Semi-Fixed Cost
A semi-fixed cost, also known as a semi-variable cost or mixed cost, is a cost that contains both fixed and variable components. This means that there is a portion of the cost that remains constant regardless of the level of activity or production, while another portion varies in direct proportion to changes in the activity or production level.
Characteristics of Semi-Fixed Costs:
- Fixed Component: A base cost that remains constant and does not change, irrespective of the volume of production or business activity.
- Variable Component: The cost that varies based on the volume of production or activity level.
The formula to represent a semi-fixed cost is:
Total Semi-Fixed Cost = Fixed Cost + (Variable Cost per Unit × Number of Units)
Where:
- Fixed Cost is the static portion of the cost.
- Variable Cost per Unit is the cost per unit that varies with production.
- Number of Units represents the level of activity or production.
To determine the fixed and variable components of a semi-fixed cost, cost accountants often use techniques like the high-low method, scatter graph method, or regression analysis.
It’s worth noting that semi-fixed costs can be challenging for budgeting and forecasting since they don’t fit neatly into purely fixed or purely variable categories. Properly understanding and estimating both components is crucial for accurate financial planning.
Example of a Semi-Fixed Cost
Let’s use a utility bill for a manufacturing facility as an example of a semi-fixed cost.
Utility Bill for XYZ Manufacturing Facility
XYZ Manufacturing pays a utility provider for electricity. The bill has two components:
- Fixed Charge: A monthly base fee of $500, which is charged irrespective of the amount of electricity consumed. This fixed fee covers the infrastructure and the availability of electricity to the facility.
- Variable Charge: A charge based on actual electricity consumption, billed at $0.10 per kilowatt-hour (kWh).
Scenario A: Low Production Month
In January, due to low demand, the facility operates minimally and consumes 2,000 kWh.
Utility Cost for January:
Fixed Charge: $500
Variable Charge: $0.10 x 2,000 kWh = $200
Total Utility Cost for January: $500 + $200 = $700
Scenario B: High Production Month
In July, there’s a surge in orders. The facility operates at full capacity and consumes 10,000 kWh.
Utility Cost for July:
Fixed Charge: $500
Variable Charge: $0.10 x 10,000 kWh = $1,000
Total Utility Cost for July: $500 + $1,000 = $1,500
From this example, we can see that the utility bill for the manufacturing facility has a fixed component of $500 every month, regardless of electricity consumption. On top of that, there’s a variable cost that changes based on the facility’s activity level.
In January, with low production, the total cost was $700. In July, with high production, the total cost was $1,500. The variation in total cost between the months is due to the variable component of the semi-fixed cost.
