Cost structure is a structure that refers to the types and proportion of different costs present in a business accounting systems. The main objective to design a cost structure is to define the prices of the products, by product. This concept can be more utilized in a system where pricing is done using cost based pricing strategy. This structure can also be used to highlight those areas where the cost must be reduced in order to achieve more control. Cost structure is used by the management accounting and it is not used by the financial accounting staff.
The cost structure is designed and defined by relating every incurred cost to its cost object. Below we are highlighting the cost associated with each cost object in the accounting system of a business entity.
- Cost Structure of Product
o Fixed Costs : Direct Labor Costs, Manufacturing Costs
o Variable Costs: Direct material cost, commissions, production supplies, wage rate
- Service Cost Structure
o Fixed Cost Structure: Administrative Overheads
o Variable Costs: Staff wages, bonus, payroll taxes, travel expense, entertainment expense
- Product Line Cost Structure
o Fixed Cost :Administrative overheads, manufacturing overhead, direct labor
o Variable Costs: Direct materials, commissions, production costs
- Consumer Cost Structure
o Fixed Costs: Administrative overhead for customer service, warranty claims
o Variable Costs: Costs of products and services sold to the customer, product returns, credit taken, discounts taken