SLC | S21W6 | Costs for entrepreneurs - Cost structure.
🔸[Hello #costs-s21w6 ]🔸 |
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Hello &. Namaste to Everyone |
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What is a cost structure, and what is its importance for entrepreneurship? |
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If any entrepreneur wants to run successful business so they can not skip cost structure. Although it is final part of any business but it plays very important role. Because when you make any product, so it's raw material costs, transportation cost, labour cost, packing cost, rent of place , electric cost, delivery cost etc have to calculate and after that they add their margin profit to sell in market .
Understand it's importance, like if you skip any cost structure element so you will calculate your wrong profit because in reality, it will not be your profit but it will be your loss and soon your business will shut down. So this is power of cost structure.
I am not entrepreneur, but I am shopkeeper so I purchase Fan at cost of 1100 Indian rupees, well it is ready made product but I also add transportation cost, which I spent to bring that product at my shop so suppose I spent 15 Indian rupees so my product cost would be 1115 rs so now I will add my profit margin to sell in market. If I will not add transportation cost so I will be in loss soon. So cost structure is very important in any business, for any entrepreneur.
Provide examples of businesses that use the cost structure methods explained; explain your answers. |
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Well as Businessman, I think all shopkeepers, small business, large business are following cost structure method. I am in India and In India, government impose so many taxes on business which have to impact on cost of product. Let me explain:
Like I will talk about electric business:
GST Tax : Indian government has different type of slots where they charge tax on products like on electricity products, they charge 18% tax which is fixed cost and entrepreneurs or small or any large business has to pay.
Labour cost is fixed cost which every entrepreneur or business have to pay because without labour, you can not deal with it.
If entrepreneur or business man is running their business at rent place so that would be fixed cost because without place how can you run your business?
Transportation cost is also fixed cost, because you have to pay transportation cost to bring product at your place.
Electric bills are also fixed cost because without electricity, it is impossible so that would be added in your cost.
Some business like restaurants, bakery etc have to pay service tax also because their business is based on giving service so they have to pay service tax also which you have to calculate in your cost.
So I think, to pick few names of business as examples is quite tough because every one who runs small or large business or they are entrepreneur, are following cost structure method and in cost structure method, you have to add every single penny which you spend to sell your product. That's what I mean.
What are the elements of a cost structure? Provide examples |
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Fixed cost: Every product has some fixed cost means a money which is fixed to spend to build or buy product example are : electric bills, employee salary etc.
Variable cost : This cost may not fixed all time, like raw material costs are not always fixed, same way transportation cost may not remain same always. It can be changed time to time.
Indirect cost : today's time marketing and branding of any product is very important, you have to run ads, you have to spend money on marketing and that is your indirect cost.
I think these are 3 most important elements which is covered all elements like rent, labour, employee salary, transportation, taxes, marketing, electricity bills etc
Prepare the cost structure of a business dedicated to making cakes. It has a production of 5 cakes per day and expects to obtain a total profit margin of 25% |
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Suppose I am running bakery and I am making 5 cakes per day..
First I have to calculate my all costs to making cakes so I will calculate my cost which is fixed means whatever is happening, I have to pay so here is example:
Fixed cost :
| Cost Name | Amount in Indian Rupees |
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| Shop Rent | 15000 Indian rupees |
| Electric bills | 1000 Indian rupees |
| Employees Salary | 9000 Indian rupees |
| Maintain cost | 2000 Indian rupees |
| Total Fixed cost - | 28,500 Indian rupees |
Variable cost:
| Cost Name | Amount in Indian Rupees |
|---|---|
| Ingredients cost | 1500 Indian rupees |
| Packing material | 500 Indian rupees |
| Gas cylinder | 300 Indian rupees |
| Total cost - | 2300 Indian rupees |
Now I am in new Business of bakery and production is very less just 5 cakes per day so I open my business for whole 30 days without taking leave.
So monthly production will be 5 cakes per day * 30 =150 cakes per month.
Let's calculate cost to built cake so I will calculate my variable cost first - 150 cakes per month * 2300 = 345000 Indian rupees
Now I also add my fixed cost - 345000+ 28500 = 373500 Indian rupees.
Pricing strategy (desired profit)
In other to achieve 25% profit margin, the price for selling should cover all expenses
Therefore;
25% of 373500 = 93375 rs
Now we will add total cost and profit what we expect :
373500+93375 = 466875 rs
So per cake selling price in market would be -
466875÷150= 3112 rs
So I will sell my cake 3112 rs.
My cake quality will be good also !! Taste is my USP.
In this beautiful contest I would like to invite @edgargonzalez,@damithudaya, @aviral123
THANK YOU
Greetings @yourloveguru
1.- You have shared the concept and importance of the cost structure for the enterprise, highlighting that it allows to control the resources invested in a productive process.
2.- You have mentioned acceptable examples of companies that adjust to the cost structure methods. You have provided the description of each of these methods, allowing the analysis of all the costs involved.
3.- You have presented the elements of the cost structure, with their respective examples; these allow us to identify the expenses in each functional area of the company.
4.- You have developed the proposed exercise acceptably, performing in detail each of the calculations. We would have liked to see a little more analysis of the results.
Thanks for joining the contest
Thank you sir ! It was good contest, I am shopkeeper so I wrote on basis of my experience. Thank you for your feedback 🙂
This doesn't make sense! if it's important it's not the final part.
I am not a shopkeeper but if I read your example and you work that way you are already bankrupt.
If you pay 15 for transportation (did you?) and you only add 15 to the prize you paid (how come transportation costs are not in it?) you will work for 0, you can not pay your rent, you have not clothing, you can not pay if something gets broke, you can not pay taxes and so on. If you are close to bankruptcy you better write down all your costs add an extra post for ? and one for salary (you are your own employer, one for your inventary/building and the total sum plus an extra % is what the item will cost. That's how it works.
In average the price difference between an item bought by a shop and it's selling price is 100 - 500% +
If only sell 5 cakes per day it's better not to start a bakery but do franchising which you can do from your home (save yourself the extra costs.
What is the price per cake if it comes to ingredients?
What is the price if you add the extra costs?
You gave the end price for 1 cake and state that if you sell it you have 25% profit. May I ask what happens if you only sell 100 cakes or 50 instead of 150?