If they get a higher price for the good than the Average Variable Cost for the output they produce, they are at least covering all variable expenses and some fixed costs.Companies can use the Average Variable Costs to maximise profits by calculating when production should be temporarily halted.The resulting number will be the Average Variable Cost. Step 3: Subtract Average Fixed cost from Average Total Cost. Step 1: Calculate Average total cost of productionĪverage Total cost= Total Cost/ Units Produced.Īverage Fixed Cost= Fixed Cost/ Units Produced. Under the Subtraction Method to arrive at average variable cost, follow these steps. Method of Subtraction:Īverage Variable Cost = Average Total Cost – Average Fixed Cost. The resulting number is the average variable cost. Step 3: Divide Total Variable cost by the Total number of units produced. Step 2: Calculate the total variable cost of production for the units. Step 1: Calculate the number of Units Produced. Under the Division Method, to arrive at an average variable cost, follow these steps. Method of DivisionĪverage Variable Cost= Total Variable cost/ units produced There are two approaches to calculate Average Variable Cost. The sum total of Variable cost and fixed cost is the total cost incurred in production. While smaller production volumes have a fixed cost, economies of scale in manufacturing allow costs to vary and decrease below that number. Regardless of how many goods the company produces, fixed costs remain constant. Raw materials and labour expenses are examples of variable costs that change over time and are often based on a company’s production volume.

These are expenses that fluctuate in response to variations in the quantity of a company’s product or service. Variable costs are the sum of marginal costs for all units produced.

To calculate Total Variable cost, subtract the fixed cost from total cost incurred. When the output changes, the variable cost changes as well. Looking at the result is the simplest way to detect if a cost is variable. Total variable cost refers to all costs that change with output, such as direct labour and raw material. The variable cost is the cost that fluctuates directly with output and is computed by dividing the total variable cost for the period by the number of units produced. The variable cost per unit of products or services is referred to as the average variable cost.

Flexible expenses economics definition