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Average Cost vs Marginal Cost

Updated on April 24, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

The key difference between Average Cost vs. Marginal Cost is that Average Cost refers to the per-unit production cost of the goods produced in the company during the period. In contrast, Marginal cost refers to the value of the increase or decrease of the total production cost of the company during the period under consideration if there is a change in output by one extra unit.

Average Cost vs Marginal Cost Differences

Average Cost vs. Marginal Cost – The average cost is the sum of the total cost of goodsTotal Cost Of GoodsThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more or services divided by the total number of goods or services. And Marginal Cost increases are the cost of producing one more unit or additional unit of product or service. The average cost and marginal costMarginal CostMarginal cost formula helps in calculating the value of increase or decrease of the total production cost of the company during the period under consideration if there is a change in output by one extra unit. It is calculated by dividing the change in the costs by the change in quantity.read more are vital concepts in accounting management, which is used widely in decision making and calculating revenue in different scenarios.

What is Average Cost?

The average cost is the sum of the total cost of goods divided by the total number of goods. The average costAverage CostAverage cost refers to the per-unit cost of production, calculated by dividing the total production cost by the total number of units produced. In other words, it measures the amount of money that the business has to spend to produce each unit of output.read more is also known as Unit cost. The below formula can calculate the average cost.

Average Cost = Total Cost / Number of units produced

It is directly proportional to the total cost of goods and inversely proportional to the number of goods, so average cost decreases when the number of goods increases. It has two components: Variable cost and Fixed cost. The average cost aims to assess the impact on total unit cost with the change in output level.

Average Cost vs Marginal Cost Differences

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What is Marginal Cost?

Marginal cost increases the cost of producing one more unit or additional unit of product or service. Marginal cost changes in the total cost of production upon the change in output that changes the quantity of production. Variable cost is an important factor in determining the output.

In short, marginal cost changes the total cost that arises when the quantity produced changes by one unit. The marginal cost function is expressed as a derivative of the total cost concerning quantity. It may change with volume, so at each production level, the marginal cost is the cost of the next unit produced. Marginal cost is equal to the change in total cost divided by the change in quantity and can be expressed as below:-

Marginal Cost = Change in Total Cost / Change in Quantity

Where,

  • Change in Total Cost is the difference in the total cost of production, including additional units, and the total cost of production of the normal unit.
  • Change in Total Cost = Total Cost of Production including additional unit – Total Cost of Production of a normal unit
  • Change in quantity is the difference of total quantity product, including additional units and total quantity product of normal units.
  • Change in quantity = Total quantity product including additional unit – Total quantity product of normal unit

It can be said as the extra expense of producing one additional unit. It helps management to make the best decision for the company and utilize its resources in a better and more profitable way, as with quantity, profit increases if the price is higher than the marginal cost.

Average Cost vs. Marginal Cost Infographics

Here we provide you with the top 6 differences between Average Cost vs. Marginal Cost.

Average Cost vs Marginal Cost Infographics

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Average Cost vs. Marginal Cost – Key Differences

The critical differences between Average Cost vs. Marginal Cost are as follows –

  • The average cost is the sum of the total cost of goods divided by the total number of goods, whereas the Marginal Cost increases in producing one more unit or additional unit of product or service. Marginal cost changes in the total cost of production upon the change in output that changes the quantity of production.
  • The average cost aims to assess the impact on total unit cost with the change in output level. In contrast, the objective of marginal cost is to find whether it is beneficial to produce an additional unit of goods.
  • The formula for Average cost = Total cost / Number of goods, whereas the formula Marginal cost = Change in total cost / Change in quantity.
  • The average cost curve in starting falls due to declining fixed costs but rises due to increasing average variable costs. Whereas the Marginal cost curve is concave with increasing returns, then moves linearly and smoothly with a constant return, and finally changes in convex when marginal cost shows an increased return.
  • The best criteria to decide the production level on average cost is when cost minimizes, and the marginal cost is when profit maximizes.
  • The average cost has two components: average fixed cost and average variable costAverage Variable CostAverage Variable Cost refers to the cost that directly varies with the output incurred on each unit of goods or services. It is evaluated by dividing the total variable cost incurred during the period by the number of units produced.read more, and Marginal cost is a single unit and does not have any component.

Average Cost vs. Marginal Cost Head to Head Difference

Let’s now look at the head-to-head difference between Average Cost vs. Marginal Cost.

Basis – Average Cost vs. Marginal CostAverage CostMarginal Cost
DefinitionIt is the sum of the total cost of goods divided by the total number of goods.It increases the cost of producing one more unit or additional unit of product or service. Marginal cost changes in the total cost of production upon a change in output that changes in the quantity of production;
AimThe average cost aims to assess the impact on total unit cost with a change in output level.The marginal cost aims to find whether it is beneficial to produce an additional unit of goods.
FormulaAverage cost = Total cost / Number of goodsMarginal cost = Change in total cost / Change in quantity.
Shape of CurveIt curves in starting fall due to declining fixed cost but then rises due to an increase in average variable costs.It curves concave when returns increase and then move linearly and smoothly with the constant return and finally change in convex when marginal cost shows increased return.
Best CriteriaWhen the objective is to minimize cost;When the objective is profit maximization;
ComponentIt has two components average fixed costAverage Fixed CostAverage 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 and average variable cost.It is a single unit and does not have any components.

Conclusion

The average cost vs. marginal cost is used for better decision-making by efficiently using resources and identifying and practicing optimum production levels. The average cost is the sum of the total cost of goods divided by the total number of goods. Marginal cost can be said as the extra expense of producing one additional unit. It helps management make the best decision for the company and utilize its resources better and more profitable as quantity profit increases if the price is higher than the marginal cost.

This article is a guide to the Average Cost vs. Marginal Cost. Here we discuss the top differences between Average Cost vs. Marginal Cost and infographics and a comparison table. You may also have a look at the following articles –

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