Meaning of Average Cost
- It 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.
- Also, Average Cost (AC) = Average Variable cost (AVC) + Average Fixed cost (AFC) Where, Average variable cost refers to the variable expenses per unit of output. AFC= Total Variable Cost (TVC) / Total output (Q) Average fixed cost refers to fixed cost per unit of output. AVC = Total Fixed Cost (TFC) / Total output (Q) It is also called Per Unit Total Cost.
- Average cost is an important factor in determining the supply and demand within the market.
Types of Average Cost
Average cost can be divided into short-run and long-run average costs Short-run average cost- varies with the production of goods, provided the fixed costs are zero, and the variable costs are constant. Long-run average cost- includes all the cost involved in the variation of the quantities of all the inputs used for production of goods. The long run average costs help in determining economies of scale of the firm.
Average Total Cost
Average total cost refers to cost per unit of output. It includes both fixed and variable costs. As the output of a firm increases, average total cost like the average variable cost decreases in the beginning reaches a minimum and then it increases.
Average Cost v. Marginal Cost
Average cost is the total cost per unit of output, whereas marginal cost is the cost of producing an additional unit of a product or service.
Average Cost Method
This method assigns cost to the inventory items based on the total cost of goods purchased or produced within a period divided by the total number of items that are purchased/ produced in a stipulated time period. This method is also known as the weighted average method. The average cost method is one of three inventory valuation methods.
