Variable, fixed and mixed (semi-variable) costs

As the level of business activities changes, some costs change while others do not. The response of a cost to a change in business activity is known as cost behavior. Managers should be able to predict the behavior of a particular cost in response to a change in particular business activity. For this purpose, costs are classified as variable, fixed and mixed costs. This article explains these three types of costs as well as their response to business activities.

Variable cost:

A cost that changes, in total dollar amount, with the change in the level of activity is called variable cost. A common example of variable cost is direct materials cost. Consider the following example to understand how variable cost behaves in a manufacturing company.

A mobile phone manufacturing company purchases speakers from another company at a cost of $2 per speaker. The speaker is a direct materials cost for mobile phone manufacturing company. One speaker is used to complete a mobile phone. The total and per unit cost of speakers at various levels of activity is given below:

 var-cost-behavior

Notice that the total cost of speakers increases as the mobile phones produced are increased but per unit cost remains constant.

Other examples of variable cost include lubricants, sales commission and shipping costs etc.

Fixed cost:

A cost that does not change, in total, with the change in activity is called fixed cost. A common example of fixed cost is rent. In above example, if mobile phone manufacturing company rents a building for its factory for $5,000 per month, it will have to pay $5,000 for every month even no mobile phone is produced during the month. The behavior of fixed is shown in the following figure:

fixed-cost-behavior

Total fixed cost does not change with the change in activity but per unit fixed cost changes with the rise and fall in the level of activity. There is an inverse relationship between per unit fixed cost and activity. If production increases, per unit fixed cost decreases and if production decreases, per unit fixed cost increases. To understand this point, we can use the data from the above example of mobile manufacturing company. Consider the following table:

average-cost

Notice that average fixed cost (computed in the last column) decreases as the production of mobile phones increases. It is an interesting property of fixed cost.

Mixed or semi-variable cost:

A cost that has the characteristics of both variable and fixed cost is called mixed or semi-variable cost. For example, the rental charges of a machine might include $500 per month plus $5 per hour of use. The $500 per month is a fixed cost and $5 per hour is a variable cost. Another example of mixed or semi-variable cost is electricity bill. The electricity bill can be divided into two parts – (1) line rent and (2) cost of units consumed. The line rent is not affected by the consumption of electricity whereas the cost of units consumed varies with the change in units consumed.

Prev
Next

9 Thoughts on Variable, fixed and mixed (semi-variable) costs

  1. chathumini

    Good educational web page for all kind of persons who are interested in accounting and management.

  2. Malaysia

    Simple, practical example to follow through….looking forward to learn more 🙂 Thanks alot.

  3. kingsley c. Adipuo

    The criticism in this mixed or semi variable cost is this,it does not specify the type of cost it starts with at the beginning i.e it does not start with fixed cost or variable cost.it has to start at least from one, so for students to understand it.

  4. Robert Beekman

    Semi-fixed costs are defined (by Thomas Nagle 1987) as those that are fixed over a range of output then are fixed again as a higher range of output … and so on. Sometimes known as “stepped costs”. For example if a delivery van can carry 100 cases of beer you need one van (fixed cost from 0-100 cases) but if output rises to 110 cases you need two vans (higher fixed cost from 101-200 cases). Very often confused with semi-variable costs. Semi-fixed costs are fixed within given ranges but are variable between. Employee salaries are sometime like this … fixed until you need to hire a new person.

  5. issa Dadi

    I think these two kinds of cost is likely to say the same because carry both element and also even examples is the same.. from my view…

  6. ali haji yusuf

    I,m very happy these Definition about managerial Accounting I need to Get more examples.

    Thank Very Much

  7. aisha

    helpful content along with simple and practical examples…

  8. Sharmi

    thank you very much

  9. Fatou Khan

    Thank you for the brief explanation

Leave a Comment