Analysis of “COSUMAR’s” cost structure and its application in decision making.
Abderrahmane Bahmida, Aya Bakhtaoui, Rania Boumahdi, Ikram c. Alaoui And Amine Zakani
SBA
ACC5302 01: Advanced Financial and Managerial Accounting
Dr. Harit Satt
May 21, 2021
Abstract:
This paper describes the cost structure in the company COSUMAR with the aim of
discovering its its relationship with decision making. from mainly primary data collected with key
personnel interviews we will analyze the company’s major cost structures and then draw
conclusions in terms of the change in the decision-making approach.
Introduction:
This case study will have as a purpose analyzing the cost structure of a company as well as
determining how cost structures can be applied for decision making. The topic selected is process
costing system since it is most likely the system used by our chosen company “COSUMAR” since
the company is for refining and extraction beet and sugar cane in Morocco and has been producing
the same final product for a long period of time.
Review of the literature:
In order to answer the research question, an understanding of the individual elements that
compose it is in order starting with the cost structure which can be defined as:
“A cost structure means the types and relative proportions of fixed and variable costs incurred by
the business. The concept can be explained in smaller units, such as by-product, service, customer,
product line, division, or geographic region.
The cost structure is employed to fix prices if you are using a cost-based pricing strategy.
It also depicts areas in which costs can be reduced or at least have better control. Therefore, the
cost structure is a management accounting concept and has no applicability to financial
accounting.” (Chang, Hall & Paz, 2020)
The other important elements are the fixed and variable costs which can be defined as:
“A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or
services produced or sold. Fixed costs are expenses that have to be paid by a company, independent
of any specific business activities.” (Fan & Liu, 2016)
“A variable cost is a corporate expense that changes in proportion to how much a company
produces or sells. Variable costs increase or decrease depending on a company's production or
sales volume—they rise as production increases and fall as production decreases.” (Marzo &
Pagnozzi, 2011)
Now that the necessary background is obtained, we can discuss the most common examples
of how cost structure can influence the decision-making process.
One of the most common decision-making practices that involves modifying the cost
structure is outsourcing where the objective is the transfer of fixed costs into variable costs due to
a myriad of strategic reasons. The objective can be to achieve lower costs or have more leverage
to focus on the core product since we can argue that variable costs concern more of the product
itself. (Liu & Tyagi, 2017)
Cost structure manipulation was also used as way to improve decision making by making
less accurate measures of costs. this at first may seems counterintuitive since in these last years
the pursuit of all companies was to accurately determine costs in order to price their products
correctly. Such example of this interesting case is using upward biased costs were the company’s
top-management legally inflates freight, labor or even finishing costs in order to avoid setting a
high price to get a higher margin of return or to even avoid salespersons giving discounts that
shave the price to its true cost. (Merchant & Shields,1993).
Cost management, a type of management which is based on the change in cost structures
in order to achieve efficiency. Mainly focused on manufacturing compagnies and specially the
production processes, it can also be used in the context of service companies. Aligning the firm’s
cost structure with its strategic direction is the goal and its starts first with an analysis of the cost
drivers since in order to do any modifications on the three well know types of costs: direct, indirect
and manufacturing overhead, one must know their origin. (Anderson, 2005)
Research Question:
Besides the main question of the application of cost structure in the decision-making
process, the following supporting questions present themselves:
1. What is the relationship between annual depreciation and the company’s performance?
2. To which extent does employee compensation affect company revenues?
3. Are the salaries of the sales team of your company based on a fixed or a variable structure?
And how does that affect your revenues?
4. Which type of cost are the most dominant in your company?
5. Are the interest expenses of your company fixed or variable?
6. How does the cost structure impact your decision making?
7. Does your company have expenses compared to its competitors?
8. What is the department that generates the most costs in your company? Are they more
variable or more fixed?
Research Methods:
Methodology:
The methodological positioning chosen for this research is the usage of primary data
collected by us. It is data concerning the cost structure and its relationship with decision making
This data will be collected to treat this specific subject matter. The collection will be done by
qualitative methods.
Strategy:
In detail, the strategy that we have based our search on is based on the case study approach
where we have chosen a Moroccan company as a subject in order to draw conclusions about our
main research question.in term of data collection qualitative individual interviews was the main
tool.
References
Anderson, S. (2005). Managing Costs and Cost Structure throughout the Value Chain: Research
on Strategic Cost Management. SSRN Electronic Journal. doi: 10.2139/ssrn.869070
Chang, H., Hall, C., & Paz, M. (2020). Suppliers' Product Market Competition, Customer
Concentration, and Cost Structure. Journal Of Management Accounting Research. doi:
10.2308/jmar-17-070
Fan, Y., & Liu, X. (2016). Misclassifying Core Expenses as Special Items: Cost of Goods Sold or
Selling, General, and Administrative Expenses?. Contemporary Accounting Research,
34(1), 400-426. doi: 10.1111/1911-3846.12234
Liu, Y., & Tyagi, R. (2017). Outsourcing to convert fixed costs into variable costs: A competitive
analysis. International Journal Of Research In Marketing, 34(1), 252-264. doi:
10.1016/j.ijresmar.2016.08.002
Marzo, G., & Pagnozzi, T. (2011). Can Depreciation Be a Variable Cost? A Comparison between
the Straight-Line Method and the Units of Production Method in a Lean Company Context.
SSRN Electronic Journal. doi: 10.2139/ssrn.1968821
Merchant, K. A., & Shields, M. D. (1993). When and Why to Measure Costs Less Accurately to
Improve Decision Meriting. Accounting Horizons, 7(2).