Mixed Cost Definition
Mixed cost is the total cost that has the combination of two types of costs i.e. fixed costs and the variable costs and therefore implies that a part of this cost doesn’t change (fixed cost) with changes in production volume, however, the other part (variable cost) changes with the volume of quantity produced. These costs are also referred to as the semi-variable costs.
It is vital for any company to have a proper understanding of the mix of these different elements of the cost, as with the help of this, one can predict that how the costs will change at the different levels of the activity.
Like, there could be a situation when there is no activity of the production in the company. Still, there could be some portion of the mixed cost. It is so because the company has to incur the fixed cost even though no activity is there. In addition to the fixed cost, the variable cost will be there in case the company has some activity and will increase with the increase in the level of activity.
Components of Mixed Cost
It consists of two components which include the following:
- Fixed Component – The fixed component includes all those costs, the total of that does not change when the volume of the activity changes.
- Variable Component – The variable component includes all those costs, the total of that change when the volume of the activity changes. The difference in the cost will be in proportion to the change in the amount of the activity.
Mixed Cost Formula
- y is total mixed cost formula
- a is fixed cost during the period
- b is a variable rate calculated per unit of the activity
- x is number of the units of the activity
Example of Mixed Cost
There is a company XYZ ltd which is manufacturing the garments. For the production of the garments, the company has to incur the fixed cost that will remain the same without any effect of the number of units produced and the variable cost, which will increase with the increase in the level of the production of the company. The total cost of the production of the garments is the mixed cost for the company as it has both fixed costs and variable cost components.
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During the month of June-2019 total fixed cost of the company, which includes rent, depreciation, salaries, and utility expenses, comes to $ 100,000. The variable cost per unit during the same period comes to $ 10 per unit, and the number of units produced is 50,000. Calculate the Mixed Cost of the company during the period.
A mixed cost can be expressed using the below algebraic formula
y = a + bx, where:
- a is fixed cost during the period = $ 100,000
- b is variable rate calculated per unit of the activity = $ 10 per unit
- x is number of the units of the activity = 50,000 units
- Mixed Cost Formula = $ 100,000 + $ 10* 50,000
- y= $ 100,000+ $ 500,000
- y= $ 600,000
- It is crucial and necessary for any business enterprise to have the proper bifurcation of the total cost between the fixed costs and the variable costs during each period according to its level of output. Such correct measurement of fixed cost and the variable costs helps the company have an appropriate costing system and the proper budgeting. If this is not there, then the management of the company would also not be able to make the correct decision for the future.
- If there is a proper understanding of the mix of different elements of the mixed cost, then with the help of this, one can predict that how the costs will change at the different levels of the activity, and the decisions can be taken accordingly.
- Some of the costs are there, which are fixed at certain output levels but tend to differ as to the output changes.
- Another problem which the company may face many times comes when some cost is paid to the same supplier having both fixed and variable element bifurcation of which may not be readily apparent from the invoice of the supplier. The separation of the costs between the fixed and the variable becomes difficult for the company, so an appropriate method is required by the company for its separation.
- In the case of the mixed costs, some of the components behave like fixed costs, while others behave like the variable cost. The fixed component is the costs that do not change when the volume of the activity changes, while the variable is all those costs that vary in proportion to change in the size of the activity.
- It is necessary for any business enterprise to have the proper bifurcation of the total cost between the fixed costs and the variable costs as it helps to have an appropriate costing system and the appropriate budgeting in the company.
Mixed cost is the cost that changes with a change in the volume of production of the company like the variable cost, and the same cannot be eliminated entirely from the total cost of the company like the fixed cost. They are often associated with manufacturing or production. When the usage of items having mixed costs increases, then the fixed component will remain the same while the variable cost will increase with such cost increase. Proper bifurcation of the total cost between the fixed costs and the variable costs helps the management of the company to make better decisions for the company’s future.
This has been a guide to what is Mixed Cost and its definition. Here we discuss the practical examples of mixed costs along with calculation, advantages, and disadvantages. You may learn more about finance from the following articles –