Average cost
Average cost (pronunciation: /ˈævərɪdʒ kɔːst/) is a term used in Economics and Accounting to describe the total cost of production divided by the total quantity produced. It is also known as unit cost or cost per unit.
Etymology
The term average cost is derived from the English words average, which means typical or normal amount, and cost, which refers to the amount of money that needs to be spent to buy, do, or make something.
Definition
In Economics, average cost represents the sum of a company's costs (both fixed and variable) divided by the quantity of output produced. It is a measure of total cost per unit of output.
In Accounting, average cost is a method for assigning costs to products and services. It is calculated by dividing the total cost of goods available for sale by the total number of units available for sale. This results in a weighted-average unit cost that is applied to the units in the ending inventory.
Formula
The formula for average cost is:
- AC = TC/Q
Where:
- AC is the average cost
- TC is the total cost
- Q is the quantity of output
Related Terms
- Total cost: The sum of all costs incurred by a firm in the production of goods or services.
- Variable cost: A cost that changes in proportion to changes in the volume of output.
- Fixed cost: A cost that does not change with the level of output.
- Marginal cost: The cost of producing one more unit of a good or service.
- Cost accounting: The process of recording, classifying, analyzing, summarizing, and allocating costs associated with a process, and then developing various courses of action to control the costs.
See Also
External links
- Medical encyclopedia article on Average cost
- Wikipedia's article - Average cost
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