What is a Semi-Fixed Cost?

A semi-fixed cost is a cost that contains both fixed and variable elements. As a result, the minimum cost level that will be experienced is greater than zero; once a certain activity level is surpassed, the cost will begin to increase beyond the base level, since the variable component of the cost has been triggered. A cost that is classified as semi-fixed does not have to contain a certain proportion of fixed costs or variable costs to be classified as such. Instead, any material mix of the two cost types qualifies a cost as semi-fixed.

A semi-fixed cost tends to also be a step cost. That is, the cost remains the same until a certain activity threshold is exceeded, after which the cost increases. The same approach works in reverse, where the variable component of the cost will be eliminated when the activity level declines below a certain amount.

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Examples of Semi-Fixed Costs

As an example of a semi-fixed cost, a company must pay a certain amount to maintain minimum operations for a production line, in the form of machinery depreciation, staffing, and facility rent. If the volume of production exceeds a certain amount, then the company must hire additional staff or pay overtime, which is the variable component of the semi-fixed cost of the production line.

Another example of a semi-fixed cost is a salaried salesperson. This person earns a fixed amount of compensation (in the form of a salary), as well as a variable amount (in the form of a commission). In total, the cost of the salesperson is semi-fixed.

A third example is the monthly bill for a cell phone, where the recipient pays a fixed fee for phone usage, as well as a variable fee if the user exceeds a certain amount of data usage, calls, or texts.

Best Practices for Tracking Semi-Fixed Costs

It can be useful to track semi-fixed costs within a budget, since they can reveal situations in which these costs can be expected to climb in response to changes in activity levels. However, it can be quite difficult to understand exactly how costs react to changes in activity levels, which can lead to incorrect projections for how these costs will change in the future. Consequently, it is best to concentrate on fully understanding a small number of these costs very well, rather than having a cursory knowledge of the cost behavior of a large number of them.