What is Cost Structure? - Definition, Types & Examples

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  • 0:00 Definition of Cost Structure
  • 0:44 Cost Types
  • 1:25 Creating a Cost Structure
  • 2:21 Another Example
  • 3:24 Lesson Summary
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

In this lesson, you'll learn how important it is for businesses to know just what kinds of costs they need to be aware of in order to stay in operation. You'll also learn how a business figures out just what kinds of costs it will incur.

Definition of Cost Structure

Each business is unique. Just think about it. If you ran a cupcake shop, you'd need a lot of ingredients to make the cupcakes and lots of boxes to package your cupcakes. On the other hand, if you owned a pet shop, you would need lots of food to feed all your animals. You would also have to purchase your animals as babies, and you'd need lots of cleaning materials to keep your shop clean.

In order for you to be successful at your business, you'll need to know just what kinds of expenses you'll have so you can keep track of them. This list of the types of expenses your business will have, or has, is called your cost structure. In this lesson, you'll learn how a cost structure is set up and how you can create one of your own.

Cost Types

Imagine that you are running your very own cupcake shop. Your target audience is brides-to-be. The cupcakes you make look like miniature wedding cakes. Some even come in layers! To help you keep track of your expenses, you write down and list all of the expenses related to keeping your cupcake operation up and running. This is where your cost structure comes in.

There are two major cost types for your cost structure. You have what are called fixed costs, which are costs that do not change, like your rent, and then you have your variable costs, which are costs that do change, like the cost of your ingredients.

You'll be listing different expenses under their respective cost types.

Creating a Cost Structure

To create the cost structure for your cupcake business, you need to sit down and think about all the things you need to keep your shop running. So, ask yourself questions like:

  • What do I need to make my cupcakes?
  • What do I need to serve my customers?
  • What do I need to ship my cupcakes?
  • Do I need employees?
  • What do I need to maintain the store?
  • What costs are fixed and which are variable?

After answering these kinds of questions, customized to your business, you are now ready to create your cost structure.

You split your costs between your two cost types, and you list them like this:

Fixed Costs Variable Costs
Rent Ingredients
Wages Packaging
Equipment maintenance costs Office supplies
Travel to events

Your cost structure doesn't have to be complicated. All you need is to list all areas of your business that cost money to operate.

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