Definition: A mixed cost is an expense that has attributes of both fixed and variable costs. In other words, it’s a cost that changes with the volume of production like a variable cost and can’t be completely eliminated like a fixed cost.
What Does Mixed Cost Mean?
Wage costs for employees who are paid a monthly salary plus commissions are a good example of mixed costs. This is a common compensation package for salesmen and sales reps. They usually receive a small base salary and commissions based on how many sales they make during the period.
The monthly salary is a fixed cost because it can’t be eliminated. Even if the salesperson doesn’t sell anything during the month, the company still has to pay the base salary.
The commission, on the other hand, acts more like a variable cost because it’s based on the productivity of the employee. The more the employee sells the greater the sales commission expense becomes. The company can eliminate this expense altogether if it doesn’t sell anything for the month.
The relationship between fixed and variable costs is usually shown on a CVP analysis with the fixed costs displayed as a horizontal line intersecting the y axis at a value above zero and the variable costs displayed by a diagonal line starting on the origin. The y-axis measures the costs and the x-axis measures product or sales volume.
This graph shows that the company can’t completely eliminate fixed costs. Even if the company does sell or produce a single product, there will still be fixed costs. Since mixed costs have characteristics of both fixed and variable costs, they are usually separated into segments in order to be graphed. Going back to our example, the salary would be graphed like a fixed cost and the commissions would be graphed like a variable cost.