What is a per unit cost of production and why should I care? A per unit cost of production allows you to examine your business over time as the size of the business changes, giving you a much more objective way of measuring performance. Think of it this way, if you add 5 employees to your payroll and your net income goes up, you won, right? Maybe, maybe not.
If you take your profit and loss statement and divide each line item by the number of employees for that same time period, you can come up with a per unit (in this case, per employee) cost. Now when you want to look at two time periods and ask are we doing better or worse, you can reliably answer by each line item. So if in 2016 first Quarter, you employed 10 people and made 10,000 widgets, you would expect 2016 Second Quarter with 15 people to be able to produce 15,000 widgets. If you actually produced 12,000 widgets, you better start digging into the numbers more. If you increased production to more than 15,000 widgets, you may deserve a pat on the back!
Now there are a ton of variables that can affect the per unit cost of production – economy, new equipment, training programs, input cost increases – all will affect the per unit costs. But at least now you have a tool to help you objectively monitor your business by line item on your P&L. The fun part is in asking the question why.
Per employee is not the only way to look at your production facility – I have seen managers look at per unit cost by total production, employee, per thousand dollars of investment, and many other ways, searching for the best way of describing their individual business.
Here is a really cool trick for you to play with: export a report from QuickBooks into Excel. Now it is just a matter of adding a column to the spreadsheet, figuring out what per unit you want to look at, and creating a formula to do all the work for you.
Piece of cake… I know! But that’s another day’s blog post…
I appreciate this post. I seem to employ the trial by fire method in my life so I’ve learned this lesson the hard way. Multiple times but the good news is that it’s made me much more aware of exactly what my costs are and what my per piece price needs to be. The little costs really add up. A penny here and a penny there can quickly become the difference between a profit and a loss.