What a unit actually costs.
WHAT TO SEPARATE
Variable costs: materials, packaging, direct labour where it varies, power per unit
Fixed costs: rent, salaries, depreciation, licences
WHY THE SEPARATION
It shows what each additional unit costs and what the factory costs regardless.
WHAT TO CALCULATE
Variable cost per unit Fixed cost per period Fixed cost per unit at your actual volume
WHY ACTUAL VOLUME MATTERS SO MUCH
Fixed cost per unit falls sharply as volume rises, and rises sharply as it falls.
WHAT THAT EXPLAINS
Why the same factory can be profitable at one volume and loss-making at another.
WHAT TO ESTABLISH
Break-even volume.
HOW
Fixed costs divided by contribution per unit.
WHAT CONTRIBUTION IS
Selling price less variable cost.
WHY IT IS THE KEY NUMBER
It is what each unit contributes toward fixed costs and profit.
WHAT TO INCLUDE IN MATERIAL COST
The quantity actually consumed, including waste.
WHY INCLUDING WASTE
Yield is never complete, and costing at theoretical usage understates cost.
WHAT TO MEASURE
Yield: output as a proportion of input.
WHAT TO INCLUDE IN LABOUR
Actual time per unit, measured.
WHAT TO INCLUDE IN OVERHEADS
Power, water, maintenance, quality control, supervision, licences, depreciation.
WHY DEPRECIATION
Equipment is being consumed and replacement requires money set aside.
WHAT TO REVIEW
Costs whenever inputs, power or volume change materially.
