In: Accounting
What are some examples of mixed costs and why would we want to separate them into fixed and variable cost components? How would we go about doing this task? Provide an example.
Mixed cost are those costs which have both variable as well as fixed portion. They can be fixed upto a specified limit and then can be converted into variable.
Examples:-
1) Your internet service provider may provide you a plan that is fixed payment of 1000 for starting 5 GB usage and then for every additional gb 150 rupeess.
2) Rent can be another example.Factory owner can say that rent will be combination of fixed amount of 20000 and 5% of sales in the month.
3) Also transport expense can be in such a way that fixed payment of 5000 per truck upto 500 units and then for each additional unit 20 rupees.
Separation of mixed cost into variable and fixed is necessary for following reason
1) To calculate break even point.
2) To analyse different mixed cost alternatives.
3) To make estimates and budgets for future period.
4) To know about the variance from standard (Inc or Dec)
5) To calculate marginal cost of producing one extra unit.
Methid of seapration
Variable portion = Change in mixed cost / Change in activity levels
Fixed portion = mixed cost - variable portion
Example :- Following is the data for 2 years of Maintenance cost
particulars | 2017 | 2018 |
Maintenance cost | 120000 | 138000 |
Units produced | 7500 | 12000 |
Change in maintenance cost = 138000 - 120000 = 18000
Change in Activity levels ( Units produced) = 12000 - 7500 = 4500
Variable portion = Change in cost / Chg in activity levels = 18000 / 4500 = 4 per unit
Fixed portion = Mixed - variable
Taking 2017 data = 120000 - (7500*4) = 90000