Variable, Semi-Variable and Fixed Cost
Fixed cost: a cost that does not vary according to the number of units produced or the sales.
Variable cost: a cost which varies in the same proportion as the units produced.
Semi-variable cost: a cost that is fixed in part and variable in part. It remains fixed up to a certain level of production and changes with the change in the volume of production beyond this level.
Semi-variable cost is the kind of cost that we are going to encounter most often.
The semi-variable costs can be separated into two parts: the fixed cost part and the variable cost part.
Semi-variable cost = Fixed cost + Variable cost
Let’s see an example:
Fixed cost: Rs. x minimum fare of a taxi upto 2 km ride.
Variable cost: In case the customer rides more than 2 km, extra charge will be proportional to the extra distance travelled. Let this extra charge be ‘y’ rupees per unit of extra distance travelled.
So, the final bill = x + Dy; where ‘D’ is the extra distance travelled apart from the 2 km travelled initially.