Question

Why do accountants normally calculate cost per unit as an average?

Determining the exact cost of a product is virtually impossible.

Some manufacturing-related costs cannot be accurately traced to specific units of product.

Even when producing multiple units of the same product, normal variations occur in the amount of materials and labor used.

All of these are justifications for computing average unit costs.

Answer 1

We normally see that the cost per unit is taken as average while making calculations by the accountants. There must have been reasons behind this. The cost per unit has fluctuations as demand go up and down and due to which supply is also disturupted which leads to fluctuations in cost per unit. This is the biggest reason why cost per unit is taken as an average to avoid these fluctuations.

Explaining the justifications given for this, let us come to the first one, that is, determining the exact cost of a product is virtually impossible. As we all know that cost of a product is determined by the total cost it is taking to be produced and the seller is adding a certain percentage to it for his profit. But the cost to be produced is not certain, as prices of raw material and other services may go up and down. So it is not easy to predict cost per unit. Therefore they are calculated as average unit costs.

Coming to the next justification, some manufacturing related costs cannot be accurately traced to specific units of product. One such manufacturing costs include electricity costs. It is an indirect cost and could not be predicted or traced for a particular unit but if an average is taken then cost can be calculated for an average cost. Therefore taking average unit cost is more accurate.

Coming to the last justification, it is stated that, even when producing multiple units of the same product, normal variations occur in the amount of materials and labor used, to avoid this situation, the cost is decided on an average unit so as to cover the variations that occur from unit to unit and thus we get a particular average unit cost that includes all the cost incurred per unit.

Here we saw how all justifications showed that calculating average unit cost is more beneficial then the cost per unit. As economic conditions change it is hard to predict unit cost, to resolve this issue accountants calculate cost per unit as an average.