Semi Variable Cost Definition Formula Calculation Examples

Semi Variable Cost Definition

In such mixed costMixed CostThe term “mixed cost” refers to a hybrid of fixed and variable costs. As a result, a part of the mixed cost remains constant while the other changes in relation to production. read more, the fixed part will occur irrespective of the production level; even in the case of zero production activities, a fixed cost will still occur. However, the variable part of such costs is dependent on the level of production work carried by the entity and increases in proportion to the production levels. That means that semi-variable costs can be calculated by adding the fixed costsFixed CostsFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more and the variable costs (based on the level of production).

Formula

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Where:

F = fixed costV = variable cost per unitX = 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, then $0.50 per call will be charged. Calculate the firm’s variable, fixed, and semi-variable costs for one month. Assume the firm makes additional 40 calls per day.

Solution:

Firm’s Fixed Cost = $ 750 per month

The fixed cost of the constant amount incurred by the firm irrespective of the number of calls made.

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

=$ (750 + 600)$ 1350

Create a sensitivity analysisSensitivity AnalysisSensitivity analysis is a type of analysis that is based on what-if analysis, which examines how independent factors influence the dependent aspect and predicts the outcome when an analysis is performed under certain conditions.read more 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, which 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-

Fixed Cost (F): $1,500,000Variable Cost per hour (V): $12,000Working hours (X): 90

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 ICC cricket world cup tournament, the factory needs to work for some extra hours to fulfill the other requirements. Therefore, the management is worried about the increment in the costsIncrement In The CostsIncremental costs are the additional costs associated with the production of one additional unit, and it only considers costs that are likely to change as a result of a specific decision, such as replacing machinery or equipment or adding a new product, and so on.read more due to additional production activities.

Consider the following information about the semi-variable cost at different production levels provided by the company’s production department 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 company’s profitability at higher levels of production.

Remember, this cost remains fixed up to a certain level of production but gradually increases upon utilization of the company’s higher levels of production capacity.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.