What Is a Semi-Variable Cost?
A semi-variable cost, also known as a semi-fixed cost or a mixed cost, is a cost composed of a mixture of both fixed and variable components. Costs are fixed for a set level of production or consumption, and they become variable after this production level is exceeded. If no production occurs, a fixed cost is often still incurred.
- Semi-variable costs have both a fixed component and a variable component.
- The fixed portion of a semi-variable cost remains constant despite changes in activity volume.
- The variable portion of a semi-variable cost changes with increases and decreases in activity volume.
- Examples of semi-variable costs include telephone bills and vehicle expenses.
Understanding Semi-Variable Costs
The fixed portion of a semi-variable cost is incurred no matter the activity volume, while the variable portion occurs as a function of the activity volume. Management may analyze different activity levels by manipulating each one to change the 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 on a company’s financial statements. Therefore, a semi-variable cost may be classified into any expense account such as utility or rent, which will show up on the income statement. The analysis of semi-variable costs and its components is a managerial accounting function, for internal use only.
Examples of Semi-Variable Costs
The fixed portion of a semi-variable cost is fixed up to a certain production volume. This means semi-variable costs are fixed for a range of activity and may change beyond that for different activity levels.
For example, electricity costs for a production facility may be $1,000 per month just to keep the lights on and the building functioning at a minimal level. However, if production doubled and additional machines are run using more electricity, the cost may increase to $1,800 for the month. In this example, $1,000 is the fixed component and $800 is the variable component.
Overtime on a production line has semi-variable features. 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 variable expenses dependent on the activity level.
Maintenance can be a semi-variable cost, given that a certain level of maintenance is necessary to prevent equipment deterioration, and additional upkeep may be required as use of the asset increases.
In a typical cellphone billing contract, a monthly flat rate is charged. However, it's possible to incur additional variable charges such as overage charges based on excessive bandwidth usage.
A salesperson’s pay structure typically has a fixed component, such as a salary, and a variable portion, such as a commission. Similarly, an executive's pay structure may have a fixed component, such as salary, and a variable portion, such as an annual bonus.
A business experiences semi-variable costs in relation to the operation of fleet vehicles. Certain costs, such as monthly vehicle loan payments, insurance, depreciation, and licensing are fixed and independent of vehicle usage. Other expenses, including gasoline and oil, are related to the use of the vehicle and reflect the variable portion of the cost.
What Are Examples of Semi-Variable Costs?
Examples of semi-variable costs include:
- Repairs and maintenance
- Telephone bills
- Electricity costs
- Vehicle expenses
What Are Two Features of Semi-Variable Costs?
Semi-variable costs have both a fixed cost and a variable cost portion. It is important to identify the fixed and variable portions of a semi-variable cost because management can use the information to project cost changes based on variable production output.
Is Salary a Semi-Variable Cost?
Salary is typically a fixed expense. However, certain pay structures are semi-variable. For example, an executive may have a fixed salary but also be eligible for a variable annual bonus.
The Bottom Line
Semi-variable costs have features of both fixed costs and variable costs. The fixed portion remains the same, regardless of the activity. But the variable costs rise or fall based on the activity level. Separating out the fixed costs from the variable ones can be used by company managers to plan and control costs.