Semi variable costs are a mixture of fixed costs and variable costs. It has two components:
- One that varies with the change in level of production/ activity (variable component).
- One that remains constant and is not dependent on the level of production/ activity (fixed component).
The total cost function (y = a + bx) can be used to estimate costs at different activity levels and is particularly useful in forecasting and decision making. If fixed component and variable component are unknown, the total cost function can be constructed using high low method or linear regression analysis.
Formula: Semi variable cost
y = a + bx
y = total semi variable cost or total cost
a = fixed component of the semi variable cost
b = variable component of the semi variable cost
x = number of units of output or the volume of activity
Example: Semi variable cost
A telephone bill has two components;
- Line rent of $ 200 per month (fixed component)
- Call charges of $ 2 per minute of phone call (variable component)
Work out total cost and cost per minute of telephone usage for each month if 500, 1000 and 1500 minutes were used in the months of January, February and March respectively.
|No. of minutes||500||1000||1500|
|Call charges per minute||$2||$2||$2|
|Total call charges (variable element)||$1,000||$2,000||$3,000|
|Line rent (fixed element)||$200||$200||$200|
|Unit cost or cost per minute of telephone usage||$ 2.4||$ 2.2||$ 2.13|