Average Cost: Calculation, Formula, and Solved Examples

Average cost is the per-unit cost of production obtained by dividing the total cost (TC) by the total output (Q) or mathematically expressed, AC = TC/Q. When a person or a dealer buys or sells different goods and services at different prices then this average cost comes into use to calculate the average price of that service or goods. The fixed and variable costs are used to calculate other costs such as marginal cost, total cost, average total cost, and average variable cost. 

Read Also: How to Calculate Percentage

Key terms: Average cost, Variable Cost, Fixed Cost, Total Cost, Average Total Cost, Average Variable Cost, Average Fixed Cost

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What is the Average Cost?

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Average cost is determined as the total cost of all products and services divided by the total number of products or services. The average cost formula tells us the average value or means value of the whole inputted data set of costs. This is performed by summing up the total cost of all the goodies and dividing it by the total number of inputs cost.

When we take all fixed costs and variable costs into consideration while calculating the average cost then it is known as per-unit cost of production or per-unit total cost of production.

Check Important Formula for Disposable Income Formula

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Average Cost Formula

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On a daily basis, we calculate an average of many things like marks, height, weight, and many more. So here we are calculating average cost which will come from adding up all the different costs and then dividing it by the total number of costs.

Generally, it can be written as:

Average cost = (i=1nCostsi ) / n

Where Costs is the sum of all costs and n is the total number of costs/quantity.

The symbol ‘∑’ (called sigma) is used to denote the summation.

AC = TC / TQ

Here, AC = Average Cost

TC = Total Cost

TQ = Total Quantity

By the definition, it is already clear that the ratio of summing up the total cost to total quantity is denoted as an average cost. This average cost (AC) also includes an average variable cost (AVC) and average fixed cost (AFC).

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How to Calculate Average Cost?

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Suppose a shopkeeper buys n products that have different variable costs as VC1, VC2, VC3, VC4…….. VCn and different fixed costs as FC1, FC2,FC3,FC4…….. FCn so AC will be calculated as

AC = AVC + AFC

Step 1: Calculating the average variable cost.

\(AVC = \frac{VC1+ VC2+VC3+VC4+……..+VCn} {n}\)

Or

AVC = (i=1nVCi ) / n

Step 2: Now, let us calculate average fixed cost

\(AFC = \frac{FC1+ FC2+FC3+FC4+……..+FCn} {n}\)

Or

AFC = (i=1nFCi) ) / n

Step 3: Summing up the average variable cost and average fixed cost to calculate average cost

AC = (i=1nVCi ) / n + (i=1nFCi) ) / n

Here, AC = Average Cost

VC = Variable Cost

FC = Fixed Cost

AVC = Average Variable Cost

AFC = Average Fixed Cost

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Things to Remember

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• The variable cost is the cost that varies according to the change in the total output.
• The fixed cost is a cost that remains constant for a certain amount of production. It does not get affected by the sale or revenue generation.
• The total cost includes the variable as well as a fixed cost.
• Ironically the mean and average costs are the same. It's just that in terms of sales and goodies the word average cost is being used.
• AC = (i=1nVCi ) / n + (i=1nFCi) ) / n

Read More: Inflation Rate Formula

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