See Also:
Fixed Costs
Inventoriable Costs
Marginal Costs
Replacement Costs
Process CostingAverage Cost Definition
Average cost per unit of production is equal to total cost of production divided by the number of units produced. The average cost per unit is also known as the unit cost. Average cost, especially over the long-term, normalizes the cost per unit of production and smoothes out fluctuations caused by seasonal demand changes or differing levels of production efficiency.
Average Cost Per Unit Formula
Average Cost Per Unit = Total Production Cost / Number of Units ProducedAverage Cost Minimization
A company producing goods will want to minimize the average cost of production. The company will want to determine the cost-minimizing mix and the minimum efficient scale. Companies with a lower average cost per unit of production are better able to defend against aggressive price-cutting among industry competitors.
The cost-minimizing mix is the lowest cost input-output production mix, or the point at which the most output can be produced for the least cost. This mix occurs at the point of tangency between the isoquant and isocost lines. In economics terminology, the isoquant line is the line that represents all different combinations of production inputs that produce the same quantity of output. The isocost line represents all possible combinations of production variables that add up to the same level of cost. The point of intersection between the isoquant and isocost lines is the point of cost minimization.
The minimum efficient scale is scale of production at which average cost of production reaches its minimum point. Up to a certain point, more production volume reduces the average cost per unit of production. This is known as economies of scale. The more output that is produced, the more thinly spread are the fixed costs of production across the units of output, which ends up lowering the average cost per unit. Production economies of scale can lower the threat of new entrants (competitors) into the industry.
Average Cost – Accounting
In accounting, average cost equals the sum of variable costs and fixed costs divided by the quantity of units produced. Average cost is also a method for valuing inventory. In this sense it is computed as cost of goods available for sale divided by the number of units available for sale. This will give you the average per-unit value of the inventory of goods available for sale.