Determining unit costs

Published on January 31, 2018   21 min
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Hello everyone. I would like to welcome you to this HSTalks lecture series on Managerial Accounting. My name is Alexander Himme, and I am the assistant professor for Managerial Accounting at the Kuhne Logistics University in Hamburg, Germany. In this third module, we would talk about how service and manufacturing companies determine unit costs.
What are examples of unit costs and why is this important for managers to know? As a manager of McDonald's, you need to know the cost to make a cheeseburger. As a manager of UPS, you need to know the cost to transport a ton of freight for a kilometer. For BMW, you would like to know the cost to make a car. For Apple, you would like to know the cost to build an iPhone. And for KPMG for example, you would like to know the cost to prepare a tax return. Knowing these unit costs helps managers set selling prices that will lead to profits. In other words, the managers want to be sure that he or she can receive a price from customers which is above the unit costs. If that is not the case, product or service which is sold is not profitable. Knowing unit costs helps managers further to compute the cost of goods sold for the income statement. Here, you have a link between Financial Accounting and Managerial Accounting. If financial accountants want to set up the income statement, they need to know the costs of goods sold. Cost of goods sold, are, in principle, the number of units sold times the unit costs. This information has provide a managerial accounting. The same is true for the balance sheet. For the balance sheet, financial accountants need to know the value of inventory. This value is determined in general by multiplying units and inventory times the unit costs. In sum, managers have to plan and control their decisions. A manager knows the unit costs then the manager can plan and control the costs of resources needed to create product or service and deliver it to the customer.