Definition of semi-variable cost
What is a semi-variable cost?
A semi-variable cost, also called semi-fixed cost or mixed cost, is a cost made up of a mixture of fixed and variable components. The costs are fixed for a determined level of production or consumption and become variable once this level of production is exceeded. If no production takes place, a fixed cost is often still incurred.
Understanding semi-variable costs
The fixed part of a semi-variable cost is incurred regardless of the volume of activity, while the variable part occurs according to the volume of activity. Management can analyze different activity levels by manipulating the activity level to modify variable costs. A semi-variable cost with lower fixed costs is favorable for a business because the break-even point is lower.
Generally accepted accounting principles (GAAP) do not require a distinction between fixed and variable costs. These costs are not distinguished in a company’s financial statements. Therefore, a semi-variable cost can be classified in any expense account such as utilities or rent, which will appear on the income statement. A semi-variable cost and the analysis of its components is a management accounting function for internal use only.
Examples of semi-variable costs
The fixed part of a semi-variable cost is fixed up to a certain production volume. This means that the semi-variable costs are fixed for a range of activities and may change beyond that for different levels of activity. For example, the electricity costs for a production facility can run up to $ 1,000 per month just to keep the lights on and the building operating at a minimum. However, if production has doubled and additional machines are used using more electricity, the cost can be $ 1,800 for the month.
Overtime on a production line has semi-variable characteristics. If a certain level of labor is required for production line operations, this is the fixed cost. Any additional production volume that requires overtime results in varying expenses depending on the level of activity. In a typical cell phone billing contract, a monthly flat rate is billed in addition to overage charges based on excessive bandwidth usage. In addition, a salesperson’s salary generally has a fixed component, such as a salary, and a variable component, such as a commission.
A business experiences semi-variable costs associated with operating fleet vehicles. Some costs, such as monthly car loan payments, insurance, depreciation, and registration are fixed and independent of use. Other expenses, including gasoline and oil, are related to the use of the vehicle and reflect the variable portion of the cost.