 In this presentation we will discuss mixed costs. In prior presentation we discussed the concept of breaking out costs, not how we normally see them on the income statement by their function, by what they do, by what their purpose. Support a counting instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it is, but instead by behavior by how they act. And we had two standard categories about how costs act. We group things into two standard categories, those between variable costs and fixed costs, variable costs being things like materials which will go up with production level, down with production level, and those things that won't go up or down with production level, for example, the rent. So if we had something like the units here units increasing as we increase the units of production, we see that variable costs will go up such as direct materials will typically go up because it's going to go up with an increase in the production level. However, fixed costs like the rent as the units go up stay the same. There we have that 20,000 total costs then have a variable and fixed component to it. So we've seen this in prior presentations. If we were to graph this, then we could see it clearly on the graph here. This 20,000 represents the fixed costs, this red line being the fixed costs that are staying the same as the production level increases, the red line stays the same. The variable costs start at zero, meaning if we don't make anything, then we don't have any variable costs and they're going up at a constant rate in this example because they're going up as we go up with production each new item giving a fixed level that will increase at a constant slope in this case. And those are the variable costs total costs then start at the fixed cost area because of course at zero production level, we still have to pay the rent and then they're going to increase at a standard level in relationship to the increase in the variable costs. So this would be the great this is nice and neat. It's easy for us to see in this format. However, there is the fact that we can't normally break out all costs between this nice neat fixed and variable costs. Sometimes we're going to have what's known as mixed costs and we're going to have to go through all of our costs, all of our expenses and say is it variable? Is it fixed or is it mixed? If it's mixed, then we're going to have to do something to it to break it out to its components. So mixed costs could be something like wages because wages we know it's going to have maybe a salary component. We're going to have part of the wages that are salaries and we might have part of the wages that are commissioned. The commission is more of a variable cost. The salaries are more of a fixed cost. So we might have other kind of variables involved. So when we look at just the expense item, we can't just say well that cost is variable or fixed. It's going to be mixed in some format. We're going to have to do some work there then if we want to break it out into the components of the two, which we do, which are variable and fixed for the CVP analysis. Utilities might have a different breakout for different reasons. So it might have a fixed base amount. For example, if we don't do anything, we might have a base amount of utilities. We still have to pay some utilities possibly. And then it might go up at some type of fixed or variable type of rate after that point. So it might act as a variable at some point. So you can see that then when we think about these mixed costs, in other words, we're going to have to go through all of our costs first of all and see where they categorize them. Are they fixed? Are they variable? Are they mixed? And then we're going to have to go look at those mixed costs and look how they behave. How can we break these out? Because that's what we're going to want to do between the fixed and variable portion of these mixed costs. And as we do so, we need to consider what kind of things we'll probably see there. Something like this, where wage is acting a little bit differently than the mixed costs of utilities. All mixed costs, in other words, are not going to be the same. What do you do for the CVP in the terms of these fixed costs, of these mixed costs? We separate them as best we can. It is not a perfect world. This is not accounting. It's not a perfect world. We're going to have to be using estimates. We're going to have to go into these mixed costs and say, okay, we don't like, we can't do mixed costs. They're too confusing. We don't want to deal with them. We need to break them out between fixed and variable. That's what we have to have for our contribution margin income statement. Mixed costs don't fit in there at all. So we're going to have to break those out somehow. It's not going to be perfect to do this. So we're going to have to go through all of those mixed costs and try to figure out how best can we do that. And there's certain methods to do this. Now, remember, these methods are not generally accepted accounting principles. They're not written in stone anywhere. These are best practices for us to try to consider. How best we can break these out so that we can do the work of projections into the future, which of course, in and of themselves are not perfect, their estimates, their projections into the future. So we're not financial accounting is more about us taking something that already happened and reporting it in accordance with a certain set of rules. Here we're projecting into the future. So we're trying to think, what's the best thing we can do? What matters in terms of our decision making? What doesn't matter in terms of our decision making? How can we break these out in some type of way that's a good estimate that will help us for decisions but also doesn't cost too much for us to be grinding these numbers out forever? We can grind numbers out forever. So one way that the the mixed costs could be broken out is we could have a stepwise type cost. And this might be something like salaries. We might see this in salaries where the salaries act kind of variable for a while and then they plateau and they become fixed. So we might see in terms of administrative salaries, this might happen where it's fixed for a certain amount because they have salaries. And then maybe at some point in time, there's bonuses or maybe at some point in time after a certain production level, then there's a salary increase or something like that. And therefore we see this kind of step pattern for those type of costs. Well, when we see that type of pattern, we can we can say, okay, we see we see this type of pattern and we can predict that type of pattern. We can we can take that into consideration when we consider our forecasting into the future, our projections. We can usually treat it then as either fixed or variable by analyzing this pattern and just and thinking about, okay, is this the relevant range when we're talking about a variable type of range or is this the relevant range that we're thinking about in our projection that's a fixed type of range. And therefore within our analysis, we may be able to break out within those ranges, whether it be fixed or variable, that's one way we can kind of step or treat a certain type of mixed costs when we see this type of pattern. We also might see more of a curvilinear type of cost pattern. In other words, it's not going up in a straight linear line, but instead it's got a shape to it. And that's going to have some changes. So now it's not as easy to deal with. Obviously straight lines are a lot easier to deal with. So now we see that as as this goes up as the units go up, the mixed cost is going up, but it's not going up at a standard amount. It might be something like direct labor. It's where we might see a pattern such as this because the direct labor can be a little bit confusing. Of course, it's not completely straightforward. We might be paying someone hourly as they make the production levels, but things can change within the production level. For example, if we start hiring people, the first people that we hire will typically increase our production level more quickly. And then at some point it'll flatten out. If we hire more people, then they won't increase the production level quite as quickly. And then at some point in time, of course, if we hire more people, they'll actually get in the way of each other. And our productivity won't increase with more people that we hire. So in that case, then we're not going to see possibly the straight line variable cost system in a curvilinear type of cost system such as this, we're going to have to figure out then because we want to graph in terms of a straight line for the CVP analysis so that we can make a nice easy type of analysis. So in cases like this, we have this kind of funny curvilinear mixed costs. We're going to have to figure out some kind of ways. Well, how can we break this out into such a way that make it strictly variable and a strictly fixed type of portion? That's what we'll need to see more of a linear type of fashion so that we can put this into a contribution margin income statement so we can use projections into the future. We'll discuss a few ways to do that in future presentations.