Courses / Cost Structure

Cost Structure

32 Lessons | 5 Quizzes

Cost structure refers to the types and characteristics of the expenses incurred by a company. The structure of the business’s expenses, in terms of operating vs. non-operating, fixed vs. variable, cash vs. non-cash and recurring vs. non-recurring, has important implications on its earnings power and cash generation. Therefore, analyzing cost structure is an important step towards estimating the company’s and the stock’s intrinsic value. We’ll start by learning how expenses are recognized (similar to revenue recognition), and then go through the characteristics and the common expense items one by one. Finally, we’ll learn how to forecast cost into the future.

Key Takeaways:

  • Expense Recognition
  • Cost structure characteristics
  • How to forecast cost


1. What is Cost Structure


Cost structure refers to the make-up of the different types and characteristics of cost in a business.

2. Expense Recognition


Expense recognition sets forth the clear conditions that has to be met for a transaction to be recognized as cost.

3. Operating vs. Non-Operating Expense


In this video, we'll learn the distinction of operating vs. non-operating expense.

4. Fixed Cost vs. Variable Cost


In this video, we'll learn the distinction of fixed cost vs. variable cost. This implicates how we forecast cost and changes in earnings.

5. Cash vs. Non-Cash Expense


In this video, we'll learn the distinction of cash vs. non-cash expense.

6. Recurring vs. Non-Recurring Expense


In this video, we'll learn the distinction of recurring vs. non-recurring expense.

7. Cost of Goods Sold (COGS)


Cost of Goods Sold (COGS) is the cost to produce and deliver the company’s products & services.

8. Research & Development (R&D)


Research & Development (R&D) is the cost to create new products or improve upon existing products.

9. Sales & Marketing Expense


Sales & Marketing Expense is the cost of selling and marketing the company’s products and services.

10. General & Administrative Expense (G&A)


General & Administrative (G&A) is the cost related to managing the administrative side of the business operations.

11. Selling, General & Administrative (SG&A)


Selling, General & Administrative is the cost of selling and marketing the company’s products and managing the business's central functions.

12. Stock-Based Compensation (SBC)


Stock-Based Compensation ("SBC") is the portion of the employee compensation expense settled with stock or stock-based securities.

13. SBC Is a Real Expense


SBC might not be paid with cash, but it's still a real expense.

14. Depreciation & Amortization (D&A)


Depreciation & Amortization ("D&A") is the cost of business's tangible and intangible assets spread over their useful lifetime.

15. Tooth Fairy Doesn't Pay for D&A


While D&A is a non-cash expense, it's created because cash was used to buy assets upfront.

16. Restructuring Cost


Restructuring Cost is cost incurred due to material changes in how a company conducts business.

17. Impairment Charge


Impairment Charge is an expense that reflects a reduction in the value of the company’s assets without actually selling them.

18. Loss on Sale of Asset


Loss on Sale of Asset is an expense that reflects reduction in the value of the company's assets based on market prices after selling them.

19. Other Expenses


Companies often have an "Other Expenses" line on their Income Statement.

20. Interest Expense


Interest Expense is the interest accrued on debt. Think of it as the basic cost of borrowing money.

21. Income Tax Expense


Income Tax Expense is the expense levied by the government on corporate income. In most situations, business expenses are tax-deductible.

22. Company-Specific Expenses


Some public companies choose instead to present cost based on their own specific categories.

23. Case Study Cost Structure


In this video, we'll go over our case study's cost structure.

24. Cost Ratios


In this video, we'll learn to analyze cost through ratios, which can reveal important relationships between the cost and its drivers.

25. Purpose of Cost Ratios


Let's discuss what we generally use the cost ratios for and the role they play in fundamental analysis.

26. Impact of Scale on Fixed Cost Ratios


Generally, corporations with larger revenue should have a lower fixed cost as percentage of revenue than peers with smaller revenue base.

27. Cost Growth


Aside from examining cost's relationship with other metrics, we can also analyze cost through growth rates.

28. Effective Tax Rate (ETR)


Effective Tax Rate ("ETR") is the average tax rate on a company's taxable income.

29. How to Forecast Costs


In this video, we'll learn how to forecast cost through a structured framework using cost drivers, historical trends and target scenario.

30. Forecasting Cost Drivers


In fundamental analysis, we drive cost forecasts through either ratios or growth rates.

31. Forecasting Costs


In this video, we'll build the cost forecast together for our case study.

32. Connecting Dots


Let's connect the dots between the cost structure concepts we learned in this course with the broader objective of fundamental analysis.