Question

Explain the meaning of each of the following terms:

(a) variable costs
(b) fixed costs
(c) semi-fixed costs
(d) semi-variable costs
Provide examples of costs for each of the four (4) categories.

Answer 1

Variable costs change with production, fixed costs do not change, semi-fixed costs have both fixed and variable components, and semi-variable costs have a fixed and variable component that does not change proportionally with production.

Step-by-step explanation:

Variable costs are costs that change in proportion to the level of production. Examples of variable costs include direct materials, direct labor, and sales commissions.

Fixed costs are costs that do not change regardless of the level of production. Examples of fixed costs include rent, salaries of permanent employees, and insurance.

Semi-fixed costs are costs that have both a fixed and variable component. For example, a telephone bill may have a fixed monthly charge plus a variable charge based on usage.

Semi-variable costs are costs that have both a fixed and variable component, but the variable component does not change proportionally to the level of production. An example of a semi-variable cost is electricity bill, where a portion of the bill is fixed and the rest depends on the amount of electricity consumed.