Cost Behavior

9.6 Mixed costs

Mixed costs are costs that 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 the total rental charge is $2,000 ($1,000+1,000 x $1). The table below shows the relationship between the variable and fixed costs, total cost and machine hours.

Illustration 9-11: Mixed cost table

Number of Machine Hours	Variable Cost per Unit, $	Variable Cost, $	Fixed Cost, $	Total Costs, $
500	$1.00	$500	$1,000	$1,500
1,000	$1.00	$1,000	$1,000	$2,000
1,500	$1.00	$1,500	$1,000	$2,500
2,000	$1.00	$2,000	$1,000	$3,000
2,500	$1.00	$2,500	$1,000	$3,500
3,000	$1.00	$3,000	$1,000	$4,000

Illustration 9-12 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. The variable cost of the mixed cost is equal to the difference between the total mixed cost and its fixed part.

Illustration 9-12: Mixed costs

Mixed costs

More examples of mixed costs and their cost drivers are provided in the Illustration 9-13.

Illustration 9-13: Examples of mixed costs

Type of Business	Cost	Cost Driver
Manufacturing	Equipment rental	Number of machine hours
Consulting Company	Consultant’s wage	Number of clients
Hotel	Maid wages	Number of rooms cleaned
Print house	Photocopier rental	Number of pages printed out

9.7 Relevant range

In previous sections we defined cost drivers and classified costs by their behavior. In order to introduce a new definition, we have to specify that all costs are fixed and variable only within a limited range of activity. This range is called relevant range.

Relevant range is the volume of activity, over which cost behavior stays valid.

As we know, Friends Corporation can produce from 100,000 to 500,000 DVDs per year. So, the relevant range of Friends Corporation is the range of normal activity from 100,000 to 500,000. Within this relevant range all fixed costs, such as rent, equipment depreciation, and salaries remain constant. If Friends Corporation decides to produce more DVDs, they have to hire additional staff and rent more equipment, which will result in an increase of fixed costs. On the contrary, if it is required to reduce the production level, Friends Corporation has to reduce staff and rental expenses, so fixed costs will decrease.

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