Costs in business are typically paid for in lump sums like bulk materials, weekly wages and monthly rent. However a business typically sells its products as units. So for a business to ensure that it is making the appropriate profit margin on the products it sells, the business needs to calculate the unit cost of each product. That is, the profit for each product = the product selling price – the unit cost of the product.

Once a unit cost has been calculated as a key performance indicator (KPI) in monetary and % terms, it can then be compared to the budget, previous periods and industry benchmarks to identify any under/over performance of the costs and profitability of the product. Given this information on an ongoing bases, managers and business owners are then able to implement strategies to mitigate problems identified or exploit the identified opportunities with the product.