Cost Structure is the relative proportion of each type of cost within an organization. Cost structure not only refers to the breakdown of costs required to manufacture a product (or provide a service) but also takes into consideration the use of all types of resources along the way. This can include costs such as labour and utilities, as well as back end costs like sales and marketing expenses.
Understanding a company’s cost structure (assuming all costs have been verified) can give management a powerful competitive advantage since:
- The current condition of the cost structure leads to a better (and more precise) determination of the unit price for each product produced (since the unit cost must exceed the actual expense of producing the product).
- 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 a more responsible use of the resources on hand.