What Is Semi Variable Cost
According to every single system that prevails in the world, the cost of any item is subjected to various changes. It is dependent on the factors that could cause the change in the price. This arises from the concept of cost variability. In this article, students will get to know more about fixed variable and semi variable cost.
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Fixed Variable And Semi Variable Cost
There are different costs for various items that are presented in the market for sale. Some of the costs of the items are subjected to changes. These changes give rise to the concept of variable pricing. There are three different types of cost. These are fixed cost, variable cost, and semi variable cost. Details about all these different types of costs are provided below.
Fixed Cost
The cost of an item that is not subject to any changes during a short period of time is known as a fixed cost. This can be irrespective of the production volume as well as the sales of the item. The cost generally is a constant for the basic operations of the business. It is also known as basic operating cost. This cost is pretty crucial and cannot be avoided for sure. Fixed cost value can be used for determining the product cost in general. It can also tell people about the losses and profits that are incurred by the business.
Here is an example of fixed costs. A person is living in a place for rent. The price of the rent for that particular place is negotiated and placed on the rent agreement. This cost of rent will not change during the period in which the person will be living there. Another example of fixed cost is the property tax that people have to provide. These types of costs are incurred usually at some regular intervals. Another term for fixed costs is period costs.
Variable Cost
Variable costs can be defined as the costs that tend to vary a lot according to the variations in the output of the organization. The number of goods and services that are produced by the organization can also be a factor in deciding the variable cost. In layman's terms, it can be said that variable costs tend to vary according to the variations in the output.
With the increase in sales, the variable cost might also change. Variable cost is pretty different than the semi variable cost example. An example of variable cost can be provided with a bakery where the price of flour tends to change. Other businesses also have examples of variable costs that are determined by the output that the business has or the raw materials that it produces.
It can be seen from the above-mentioned examples that variable costs are subject to a lot of changes. These changes are proportional to the change in the output or the production volume of the organization or the company. Hence, it can be said without a single speck of doubt that the prices or costs that tend to change proportionally with the units that are produced can be called variable costs. Direct expenses, direct materials, direct labors, etc. are some examples of variable costs.
In the next section, students will learn about the semi variable cost.
Semi-Variable Cost
When it comes to semi-variable cost, it has elements from both fixed cost and variable cost. So, the components of fixed as well as variable costs combine to form a semi variable cost example. In this case, the cost of an item or a product will remain the same or fixed up to a certain extent of production level. In case the volume of production changes after that level, the cost of the item will also end up changing. The portion that remains as a fixed cost can be referred to as the base level price and the portion that varies after the crossing of the production volume is being referred to as the additional cost. This additional cost might change according to the changes in the volume of production.
Semi-Variable Cost Formula
The semi variable cost formula is mentioned right here. With the help of this formula, one will be able to decide the semi-variable cost in the best way.
Cost (C) = x + Ny; where ‘N’ can be deemed as the number of units that anyone has consumed. This excludes the 1 GB that cost the person x rupees.
There are two different terms included in the formula for semi variable expenses. We have the fixed cost part and the variable cost part.
Semi-variable cost = Fixed cost + variable cost
Variable cost per unit = change in cost/change in output
For that reason, the semi-variable cost can also be called semi-fixed or mixed cost.
Fixed variable and semi variable cost are the basic three types of costs that are associated with the price of a product. These three types have distinct properties and characteristics.
FAQs on Semi Variable Cost
1. What is a semi-variable cost, with a common business example?
A semi-variable cost, also known as a mixed cost, is a business expense that contains both fixed and variable components. The cost remains fixed up to a certain level of activity and then becomes variable once that level is exceeded. A common example is a company's electricity bill, which often includes a fixed monthly charge (the fixed portion) and additional charges based on the amount of electricity consumed during production (the variable portion).
2. How does a semi-variable cost differ from a purely variable cost?
The key difference lies in their behaviour with changes in business activity. A purely variable cost, like raw materials, changes in direct proportion to the volume of output, starting from the very first unit produced. In contrast, a semi-variable cost has a base amount that remains fixed regardless of output, and the variable part only begins to increase after a specific activity threshold is met.
3. How is the formula for semi-variable cost applied in accounting?
The formula for a semi-variable cost is used to break down the total cost into its fixed and variable parts for analysis. The standard formula is Y = a + bx, where:
- Y is the Total Semi-Variable Cost.
- a is the Total Fixed Cost component.
- b is the Variable Cost per unit of activity.
- x is the level of activity or number of units.
4. Why is it important for a business to segregate semi-variable costs into fixed and variable components?
Segregating semi-variable costs is crucial for effective managerial decision-making. It allows a business to accurately forecast expenses, perform break-even analysis, set appropriate product prices, and create flexible budgets that adjust to different levels of production. Without segregation, it is difficult to predict how total costs will change, hindering financial planning and control.
5. Can factory labour be considered a semi-variable cost? Explain with an example.
Yes, factory labour can be a semi-variable cost. For example, a company may employ a core team of salaried supervisors whose pay is a fixed cost. However, as production orders increase, the company may need to pay its hourly workers for overtime or hire temporary staff. These additional wages are a variable cost because they depend directly on the production volume. The total labour expense, combining fixed salaries and variable wages, is therefore semi-variable.
6. In a restaurant, what is a typical example of a semi-variable cost?
In a restaurant, the cost of maintenance and repairs is a typical semi-variable cost. There might be a fixed annual maintenance contract for kitchen equipment, which is paid regardless of how many customers are served. However, the cost of repairing equipment that breaks down due to heavy use (e.g., during a busy holiday season) would be a variable component, as it directly relates to the level of business activity.
7. How does a semi-variable cost graph visually represent its fixed and variable nature?
A semi-variable cost graph visually shows its dual characteristics. The line on the graph does not start at the origin (0,0); instead, it begins on the Y-axis (Cost) at the level of the fixed cost component. This shows that a cost is incurred even with zero activity. The line then remains horizontal for a certain range before sloping upwards, which represents the variable cost being added as the activity level (X-axis) increases.
