The Rear View Mirror and the Tree: An Accounting Story

 

 

Winding Road

Authors’ note:

Explaining accounting and finance can be pretty dull. That’s a problem, if you need to learn accounting or finance.

On a plane from St. Louis to Seattle, I decided to try and fix the problem. What if I could wrap some accounting concepts inside of a quirky (funny?) short story? My goal here is to present some information, and then add another step in the story. So, when you get to the end, you’ve been reminded of an accounting concept- but you’ve received the information in a light-hearted way.

Anyway, that’s the goal here. Enjoy!

Well, it seemed strange.

Greg and his dog Collete eyed the tree between the street and the sidewalk. The bark on one side of the tree seemed to be sheared off, and there was broken glass and plastic around the tree. How in the world…..then his cell phone rang.

“Hey, Greg, it’s Tony. Sorry- I know it’s early- but Arctic Wind wants a special order before the end of the month…that’s only a few days out, so I thought I would call you on way in. They’d like to get a price on an order later today.”

Greg hung up, shoved the empty plastic bag into his back pocket, and headed back to the house.

MountainView Clothing, manufactured clothing for the hiking and biking market. They sold products through the company website and as a distributor to retailers. Arctic Wind was one of those retailers, and the chain of outdoor stores was a big customer.

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Greg cut through the production plant on his way to the office. The Summer Olympics were on. What is that….synchronized swimming? A group of women in matching outfits were on the pool deck, slashing their arms back and forth in perfect unison. Then, they jumped into the pool in groups. Wow, it’s a lot more synchronized than I thought…..

Tony stroller into Greg’s office. “Yea- so they want a price quote for 3,000 pairs of Tundra Tough shorts. Turns out their sales estimates for August were too low- they want them shipped in 5 days. We can do that, right?”

Greg opened his budget spreadsheet for Tundra Tough. “Sure, the shipping date isn’t an issue- I just need to think about the price.” Greg pulled up this spreadsheet:
Tundra Tough Shorts: 2015 Price and Cost Per Unit Budget
Sale Price: $100
Direct Material
StretchAll Cotton $50
Metal, plastic inserts $10
Direct Labor
Cutting, sewing $20

Total Direct Costs $80

Indirect Costs $5
(Overhead)

Total Costs $85
Profit per unit $15 (15%)

Greg glanced at the calendar- the 27th of the month, he thought. “Hey, Tony, let me show you something. See this overhead cost? That’s for repair and maintenance on machinery, utility costs for the factory- costs that we can’t assign direct to each pair of shorts. Since it’s the 27th of the month, we’ve already covered those costs with our prior production.”
He reached for his coffee: “We can actually exclude that $5 overhead cost from this price calculation, since that cost has already been paid for. So, quote them a $95 per pair sales price. We’ll still make $15 per unit.”
“OK- cool”, said Tony. “Hey- I’m gonna go by Qdoba for lunch- have you seen that soda machine with all of the flavors? Sick!”

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Greg shook his head. “I can’t figure it out- it looks like the Starship Enterprise. I think I combined three flavors last time completely by accident.”
Tony laughed and headed out the door. Nice to get that special order at the end of the month, Greg thought. Wow- I need to remember to tell the kids about the synchronized swimming…looks intense.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

Co-Founder: accountinged.com

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

(you tube channel) kenboydstl

Image:

Dominic Alves, Winding Road (Ditchling Road, Hollinsbury) (CC By 2.0)

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