Semi-variable cost

Semi-variable costs are costs that have both a fixed and variable component. For example, a business that rents a building may have a monthly fixed cost for rent and a monthly variable cost for utilities.

• Fixed component: The fixed component of semi-variable costs is the portion of the cost that will remain constant regardless of the level of production or output. In the example of a business that rents a building, the fixed component of the cost is the rent payment.
• Variable component: The variable component of semi-variable costs is the portion of the cost that will vary based on production or output. In the example of a business that rents a building, the variable component is the utility bill.

Example of Semi-variable cost

Semi-variable costs can vary widely depending on the industry and the specific costs that are included. For example, a manufacturing company may have semi-variable costs such as electricity and labor.

• Electricity: Electricity is a semi-variable cost because the company will have a fixed cost for the electricity that they use, as well as a variable cost based on the amount of electricity they use each month.
• Labor: Labor is a semi-variable cost because the company will have a fixed cost for the labor they use, as well as a variable cost based on the number of hours worked.

When to use Semi-variable cost

Semi-variable costs can be used to help business owners and managers determine the total cost of production. This type of cost is especially important for businesses that have large capital investments as these costs can quickly add up. Additionally, semi-variable costs can help to predict future expenses and ensure that budgets are properly allocated.

Semi-variable costs can also be used to identify areas of potential cost savings. By recognizing and managing the fixed components of semi-variable costs, a business can ensure that it is not overspending in any areas. By tracking and managing the variable components of semi-variable costs, a business can be sure that it is not wasting money on unnecessary production costs.

Types of Semi-variable cost

• Production costs: Production costs are costs associated with the production of a product or service. Examples of production costs include labor, raw materials, and overhead. These costs are typically semi-variable in nature, as the amount of labor or raw materials used can change depending on the level of production or output.
• Administrative costs: Administrative costs are costs associated with running a business, such as rent, utilities, marketing, and staffing. These costs are typically semi-variable in nature, as the amount of rent or utilities used can change depending on the size of the business or the amount of marketing or staffing needed.
• Regulatory costs: Regulatory costs are costs associated with complying with regulations and laws. Examples of regulatory costs include insurance, fees, and taxes. These costs are typically semi-variable in nature, as the amount of insurance or fees paid can change depending on the level of production or output.

Advantages of Semi-variable cost

• Predictability: Semi-variable costs provide a degree of predictability to businesses, as the fixed component of the cost remains the same regardless of the level of production or output. This allows businesses to more accurately predict their costs.
• Flexibility: Semi-variable costs also provide businesses with a degree of flexibility, as the variable component of the cost can be adjusted to meet changing production needs.

Limitations of Semi-variable cost

• Unpredictable Nature: The unpredictable nature of the variable component of semi-variable costs can make it difficult to estimate their overall cost. For example, it can be difficult to estimate the utility bill for a certain level of production or output.
• Fixed Component: The fixed component of semi-variable costs often does not change over time, meaning that businesses will not be able to reduce their cost if production or output declines.
• Opportunity Cost: Since semi-variable costs have both a fixed and variable component, businesses may have to choose between one or the other when making decisions. This can lead to opportunity costs that may not always be considered.

Other approaches related to Semi-variable cost

• Activity-based costing: Activity-based costing is a method of assigning costs to products or services based on the activities required to produce them. This method is useful for understanding which costs are associated with specific activities and for making decisions about which activities to cut or keep.
• Marginal costing: Marginal costing is a method of costing that considers only the incremental costs associated with producing additional units of a product or service. This method of costing is useful for making decisions about pricing and production levels.

Semi-variable cost — recommended articles

Fixed overhead — Manufacturing cost — Fixed cost — Manufacturing overhead (MOH) — Process costing — Committed cost — Applied overhead — Direct labor — Labor and material

References

• Cokins G. (2001). Activity-Based Cost Management, John Wiley & Sons, Inc., London, p. 354.
• Dury C. (2008). Management and Cost Accounting, South Western Centage Learning, London.
• Horngren Ch. T. (2012). Cost Accounting. A Managerial Emphasis, Prentice Hall, Boston.
• Kaplan R.S. (2013). Advanced Management Accounting: Pearson New International Edition, Pearson Education Limited, Pearson, p. 65-93.
• Stiglitz J.E. (2005). Principles of Microeconomics, W.W. Norton&Company, New York, London, p. 135-167.
• Walther L.M. (2009). Managerial and Cost Accounting, CreateSpace Independent Publishing Platform, California.