Essay on Operating Cost and Joe

Submitted By ridaansari
Words: 1162
Pages: 5

An Accounting Accounting
A Tragedy in One Act by Rex H. Anderson

The Scene: A small store deep in the jungle of accounting logic

The Time: Today – and tomorrow, if you aren’t careful

The Cast: Joe, owner and operator of a small store-restaurant An Accounting – Efficiency Expert.

As the curtain rises, we find Joe dusting his counter and casting admiring glances at a shiny new rack holding brightly colored bags of peanuts. The rack sits at the end of the counter. The store itself is like all small store-restaurants in the jungle of accounting logic. It is a clean, well-lighted joint patronized by the neighborhood residents and an occasional juvenile delinquent. As Joe dusts and admires his new peanut rack, he listens almost uncomprehendingly to the earnest speeches of the Accounting – Efficiency Expert.

Expert:
Joe, you said you put in these peanuts because some people ask for them, but do you realize what this rack of peanuts is costing you?
Joe:
It ain’t gonna cost. ‘Sgonna be a profit. Sure, I hadda pay $25 for a fancy rack to hold the bags, but the peanuts cost $.06 a bad, and I sell ‘em for $.10. I figure I’ll sell 50 bags a week to start. It’ll take 12 ½ weeks to cover the cost of the rack. After that, I gotta clear profit of $.04 per bag. The more I sell, the more I make.
Expert:
That is an antiquated and completely unrealistic approach, Joe. Fortunately, modern accounting procedures permit a more accurate picture that reveals the complexities involved.
Joe:
Huh?
Expert:
To be precise, those peanuts must be integrated into your entire operation and be allocated their appropriate share of business overhead. They must share a proportionate part of your expenditures for rent, heat, light, equipment, depreciation, decorating, salaries for waitresses, the cook…
Joe:
The cook? What’s he got to do with the peanuts? He don’t even know I got ‘em.
Expert:
Look, Joe, the cook is in the kitchen, the kitchen prepares the food, the food is what brings people in, and while they’re in, they ask to buy peanuts. That’s why you must charge a portion of the cook’s wages, as well as your own salary, to peanut sales. This sheet contains a carefully calculated cost analysis that indicates the peanut operation should pay exactly $1,278 per year toward these general overhead costs.
Joe:
The peanuts? $1,278 a year for overhead? That’s nuts!

Expert:
It’s really a little more than that. You also spend money each week to have the windows washed, to have the place swept out each morning, to keep soap in the washroom, and to provide free colas to the police. That raises the total to $1,313 per year.
Joe:
(Thoughtfully) But the peanut salesman said I’d make money – put ‘em on the end of the counter, he said, and get $.04 per bag profit.
Expert:
(With a sniff!) He’s not an accountant. Do you actually know what the portion of the counter occupied by the peanut rack is worth to you?
Joe:
Ain’t worth nothin’ – there’s no stool there – just a dead spot at the end.
Expert:
The modern cost picture permits no dead spots. Your counter contains 60 square feet, and your counter business grosses $15,000 per year. Consequently, the square foot of space occupied by the peanut rack is worth $250 per year. Since you have taken that area away from the general counter use, you must charge the value of the space to the occupant.
Joe:
You mean I gotta add $250 a year more to the peanuts?
Expert:
Right. That raises their share of the general operating costs to a grand total of $1,563 per year. Now then, if you sell 50 bags of peanuts per week, these allocated costs will amount to $.60 per bag.
Joe:
(Incredulously) What?
Expert:
Obviously, to that must be added your purchase price of $.06 per bag, which brings the total to $.66. So you see, by selling the peanuts at $.10 per bag, you are losing $.56 on every sale.
Joe:
Something’s crazy!
Expert:
Not at all! Here are the figures. They…