When was the last time you had coffee at Starbucks? Did you ever wonder why your Mocha Grande costs at least $4.25? I mean, the coffee beans in your cup likely were no more than ten cents. Why so expensive?
When considering the price paid for a cup of Starbucks coffee, we need to consider every cost, both variable and fixed, associated with the production of that coffee. Variable costs refer to the costs that Starbucks incurs in the process of making coffee. The main variable costs are raw materials (coffee beans, plastic cups, etc.) and labor costs (e.g. barista salaries). To a large extent, Starbucks has control over their variable costs. For instance, if Starbucks management decided that they wanted to caffeinate consumers less, they can make your Latte with fewer coffee beans, thereby lowering their variable costs.
Aside from variable costs, Starbucks must incur fixed costs, which are the expenses they pay whether they make coffee or open their doors or not. For example, if Starbucks does not sell one cup of coffee, they still have to pay store rent. How would we allocate the rent of a Starbucks store to the cost of a cup of coffee? One logical method would be to divide the rent by the number of cups of coffee sold. If a Starbucks sold 30,000 cups of coffee in a month and had to pay a rent of $30,000, then the rent allocated to one cup of coffee is $1. As we examine the various costs that go into production, we can start to see why a cup of coffee can be so expensive. In fact, case costing is the practice that enables the analysis of the production costs of a particular product.