When a business manufactures a product or creates a service there will always be certain costs involved. The nature of these costs will depend on the exact product or service being offered. Cost structure refers to the way that all the different costs are distributed throughout the process of creating a good or service. It will include such things as paying for the resources needed to make the product and other costs such as labor and electricity. The money spent marketing and delivering the item will also be included in this too.
The Importance of Cost Structure
Understanding the cost structure for any product or service is very important for a business. This is especially true if they make a number of different items. If the company has no real idea about how much it is costing them to get something to the consumer it will be hard for them to decide on an appropriate price. It could end up in a situation where they are charging less for something than it is actually costing them to get to the customer. These days there is a lot of pressure on businesses to sell items as cheaply as possible, but if they have no idea of their costs they will find it hard to decide on how much they can lower their price. If a company is charging too little or too much for a product it could soon put them out of business. By understanding the cost structure they will be able to avoid all this.
Another important reason why a business will want to understand the structure of costs is that it will allow them to see exactly where there money is going. This information can be used to point out any unnecessary wastage. If the business discovers that one part of the process is taking up a lot of money they will be able to re-examine things to see if they can make it more cost-effective. In fact by having a cost structure they will be able to examine every aspect of the process in an attempt to reduce costs.
How to Create a Cost Structure
If a business wishes to know the costs of every part of the process of production they will first need to break down this process into steps. For most items the first step will be product development followed by buying of materials. The more effective the business is at breaking down the steps of production the more useful will be the information available in their cost structure. It is important that everything is included. For instance, the company won’t just be taking into account the labor costs for every step of the process but also the other benefits that the employee receives such as holiday pay and bonuses. There are also other costs such as storage of the finished product and marketing; these too need to be taken into account. This all means then that determining cost structure can be a very involved task.