Average Cost vs Marginal Cost

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 whereas Marginal cost refers to the value of increase or decrease of total production cost of the company during the period under consideration if there is 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 goods or services divided by the total number of goods or services. And Marginal Cost increases is the cost of producing one more unit or additional unit of product or service. The average cost and marginal cost both are a vital concept in the management of accounting, which is used widely in decision making and calculating revenue in a different scenario.

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 cost 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 when the number of goods increases average cost decreases. It has two components Variable cost and Fixed cost. The average cost aims to access the impact on total unit cost with the change in output level.

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What is Marginal Cost?

Marginal Cost increases in 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 in the quantity of production. Variable cost important factor in determining the output.

In short, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. Mathematically, the marginal cost function is expressed as a derivative of the total cost with respect to quantity. It may change with volume, and so at each level of production, the marginal cost is the cost of the next unit produced. Marginal cost is equal to the change in total cost divided by 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 unit and total cost of production of the normal unit.
  • Change in Total Cost = Total Cost of Production including additional unit – Total Cost of Production of normal unit
  • Change in Quantity is the difference of total quantity product, including additional unit and total quantity product of normal unit.
  • 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 profitable way as with quantity profit increase if the price is higher than the marginal cost.

Average Cost vs. Marginal Cost Infographics

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

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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 Marginal Cost increases in 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 in 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 formula Marginal cost = Change in total cost / Change in quantity.
  • The average cost curve in starting falls due to declining fixed cost but then 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 increase return.
  • The best criteria to decide the production level on average cost is when cost minimize, and the marginal cost is when profit maximizes.
  • The average cost has two components the average fixed cost and average variable cost, 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 the difference between Average Cost vs. Marginal Cost.

Basis – Average Cost vs. Marginal Cost Average Cost Marginal Cost
Definition It is the sum of the total cost of goods divided by the total number of goods. It increases in 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;
Aim The average cost aims to access 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.
Formula Average cost = Total cost / Number of goods Marginal cost = Change in total cost / Change in quantity.
Shape of Curve It curves in starting fall due to declining fixed cost but then rises due to an increase in average variable costs. It curves is concave when returns increases and then move linearly and smoothly with the constant return and finally change in convex when marginal cost show increase return.
Best Criteria When the objective is to minimize cost; When the objective is profit maximization;
Component It has two components average fixed cost 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 using resources efficiently and to identify and practice 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 on producing one additional unit. It helps management to make the best decision for the company and utilize its resources in a better and profitable way as with quantity profit increase if the price is higher than the marginal cost.

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