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Cost structure analysis is a process that reviews all types of costs required to complete production processes. It includes a review of cost types, cost behavior, and break-even analysis to define how efficiently and effectively a company completes activities. Identifying costs helps the review process, and management accountants often engage in cost structure analysis activities to determine if a product or product line is generating enough profit to pay costs and generate profit.
Cost structure analysis is a common process for production manufacturing companies. The activity reviews all types of costs required to complete the production processes. The different cost structure analysis methods include a review of cost types, cost behavior, and break-even analysis. Each method focuses on a different part of the company’s business activities to define how efficiently and effectively the company completes the activities. Other companies can also use this analysis to improve efficiency.
There are many types of costs in a company. Cost structure analysis usually begins with a review of each type. Common types of costs include sunk, marginal, and fixed costs, which can be the most expensive in production and manufacturing. Sunk costs represent money spent that cannot be recovered by any business action; marginal cost is the additional cost to produce one more unit; and fixed costs are those items that a business needs to make goods, such as buildings and equipment. Identifying these costs helps the review process in subsequent methods.
Cost behavior defines how a company’s costs act in terms of production and manufacturing activities. The definition of cost behavior in cost structure analysis helps management accountants create a cost accounting system. Variable costs change with the volume of production in a company. These costs can be utilities, labor hours, or direct materials used to produce a good or service. Fixed costs do not change over time and include items such as depreciation, rent, property taxes, or management salaries.
Break-even analysis helps a company determine how much sales revenue is needed to cover all operating costs. This activity is quite important in cost structure analysis. Many companies also use this formula to define the sales needed to achieve the revenue goal. The basic formula here is fixed cost plus total variable cost. Total variable costs are production output multiplied by variable cost per unit.
Management accountants often engage in cost structure analysis activities on a frequent basis. Accountants help a business determine whether a product or product line is generating enough profit to pay costs and generate profit. Businesses can also compare their revenue performance with other businesses. This allows the company to understand if it is making enough profit based on its cost structure. Cost reduction is one of two ways a company can improve its profits to generate better financial returns.
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