What is Unit Cost?

Unit cost is the outlay incurred to produce a single unit of a product or service. Since this outlay is typically comprised of both variable cost and fixed cost elements, the cost for a single unit is derived by compiling the cost of production and dividing by the number of units produced. Unit cost is one of the most commonly-tracked cost accounting measurements, since it indicates the ability of a business to earn a profit.

A business that competes by being the lowest-cost producer will focus on reducing unit costs below the costs that can be achieved by its competitors. By being in the lowest-cost position, a business can always set prices lower than its competitors while still earning a profit.