HomeProductsAccountingIntroduction to the Concept of Cost Structure

Introduction to the Concept of Cost Structure [2022]

Cost becomes one of the essential elements in a company’s financial statements. Understanding the concept of cost structure is very important for the company. If the business can control well, the industry’s impact will get maximum profit.

Of course, product development, product sales, customer relationships, and after-sales service all cost money. You can easily calculate the costs if you understand the primary resources, the main activities, and the primary partnerships. 

Costs usually include fixed and variable costs. No matter how many products are produced, fixed costs are understood as fixed costs. For example, fixed costs are building rent, permanent employee salaries, and more.

In addition, this cost structure is commonly known as the method of controlling production costs. The primary purpose of this structure is to obtain planning and decision-making in a business.

Understand more in terms, types, elements, to how to allocate cost structure below. After understanding more, refine cost components and improve more efficient business control. For example, you can control your company’s procurement costs with HashMicro’s Purchasing System.

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Table of Contents

What is Cost Structure?

cost structure

The cost structure incurred in producing and marketing goods and services. The cost structure will explain all the business’s costs to operate.

Companies in cost structure refer to the different costs incurred, generally consisting of fixed and variable costs. Fixed costs remain constant regardless of the amount of output a company produces, whereas variable costs vary according to production volume.

Therefore, expenses in a company’s financial statements depend on the products or services sold, projects or activities held, company customers, and other business activities. Even within a company, the spending pattern can vary between product lines, divisions, or business units, because the types of activities that businesses do are different.

Also Read: Know What a Lean Canvas Business Model Is

 

Types of Cost Structure Analysis

Different types of cost activities occur in the cost structure; Here are some types of cost structures:

Fixed types of cost

A flat fee is a type of cost that does not change in proportion to the number of goods or services a company produces. In other words, these costs will remain constant regardless of the number of goods or services produced.

The fixed cost has a fixed amount, but that amount will not always be the same. These costs may change in the future. A simple illustration is a cost of renting a building. Although this cost is arguably fixed and constant, it can change at any time based on the building owner’s wishes.

This means that costs will remain constant over the current period and may increase or decrease in the next period. However, these changes usually occur over a more extended period.

Examples of fixed costs are depreciation, insurance, salaries, rental, and more.

Variable costs

Unlike fixed costs, variable costs change as the number of products produced changes. The higher the production, the higher the variable cost. Also, the lower the production, the lower the number of variable costs.

Examples of variable costs are raw materials, product packaging costs, shipping cargo costs, wholesale employee wage costs, etc. 

Allocating costs

Cost allocation is analyzing and collecting costs that arise to perform cost objects more precisely. Examples include well-structured products, projects, departments, business units, and consumers.

After that, the company will generally use this cost allocation to perform those costs according to the activities of different cost objects to achieve calculations and profits. 

Cost pool

A cost pool is a distinct set of costs for which the company must make the next cost allocation. Simple examples of collecting these costs include overheads, maintenance, and other flat expenses. Typically, businesses allocate costs from the cost pool to a designated cost object using a single cost allocation basis, such as working hours or machine hours.

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What are the elements of cost structure?

cost structure

The following are some examples of production expenditure structure elements:

Customer cost structure

  • A flat fee is an additional administrative fee for customer service and warranty claims. 
  • Variable costs are the cost of the goods and services you sell to customers, the return on sales, and the credit notes you receive.

Product cost structure

  • Fixed costs are divided into direct labor costs and factory overhead costs. 
  • Variable costs are divided into direct materials, production equipment, costs, and cutwork.

Service cost structure

  • Fixed costs, including additional management fees.
  • Variable costs include employee salaries, bonuses, tax credits withholding taxes, travel, and entertainment.

The cost structure of the product line

  • Fixed costs have administrative costs, production costs, and direct labor. 
  • Variable costs include direct materials, manufacturing equipment, and commissions. You may need to map these costs from various activities to the cost structure of a specific object.

Cost Structure-function for the Company

The business’s cost structure is fundamental, especially for the finance division. Generally, determine this cost by using fixed and variable cost elements.

Given that this is related to the business’s financial health, then it should be that every company can make a cost structure. Because, by utilizing expenditure structure, the company will be able to control various divisions and make efficient spending efforts in the future.

Also Read: Business Model Canvas: Definition, Benefits, and Elements

After discussing the cost structure of a business, you now have a basic understanding of financing and its various forms. Arrange and choose the rules for multiple activities intelligently and carefully. Budget management can help your business become more efficient and reduce the risk of loss.

The Example of Cost Structure

Examples of Cost Structure Allocation

With the collection of costs, the production overhead cost uses direct working hours to calculate cost allocation.

At first, the business will undoubtedly accumulate the company’s overhead costs over time.

For example, in one year, the total overhead costs are divided by the total hours worked to determine overhead costs, i.e., cost per hour or allocation rate.

Thus, the business will double the hourly cost by the number of hours worked in producing the product to arrive at a specific overhead cost.

Conclusion

Cost Structure

To optimize the company’s revenue, you should look for as many steps as possible to minimize cost structure. In addition, since fixed costs are essential for a company’s operations, a person with financial analytical skills should monitor financial statements.

The financial statements should show whether there is a possibility of high costs and whether an economic activity is making a profit or not. Meanwhile, a financial analyst familiar with the structure of production costs must find a way to reduce costs without implying product quality.

Thus, businesses can use this analysis to monitor cost trends to ensure that stable cash flow and unexpected cost increases do not occur or are minimal. The cost allocation function can help an analyst to be able to calculate the cost per unit based on some product, business unit, or department, until knowing the profit per unit.

Automate cash flow management, financial statement creation, bank reconciliation, adjustment journals, invoice creation, and more with Accounting Software from HashMicro. The budget management feature manages the budget and sets the approval matrix based on the available budget.

 

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Fadel Rasyid
Fadel Rasyid
I see myself as an active and curious person. Constantly open to learning and growing with values. I never can't see the bright side of a situation — a content writer at HashMicro & a digital marketing enthusiast.

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