What is a Cost Structure?

Cost structures are simply the identification of how costs associated with the production of a good or service are distributed throughout the process. While some think of this structure as referring only to the finances utilized in the production process, a true one will also take into consideration the use of all types 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 attempting 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 begins with the development of the idea for the product, the acquisition of raw materials, and the creation of production facilities that are used to create the end 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 ancillary benefits offered to employees, such as vacation, retirement, and health benefits. Essentially, any expense that is incurred to ensure all the necessary components 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 matters of storage, marketing and sales, and the conveyance of the product to the consumer. This means that the structure must also include warehousing costs incurred while the product awaits sale, all costs associated with marketing and selling the product, and the transportation and transaction costs that are incurred while delivering the product to a buyer.

Analyzing all these factors as part of determining the current cost structure yield two important benefits for the producer. First, the current condition of the cost structure aids in helping to determine the unit price for 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 a more responsible use of the resources on hand. This aspect can also impact the final unit cost, and possibly help to increase the profit margin on each unit produced.