Definition of Semivariable Costs
Semivariable costs are costs or expenses whose behavior is partially fixed and partially variable. That is, part of the total cost does not increase or decrease as an activity changes within a reasonable range of activity, while another part of the total cost increases as an activity increases and it decreases as the activity decreases. Semivariable costs are also referred to as mixed costs.
The equation for a semivariable cost is Total Cost = Fixed cost + Variable cost rate X Activity.
Examples of Semivariable Costs
A common example of a semivariable cost is the annual cost of operating a vehicle. Some of the vehicle’s total annual operating costs will be the same regardless of the miles driven. These fixed costs include depreciation, insurance, and licensing. On the other hand, the vehicle’s total fuel costs will vary with the miles driven.
A manufacturer’s electricity cost is another example of a semivariable cost. Each month’s electricity bill will consist of the following amounts:
- A fixed amount based on the manufacturer’s peak electricity usage (since the utility must build and maintain the generating capacity to provide electricity on peak demand days)
- A variable amount based on the number of kilowatt hours of electricity actually used by the company
The manufacturer’s electricity cost is also semivariable in relation to the company’s machine hours. The portion of the electricity cost used to operate the production equipment is variable, but the portion of the electricity cost used to light and air condition the manufacturing facility is fixed.
These simple examples show it can be difficult to understand how costs behave. After all there are many factors, activities, and drivers that influence the level of costs.
