When planning for costs, corporations generally know the amount of a given expense and how it will affect their budget. However, the rate to which the cost varies from month to month is also a large consideration. Some expenses remain the same every month, while others vary depending on usage, activity or a variety of other factors. Those that contain both a base cost (fixed amount) and a variable cost are known as semi-variable costs.
What Is Semi-Variable Cost?
A cost that consists of a base expense that remains the same for each period and a variable cost that may change on a regular basis is known as semi-variable cost or mixed cost. A cell phone plan is one example of a semi-variable expense. The basic plan will cost the user a set amount each month. However, additional texting or calling charges above what the basic plan allows would be a variable expense. Therefore, because the fixed amount is expected, and the variable depends on usage, it is a mixed cost expense.
While it may be a good idea for budgeting individuals to understand semi-variable costs, they are especially important to companies when estimating future expenses. Because the variable cost on top of the fixed expense may vary significantly depending on demand, output and other work factors, proper tracking of the estimated amount of a semi-variable cost is the only way to ensure the expense does not eat into profits. If the semi-variable cost is underestimated, sales may not be enough to cover expense, thus affecting the company's bottom line.
Common corporate semi-variable costs include inventory, maintenance and utilities. Oftentimes these mixed costs depend on supply and demand in the marketplace. If there is a strong demand for the product, productions costs increase. Therefore, factory, utilities and supply costs will increase as well. Depending on the scope of the organization, human resources may be seen as semi-variable costs as well. For example, pay for salespeople who work on commission will fluctuate over time.
Tracking Semi-Variable Expenses
Because of the dual nature of semi-variable costs, it can be difficult for corporations to estimate monthly or periodic expenses. One popular accounting method is the high-low method, in which production activity and cost are averaged from the highest and the lowest points. Another method, regression analysis, uses a graphical representation to estimate the pattern of semi-variable costs and how they may change month to month. Both methods are somewhat reliable because they look at patterns and history in the semi-variable expense. However, market changes, unforeseen events or other circumstances can still make it difficult to estimate semi-variable costs with complete certainty.