For effectively administering the foregoing themes and to provide the most value in performing their problem-solving, scorekeeping, and attention-directing roles employ a cost benefit approach, the managers should give full recognition to behavioral as well as technical considerations and use different costs for different purposes.
Modern day management accountants are faced with the problem of inadequacies in the traditional costing systems and are constantly on the lookout for newer methods of collecting and allocating costs to different products/services.
For enabling the management accountant to take a stand on the various assumptions in the process of decision making, the cost of the product or service is a key element. Traditionally there are various methods of ascertaining the cost of a particular product or service. One of such methods is collecting the various cost elements and allocating them to the particular product or service is known as unit costing.
A UNIT COST also called AVERAGE COST is computed by dividing some amount of total costs by the related number of units. The units might be expressed as hours worked, packages delivered or automobiles assembled.
A plant manager
Unit costs are frequently used in financial reports. However for many decisions, managers should take a straight forward analytical approach and think in terms of total costs rather than unit costs.
Consider the following example:
The data relate to a manufacturing plant of cellular products:
Assumptions: For year 2004
Fixed Costs US $ 10,000,000
Variable costs @ $ 60 per unit of phone assembled US $ 30,000,000
Total costs US $ 40,000,000
Assuming that the fixed costs and variable costs for the next year 2005 remain unchanged the following are the budgeted costs for 2005 at different production levels:
UNITS VARIABLE TOTAL TOTAL TOTAL UNIT
PRODUCED COST/UNIT VARIABLE COSTS FIXED COSTS COSTS COST
100,000 $ 60 $ 6,000,000 $ 10,000,000 $ 16,000,000 $ 160
200,000 $ 60 $ 12,000,000 $ 10,000,000 $ 22,000,000 $ 110
500,000 $ 60 $ 30,000,000 $ 10,000,000 $ 40,000,000 $ 80
800,000 $ 60 $ 48,000,000 $ 10,000,000 $ 58,000,000 $ 72.5
1,000,000 $ 60