Let’s examine the cost data from Regent Airline using the high-low method. When put into practice, the managers at Regent Airlines can now predict their total costs at any level of activity, as shown in Figure 2.34. In this method, just two data points an equation of a line for total mixed costs is are required to determine the mix of fixed and variable costs. Amantha’s variable costs are flour, butter, sugar, vanilla essence and other ingredients in her cupcakes. The fixed costs are the rent for her store and public liability insurance.

Next we will divide the change in cost by the change in activity to calculate the variable rate. There are a number of ways to calculate the cost formula for a mixed cost. This method is not the most precise method but it is the easiest to calculate. Let’s take a more in-depth look at the cost equation by examining the costs incurred by Amantha’s Artistry in the manufacture of sweet treats, as shown in the table below. Let’s take a more in-depth look at the cost equation by examining the costs incurred by Eagle Electronics in the manufacture of home security systems, as shown in Table 2.9. When answering this question, ask yourself if there is a cost driver.

Example of Mixed Costs

Since a portion of the mixed cost is fixed in nature, it will be present even in the absence of any activity at all. Further, it also in partially variable in nature and so it is likely to increase as the activity level increases. The reason of the dual nature is the fact that mixed cost is a combination of fixed and variable costs. So, it is important to understand the mix of both the components to be able to predict a change in mixed cost at different levels of activity. Distinguishing between fixed and variable costs is critical because the total cost is the sum of all fixed costs (the total fixed costs) and all variable costs (the total variable costs).

• For instance, the fixed component of a mixed cost may increase over time due to factors like inflation, thereby altering the overall cost behavior and complicating accurate predictions.
• Mixed costs (also called semi-variable costs) are costs that have both fixed and variable components.
• First let’s identify the costs in the problem and if they are variable or fixed.
• When using this approach, Eagle Electronics must be certain that it is only predicting costs for its relevant range.
• Distinguishing between fixed and variable costs is critical because the total cost is the sum of all fixed costs (the total fixed costs) and all variable costs (the total variable costs).

A mixed cost differ from fixed cost in that the total mixed cost changes while the fixed cost remain constant. Similarly, mixed cost differs from variable cost in that the per-unit change in variable cost is fixed while the per-unit change in mixed cost decreases as output increases. In the previous post about mixed cost, we stated that a mixed cost is just the sum of the variable and fixed components. This is fairly easy to deal with when we are dealing with an external cost where we are given the variable rate and the fixed cost. In business, many mixed costs are actually generated internally.

Mixed Cost

To visualize the behavior of a mixed cost, it is helpful to graph at least 8 observations. Each observation’s total cost (y) is aligned with the y-axis and is also aligned with the volume amounts indicated on the x-axis. To compute the best fitting line through the graphed data, you could use a mathematical tool known as simple linear regression analysis. This will calculate the fixed expenses (a) and the variable rate (b) based on the historical observations. This is due to fluctuations in the fixed and variable components.

Instead, they comprise both, fixed and variable components. Both these components are added together to arrive at the total mixed cost of the company. Where Y is the total cost, a is the fixed cost, b is the variable cost per unit, and x is the level of activity.

Mixed Cost and The High-Low Method

When dealing with mixed costs, start by identifying your variable and fixed components. Make sure to note the period of time your fixed cost is for (monthly, quarterly, annually, etc). Fixed cost, variable cost and mixed cost are three categories of costs with respect to cost behavior, i.e. the relationship between total cost and output in the relevant range.

For example, if the business expands over 40,000 treats, the business would need to expand and rent a larger premises. Using the maintenance cost data from Regent Airlines shown in Figure 2.32, we will examine how this method works in practice. Plug either the high point or low point into the cost formula and solve for fixed cost.