coststructure

Cost structure is the relative proportion of fixed and variable costs that a firm incurs in delivering its products or services. Fixed costs remain constant within a relevant range of activity, such as rent, salaries, and depreciation. Variable costs vary with output, including materials, direct labor per unit, and sales commissions.

A typical cost structure includes cost of goods sold (COGS), which covers direct materials and manufacturing labor, and operating expenses, including selling, general and administrative costs. Indirect costs or overhead, such as utilities and depreciation on equipment, support production without being tied to a single unit.

The balance between fixed and variable costs shapes profitability and risk. High fixed costs create greater operating leverage, increasing potential profits at higher volumes but also elevating risk when demand declines. Variable-heavy structures provide greater flexibility but may limit scale advantages.

Business planning uses cost structure analysis to determine break-even points, target margins, and pricing. Techniques such as break-even analysis and activity-based costing help allocate overhead more accurately and identify cost drivers. Firms may seek to optimize cost structure by outsourcing, automation, redesigning processes, or shifting the mix of products or services to alter the fixed-to-variable ratio.

Industry differences are common: capital-intensive manufacturing often carries higher fixed costs, while service and project-based firms may incur more variable costs. Understanding cost structure is essential for budgeting, forecasting, and strategic decisions.