Mixed cost

Mixed cost
See also
Variable Cost Ratio Step cost Direct expense Segment margin Differential costing Variable overhead efficiency variance Cost per unit Step fixed cost Absorbed costs

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

Advantages of Mixed cost

Mixed cost has many advantages for companies. The following are some of the advantages:

• Mixed costs provide companies with a more accurate measure of their costs. By separating the variable and fixed elements of the cost, companies can more accurately measure the actual costs of production. This helps companies to make more informed decisions about pricing and how much to produce.
• Mixed costs also allow companies to better plan and budget for their expenses. By separating the variable and fixed components of the cost, companies can better anticipate their costs and plan accordingly. This helps them to better manage their resources and ensure that their operations are financially sound.
• Mixed costs can also help companies identify areas of their operations that can be improved. By separating out the variable and fixed elements of the cost, companies can identify areas where costs can be reduced or eliminated. This helps them to become more efficient and save money.

Limitations of Mixed cost

Mixed costs have some limitations, which can make it difficult to predict and analyze their behavior. These limitations include:

• Difficult to identify individual cost components - It can be difficult to identify the exact components of a mixed cost. In order to separate a mixed cost into its fixed and variable elements, a cost accounting system must be used.
• Not proportional to production volumes - Unlike variable costs, mixed costs do not vary in proportion with production volumes, making it difficult to predict how the cost will change in response to production changes.
• Not easily predictable - Mixed costs are not easily predictable because they include both fixed and variable elements. As production volume changes, the cost of a mixed cost can change, but it is difficult to predict how much the cost will change.

Other approaches related to Mixed cost

The following are other approaches related to Mixed cost:

• Activity-Based Costing (ABC) – ABC is a method of assigning costs to products and services based on the activities that are required to produce them. It is used to identify and assign the cost of each activity to the product or service that is being produced.
• Target Costing – Target Costing is a cost management tool used to determine the cost of a product or service in order to achieve a desired profit margin at a specified price point. It is used to help companies set prices for their products and services by determining the cost of production and the target profit margin.
• Value Engineering – Value Engineering is a process used to identify and reduce the cost of production or service delivery, while maintaining or improving the quality of the product or service. It is a systematic approach to looking for ways to make improvements in cost, quality, and delivery of goods and services.

In conclusion, Mixed cost is a type of cost that includes both fixed and variable elements and must be separated into fixed and variable costs to understand their behaviour. Other approaches related to Mixed cost are Activity-Based Costing, Target Costing, and Value Engineering.

References

• Jackson S., Sawyers R., Jenkins G. (2007) Managerial accounting: A Focus on Ethical Decision Making Fourth edition, Thomson South-Western, 102-105
• Needles B., Crosson S. (2013) Managerial Accounting Tenth edition, South-Western Cengage Learning, 169-178
• Sivabalan P., Wakefield J., Sawyers R.B., Jackson S., Jenkins G. (2018) ACCT3 Management 3rd edition, Cengage AU, 63-65
• Walther L. M., Skousen Ch. J., (2010) Cost Analysis Managerial and Cost Accounting, 14-17

Author: Emilia Zapart