Starbucks Cost Structure - Essay Example

Fixed costs, on the other hand, are expenses the company incurs whether they make coffee or not. For example, if they don’t sell a cup of coffee, they still have to pay store rent. When allocating the rent of the Starbuck store rent it is advisable to divide the rent by the number of coffee bags sold (Maryanne, 109).

Manufacturing and nonmanufacturing costs: Manufacturing costs are indirect factory-related costs that are incurred during the manufacturing process. The cost of manufacturing overhead cost must be assigned to each unit produced so that inventory and cost of goods sold can be valued. For the case of Starbuck Company, nonmanufacturing costs include direct material and direct labor. Again the nonmanufacturing costs represent the manufacturer’s expenses that occur apart from the manufacturing function. These expenses are not product costs and are reported in a financial statement as expenses incurred. They include interest on business loans, marketing, and advertising costs, taxes, and salaries of the staff (Maryanne, 110).

Job costing and process costing: Job costing is a way of determining the cost to a company for each unit of item. This is done by taking each job as independent and how much each job cost to produce a number of units. This allows managers and executives to calculate the number of profits made from each job. The Starbuck Company for each type of drink it delivers a certain price. This is an effective way of controlling the price of a product. Process costing is a process in which the company comes up with long-term statistics to know how the price keeps on changing over time (Maryanne, 112). It also simplifies record-keeping hence allowing the company to when changes need to be made.

Direct and Indirect Costs: Material, labor, and other expenses which are directly or easily traceable to a product, service, or job are known as direct costs. In the production of coffee, materials are purchased, wages are paid to workers and certain other expenses are incurred directly (Wiley & Sons, 34). All these take an active and direct part in the manufacture of a product and are, therefore, called direct costs. Examples are Direct material: All material that becomes an integral part of the finished product and which can be conveniently assigned to specific physical units of the finished product is known as direct material or process material. Direct labor: Labor that takes an active and direct part in the production of a particular commodity is known as direct labor. Direct labor is also known as productive or operating labor. Wages paid to a coffee seller constitute direct labor cost. Indirect costs refer to the expenses incurred on those items which are not directly chargeable to production; Salaries of timekeepers, storekeepers, and foremen are examples of indirect costs. Indirect cost is incurred for the concern as a whole rather than for a particular product. They include indirect labor, indirect expenses among others. Read More