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.

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 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 to pay the fixed costs on a monthly basis to operate them efficiently. However, the cost will increase when the machine breaks down.