Which expression correctly defines unit cost?

Which expression correctly defines unit cost?

• A. Total costs of all cost centers divided by total service units
• B. Indirect costs divided by service units
• C. Total direct costs divided by service units
• D. Total costs divided by a fixed annual budget

Answer: (C)

Unit cost is the amount of cost assigned to producing or delivering one unit of service. To get that per-unit amount, you divide the costs directly tied to delivering the unit by how many units you produced or delivered. Using total direct costs divided by the number of service units gives the per-unit direct cost, which is the standard way to express unit cost when you want to reflect the costs that are directly attributable to each unit of service. Dividing all costs (direct and indirect) by total service units would mix overhead with the direct costs and isn’t the definition of unit cost in this context. Dividing indirect costs by service units would give overhead per unit, not total unit cost. Dividing total costs by a budget amount uses a budgeted figure and a budgeted amount of output, which isn’t the actual unit cost metric focused on per-service-unit delivery. Therefore, total direct costs divided by service units best defines unit cost here.

Unit cost is the amount of cost assigned to producing or delivering one unit of service. To get that per-unit amount, you divide the costs directly tied to delivering the unit by how many units you produced or delivered.

Using total direct costs divided by the number of service units gives the per-unit direct cost, which is the standard way to express unit cost when you want to reflect the costs that are directly attributable to each unit of service.

Dividing all costs (direct and indirect) by total service units would mix overhead with the direct costs and isn’t the definition of unit cost in this context. Dividing indirect costs by service units would give overhead per unit, not total unit cost. Dividing total costs by a budget amount uses a budgeted figure and a budgeted amount of output, which isn’t the actual unit cost metric focused on per-service-unit delivery. Therefore, total direct costs divided by service units best defines unit cost here.