Semi Variable Cost Examples

What is Semi Variable Cost?

Semi variable costs include components of both fixed and variable costs. That means it is a mixture of both fixed and
variable costs, hence it is also known as mixed costs.

In semi variable cost, the fixed part will occur irrespective of the level of the production, even in case of zero
However the variable part of such costs is totally
production activities, a fixed cost will still incurred.
dependent on the level of production work carried by the entity and increases in proportion with the
production levels.

That means that semi variable cost can be calculated by adding the fixed costs and the variable costs
(based on level of productions). The equation to calculate semi variable cost is as follows:-

T = F + VX
Where:
 T = Semi variable cost
 F = fixed cost
 V = variable cost per unit
 X = total production in units

Semi Variable Cost Examples

Example 1: The best examples to understand the concept of semi variable costs are the expenses
related to telephone and electricity:

 Telephone Bills: - A firm has a landline telephone connection with a plan to make 100 calls per
day. The plan costs $750 per month, however if firm makes more calls than a rate of $0.50 per
call will be charged. Calculate the variable, fixed and semi variable costs for the firm for 1
month. Assume firm make additional 40 calls per day.

Solution:

The firm’s fixed cost = $ 750 per month

This constant amount incurred by firm irrespective of number of calls made is the fixed cost

Total variable cost =variable cost per unit∗additional calls per month
 0.5 * (40*30)
 $ 600 per month

Semi variable cost=¿ costs+Total variable cost

 $ (750 + 600)
 Semi variable cost = $ 1350
  Create a sensitivity analysis of the semi variable cost for the telephone bills of the firm and
create a graphical presentation.

Total calls per month as per plan 3000

Total
Total Variable Total Semi
additional Fixed
Calls per day Days per month calls in a cost per variable variable
calls in a Cost
month call cost cost
month
20 30 600 3600 0.5 300 750 1050
30 30 900 3900 0.5 450 750 1200
40 30 1200 4200 0.5 600 750 1350
50 30 1500 4500 0.5 750 750 1500
60 30 1800 4800 0.5 900 750 1650

Semi Variable Cost

Monthly Charges
No of calls
1800 Monthly Charges
1600 0 750
1400 600 750
1200
1200 750
1000
800 1800 750
600 2400 750
400 3000 750
200 3600 1050
0 3900 1200
0 600 1200 1800 2400 3000 3600 3900 4200 4500 4800 4200 1350
4500 1500
4800 1650

Example 2: the production dept of a company incurs fixed expenses of $1.5 million per month while
operating on its minimal capacity. Due to an urgent big order it has to work for additional 90 hours in
the month.

The company provides the data regarding its variable costs that consists of electricity bills, telephone
bills, raw material expenses and salaries to be $12000 per hour. The company wants to calculate its total
semi variable cost.

Given:

 Fixed cost (F) = $ 1,500,000

 Variable cost (V) = $ 12,000 per hour
 Working Hours (X) = 90 hours
Calculating total semi variable cost:

T = F + VX
 1,500,000 + (12000 * 90)
 1,500,000 + 1,080,000
 2,580,000

Example 3: Let’s say Admiral Sportswear Pvt. Ltd, an international sportswear manufacturing company
located in England. For the upcoming tournament of ICC cricket world cup, the factory needs to work for
some extra hours to fulfill the extra requirements.

The management is worried about the increment in the semi variable costs due to additional production
activities.

Consider the following information about the semi variable cost at different production levels provided
by the production department of the company to calculate the variable cost and the fixed cost.

Given:

  Quantity Cost
Semi Variable Cost at 500000 £ 14,000,000
different levels of
production 100000 £ 5,000,000

1. Calculating variable portion (per unit)

a. Difference between the units of output and related Cost

Quantity Cost
  500000 £ 14,000,000
  100000 £ 5,000,000
Difference 400000 £ 9,000,000

b. Variable cost per unit:

 Divide the calculate difference cost by quantity:

 £ 9,000,000 / 400000
 Variable cost per unit =£ 22.5 per unit

2. Calculating Fixed cost

 Semi
Quantity variable cost Variable cost Fixed Cost
100000 £ 5,000,000 £ 2,250,000 £ 2,750,000
3. Rechecking the results: by adding the fixed cost to the total variable costs (at 500000 units). The
result should be the total semi variable cost as given

Quantity 500000
Variable cost per unit £ 22.50
Total variable cost £ 11,250,000
Fixed Cost £ 2,750,000
Semi variable cost (0.5 million units) £ 14,000,000

4. Conclusion

Quantity (Units) 100000 500000

Variable cost @ 22.5 per
unit £ 2,250,000 £ 11,250,000
Fixed Costs £ 2,750,000 £ 2,750,000
Semi variable cost £ 5,000,000 £ 14,000,000

Conclusion

Semi variable cost has components of both variable and fixed expenses hence it become important for
companies to consider semi variable costs while planning for additional production activities. Ignorance
or inefficient management of semi variable costs may limit the profitability of the company at higher
levels of production.

Remember semi variable cost remain fixed up-to a certain level of production but gradually increases
upon utilization of higher levels of production capacity of the company.

Refer the graph shown in example 1 where telephone bills remain constant up-to a certain limit and
with additional usage the bill amount gradually rises.