Mixed Costs

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Definition and explanation of mixed or semi variable cost:
A mixed cost is one that contains both variable and fixed cost elements. Mixed cost is also known as semi variable cost. Examples of mixed costs include electricity and telephone bills. A portion of these expenses are usually consists line rent. Line rent normally is fixed for each month. Variable portion consists units consumed or calls made. The relationship between mixed cost and level of activity can be expressed by the following equation or formula: Y = a + bX

In this equation,
* Y = The total mixed cost
* a = The total fixed cost
* b = The variable cost per unit
* X = The level of activity
The equation makes it very easy to calculate what the total mixed cost would be for any level of activity within the relevant range For example, Suppose that the company expects to produce 800 units and company has to pay a fixed cost of $25,000 and a variable manufacturing cost is $3.00 per unit. The total mixed cost would be calculated as follows: Y = a + bX

Y = $25,000 + ($3.00 × 800 units)
= $27,400
A characteristic of mixed cost that needs to be understood is that we usually have to separate fixed and variable components of the total mixed cost.

The analysis of mixed costs:
In practice the mixed costs are very common. For example the cost of providing X-ray services to patients is a mixed cost. There are substantial fixed costs for equipment depreciation and forsalaries for radiologist and technicians, but there are also variable costs for X-ray film, power and supplies. Maintenance costs of machineries and plants are also mixed costs. Companies incur costs for renting maintenance facilities and for keeping skilled mechanics on the payroll, but the costs of replacement parts, lubricating oil, tires, and so forth are variable with respect to how often and how far the machineries and plants are used. The fixed portion of the mixed cost represents the basic, minimum cost of just having a service available for use. The variable portion represents the cost incurred for actual consumption of the service. The variable element varies in proportion to the amount of service that is consumed . Formula can also be written as:

Variable cost = Change in cost / Change in activity
Therefore, when high and low point method is used, the variable cost is estimated by dividing the difference in cost between the high and low activity levels by the change in activity between those two points. We can apply high and low point method on the following data to spare fixed and variable costs. Month| Activity Level:

(Hours Worked)| Mixed Cost
(Maintenance Cost)|
January
February
March
April
May
June
July| 5,600
7,100
5,000
6,500
7,300
8,000
6,200| $7,900
8,500
7,400
8,200
9,100
9,800
7,800|
Using the high and low point method we first identify the period with the highest and lowest activity-in the following data June and March. We then use the activity and cost data from these two periods to estimate the variable cost component as follows: Activity Levels| Patient| Maintenance Cost|

High activity level (June)
Low activity level (March)| 8,000
5,000| $9,800
7,400|
Variable Cost = Change in Cost / Change in Activity
$2,400 / 3,000 hours
= $ 0.80 Per hour
Variable rate is $0.80 per unit according to above calculation under high and low point method. We can now determine the amount of fixed cost as follows: Fixed cost element = Total cost − variable cost element

$9,800 − ($0.80 per unit × 8,000 hours)
= $3,400
Both the elements, variable and fixed , have now been isolated. The cost of maintenance can now be expressed as $3,400 per month plus $0.80 per hour. The cost of maintenance can also be expressed in terms of the equation for a straight line as follows: Y = $3,400 + $0.80X

Some times the high and low levels of activity don't coincide with the high and low amounts of cost. For example, the period that has the highest...
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