Mixed cost

Mixed cost
See also

Mixed cost (also called semi variable or semi fixed ) includes fixed and variable element, which means that it is hard to predict how the cost changes when the production changes (unless cost is first separated into variable and fixed elements). Mixed costs grow at a steady pace, which is characteristic for variable costs, but they do not vary in proportion with production volumes. Along with the production of more units, the cost per unit decreases, which shows the characteristics of fixed costs. If cost changes in total and also per unit it means that it is mixed cost. A mixed cost has element that is constant despite of production volume. Mixed costs must be separated into fixed and variable costs to understand their behaviour.

Examples of mixed cost

Mixed costs change with volume or usage. Simple example of mixed cost is heating or electrecity. When it comes to the cost of electricity, we pay for monthly service, (fixed cost) but also per kilowatt-hour we used in month (variable cost). Telephone charges are also mixed costs. We pay fixed amount for subscription, but if we make more phone calls than what we have included in the contract, we have to pay extra.

High-Low method

High-low method is probably the simpliest technique to separate variable and fixed components of mixed costs. The variable cost is the difference in cost between the highest and the lowest level of activity. The cost difference is divided by activity difference to determine a variable cost for each additional unit of activity. However this method is not very accurate. The highest and the lowest point are not well precised in every case, therefore, calculations may be inaccurate.

\({Variable\ Cost\ Per\ Unit} = \frac{Highest\ Activity\ Cost\ -\ Lowest\ Activity\ Cost}{Highest\ Activity\ Units\ -\ Lowest\ Activity\ Units} \)

To calculate fixed cost you can subtratct variable cost (per-unit variable cost multiplied by the activity level) from total cost

\( Fixed\ Cost = Highest\ Activity\ Cost - (Variable\ Cost\ Per\ Units \cdot Highest\ Activity\ Units) \)

Regression analysis

Least squares regression is the name of the technique that is used to estimate the fixed and variable components of a mixed cost. Regression analysis is statistical tool, which uses least squares regression to fit the best cost line (called regression line) through a number of data points. This line the best expresses cost behavior. It is a line that minimizes the sum of the squared distances from each data point to the line. A dependend variable is on the Y axis and independent variable on the X axis. You can use a spreadsheet program to make regression analysis, like Excel.

Cost-Volume-Profit (CVP) Analysis

Cost-volume-profit (CVP) analysis examines the relationship between cost, volume of output and profit. CVP analysis is mainly used for a single product, product line or division of a company. In CVP analysis profit and operate income mean the same thing.

\( Sales\ Revenue\ -\ Variable\ Costs\ -\ Fixed\ Costs = Profit \)

\( (Sales\ [[Price]]\cdot Units\ Sold)\ -\ (Variable\ Rate \cdot Units\ Sold) - Fixed\ Costs = Profit \)

CVP analysis shows financial activity. It helps managers estimate how changes affect profit. CVP analysis allows planning managers to calculate net income when the sales volume is known and they are also able to determine the level of demand for sales. CVP analysis is also used in budgeting, it examines if organisation's department is performing well.

CVP analysis makes decisions about:

  • product pricing
  • product mix
  • product line
  • accepting special orders

References

Author: Emilia Zapart