Semi Variable Cost Definition
Semi-variable cost can be defined as the mixture of the fixed cost as well as the variable cost where the fixed costs are set at certain production level and exceeding fixed cost it becomes variable costs, for example, electricity bill etc. and its behavior depends partially on fixed & variable costs because of which these costs are also known as mixed cost.
In such mixed cost, the fixed part will occur irrespective of the level of the production, even in case of zero production activities, a fixed cost will still incur. However, the variable part of such costs is totally dependent on the level of production work carried by the entity and increases in proportion with the production levels. That means that semi-variable costs can be calculated by adding the fixed costs and the variable costs (based on the level of production).
Formula
Where:
- F = fixed cost
- V = variable cost per unit
- X = total production in units
Examples of Semi Variable Cost
Example #1
The best examples to understand this concept are the expenses related to telephone and electricity:
Telephone Bills: – A firm has a landline telephone connection with a plan to make 100 calls per day. The plan costs $750 per month; however, if the firm makes more calls, than a rate of $0.50 per call will be charged. Calculate the variable, fixed, and semi-variable costs for the firm for 1 month. Assume firm makes additional 40 calls per day.
Solution:
Firm’s Fixed Cost = $ 750 per month
This constant amount incurred by firm irrespective of the number of calls made is the fixed cost
Total Variable Cost = Variable Cost Per Unit * Additional calls per month
- =0.5 * (40*30)
- =$ 600 per month
Semi-Variable Cost Formula = Fixed Cost + Total Variable Cost
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- =$ (750 + 600)
- $ 1350
Create a sensitivity analysis of the cost for the telephone bills of the firm and create a graphical presentation.
Graphical presentation of mixed cost for monthly charges is as follows-
Example #2
The production dept of a company incurs fixed expenses of $1.5 million per month while operating on its minimal capacity. Due to a big urgent order, it has to work for an additional 90 hours in the month. The company provides the data regarding its variable costs that consist of electricity bills, telephone bills, raw material expenses, and salaries to be $12000 per hour. The company wants to calculate its total semi-variable cost.
We have the following data for the calculation of cost-
Calculating the total mixed cost:
- T = F + VX
- =1,500,000 + (12000 * 90)
- =1,500,000 + 1,080,000
- =2,580,000
Example #3
Let’s say, Admiral Sportswear Pvt. Ltd, an international sportswear manufacturing company, located in England. For the upcoming tournament of the ICC cricket world cup, the factory needs to work for some extra hours to fulfill the other requirements. The management is worried about the increment in the costs due to additional production activities.
Consider the following information about the semi-variable cost at different production levels provided by the production department of the company to calculate the variable cost and the fixed cost.
Given:
Calculating the variable portion (per unit)
#1 – Difference between the units of output and related Cost
#2 – Variable cost per unit
Divide the calculated difference cost by quantity:
- = £9,000,000 / £ 400000
- = £22.50
#3 – Calculating Fixed cost
- = £ 50,00,000 – £ 22,50,000
- = £ 27,50,000
#4 – Rechecking the results: by adding the fixed cost to the total variable costs (at 500000 units). The result should be the total cost as given.
Refer above-given excel sheet for detailed calculations.
Conclusion
Semi variable cost has components of both variable and fixed expenses; hence it becomes vital for companies to consider while planning for additional production activities. Ignorance or inefficient management of costs may limit the profitability of the company at higher levels of production.
- Remember, this cost remains fixed up to a certain level of production but gradually increases upon utilization of higher levels of production capacity of the company.
- Refer to the graph shown in example 1, where telephone bills remain constant up to a certain limit and with additional usage, the bill amount gradually rises.
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