Cost structure: should I always use fixed cost vs. variable cost?

Hi there,

I would argue that you should almost never use FC and VC

This is overly generic, and as an interview I always shake my head when this is used.

Everyone knows FC/VC and this doesn't actually break down costs in a way that helps you solve your problem!

Rather, think about whether it makes sense to break things down by product, geography, customer, back-office vs. front-office, etc.

Think about the case, then use that to determine your cost structure. Make sense?

No need to always use FC/VC method. Follow the case and take hint from it.

Sometimes, you will have to sketch out the value chain.

Have a look at these very helpful Q&A on similar question:

• https://www.preplounge.com/en/consulting-forum/structureframework-for-cost-cutting-cases-8689
• https://www.preplounge.com/en/consulting-forum/when-should-i-break-down-costs-as-fixed-and-variable-as-opposed-to-over-the-value-chain-5990

Regarding your question on salary, if employees are on full-time contracts and paid fixed annual salary, then its Fixed Cost. If they are on hourly contract, then its Variable.

Hi there, 

The right approach depends very much on the type of cases. Aside from the examples you mentioned, I'd also take into account direct vs indirect costs. Try to keep all of these in mind as you're approaching the case and figure out which would make most sense in your context. Getting good at cases means exactly this - developing the necessary flexibility to approach any case leveraging your prior experience. 

Hi!

Very interesting question!

You should break down costs in the most appropriate fashion for the specific case. For instance, you might segment based on a process flow, direct vs indirect costs, etc.

Hope this helps.

Best,

Anto

As laid out by other experts, you don't have to force this breakdown. Instead, think of other MECE categories for operating costs that match the specific problem. As a consultant, your job is generally to challenge whatever needs to be challenged - including such doctrines.

The moment candidates enter the cost bucket in their profit structure and give me the old “so there's fixed and variable costs” they've missed an opportunity to shine by simply skipping an intellectual step. Worst case, it simply doesn't make sense and I have to mark them down.

Not sure about cost vs expense though. There's a technical difference between the two but they're generally used very interchangeably, which may lead to confusion.

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