Cost Accounting

Satisfactory Essays
Peanuts and Cost Accounting
A problem faced by a Restaurateur (Joe) as revealed by his Accountant-Efficiency Expert (Eff. Ex.)
EFF. EX. 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 holda bags, but the peanuts cost 6 cents and I sell 'em for 10 cents. Figger I 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 4 cents a bag. The more I sell, the more I make.
EFF. EX. That is an antiquated and completely unrealistic approach, Joe. Fortunately, modern accounting procedures permit a
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Decrease the square foot value of your counter. For example, if you can cut your expenses 50%, that will reduce the amount allocated to peanuts from $1,563 down to $781.50 per year, reducing the cost to 35 cents per bag.
JOE (Slowly) That 's better.
EFF. EX. Much, much better. However, even then you would lose 26 cents per bag if you charge only 10 cents. Therefore, you must also raise your selling price. If you want a net profit of 4 cents per bag, you would have to charge 40 cents.
JOE (Flabbergasted) You mean after I cut operating costs 50%, I still gotta charge 40 cents for a 10 cent bag of peanuts? Nobody 's that nuts about nuts. Who 'd buy 'em?
EFF. EX. That 's a secondary consideration. The point is at 40 cents, you 'd be selling at a price based upon a true and proper evaluation of your then reduced costs.
JOE (Eagerly) Look! I got a better idea. Why don 't I just throw the nuts out -- put 'em in a trash can?
EFF. EX. Can you afford it?
JOE Sure. All I got is about 50 bags of peanuts -- cost about three bucks -- so I lose $25 on the rack, but I 'm outa this nutsy business and no more grief.
EFF. EX. (Shaking head) Joe, it isn 't quite that simple. You are in the peanut business! The minute you throw those peanuts out, you are adding $1,563 of annual overhead to the rest of your operation. Joe, be realistic -- can you afford to do that?
JOE (Completely crushed) It 'sa unbelievable! Last week, I was gonna make money. Now, I 'm in a trouble --
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