In accounting and economics, a semi-variable cost (also referred to as semi-fixed cost) is an
expense
An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition ...
which contains both a
fixed-cost component and a
variable-cost component. It is often used to project financial performance at different scales of production. It is related to the scale of production within the business where there is a
fixed cost
In accounting and economics, 'fixed costs', also known as indirect costs or overhead costs, are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be recurring, such as interest or ...
which remains constant across all scales of production while the
variable cost increases proportionally to production levels.
Using a factory as an example, fixed costs can include the
leasing
A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...
of the factory building and
insurance
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
, while the variable costs include
overtime pay and the purchase price of the raw materials.
Calculating semi-variable costs
Linear costs
In the simplest case, where cost is
linear
Linearity is the property of a mathematical relationship ('' function'') that can be graphically represented as a straight line. Linearity is closely related to '' proportionality''. Examples in physics include rectilinear motion, the linear ...
in output, the equation for the total semi-variable cost is as follows:
:
where
is the total cost,
is the fixed cost,
is the variable cost per unit, and
is the number of units (i.e. the output produced).
Example with linear costs
A factory costs £5000 per week to produce goods at a minimum level and due to high demand it has to produce for an extra 20 hours in the week. Including the wages, utility bills, raw materials etc. the extra cost per hour (the variable cost) is £300. In t