Sunday, March 7, 2010

How to apply cost accounting to life...sort of

I'm going to start off this blog by saying that I am not a cost accountant. I'm a revenue accountant. But way back in undergrad, I did have to take a cost accounting class, and I actually enjoyed it. (This is unusual, even for accountants. Cost accounting is a big pain in the butt that no one likes to do except for a few freaky people. Apparently I'm one of them.)

The basic idea in cost accounting is to add up all of the costs of something so you can figure out what it's price should be. There are two types of costs: fixed and variable. Yes, we accountant types are very creative. Fixed costs are generally set, at least for the time being, and include things like overhead and wages, while variable costs vary with the number of units produced. So rent and salaries are fixed costs, while materials are variable. Hourly wages and energy use fall into that gray area about which accountants argue, and is the reason all of you out there who aren't accountants still don't want to be accountants.

There's a relatively new business idea out there called the triple bottom line. The three pieces are the economic bottom line (the one we're all used to thinking about), the ecological bottom line, and the social bottom line. The idea is that companies that do well in all three are really, really great companies, and that the other ones just suck by comparison. I'm a capitalist by nature. I believe that a company's job is to make money for its shareholders. The end. I'm not heartless. I just don't think that it's a company's job to solve the world's problems. I don't think a company should be obligated to support the special Olympics, or saving baby animals, or whatever. Those are good causes, sure, but it's not the job of a company to further them.

However, companies have found that people like buying their stuff even more if they support a cause, or try to improve the areas where their stores are located, or reduce the environmental impact of their products. I love that Coca-Cola is a sponsor of the special Olympics; I love that Starbucks purchases fair trade coffee and tries to help it's farmers improve their skills without destroying the environment; I love that Kashi sells whole grains and not bleached wheat crap.

Based on the concept of a triple bottom line, a consumer would pay for all of the costs associated with a product, including the social and environmental costs, and not just the financial costs. So that can of Coke that's helping to sponsor the special Olympics? Well, you'd also have to pay to carbon-offset the energy used to make that can, and it's contents, including the high-fructose corn syrup. And that corn syrup, well, it relies on petroleum-based fertilizer, that's being washed away by rain, potentially entering our drinking water, but also wrecking havoc in our rivers, lakes, and oceans. And, on top of that, it's (at least partially) causing the obesity problem in our country. And that obesity problem is causing health care costs to go up, because, **GASP** obese people have more health problems than people with a healthy body weight. So now that can of coke, which under traditional cost accounting, probably cost about $0.30 to make, and sells for $0.75, now would cost (and I'm making a WAG here) $4.50. For Coke to get the same profit margin, it would have to sell it for $11.25. Outrageous, right?

Believe it or not, the reason I'm bringing this all up is not because I'm ticked that I'm going to have to pay for a bunch of obese Americans, although I am annoyed about that. I'm bringing this up because next week Captain America and I are headed to Europe for two weeks. According to our Lonely Planet guidebook for Switzerland, "two people taking a return flight between Europe and the US will contribute as much to climate changes as an average household's gas and electricity consumption over a whole year." Yikes! The Lonely Planet has not lost it's mind and started encouraging people not to travel; it simply suggests to tread as softly as possible, and to carbon-offset your flights, etc.

According to Riot 4 Austerity, the average American usage of gasoline is 500 gallons per person per year, and the average usage of electricity is 11,000 kwh per household per year. Because I'm a bit of a mathlete dork, I actually figured out what this would cost us. At $0.13/kwh, the electricity would cost $1,430. At $2.84/gallon, the gas for a family of four would be $5,680. So in total, our flights should have cost us $7,110 more just to offset our carbon footprint. Good Lord! That's more than the budget of our trip!

So then I started wondering, what if we had to pay that much? Well, first of all, we wouldn't be going. But then again, it's only been in the last 50 or 60 years, or so, that air travel has become even reasonably affordable for the average American. Perhaps, if we had to pay the full costs of things, including the cost of environmental change, we would be more thoughtful in our purchases. Perhaps if we thought more about our purchases, we'd make fewer, but with more care. If a Coke cost $11.25 a can, perhaps we would only purchase it on special occasions (as a kid, we were only allowed soda on special occasions, and we're not obese in my family--I'm sure this is not the sole contributing factor, but still...). And then, if we only made thoughtful purchases, our carbon footprint would be lower, we'd potentially be paying fewer health-care costs, fewer costs of our increasingly unpredictable weather patterns, and fewer costs of chemicals in our drinking water. We might actually be better off if we just took the time to think about what we're doing.

The Lonely Planet also says that it "regards travel, overall, as a global benefit, but believes we all have a responsibility to limit our personal impact on global warming." I agree. I'm not saying to give up travel, or Coke, or anything else that brings your life a little pleasure. By all means, it's your life: live it! Just think about it, too!

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