Average Cost Formula

Average Cost Formula Definition

The average cost refers to the cost per unit manufactured in production. It determines the average amount spent to produce a product. 

Significance of Average Cost

Average cost formula simplifies the record-keeping process of companies. It offers several other benefits such as:

  • Calculating the manufacturing cost using a simpler method
  • Preventing the manipulation of income generated

Applications of Average Cost Formula

  • The result of the average cost formula helps companies in future planning and budget making.
  • The formula helps e-commerce businesses to set its pricing to yield profits
  • The average cost formula is used to calculate the inventory value. 

Average Cost Formula

Weighted-average unit cost =

Total cost of inventory / Total units in inventory

Understanding With the Help of an Example

For example,

Purchase DateNumber of ItemsCost Per UnitTotal Cost
02/0110A$25A$250
03/0120A$35A$700
04/0130A$45A$1350
TOTAL60A$2,300

The total inventory cost is A$2,300 and the total units in inventory is 60. Hence, 

Average Cost = A$2300/ 60 = A$38.33 cost per unit

What You Can Infer From the Formula

The average cost formula helps companies determine how much each unit’s output costs. It tells an e-commerce business how much spending is required to produce a unit of a specific product. It is the fundamental unit of demand and supply that affects the supply curve. 

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