Loading acctg211..

Mixed Costs

Mixed costs have characteristics of both variable and fixed costs. A cost may remain variable over one range of activity but remain fixed over another range. These types of costs include a base rate and a production rate.

Utility costs can be a mixed cost. If a plan has a base rate of $20 plus a usage charge of $0.01 per kilowatt-hour, it is a mixed cost. The $20 charge is fixed, and the $0.01 charge per kilowatt-hour is variable: this is a mixed cost.

There are several ways to separate a mixed cost into its variable and fixed components. This course will use the high–low method.

High–Low Method

The high–low method is an easy, three-step method used to determine the variable and fixed cost components of a mixed cost. 

Say your company has gathered information related to monthly utility costs and direct labor hours in its manufacturing facility. The utility costs are a mixed cost. You reviewed the information from each month and identified the months of March and July as the months with the lowest and highest utility costs for the year. This method will ignore the other months.

Step 1

Calculate the variable cost per direct labor hour (or whatever activity base is used).

You would calculate the difference between the highest month and the lowest month and then divide the difference in utility costs ($6,300) by the difference in direct labor hours (2,000) to calculate the variable cost per direct labor hour ($3.15).

• variable cost per direct labor hour = difference in utility costs / difference in direct labor hours
• variable cost per direct labor hour = $6,300 / 2,000 direct labor hours
• variable cost per direct labor hour = $3.15 

Step 2

Calculate the total fixed costs.

You would use the direct labor hours, utility costs, and the cost per direct labor hour to calculate fixed costs. Select the information from either the highest month or the lowest month to determine the dollar amount for fixed costs. The calculations using both the highest and the lowest month are shown below. (You only have to choose one method.)

Pick either the high or the low volume. Both will provide the same answer. If you choose the high volume, the calculations will look like this:

• total fixed cost = total costs - total variable cost
• total fixed cost = total costs - (variable cost per unit x direct labor hours)
• total fixed cost = $27,600 - ($3.15 x 8,000 direct labor hours)
• total fixed costs = $27,600 - $25,200
• total fixed cost = $2,400

If you choose the low volume, the calculations will look like this:

• total fixed cost = total costs - total variable cost
• total fixed cost = total costs - (variable cost per unit x direct labor hours)
• total fixed cost = $21,300 - ($3.15 x 6,000 direct labor hours)
• total fixed costs = $21,300 - $18,900
• total fixed cost = $2,400

Step 3

Calculate the formula to estimate the total costs within the relevant range.

You would use the information calculated in Steps 1 and 2 to create a formula that you can use to estimate total utility cost per month based on expected direct labor hours:

• total costs per month = total fixed cost + total variable cost
• total costs per month = $2,400 + $3.15 per direct labor hour

Using the Formula to Estimate Utility Costs

Suppose you want to estimate the total utility costs for an upcoming month. You've estimated that you will use 7,000 direct labor hours. You would use the formula above and the estimated direct labor hours to estimate the total monthly utility costs: 

• total estimated costs per month = total fixed cost + total variable cost
• total estimated costs per month = $2,400 + $3.15 per direct labor hour
• total estimated costs per month = $2,400 + $3.15 (7,000 direct labor hours)
• total estimated costs per month = $2,400 + $22,050
• total estimated costs per month = $24,450