Cost structure is the relative proportion of each type of cost in organization as stated from a Managerial Accounting book written by Garrison (2012). Cost is divided in majority by categorized it as fixed cost or variable cost. Another category is semi fixed cost and semi variable cost. Even though there are only 2 major cost structures, it is important to divide each cost to fixed or variable cost (or semi fixed or semi variable cost) accurately. Cost structure seems simple but it is not. Categorizing cost structure is not an easy task. Without proper cost structure, company may not achieve their best performance because there is miscalculation in their cost calculation. For example, there is a cost that should be put in fixed cost rather than in variable cost thus when the sales goes up, that cost will also go up because it is in variable cost. If that cost is in fixed cost, it will not go up and maybe the performance and net operating income from that company is much better. Thus in reality there are some companies that fail to manage their cost structure properly and some of them can achieve higher performance by managing its cost structure properly.
The worst case that company can ‘achieve’ without proper cost structure is out of business or bankrupt. This is what happens to Solyndra company. Solyndra is solar panel manufacturing that became the model for government investment green technology. Solyndra got loan from government around $ 535 million. Even though Solyndra is an innovative company and supported by government even supported by President Obama, Solyndra failed to meet its ‘business goal’ which is to make profit. In 2011 Solyndra filed for bankruptcy. While Solyndra defended themselves that their bankruptcy was caused by competitiveness in international solar panel industry, actually Solyndra went bankrupt because it had poor cost structure and not because of solar panel industry (EconMatters, 2011). Solyndra average sales price was over $3.5 per watt but its cost of manufacturing was over $6 per watt. While other company in solar Industry can manage their cost structure better (such as China can lower their cost for solar panel), Solyndra cannot manage its cost structure properly.
One of the companies that can achieve better performance by improving its cost structure is Shell. Shell is one of the biggest oil and gas company in the world. The condition in oil and gas industry is nearly impossible to predict the demand which changing in global trading patterns. CFO Shell, Gerard Paulides (2011) stated in his writing that “Given these industry conditions, companies that fail to deftly manage revenue and costs will find themselves vulnerable to market and price fluctuations that are often out of their control”. In 2010, Shell restarting its cost structure by not improving it little by little but by doing “Hard Reset” to its cost structure. They evaluated all cost structure by using zero based cost management. The budgets for assets, operations, functions, and departments were evaluated by reverting it back to zero as a starting point so employee can have fresh argument and discussion for every funding and portfolio decision. Shell cost management with zero based cost management was time consuming and needed a lot of effort but it will give them long term better performance. Paulides stated that the result of better performance is yet to be seen but they are right on track meeting its goal.
In conclusion, cost structure is very important for company to meet its goal (profit). Company without proper cost structure can go to bankruptcy despite how innovative the company is (like Solyndra). On the other hand, company that can manage their cost structure can improve its performance to meet its goal like Shell which can get better performance by restructuring its cost structure to adapt with changes.
Source:
EconMatters. (2011, September 18). Solyndra Solar Failed by Poor Cost Structure. EconMatters. Retrieved from http://www.econmatters.com/2011/09/solyndra-solar-failed-by-poor-cost.html
Garrison R.H, Brewer P.C., Noreen E.W., Cheng N.S., Yuen K.C.K. (2012). Managerial Accounting: An Asian Perspective. New York: McGrawHill
Paulides G. (2011, November 22). Resetting the Cost Structure at Shell. Retrieved February 2, 2013 from http://m.strategy-business.com/article/11402?gko=bf63b
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