Mixed costs, also known as semi-variable costs, are business expenses that have both fixed and variable components. In simpler terms, it’s a cost that fluctuates according to the amount of production and cannot be eradicated like a fixed expense.
Mixed costs contain two parts – a fixed cost component and a variable cost component. The proportion of each component in the total cost may vary depending on production volume.
Generally, larger production volumes will result in a higher proportion of variable costs and vice versa. Examples of mixed costs include rent, insurance, management fees, salaries, salaries plus bonuses, and utilities.
So, mixed costs are not purely fixed or variable costs but are a combination of both.
Mixed Costs Definition
Mixed costs are those costs that contain both fixed and variable components. They fluctuate with the production volume and cannot be removed from the cost structure like a fixed expense (Warren & Tayler, 2020).
The fixed component of mixed costs includes expenses that do not change with the production level, such as rent, insurance, and management fees. The variable component contains expenses that change with the production level, such as materials, labor, and energy (Bragg, 2019).
To calculate a mixed cost, one must first determine the fixed and variable components and add them together.
For example, if a business pays $1,000 in rent and $400 in utilities monthly, the total mixed cost is $1,400. In this case, the fixed component (rent) is $1,000, and the variable component (utilities) is $400.
In simple words, mixed costs are expenses that cannot be separated into fixed and variable costs but are a combination of both.
10 Mixed Costs Examples
- Rent: A company’s rent is a mixed cost. It is usually fixed but may vary depending on the size of the space. So, if a company moves to a larger space, its rent may increase. Besides, they may pay a certain fee for the furniture and equipment.
- Electricity: An electricity bill is a mixed cost because it contains fixed charges for the meter and variable fees for usage. So, the more electricity a company uses, their bill is likely to increase.
- Salaries: Employees’ salaries are also considered as a mixed cost because many of them typically have a fixed salary plus additional bonuses or incentives. For example, an employee might get a fixed salary of $4000. However, sometimes, they may get an additional bonus based on their performance, which will be considered a variable component.
- Insurance: Business insurance, such as liability or property insurance, is also considered mixed costs. Every business insurance typically contains not only fixed premiums but also additional coverage and variable fees. The latter varies depending on the coverage and type of insurance.
- Depreciation: Depreciation is also a mixed cost, containing fixed and variable components. The former includes the asset’s original cost, and the latter – the charge for depreciation over time.
- Advertising: Advertising is another mixed cost that every company can incur. For example, an organization may pay for a website subscription but also spend money on advertising campaigns. In such a case, the subscription is a fixed component, and the advertising campaign – is variable.
- Utilities: Utilities such as water and gas are also mixed costs. They have both a fixed component, such as a connection fee, and a variable component, such as the usage fees. For example, a company may pay a flat fee for their water connection but also have to pay a certain amount based on the amount they use.
- Materials: Materials are also mixed costs as they may include a fixed component, such as the purchase of raw materials, and a variable component, such as the cost of labor. For example, suppose a company is producing shoes. In that case, it may need to purchase certain production materials and pay for the labor cost.
- Maintenance: Maintenance is another mixed-cost example because it contains both fixed and variable components. The fixed component includes expenses such as repairs and replacements, and the variable component includes expenses such as labor expenses.
- Shipping: Shipping is another prime example of a mixed cost as it typically includes a fixed fee for the shipment, such as postage and handling fees, plus additional fees for the delivery services. These fees may vary depending on the weight and destination of the shipment.
Mixed Costs Calculation: 3 Methods
Mixed costs can be calculated by adding the fixed and variable components together. However, businesses may use other more complicated methods such as the high-low method, regression analysis, and scatter graph method.
The simple algebraic equation for mixed costs is following:
Mixed Cost = Fixed Costs + Variable Costs
For example, if a company pays $1,000 in rent and $400 in utilities monthly, the total mixed cost is $1,400. In this case, rent is the fixed component, and utilities are variable (Bragg, 2019).
Still, mixed costs can also be calculated using more complex formulas. They include the high-low method, regression analysis, and scatter graph method. They are often used to determine how a change in activity level will affect total mixed costs.
1. High-Low Method
A high-low-cost accounting method is an efficient approach to determining fixed and variable costs with limited data.
By assessing the highest and lowest levels of activity, you can compare total costs to identify expense patterns (Weygandt et al., 2018).
For example, suppose there is a $10,000 difference between the total costs at the highest and lowest levels of activity. In that case, you could assume that $10,000 makes up fixed costs while the rest is variable.
This method provides a powerful way to understand your spending over time so that you can make more informed decisions about budgeting for future projects.
2. Regression Analysis
Unlike the high-low method, regression analysis estimates how modifying one independent variable affects a dependent variable when another remains fixed.
This technique helps people comprehend how changing variables can influence outcomes accordingly. In terms of mixed costs, regression analysis can help determine how a certain change in activity level affects the total cost (White et al., 2020).
For example, suppose a business is producing a product and incurs $100 in additional costs as production increases. In that case, it can use regression analysis to estimate the total cost at various production levels.
3. Scatter Graph Method
A scatter graph method is a powerful tool that helps segregate fixed and variable pieces of mixed costs by plotting activity levels on the x-axis while simultaneously displaying mixed costs along the y-axis (Weygandt et al., 2018).
This graphical technique simplifies complex data into manageable visuals, allowing for easy analysis and understanding of financial information. By plotting activity levels across a graph, businesses can quickly identify which parts of their costs are fixed and variable.
Advantages of Mixed Costs
Mixed costs offer a variety of advantages for businesses as they help to improve cost estimation, conduct more accurate budgeting, and get better financial insights.
Here are some advantages of mixed costs:
- Improved cost estimation – Mixed costs are a vital factor of any business, as they assist in determining the cost of their products. By accurately calculating variable and fixed costs, businesses can make more informed decisions regarding pricing.
- More accurate budgeting – With mixed costs, budgeting is more accurate since businesses can better predict their future costs based on the fixed and variable components.
- Easier analysis – Mixed costs make a financial analysis much easier as businesses can quickly identify their expenses’ fixed and variable components and track their performance more effectively.
- Greater financial insight – Considering the fixed and variable components of mixed costs gives businesses greater financial insight and helps them make informed decisions.
- Better cost control – With mixed costs, businesses can better control their costs by being aware of how much they spend on different activities. It can help them make more efficient investments and save money in the long run (Hansen & Mowen, 2018).
Disadvantages of Mixed Costs
While mixed costs offer many advantages, there are some drawbacks that businesses should be aware of, including difficulty in mixed costs’ forecasting and budgeting errors.
Here are some disadvantages of mixed costs:
- Difficulty in determining fixed and variable components – It is often hard to accurately determine the fixed and variable components of mixed costs, which can lead to incorrect assumptions and poor financial decisions.
- Complicated forecasting – When the fixed and variable components of mixed costs are not accurately determined, businesses can face difficulties forecasting their future costs.
- Higher risk of budgeting errors – Businesses can make budgeting errors without the right analysis while calculating mixed costs, leading to financial losses.
- Inaccurate cost allocation – Organizations can end up allocating costs inaccurately without the proper understanding of mixed costs. It can lead to inaccurate pricing and financial losses (Hansen & Mowen, 2018).
Other Types of Costs in Economics
- Marginal Costs: the marginal cost reflects the change in total cost that arises when producing one extra unit of a good or service. It is the incremental cost of producing an extra unit, which is usually not fixed.
- Sunk Costs: Sunk costs are defined as expenses that have already been incurred and cannot be reversed or recovered.
- Implicit Costs: Implicit costs are economic costs incurred by a business that do not directly involve monetary expenditures.
- Opportunity Costs: Opportunity cost is the cost of giving up one opportunity in order to take another one.
Mixed costs, a type of business expense, are comprised of fixed and variable elements. The fixed component remains the same regardless of production or activity levels, whereas the variable component is more dynamic as it rises with increased output.
Examples of mixed costs include rent, insurance premiums, utilities, and more. They can be easily calculated by adding the fixed and variable components together.
Businesses can leverage more sophisticated methods such as the high-low method, regression analysis, or scatter plot technique to refine their fixed and variable components further. These methods offer greater accuracy in cost estimation, budgeting, and financial insight – improving overall efficiency.
However, mixed costs also have drawbacks, such as difficulty in forecasting and budgeting errors. Therefore, businesses should be aware of the potential pitfalls when dealing with mixed costs.
Bragg, S. M. (2019). Cost accounting fundamentals: Essential concepts and examples. Accounting Tools Inc.
Hansen, D. R., & Mowen, M. M. (2018). Cornerstones of cost management. Boston Cengage Learning.
Warren, C. S., & Tayler, W. B. (2020). Managerial accounting (15th ed.). Cengage.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Managerial accounting: Tools for business decision-making. Singapore Wiley.
White, J. A., Grasman, K. S., Case, K. E., Needy, K. L., & Pratt, D. B. (2020). Fundamentals of engineering economic analysis. Wiley.