Semi Variable Costs
Semi-Variable Cost Example 1
Here is an example of a semi variable cost. Let’s say you subscribe to a phone service that charges $40 dollars per month, plus $0.10 per minute for each additional minute beyond 500 minutes per month.
If you talk for less than 500 minutes per month, the cost is $40 dollars per month. Beyond 500 minutes, the cost increases. This is an example of a semi variable cost. The flat rate of $40 dollars for 500 minutes is the fixed cost component. The additional $0.10 per minute for each additional minute beyond 500 minutes is the variable cost component.
Semi-Variable Cost Example 2
Here is an example of a slightly different type of semi variable cost. Let’s say a manufacturing company has an electric bill that uses semi variable cost, including a fixed cost component and a variable cost component.
The electric company charges the manufacturing company a flat monthly rate of $300 dollars per month for basic electricity service, and then charges $0.015 per kilowatt hour (kwh). In this example, the flat rate of $300 dollars per month is the fixed cost component. And the $0.015 per kwh is the variable cost component.
If the manufacturing company uses 50,000 kwhs of electricity in a particular month, its electric bill would be $1,050 dollars. ($1,050 = $300 + ($0.015 x 50,000kwhs)). And if the manufacturing company uses 100,000 kwhs of electricity the following month, its electric bill would be $1,800 dollars. ($1,800 = $300 + ($0.015 x 100,000kwhs)).
Cost accountants typically separate semi variable costs into their two distinct components – the fixed cost component and the variable cost component – when dealing with semi variable costs. Treat the fixed cost component separately as a fixed cost; then treat the variable cost component separately as a variable cost. This may cause a differentiation of cost that does not reflect economic reality, but it makes it easier to handle and examine the effects of semi variable costs.
Barfield, Jesse T., Michael R. Kinney, Cecily A. Raiborn. “Cost Accounting Traditions and Innovations,” West Publishing Company, St. Paul, MN, 1994.