What is meant by a 'semi-variable cost'?

A 'semi-variable cost' refers to a cost that contains both fixed and variable elements. This means that part of the cost remains constant regardless of the level of production or activity, which represents the fixed component, while another part of the cost varies in accordance with the level of activity, reflecting the variable component.

For instance, consider a utility bill that charges a base fee (fixed) plus an additional charge that depends on usage (variable). As activity levels increase, the variable portion of the semi-variable cost will also increase, while the fixed portion remains unchanged. This type of cost structure is important for businesses to understand, as it helps in budgeting, forecasting, and analyzing how costs respond to changes in production levels.