Average Variable Cost

What is Average Variable Cost (AVC)?

**Average Variable Cost (AVC)** is an economics and management accounting metric representing the variable expenses incurred per unit of output produced. Variable costs are business expenses that change in direct proportion to production volume, such as raw materials, packaging, direct manufacturing labor, and payment processing fees.

How to Calculate Average Variable Cost

The primary formula for calculating Average Variable Cost divides the **Total Variable Cost (TVC)** by the total **Quantity of Output (Q)**:

$$\text{AVC} = \frac{\text{TVC}}{\text{Q}}$$

Alternatively, if you know the **Average Total Cost (ATC)** and the **Average Fixed Cost (AFC)** per unit, you can compute AVC using subtraction:

$$\text{AVC} = \text{ATC} - \text{AFC}$$

Why is Average Variable Cost Important?

In microeconomics, AVC plays a key role in identifying a business's **shutdown point**. In the short run, if a company's product price falls below its Average Variable Cost, it is more cost-effective to shut down production entirely rather than continue operating. Operating below the AVC means that every unit sold increases the company's net loss.

You can analyze your overall business margins and net profitability using our related Accounting Profit Calculator.