When someone starts or run a business then cost and expenses are needed for it and breaking down of all these expenses and cost is all about structure of cost. I am going to share some costs types;
• There are some of expenses which remains same regardless of lesser or more production of products called fixed costs.
• There are some of expenses which don't remains same and change depending upon lesser or more production of products called fixed costs.
• There are some of the expenses in which there is presence of both fixed and variable components called semi variable costs.
Cost structure is important for entrepreneurship in different ways;
• When entrepreneur will understand cost structure properly then they can set pricing for setting their profit margins.
• Through cost structures entrepreneurs can point out areas in which cost can be minimised.
• When entrepreneurs will know about cost structure properly then they can make decisions related to Investments in technology or in new equipments.
• Entrepreneurs will anticipate and can manage flows of cash by taking help from proper cost structure.
• Entrepreneurs can get competitive edge in market by making optimisation in cost structure they have.
There are some of the businesses which are using different cost structure methods;
| Fixed cost structure |
|---|
These are type of cost structure that cannot altered regardless of increase or decrease in production of a particular business.
• Retailer store with fixed rent and salary is an example of it.
• In justification I can say that retailer store fixed cost remain unaltered irrespective of sales volume which make it crucial for management of cost properly.
| Variable cost structure |
|---|
These are type of cost structure that alters when there are any changes occurs in production of products in a business.
• Customised product manufacturing company that is producing products with variance in cost of raw materials is an example of it.
• In justification I can say that with any change in production volume company manufacturing variable costs will also alters so in this way for making profit it will be important for managing these cost.
| Semi variable cost structure |
|---|
These are some of the cost structures which use components of fixed and variable cost both.
• Transport company that have fixed and variable costs both like salaries of workers of transportation and fuel expenses respectively.
• In justification transport company use semi variable cost which is needed for managing of fixed and variable expenses in a balanced way.
| Activity based Costing |
|---|
These are some of cost methods which depends on usage of resources.
• Company which is working on development software is using ABC for allocating cost to different projects depending on usage of resources.
• In justification software development company is using ABC which is enabling precise allocation of cost for making better decisions.
There are different elements cost structure is using;
| Fixed cost structure |
|---|
These are type of cost structure that cannot altered regardless of increase or decrease in production of a particular business.
• Retailer store with fixed rent and salary is an example of it.
| Variable cost structure |
|---|
These are type of cost structure that alters when there are any changes occurs in production of products in a business.
• Customised product manufacturing company that is producing products with variance in cost of raw materials is an example of it.
| Semi variable cost structure |
|---|
These are some of the cost structures which use components of fixed and variable cost both.
• Transport company that have fixed and variable costs both like salaries of workers of transportation and fuel expenses respectively.
| Direct costs |
|---|
These are some of the expenses which have direct relationship with specific project or product.
• Raw materials, packaging and labor are examples.
| Indirect costs |
|---|
These are some of the expenses which have not any direct relationship with specific project or product.
• Salaries, insurance and rent are best examples.
| Operating cost |
|---|
There are some of the expenses which have relationship with day to day operations of business.
• Daily utilities, transports and maintenance are best examples.
These all elements are helpful for businesses in understanding and managing of costs in effective way through which profit making may be optimised.
Cost structure can be created by calculating all types of costs together by sum up them so let's start calculation;
| Fixed costs |
|---|
| Rent costs | $500/month in case of small bakery |
|---|---|
| Equipment costs | $200/month |
| Insurance cost | $150/month |
| Salaries for 2 employees | $1,500/month |
Fixed costs are around $2,350/month
| Variable cost |
|---|
| Ingredients including flour,eggs | $10 for each cake |
|---|---|
| Packaging materials like bags | $2/cake |
| Marketing expenses like flyers(Optional) | $5/cake |
Total variable cost are $17/cake
| Semi variable costs |
|---|
| Daily utilities like water,gas | $50/month if bakery is small |
|---|---|
| Transport costs like charges of delivery | $20/month |
Total semi variable costs are $70/month
Revenue generated and profitability
• Selling price for each cake will be around $35 if there's premium product.
• Daily generated revenue for 5 cakes is around $35/cake x 5 cakes for each day which is $175 per day after calculation.
• Monthly revenue generated is $175/day x 30 days which is calculated as $5,250 per month
Total profit obtained is around $5,250/month - $5,070/month = $180/month
Profit margin can be calculated by dividing 180$ per month with 5250$ per month and then multiplying it with 100 which is equal to 3.4%.
For achieving a 25% profit margin, business can be considered;
- Enhancing selling price for each cake
- Reduction of variable costs like negotiating better ingredient pricing
- Enhancement of operational efficiency for reducing semi-variable costs
- Investment in marketing for increasing sales volume
Very practical post. The bakery example in particular illustrates the types of costs in a great way. The applications you shared are very useful. Good luck for this contest.
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