Are you wondering how to calculate your average variable cost (AVC)? You are in the right place! Here you can find the AVC formula that can help finance students and entrepreneurs calculate their average variable cost in a matter of seconds. It is also helpful for economics enthusiasts who are interested in learning this formula.
With the help of this tool, you will save time and avoid the hassle of computing AVC on paper every time you need it. But it’s not all about this formula. You will also find out more about the average variable cost, how to implement it, and much more. Without further ado, let’s dig a bit deeper.
Average Variable Cost (AVC) Formula
The AVC formula is very simple. Likewise, the AVC calculator allows you to calculate your average variable cost with ease. It uses the following formula:
AVC = Variable Cost / Quantity of Goods (or Total Output)
As you can see, the calculation is quite easy and only two components are needed: Variable Costs and Total Output. Let’s say a few words about them for a better understanding of the formula.
- Variable Costs (VC): These costs are dependent on how many goods are produced. For example, they include the costs of transportation, electricity expenses, the cost of human labor, and the expenses of gasoline used. So, if you want to find out how much your VC is, then you’ll have to take into account each produced unit and total up all the marginal expenses over them.
- Total Output (Q): This component tells you how many goods have been produced for a set amount of time.
To help you get a better idea of the AVC formula, we will go through an easy example of how it works. We will assume that Variable Costs (VC) is $500,000, while Total Output (Q) is 250. For these values, the calculation is as follows: $500,000 / 250 = $2,000. That means the average variable cost is $2,000!
What’s the Average Variable Cost (AVC)?
Okay, now that you know how the average variable cost is calculated, you will want to learn more about it, right? The average variable cost is the cost of a unit of production that is not fixed. As you can see, these costs can be either calculated by dividing the total variable costs by the quantity of production or by dividing the total cost minus fixed costs by the quantity of production.
Keep in mind that the variable cost is the cost that changes with the level of production. Also, it is a cost that varies with the quantity of output. These costs change according to the level or volume of production. Simply put, it’s the total variable cost per unit – whether it is a service or physical product – that a company has produced.
There are two types of variable costs: direct and indirect. Direct variable costs are those that can be traced to a specific product, service, or department. Indirect variable costs are those that cannot be traced to a specific product, service, or department and include such things as overhead and general expenses.
Why Is It Worth Calculating?
One may say: “Okay, that’s fine, but why is it important? What can I do with this calculation?” Well, it is a good way to quickly check your average cost at any time and operate more effectively.
The larger the outputs, the greater the average cost. When the outputs go down, the costs will do the same. With that being said, you can use the AVC to find out whether to decrease or stop the production as needed. That can help companies avoid handling big costs.
Generally speaking, the producer will be able to successfully cover their variable costs as well as a portion of their fixed expenses in case the AVC is lower than the price of goods. The production should be continued as usual in this instance. Otherwise, it is recommended to reduce or stop the production completely so as not to face extra costs.
Other Tools to Use In Addition to AVC Calculator
Besides calculating average variable costs, there are also other tools and things to know. As an entrepreneur, you should have a wide variety of business tools at your fingertips. Here are some finance calculators you may also find helpful:
- Profit margin – It will let you know what portion of your revenue will remain when deducting all the costs like interests, taxes, fees, and so on.
- Contribution margin – With this finance calculator, you will know the distinction between the variable costs and sales revenue.
- VAT calculator – This useful tool allows you to calculate the goods and services tax (also known as value-added tax) in no time. Without knowing their VAT, many businesses can’t operate effectively.
- Margin with discount – By combining an added discount with the profit and contribution margins, this calculator lets you save time.
FAQs
What Is Meant By AVC (Average Variable Cost)?
Average variable cost is the total of all variable costs for a given period divided by the number of units produced or sold during that same time. In other words, it is the total cost of production divided by the number of units (goods or services) produced. AVC is a measure of profitability that takes into account the average price per unit and the average quantity produced.
How Is the Average Variable Cost Calculated?
The average variable cost can be calculated in two ways:
1) The total variable cost for a given period is divided by the number of units produced or sold during that same time. (It is a more common way)
2) The average fixed cost is subtracted from the total cost and then divided by the number of units produced or sold during that same time.
The average variable cost curve illustrates how it changes as output rises. It usually starts at a high level, falls to a low point, and then rises again as more units are produced.