Average cost is one of the cost types used in economic terms. Also known as average cost, it is used to calculate the average cost of producing a unit. In addition, the average cost calculation serves the to control the variable and fixed costs associated with production.
The calculation of the average cost serves like other cost calculations to carry out an economic or financial control of the company. Usually the average cost increases as production increases, although not in proportion to it.
Calculate average cost
The value of the average cost depends fundamentally on the prices of the materials and inputs used, as well as the technology and production factors used, so that reducing the cost of these items represents a direct reduction compared to the average cost of production.
The average cost is calculated by applying the following formula, resulting in the average cost of producing a unit:
Cm = Ct / Q
Where:
-Cm: Average coasts.
-Ct: Total cost.
-Q: Quantity produced.
Average cost types
El coste involved in producing a unit can be divided into two types of costs: fixed average costs, which are characterized by decreasing as production volume increases, as well as variable average costs, whose amount does not directly depend on the number of units produced .
Fixed average cost
The average fixed cost is calculated by dividing the total fixed costs by the number of units produced:
Cmf = Cft / Q
Where:
- Cfv: Fixed average cost.
- Cft: Total fixed cost.
- Q: Quantity produced.
Variable average cost
The average variable cost is calculated by dividing the total variable costs by the number of units produced:
Cmv = Cvt / Q
Where:
- Cmv: Variable average cost.
- Cvt: Coste variable total.
- Q: Quantity produced.