Question

Discuss why firms have differing costs structures. Example of firms costs structure.

Answer 1

Fixed costs are routinely incurred, and are unlikely to fluctuate over time. Examples of fixed costs are payroll costs such as rent, interest payments, real estate taxes and fixed asset depreciation. A specific example of fixed cost is the direct cost of labor. Although the direct labor cost appears to vary depending on the amount of hours employed by an employee, it also tends to be relatively constant and can thus be regarded as a fixed cost, although it is more generally known as a variable cost for hourly employees.

Variable costs are costs which vary with production. Variable cost sources include direct labor costs , direct material costs , insurance, incentives and fees, and marketing costs. The variable costs continue to vary more than the fixed costs. Variable costs may include direct supplies, fees, and piece-rate compensation for companies selling goods. Variable expenses are comprised of salaries , bonuses and travel costs for service providers. Costs such as wages and other project costs depend on the amount of hours spent in each of the projects for project-based organizations.

Cost allocation is the method of defining costs incurred, and then calculating and assigning them on a observable basis to the correct cost objects ( e.g., product lines, service lines, programs, divisions, business units, customers). In order to calculate the profitability of, for example, different product lines, cost allocation is used to distribute costs among various cost objects.

A cost pool is a collection of individual costs, from which subsequent allocations of costs are made. Typical examples of cost pools are overhead costs, maintenance costs, and other fixed costs. A company usually uses a single cost allocation basis for allocating costs from cost pools to designated cost objects, such as work hours or machine hours.