Formula to Calculate Average Variable Cost

The formula is as follows:

Average Variable Cost (AVC)= VC/Q

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Where,

  • VC is the Variable Cost,Q is the quantity of output produced

The AVC can also be calculated based on the average total cost and the average fixed cost. It is represented as follows,

AVC = ATC – AFC

  • ATC is Average Total CostAFC is Average Fixed Cost

Calculation of Average Variable Cost (Step by Step)

For calculation of AVC, the steps are as follows:

  • Step 1: Calculate the total variable costStep 2: Calculate the quantity of output producedStep 3: Calculate the average variable cost using the equationAVC = VC/QWhere VC is variable cost and Q is the quantity of output produced

In certain cases, average total costs and average fixed costsAverage Fixed CostsAverage Fixed Cost refers to the company’s fixed production expenses per unit of goods produced. Fixed costs are costs that do not vary with the amount of output produced by the company and are independent of the number of goods or services produced by the business.read more are given. In such cases, follow the given steps

  • Step 1: Calculate the average total costsStep 2: Calculate the average fixed costsStep 3: Calculate the average variable costs using the equationAVC = ATC – AFCWhere ATC is Average Total Cost, and AFC is Average Fixed Cost

Examples

Example #1

The total variable cost of a firm is $50,000 in a year. The number of units produced is 10,000. The average total cost is $40, while the average fixed cost is $25. Calculate the average variable cost.

Solution

Use below given data for the calculation.

  • Variable Cost: $5,000Quantity (Q): $10,000Average Total Cost (ATC): $40Average Fixed Cost (AFC): $25

The calculation can be done as follows-

  • = $50000/10000

The calculation can be done as follows:

  • = $40 – $25

  • The AVC is $15 per unit.

Example #2

An Economist in Bradleys Inc. is looking at the cost data of the company. First, calculate the average variable cost for each output level.

Here is the cost data

The AVC is calculated in the following table for each output level using AVC = VC/Q.

  • =40/1

Similarly, we can calculate the AVC as follows

Example #3

George’s Inc. has the following cost data. First, calculate the average variable cost for each output level. Also, determine the output level where the average cost is the minimum.

=50/1

  • Similarly, we can calculate the AVC as follows

The lowest AVC is 24.17 per unit. It corresponds to an output level of 6 units.

Hence, the output at which the average variable cost is the minimum is six units.

Example #4

Lincoln Inc. gives you the following financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more. You are required to calculate the average variable cost for each output level.

 Solution:

Step 1: We have to use the AVC Formula, i.e., = Variable Cost/Output.

For this purpose, insert =B2/A2 in cell C2.

Step 2:

Drag from cell C2 up to cell C10

Relevance and Uses

Initially, as output increases, the average variable cost reduces. Once the low point is initially, the average variable cost reduces as output increases. Once the low point is reached, the AVC rises with rising output. Hence, the average variable cost curve turns out to be a U-shaped curve. It implies that it slopes down from left to right and then reaches the minimum point. Once it reaches the minimum mark, it starts rising again. Therefore, AVC is always a positive number. At the minimum risk, the AVC is equal to the marginal cost. Let us use an illustration to find out the behavior of the AVC.

In the above illustration, the average variable cost is $5,000 per unit if only 1 unit is produced. Then it is on a declining trend up to the production of 6 units. Finally, it reaches its lowest point at $2,400 per unit when six units are produced. Then, it is on an increasing trend, making it a U-shaped curve.

The AVC is used to decide when to shut down production in the short run. For example, a firm can continue its production if the price exceeds AVC and covers some fixed costs. Conversely, a firm would shut down its production in the short run if the price is less than AVC. Shutting down production will ensure that additional variable costs are avoided.

This article has a Guide Average Variable Cost Formula. Here we discuss the formula for calculating the average variable cost, practical examples, and a downloadable excel template. You can learn more about accounting and budgeting from the following articles –

  • Average Fixed Cost FormulaMarginal BenefitFormula of Total Variable CostSemi Variable CostManufacturing Overhead FormulaManufacturing Overhead FormulaManufacturing Overhead, also known as Factory Overhead, refers to all the indirect factory-related costs incurred in the product manufacturing process. You can calculate it by adding up all the indirect expenses, including Depreciation charges, Factory Building Rent, Salaries of Manufacturing Managers & Material Managing Staff, Property Taxes, & Factory Utilities. read more