Mixed Costs

11 November 2016

Definition and explanation of mixed or semi variable cost: A mixed cost is one that contains both variable and fixed cost elements. Mixed cost is also known as semi variable cost. Examples of mixed costs include electricity and telephone bills. A portion of these expenses are usually consists line rent. Line rent normally is fixed for each month. Variable portion consists units consumed or calls made. The relationship between mixed cost and level of activity can be expressed by the following equation or formula: Y = a + bX

In this equation, * Y = The total mixed cost * a = The total fixed cost * b = The variable cost per unit * X = The level of activity The equation makes it very easy to calculate what the total mixed cost would be for any level of activity within the relevant range For example, Suppose that the company expects to produce 800 units and company has to pay a fixed cost of $25,000 and a variable manufacturing cost is .

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00 per unit. The total mixed cost would be calculated as follows: Y = a + bX Y = $25,000 + ($3. 00 ? 800 units) = $27,400

A characteristic of mixed cost that needs to be understood is that we usually have to separate fixed and variable components of the total mixed cost. The analysis of mixed costs: In practice the mixed costs are very common. For example the cost of providing X-ray services to patients is a mixed cost. There are substantial fixed costs for equipment depreciation and forsalaries for radiologist and technicians, but there are also variable costs for X-ray film, power and supplies. Maintenance costs of machineries and plants are also mixed costs.

Companies incur costs for renting maintenance facilities and for keeping skilled mechanics on the payroll, but the costs of replacement parts, lubricating oil, tires, and so forth are variable with respect to how often and how far the machineries and plants are used. The fixed portion of the mixed cost represents the basic, minimum cost of just having a service available for use. The variable portion represents the cost incurred for actual consumption of the service. The variable element varies in proportion to the amount of service that is consumed .

We can now determine the amount of fixed cost as follows: Fixed cost element = Total cost ? variable cost element $9,800 ? ($0. 80 per unit ? 8,000 hours) = $3,400 Both the elements, variable and fixed , have now been isolated. The cost of maintenance can now be expressed as $3,400 per month plus $0. 80 per hour. The cost of maintenance can also be expressed in terms of the equation for a straight line as follows: Y = $3,400 + $0. 80X Some times the high and low levels of activity don’t coincide with the high and low amounts of cost.

For example, the period that has the highest level of activity may not have the highest amount of cost. Nevertheless, the highest and lowest levels of activity are always used to analyze a mixed cost under the high and low point method. the reason is that the analyst would like to use data that reflect the greatest possible variation in activity. While some costs can be classified as pure fixed or pure variable, many include elements of both types. We’ll look at several common examples of mixed costs, breaking them down into their components.

To help students better understand account principles, they are often introduced to costs as being fixed or variable. In reality, many of the costs that businesses incur fall in the middle; in essence they are mixed costs. Variable costs are the type that increase or decrease depending of the level of activity being undertaken. For example a drink company normally will not spend money for juice concentrate if it isn’t making drink products, but can expect the sum that it pays to its suppliers to rise in direct proportion to the amount of drinks it makes.

Therefore, management will not need to worry about incurring variable costs if operations are temporarily shut down. On the other hand, fixed costs remain constant with little regard to the level of production being realized. A good example of fixed costs is rent. Of course there are exceptions, but whether or not a company is using the full capacity of the facility it is renting, the rent will still become due. However, a positive characteristic of fixed costs is that they usually remain constant; and so everything that is earned after the break-even point is reached increases profit margin.

Variable costs change in relation to (and generally in proportion to) sales. Examples include: Chlorine costs for a pool-service company. (More pools serviced = more revenues = more chlorine bought). The cost of nails for a building contractor. (More houses sold = more nails bought). The cost of temporary labor for a temporary staffing company. (More temps placed = more temps hired and paid. ) The cost of paper for a printing company. (More jobs printed = more paper used)  The cost of beef for a restaurant. (You get the idea). **Costs will increase per production** f there are no production, then there are no costs therefore any ‘materials’ is an example Variable Costs and Fixed CostsAll the costs faced by companies can be broken into two main categories: fixed costs and variable costs. Fixed costs are costs that are independent of output. These remain constant throughout the relevant range and are usually considered sunk for the relevant range (not relevant to output decisions). Fixed costs often include rent, buildings, machinery, etc. Variable costs are costs that vary with output. Generally variable costs increase at a constant rate relative to labor and capital.

Variable costs may include wages, utilities, materials used in production, etc. In accounting they also often refer to mixed costs. These are simply costs that are part fixed and part variable. An example could be electricity–electricity usage may increase with production but if nothing is produced a factory still may require a certain amount of power just to maintain itself. Below is an example of a firm’s cost schedule and a graph of the fixed and variable costs. Noticed that the fixed cost curve is flat and the variable cost curve has a constant upward slope. | |

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