In economics, the cost is the monetary value of the consumption of factors that involves the exercise of an economic activity aimed at the production of a good, service or activity. Any production process of a good involves the consumption or wear of a series of productive factors, so the concept of cost is closely linked to the sacrifice incurred to produce such good.
Costs can be classified in different ways, here we present some of the most important, with a brief description for each of them:
According to the functional area with which it is related
Under a traditional approach, it is necessary to specify if the investment is made in the production area, in the distribution area or in the administration area.
According to their identification with the value proposition
They can be direct costs or indirect costs, given the way they are related to the generation of the value proposition. For example, raw material is considered a direct cost and financing an indirect cost.
According to their behavior with the volume of activity
Variable costs are those that change directly with changes in the volume of activities related to the generation of the value proposition. For their part, fixed costs remain constant regardless of the volume of activities.
CHARACTERISTICS AND STRATEGIES OF THE COST STRUCTURE
One of the most important characteristics to highlight has to do with the description of the fixed costs and the variable costs of the structure. This will allow us to determine the breakeven point of the business model, defined as the minimum number of value propositions that must be sold to cover all costs.
On the other hand, you must decide on the direction that you will give the business in terms of adopting a low-cost strategy, based on cost-cutting policies and low-price value propositions, or implement a profit strategy focused on contribution of value to the business and not so concerned about costs.
Questions to Ponder About Cost Structure
What are the most significant costs?
Useful to locate which are the elements that require a greater investment in the business and on which it is necessary to focus when minimizing costs.
What are the most costly key resources and activities?
It is used to determine the main costs of these modules and evaluate their relationship with the contribution to the value proposition, in order to achieve a coherent business model.
Taking into account the above, it is recommended to use the following formulas to calculate the cost structure of your company.
Basic or direct cost = Consumption of raw materials + Direct labor + Energy + Other direct costs
Industrial cost = Direct cost + Indirect general industrial costs + Indirect manufacturing labor
Operating cost = Industrial cost + General administration and sales costs + Indirect administration and sales labor
Company cost = Operating cost + Financial costs
If you require advice on how to create your cost structure, our team of advisers is at your disposal, additionally if you are a client of our company, you can take the course dedicated to financial strategies for your company in our business academy.