Average cost refers to the average level of cost consumption in a certain range and period. The average annual cost is the average level of cost consumption in a year.
The average cost is always for a product or service. The change of the average cost of product production or service provision in a certain period often reflects the change of the overall level of cost management in a certain range. The average cost in different periods may vary greatly. Through comparative analysis, we can understand the overall level of cost changes and point out the direction for in-depth analysis.
The annual average cost method regards the continued use of old equipment and the purchase of new equipment as two mutually exclusive schemes, and assumes that replacement equipment can be found according to the original annual average cost when replacing equipment in the future.
The main problem solved by this method is that it is impossible to calculate the complete cash flow, so it is impossible to calculate the net present value or other indicators. Mainly applicable to the decision-making of fixed assets renewal and transformation, but not limited to the decision-making of fixed assets renewal.
The average annual cost of fixed assets refers to the average annual cash outflow caused by this asset. If the time value of money is not considered, it is the ratio of total cash outflow to future service life. If the time value of money is considered, it is the ratio of the total present value of cash outflow to the present value coefficient of annuity in the future service life, that is, the average annual cash outflow.