What is a 'Semi-Variable Cost'

A semi-variable cost, also known as a semi-fixed cost or a mixed cost, is a cost composed of a
mixture of fixed and variable components. Costs are fixed for a set level of production or
consumption and become variable after this production level is exceeded. If no production occurs,
a fixed cost is still incurred.

BREAKING DOWN 'Semi-Variable Cost'8

The fixed portion of a semi-variable cost incurs repeatedly, while the variable portion occurs as a
function of the activity volume. Management may analyze different activity levels by manipulating
the activity level to change the variable costs. A semi-variable cost with lower fixed costs is
favorable for a business as the breakeven point is lower.

Examples of Semi-Variable Costs

Overtime on a production line has semi-variable features. If a certain level of labor is required for
production line operations, this is the fixed cost. Any additional production volume that requires
overtime results in variable expenses dependent on the activity level. In a typical cellphone billing
contract, a monthly flat rate is charged in addition to overage charges based on excessive
bandwidth usage. A business likely experiences a similar structure when charged for utilities. Also,
a salesperson’s salary typically has a fixed component such as a salary and a variable portion such
as a commission.

A business experiences semi-variable costs in relation to the operation of fleet vehicles. Certain
costs, such as monthly vehicle loan payments, insurance, depreciation and licensing, are fixed and
independent of usage. Other expenses including gasoline and oil are related to the use of the
vehicle and reflect the variable portion of the cost.

Production Volume

The fixed portion of a semi-variable cost is fixed up to a certain production volume. This means
certain costs are fixed for a range of activity and may change for different activity levels. For
example, rent expense for a production facility may be $2,000 per month. However, if production
doubled and an additional facility is rented, the new fixed rent charge may be $3,500. This charge
remains fixed even though the dollar amount changed because the production volume was
adjusted.

Accounting for Semi-Variable Costs

Generally accepted accounting principles (GAAP) do not require a distinction between fixed
and variables costs. These costs are not distinguished on a company’s financial statements.
Therefore, a semi-variable cost may be classified into any expense account such as utility or rent. A
semi-variable cost and analysis of its components is a managerial accounting function for internal
use only.