Explain variable cost and semi-variable cost with suitable examples.

Variable Cost

Variable costs are those costs which vary in amount with changes in the level of output or activity. They increase or decrease in the same proportion in which the level of output rises or falls.

Key features:

• Variable costs vary in total but remain constant per unit of production.
• There is a linear relationship between volume of output and total variable cost.
• They are activity-based and controllable in the short run.

Examples: Cost of raw material (e.g., sugarcane in a sugar mill), power and fuel consumed in production, wages paid to direct labour on piece-rate basis, wear and tear of machines.

For instance, when output rises from 5,000 to 6,000 units, total variable cost may rise from ₹25,000 to ₹30,000, but variable cost per unit remains ₹5.

Semi-Variable Cost (Semi-fixed Cost)

Semi-variable costs are costs which vary, but not in direct proportion, with changes in the volume of production. They are a combination of fixed and variable components — partly fixed and partly variable.

Key features:

• The fixed component represents the cost of providing capacity (must be incurred even if there is no activity).
• The variable component represents the cost of using the capacity (varies with usage).
• They are neither perfectly fixed nor absolutely variable.

Examples:

• Telephone bill — Fixed monthly rent (e.g., ₹500) + Variable call charges.
• Electricity bill — Fixed minimum charge + Variable consumption charge.
• Salary with commission — Fixed basic salary + Variable commission/incentive.