is simple: every lira tied directly to that purchase or that product goes into unit cost, and the bills you pay every month just to keep the doors open stay out.

Say a textile studio pays ₺8,800.00 for 40 m of linen and ₺200.00 for delivery. Forget the delivery and a metre looks like ₺220.00; the real figure is (8,800 + 200) ÷ 40 = ₺225.00. If a shirt takes 1.6 m, that's ₺8.00 per shirt. It looks small, but over 100 shirts it's ₺800.00.

• In: the material itself, the shipping or delivery charge for that order, and the box, jar, label or bag that leaves with the product.
• In: labour you pay per piece, for example a fixed sewing fee for every shirt.
• Out: rent, electricity and water bills, monthly wages, your accountant's fee. These are fixed costs, paid no matter how many pieces you make.

Rather than spreading fixed costs across every product, keep them separate: know your unit cost first, then work out how many sales a month cover the rent and bills. That's what the break-even point is for.

Which unit cost do you use when you bought the same item at different prices?

There are three ways: latest purchase price, average cost, and first in, first out. All three are correct; they just answer different questions.

Picture olive oil at a small grocer. Last month you bought a case: 12 bottles at ₺310.00 each. 8 bottles are still on the shelf. This week a new case arrived, but at ₺360.00 a bottle, a 16.1% rise. Now there are 20 bottles on the shelf, bought at two different prices.

• Latest purchase price: ₺360.00. Whatever you paid last. It answers “What would it cost me to buy this again today?”
• Average cost: ₺340.00. The total cost of the bottles on the shelf divided by the number of bottles, also called a weighted average. It answers “What is the stock I'm holding worth?”
• First in, first out: ₺310.00, then ₺360.00. You assume the old bottles sell first, so the next 8 sales are costed at ₺310.00 and the rest at ₺360.00. With anything that has a use-by date, that's how you stack the shelf anyway.

Which unit cost should you use to set your prices?

To set a selling price, use today's replacement price, which is your latest purchase price. To value your stock or a count difference, the average cost is fairer.

Here's why. The 8 cheaper bottles will sell out, and from then on you'll be restocking at ₺360.00 a bottle. Price from the old ₺310.00 cost and you'll look profitable for a few days, then your margin melts the day you open the new case. How to get from cost to a selling price is covered in our guide to profit margin and pricing.

The average is for looking back. If a bottle goes missing at a stock count, it might have been a cheap one or a dear one; valuing it at the average neither scares you for nothing nor lets you off lightly.

What are the most common unit cost mistakes?

The three most expensive are mixing up VAT, forgetting packaging and using an old price. All three break the sum without showing any sign of it.

• Forgetting packaging and small parts. 180 g of soy wax costs ₺46.80; add a ₺25.00 jar and a ₺2.50 wick and the candle comes to ₺74.30. Leave out the jar and wick and you miss more than a third of what that candle costs.
• Using an old price. Pricing from a receipt three months old means absorbing the price rise yourself instead of passing it on. Work out the unit cost again with every purchase.
• Mixing up units. Multiplying grams by a price per kilo, or treating a case price as a bottle price. At the end of every sum, ask once: “Does this number make sense?”
• Guessing quantities. Assuming “a bolt is always 50 metres”. Read the label, and measure once if you have any doubt.