Direct and Indirect ..instead of fixed and variable

cost structure
New answer on May 04, 2020
8 Answers
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Anonymous A asked on Mar 04, 2020

Hello Everyone,

why do candiaites usually refer to fixed and variable cost when it could be easier to start with Direct and Indirect which is easier and relatable? .. anythoughts?

Thanks!

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Sidi
Expert
replied on Mar 05, 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers

Hi!

You should not limit yourself while structuring! Instead of just regurgitating "I want to split into fixed and variable cost" (no seasoned consultant would do this with a client!!) , you should discuss in a more mature way. One possiblity could be to say something like:

"In order to scrutinize and quantify the cost side, we will need to disaggregate costs into logical components. We could do it in a classical way by distinguishing into fixed and variable cost components, or we could possibly go along the value chain, or we could opt for another split. This will depend on the concrete information and data at our disposal, so we need to see what makes most sense here."

By doing this, you convey to the interviewer that you know exactly what you are talking about. However, at the same time you cast the ball back into his field by implicitly saying "Well, the exact path that I will take here will depend on what information you have for me my friend."

Cheers, Sidi

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Anonymous replied on May 03, 2020

It really depends on the case situation. For example:

  1. If the case involve an large upfront investment probably better to use Capex vs Opex split
  2. If the case is about identifying cost saving opportunities from operations probably better to use value chain breakdown
  3. Etc

I would also suggest to confirm to the interviewer once you propose a path to ensure that he/she understand your reasoning

The key things is to understand what is the case question, what analysis you need to do to answer the question and what data do you need.

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Ian
Expert
Content Creator
replied on May 04, 2020
MBB | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Hi,

Just remember these key principles:

1) MECE

2) Appropriate to the contexct

3) Fits your style/way of thinking and approaching problems

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Anonymous replied on May 03, 2020

Hey there,

Agree with others that it deosn't really matter how you name the buckets of costs, as long as you have the right key cost components covered, which could be quite industry specific. If you have the right components, in some cases you don't even need to put them into 2 buckets.

Best,

Emily

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Nathaniel
Expert
replied on Mar 06, 2020
McKinsey | BCG | CERN| University of Cambridge

Hello there,

How to divide the cost should depends on the nature of the industry and the case in question.
Other ways includes categorizing it based on the value chain.

Never opt for a specific categoriztion method just becuase it is easier.
Focus on crafting your own logic and utilize categorization which would help the client in addressing the issue the most.

Hope it helps.

Kind regards,
Nathan

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Robert
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Content Creator
replied on Mar 05, 2020
McKinsey offers w/o final round interviews - 100% risk-free - 10+ years MBB coaching experience - Multiple book author

Hi Anonymous,

The question should be less what is easier or not, but what is more appropriate in terms of structuring the case.

Whenever you are in a high fixed-cost / varialbe-cost business it might make sense to structure along those buckets, especially when you want to understand impact of top-line change (revenue) on bottom-line (profits).

Hope that helps - if so, please give it a thumbs-up with the upvote button!

Robert

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Clara
Expert
Content Creator
replied on Mar 05, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

It´s not a good approach to have a pre-defined framework for splitting the costs, let it be fixed vs. variable or direct vs. indirect.

The important thing is to be able to think on your feet and decide which is the best structure per each case (this depends on the industry, the goals... in a nutshell, needs to be shapped according to the prompt).

Hope it helps!

Cheers,

Clara

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Francesco
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Content Creator
replied on Mar 05, 2020
#1 Coach for Sessions (4.000+) | 1.400+ 5-Star Reviews | Proven Success (➡ InterviewOffers.com) | Ex BCG | 9Y+ Coaching

Hi Anonymous,

direct or indirect could also be fine although a bit unusual. So far that your structure is MECE and you can identify all the relevant costs, it doesn’t really matter if you use fix vs variable or direct vs indirect (or even analyse the value chain). The important thing is that you keep a first level of the structure, and then start to brainstorm for each bucket after laying down your approach instead of brainstorming immediately different costs.

Hope this helps,
Francesco

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Sidi gave the best answer

Sidi

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers
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