Bad as it is when accounting runs your life, it is even worse when bad accounting takes over. Read & enjoy…
A guy owns a bar. It is a bustling place with a 40 foot bar, a kitchen, and seating for customers to eat and drink. He generates $500k in revenue and nets around $80k for himself to take home. He wants to make more money, so he sets up a peanut display at the end of the bar. He charges 50 cents for bags or peanuts and other salty snacks. He figures it is a no-brainer since he doesn’t need to hire extra staff to sell the peanuts and not only is it extra income, but the salt will make people thirsty and drink more beer. What could possibly go wrong? Enter the accountant….
His accounting is performing a quarterly audit and preparing his tax payments. He sees the peanut display and the extra revenue in the books: $1000. He looks at the income, looks at the peanuts, and declares “Are you nuts? You must get rid of those peanuts! They are nothing but a money loser! Let me explain…”
“You see, you make money selling beer. Your 40 foot bar brings in $500k, or $12,500 per foot. You’ve taken away two feet of bar space for your peanut display. Your peanuts take up two feet of bar space and only bring in $1000 per quarter, or $4000 total. That is only $2000 per foot. You are losing $21,000 because of those peanuts! You must get rid of them!”
So what happened? The accountant created a fictional relationship between bar space utilization and income. He assumed 2 feet of bar space equals $25k in income and penalized the peanuts for only bringing in $4k. He created then managed to a fictional relationship. Sound too dumb to be true?
Well, consider a manufacturer that has 25 people sitting around and assembly line making $35/hr. Also supporting the line are a supervisor, an electrician, and a machine repairman, all at $35/hr. In total there are 28 people, but only 25 perform direct labor assembling product. With 28 people required to enable 25 laborers, you have 28/25 x 35 = $39.2/hr cost of labor.
Now, automate the line. There are only 5 workers, but now two electricians are needed, plus the machine repairman, plus a pipefitter, plus the supervisor. 10 people required to enable 5 laborers = 10/5 x 35 = $70/hr. Labor costs are killing us! We must outsource!!!!
Sound too dumb to be true? Go read an old automaker annual report where they report cost-of-labor at $70/hr or more, and then go find a worker who actually made $70/hr.
Now, consider social security:
Politician: How is the Social Security funding going?
Accountant: Good!
Politician: “Good” is meaningless, give me a number dammit!
Accountant: Ok, I’ll create a number called Current Ratio. I’ll define it as assets in the trust divided by one-year’s payout. Now it is “Good” because current ratio is over 10.
Politician: Well, if “10” is good, isn’t “50” better? Why not “100”? Why not “1000”?
(insert face-palm here...)