Semi-fixed cost

A semi-fixed cost is a cost that contains both fixed and variable elements. As a result, the minimum cost level that will be experienced will be greater than zero; once a certain activity level is surpassed, the cost will begin to increase beyond the base level, since the variable component of the cost has been triggered. As an example of a semi-fixed cost, a company must pay a certain amount to maintain minimum operations for a production line, in the form of machinery depreciation, staffing, and facility rent. If the volume of production exceeds a certain amount, then the company must hire additional staff or pay overtime, which is the variable component of the semi-fixed cost of the production line.

Another example of a semi-fixed cost is a salaried salesperson. This person earns a fixed amount of compensation (in the form of a salary), as well as a variable amount (in the form of a commission). In total, the cost of the salesperson is semi-fixed.

A third example is the monthly bill for a cell phone, where the recipient pays a fixed fee for phone usage, as well as a variable fee if the user exceeds a certain amount of data usage, calls, or texts.

A cost that is classified as semi-fixed does not have to contain a certain proportion of fixed or variable costs to be classified as such. Instead, any material mix of the two cost types qualifies a cost as semi-fixed.

A semi-fixed cost tends to also be a step cost. That is, the cost remains the same until a certain activity threshold is exceeded, after which the cost increases. The same approach works in reverse, where the variable component of the cost will be eliminated when the activity level declines below a certain amount.

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Cost Accounting Fundamentals