What are the different types of cost structures?
Cost structures are different ways that the manufacturer can manage the operating budget so that the fixed cost ratio to variable costs brings the highest profitability. In general, there are three types of cost structures: production point, origin of process and purchase structure. Each of these cost structures focuses on the business area where the change in the allocation of expenditure causes changes in operational efficiency. Usually, a type of cost structure is more suitable for specific types of businesses.
The company's operating budget consists of fixed and variable costs. Fixed costs are costs that remain the same each month. An example of fixed costs is the rent with a flat rate paid for the facility on the basis of an agreement that extends the total rental of rent after 12 months in the same installments. This expenditure is known in advance and is contractually determined. It cannot be easily changed to reduce costs.
On the other hand, variable costs change each month. Company has some control over these expenditure. AcrossFor example, the employee mobile phone fees are variable costs that change every month based on use. Managers have the ability to reduce these costs by limiting use and it is a change that can be made immediately.
Management decisions that allow companies to work with costs that are more or less in fixed or variable categories include its cost structure. There are three general types of cost structures that managers can accept. The structures of the cost of the production point assign fixed and variable expenses based on whether there are cost savings involved in the transfer of the production point to another location, such as offshore. The structures of the cost of the process look at fixed and variable expenditures based on whether it is more cost -effective to maintain production processes internally or is an outsourcing specialist for a third party.
Purchasing of Ana's costThey ski solid and variable expenses associated with the purchase of raw materials. This is one of the most popular structures of consumer goods manufacturers, as raw material costs are 60 to 80 percent of total operating costs. Managers must often be careful when they align their operating budgets to suit one of these three structures. Moving to reduce variable expenditure may result in strategic disadvantages that have their own expenses, such as loss of efficiency by moving the plant to a foreign country or creating a more complex distribution system of outsourcing parts of business.