Cost Structure
It is easy to increase raw materials, labor and supplies to meet demand but not so easy to buy a new forklift since they are capital investment which require large financial outlays and time for completion
A proper understanding of cost structure hinges on the fundamental distinction between fixed costs and variable costs. Fixed costs can be classified into two categories:
- (1) committed fixed costs, p
- (2) discretionary fixed costs. Committed fixed costs are costs associated with investments in basic organizational assets and structure (e.g., depreciation, insurance expenses, property taxes, and administrative salaries). Such costs are long term in nature (several years) and cannot be significantly reduced in the short term even during periods of diminished activity. In contrast,
Discretionary fixed costs (e.g., advertising, repairs and maintenance, research and development) are short term in nature (one year). Such costs can be altered by current managerial decisions with minimal damage to an organization's long-term goals. As a result, these costs are generally the first to be cut during bad times.
In terms of per unit and total comparisons, fixed costs that are expressed on a per-unit basis will vary inversely with the level of activity. In other words, unitized fixed costs will decrease as volume increases and vice versa. However, in total, fixed costs remain constant within the relevant range. For example, rent will not increase if a factory is working at full capacity or at minimum capacity, or if an outpatient clinic serves one patient or 20 patients daily. The relevant range is the range within which a factory, business, hospital, school, etc. can operate without increasing the size of its operations in the short run. Within this range, assumptions about variable and fixed cost behavior are reasonably valid.
In contrast to