Semi-Variable Costs: Definition
It is sometimes not possible to classify a cost as either fixed or variable. When this is the case, the cost is known as a semi-variable cost. These costs contain both a fixed element and a variable cost element.
Semi-variable costs are also referred to as mixed costs or semi-fixed costs. Costs of this kind may change, but they do not change in direct proportion to changes in activity.
Another definition of semi-variable cost views it as one that varies with increases or decreases in production volume, but not proportionately. At the same time, semi-variable costs cannot remain static at all times. This is also known as a semi-fixed cost.
Semi-Variable Costs: Explanation
Semi-variable costs have some of the features of both fixed costs and variable costs. They vary with production but not in direct proportion to volume.
Although semi-variable costs are neither wholly fixed nor wholly variable in nature, they must ultimately be separated into fixed and variable components for the purpose of planning and control.
The fixed part of a semi-variable cost usually represents a minimum fee for making a particular item or service available. The variable portion is the cost charged for actually using the service.
Examples of Semi-Variable Costs
Examples of semi-variable costs include:
- Monthly telephone charges
- Indirect materials
- Indirect labor
Considering the example of monthly telephone charges in greater depth, notice that these consist of a service charge with extra charges for more telephones and long-distance calls.
The service charges are fixed but the cost of additional telephones and long-distance charges are variable because they depend on monthly use.
Maintenance is another common example of a semi-variable cost. Some level of maintenance is required to prevent the deterioration of buildings and equipment, and additional maintenance is required as the use of these assets increases.
As these examples show, semi-variable costs may be broken down into their respective fixed and variable parts to assist in cost planning and control.