CVP discusses fixed and variable costs. However, we also have mixed costs have both a variable...

CVP discusses fixed and variable costs. However, we also have mixed costs have both a variable and fixed cost component. For example, many overhead costs operate like that. For example, electricity usually has a base charge and then it has a usage charge. So, what do we do with those costs in CVP? Does this mean we can't use for companies with mixed costs?

Expert Solution

Mixed Costs also known as semi-variable costs contains two components which are-

1. Fixed component- It includes all those costs which does not change with the change in volume of activity

2. Variable component- It includes all those costs which changes with the change in volume of activity

For such mixed costs, In CVP we apply mixed cost formula and bifurcate the mixed cost into Fixed costs component and variable cost component

The mixed costs formula is

y = a + bx

where

y indicates formula of total mixed cost
a indicates fixed cost during the period
b indicates a variable rate calculated per unit of the activity
x indicates number of the units of the activity

No, this doesn't mean we can't use for companies with mixed costs, we have to calculate the fixed cost component and the variable cost component from the mixed costs using the mixed cost formula mentioned above and consider the calculated variable costs and fixed costs in CVP .

ekkarill92 answered 1 year ago

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