Unit cost calculations are important for both Businesses and Not-for-Profit organisations. They help you understand the cost of each of your activities or products so that you can see which ones are profitable and which are problematic. Unit Costs are a vital part of being informed and knowing what parts of your business to maintain and expand. This means you can be sustainable for the long term.
How to Do Unit Cost Calculations
To start with Unit Cost Calculations, you need to consider how and where you are collecting the overall cost information and then where you can get data on the activities you want to track. The costs will be somewhere in your accounting system, but can you identify exactly where? Are they all allocated to one General Ledger expense account? Or are they spread over multiple accounts with a common business unit to group them? The activity information will typically come from outside your accounting system. It could be the number of people participating in some activity or the number of products or services you sell. Often this will come from some ecommerce system or a CRM or something similar.
Record the Non-Financial Information
Whether you’re measuring the number of participants in an activity, the number of widgets you’ve sold or the number of hours you’ve worked, Metrics are the tool for you. You can create and manage them under Reports, KPIs & Metrics. Then update budgets and actuals in the budget builder. If you’re viewing the budget for the organisation or a business unit, switch the view from Accounts by month to Metrics by month. Alternately, expand the left menu, then Metrics and select the metric you want to edit. You’ll be able to see budgets and actuals for all business units together. This makes it much easier when applying the same formula to all of them.
Add the Metrics you need. Most of the time Sum is the best calculation type. This will add your Metrics if you run a report over multiple months. It makes sense for things like the number of transactions you do. Use End as the calculation type for something where you want the end of period value. This works for Metrics like Shop Area where the value is the same each month.
Record budgets for the year and then update the actuals each month. Just like with your financial budgets, enter the Metrics budgets against the right budget version. Use formulas if you need to update one budget from another. If you have lots of actuals to update, import them from a spreadsheet.
Pull it all together with KPIs
The next step is to create custom KPIs to combine your financial data with your Metrics. You could use the pre-set account group of Total Expenses or create your own group if you need something more specific. Then create a formula for your Unit Cost calculation which would be something like:
[Total Expenses]/[Number of Participants]
It’s really as simple as that!
For more ideas on integrating KPIs into your management reports check out our article Get Creative with KPIs.
Chart your Unit Cost Calculations
Compare actuals to budgets easily with a KPI Chart or add the unit cost KPI to a dashboard chart. Add it to an Account Tree or directly to any of the budget or Profit & Loss reports. The P&L with Projected Total is great for seeing trends and aberrations, showing actuals for the completed months of the year and budgets for the remainder.
The quickest way to see which reports work with KPIs is to filter the list in the Report Builder for KPIs (you’ll find that in the Report Data filter at the top). But of course, if you’re adding them to an Account Tree, they can be applied to almost any report.
Working with Unit Costs
The beauty of unit costs is that they will give you visibility over the profitability of your activities, independent of the volume of transactions. While we’ve talked here about costs, the same principles apply to calculating the average revenue per unit. Then you can use the KPI Comparison line chart to compare how they change over time.
To really get going with unit costs, check out our Unit Costing: The Ultimate Guide. It will step you through all you need to know about unit cost calculations.