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Tuesday
Jan292013

## What is a mixed cost?

A mixed cost is a cost that contains both a fixed component and a variable component. It is of some importance to understand the mix of these elements of a cost, so that you can predict how costs will change with different levels of activity. Typically, a portion of a mixed cost may be present in the absence of all activity, in addition to which the cost may also increase as activity levels increase.

As the level of usage of a mixed 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

For example, if a company owns a building, the total cost of that building in a year is a mixed cost. The depreciation associated with the asset is a fixed cost, since it does not vary from year to year, while the utilities expense will vary depending upon the company's usage of the building. The fixed cost of the building is \$100,000 per year, while the variable cost of utilities is \$250 per occupant. If the building contains 100 occupants, then the mixed cost calculation is:

\$125,000 Total cost = \$100,000 Fixed cost + (\$250/occupant x 100 occupants)

As another example of a mixed cost, a company has a broadband contract with the local cable company, which it pays \$500 per month for the first 500 megabytes of usage per month, after which the price increases by \$1 per megabyte used. The following table shows the mixed cost nature of the situation, where there is a baseline fixed cost, above which the cost increases at the same pace as usage:

 Megabytes Variable Cost Fixed Cost Total Cost 500 \$0 \$500 \$500 600 100 500 600 700 200 500 700 800 300 500 800 900 400 500 900

Mixed costs are common in a corporation, since many departments involve a certain amount of baseline fixed costs in order to support any activities at all, and also incur variable costs to provide varying quantities of services above the baseline level of support. Thus, the cost structure of an entire department can be said to be a mixed cost. This is also a key concern when developing budgets, since some mixed costs will vary only partially with expected activity levels, and so must be properly accounted for in the budget.

Similar Terms

Mixed cost is also known as semi-variable cost or semi-fixed cost.

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