Short definition: A semi-variable cost, also known as a mixed cost, is a cost that has both fixed and variable components.
Explanation: It means that a portion of the cost remains constant regardless of the level of activity (the fixed component), while another portion changes in direct proportion to the level of activity (the variable component). This type of cost is common in many businesses, as some expenses have a base cost that is incurred regardless of production or sales volume, but also increase as activity levels rise.
Example: A company’s utility bill might be a semi-variable cost. There might be a base charge for the service that is incurred even if no electricity is used, but the total cost will increase as more electricity is consumed.
Additional information (optional): Understanding the breakdown of semi-variable costs into their fixed and variable components is important for businesses to accurately predict and manage their costs at different levels of activity. This information can be useful for budgeting, pricing decisions, and evaluating the profitability of different products or services.