Indicate which of the items of cost are fixed variable and semi variable find out the total and per unit cost of production
Answers
Variable Cost
These are the costs that vary as the total cost to the organization when the output (number of items or services produced by the unit/business) varies. In other words, we say that a variable cost varies in exactly the same proportion as the output varies.
Therefore, as sales increase the variable costs will increase. For example, a variable cost for a bakery would be the cost of the flour. Similarly, in other businesses, the variable cost will be determined by the raw materials and the output of the business. For example, with massage therapy, oil may be used and there may be the cost of laundering one or two towels. This will constitute the variable cost.
Thus we see that the variable costs are those costs which vary directly in proportion to change in the volume of production/output. Hence we can say that the cost which changes in the same proportion as the units produced, is the variable cost. Some of the examples of variable cost are direct expenses, direct labour, direct material etc.
Semi-Variable Cost
This cost is a cost which has elements of both fixed cost as well as the variable cost. So a cost that contains the components of both the fixed as well as the variable cost is said to be a semi-variable cost. In other words, we say that a cost that remains fixed up to a certain level of production and changes with the change in the volume of production beyond this level is a semi-variable cost. We can see the fixed part as a base level cost that is always incurred while as the variable portion of the cost is an additional cost which changes as we change the volume of production.
Formula For Semi-Variable Costs
We can understand the concept of semi-variable cost with the help of some of the following examples. For example, a popular cellular network provides you with a certain service for a fixed nominal charge. Say, for example, you get 1 GB data per day if you subscribe to a monthly plan of ‘x’ rupees. So this ‘x’ rupees is a fixed cost which will not change unless you start to use more data than 1 GB. In case your data usage exceeds 1 GB, the same company will charge you extra money. This charge will be proportional to the amount of extra data that you use. Let this extra charge be ‘y’ rupees per unit of extra data used. Then the cost of the final bill will be:
Cost (C) = x + Ny; where ‘N’ is the number of units that you consumed apart from the 1 GB that cost you x rupees.
The semi-variable costs can thus be separated into two terms. The fixed cost portion and the variable portion. We write:
Semi-variable cost = Fixed cost + variable cost
Variable cost per unit = change in cost/change in output
As a result, the semi-variable cost is also called the mixed cost and a semi-fixed cost.
Hope this answer helps you