By Aaron Berger, University of Nebraska-Lincoln Extension educator
Unit cost of production (UCOP) is a value based on the relationship between costs and units of product produced.
Unit Cost of Production = Costs Units Produced
The relationship between the numerator (Costs) and the denominator (Units Produced) is what drives the UCOP value. If costs increase, while units produced increase at a proportionally slower pace, stay the same or decrease, UCOP values go up. If units produced increase while costs increase at a proportionally slower rate, stay constant or decrease, UCOP values decrease.
The value of knowing UCOP is that everything involved in production is represented in the numerator or denominator of the equation. For example, if a producer wants to buy a bull that will be used for calf production, he can estimate how the purchase will affect his UCOP in terms of cost per pound of calf produced. Knowing UCOP allows a producer to benchmark their costs against other producers who are producing a similar product. Knowing UCOP allows producers to track what is happening in the cow-calf enterprise and can be useful in evaluating management and marketing decisions.
The first step in calculating UCOP is to have production and financial records. These records do not have to be complicated, but they need to be accurate and thorough. They need to allow for the allocation of expenses to different enterprises within the operation. Many financial record keeping programs are designed to track and allocate expenses to enterprises.