Total cost consists of fixed and variable costs. Fixed costs do not change based on production. Examples of fixed costs include rent, utilities and salary of employees. Variable costs vary based on the number of units produced such as raw materials, packaging and wages of hourly workers. The cost per unit is based on the total fixed cost, variable cost and the number of units produced during an accounting period.

## Understanding Cost Per Unit

### Step 1

Determine what your total fixed costs are by adding up the total expenses that are incurred to produce the product in order to begin calculating unit cost.

### Step 2

Calculate the total variable costs that are generated with current production. As production increases and more products are manufactured, the total variable cost will increase, thus changing your cost per unit. When production is low, total variable costs will also be low.

### Step 3

Add the total fixed and variable costs together to get the total cost of production.

### Step 4

Divide the total cost by the total number of units produced to derive the cost per unit.