Cost per Unit

Cost per unit ties labour costs directly to process output. The higher the throughput, the lower the cost per unit, because the same labour expense is spread across more units. When throughput drops, each unit absorbs a larger share of the fixed labour cost.

This is why capacity utilization matters financially: a process running at 50% utilization costs twice as much per unit as the same process at 100% utilization.

Formula

Cost per Unit = Labour Cost per Time Period / Throughput

When using per-step labour costs: Cost per Unit = Σ (Step Labour Cost per Time Period / Throughput), summed across all steps.

Example

A coffee shop has 4 employees costing $3,200 per day total. Throughput is 80 orders per day. Cost per unit = $3,200 / 80 = $40.

If hours are cut and throughput drops to 70, but costs drop to $2,800: cost per unit = $2,800 / 70 = $40. Costs were cut, but cost per unit stayed the same because throughput dropped proportionally.

Why It Matters

Cost per unit is the metric that connects process performance to financial outcomes. Reducing costs without understanding throughput impact is a common mistake, the example above shows how cutting hours can reduce total cost while leaving unit cost unchanged. A detailed process analysis identifies where to cut (idle capacity at non-bottleneck steps) without reducing throughput.