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July 5, 2006

What are mixed costs?

The term mixed costs often refers to the behavior of costs and expenses. Mixed costs consist of a fixed component and a variable component. The annual expense of operating an automobile is a mixed cost. Some of the expenses are fixed, because they do not change in total as the number of annual miles change. Think insurance, parking fees, and some depreciation. Other expenses are variable, because they will increase for the year when the miles driven increase (and will decrease when the miles driven decrease). Think gas, oil, tires, and some depreciation.

The algebraic formula for a mixed cost is y = a + bx, where y is the total cost, a is the fixed cost per period, b is the variable rate per unit of activity, and x is the number of units of activity. For the annual expense of operating an automobile, the fixed cost, a, might be $5,000 per year; the variable rate, b, could be $0.20; and the number of units of activity, x, might be 15,000 miles per year. With these hypothetical assumptions, the annual expense, y, would be $8,000. If x were 10,000 miles, the annual expense y would be $7,000.

To gain insight on the behavior of a mixed cost, it is helpful to graph the cost: For each observation, indicate a point on the graph where the total mixed cost amount aligns with the amounts on y-axis and also aligns with the activity amounts on the x-axis. To compute the best fitting line through the graphed data, you could use a mathematical tool known as regression analysis. This will calculate the fixed expenses, a, and the variable rate, b, based on the historical data that is utilized.

Learn about Break-even Point.

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Comments

13 Responses to “What are mixed costs?”

  1. fe on March 21st, 2008 10:24 pm

    Please help me complete the Mixed Costs?

    Q: The company’s president receives a $100,000 based on salary and a bonus of 0.5% of sales for the year.

    How much will the president earn at a sales level of $2,750,000 for the year?

    Please show you work.

    Thanks.

  2. Eddie on April 19th, 2008 1:58 am

    0.005 x 2750000=113750(bonus)
    113750 + 100000 = 213750

    The president will earn $213,750 this year.

  3. Desiree on June 20th, 2008 5:00 pm

    Which of these are mixed cost, fixed,or variable and whether it is service cost or period cost.

    Wages of fork lift drivers
    Paper towel used in factory
    Insurance premiums
    Columnar paper used in a firm
    Cost of labels attached to a shirt made by a company
    Wages of factory maintenance workers
    Property taxes
    Salaries of secretaries
    Freight cost of raw materials from suppliers
    Cost of wax to make candles
    Cost of radioactibe materials used to generate power in a nuclear plant.

    I am a little confused

  4. Lassy on August 13th, 2008 11:26 pm

    Wages of fork lift drivers - F
    Paper towel used in factory - V
    Insurance premiums - F
    Columnar paper used in a firm -V
    Cost of labels attached to a shirt made by a company - V
    Wages of factory maintenance workers - F
    Property taxes - F
    Salaries of secretaries - F
    Freight cost of raw materials from suppliers - V
    Cost of wax to make candles - V
    Cost of radioactibe materials used to generate power in a nuclear plant - V

    F - FIXED
    V - VARIABLE

  5. Gus on February 27th, 2009 9:14 am

    A automobile company purchases air bags from a supplier, and installs them on automobiles. Would this be considered a variable or mixed cost?

  6. Lou on April 21st, 2009 5:27 pm

    Wouldn’t it be a bonus of $13,750 not $113,750 for a total salary of $113,750?

  7. JO on May 5th, 2009 10:19 am

    I have to determine which expenses are mixed and by using the high low method separate mixed expenses into variable and fixed elements.
    Given to me is:
    Sales revenue…420,000
    cost of goods sold…168,000
    shippening expense…44000
    advertising expense…70,000
    salaries and commissions…107000
    insurance expense…9000
    depreciation expense…42,000
    this information is for one month and I am given three months.
    I am completely lost can you please help?

  8. Sudeep on May 7th, 2009 1:02 am

    Yes.

    Fixed Cost :100000
    Bonus :13750

    Presidents total Earnings: $1,13,750

    Thanks you.
    Regards,
    Sudeep

  9. satra on July 25th, 2009 4:57 am

    i understand the variable and fixed cost.but it can be the element of cost or not .what is the element of cost .

  10. ochuong on August 24th, 2009 4:01 pm

    please explain the different between MIXED COST and MARGINAL COST, I am confused a little bit.
    Thank you very much

  11. jstwaytoosweet on September 23rd, 2009 9:52 pm

    I am having some difficulty understanding (M)mixed, (F) fixed and (V) variable cost. With the following costs please help me with the above as well as (DM) direct material, (DL) direct labor or (OH) overhead.
    factory supervision
    aluminum tubing
    rims
    emblem
    gearbox
    straight-line depreciation
    fenders
    inventory clerks salary
    inspector’s salary
    handlebars
    metal workers wages
    roller chain
    spokes (assuming cost is considered significant)
    paint (assuming cost is considered significant)
    This is for the manufacturing of a bicycle

  12. Elia on October 2nd, 2009 4:52 pm

    If i had un expected failure with some of the machines, is the cost of the repair will be Fixed or Variable cost?

  13. Melinda on October 7th, 2009 3:25 am

    Can you help me? please give me many examples of mixed cost and why that costs are mixed cost?

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