How to Work out Average Fixed Cost
Choose a time period to measure., Combine total fixed costs., Determine the quantity of units produced., Divide the total fixed costs by the quantity of units produced.
Step-by-Step Guide
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Step 1: Choose a time period to measure.
You'll want to choose a distinct time period for your calculation.
This will help you align your costs to your production and properly calculate fixed cost.
In general, it's easiest to use one month or a number of months because you can easily determine fixed costs over this time period.
You can also approach this from the other end and use the amount of time it takes to produce a certain amount of units.
For example, you could recognize that you produce 10,000 units every two months and use that time constraint to figure out your fixed costs. -
Step 2: Combine total fixed costs.
Fixed costs are those costs that don't change based on how many products you produce.
This includes things like the rent on the building used to produce or sell the good, the cost of buying or maintaining manufacturing equipment, property taxes, and insurance.
This can also include the cost of payroll for employees not directly involved in the manufacturing process.Sum these costs to determine total fixed costs.
Going with our previous example, manufacturing 10,000 units in two months, let's say you spend $4,000 per month on rent for your manufacturing space, pay $800 per month in property taxes, $200 in insurance, $5,000 in non-manufacturing (administrative) wages, and $1,000 in depreciation expense on your machinery.
This would total $11,000 per month in fixed expenses.
Because you're measuring for two months, simply double this number to get $22,000 in total fixed costs.
For more information, see how to calculate fixed cost.
Keep in mind that this does not include any variable costs, or costs incurred based upon how many products you produce.
Variable costs can be materials used in production, utilities, labor costs from manufacturing employees, and packaging expenses., Simply use your figures for goods produced within the period you are measuring.
Be sure that the production time period matches the time period from which you collected the information for fixed cost expenses.
In our example, this would be the 10,000 units produced in the two months we are measuring. , This gives you the average fixed cost.To complete our example, we would now divide the $22,000 in total fixed cost over our two month period by the 10,000 units produced in that period.
This gives us an average fixed cost of $2.20 per unit. -
Step 3: Determine the quantity of units produced.
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Step 4: Divide the total fixed costs by the quantity of units produced.
Detailed Guide
You'll want to choose a distinct time period for your calculation.
This will help you align your costs to your production and properly calculate fixed cost.
In general, it's easiest to use one month or a number of months because you can easily determine fixed costs over this time period.
You can also approach this from the other end and use the amount of time it takes to produce a certain amount of units.
For example, you could recognize that you produce 10,000 units every two months and use that time constraint to figure out your fixed costs.
Fixed costs are those costs that don't change based on how many products you produce.
This includes things like the rent on the building used to produce or sell the good, the cost of buying or maintaining manufacturing equipment, property taxes, and insurance.
This can also include the cost of payroll for employees not directly involved in the manufacturing process.Sum these costs to determine total fixed costs.
Going with our previous example, manufacturing 10,000 units in two months, let's say you spend $4,000 per month on rent for your manufacturing space, pay $800 per month in property taxes, $200 in insurance, $5,000 in non-manufacturing (administrative) wages, and $1,000 in depreciation expense on your machinery.
This would total $11,000 per month in fixed expenses.
Because you're measuring for two months, simply double this number to get $22,000 in total fixed costs.
For more information, see how to calculate fixed cost.
Keep in mind that this does not include any variable costs, or costs incurred based upon how many products you produce.
Variable costs can be materials used in production, utilities, labor costs from manufacturing employees, and packaging expenses., Simply use your figures for goods produced within the period you are measuring.
Be sure that the production time period matches the time period from which you collected the information for fixed cost expenses.
In our example, this would be the 10,000 units produced in the two months we are measuring. , This gives you the average fixed cost.To complete our example, we would now divide the $22,000 in total fixed cost over our two month period by the 10,000 units produced in that period.
This gives us an average fixed cost of $2.20 per unit.
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Joshua Campbell
Brings years of experience writing about practical skills and related subjects.
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