What is Average Variable Cost

Study of variable costs, which are a part of the total costs, is essential for all product manufacturing firms. The characteristic of these costs is that they get modified with changes in levels of production. Dealing with variable costs is a challenge for business houses, to maintain their profits.

Variable costs are analyzed with the help of average variable cost curve, in which we have the quantity produced, charted on the X axis, and price on Y axis. From the graph, we know how the costs change with respect to production quantity.

As mentioned above, variable costs will be changing as per 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.

Fixed costs are ones 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 and variable costs would be quite easy to understand if we consider some examples.

Indirect materials, payroll taxes, overtime paid to employees and workers, lubricant costs for the machines, depreciation on machinery, cost of tools, and labor, are best examples of variable costs. On the other hand, rent, insurance payable, electricity, power, and salary of the plant manager would be fixed cost examples.

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

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

We are all aware that total cost is the sum of fixed and variable costs. 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

Total variable cost is nothing but the sum of all those costs which will be changing in 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.

We calculate it by multiplying the total output units by the variable cost per unit. This has been expressed in the form of a mathematical formula below.
Total variable cost = Total output units x Variable cost per unit