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Cost structure is all about how costs associated with the sale of a product or service are classified for business. It is defined by several variables and allows a business to ascertain the cost of operation on a wide, company-broad level or a personal product level.
Cost structure includes every cost that is related to selling a product or service, as well as how those costs are classified. Most variables that can influence how a business refers to cost structure are cost items such as services, projects, products, customers, as well as business activities. Furthermore, cost structure may differ even within a business based on product lines, business divisions, or units.
The cost structure is one of the major facets of any business as it has to do with the sources and categories of the costs incurred by the business. Cost structure can have a notable influence on the profitability, sustainability, as well as sustainability of the business. The cost structure is therefore important to entrepreneurship in the following ways:
It assists in the estimation of the sum cost of business and compares it with the anticipated incomes and benefits. This can help assess the financial viability as well as the ROI of the business in making informed decisions.
It helps in identifying fixed and variable costs and how they change as time passes and across varied scenarios. This helps in efficient planning and allocation of resources and optimization of cost quality and performance.
It helps understand the uncertainties and the possible adverse outcomes associated with the business and how they can influence the business outcome as well as goals. It also helps to expect and reduce probable cost overruns and shortfalls, as well as manage business reserves and contingencies.
It is also helpful for communicating and justifying business costs to stakeholders and sponsors and gaining their support as well as approval. This further helps in aligning business anticipations and deliverables with the stakeholders' requirements and needs.
Cost-incited or Cost-driven
Cost-incited or driven businesses concentrate on the provision of low-cost products and services, placing priorities on affordability for their customers. They carry out different costing strategies as well as optimize processes to keep costs as low as possible. An example of a Cost-driven business is the budget airlines that give lower prices than their rivals.
Value-incited or Value-driven
Value-incited business targets the delivery of excellent values to their customers. Although their products and services may not necessarily be the cheapest, they are concentrated on the provision of possible optimal quality and experience for the price. Examples of such businesses are premium airlines, proficient service providers, and luxury retailers that concentrate on the delivery of greater value instead of the lower price.
Fixed costs
These are business expenses that don't change regardless of the number of productions or services of the company. It includes utilities, rent, salaries, and taxes. Though these expenditures may fluctuate, they don't change with respect to the products and services sold by the business.
Variable costs
These cost changes in respect to the number of products and services sold by a business hence, can be said to be directly proportional to the products and services sold by the business. As a business increases in magnitude gives new products or raises sales of a product, its variable cost can increase. This usually includes bonuses and commissions, direct material costs, marketing costs, direct labor costs, and payroll taxes.
Material Costs
This has to do with the cost of components or physical materials utilized in the course of production or services. For instance, in the technology and information technology business, it may be software and hardware resources. In construction, it encompasses items such as bricks, concrete, and steel.
Overhead Expenses
These are indirect costs associated with administrative expenditures, office upkeep, and utilities, as well as other different non-production cost such as insurance of machinery, depreciation, and rent.
Fixed Costs
| Elements | Amount ($) |
|---|---|
| Rent | 500 |
| Utilities | 450 |
| Equipment | 700 |
| Insurance | 250 |
| Salaries | 1,000 (monthly) |
| Total | 2,900 |
Variable Costs
| Elements | Amount ($ daily) |
|---|---|
| Raw materials | 250 |
| Labor | 80 |
| Packaging | 60 |
| Delivery | 70 |
| Total | 460 |
Semi-Variable Costs
| Elements | Amount ($) |
|---|---|
| Utilities | 25 |
| Maintenance | 35 |
| Repairs | 15 |
| Total | 75 |
Total Costs
| Cost | Monthly Amount ($) |
|---|---|
| Fixed cost | 2,900 |
| Variable costs | 460 x 30 days = 13,800 |
| Semi-Variable | 75 |
| Total cost | 16,775 |
Revenue and Profit
| Revenue | Amount |
|---|---|
| 5 cakes daily at $30 per cake | 5 x 30 x 30 = 4,500 (monthly) |
| Desired profit margin | 25% = 0.25 |
| Anticipated profit | 4,500 x 0.25 = 1,125 |
| Desired monthly profit | $1,125 |
Thank you for reading.
Written by: @onyiluvdan
Inviting @chilaw, @chima09, and @mercybliss
Greetings @onyiluvdan
1.- You have presented the concept and importance of the cost structure, implying that it helps in the efficient planning of resources.
2.- You have mentioned the examples of businesses that fit the cost structure methods, which optimally guide towards the company's objectives.
3.- You have shared the elements of the cost structure, which every business must keep in mind.
4.- You have developed the proposed exercise in an acceptable and easy-to-analyze manner.
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