Business, Legal & Accounting Glossary
Average cost is an economic term that is denoted by the total cost of production divided by the number of units produced. The average cost is also the summation of average variable costs and average fixed costs. Average cost is one of the fundamental components of assessing demand and supply. It significantly affects the supply curve. Role of the average cost curve is highlighted in monopolies and perfect competition.
There is a difference between price and average cost. The average cost is related to the elasticity of demand and elasticity of supply. In perfect competition, it is often seen that price is lower than the average cost. This is due to marginal cost pricing.
The average cost is also used quite often in accounting and auditing. It is an important concept in labour economics as well. It has been observed that if the average cost falls in the long run along with an increase in output, companies face economies of scale.
Fixed cost is a type of production cost that remains the same. It is not affected by alterations in the business activities of a particular company. A major example of fixed cost is the payment of lease, which remains the same and never change irrespective of the business performance of a company.
In the short-run production process,
Average fixed cost (AFC)= total fixed cost(TFC)/total quantity (Q)
Variable cost is the expense that changes in accordance with alterations in the activities and business performance of a particular company. An example of the variable cost would be expenses incurred in travel that keep varying as per the number of trips made by people related to that company.
Average variable cost is obtained by dividing the variable cost by the total amount of units produced. Average variable cost is widely used in a number of fields like accounting and auditing, manufacturing, industries and technology. It is also related to concepts like closing down point and shutdown point.
Average cost and marginal cost are closely related concepts. In cases where the average cost is going down along with an increase in output, the average cost is higher than the marginal cost. In cases where the average cost goes up with an increase in output, it is lesser than the marginal cost. If the average cost is fixed, marginal and average costs are the same.
The weighted average cost of capital (WACC) is a way of calculating the cost of capital of a particular firm. In this case, every capital category is weighted in a proportionate manner. The following items, which are mainly sources of capital for a company, are included in calculations of the weighted average cost of capital – common stock, bond and preferred stock, for example.
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This glossary post was last updated: 29th March, 2020 | 1 Views.