This handbook is intended to acquaint Department of Defense (DoD) executives and managers with the subject of unit cost. It provides an overall familiarization with unit cost and the management challenges, opportunities and benefits unit cost management offers.

Unit cost principles underlie a management methodology that is applicable to many organizations, whether operations are funded by direct appropriations or financed through a revolving fund. The aim of unit cost is to relate total cost to the work or output produced. To improve use of resources, decision makers must understand their mission and the work required to perform that mission. They must also have visibility of total cost, including costs that historically have been viewed as "free" such as military labor or capital equipment.

Unit cost focuses management attention on relating total cost with work accomplished (output produced). Outputs produced must be specifically identifiable and quantifiable. Costs are captured and categorized as: direct, indirect, and general and administrative costs. The unit cost (or average total cost) is the sum of these costs, divided by the number of units of outputs produced. Output and cost data are collected through financial and nonfinancial processes and systems. Unit Cost Reports provide data on the execution of a program in unit cost terms.

Working groups consisting of representatives from the Office of the Under Secretary of Defense (Comptroller) and components have implemented the unit cost methodology for a number of functional support areas. For these areas, a target, called the unit cost goal, is passed to each component headquarters organization. The unit cost goal serves as a financial benchmark. The Unit Cost Reports help executives and managers monitor performance against these unit cost goals.

Executives and managers who manage with unit cost principles will improve decision making capabilities by having better, more meaningful information. Unit cost management is a tool, not a substitute for sound management or leadership. The unit cost approach encourages all employees to look at all costs in terms of the outputs of the business. Properly used, unit cost also helps target areas needing management attention, promotes creative management, highlights efficiency, provides financial benchmarks and other information to measure organizational performance, and provides a common framework to evaluate support activities