Explaining accounting and finance and can be pretty dull. That’s a problem, if your need to learn accounting and finance.
So, on a plane from St. Louis to Seattle this spring, I tried to find a solution to that problem. What if I could write about some accounting concepts inside of a quirky (maybe even funny) short story? My goal here is to present some accounting information, then add another quirk to the story. By the end, you’re learned something about accounting- but it’s presented in a light-hearted way that keeps your attention.
Anyway, that’s the goal here- enjoy!
The leaves always looked brighter after a good rain, Roger thought, as he drove to office on a bright October morning.
Roger owned Dreamboat Annie Catering Company- named after the old song from the band Heart. Dreamboat had grown into a pretty big business. Roger’s company supplied desserts to 6 busy restaurants in St. Louis.
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As he put down the visor to combat the morning sun, he thought about the pricing discussion he had with his accountant. Dreamboat had a fair amount of overhead that needed to be included in the price of the products they sold. Roger needed a more precise way to assign that overhead. He mulled it over as he pulled into the parking lot.
The rearview mirrors needed adjusting. His 15-year old daughter, Rosie had insisted on a last-minute trip to Target the night before. Park of her reason for going was to get more experience driving at night.
He pulled his backpack out of the car and smiled. The Target trip has started as a quick trip to get a pair of tights for a play. It turned into a 30-minute ordeal. Rosie spend every available dime she had- including a plastic monkey skull paperweight that she just had to have….priorities, he thought.
The overhead issue boiled down to two costs. First, he needed to allocate the salary and benefit costs for Gloria, his assistant. Gloria took orders from clients, sent instructions to the production department and invoiced clients.
Dreamboat Annie’s also needed to allocate the salary and benefit costs for Burt, the delivery driver. Burt’s job was to load the truck and make deliveries to each of the restaurants.
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Wow- that coffee is scalding, Roger thought. How does Starbucks keep everything in their coffee cups at a boiling point?
Now, there was more to it than just the two salaries. Burt, for example, incurred a pretty significant amount of mileage on the truck. The truck’s repair and maintenance was also an issue.
The salary and benefits for Gloria and Burt totaled $75,000, however. The cost was the lion’s share of the overhead that needed to be applied, Roger thought. Might as well start there.
“Roger, look what I found in that back room was just cleaned out!” Burt smiled as he proudly presented a stack of Playboy magazines.
“Wow- 1978 and ’79, stacked in order by month…impressive!”, laughed Roger. He has just read that Playboy was ending the practice of completely nude women in the magazine. ‘Guess people will just have to read the articles, he thought.
Burt commented that the mags were too moldy to open- he’d throw them out.
Dreamboat’s 6 customers placed in average of 3,000 orders a year. The average of 500 per restaurant- multiple orders a day were common. Most restaurants would order more desserts based on reservations that accumulated during the day. Dreamboat had a 2pm cutoff for taking orders.
Roger took out a legal pad. $75,000 divided by 3,000 orders was $25 per order. Yea- that’s what they were charging as overhead per order. He glanced at the invoicing form on the screen. There was a line item of “$25 overhead” printed on every invoice.
Gloria and Burt had tracked the percentage of their time they spend on each client for 3 months, and the results were surprising. A single restaurant could eat up a lot of time, particularly if they changed their order.
Changes required Gloria to immediately call production. After all, if they changed an order from 50 cheesecakes and 100 muffins to 100 cheesecakes and 50 muffins, someone had to know in the kitchen. In extreme cases, the changes resulted in food that wasn’t sold- Roger donated this food to a soup kitchen nearby.
Order changes also impacted Burt. He would often have to unpack and repack the truck. Burt also needed to get a corrected invoice from Gloria. Gloria emailed invoices, and also made sure that a copy was sent with each order.
“I don’t know what do to….we can’t resign ANY of the infielders…and we need to blow up the pitching staff!” The Cardinals had just lost to the Cubs (did it have to be the Cubs?) in the playoffs. As usual, St Louis baseball fans were panicking. Didn’t we just win 100 games?, Roger thought? He turned down the sports talks station.
As it turned out, Compared To What took up 30% of the total time spent by Burt and Gloria. The restaurant (named after the Henny Youngman joke) did a huge business using a menu that changed constantly. Charlie, the restaurant owner, had become a good friend of Roger’s.
He got up to stretch. His accountant has explained a concept called Activity-Based Costing, or ABC. ABC costing allowed an owner to assign overhead costs based on activities. In this case, the activity used to assign costs was the time spent by Gloria and Burt.
Roger headed out to his car. Compared To What’s frequent order changes meant that they needed to be assigned more overhead costs. If not, he was underpricing the goods sold to that restaurant. Other customers, as a result, would be overcharged for overhead.
He started the car and headed over to see Charlie. He wanted to explain the pricing change in person. Actually, Roger thought, the price increase may motivate Charlie to reduce the number of order changes. If he understands the changes increase Dreamboat’s costs, he’ll be motivated to change the practice.
He’d checked the menu online. Compared To What’s lunch feature was steamed clams and apple sauce…wonder if that will sell?
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
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Cash register close up
David Tarwin, Cash register close up
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