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 become variable after this production level is exceeded. If no production occurs, a fixed cost is often still incurred.
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 the activity level 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. A semi-variable cost and analysis of 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 building functioning at a minimal level. However, if production doubled and additional machines are run using more electricity, the cost may be $1,800 for the month.
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. In a typical cellphone billing contract, a monthly flat rate is charged in addition to overage charges based on excessive bandwidth usage. Also, a salesperson’s salary typically has a fixed component, such as a salary, and a variable portion, such as a commission.
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 usage. Other expenses, including gasoline and oil, are related to the use of the vehicle and reflect the variable portion of the cost.