Variable Costs, Fixed Costs, Semi-Fixed Costs, and Mixed Costs
By observing the relationship between the behavior of a total cost and changes in the measure of activity (such as units produced, units sold, labor hours, and machine hours), a cost can be classified as variable, fixed, semifixed, or mixed
Fixed costs are those in which total cost remains constant over a given range of output,
while the cost per unit varies inversely with output. For example, the fixed costs identified in Illustration 2-2 will remain at $2,000 a year if production is between 0 and 40 units. At 25 units of production, the fixed cost is $2,000 or $80 per unit ($2,000/25). At 40 units of production, the fixed cost remains at $2,000, but the fixed cost per unit reduced to only $50 ($2,000/40). Straight-line depreciation, property taxes, rent, salaries of top management, and insurance are some examples of fixed costs.
Semi-fixed costs vary in stairstep fashion and thus do not fit the definitions of either variable
costs or fixed costs. Semi-fixed costs remain unchanged only over a limited range of activity. Inspection costs and supervisor's salaries are examples of costs which behave in this manner. To illustrate, assume that an inspector can inspect 1,000 units a month. If 2,000 units are to be inspected each month, two inspectors would be needed. If more than 2,000 units are to be inspected, additional inspector(s) must be added. Although an inspector's monthly salary say $1,500 is fixed, the number of inspectors may vary. In practice, when the steps for a semi-fixed cost are relatively small, the cost is treated as a
variable cost. If the steps are very large, the step cost is treated as a fixed cost.
Factory Overhead Costs include all manufacturing costs other than direct materials and direct labor, and are sometimes referred to as indirect manufacturing costs. Examples are indirect materials, indirect labor, rent, taxes, insurance, depreciation on equipment, water, electricity, and power used in the production process. Factory overhead may be subclassified into two categories depending on cost behavior. 1. Variable factory overhead—Examples are utilities, supplies, indirect materials, and indirect labor which varies in direct proportion to the activity level, and
2. Fixed factory overhead—Examples are rent, insurance, property taxes, depreciation, and supervisory salaries. They do not change as the activity level of changes.
Opportunity costs are the benefits of an alternative that is given up when a diff erent deci-sion alternative is chosen. Opportunity costs are not recorded in formal accounting systems, but may be significant in evaluating an alternative course of action. For example, suppose a firm can either use its current extra capacity of 10,000 machine hours to process a product further or rent the extra capacity to another firm for $15,000. In this case, the $15,000 is an opportunity cost of choosing to further process the product. Opportunity costs are defined in relation to the best alternative that is available to the firm. In the previous example, if there is a third alternative that will provide $20,000 of profit, then the opportunity cost of utilizing the facility to further process the product is $20,000. If there is no other alternative to utilize the capacity, there will be no opportunity cost