## 6. Mixed costs

Mixed costs contain components of both variable and fixed cost behavior patterns. Mixed costs are sometimes called semivariable or semifixed costs.

The fixed component of a mixed cost is the minimum cost of supplying a resource, and the variable component is the cost that fluctuates depending on changes of activity levels.

Suppose Friends Company uses rented machinery. The rental charges are \$1,000 per year, plus \$1 for each machine hour the machinery is in use. If the machinery is used for 1,000 hours, then the total rental charge is \$2,000 = \$1,000 + \$1 x 1,000 hrs). The table below shows the relationship between the variable and fixed costs, the total cost, and machine hours:

Illustration 11: Mixed cost table

 Number of Machine Hours Variable Cost per Hour Variable Cost Fixed Cost Total Cost Total Cost Calculation 500 \$1.00 \$500 \$1,000 \$1,500 \$500 + \$1,000 1,000 \$1.00 \$1,000 \$1,000 \$2,000 \$1,000 + \$1,000 1,500 \$1.00 \$1,500 \$1,000 \$2,500 \$1,500 + \$1,000 2,000 \$1.00 \$2,000 \$1,000 \$3,000 \$2,000 + \$1,000 2,500 \$1.00 \$2,500 \$1,000 \$3,500 \$2,500 + \$1,000 3,000 \$1.00 \$3,000 \$1,000 \$4,000 \$3,000 + \$1,000

The following formula was used in the table:

 Mixed Cost = Fixed Cost + Variable Cost

Illustration 12 graphically demonstrates this relationship. You can see that the mixed cost line starts at the fixed-cost point of the vertical axis (\$1,000 in our case) and then increases to the right. The lowest amount of the total mixed cost equals its fixed part and is applicable when machinery is not used at all. In this case only the fixed portion of the cost is incurred and equals \$1,000. When machinery is used, the variable cost (\$1 per hour) is added to the fixed cost to arrive at total mixed cost:

Illustration 12: Mixed costs graph

More examples of mixed costs and their cost drivers are provided in Illustration 13:

Illustration 13: Examples of mixed costs

 Type of Business Cost Cost Driver Manufacturing Equipment rental Number of machine hours Hotel Maid wages Number of rooms cleaned Printing company Photocopier rental Number of pages printed
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