Fundamentals of Financial and Cost Accounting · Classification of Costs (CAS 1)

Fixed, Variable and Semi-Variable Costs Explained

Updated 10 October 2026 · Fact-checked

Cost behaviour describes how a cost changes when activity changes. A fixed cost stays the same in total within the relevant range. A variable cost changes in total in direct proportion to activity. A semi-variable cost has a fixed part and a variable part. Split it using total cost = fixed + variable rate × units.

Understand Fixed, Variable and Semi-Variable Costs

Costs do not all react the same way when you produce more or less. Classification by behaviour (also called by variability) groups costs by how their total changes when the level of activity changes. Activity can be units produced, machine hours, labour hours or units sold.

Fixed costs do not change in total when activity changes within a relevant range. Rent of a factory, salary of the supervisor and insurance are common examples. But the fixed cost per unit falls as output rises, because the same total is spread over more units.

Variable costs change in total in direct proportion to activity. Direct materials and piece-rate wages are examples. If output doubles, total variable cost doubles. The variable cost per unit stays constant.

Semi-variable (mixed) costs have both parts. A telephone bill with a fixed rental plus a charge per call is a good example. Electricity with a minimum charge plus a per-unit charge is another. A step cost is fixed over a band of activity and then jumps to a higher level, such as one supervisor for every 50 workers.

On a graph, a fixed cost is a horizontal line. A variable cost is a straight line starting at the origin and rising. A semi-variable cost is a straight line that starts on the vertical axis at the fixed amount and rises. A step cost looks like a staircase.

Key formulas to remember

Total fixed cost: Total fixed cost = constant within the relevant range; Does not change with output in total. Fixed cost per unit = Total fixed cost ÷ Units, which falls as units rise.
Total variable cost: Total variable cost = Variable cost per unit × Units; Variable cost per unit is constant. Total rises in proportion to units.
Semi-variable cost: Total cost = Fixed part + (Variable rate × Units); Use this to find the cost at any activity level once the two parts are known.
Variable rate from two levels (high-low): Variable rate = (Cost at high level − Cost at low level) ÷ (High units − Low units); Then Fixed part = Total cost − Variable rate × Units at either level.
Total cost: Total cost = Total fixed cost + Total variable cost; Cost per unit = Total cost ÷ Units.

How to solve Fixed, Variable and Semi-Variable Costs questions

Use this order for any question on cost behaviour, whether it is a concept MCQ or a numerical.

1Read what changes: total cost or cost per unit. Many wrong options swap these.
2Name the cost type from the clue words: 'does not change', 'in proportion', 'minimum charge plus', 'steps up'.
3For concept questions, recall the graph shape: horizontal for fixed, line through origin for variable, line from a positive intercept for semi-variable.
4For a numerical, check that the new activity lies in the relevant range before using the same fixed cost.
5If a cost is mixed, take two activity levels and find the variable rate by dividing the change in cost by the change in units.
6Find the fixed part by subtracting variable cost from total cost at one level.
7Compute the required total or per-unit figure and re-check using the other level as a test.

Quickest way: Two-point split for mixed costs

When to use it: Use when an MCQ gives total cost at two output levels and asks for the fixed cost, variable rate or cost at a third level.

Subtract the lower cost from the higher cost.
Subtract the lower units from the higher units.
Divide the first result by the second to get the variable rate.
Multiply the rate by units at one level and subtract from that total to get the fixed part.
Find the answer and eliminate options that fail the check at the other level.

Common mistakes in Fixed, Variable and Semi-Variable Costs

Saying fixed cost per unit is constant.
The word 'fixed' is applied to every figure, including per-unit cost.
Fix: Remember: fixed is fixed in total; per unit it falls as output rises. Variable is the opposite: constant per unit, changing in total.
Treating a semi-variable cost as fully variable.
Students multiply the total cost by the new units ratio.
Fix: Split it first. Only the variable part scales with activity; the fixed part stays.
Drawing the variable cost line from the vertical axis.
It gets confused with the semi-variable line.
Fix: Variable cost is zero at zero activity, so its line starts at the origin. Semi-variable starts at the fixed amount.
Assuming fixed costs never change at all.
The relevant range condition is skipped.
Fix: Fixed costs stay constant only within a relevant range. Beyond capacity, new fixed costs arise, which is the idea behind step costs.
Mixing up step cost and semi-variable cost.
Both have a fixed element and both change with activity.
Fix: A step cost is fixed over a band and jumps; a semi-variable cost has a fixed part plus a smoothly rising variable part.

Worked examples

Example 1

A factory's maintenance cost is ₹40,000 when 2,000 units are produced and ₹55,000 when 3,500 units are produced. What is the maintenance cost at 3,000 units?

Show the solution

Change in cost = 55,000 − 40,000 = ₹15,000.
Change in units = 3,500 − 2,000 = 1,500 units.
Variable rate = 15,000 ÷ 1,500 = ₹10 per unit.
Fixed part = 40,000 − (10 × 2,000) = 40,000 − 20,000 = ₹20,000.
Check at 3,500 units: 20,000 + 10 × 3,500 = ₹55,000, which matches.
Cost at 3,000 units = 20,000 + 10 × 3,000 = ₹50,000.

Answer: ₹50,000

Example 2

Fixed cost of a firm is ₹2,40,000 a year and variable cost is ₹30 per unit. Find the total cost and cost per unit at 8,000 units and at 12,000 units, both within the relevant range.

Show the solution

At 8,000 units: variable cost = 30 × 8,000 = ₹2,40,000.
Total cost = 2,40,000 + 2,40,000 = ₹4,80,000.
Cost per unit = 4,80,000 ÷ 8,000 = ₹60.
At 12,000 units: variable cost = 30 × 12,000 = ₹3,60,000.
Total cost = 2,40,000 + 3,60,000 = ₹6,00,000.
Cost per unit = 6,00,000 ÷ 12,000 = ₹50.
Fixed cost per unit fell from ₹30 to ₹20, so cost per unit fell by ₹10.

Answer: At 8,000 units: total ₹4,80,000, ₹60 per unit. At 12,000 units: total ₹6,00,000, ₹50 per unit.

Exam tips

Questions often test the total versus per-unit distinction. Underline which one is asked before looking at options.
Learn the four graph shapes: horizontal, line from origin, line from a positive intercept, and staircase.
Memorise standard examples: rent and insurance as fixed; direct materials as variable; telephone and electricity bills as semi-variable; supervisors per batch of workers as step.
For numericals, do the two-point split on rough paper in under a minute and verify with the second level.
There is no negative marking, so always answer. Eliminate options that treat per-unit fixed cost as constant.

Practice questions from Classification of Costs (CAS 1)

Fixed, Variable and Semi-Variable Costs in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CA IntermediateOverhead Variances (Variable and Fixed)

Fixed, Variable and Semi-Variable Costs: frequently asked questions

What is the difference between fixed cost and variable cost?

A fixed cost stays the same in total when activity changes within the relevant range, while a variable cost changes in total in direct proportion to activity. Per unit, fixed cost falls as output rises and variable cost stays constant.

What is a semi-variable cost with an example?

It is a cost with both a fixed and a variable part. A telephone bill with a monthly rental plus a charge per call is a typical example. You split it into the two parts before using it in calculations.

How is a step cost different from a semi-variable cost?

A step cost stays constant over a range of activity and then jumps to a new level, like one supervisor for every fixed number of workers. A semi-variable cost has a fixed part and a variable part that rises steadily with activity.

How do I solve cost behaviour numericals?

Find the variable rate by dividing the change in total cost by the change in units. Then find the fixed part by subtracting variable cost from total cost at one level. Use total cost = fixed + rate × units for the level asked.