Semi Variable Costs

Semi Variable Costs Definition

Semi variable costs are costs that include both a fixed and a variable component. They are also called mixed costs.

Semi-Variable Cost Example 1

For example, 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, then 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. For example, 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. Then they charge $0.015 per kilowatt hour (kwh). In this example, the flat rate of $300 dollars per month is the fixed cost component. And the variable cost component is $0.015 per kwh.

If the manufacturing company uses 50,000 kwhs of electricity in a particular month, then 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, then its electric bill would be $1,800 dollars. ($1,800 = $300 + ($0.015 x 100,000kwhs)).

Accounting Treatment

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.

semi variable costs

Source:

Barfield, Jesse T., Michael R. Kinney, Cecily A. Raiborn. “Cost Accounting Traditions and Innovations,” West Publishing Company, St. Paul, MN, 1994.

See Also:
Variable vs Fixed Cost
Absorption vs Variable Costing
Product Costs vs Period Costs
Sunk Costs
How to Estimate Expenses for an Annual Budget

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