Average Cost vs Marginal Cost

Average Cost vs. Marginal Cost - The average cost is the sum of the total cost of goods or services divided by the total number of goods or services. And Marginal Cost increases are the cost of producing one more unit or additional unit of product or service. The average cost and marginal cost are vital concepts in accounting management, which is used widely in decision making and calculating revenue in different scenarios.

The average cost is the sum of the total cost of goods divided by the total number of goods. The average cost is also known as Unit cost. The below formula can calculate the average cost.

Average Cost = Total Cost / Number of units produced

It is directly proportional to the total cost of goods and inversely proportional to the number of goods, so average cost decreases when the number of goods increases. It has two components: Variable cost and Fixed cost. The average cost aims to assess the impact on total unit cost with the change in output level.

Marginal cost increases the cost of producing one more unit or additional unit of product or service. Marginal cost changes in the total cost of production upon the change in output that changes the quantity of production. Variable cost is an important factor in determining the output.

In short, marginal cost changes the total cost that arises when the quantity produced changes by one unit. The marginal cost function is expressed as a derivative of the total cost concerning quantity. It may change with volume, so at each production level, the marginal cost is the cost of the next unit produced. Marginal cost is equal to the change in total cost divided by the change in quantity and can be expressed as below:-

Marginal Cost = Change in Total Cost / Change in Quantity

Where,

• Change in Total Cost is the difference in the total cost of production, including additional units, and the total cost of production of the normal unit.
• Change in Total Cost = Total Cost of Production including additional unit – Total Cost of Production of a normal unit
• Change in quantity is the difference of total quantity product, including additional units and total quantity product of normal units.
• Change in quantity = Total quantity product including additional unit – Total quantity product of normal unit

It can be said as the extra expense of producing one additional unit. It helps management to make the best decision for the company and utilize its resources in a better and more profitable way, as with quantity, profit increases if the price is higher than the marginal cost.

Here we provide you with the top 6 differences between Average Cost vs. Marginal Cost.

The critical differences between Average Cost vs. Marginal Cost are as follows –

• The average cost is the sum of the total cost of goods divided by the total number of goods, whereas the Marginal Cost increases in producing one more unit or additional unit of product or service. Marginal cost changes in the total cost of production upon the change in output that changes the quantity of production.
• The average cost aims to assess the impact on total unit cost with the change in output level. In contrast, the objective of marginal cost is to find whether it is beneficial to produce an additional unit of goods.
• The formula for Average cost = Total cost / Number of goods, whereas the formula Marginal cost = Change in total cost / Change in quantity.
• The average cost curve in starting falls due to declining fixed costs but rises due to increasing average variable costs. Whereas the Marginal cost curve is concave with increasing returns, then moves linearly and smoothly with a constant return, and finally changes in convex when marginal cost shows an increased return.
• The best criteria to decide the production level on average cost is when cost minimizes, and the marginal cost is when profit maximizes.
• The average cost has two components: average fixed cost and average variable cost, and Marginal cost is a single unit and does not have any component.

Let’s now look at the head-to-head difference between Average Cost vs. Marginal Cost.

The average cost vs. marginal cost is used for better decision-making by efficiently using resources and identifying and practicing optimum production levels. The average cost is the sum of the total cost of goods divided by the total number of goods. Marginal cost can be said as the extra expense of producing one additional unit. It helps management make the best decision for the company and utilize its resources better and more profitable as quantity profit increases if the price is higher than the marginal cost.

This article is a guide to the Average Cost vs. Marginal Cost. Here we discuss the top differences between Average Cost vs. Marginal Cost and infographics and a comparison table. You may also have a look at the following articles –

• Fixed Cost Calculation
• Examples of Fixed Cost
• Incremental Costs
• Hard Cost vs Soft Cost
• Cost Classification