A fixed cost stays the same in total as activity changes, a variable cost moves in proportion to activity, and a semi variable cost has a fixed part plus a part that varies. Splitting costs this way lets you forecast costs at any level of sales, set prices that cover them and see how profit will move when volume changes. The split only holds within the range of activity the business has actually experienced.

What do fixed, variable and semi variable costs mean?

  • Variable costs rise and fall in line with output or sales: materials, goods for resale, packaging, sales commission, card fees, subcontractors paid per job.
  • Fixed costs do not change in total when activity changes in the short term: rent, business rates, insurance, salaried staff, software subscriptions, depreciation.
  • Semi variable (or semi fixed) costs mix the two. ACCA’s example is a telephone bill with a fixed monthly rental and a variable charge for calls; energy, vehicle running costs and many service contracts behave the same way.
  • Stepped costs are fixed within a band and then jump: a second van, another supervisor, a bigger unit.

FRS 102 draws the same line for stock valuation. Paragraph 13.8 describes fixed production overheads as indirect costs that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and equipment, and variable production overheads as indirect costs that vary directly, or nearly directly, with volume, such as indirect materials and indirect labour.

Behaviour is about how a cost responds to activity, not what the account is called. Wages are variable if staff are paid per piece or sent home when work is short, and fixed if they are salaried. The same nominal ledger line can behave differently in two businesses.

Why does the relevant range matter?

ACCA’s cost volume profit article warns that treating costs and revenue as straight lines is only likely to hold for a short run and a restricted level of activity, and that fixed costs remain constant over the relevant range: the levels of activity the business has experience of and can predict with some accuracy. Outside that range, fixed costs step up, suppliers change their prices and staff need overtime.

The same article makes a point that catches many owners out: fixed cost per unit is not a constant. Total fixed costs are used in calculations because fixed cost per unit varies with output. A business with £120,000 of fixed costs carries £12 per unit at 10,000 units and £24 per unit at 5,000. Any forecast or price built on a fixed cost per unit is quietly assuming a volume.

How do you split a semi variable cost?

Three methods are used, in rising order of reliability.

High low method

Take the periods with the highest and lowest activity. The change in cost divided by the change in activity gives the variable cost per unit; subtracting the variable element from either total gives the fixed part. It is quick but relies on only two observations, so an unusual month distorts it.

Line of best fit

ACCA describes plotting every period’s cost against activity and drawing the line that best fits the points. The weakness, as ACCA notes, is that different people can draw different lines through the same data.

Regression analysis

Regression finds the line statistically in the form y = a + bx, where a is the fixed element and b the variable cost per unit. In ACCA’s worked example, eight quarters of production data give y = 208.90 + 9.1x, so the fixed element is about $208,900 a quarter and each thousand units adds $9,100. The coefficient of determination of 0.931 means 93.1% of the change in cost is explained by activity. ACCA cautions that regression suggests a relationship but cannot prove it, and that past observations may not predict the future when the business environment changes.

What does a worked example look like?

Illustration only. A workshop’s energy bills over six months range from £3,400 in its quietest month (2,000 machine hours) to £6,100 in its busiest (5,000 machine hours).

Step Working Result
Variable cost per hour (£6,100 less £3,400) divided by (5,000 less 2,000 hours) £0.90
Fixed element £6,100 less (5,000 x £0.90) £1,600 a month
Check at low point £1,600 plus (2,000 x £0.90) £3,400
Forecast at 4,000 hours £1,600 plus (4,000 x £0.90) £5,200

If the owner had simply averaged cost per hour from the busiest month (£1.22) and applied it to 2,500 hours, the forecast would be £3,050, which is £800 short of the true £3,850. The error comes from treating the fixed £1,600 as if it disappeared when activity fell.

How is cost behaviour used in forecasting?

  • Flexed budgets. Once each cost is split, the budget can be redrawn for the actual level of activity, so variances show real overspending rather than the effect of volume. See budgeting for small businesses.
  • Break even and margin of safety. Fixed costs divided by contribution per unit gives the break even volume; the method is explained in break even analysis.
  • Scenarios. A cost model with separate fixed and variable lines lets you test a 20% drop in sales properly, because only the variable costs fall with it. See scenario and sensitivity analysis.
  • Step points. Note the volume at which each stepped cost jumps; growth plans that cross a step look worse in the month the new cost starts.
  • Learning effects. ACCA’s article on the learning curve explains that people get quicker at repetitive tasks, so labour time per unit can fall as cumulative output grows. A new product’s labour cost per unit is often higher at first than it will be later.

Keep inflation separate from behaviour. A rent review increases a fixed cost; it does not make rent variable.

How does cost behaviour feed into pricing?

ACCA’s pricing article contrasts two cost plus approaches. With marginal cost of $120 and a 25% markup, the price is $150 and each unit contributes $30 towards fixed costs; whether that produces a profit depends on volume. With total absorption cost of $160 (adding $40 of fixed overhead per unit) and a 20% markup, the price is $192. The absorption price looks safer but builds in an assumed volume through the overhead rate.

Understanding behaviour shows where each is useful. For a one off order using spare capacity, any price above variable cost adds contribution, provided it does not undercut normal prices. For standard list prices, fixed costs must be recovered somewhere. A business that raises prices to spread fixed costs over falling volumes can lose more sales and push unit costs higher still. More on this in pricing methods and contribution margin.

How do the statutory accounts treat fixed and variable overheads?

For stock and work in progress, FRS 102 paragraph 13.9 requires fixed production overheads to be allocated on the basis of normal capacity, meaning the production expected on average over a number of periods. The fixed overhead allocated to each unit is not increased because of low production or idle plant, and unallocated overheads are expensed in the period. Variable production overheads are allocated on actual use. So the statutory figures already rely on the fixed and variable split, and a quiet year should not inflate stock values. The management accounting consequences are covered in absorption vs marginal costing.

What mistakes come up most often?

  • Classifying by account name instead of by how the cost actually responds to activity.
  • Treating all staff costs as variable when most staff are salaried and would be paid anyway.
  • Using a fixed cost per unit in forecasts at a different volume from the one it was calculated on.
  • Extrapolating far outside the relevant range, for example doubling sales without allowing for new premises or staff.
  • Relying on a high low split from distorted months, such as a month with a one off repair or a bulk purchase.
  • Mixing price inflation with volume effects, which makes fixed costs look variable.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.