Average Variable Cost

Formula to Calculate Average Variable Cost

Average Variable Cost refers to the variable cost of per unit of the goods or services where the variable cost is the cost that directly varies with respect to the output and is calculated by dividing the total variable cost during the period by the number of the units.

The formula is as per below:

Where,

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

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

AVC = ATC – AFC

Where,

• ATC is Average Total Cost
• AFC is Average Fixed Cost

Calculation of Average Variable Cost (Step by Step)

To calculate the AVC, 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 equation

• • AVC = VC/Q
  • Where 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 equation

• • AVC = ATC – AFC

• • Where 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 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.

• Variable Cost: $5000
• Quantity (Q): $10000
• Average Total Cost(ATC): $40
• Average 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. Calculate the average variable cost for each output level.

Here is the cost data

Output	Total Variable Cost ($)
1	40
2	70
3	95
4	110
5	145
6	200
7	300

Solution

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

The calculation can be done as follows-

• =40/1

Similarly, we can calculate the AVC 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.

Output	Total Variable Cost ($)
1	50
2	75
3	95
4	110
5	125
6	145
7	175
8	225
9	300
10	420

Solution

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

The calculation can be done as follows-

=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 information. You are required to calculate the average variable cost for each output level.

Output	Total Variable Cost ($)
1	5
2	7
3	10
4	12
5	14
6	17
7	22
8	30
9	50

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 reached, the AVC starts rising with rising output. Hence, the average variable cost curve is 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. An AVC is always a positive number. At the minimum mark, the AVC is equal to the marginal cost. Let us use an illustration to find out the behaviour of the AVC.

Output	Average Variable Cost ($)
1	5000
2	3800
3	3200
4	2750
5	2550
6	2400
7	2500
8	2800
9	3350
10	4300

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 six units are produced. Then, it is on an increasing trend, making it a U-shaped curve.

The AVC is used to make decisions as regards when to shut down production in the short-run. A firm can decide to continue its production if the price is above AVC and covers some fixed costs. 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.

Recommended Articles

This article has been a Guide Average Variable Cost Formula. Here we discuss the formula 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 –

• Average Fixed Cost Formula
• Marginal Benefit
• Formula of Total Variable Cost
• Semi Variable Cost
• Manufacturing Overhead Formula