Average Cost: Calculation, Formula, and Solved Examples

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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


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


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


Sample Questions

Ques. A bag contains 5 balls which cost Rs.200. Find the average cost of each ball. (2 marks)

Ans. In the given question,

Average Cost (AC) =?

Total Cost (TC) = 200

Quantity(N) =5

As we know,

AC = TC / N

Substituting the values in the above we get:

AC= 200/5

AC= 40

Therefore, the cost of each ball is Rs.40

Ques. I bought a pack of candies at an average cost of Rs. 2 per candy. Meanwhile the total cost of the whole pack was Rs. 50. Calculate how much candies are present in a pack. (2 marks)

Ans. In the given question,

Average Cost (AC) = 2

Total Cost (TC) = 50

Quantity(N) =?

As we know,

AC = TC / N

Substituting the values in the above we get:

2 = 50 /N

N = 25

Hence, 25 candies are present in the pack

Ques. Akshaya started an online business selling wooden tables for office use. The total amount which included fixed and variable costs of the table was around 10,000 rupees. In a month he manufactured a total of twenty–two tables. So now calculate the average cost per table. (2 marks)

Ans. In the given question we are provided with:

VC+FC = 10,000

N = 22

AC =?

AC = VC + FC / N

Putting the value in the above formula we get:

AC = 10000 / 22

AC = 454.54

Hence, the average cost per table is Rs. 454.54

Ques. Find the average cost of price of 5 chocolates whose prices are Rs.50, Rs.20, Rs.55, Rs. 45, Rs.60. (1 mark)

Ans. In the given question ,

Prices of chocolates are Rs.50, Rs.20, Rs.55, Rs. 45, Rs.60

N = 5

As we know, Average cost = Sum of all the prices of chocolates / Total no. of chocolates

AC= 50+20+55+45+60/5

AC = 230/5

AC= 46

Therefore, Rs. 46 is the average cost of 5 chocolates.

Ques. Given below is a table calculating the values of a and b. (5 marks)

S.No. Quantity Fixed Cost Variable Cost Total Cost Average Total Cost Average Variable cost
1 16 160 80 240 15 5
2 40 160 160 320 a 4
3 60 160 240 400 6.6 b
4 72 160 320 480 6.6 4.40

Ans. In the above table a and b are the average total cost and average variable cost values

Now, first of all, let us calculate a

Here, N= 40

TC = FC+ VC = 320

ATC = a

As we know, the total cost is the sum of fixed cost and variable cost

We can write the formula as

ATC = FC + VC /n

ATC x n = FC + VC

Substituting the values in the above, we get,

a = 320 / 40

a = 8

Now, let us calculate the value of b,

Here, N = 60

VC= 240

b = VC /N

b = 240/60

b = 4.0

Hence, the values of a and b are 8 and 4 respectively.

Ques. Find the cost per unit of 400 devices that costs Rs.25,00,000. (2 marks)

Ans. In the given question ,

Total Cost = 25,00,000

N = 400

Cost per unit (ATC) = ?

As we know,

ATC= TC/N

Substituting the values we get,

ATC = 25,00,000 / 400

ATC= 6250

Therefore, cost per unit is Rs.6250

Ques. Given below is a table calculate the values of A, B , C , D to make the table complete. (5 marks)

S.No. Quantity (N) Fixed Cost Variable Cost Average Total Cost
1 10 200 240 A
2 40 200 320 B
3 30 200 400 C
4 20 200 480 D

Ans. To find the values of A,B,C,D we have to sum up the fixed cost and variable cost

As we know, ATC = FC + VC / Quantity (N) – equation 1

So, we start from finding value of A

Here, FC = 200

VC= 240

N= 10

Substituting the values in eq 1 we get:

A = 200+ 240 /10

A = 44

Now, let us calculate the value of B

Here, FC = 200

VC= 320

N= 40

Substituting the values in eq 1 we get:

B = 200+ 320 /40

B = 13

Now, let us calculate the value of C

Here, FC = 200

VC= 400

N= 30

Substituting the values in eq 1 we get:

C = 400 + 200 /30

C = 20

Now, let us calculate the value of D

Here, FC = 200

VC= 480

N= 20

Substituting the values in eq 1 we get:

D = 200+ 480 /20

D = 34

Therefore, the values of A, B, C and D are 44, 13 , 20, 34 respectively.

Ques. Find the cost of all ten buckets where each bucket costs Rs.100. (1 mark)

Ans. In the given question we are provided with ,

N =10

ATC = 100

TC = ?

ATC = TC/N

Substituting the values in the formula we get,

100 = TC/10

TC = 1000

Hence, the cost of all ten buckets are Rs.1000.

Ques. Ram and Shyam decided to start a hat business. To learn more about the business they started visiting local vendors which tells them that a pack of 5 hats has a fixed price of Rs.20 and this price varies to Rs.50 also. Now determine the average cost price of one hat. (2 marks)

Ans. In the given question we are provided with:

Variable cost (VC) = 50

Fixed cost (FC) = 20

N = 5

Average cost price (AC) =?

AC = VC + FC / N

Putting the value in the above formula we get:

AC = 50+20/5

AC = 14

Hence, the average cost price of one hat is Rs. 454.54

Ques. Find the fixed cost of each box from six boxes whose average total cost is Rs.300 and has a variable cost of Rs.240. (2 marks)

Ans. In the given question we are provided with:

Variable cost (VC) = 240

Fixed cost (FC) = ?

N = 6

Average total cost (ATC) = 300

ATC = VC + FC / N

Putting the value in the above formula we get:

300 = 240+FC/6

1800-240 = FC

1560 = FC

Now, FC/6 = Fixed cost of each box

1560/6 = 260

Hence, the fixed cost of each box is Rs.260

CBSE CLASS XII Related Questions

  • 1.
    Read the following statements carefully:
    Statement 1: Under the flexible exchange rate system, a deficit or surplus in the Balance of Payments is automatically corrected.
    Statement 2: Under the flexible exchange rate system, there is always a possibility of over/under valuation of currency.
    In the light of the above given statements, choose the correct option from the following:

      • Statement 1 is true and Statement 2 is false.
      • Statement 1 is false and Statement 2 is true.
      • Both Statements 1 and 2 are true.
      • Both Statements 1 and 2 are false.

    • 2.
      "Under a study, examining the spending habits of a hypothetical economy, it was observed that even households with zero income managed to consume basic necessities. As the income of people increased, their consumption also increased, but not as rapidly as income."
      Based on the given text and common understanding, answer the following questions: (i) Identify and elaborate the type of consumption indicated in the first para of the above text. (ii) Explain, the reason behind the positive slope of Aggregate Demand Curve.


        • 3.
          Identify which of the following is a `Stock' variable:

            • Monthly Salary of a teacher
            • Distance between Delhi and Mumbai
            • Annual Interest on savings
            • Quantity of wheat produced in a year

          • 4.
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              • Canada
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              • India

            • 5.
              Read the following text carefully: To ensure inclusive and quality education for all, the Indian government has launched several important schemes. These schemes aimed at improving access, equity, and learning outcomes, especially among disadvantaged groups. The Right to Education (RTE) Act, passed by the India Parliament on August 4, 2009, guarantees free and compulsory education to every child between 6-14 years of age. It ensures that all children have access to education in neighbourhood schools, until they complete elementary education. Another key initiative is Sarva Shiksha Abhiyan (SSA). It was introduced in 2001. It is one of India’s flagship programmes for the Universalisation of Elementary Education. Digital India Campaign, launched on July 1, 2015, focuses on transforming India into a digitally empowered society by improving mobile and internet connectivity, particularly in rural and remote regions. This initiative supports digital learning & access to educational resources. Through these initiatives, the government strives to create an equitable, accessible & quality driven educational environment for all children, laying a strong foundation for national development. On the basis of the given text and common understanding, answer the following questions: (i) Identify, which law guarantees free and compulsory education upto the age of 14 years. Explain, how does it help in enhancing access to education. (ii) In your opinion, how has the increase in public spending on education contributed to India’s social and economic transformation? Support your answer with valid arguments.


                • 6.
                  Refer the given image carefully:
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