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 a minimum cost of supplying a resource, and the variable component is the costs that fluctuate depending on changes of activity levels.

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

Illustration 11: Mixed cost table

The following formula is 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 minimal value of the mixed cost is equal to its fixed part and is applicable when machinery is not used at all; therefore, only 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 the Illustration 13.

Illustration 13: Examples of mixed costs