The average cost is the average price of goods and services. When we have multiple products to sell or buy, of almost the same value, the average of these values will give the average cost price. It helps shopkeepers in the buying and selling process.
The average cost is the ratio of the total of cost of all the products to the total number of products. In Maths, we also have the term called “average”. The average of any given set of data is called the mean of data. But in case of business, where profit and loss are the key features, the average is said to be the right term.
Average Cost Formula
The formula for calculating average cost is given by;
Average cost = Total cost of the units/Number of units
The average cost deals with the summation of arithmetic cost divided by the number of the quantity or the number of items given. The formula to calculate the average cost is given here.
X = ∑(xi)/n
Where xi is the sum of all costs and n is the number of items.
The symbol ‘∑’ (called sigma) is used to denote the summation.
How to Calculate Average Cost?
We have already discussed the formula to calculate the average cost. Let us see an example to find the average cost.
Example: Find the average cost of price of 11 bags whose prices are Rs.500, Rs.550, Rs. 450, Rs. 510, Rs. 520, Rs. 530, Rs. 540, Rs. 460, Rs. 470, Rs. 480 and Rs. 490.
Solution: Given, the cost price of 11 bags are:
Rs.500, Rs.550, Rs. 450, Rs. 510, Rs. 520, Rs. 530, Rs. 540, Rs. 460, Rs. 470, Rs. 480 and Rs. 490.
Hence, as per the average cost formula, we know;
Average = Sum of all the cost of bags/Total number of bags
A = (500+550+450+510+520+530+540+460+470+480+490)/11
A = 5500/11
A = 500
Therefore, Rs. 500 is the average cost of 11 bags.
Also, read:
Average Cost and Marginal Cost
By the definition of average cost, we know it is the ratio of the total cost to the number of manufactured products. The total cost here is also termed as unit cost, which is equal to the sum of fixed cost and variable cost.
Hence,
Average cost = Total cost/Number of units = (Fixed cost + Variable cost)/Number of units
Whereas, marginal cost is the cost incurred due to the change in the total cost because of an increase in the number of products. Hence, it is the additional cost, because of the manufacturing of extra products.
It is helpful for businesses to know whether it is beneficial to produce extra units of products or not. The marginal cost is given by;
MC = Change in cost/Change in quantity
FAQs
The marginal cost curve is upward-sloping. Average total cost (sometimes referred to simply as average cost) is total cost divided by the quantity of output. Since the total cost of producing 40 haircuts is $320, the average total cost for producing each of 40 haircuts is $320/40, or $8 per haircut.
What is marginal cost and average cost examples? ›
For example, if a company needs to build a new factory in order to produce more goods, the cost of building the factory is a marginal cost. Economists analyze both short run and long run average cost. Short run average costs vary in relation to the quantity of goods being produced.
What is the formula for marginal cost example? ›
Marginal Cost Examples
Example 1: Find the marginal cost of production if a company spent $20 on producing 2 units of output. Solution: Given, the cost of producing 2 units = $20. It implies, ΔC = $20 and ΔQ = 2. So, by using the formula, we get, MC = ΔC/ΔQ = $20/2 = $10.
What is the relation between marginal cost and average cost? ›
Relationship between Average Cost and Marginal Cost
If the average cost falls due to an increase in the output, the marginal cost is less than the average cost. If the average cost rises due to an increase in the output, the marginal cost is more than the average cost.
How do you calculate the average cost? ›
Average cost = Total cost of the units/Number of units
The average cost deals with the summation of arithmetic cost divided by the number of the quantity or the number of items given. The formula to calculate the average cost is given here.
How do you calculate average cost using marginal cost? ›
Marginal cost (MC) is calculated by taking the change in total cost between two levels of output and dividing by the change in output. The marginal cost curve is upward-sloping. Average total cost (sometimes referred to simply as average cost) is total cost divided by the quantity of output.
What is the best example of marginal cost? ›
Marginal cost is the added cost to produce an additional good. For example, say that to make 100 car tires, it costs $100. To make one more tire would cost $80. This is then the marginal cost: how much it costs to create one additional unit of a good or service.
How to calculate average fixed cost? ›
The average fixed cost in a company is the fixed cost per unit. It is calculated by dividing the fixed production cost by the quantity of output produced.
What is an example of a marginal cost in the short run? ›
Marginal cost can be calculated by taking the change in total cost and dividing it by the change in quantity. For example, as quantity produced increases from 40 to 60 haircuts, total costs rise by 400 – 320, or 80. Thus, the marginal cost for each of those marginal 20 units will be 80/20, or $4 per haircut.
How to calculate marginal cost from a table? ›
You need data on your total costs and the number of units produced. This is the difference in total cost when the units of production are increased by one unit. This is usually one unit if we're considering the cost of producing one additional unit. Use the formula (ΔTC / ΔQ) to find the marginal cost.
Ans : Average fixed cost or AFC is the total fixed cost divided by the number of units produced in a given period. It can be expressed as AFC = TFC/Q. Ans : Average variable or AVC cost is the total variable cost divided by the number of units produced in a given period. It is expressed as AVC = TVC/Q.
Is marginal cost always higher than average cost? ›
Shape of Average Cost Curves
Because average cost includes fixed cost but marginal cost does not, it is generally the case that average cost is greater than marginal cost at small quantities of production.
What is the average cost method formula? ›
First, find the total cost of all individual inventory items purchased. Second, divide that sum by the number of items. The result is the average cost per item.
How to calculate average formula? ›
Average This is the arithmetic mean, and is calculated by adding a group of numbers and then dividing by the count of those numbers. For example, the average of 2, 3, 3, 5, 7, and 10 is 30 divided by 6, which is 5.
What is the formula for the average cost function? ›
To find the average cost, you will simply divide the total cost by the total number of units produced. The marginal, or additional, cost represents the cost of producing one additional unit of the good.
What is marginal cost in short answer? ›
Marginal cost is the change in total production cost that comes from making or producing one more unit. It's calculated by dividing the change in production costs by the change in quantity. You can use marginal cost to determine your optimal production volume and pricing. It includes both fixed and variable costs.
What is the best definition of marginal cost? ›
Marginal cost refers to the expense of creating one more item for sale. It is most commonly used in manufacturing, where it's called the marginal cost of production. The marginal cost tells a business precisely how much more they have to spend to create one more product, or deliver a service one more time.
What is marginal and average product example? ›
Let's say a shoe factory makes 1000 pairs of shoes with 5 workers. So, the Total Product is 1000 pairs. If they add an additional worker and production increases to 1150 pairs, the Marginal Product of the new worker is 150 pairs (1150-1000). The Average Product is the Total Product divided by the number of workers.
