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What is a cost structure, and what is its importance for entrepreneurship?
Cost structure talks about the breakdown of all the cost and expenses during production and distribution of a product or service. It is the backbone of every business because it is needed in effectively putting together business cost and facilitate business decisions. It is categorised into components such as
Direct Component
This talks about every cost directly related to the product or service during the course of production and distribution. Examples are the raw materials used, man power, packaging materials and transportation
Indirect Cost
It talks about cost that are not directly related to producing and distributing the goods and services. Examples are marketing and advertising, rent payment, insurance etc
Fixed Cost
This component of cost structure remain unchanged as the name implies "fixed' regardless of the production volume or whether the business is going bankrupt or thriving
Example Rent of the business place, salaries of employees
Variable Costs
Here, cost varies directly with production volume or sales.
Examples are Raw materials and supplies,cost for production staff, Packaging materials and transportation costs
Operating Costs
These are ongoing expenses for running the business.
Examples: Salaries and wages, Rent or lease payments, Utilities bills (electricity, water, gas), Marketing and advertising expenses
Capital Expenditures (CapEx)
They are Long-term investments in assets that generate future benefits.
Examples: Purchasing new equipment or machines, acquiring new facilities, Investing in development
IMPORTANCE FOR ENTREPRENEURSHIP
- Helps in decision making and strategic planning
- Helps entrepreneur to set competitive prices based on cost
- Cost structure helps the entrepreneur to identify areas for cost reduction so as to improve profitability
- It anticipates and manages the outflow of cash
- It helps the entrepreneur monitor the business growth and for evaluation
- Also, helps I'm identifying and reducing potential cost related rush
Provide examples of businesses that use the cost structure methods explained; explain your answers.
Free source
Fixed Cost.
This is a structure where cost remains constant despite production sales.
Restaurants e.g McDonalds are perfect examples
Big restaurants and eateries like McDonald falls into this category because it has high network of restaurants, machines and staff salaries, rent of office
Capital Expenditures (CapEX)
This component deals with long term investments on equipment and properties
E.g Tesla Company
Tesla is known for investing heavily in manufacturing facilities, doing lots of research and development. These investments will aid the company to expand its presence in the car market amongst its competitors
Indirect Costs
Fitting into this category are companies that incur cost due to marketing and administration.
Example is Apple Company.
Their indirect cost include expenses from marketing and advertising, research, remodelling. They pump in so much funds into their advertising and remodeling, that is why Apple is a popular brand
Direct Cost
Example is Automobile Manufacturers e.g Ford
In this component, cost is incurred from cost of raw material, payment of staff, etc
What are the elements of a cost structure? Provide examples
Fixed Cost
In fixed cost, expenses are unchanged regardless of the volume of production or whether the business is doing well or not. These costs are there to maintain the operation of the business.
Example of fixed costs are
Rent for the office space, utility (light, water, internet) bill, payment of staff salaries, insurance
Variable Costs
Like the name is, this kind of cost structure, varies. Expenses here are incurred in the production and selling of the goods and services.
Examples are money used in getting the raw material, packaging, payment of staff,
intangible cost
This cost are not physical, but are related to producing and selling the goods or services. It is there to support the business operations
Example of intangible cost
Expenses on development, research, branding, consulting fee
Direct cost
These are expenses that are directly related to the production and selling of a goods and services.
Examples
Cost for purchasing the raw material, cost for packaging, cost for equipment
Indirect Expenses
These expenses are not in any way related to the manufacturing of the goods and services, but are needed for the business operations
Examples of
Payment of rent, staff salaries, utility bill, marketing and advertising
Capital Expenditures (CapEX)
These are expenses made for long term investments in getting assets. This expenses helps in the total production output.
Examples of CapEx are expenses for purchasing new machines, Investing in software, expenses used in acquiring new property
Prepare the cost structure of a business dedicated to making cakes. It has a production of 5 cakes per day and expects to obtain a total profit margin of 25%.
First, we will break them down into profit fixed cost, variable cost and desired profit margin so we can calculate our selling price
Fixed cost
Rent of shop £100 Utility Bill £40 Salaries £50 Insurance £25 Equipment Maintainance £15 Total £230
Variable cost (per cake)
Ingredients £15 Packaging £5 Gas for oven £3 Total £23
Monthly Production
Let's say, the business opens 25 days in a month (that is every Sunday is off day)
Daily production of 5 cakes
5 cakes × 25 days
Monthly Production= 125 cakes
Total Monthly Cost
Total variable cost = 125 cakes × 23
= 2,875
Total fixed cost =230
Total = 3,105
Pricing strategy (desired profit)
In other to achieve 25% profit margin, the price for selling should cover all expenses
Therefore;
25% of 3,105
= 776.25
Total Revenue Required
Total cost + Desired Profit
=3105 + 776.25
=3,881.25
Selling price per cake
Total Revenue ÷ monthly Production
3881.25 ÷ 125 cakes
=31.05
That is the cake will be sold at £31
There is my entry. Thank you for reading through.
I will invite @alexanderpeace @ruthjoe @eliany to participate in this contest
Cost structure talks about the breakdown of all the cost and expenses during production and distribution of a product or service. It is the backbone of every business because it is needed in effectively putting together business cost and facilitate business decisions. It is categorised into components such as
Direct Component
This talks about every cost directly related to the product or service during the course of production and distribution. Examples are the raw materials used, man power, packaging materials and transportation
Indirect Cost
It talks about cost that are not directly related to producing and distributing the goods and services. Examples are marketing and advertising, rent payment, insurance etc
Fixed Cost
This component of cost structure remain unchanged as the name implies "fixed' regardless of the production volume or whether the business is going bankrupt or thriving
Example Rent of the business place, salaries of employees
Variable Costs
Here, cost varies directly with production volume or sales.
Examples are Raw materials and supplies,cost for production staff, Packaging materials and transportation costs
Operating Costs
These are ongoing expenses for running the business.
Examples: Salaries and wages, Rent or lease payments, Utilities bills (electricity, water, gas), Marketing and advertising expenses
Capital Expenditures (CapEx)
They are Long-term investments in assets that generate future benefits.
Examples: Purchasing new equipment or machines, acquiring new facilities, Investing in development
IMPORTANCE FOR ENTREPRENEURSHIP
- Helps in decision making and strategic planning
- Helps entrepreneur to set competitive prices based on cost
- Cost structure helps the entrepreneur to identify areas for cost reduction so as to improve profitability
- It anticipates and manages the outflow of cash
- It helps the entrepreneur monitor the business growth and for evaluation
- Also, helps I'm identifying and reducing potential cost related rush
Free source
Fixed Cost.
This is a structure where cost remains constant despite production sales.
Restaurants e.g McDonalds are perfect examples
Big restaurants and eateries like McDonald falls into this category because it has high network of restaurants, machines and staff salaries, rent of office
Capital Expenditures (CapEX)
This component deals with long term investments on equipment and properties
E.g Tesla Company
Tesla is known for investing heavily in manufacturing facilities, doing lots of research and development. These investments will aid the company to expand its presence in the car market amongst its competitors
Indirect Costs
Fitting into this category are companies that incur cost due to marketing and administration.
Example is Apple Company.
Their indirect cost include expenses from marketing and advertising, research, remodelling. They pump in so much funds into their advertising and remodeling, that is why Apple is a popular brand
Direct Cost
Example is Automobile Manufacturers e.g Ford
In this component, cost is incurred from cost of raw material, payment of staff, etc
Fixed Cost
In fixed cost, expenses are unchanged regardless of the volume of production or whether the business is doing well or not. These costs are there to maintain the operation of the business.
Example of fixed costs are
Rent for the office space, utility (light, water, internet) bill, payment of staff salaries, insurance
Variable Costs
Like the name is, this kind of cost structure, varies. Expenses here are incurred in the production and selling of the goods and services.
Examples are money used in getting the raw material, packaging, payment of staff,
intangible cost
This cost are not physical, but are related to producing and selling the goods or services. It is there to support the business operations
Example of intangible cost
Expenses on development, research, branding, consulting fee
Direct cost
These are expenses that are directly related to the production and selling of a goods and services.
Examples
Cost for purchasing the raw material, cost for packaging, cost for equipment
Indirect Expenses
These expenses are not in any way related to the manufacturing of the goods and services, but are needed for the business operations
Examples of
Payment of rent, staff salaries, utility bill, marketing and advertising
Capital Expenditures (CapEX)
These are expenses made for long term investments in getting assets. This expenses helps in the total production output.
Examples of CapEx are expenses for purchasing new machines, Investing in software, expenses used in acquiring new property
First, we will break them down into profit fixed cost, variable cost and desired profit margin so we can calculate our selling price
Fixed cost
| Rent of shop | £100 |
|---|---|
| Utility Bill | £40 |
| Salaries | £50 |
| Insurance | £25 |
| Equipment Maintainance | £15 |
| Total | £230 |
Variable cost (per cake)
| Ingredients | £15 |
|---|---|
| Packaging | £5 |
| Gas for oven | £3 |
| Total | £23 |
Monthly Production
Let's say, the business opens 25 days in a month (that is every Sunday is off day)
Daily production of 5 cakes
5 cakes × 25 days
Monthly Production= 125 cakes
Total Monthly Cost
Total variable cost = 125 cakes × 23
= 2,875
Total fixed cost =230
Total = 3,105
Pricing strategy (desired profit)
In other to achieve 25% profit margin, the price for selling should cover all expenses
Therefore;
25% of 3,105
= 776.25
Total Revenue Required
Total cost + Desired Profit
=3105 + 776.25
=3,881.25
Selling price per cake
Total Revenue ÷ monthly Production
3881.25 ÷ 125 cakes
=31.05
That is the cake will be sold at £31
There is my entry. Thank you for reading through.
I will invite @alexanderpeace @ruthjoe @eliany to participate in this contest