Average Variable Cost Formula

The following equation is used to calculate an average variable cost.

average variable cost formula


Average Variable Cost Definition

An average variable cost is a ratio of a business or entity’s total variable costs divided by the quantity of of output.

In short, this is a means to analyze how changing costs in things like labor, raw material, utilities, ect. affect the total output a certain manufacturing plant or business can achieve for any given product.


Example

The following is an example problem of calculating the average variable cost.

  1. First, determine the total amount of the variable cost. For this example we will say the total variable costs are $10,000.00.
  2. Next, determine the total output at this variable cost. For this example it’s determined the total output is 5,000 units.
  3. Finally, calculate the average variable cost using the formula presented above. So, $10,000.00/5,000 = 2.

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