# Unit cost

In contrast to total costs , unit costs , also known as average costs, are generally understood to mean the costs per unit of a good . In business administration and economics, there are sometimes different definitions and uses of the term.

One aspect of the unit costs is the unit wage costs , which as a measure between workload and production are an indicator for personnel-related productivity , also for economic analyzes.

## Unit costs in business administration

Costs are related to a quantity or unit volume cost . The amount of the unit costs depends on the cost allocation principle used . As part of cost unit accounting (part of cost and performance accounting ), they are used, among other things, to calculate the lower price limit.

### Unit cost calculation

Unit costs graphically

The unit costs can - like most other types of costs - be divided into fixed and variable costs :

${\ displaystyle k = k _ {\ mathrm {f}} + k _ {\ mathrm {v}}}$

With

${\ displaystyle k}$: (total) unit costs
${\ displaystyle k _ {\ mathrm {f}}}$: fixed unit costs
${\ displaystyle k _ {\ mathrm {v}}}$: variable unit costs, based on the production volume

A simple method of determining the unit costs is to divide the total costs (variable costs and fixed costs ) by the production quantity : ${\ displaystyle K _ {\ mathrm {v}}}$${\ displaystyle K _ {\ mathrm {f}}}$${\ displaystyle x}$

${\ displaystyle k = {\ frac {K _ {\ mathrm {f}} + K _ {\ mathrm {v}}} {x}}}$

The problem here, however, is the allocation of the fixed costs to the products, although these are independent of the production volume. More advanced methods of calculating unit costs are:

• Causation principle
• Stress principle
• Decision-making principle

An increase in the quantity produced leads to a change in the variable unit costs and, as a result, also in the total unit costs. The level of the slope depends on the variable factors of the production process and its costs. Unit costs are closely related to economies of scale : “The larger the number of units in a company, the lower the average costs.” This relationship describes increasing economies of scale.

The minimum of the unit cost coincides with the marginal cost since the unit cost decreases when it is above the marginal cost and increases when it is below the marginal cost. In neoclassical production functions , the minimum of the average variable costs is zero (marginal solution).

## Classification

### Total Average Cost (TDK)

As a total average cost is defined as the costs incurred in full extent per unit produced, that is the sum of the fixed and average variable cost. They result from dividing the total costs by the associated output . ${\ displaystyle K_ {g}}$${\ displaystyle x}$

### Average fixed costs (DFK)

Fixed costs also arise when there is no production. They are completely neutral towards the output, which means that they do not change with the variation in the output quantity, i.e. they remain the same. To calculate the average fixed costs , the fixed costs are divided by the reference value.

${\ displaystyle DFK (x) = {\ dfrac {K_ {f}} {x}}}$

“Since the fixed costs are constant, the average fixed costs decrease when the output increases.” Consequently, one can say that the larger the output volume, the lower the fixed average costs. “This relationship is called fixed cost degression . The so-called law of mass production describes the degressive course of the unit costs per unit. "

### Variable average costs (DVK)

The total variable average costs are obtained on the one hand by subtracting the fixed costs per piece from the total costs per piece.

${\ displaystyle DVK (x) = DTK (x) -DFK (x)}$

Another way to calculate the average variable costs is to divide the variable costs by the output of goods.

${\ displaystyle DVK (x) = {\ dfrac {K_ {v} (x)} {x}}}$

They are dependent on the quantitative output. An increase in the output quantity leads to a change in the variable average costs. It cannot be said with certainty whether the quantitative increase in output leads to an increase or a decrease in the variable average costs.

## The importance for the company

Average costs serve as an information basis for the pricing policy and success control of the company. Since costs are incurred in the production of goods , companies must try to cover these with the revenues and, if necessary, to exceed them. The size of the contribution margin is of great importance here. It is defined as the difference between the revenues and the variable costs. “The contribution margin combines cost-based thinking with sales-driven thinking. The starting point is the net proceeds of a product. The variable costs of the product are compared with this net proceeds. ”With the help of this figure, one can assess the extent to which the company is able to cover the fixed costs.

If the price per unit produced is the same as the variable average cost, the contribution margin is zero. In this situation the company makes a loss equal to the fixed costs and the company would have the same loss if it did not produce at all. If the price is below the variable average costs, this leads to a negative contribution margin and thus to a greater loss; the company increases its losses by producing and should stop production. A profit is only made if the unit price is above the average cost. If the contribution margin is positive but less than the fixed costs, the company still generates losses, but these are lower than with non-production. In the short term it can therefore make sense to produce in this situation, but not in the long term. This is only possible if the contribution margin is greater than the fixed costs, because then a profit falls.

In order to be able to judge whether and how much is being produced, the average costs are a very important variable. But the division into short and long term is also important here. “For the offer of the entrepreneur - this is shown in connection with profit maximization - those costs are decisive that the production of an additional unit of quantity of the good causes. These costs are referred to as marginal costs or marginal costs (GK). "

The comparison of the marginal costs with the variable and total average costs is crucial for a correct decision of a company that wants to withstand the competition in the market. On the basis of this comparison, the companies can find out what effect each additional unit or each smaller amount has on the contribution margin and profit.

But also what effects a variation in price has on these two important variables. As a result, companies can use it to control their success and make optimal price decisions.

## literature

• Ulrich Fehl, Peter Oberender: Fundamentals of Microeconomics. 5th edition. Franz Vahlen, Munich 1992.
• Norbert Häring, Olaf Storbeck: Economy 2.0. Schäffer-Poeschel, Stuttgart 2007.
• Dennis Paschke: Microeconomics: clearly presented. 1st edition. PD-Verlag, Heidenau 2003.
• Pindyck, Rubinfeld: Microeconomics. 5th edition, Pearson Studium, Munich 2003.
• Guido Scheld: Internal accounting in industrial companies. Volume 1, Actual Costing. 4th edition. Fachbibliothek Verlag, Borchen 2004.
• Guido Scheld: Internal accounting in industrial companies. Volume 2, partial cost accounting. 3. Edition. Fachbibliothek Verlag, Büren 2005.
• Ferry Stocker: Having fun with micro: Introduction to microeconomics. 3. Edition. Oldenbourg, Munich 1995.
• Klaus Watzka: Lecture: General Business Administration, Basic Business Administration. (WS 2006/07).
• Harald Wiese: Microeconomics, an introduction to 365 questions. 2nd Edition. Springer, Berlin 1995.

## Individual evidence

1. ^ Norbert Häring, Olaf Storbeck: Economy 2.0. Schäffer-Poeschel, Stuttgart 2007, p. 110.
2. Pindyck, Rubinfeld: Microeconomics. 5th edition, Pearson Studium, Munich 2003, p. 307.
3. Dennis Paschke: Microeconomics: clearly presented. 1st edition. PD-Verlag, Heidenau 2003, p. 236.
4. Guido Scheld: Internal accounting in industrial companies. Volume 2, partial cost accounting. 3. Edition. Fachbibliothek Verlag, Büren 2005, p. 9.
5. Ulrich Fehl, Peter Oberender: Fundamentals of Microeconomics. 5th edition. Franz Vahlen, Munich 1992, p. 16.