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Mixed Cost

By Yuriy Smirnov Ph.D.

Definition

In managerial accounting, costs by their behavior are classified into fixed cost, variable cost, and mixed cost.

Mixed cost, also referred to as semivariable cost, combines the behavior of both fixed cost and variable cost. In other words, some of their components behave like fixed cost, and others behave like variable cost. The common example of mixed cost is transportation cost, which has fixed components, such as depreciation of a vehicle and insurance fees, and some variable components, such as fuel, motor oil, and consumables. Another example of such cost is mobile communications expenses. A mobile network operator usually offers its clients a plan with a flat rate (e.g., per month, quarter, or year) for a fixed set of services. If a customer exceeds the limits of the plan, it will pay additional fees depending on the volume of additional services received. The flat rate is a fixed component, and additional fees represent a variable component.

The raw numbers of mixed cost are not useful for managerial accounting purposes, so they should be split into variable components and fixed components. Common methods to do this are:

  1. High-low method
  2. Scatter diagram method
  3. Least square method (regression analysis)

Example

Cargo-X LLC decided to rent a new truck for a fixed monthly fee of $5,000 and an additional charge of $0.7 per each mile actually run.

As we can see, rent payment must be classified as mixed cost because it has a fixed component and a variable component depending on the actual run of a truck during the accounting period. The amount of rent payment depending on actual mileage is shown in the table below.

Mixed cost example

Mixed cost behavior

Total cost

The graph below is drawn using the data from the example above.

Decomposition of mixed cost into fixed and variable component

As we can see, the total mixed cost curve starts at $5,000, the fixed component of rent payment. The variable component at this point equals zero. As the mileage increases, the variable component is also rising. Thus, rent payment combines both fixed cost and variable cost.

Per unit cost

The per unit amount of mixed cost gradually decreases as production output or business activity increases. Using the data above, we can draw the per unit cost curve.

Mixed cost per unit graph

As we can see, the higher the actual mileage, the lower per unit cost. For example, if monthly mileage is 5,000 miles, the cost per mile will be $1.7 ($8,500÷5,000), but the actual mileage of 10,000 miles means a lower cost per mile of $1.2 ($12,000÷5,000).