Hello everybody, I heard feedback from a Case Partner that I should name cost drivers faster. So my thinking here is the following: there are fixed and variable cost, and the main drivers for fixed and variable are: Fixed costs: Rent / Lease / Property / Production site Possible depreciation Administration Variable costs: Personnel Energy/ Water Unit costs/ material Now my two questions: 1) Are these the most important cost blocks or have I overlooked something important here? I am interested in an overview of the possible cost sources, which can then be adapted to specific cases. 2) Where would you also assign the terms production costs, operating costs and investment costs to fixed and variable areas? Thanks a lot!

Alright, so let's try to bring some order into this. :) You first have to understand that there are different ways to classify costs. These can then be layered on top of each other using a matrix or similar if this is considered sensible. At the highest level, there are Operational costs Costs of capital (usually interest payments) Investments You are mostly talking about Operational Costs. Depending on the criterion used, there are at least 4 possible categories for subdivision: Contingent on the behavior of costs in the event of fluctuations in production, there are Fixed Costs Variable Costs Depending on the type of production factors consumed, a distinction is made between Personnel costs Operating costs Material costs According to the functional area in the value chain, there are Procurement costs Warehousing/storage costs Manufacturing costs Administrative expenses Direct sales & distribution expenses Aftersales expenses Other costs (such as marketing) Depending on how costs are attributed to the products or services, a distinction can be made between Direct costs Overhead A couple of important points: Production costs usually cover all costs that can be attributed to the production of produced goods (but interestingly, they are not always direct costs, since material overheads and production overheads can also be included!). This would include the three cost types procurement costs, storage costs and manufacturing costs in the breakdown by functional areas (as mentioned, if directly attributable to the product). Overhead costs and are usually fixed. Investments are not operational costs and should therefore be separated from the above consideration Cheers, Sidi

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Anonymous A

on Apr 16, 2019

Global

What are the typical cost drivers?

Hello everybody, I heard feedback from a Case Partner that I should name cost drivers faster. So my thinking here is the following: there are fixed and variable cost, and the main drivers for fixed and variable are:

Fixed costs:

Rent / Lease / Property / Production site
Possible depreciation
Administration

Variable costs:

Personnel
Energy/ Water
Unit costs/ material

Now my two questions:

1) Are these the most important cost blocks or have I overlooked something important here? I am interested in an overview of the possible cost sources, which can then be adapted to specific cases.

2) Where would you also assign the terms production costs, operating costs and investment costs to fixed and variable areas?

Thanks a lot!

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Serhat

Coach

on Apr 20, 2019

You can check these discussions:

https://www.preplounge.com/en/consulting-forum/where-to-include-investment-cost-in-structure-2651

https://www.preplounge.com/en/consulting-forum/any-tips-when-drawing-a-pl-and-cost-structure-1736

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Sidi

Coach

edited on Apr 16, 2019

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 400+ candidates secure MBB offers

Alright, so let's try to bring some order into this. :)

You first have to understand that there are different ways to classify costs. These can then be layered on top of each other using a matrix or similar if this is considered sensible.

At the highest level, there are

Operational costs
Costs of capital (usually interest payments)
Investments

You are mostly talking about Operational Costs. Depending on the criterion used, there are at least 4 possible categories for subdivision:

Contingent on the behavior of costs in the event of fluctuations in production, there are
- Fixed Costs
- Variable Costs
Depending on the type of production factors consumed, a distinction is made between
- Personnel costs
- Operating costs
- Material costs
According to the functional area in the value chain, there are
- Procurement costs
- Warehousing/storage costs
- Manufacturing costs
- Administrative expenses
- Direct sales & distribution expenses
- Aftersales expenses
- Other costs (such as marketing)
Depending on how costs are attributed to the products or services, a distinction can be made between
- Direct costs
- Overhead

A couple of important points:

Production costs usually cover all costs that can be attributed to the production of produced goods (but interestingly, they are not always direct costs, since material overheads and production overheads can also be included!). This would include the three cost types procurement costs, storage costs and manufacturing costs in the breakdown by functional areas (as mentioned, if directly attributable to the product).
Overhead costs and are usually fixed.
Investments are not operational costs and should therefore be separated from the above consideration
Cheers, Sidi

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2 comments

Anonymous B

on Oct 17, 2022

Hi Sid, very useful. Quick clarification. In terms of the functional value chain, Im assuming you cannot use P&L items as sub-drivers. How would you break this down further? Thank you!

Sidi

Coach

on Oct 17, 2022

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 400+ candidates secure MBB offers

This is purely context dependent! In a case interview, you need to align with the interviewer and make clear that you understand that this has to be broken down based on information from the client. Only if no information is available, an educated assumption based on the business model can be suggested.

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Ian

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