Average Variable Cost Formula

The Formula for Average Variable Cost Calculation (Table of Contents)

• Formula
• Examples

What is the Average Variable Cost Formula?

The total variable cost per unit of output is the average variable cost. Variable costs include labor, materials, electricity, etc. The average variable costs are the total variable costs divided by the quantity of output produced. The formula for average variable costs is:

In symbolic terms,

AVC = VC/Q

Where,

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

The average variable cost can also be calculated in terms of the average total cost and the average fixed cost. The average variable cost equation is represented as follows,

In symbolic terms,

AVC = ATC – AFC

Where,

• AVC is the Average Variable Cost
• ATC is Average Total Cost
• AFC is Average Fixed Cost

Explanation of the Average Variable Cost Formula

In order to calculate the average variable cost, use the following steps:

Step 1: Calculate the total variable cost

Step 2: Calculate the quantity of output produced

Step 3: Calculate the average variable cost using the formula

AVC = ATC – AFC

Where,

• AVC is average variable cost, VC is variable cost and Q is the quantity of output produced

In certain cases, average total costs and average fixed costs are given. In such cases, follow the given steps

Step 1: Calculate the average total costs

Step 2: Calculate the average fixed costs

Step 3: Calculate the average variable costs using the formula

AVC = ATC – AFC

Average Variable Cost = Average Total Cost – Average Fixed Cost

Where,

• AVC is Average Variable Cost, ATC is Average Total Cost and AFC is Average Fixed Cost

Examples of Average Variable Cost Formula

Let’s see some simple to advanced practical examples of the average variable cost equation to understand it better.

Example #1

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

Solution

Use below given data for the calculation of average variable cost.

Calculation of average variable cost can be done as follows-

• = $50000/10000

Average Variable Cost will be –

• Average Variable Cost = $5

The average variable cost is $5 per unit.

Calculation of average variable cost can be done as follows:

• = $40 – $25

Average Variable Cost will be –

• Average Variable Cost = 15

The average variable cost is $15 per unit.

Example #2

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

Here is the cost data

Solution

The average variable cost (AVC) is calculated in the following table for each output level using the formula AVC = VC/Q

Calculation of average variable cost can be done as follows-

• =40/1

Average Variable Cost will be –

• Average Variable Cost =40.00

Similarly, we can calculate the average variable cost as follows

Example #3

Georges Inc. has the following cost data. Calculate the average variable cost for each output level. Also, determine the output level at which the average cost is the minimum.

Solution

The average variable cost (AVC) is calculated in the following table for each output level using the formula AVC = VC/Q.

Calculation of Average Variable Cost can be done as follows-

=50/1

Average Variable Cost will be –

• Average Variable Cost = 50.00

Similarly, we can calculate the average variable cost as follows

The lowest average variable cost (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 6 units.

Relevance and Uses

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

In the above illustration, the average variable cost is at $5,000 per unit if only 1 unit is produced. Then it is on a declining trend up to the production of 6 units. It reaches its lowest point at $2400 per unit when 6 units are produced. Then, it is on an increasing trend, making it a U-shaped curve.

The average variable cost is used to take decisions as regards when to shut down production in the short-run. A firm can take a decision to continue its production if the price is above average variable costs and covers some fixed costs. A firm would shut down its production in the short run if the price is less than average variable cost. Shutting down production will ensure that additional variable costs are avoided.

Average Variable Cost Formula in Excel (with Excel Template)

Lincoln Inc. gives you the following financial information. You are required to calculate the average variable cost for each output level.

Solution:

Step 1:

We have to use the formula Average Variable Cost = Variable Cost/Output

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

Step 2:

Drag to a formula from cell C2 up to cell C10

Recommended Articles

This has been a Guide Average Variable Cost Formula. Here we provide step by step guide to calculate the average variable cost along with practical examples and downloadable excel template. You can learn more about accounting and budgeting from the following articles –

• Marginal Benefit Formula Overview
• Formula of Average Fixed Cost
• Formula of Total Variable Cost
• What is Semi Variable Cost?
• Formula of Average Total Cost