## What is Average Total Cost?

The **Average Total Cost (ATC)** is the total cost per unit of output, inclusive of both fixed costs and variable costs. Therefore, the average total cost, often abbreviated as “average cost” for short, is the per-unit cost of producing a product.

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## How to Calculate Average Variable Cost

The average total cost is the total cost of production, or sum of fixed and variable costs, divided by the total quantity of output.

The average total cost (ATC) is an economic term that refers to the total cost of production, expressed on a per-unit basis.

In practice, the average total cost (ATC) is a method used to determine the breakeven price, which is the minimum price the company can charge to receive no income or loss.

There are two components in a company’s cost structure (and total costs) – the fixed cost (FC) and variable cost (VC) – which represent the total cost of production incurred by the company.

**Fixed Costs (FC)**→ Fixed costs remain constant irrespective of the quantity of output or production level, particularly in the near term (e.g. rent, insurance, utilities).**Variable Costs (VC)**→ Variable costs, on the other hand, continuously fluctuate based on the quantity of output (e.g. direct labor, direct material).

In short, fixed costs are independent of the quantity of output, while variable costs increase (or decrease) in tandem with the current level of output.

The fixed cost, variable cost, and total cost measure distinct parts of the cost of production in monetary terms. However, the average fixed cost, average variable cost, and average total cost are standardized into per-unit measures.

Once the total cost (TC) is divided by the quantity of output (or production units), the resulting figure is the average total cost (ATC).

Therefore, the method to calculate the average total cost (ATC) comprises three steps:

- Determine the Total Quantity of Output (or Production Units)
- Calculate the Total Cost (Fixed Cost + Variable Cost)
- Divide the Total Cost (TC) by Total Quantity (Q)

## Average Total Cost Formula

The formula to calculate the average total cost is as follows.

**Average Total Cost (ATC) =**Total Cost (TC)

**÷**Quantity of Output (Q)

The total cost is determined by adding a company’s fixed costs to the product of its variable cost per unit and the quantity of output.

**Total Cost =**Fixed Costs

**+**(Variable Cost per Unit

**×**Quantity of Output)

On the other hand, the quantity of output is the number of units produced in the coinciding period.