So What Club
Start free

Frameworks, and why we do not teach them

Cost structure: what it is and what to do instead

Fixed and variable is only a start; build cost from the steps this business runs.

Facts checked against sources on

What is Cost structure?

A cost structure splits total cost into fixed and variable, or into buckets such as labour, materials and overheads, and sizes each one. Candidates often use the same buckets for every cost case.

The idea worth keeping

Not as boxes to fill, but as questions that fall out of the maths of the goal:

  • What is the unit (a parcel, a patient, a tonne), and what does one cost?
  • Which step in the operation is the biggest share of that cost?
  • What drives the cost of that step: time, distance, waste, or how full the asset is?

Why reaching for it fails in an interview

  • It is generic. Labour, materials and overheads describe every company and point to none of their steps.
  • It misses the driver that matters. Driver cost in parcel delivery depends on how many drops a driver makes a day, which a labour bucket hides.
  • It sounds rehearsed. Opening with fixed versus variable for every cost case shows a habit, not a look at this operation.

What to do instead: a worked case

A parcel company must match a cheaper rival

A parcel delivery company must cut its cost per parcel by 10% to match a rival's price. Where should it look?

The tempting answer: Fixed costs versus variable costs, then labour, materials and overheads.

  1. Pin the question

    Find 0.50 of savings on a cost of 5.00 per parcel without losing service.

  2. Write the maths of the goal

    • Cost per parcel = sorting + trunking between hubs + final delivery to the door
    • Final delivery cost per parcel = driver and van cost per day / parcels delivered per driver per day

  3. Use what you know about the business

    • In parcel delivery, the final drive to the door is usually the biggest single cost step.
    • Drops per driver depend on how close together the addresses are and on failed deliveries, which force a second trip.
    • Sorting is automated and shared, so it falls with volume rather than with effort.

    The structure that falls out of it

    • Final delivery (3.00 per parcel)
      • Drops per driver per day
      • Failed first attempts
      • Driver and van cost per day
    • Sorting (1.00)
      • Hub throughput
    • Trunking between hubs (1.00)
      • How full the trucks are

    Hypothesis: The saving is in final delivery, through more drops per driver, because that step is 60% of the cost and depends on route density.

  4. Find the facts that decide it

    • A driver and van cost 300 a day and make 100 drops: 3.00 per parcel. At 120 drops a day the cost is 300 / 120 = 2.50, a saving of 0.50, which is the whole target.
    • 12% of first attempts fail today. Parcel lockers and delivery time slots could cut failures, and tighter routes would add drops per hour.

  5. Say so what

    Close the gap in final delivery: raising drops per driver from 100 to 120 cuts cost per parcel from 5.00 to 4.50. Do it with tighter routes, lockers and time slots that cut failed attempts. The risk is driver overload and late deliveries, so phase it in by area and track on-time delivery.

Why this beats Cost structure: Costing one parcel step by step shows that one step is most of the cost, and knowing how delivery routes work shows the lever.

Build the acumen behind it

The worked case used two things a list cannot give you: the five moves, and knowing how this kind of business makes money. These pages teach both.

Learn it in context

See the idea behind Cost structure at work in a lesson from Cost reduction and cost cutting, built from the question rather than a list.

Learn it in context: Cost reduction and cost cutting Choose another framework

Spotted something wrong or out of date? Report a mistake. We check every report and correct the page.