cost formula

As the name suggests, a mixed cost is made up of a mix of variable cost and fixed cost. A cost must have both components to be considered a mixed cost.

There are many mixed costs around us. If you look at an electric bill, most will have a fixed customer service charge and various variable charges. We recently rented a moving truck. We were charged a daily rate (fixed cost) plus a rate per mile (variable cost).

The cost formula for a mixed cost is the sum of the variable and fixed components.

Total Mixed Cost = Variable Cost + Fixed Cost

If you remember the post on variable cost, you’ll remember that the formula for total variable cost is rate x activity. Therefore, we can expand our formula for mixed cost:

Total Mixed Cost = Rate X Activity + Fixed Cost

In some books, you will see the mixed cost equation expressed as the slope equation:

y = mx + b

y = total mixed cost
m = variable rate
x = activity
b = fixed cost

Don’t let this formula scare you. It’s the same as the formula above it. While it is important to understand that you can graph cost to observe it’s behavior, don’t get overwhelmed by the slope formula. If you understand that a mixed cost has a variable and a fixed component, the formula is pretty easy.

Calculating a mixed cost

Let’s look at a few examples to see how to calculate a mixed cost.

Example #1

ACI, Inc. is looking to lease a copier. The terms of the agreement state that there will be a monthly lease fee of $99 plus a charge of $0.02 per copy. If ACI plans to make 10,000 copies next month, how much would the copier lease cost?

First let’s identify the costs in the problem and if they are variable or fixed.

The first cost mentioned is a $99 monthly lease fee. Is this cost fixed or variable? When answering this question, ask yourself if there is a cost driver. Is there any activity that makes the monthly lease fee change? The answer is no. It will be $99 for the term of the lease. Therefore it is fixed.

The other charge is $0.02 per copy. Does this cost have a cost driver? Yes. For every copy that is made, the total cost of copies increases bt $0.02. Therefore this cost is variable.

Since we have identified a variable cost and a fixed cost, the total cost of the copier lease is a mixed cost. Let’s write the cost formula for the cost of the lease.

Total Mixed Cost = Rate X Activity + Fixed Cost

Total Monthly Lease Cost = $0.02 X number of copies + $99

As we do monthly cost planning, we now have a formula to help us plan.

Now answer the question that was asked. Plug the number of copies into the formula and solve.

Total Monthly Lease Cost = $0.02 X 10,000 + $99

Total Lease Cost = $200 + $99

Total Lease Cost = $299

Example #2

ACI, Inc. is doing budget planning for next fiscal year. The company believes that it will make 150,000 copies annually on the copier it plans to lease. What is the total projected cost of the copier for the next fiscal year?

Let’s go back to our cost equation.

Total Monthly Lease Cost = $0.02 X number of copies + $99

How must we change the formula to use it for annual planning? The current formula is for monthly cost and we are now trying to plan for an annual cost. Take the fixed cost and multiply it by 12.

Total Annual Lease Cost = $0.02 X number of copies + $1,188

Now we can solve.

Total Annual Lease Cost = $0.02 X 150,000 + $1,188

Total Annual Lease Cost = $3,000 + $1,188

Total Annual Lease Cost = $4,188

Final Thoughts

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). Next write your cost equation. Finally, plug in your level of activity and solve.

Don’t let the slope formula throw you off. Remember that a mixed cost is just the sum of it’s fixed and variable components.

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