What is a Semi-Variable Cost?

A semi-variable cost is a cost that contains both fixed cost and variable cost elements. The fixed element of the cost will be incurred repeatedly over time, while the variable element will only be incurred as a function of activity volume. Thus, a base-level cost will be always be incurred, irrespective of volume, as well as an additional cost that is based only on volume. This concept is used to project financial performance at different activity levels. It can be difficult to incorporate semi-variable costs into a budget, since doing so greatly increases the complexity of the model.

As the level of usage of a semi-variable cost item increases, the fixed component of the cost will not change, while the variable component will increase. The formula for this relationship is:

Y = a + bx

Y = Total cost
a = Total fixed cost
b = Variable cost per unit of activity
x = Number of units of activity

Presentation of Semi-Variable Costs

The accounting standards do not require that the fixed or variable nature of a cost be identified in a firm’s financial statements. However, it can be useful to identify these costs for internal reporting purposes. In particular, you should know which costs are semi-variable when developing an organization’s annual budget model, so that the model will lock in the fixed component of each cost, even when activity volumes change. This means formally presenting these costs as semi-variable within the model. By understanding how semi-variable costs impact the budget, you can develop a budget that is more likely to reflect actual conditions.

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Examples of Semi-Variable Costs

If a company owns a production line, the total cost of that equipment in a month is a semi-variable cost. The depreciation associated with the asset is a fixed cost, since it does not vary from period to period, while the utilities expense will vary depending upon the amount of time during which the production line is operational. The fixed cost of the production line is $10,000 per month, while the variable cost of utilities is $150 per hour. If the production line runs for 160 hours per month, then the semi-variable cost calculation is:

$34,000 Total cost = $10,000 fixed cost + ($150/hour x 160 hours)

From the perspective of a company manager, it is generally safer to increase the variable portion of a semi-variable cost and decrease the fixed portion. Doing so lowers the revenue level at which a business can break even, which is useful if the business suffers from highly variable sales levels.

Here are several additional examples of a semi-variable cost:

A production line may require $10,000 of labor to staff it at a minimal level per day, but once a certain production volume is exceeded, the production staff must work overtime. Thus, the basic $10,000 daily cost will be incurred at all volume levels, and is therefore the fixed element of the semi-variable cost, while overtime varies with production volume, and so is the variable element of the cost.
In the billing structure for a cell phone, there is a flat-rate monthly charge, plus an overage charge for any bandwidth used that exceeds the cap allowed under the flat rate. Thus, the flat rate is the fixed element of the cost, and the excess bandwidth charge is the variable element of the cost.
Within the compensation of a salesperson, there is usually a salaried component (fixed cost) and a commission (variable cost).