Review of Fixed, Variable and Semi-Variable Costs
You will recall that when an item of expenditure remains the same regardless of the increases or decreases in the level of activity, we refer to this as a fixed cost. If we were to draw a bar chart of the fixed costs for a particular course, it would look something like Figure 2a below:
Figure 2a – Fixed Costs
The bar chart shows that the fixed costs for this particular course are ZAR 4,000 irrespective of whether one student or nine hundred students enrol for it.
By way of contrast, variable costs increase or decrease in proportion to increases or decreases in the level of productive activity. This is graphically illustrated in Figure 2b below. The graph shows that the variable costs for this course change in a linear (straight line) fashion. The variable costs of providing the course for one hundred students are ZAR 1,000, for two hundred students they are ZAR 2,000, and so forth.
Figure 2b – Variable Costs
Finally, you will remember that semi-variable costs behave like fixed costs within a particular range or level of activity. Once that range is exceeded, then the amount spent will rise in a step-by-step fashion. A typical example of semi-variable costs is illustrated in Figure 2c below. When student numbers on this particular course are between 1 - 299, then the semi-variable costs remain unchanged at ZAR 2,000. If three hundred students are enrolled, then the semi-variable costs would go up to ZAR 4,000. These step-like increases occur every time student numbers increase by three hundred.
Figure 2c – Semi-Variable Costs