馃攳
WHAT IS A COST STRUCTURE? - YouTube
Channel: unknown
[0]
it goes without saying that
[1]
understanding your costs is extremely
[3]
important for running a profitable
[5]
business a proper understanding of costs
[7]
is needed to make some investment
[9]
decisions pricing decisions deciding
[11]
whether to keep or kill a product
[12]
keeping track of your overall business
[14]
profitability among many other things
[16]
note however that I'm not talking about
[18]
keeping track of costs for tax or
[20]
compliance reasons in this video I'm
[23]
talking about keeping track of costs so
[25]
that you can make proper strategic
[27]
business decisions so in this video
[30]
we're going to cover a foundational
[31]
aspect of cost analysis the cost
[34]
structure boring as it may sound it
[36]
really is an important concept to master
[37]
for anyone wanted to make solid business
[40]
decisions so throughout the video we'll
[43]
be using the example of a bakery one of
[45]
the bakery's employees is a baker and he
[48]
bakes everything their bread pastries
[50]
pies cakes everything but the bakery
[53]
also has specialized cake decorator
[55]
whose only job consists of decorating
[57]
these beautiful wedding cakes now when
[60]
you think about the costs that go into
[62]
making one of these wedding cakes some
[63]
of them are quite obvious every cake
[67]
needs flour milk sugar eggs and butter
[70]
among other ingredients and obviously if
[73]
you want to make one more cake you need
[75]
to use the same amount of ingredients in
[77]
fact whenever you make one more cake you
[80]
need more ingredients so the overall
[82]
ingredients costs increases as more
[84]
cakes are made this costs that increase
[87]
as production volume increases our
[89]
variable costs and since we can easily
[92]
link the use of ingredients to a wedding
[94]
cakes production we say that these costs
[96]
are direct costs so the ingredients are
[99]
examples of direct variables costs of
[102]
selling a wedding cake another example
[104]
would be packaging since whenever a cake
[106]
is sold it needs to be packaged for
[109]
delivery but producing a wedding cake
[111]
has a lot more costs for example the
[114]
cake needs to be baked and whenever a
[116]
cake is to be baked we need to spend
[118]
some electricity to get the ovens going
[119]
the more cakes we bake the higher our
[122]
electricity bill will be so the
[125]
electricity cost increases whenever an
[127]
additional cake is made and therefore
[130]
we're again looking at a variable cost
[132]
however although
[134]
it's easy to see how baking more cakes
[136]
drives costs up it's a lot harder to say
[138]
what part of our electricity bill
[140]
corresponds to a cake since electricity
[142]
is needed for so many other things
[144]
besides making the wedding cakes
[146]
therefore we can try to allocate the
[148]
electricity costs to wedding cakes but
[151]
it's not so easy and it requires some
[153]
judgment these types of costs are what
[156]
we call indirect costs
[157]
so when costs change with production
[160]
volume but can't be easily linked to a
[163]
cost object we say we have indirect
[166]
variable costs but to run this bakery
[169]
business selling wedding cakes there are
[171]
some other very important costs that are
[173]
neither directly related to making cakes
[175]
nor vary with production volume in other
[178]
words they are indirect and fixed an
[182]
example might be the bakeries rent if
[184]
you bake and sell a cake you need to pay
[187]
rent but you always have to pay the same
[189]
regardless of how many cakes you bake
[191]
and sell so since this cost does not
[195]
increase as more cakes are made it is
[197]
fixed and just as in the case of the
[199]
electricity seen before you can allocate
[201]
this costs to wedding cakes but it's not
[204]
so straightforward
[205]
they are indirect another indirect fixed
[208]
cost might be the salary of the person
[211]
selling the cakes and the breads
[212]
although this may vary a lot depending
[214]
on your local labor laws but for the
[217]
purpose of this video let's assume that
[219]
hiring and firing someone isn't
[220]
something that you can do from one day
[222]
to the next so the salary would be the
[225]
same every month regardless of how many
[227]
cakes are sold and you cannot link that
[229]
cost to a specific product line like
[231]
wedding cakes breads or whichever
[233]
product the bakery made have an
[235]
important thing to note here is that
[237]
fixed costs are only fixed within a
[239]
relevant range of production meaning
[241]
that they stay the same as long as
[244]
production volume stays within an
[245]
interval for example let's assume that
[249]
the demand for the bakeries products all
[250]
of the sudden doubles if the bakery
[252]
isn't working anywhere near its full
[254]
capacity it may be possible to meet the
[256]
extra demand without having to hire more
[258]
sellers or expanding the capacity limit
[261]
however if the demand for the Baker's
[264]
products increased 10 times the
[266]
bakery might not have enough capacity to
[268]
supply that demand and in case it is
[270]
cited to meet that demand it will
[272]
probably need to rent more space get
[275]
more ovens and more employees which will
[277]
therefore increase the fixed cost so the
[281]
fixed cost would have to increase to a
[283]
new level at which they would then again
[285]
remain fixed but for a new production
[287]
capacity and finally let's talk about
[290]
that cake decorator that I mentioned in
[292]
the beginning of the video whose only
[293]
job consists of decorating the wedding
[295]
cakes since we have to pay her salary
[297]
regardless of whether she decorates one
[300]
cake two cakes or 20 cakes employing her
[303]
is clearly a fixed cost because sure she
[307]
spends time whenever she decorates a
[308]
cake but since she earns a fixed salary
[310]
it does not cost us more for her to
[313]
decorate extra cakes of course has seen
[316]
previously within the production volume
[318]
limits imposed by the hour see works per
[320]
day so if what we are analyzing is the
[324]
cost of producing the wedding cakes her
[326]
salary is a direct cost if we produce
[329]
wedding cakes we need to employ her if
[331]
we want to produce those cakes we won't
[334]
have this cost this means that in the
[337]
case of the wedding cake decorator when
[339]
we are analyzing the costs of wedding
[341]
cakes the cost of employing her are
[343]
direct fixed costs so summing up the
[348]
first thing we need to do to understand
[350]
our cost structure is to ask the
[352]
question do costs change has the number
[355]
of produced units changes if the answer
[358]
is yes we have variable costs if the
[361]
answer is no the costs are fixed and the
[365]
second question we would need to ask is
[367]
can costs be easily linked to a cost
[370]
object if the answer is yes the costs
[373]
are direct if the answer is no the costs
[376]
are indirect but note here that I say
[379]
cost object and this is a very important
[382]
detail because the same cost can be
[385]
direct or indirect depending on the
[388]
analysis we are doing let me clarify
[390]
throughout the presentation although I
[393]
never mentioned it the cost object that
[395]
I was considering was the wedding cakes
[397]
production line
[399]
in this case the ingredients were
[402]
examples of direct federal costs the
[404]
wedding cake decorator was a direct
[406]
fixed cost the electricity to bake the
[408]
cakes was an indirect variable cost and
[410]
the bakery's rent was an indirect fixed
[413]
cost but this analysis would be
[416]
interesting if what we were trying to
[418]
make business decisions about was the
[420]
future of the wedding cakes production
[421]
line but if we had a chain of bakeries
[425]
and we were trying to make a decision
[426]
about whether to close a store then we
[429]
should be analyzing cost per store and
[431]
the entire store would be our cost
[433]
object if that was the case all the
[435]
costs related to running that store
[437]
would be direct costs of our new cost
[439]
object and that would include the rent
[442]
and the salaries of the employees
[444]
working for that store the only indirect
[447]
costs in that case would be those
[448]
generated by the central activities
[450]
required to manage the source network I
[452]
hope that wasn't too confusing but in
[455]
case that was let me know in the
[456]
comments anyway this video is only meant
[459]
to cover the basics of the cost
[461]
structure so that those of you who
[462]
aren't familiar with it can still follow
[464]
along the videos about the break-even
[465]
point and the contribution margin that
[467]
keeps coming up in pricing videos it
[469]
wasn't meant to turn you into managerial
[471]
accountants so I hope you found it
[474]
useful and has mentioned let me know in
[476]
the comments if anything wasn't clear
[477]
see in the next video bye
Most Recent Videos:
You can go back to the homepage right here: Homepage