UrbanPro
true

Take ICWA(CMA) Coaching from the Best Tutors

  • Affordable fees
  • 1-1 or Group class
  • Flexible Timings
  • Verified Tutors

Search in

Cost Structure

Karthikeyan
06/03/2018 0 0

Cost structure refers to the types and relative proportions of fixed and variable costs that a business incurs. The concept can be defined in smaller units, such as by product, service, product line, customer, division, or geographic region. Cost structure is used as a tool to determine prices, if you are using a cost-based pricing strategy, as well as to highlight areas in which costs might potentially be reduced or at least subjected to better control. Thus, the cost structure concept is a management accounting concept; it has no applicability to financial accounting.

To define a cost structure, you need to define every cost incurred in relation to a cost object. The following bullet points highlight key elements of the cost structures of various cost objects:

i. Product cost structure:

  • Fixed costs. Direct labor, manufacturing overhead
  • Variable costs. Direct materials, commissions, production supplies, piece rate wages

ii. Service cost structure:

  • Fixed costs. Administrative overhead
  • Variable costs. Staff wages, bonuses, payroll taxes, travel and entertainment
  • Product line cost structure
    • Fixed costs. Administrative overhead, manufacturing overhead, direct labor
    • Variable costs. Direct materials, commissions, production supplies
  • Customer cost structure
    • Fixed costs. Administrative overhead for customer service, warranty claims
    • Variable costs. Costs of products and services sold to the customer, product returns, credits taken, early payment discounts taken

Some of the preceding costs can be difficult to define, so you may need to implement an activity-based costing project to more closely assign costs to the cost structure of the cost object in question.

You can alter the competitive posture of a business by altering its cost structure, not only in total, but between its fixed and variable cost components. For example, you could outsource the functions of a department to a supplier who is willing to bill the company based on usage levels. By doing so, you are eliminating a fixed cost in favor of a variable cost, which means that the company now has a lower break even point, so that it can still earn a profit at lower sales levels.

A knowledge of the capacity levels associated with the existing fixed cost structure can also allow a business to increase its profits by lowering prices sufficiently to maximize the utilization of a fixed cost item. For example, if a company has spent $100,000 on a high-capacity automated machine and it is currently only being utilized 10% of the time, a reasonable action would be to obtain more work to increase the amount of cash earned from that machine, even at prices that might normally be considered low. This type of pricing behavior is only possible if you have a detailed knowledge of the cost structure of a business.

0 Dislike
Follow 2

Please Enter a comment

Submit

Other Lessons for You

Proposed 18% GST Rate To Not Impact Home Prices.
While a final decision on the rates is yet to be taken, the rating agency said the final rates to be notified would be the key determinant of the impact of GST on the sector New Delhi: The proposed...

A short Concept of Dividend in Accountancy :--
A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, paid to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock,...
K

GST: Goods And Service Tax
What is GST? Goods and Services Tax, GST is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level. Through a tax credit mechanism, this tax is collected...

Introduction Of Auditing
What is Audit? It can be said that auditing is the process by which a competent independent individual collects and evaluates evidence to form an opinion and communicates his opinion to the person interested,...

Essential Elements of a Valid Contract
Essential Elements of a Valid Contract: (i) Agreement: In order to constitute a contract, there must be an agreement in first place. An agreement in turn is composed of two elements-offer and acceptance....
X

Looking for ICWA(CMA) Coaching Classes?

The best tutors for ICWA(CMA) Coaching Classes are on UrbanPro

  • Select the best Tutor
  • Book & Attend a Free Demo
  • Pay and start Learning

Take ICWA(CMA) Coaching with the Best Tutors

The best Tutors for ICWA(CMA) Coaching Classes are on UrbanPro

This website uses cookies

We use cookies to improve user experience. Choose what cookies you allow us to use. You can read more about our Cookie Policy in our Privacy Policy

Accept All
Decline All

UrbanPro.com is India's largest network of most trusted tutors and institutes. Over 55 lakh students rely on UrbanPro.com, to fulfill their learning requirements across 1,000+ categories. Using UrbanPro.com, parents, and students can compare multiple Tutors and Institutes and choose the one that best suits their requirements. More than 7.5 lakh verified Tutors and Institutes are helping millions of students every day and growing their tutoring business on UrbanPro.com. Whether you are looking for a tutor to learn mathematics, a German language trainer to brush up your German language skills or an institute to upgrade your IT skills, we have got the best selection of Tutors and Training Institutes for you. Read more