How do companies choose cost structure? What is the nature and function of the operating scales? What are functional and dysfunctional scales of operation? These policy issues are related to the optimum overall cost of a business – with the right combination of spending that maximizes return on investment and shareholder wealth while at the same time minimizing operating costs.
It is clear that Efficiency Economies (MES) are correlated with the optimum cost structure and are critical to the business strategies designed to maximize the company's wealth-generating capacity. In these series, we deal with the management of effective spending on relevant strategic issues and offer some operational guidance. The primary purpose of this review is to highlight core cost theory, strategic spending relations, and industry best practices.
As we have already stated, the optimal cost structure and the appropriate operating size in each company are significantly different from the overall industry dynamics, market structure, degree of competition, entry height / exit barriers, market competitiveness, industry life cycle and market competition. In fact, as with most market performance indicators, the position of a company-specific cost structure is only one of the industry's expected value (average) and generally accepted industry benchmarks and best practices (1969) as one of the most important contributions to economic science. management science is the optimum derivative of the Bellmann equation – a dynamic programming method that makes decision-making problems smaller by partial problems and early applications based on Beckmann, Muth, Phelps and Merton and the resulting recursive model. In practice, any optimization problem has objectives that are often referred to as objective functions such as maximizing performance, maximizing profits, maximizing utility, minimizing total cost, minimizing cycle times, minimizing cost allocation, minimizing shipping costs, and more.
Cost structures consist of a combination of fixed costs, variable costs, and mixed costs. Fixed costs include costs that are equal to the volume of goods or services produced in the current production volume. Examples include payments, rents, and physical manufacturing opportunities. Many high-capital-intensive businesses, such as airlines and refineries, are characterized by a high rate of fixed costs that can effectively hinder the entry of new industry entrants. Please note that effective exit barriers are effective barriers to entry. If companies can not easily exit the loss-making markets due to high exit barriers, they should not enter this market.
Variable costs vary proportionally with the amount of products or services produced. Job-intensive businesses focusing on banking and insurance services are characterized by high rates of variable costs. In practice, variable costs often influence profit forecasts and calculation of business or project breakpoints
. Mixed cost items consist of constant and variable components. For example, some management costs typically do not change with the number of units produced. However, if production drops dramatically or reaches zero, dropout may occur. This is evidence of a long-term change in total cost
Finally, a company with a large number of variable costs (compared to fixed costs) more unit cost per unit and thus higher predictable unit of profit than a less cost variable enterprise. However, a company with less variable costs (and thus a higher number of fixed costs) may increase potential gains (and losses) as revenue (or decrease) revenue is applied to a more cost-effective level.
Most businesses determine costs for costs incurred in the cost object or activity. And as certain expenditures are difficult to determine, we often implement an activity-based project to better allocate costs to the cost structure of a cost or object in question and use activity-based accounting. Keep in mind that the time needed to complete this activity is a critical factor in cost management. Therefore, in order to minimize the top level of any activity or project, it is essential to minimize the time required to complete the activity or project. The following examples relate to the key elements of the cost structure of the various publishing objects:
Product Cost Structure : This structure has fixed costs that can include direct labor and manufacturing costs; and variable costs, which may include direct materials, production inventories, commissions and wages Cost of Service: This cost structure includes fixed costs, which may include administrative costs; and cost variables, which can include personal wages, bonuses, payroll, travel and entertainment.
Product Line Cost Structure: There are fixed costs in this structure that include administrative burdens; and variable costs, which may include direct materials, commissions, production inventories; and Customer Cost Structure: In this structure: Costs included in this cost structure have administrative burdens for customer service, warranty claims; and variable costs, which may include costs for products and services sold to a customer, product rebates, credits, early payment discounts.
The optimal cost structure is a combination of fixed and variable costs that minimizes total operating costs at the same time. The cost structure describes the costs associated with operating the business model (fixed and variable). Also Cost structure refers to the types and relative ratios of fixed and variable costs caused by a business. In practice, the cost concept can be categorized by region, product family, product item, customer group, department, or department.
In a cost-based pricing strategy, the cost structure is used as a technique that determines actual prices and identifies areas where expenditures can be potentially reduced or at least improved management control. Therefore, the concept of cost structure is a management accounting instrument that has many financial accounting applications
Business models have a cost to create value – this is by adding actual or perceived value; creating value creation and maintaining effective, mutually beneficial and satisfactory customer relationships; and value-taking, which is the result of a change in the value distribution of good or service and production chains. The objective function is to minimize total operating expenses. Such costs can be relatively easily calculated by cost drivers, key activities, and key input isolation; Key Resources and Strategic Partnerships
It is our experience to minimize operating costs in all business models. In addition, low-cost structures are more important than certain business models than others. Therefore, it is useful to distinguish between two major categories of business models: cost-driven and value-driven (many business models fall into these two extreme categories)
The DuPont model shows that return on investment is a product (net revenue / sales) rate (sales / total assets). The DuPont analysis shows that ROE is influenced by three factors – the operational efficiency, which is measured by Profit Margin; Asset efficiency, measured by Total Asset Turnover; and Financial leverage measured by capital multiplier: ROE = Retained earnings (profit / sales) * Total translation of assets Cost-driven business model driven business model focuses on minimum overhead costs wherever possible. This approach targets standardization and the least costly method by creating and maintaining the lowest possible cost structure with low and dynamic price suggestions, maximum automation and strategic outsourcing. – The value-driven business model – Under this business model, most businesses often do not deal with costs associated with a particular business model design and their main emphasis is on value creation. Premium value suggestions, customization, and a high degree of personalized service often characterize value-driven business models.
Some operating instructions
In practice, companies seeking optimization of cost management should optimize time management. One of the most significant revelations of activity-based accounting is the impact of time and activity on the general operating costs of companies: Cost structure activity and time-consuming activity. Therefore, time is the most important factor for efficient cost management. Simply put, companies need to reduce the time needed to carry out a specific activity to reduce the costs associated with the specific activity, ceteris paribus.
In addition, companies aspiring to leverage and optimize size economies should optimize the degree of operational cost savings. Please note that operating balances are workable and curve derivatives of logarithmic cost-cutting experience; learning effects; farms; division of labor; specialization; horizontal and vertical differentiation or a dysfunctional and long-term cost-enhancing derivative for reactive and embedded management with greed and personality-driven vision; organizational inertia; adaptive and abusive surveillance; increasing bureaucratic costs; lack of innovation; increasing internal and external transaction costs
In summary, companies optimize the cost structure through efficient time management and optimization of operating scales. Therefore, companies seeking to maximize profit-making capacity of an enterprise must define and implement dominant, effective and cost-effective strategies based on an appropriate combination of costs that maximize return on investment and shareholder wealth while at the same time minimizing operating costs. As we have already stated, more and more empirical evidence confirms that companies that choose scale and volume will better meet the premium ceteris paribust.
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