Semi Variable Cost

Semi Variable cost, also known as mixed cost, is the cost which has both fixed and variable cost features. Fixed cost is the cost that remain the same regarding the production unit. Variable cost is the cost that will change depending on the production unit. So the semi-variable will remain the same at some certain units and it will increase after the production unit reach a certain level. One part of the cost will be fixed and other parts of the cost will fluctuate depending on the production units or business activities.

Understanding the nature of semi-variable cost will help to forecast cost and target profit in each certain stage of production. We need to identify the fixed portion which is the base cost and the variable portion which will change base on production.

Variable costs are an important element to consider when managing a business. These costs vary with production volume, meaning that they can increase or decrease based on how much is being produced. For example, if a business is producing a large amount of product, the raw materials needed will be greater and the direct labor required will increase. Variable costs can fluctuate pretty dramatically, so it’s important for businesses to keep tabs on these costs and adjust production levels accordingly.

Examples of variable costs include raw materials, commissions, and direct labor. The total variable cost is the sum of all the variable costs incurred in producing a good or service.

A fixed cost is a type of business expense that does not vary with the amount of goods or services produced or sold. Fixed costs are also sometimes referred to as overhead costs. Common examples of fixed costs include rent, insurance, and salaries. These kinds of expenses are often incurred regardless of how much revenue a business generates.

Most businesses have a combination of fixed and variable costs. For decision-making purposes, it is often helpful to divide total costs into these two categories. This is because fixed costs remain the same regardless of how much is produced while variable costs change with production volume. As a result, variable costs are often more closely associated with revenue and profit than fixed costs. For this reason, businesses often focus on reducing variable costs when they are trying to improve profitability.

Semi Variable Cost Example

For example, the semi-variable cost may include the following cost such as:

• Commission to the salesperson: The company will pay a fixed amount to the employees who work in the sales department. But it will increase to a new level when sales increase to a certain level.
• Monthly Telephone charge: the phone company charge us $10 per month and allow us to make a call of 100 minutes. If we use more than 100 minutes, we will be charged $ 0.2 per minute.
• Indirect Labor: indirect labor such as security guards who ensure safety in the factory and prevent any theft or burglar. The company will pay a fixed salary to them, however, if the factory expands, we need to increase the number of security guards too.
• Repair & maintenance: The machinery usually requires paying the fixed costs on a monthly basis to operate them efficiently. However, the cost will increase when the machine breaks down.

Advantage of Semi Variable Cost

Semi-variable cost is a type of business expense that consists of both fixed and variable costs. This cost is also known as a mixed cost. Semi-variable costs are pervasive in the normal course of business and offer some valuable insights for business decision-makers.

If the company can identify the semi variable cost, it will provide some benefit to the business such as:

• Setting the price of a product is a complex task that takes many different factors into consideration. One of the most important factors is the cost of production. By understanding how much it costs to produce a product, decision-makers can ensure that the price reflects the true cost of making the item. This information can also help to inform decisions about how to improve the efficiency of production or where to source cheaper materials.
• A company needs to understand the concept of fixed and variable costs in order to control the cost. If a company does not have a good grasp of these concepts, it will be difficult to make informed decisions about how to reduce costs. Mixed cost is the combination of both. If the company classified it as a fixed or variable cost, it will have a huge impact on the decision-making as well.

Disadvantage of Semi-Variable Cost

Wrong classification: It is not easy to classify the semi-variable cost. This cost classification consists of both variable and fixed costs. Most of the time, the company will consider it as a fixed cost. They are not sure about the level of fixed cost that will remain the same until it starts to increase alongside the production unit.