Average Variable Cost

Study of variable costs, which are a part of the total costs, is essential for all product manufacturing firms. The specialty or characteristic of these costs is that they change with the changes in levels of production. Dealing with changing variable costs is a challenge for business houses, to maintain their profits. Variable costs are analyzed with the help of the average variable cost curve, in which we have the quantity produced on the X axis and the price on the Y axis. From the graphical figure we get to know how the costs change with respect to the price.

How is Variable Cost Different from Fixed Cost

As mentioned above, variable costs will be changing as per the levels of production. So, more the production, more will the company pay for such costs. These costs will be almost equal to zero when the company stops its production or reduces it considerably. Exactly opposite to this is the concept of fixed costs. The fixed costs are those costs which are paid by the factory owner even if he lowers his production to a great extent. Thus, fixed costs can be quite a burden for upcoming and small business ventures. The comparison between fixed costs and variable costs would be quite easy to understand if we consider some examples of these types of costs. Indirect materials, payroll taxes, overtime paid to employees and workers, lubricant costs for the machines, depreciation on machinery and cost of tools and labor are best examples of variable costs. On the other hand, rent, insurance payable, electricity, power, depreciation on building and salary of the plant manager would be the fixed cost examples.

Average fixed cost = Fixed cost of production / Quantity of output produced.

Calculating Average Variable Costs

Average variable cost = Total variable cost / Quantity of output produced.

We are all aware that the total cost is the sum of fixed cost and the variable cost. So, naturally, the average total cost will be the sum of the average fixed cost and average variable cost. This has been expressed in terms of a mathematical formula below

Average total cost = Average variable cost + Average fixed cost.

The total variable cost is nothing but the sum of all those costs which will be changing in a direct proportion to the change in the quantity or volumes of production. Such costs consist of the cost of operations, raw material costs and labor costs. The total variable cost computation is also easy like that of average variable cost. We calculate it by multiplying the total units of output and the variable cost per unit. This has been expressed in the form of a mathematical formula below.

Total variable cost = Total units of output x Variable cost per unit.

In the field of economics and accounting, knowledge of average variable cost is a must. Hoping that you will use this data for fast calculations I would like to sign off here. Good luck!