Average cost

What is the average cost?

Average cost, also called unit cost or average cost, is the cost per unit of a production.

It is called "average" since it is calculated by obtaining a average based on fixed costs and variable costs.

You can define the average cost using a mathematical formula that comprises the division of the total cost of production by the total quantity of products available for sale by unit.

Average cost formula

Although, depending on the type of average cost that is sought, there is a wide variety of algebraic formulas that can be used, the most common and simple formula to obtain the average cost is the following:

Formula to calculate average cost.

To make use of this formula we must have the following data:

• Total cost of production: that obtained by adding the average fixed cost and the average variable cost.
• Total production: total number of products available for sale.

Average cost rating

Average cost can be fixed, variable or total.

Average fixed cost (CFP)

Average fixed cost, also known as average fixed cost (CMeF), understands the values ​​that they will always be present, regardless of your production quantity. For example, the value of the machinery used for production.

The greater the quantity produced, the easier it will be to cover said fixed cost and, therefore, it will be lower.

The formula to calculate the CFP or CMeF consists of dividing the total fixed cost by the number of units produced, as detailed below:

Formula to calculate the average fixed cost.

Average variable cost (CVP)

Average variable cost, also called average variable cost (CMeV), is the variable cost or price per unit of production. That is, it is a cost that varies according to the number of units produced.

For example, the packaging of the product, whose value is directly related to the number of units produced.

To calculate this cost, the total variable cost (the sum of all variable costs) is divided by the number of units produced, as detailed below:

Formula to calculate the average variable cost.

Average total cost (CTP)

Average total cost comprises the value or total unit cost of production. That is, how much it has cost us to finally produce each unit.

To calculate it, the following formula is used:

Formula to calculate the average total cost.