Cost structures identify how costs are distributed in producing a good or service, including labor, utilities, sales, and marketing. Analyzing the structure helps determine unit price and identify areas for greater efficiency.
Cost structures are simply the identification of how the costs associated with producing a good or service are distributed throughout the process. While some think that this structure refers only to the finances used in the production process, a true one will also take into account the use of all kinds of resources along the way. This can include costs such as labor and utilities, as well as back-end costs like sales and marketing expenses.
When trying to create a reasonable picture of the cost structure associated with the production of any type of good or service, the first step is to understand each individual step that occurs. This starts with the development of the product idea, the procurement of raw materials, and the creation of production facilities that are used to create the final product. At the same time, this structure will address all labor costs associated with each step. This will include not only the expense of wages and salaries, but also fringe benefits offered to employees, such as vacation, retirement, and health benefits. Essentially, any expense incurred to ensure that all the components necessary for production are in place will be part of the cost structure.
However, the components of an effective cost structure do not end when the good or service is produced. There are still the issues of storage, marketing and sales, and the transportation of the product to the consumer. This means that the structure must also include storage costs incurred while the product awaits sale, all costs associated with marketing and selling the product, and transportation and transaction costs incurred in delivering the product to a buyer.
Analyzing all of these factors as part of determining the current cost structure produces two important benefits for the producer. First, the current condition of the cost structure helps determine the unit price of each product produced. Obviously, the unit cost must exceed the actual expense of producing the product, or the company will soon be out of business. Second, evaluating the expenses that make up the cost structure can often help identify points along the process that can be refined for greater efficiency, or at least more responsible use of available resources. This aspect can also affect the final unit cost and possibly help increase the profit margin on each unit produced.
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