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 Date | Number of Items | Cost Per Unit | Total Cost |
| 02/01 | 10 | A$25 | A$250 |
| 03/01 | 20 | A$35 | A$700 |
| 04/01 | 30 | A$45 | A$1350 |
| TOTAL | 60 | A$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.