Cost structure analysis is a common process for production manufacturing companies.
Cost structure analysis is a common process for production manufacturing companies. The activity analyzes 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 in order to define how efficiently and effectively the company completes the activities. Other companies can also use this analysis to improve efficiency.
Many types of costs exist in a company. Cost structure analysis typically 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 the items a company needs to manufacture goods, such as buildings and equipment. Identifying these costs helps the review process in later methods.
Cost behavior defines how a company’s costs act in terms of production and manufacturing activities. Defining cost behavior in cost structure analysis helps management accountants to create a cost accounting system. Variable costs change with a company’s production volume. These costs can be utilities, labor hours, or direct materials used in producing 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 the company determine how much sales revenue is needed to cover all operating costs. This activity is very important in the analysis of the cost structure. Many companies also use this formula to define the sales needed to achieve the desired revenue. The basic formula here is fixed cost plus total variable cost. Total variable costs are output times variable cost per unit.
Management accountants often engage in cost structure analysis activities frequently. Accountants help a business determine whether a product or product line is generating enough profits to pay the costs and make a profit. Companies can also compare their revenue performance with other companies. This allows the company to understand if it is making enough profit based on its cost structure. Reducing costs is one of two ways a company can increase profits to generate better financial returns.