Square Root Costing: A powerful new approach
Square Root Costing, or SRC, is a powerful approach innovated to address the lack of practical alternatives for companies committed to understanding their costs. Companies typically treat costs as either fixed or variable. However, a significant and growing portion of costs fall into a third category—Complexity Costs. These are costs that are driven by variety, such as SGA, working capital, and manufacturing overhead.
Fifty years ago, this cost category was a relatively small proportion of overall costs—today it is significant. SRC recognizes that, all else equal, complexity costs tend to follow a square root of volume relationship, meaning that the cost is proportional to the square root of the volume. This insight, embedded in our service, means that companies now have the means to quickly diagnose where they are a creating, or destroying, value.