5 Types of Cost
Fixed costs
Variable costs
Total costs
Marginal costs
Average costs
What are fixed costs:
Costs that do not change with the level of output.
Eg: rent, salaries, insurance, advertising
Variable costs:
Costs that vary according to output.
Eg: raw materials, direct labour costs.
Total costs
= fixed costs + variable costs
In a graph, starts at the same level as fixed costs
Marginal costs
The amount by which total costs change for each additional unit of output.
Formula:
Total cost of A+1 units -/- total cost of A units.
Average costs formula
Total costs / number of units of production
Advantages of outsourcing
- Expertise: can improve quality and keep costs down
- Know fee
Disadvantages of outsourcing
- Can lead to a lack of control
- Unlikely to gain a competitive advantage
- Dependent on an outside organisation: - possible price rises in the future
- the outside organisation could fail or refuse to provide the service - Loss of internal expertise:
- hard to bring expertise back in-house
- no longer ?? - The external organisation has less understanding of the business than the internal dept.
- Loss of confidentiality
Core competencies
- should never be outsourced; essential to competitive advantage
Complementary competencies
- Only outsourced to an expert
Residual competencies
- can be outsourced to anyone
Structures of businessss
- network organisations
- virtual organisations
What is a network organisation?
- Flexible
- Depends on relationships with other parties: - keep employed staff to a minimum.
- outsource many activities to external providers
- the role of the organisation is to co-ordinate the outsourced activities
- tend to keep the key drivers of its ability to compete ‘in-house’
- relies on strategic alliances
Virtual Organisation:
- Uses IT as the main communication tool between its employees
- staff can be located geographically dispersed locations
Transaction Cost Theory =
Allows organisations to weigh up the two following actions:
- Employ people / hierarchy solutions
- Outsource / market solutions
3 Costs in addition to the actual contract fee:
- Contract negotiation
- Supplier monitoring
- Legal costs of non-conformance to contract
Types of Asset specificity
- an employee, with a particular skill set
- a building in a specific location
- piece of equipment, that is good for 1 specific purpose
The more specific an asset is, the higher the transaction cost will be
Bounded rationality =
When making decisions people are confined by 3 constraints:
- limited capacity of the human mind
- limited amount of time
- limited amount of information available
There is a cost to making decision making errors.
2 Alternatives to outsourcing
- Shared services organisations
- Flexible staffing
Shared services organisation
Repeated services are put into one division which serves the organisation (eg. accounting, HR, IT).
- Avoids duplication
- Increases efficiency
3 ways of Flexible staffing
- employment agencies (temporary through an agency)
- leased employees (long-term through an agency)
- contractors
Benefits of flexible staffing
Potentially reduced costs from:
- only pay when staff is needed
- no direct recruitment costs
- no overtime rates for internal staff
- payroll performed elsewhere
- no long term staff development costs
Negatives of flexible staffing
- less loyalty
- higher hourly rate
