Post no prices and your shop sells nothing, yet the Daily Report still shows a loss. That one dark day teaches the most important split in cost accounting.
Learning objectives. After this week you can (1) tell fixed from variable costs on your Daily Report; (2) compute average total cost and marginal cost; and (3) explain why marginal cost rises and average total cost is U-shaped.
Remember this: average cost is the cost per cup. Marginal cost is the cost of the next cup.
1) Fixed and variable
Total Cost = Fixed Cost + Variable Cost
A fixed cost is owed even at zero output. On your report that is the Fixed line: rent, the machine lease and overhead, due even on a dark day. A variable cost disappears when you don't produce. COGS (beans, milk, pastries) grows with every cup; Wages grow with the crew and hours you choose. Fixed + Wages + COGS + Spend add up to Expenses, your total cost.
2) Average and marginal cost
Average Total Cost = Total Cost ÷ Quantity
Marginal Cost = change in Total Cost ÷ change in Quantity
| Cups | Total cost | ATC (TC÷Q) | MC per cup |
|---|---|---|---|
| 10 | $90 | $9.00 | $5.00 |
| 20 | $120 | $6.00 | $3.00 |
| 30 | $180 | $6.00 | $6.00 |
| 40 | $280 | $7.00 | $10.00 |
ATC falls to $6 between 20 and 30 cups, then rises, and MC ($6) meets ATC ($6) right at the bottom.
3) Why the curve turns up
The law of diminishing returns: add more of a variable input (more baristas behind one small counter) and each adds less output, so the cost of an extra cup eventually rises. At low output, spreading fixed cost over more cups pulls ATC down; at high output, rising MC pushes it back up. That is the U. When MC is below ATC it pulls the average down; above it, it pulls the average up.
4) Your own two days
Every customer buys one drink, so Customers served is your cup count. Tuesday: 300 customers, Expenses $1,180. Wednesday, same crew and hours: 340 customers, Expenses $1,230. MC = (1,230 − 1,180) ÷ (340 − 300) = 50 ÷ 40 = $1.25 a cup. ATC is 1,180 ÷ 300 ≈ $3.93 on Tuesday and 1,230 ÷ 340 ≈ $3.62 on Wednesday: the busier day spread the same fixed costs wider. Your report prints ATC, so you can check your division.
Quick self-check
(a) Total cost rises from $90 to $120 when output rises by 10 cups. What is MC? (b) Total cost is $120 for 20 cups. What is ATC? (Answers: $30 ÷ 10 = $3; $120 ÷ 20 = $6.)
Common mistakes
- Thinking rent got cheaper on a busy day. Fixed cost per cup fell; the rent did not.
- Comparing days with different crews or hours. The wage change hides the cup's cost.
- Mixing up ATC and MC. One is an average; the other is one more cup.
This week in the arena
Find two Daily Reports this week with the same baristas and open hours but different customers served. Work out the marginal cost per cup between them, then read the ATC line on each. Which day was cheaper per cup, and which line on the report explains why?