Mixed Costs

Mixed costs ⇒ have both a fixed and a variable component. An example of a mixed cost is a contract for electricity that includes a basic fixed fee that covers a certain number of kilowatts of usage per month, and usage over that allowance is billed at a specified amount per kilowatt used. The electricity plan has a fixed component and a variable component. A mixed cost could also be an allocation of overhead cost that contains both fixed and variable overheads.

Many costs are mixed costs. Mixed costs have a combination of fixed and variable elements. Mixed costs may be semi-variable costs or semi-fixed costs, which are also called step costs or step variable costs.

A semi–variable cost ⇒ has both a fixed component and a variable component. It has a basic fixed amount that must be paid regardless of the amount of activity (or even in the event of no activity) and added to that fixed amount is an amount that varies with activity. Utilities provide an example. Some basic utility expenses are required just to maintain a factory building, even if no production is taking place. Electric service, water service, and other utilities usually must be continued, so that basic amount is the fixed component of utilities. If production begins (or resumes), the cost for utilities increases by a variable amount, depending on the production level, because machines are running and using electricity and people are using the water. The fixed component does not change, but the total cost increases incrementally by the amount of the variable component when production activity increases. Another example of a semivariable cost is the cost of a salesperson who receives a base salary plus a commission for each sale made. The base salary is the fixed component of the salesperson’s salary, and the commission is the variable
component.

A semi–fixed cost⇒ also called a step cost or a step variable cost, is fixed over a given, small range of activity, and above that level of activity, the cost suddenly jumps. It stays fixed again for a while at the higher range of activity, and when the activity moves out of that range, it jumps again. A semi-fixed cost or step variable cost moves upward in a step fashion, staying at a certain level over a small range and then moving to the next level quickly. All fixed costs behave this way, and a wholly fixed cost is also fixed only as long as activity remains within the relevant range. However, a semi–fixed cost is fixed over a smaller range than the relevant range of a wholly fixed cost. 

The difference between a semi-variable and a semi-fixed cost (also called a step cost or a step variable cost) is that the semi-variable cost starts out at a given base level and moves upward smoothly from there as activity increases. A semi-fixed cost moves upward in steps.