The semi-variable costs can thus be separated into two terms. Then the cost of the final bill will be:Ĭost (C) = x + Ny where ‘N’ is the number of units that you consumed apart from the 1 GB that cost you x rupees. Let this extra charge be ‘y’ rupees per unit of extra data used. This charge will be proportional to the amount of extra data that you use. In case your data usage exceeds 1 GB, the same company will charge you extra money. So this ‘x’ rupees is a fixed cost which will not change unless you start to use more data than 1 GB. Say, for example, you get 1 GB data per day if you subscribe to a monthly plan of ‘x’ rupees. For example, a popular cellular network provides you with a certain service for a fixed nominal charge. We can understand the concept of semi-variable cost with the help of some of the following examples. 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. 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. 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. This cost is a cost which has elements of both fixed cost as well as the variable cost. Some of the examples of variable cost are direct expenses, direct labour, direct material etc. Hence we can say that the cost which changes in the same proportion as the units produced, is 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. For example, with massage therapy, oil may be used and there may be the cost of laundering one or two towels. Similarly, in other businesses, the variable cost will be determined by the raw materials and the output of the business. For example, a variable cost for a bakery would be the cost of the flour. Therefore, as sales increase the variable costs will increase. In other words, we say that a variable cost varies in exactly the same proportion as the output varies. 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. Fixed costs are usually incurred at regular intervals (for example monthly rent) so sometimes we call them the period costs. Similarly, another example is the property tax. This cost will not change as long as the rental agreement is valid. For example, if you are living in a rented place, you must have negotiated the cost of the place or the rent for a term that is on the rental agreement. We can understand the fixed cost with the help of many examples. The value of fixed cost determines the cost of the product and thus the profit and loss incurred by the business. This cost is usually a constant cost for a basic operation of businesses or in other words it is a basic operating cost of a business which is crucial and can’t be avoided. Therefore, they are not sunk costs because at least part of the cost can be recovered by selling.Variable Cost, Semi-Variable and Fixed Cost Fixed CostĪ cost that doesn’t change in a short term, irrespective of how the volume of production or the sales may change is the fixed cost. Some fixed costs, like the purchase of land, factories and capital can be resold. If you exit the industry, the expenditure on advertising is gone and cannot be recovered. However, this is also money you cannot get back. If you spend money (£1m) on advertising, it counts as a fixed cost, because however many goods you sell, the fixed cost is the same £1m. Difference between fixed and sunk costsĪ sunk cost is a cost that is irretrievable. For example, if a firm has three managers on a contract, it will need to pay them their salary – whatever the output of the firm, but if the low output continues, they can terminate their contracts and reduce the outgoing salary. In the short-term, some costs will be fixed and unrelated to output, but in the longer term, these can become variable. This means that as output increases, long-run average costs fall and the firm is relatively more efficient. Importance of fixed costsīusiness with high fixed costs will experience economies of scale. These costs are variable to the output produced. If a firm produces more cars, it will have to purchase more steel, plastic and tyres to make the cars. Some costs like raw materials are related to output.
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