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Semi-variable cost is an expense which contains both a fixed-cost component and a variable-cost component. The fixed cost element shall be a part of the cost that needs to be paid irrespective of the level of activity achieved by the entity. On the other hand the variable component of the cost is payable proportionate to the level of activity.
It shows similarities to telephone bills. One must pay line rental and on top of that a price that depends on how heavy one is using the service. So it changes with output. Another example is satellite television. A price for the box must be paid monthly and to get additional movies, more money has to be given.
Cost of energy, such as electricity, is a good example as it is integral to production of goods and services. This component straddles both the fixed and variable universe because electrical power is essential for the basic operation of the business in lighting and heating – this portion is a sunk cost that is foregone regardless of production. As demand ramps up, more energy is required to ramp up the production process in the use of machinery or large banks of computers for instance. Cost of electrical energy will then rise accordingly as production activities increase. Therefore, the cost of electricity can be viewed as semi-variable.
Take the highest output and costs. Take the lowest output and costs. Take one from the other = movement in cost per unit Calculate variable cost per unit Put back into highest total cost and rework variable cost to the output, leaving fixed cost.
General form of semi-variable cost
The relationship between mixed cost and level of activity can be expressed by the following equation.
Y = a + bX
In this equation,
* Y = The total mixed cost * a = The total fixed cost * b = The variable cost per unit * X = The level of activity
The equation makes it very easy to calculate what the total mixed cost or an unknown factor(fixed cost/variable cost/level of activity)
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