 # 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,

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. 