Dear all,
Wondering what the best way is to structure fixed costs?
Variable costs can be ideally splitted along the value chain:
- Procurement (material costs, inbound logistics costs, inventory)
- Production (wages, maintenance of machines, electricity etc.)
- Distribution (packaging, transport costs, customs)
But what is the best way to substructure fixed costs?
Thanks a lot.
Best
There is no one best way. Industries will usually have a very significant fixed cost component, Services often a larger variable cost component - but inside FC & VC, a number of parameters will come into play depending on the business model.
If it helps though, you can think of the following: Rent/Utilities (fixed but you can always move if needed) / Machinery & amortization / G&A / "Others".
I never expect a candidate to think of all the costs; what I do expect however, is that you take a crack at it and suggest a couple of potential costs; asking me then "is there any other cost I should be concerned with" is perfectly acceptable and moves the case efficiently along.
Simple answer: the same! If you can distribute variable costs across the value chain, you should also be able to do the same for fixed cost! Or in other words: for each part of the value chain, you split the costs into fixed and variable. Hint: don't forget support functions such as marketing, finance & admin etc. in your value chain!
Cheers, Sidi
Hi,
It depends on the industry. Utilities and rent may be a fixed cost as well. Labor is very often partially or fully fixed. Also, most of the candidates forget about marketing as a fixed cost. Pls always take the industry and business model contexts into account
Best
