What is Fixed, Semi Variable & Variable Costs?

Cost ascertainment is the most important factor in financial accounting. An Accountant should have clear understanding regarding the nature of cost. Costs usually classified as fixed costs, variable costs and semi variable costs. If an accountant considers fixed costs as variable costs and charged to profit and loss account, it will reduce the company’s profit as well as the existence of asset may disappear from the books of accounts and that assets could be stolen. On the other hand, if an accountant consider variable costs as the fixed costs, it will overstate the profit of the company and may increase the Earning per share of the company. Hence, accountants should concern this issues.

In this articles we will try to clear the nature fixed costs, semi variable costs and variable costs that may help an financial accountant to give necessary effect on the financial statements.

Types of Costs

Costs may be classified are as follows:

  • Fixed Costs
  • Semi-variable costs
  • Variable Costs

Fixed Costs

Fixed Costs is the cost which is not varied in for a particular of time unless any significant changes in production or volume have been occurred. This cost also refers as Standby costs, Capacity costs, or Period Costs. Some common items of fixed costs are:

  • Rent
  • Property taxes
  • Depreciation on Office equipment etc.

Fixed costs are not change with normal production changes.

Fixed Costs can be classified in the following manner:

  • Committed Costs
  • Discretionary Costs

The Details of above costs are enumerated as follows:

Committed CostsCommitted costs are considered as the integral part of the business. A business can not continue without committed costs. This is the costs which can not eliminate from the budget of the company. A good example of committed costs are : Leasing an Office space, Purchase machinery for the production, Utility costs etc. All are considered as the most important costs. Hence, we can define committed costs as ” Committed costs is the cost which can not be eliminated from the budget of the company and is considered as a integral part of the business.”
Discretionary
Fixed Cost
Discretionary fixed costs is the cost which is required expenditure for the specific period of time. Discretionary cost could be unnecessary for particular time but would be necessary for other times. This costs can be easily allocated or reduced them from committed fixed costs. The list of discretionary fixed costs is advertising costs, quality control costs, research and development costs, website maintenance costs etc.


Semi-Variable Cost

These costs also refers as Semi fixed costs or mixed costs. Semi-variable costs is the combination of fixed costs and variable costs. Semi variable costs arise when a company exceeded its predetermined production level or consumption units. Generally Accepted Accounting Principles (GAAP) segregates these costs as fixed and variable. These costs are not distinguished on the financial statements of the company. Actually semi variable costs is the revenue expenditure and charged in the income statement of the company. A common example of semi-variable costs are : Rent and Utility costs. These costs are using for managerial accounting functions and using for internal purpose.

Example: XYZ Inc. pays monthly salary @ $10 million. At the end of March, the company announces a bonus @ 3% on its entire amount and the bonus amount comes at @ 1.5 million. Total Salary and Bonus paid for the month is 11.50 million where 10 million is Fixed Costs and 1.5 million is Variable costs.

The Formula of Semi-variable costs is ,

Y = a + bX

Where,

Y = Total Mixed Costs

a = Total Fixed Costs

b = Variable cost per unit

Variable Costs

Variable cost is a cost which is changed if the level of production is changes. The components uses as a Raw materials of the products will be treated as variable costs.

Some examples of variable costs are as follows:

Direct MaterialsRaw materials used in the production are the most pure example of variable costs which is increased or decreased as a result the levels is increased or decreased.
Labor CostSometimes labors are paid for each unit produced. When labors are paid for each unit produced , will be treated as variable costs. On the other cases, labour cost is considered as a fixed costs.
Commission on salesCommission on sales is another example of variable costs. Sales person are paid commission for their sales. If sales increase the commission is increased, when the sales is decreased, the commission is decreased.
Freight CostFreight cost are the another example of variable costs.