Calculating and Separating Semi-Variable Costs
Semi-variable costs, also known as “mixed costs,” include both fixed and variable rates. An easy way to understand these costs is to consider a cell phone bill: consumers pay a fixed rate for their plan each month, but that bill may increase with additional text messages or long distance calls. This bill, then, would constitute a semi-variable expense.
Common Semi-Variable Expenses
The most common semi-variable expense for manufacturers is electricity. Manufacturing companies rely heavily on machinery to complete production tasks, but the frequency with which that technology is actually put to use will vary with consumer demand and volume of production. Thus, a company will pay a certain amount of money each month to keep a warehouse open (this sum will likely include lighting costs, for example), but portions of this electric bill (i.e. those reflecting the cost to run machines) will increase during particularly busy periods and decrease in downturns.
A company can calculate its mixed costs by gathering information with regards to its fixed costs, variable costs, and overall activity. Specifically, semi-variable costs can be calculated via the following equation: Y=-a+bX. In this formula, Y represents the total mixed cost, a stands for fixed cost, b equals the variable cost per unit, and X represents the level of company activity. A company producing 100 units of product with fixed expenses of $30,00 and a variable cost of $5 per unit would thus have $35,000 in semi-variable expenses, based on the following equation: Y=30,000+(5x100).
High and Low Point Method: Part 1
The variable and fixed rates of a mixed cost can also be isolated by using the high and low point method, a two step process which first estimates variable cost by dividing a change in cost by change in activity. These calculations require an analysis of company activity at its lowest and highest points, deemed “first point” and “second point,” respectively. The formula for this method is: variable costs=(Y2-Y1)/(X2-X1), where the y variables equal cost at the alternate points of activity, and the x variables equal those points of activity themselves.
High and Low Point Method: Part 2
After calculating the total variable cost via the method described above, the fixed cost can then be determined by subtracting the variable elements from the total documented costs. For example, if a company spends a total of $10,000 and calculates a variable cost of $5,000, then the fixed cost would amount to $5,000. This formula provides a simplified method for estimation, but because it only analyzes companies at their opposite extremes, it is not always perceived as the most accurate calculation of fixed and variable rates.
Almost every company employs some version of semi-variable costs. Even a business whose input and output displays an inordinate level of regularity might pay their employees a variable commission on top of a fixed salary. Inevitable maintenance for machinery and the cost of equipment replacement also constitute variable expenses, which would be added to the fixed cost of keeping those machines running—thus making up a semi-variable total.