Semi-Variable Cost
A semi-variable cost, also known as a mixed or semi-fixed cost, is a cost that contains both fixed and variable components. It doesn’t change strictly in direct proportion to the level of activity or production, nor does it remain completely constant regardless of the level of activity.
Here’s a breakdown:
- Fixed Cost: This remains constant regardless of the volume of production or the level of activity. For example, the monthly rent for a factory or shop is a fixed cost because it remains the same whether the factory produces one unit or thousands of units.
- Variable Cost: This changes in direct proportion to the volume of production or activity. If a factory produces more units, its variable costs increase. For instance, the cost of raw materials required to produce a product is a variable cost. If you produce more products, you need more raw materials, hence the cost increases.
Semi-variable costs, as the name implies, combine elements of both. For example, a mobile phone bill might have a fixed monthly charge (a constant amount that’s charged regardless of how much the phone is used) plus a variable charge that depends on the amount of data used beyond a certain limit.
Another example might be a salesperson’s pay structure: a fixed monthly salary plus a commission that varies with the number of products sold.
When analyzing semi-variable costs, it can be helpful to split them into their fixed and variable components, especially when engaging in cost forecasting or when trying to understand the cost behavior in different scenarios.
Example of a Semi-Variable Cost
Let’s use the example of a delivery truck for a small business:
Scenario: A business owns a delivery truck that is used to transport goods to its customers. The business incurs certain costs associated with operating this truck.
Semi-Variable Cost: Truck Operating Cost
- Fixed Component: The truck’s insurance and regular monthly loan payments (if it’s not fully paid off) would be the fixed costs. No matter how much or how little the truck is used during the month, these costs remain the same.
- Variable Component: The fuel and maintenance costs for the truck are variable. The more the truck is used, the more fuel it consumes and the more wear and tear it undergoes, leading to higher maintenance costs.
Let’s say the monthly insurance and loan payments total $400 (fixed cost), and for each delivery, it costs $20 in fuel and maintenance (variable cost).
Calculation:
- In a month where no deliveries are made: The total truck operating cost = $400 (fixed component)
- In a month where 50 deliveries are made: The variable cost = 50 deliveries x $20/delivery = $1000 The total truck operating cost = $400 (fixed) + $1000 (variable) = $1400
- In a month where 100 deliveries are made: The variable cost = 100 deliveries x $20/delivery = $2000 The total truck operating cost = $400 (fixed) + $2000 (variable) = $2400
From the example, it’s clear that there’s a fixed cost element that doesn’t change, but there’s also a variable component that changes based on the number of deliveries made. This combined cost behavior is what defines a semi-variable cost.
