What type of analysis is used to determine the fixed and variable components of mixed costs?

Mixed Cost Definition

Mixed cost is the total cost that combines two types of costs, i.e., fixed costs and variable costs, and therefore implies that a part of this cost doesn’t change (fixed cost) with changes in production volume. However, the other part (variable cost) changes with the volume or quantity produced. These costs are also referred to as semi-variable costsFixed and variable costs combine to form semi-variable costs. Because semi variable costs are influenced by both fixed and variable costs, they are also referred to as mixed costs.read more.

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• Mixed Cost Definition
• Components of Mixed Cost
• Mixed Cost Formula
• Example of Mixed Cost
• Disadvantages
• Important Points
• Recommended Articles
• How do you determine fixed variables and mixed costs?
• How do you analyze mixed costs?
• Which statistical method is better to analyze mixed costs?
• What are the 3 methods for analyzing mixed costs?

Any company needs to have a proper understanding of the mix of these different elements of the cost, as with the help of this, one can predict how the costs will change at the different levels of the activity.

Like, there could be a situation when there is no production activity in the company. Still, there could be some portion of the mixed cost. It is so because the company has to incur the fixed cost even though no activity is there. In addition to the fixed costFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more, the variable cost will be there if the company has some activity and will increase with the increase in the activity level.

Components of Mixed Cost

It consists of two components which include the following:

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For eg:
Source: Mixed Cost (wallstreetmojo.com)

• Fixed Component – The fixed component includes all those costs, the total that does not change when the volume of the activity changes.
• Variable Component – The variable component includes all those costs, the total of that change when the volume of the activity changes. The difference in the cost will be in proportion to the change in the amount of the activity.

Mixed Cost Formula

y = a + bx

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For eg:
Source: Mixed Cost (wallstreetmojo.com)

where

• y is the total mixed cost formula
• a is fixed cost during the period
• b is a variable rate calculated per unit of the activity
• x is the number of the units of the activity

Example of Mixed Cost

There is a company XYZ ltd which manufactures garments. For the production of the garments, the company has to incur the fixed cost that will remain the same without any effect on the number of units produced and the variable cost, which will increase with the increase in the company’s production level. Therefore, the total cost of the production of the garments is a mixed cost for the company as it has both fixed costs and variable cost components.

During the month of June-2019 total fixed cost, which includes rent, depreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more, salaries, and utility expensesUtilities Expenses are the prices incurred by a Company for the usage of utilities like sewage, electricity, waste disposal, water, broadband, heating, & telephone. These are included as operating expenses in the Company’s income sheet. read more, comes to $ 100,000. The variable cost per unitVariable cost per unit refers to the cost of production of each unit produced, which changes when the output volume or the activity level changes. These are not committed costs as they occur only if there is production in the company.read more during the same period comes to $ 10 per unit, and the number of units produced is 50,000. Calculate the Mixed Cost of the company during the period.

Solution

A mixed cost can be expressed using the below algebraic formula

y = a + bx, where:

• a is fixed cost during the period = $ 100,000
• b is the variable-rate calculated per unit of the activity = $ 10 per unit
• x is the number of the units of the activity = 50,000 units

Now,

• Mixed Cost Formula = $ 100,000 + $ 10* 50,000
• y= $ 100,000+ $ 500,000
• y= $ 600,000

Advantages

• It is crucial and necessary for any business enterprise to have the proper bifurcation of the total cost between the fixed costs and the variable costs during each period according to its output level. Such correct measurement of fixed and variable costs helps the company have an appropriate costing system and the proper budgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time.read more. If this is not there, then the company’s management would also not be able to make the correct decision for the future.
• Suppose there is a proper understanding of the mix of different elements of the mixed cost, then with the help of this. In that case, one can predict how the costs will change at the different activity levels, and the decisions can be taken accordingly.

Disadvantages

• Some of the costs are there, which are fixed at certain output levels but tend to differ as to the output changes.
• Another problem that the company may face often comes when some cost is paid to the same supplier having both fixed and variable element bifurcation, which may not be readily apparent from the supplier’s invoice. The separation of the costs between the fixed and the variable becomes difficult for the company, so the company requires an appropriate method for its separation.

Important Points

• In the case of the mixed costs, some of the components behave like fixed costs, while others behave like variable costs. The fixed component is the costs that do not change when the volume of the activity changes, while the variable is all those costs that vary in proportion to a change in the size of the activity.
• Any business enterprise must have the proper bifurcation of the total cost between fixed and variable costs. It helps to have an appropriate costing system and the appropriate budgeting in the company.

Conclusion

Mixed cost is the cost that changes with a change in the company’s production volume, as the variable cost, and the same cannot be eliminated from the company’s total cost like the fixed cost. They are often associated with manufacturing or production. When the usage of items having mixed costs increases, then the fixed component will remain the same while the variable cost will increase with such cost increase. Proper bifurcation of the total cost between the fixed and variable costs helps the company’s management make better decisions for the company’s future.

Recommended Articles

This has been a guide to what mixed cost is and its definition. Here we discuss the practical examples of mixed costs and calculation, advantages, and disadvantages. You may learn more about finance from the following articles –

• Differential Cost
• Standard Costing
• Formula of Marginal Cost