Question

Question CT 15.7, Considering Your Costs and Benefits, is the basis for discussion pertaining to chapter 15. What are your thoughts? Would you include charges for those costs, or would you not include them? Please provide support for your view.

CT15.7 After graduating, you might decide to start a small business. As discussed in this chapter, owners of any business need to know how to calculate the cost of their products. In fact, many small businesses fail because they don't accurately calculate their product costs, so they don't know if they are making a profit or losing money—until it's too late.

Suppose that you decide to start a landscape business. You use an old pickup truck that you've fully paid for. You store the truck and other equipment in your parents' barn, and you store trees and shrubs on their land. Your parents will not charge you for the use of these facilities for the first two years, but beginning in the third year they will charge a reasonable rent. Your mother helps you by answering phone calls and providing customers with information. She doesn't charge you for this service, but she plans on doing it for only your first two years in business. In pricing your services, should you include charges for the truck, the barn, the land, and your mother's services when calculating your product cost? The basic arguments for and against are as follows.

• YES: If you don't include charges for these costs, your costs are understated and your profitability is overstated.
• NO: At this point, you are not actually incurring costs related to these activities; therefore, you shouldn't record charges.

Instructions

Write a response indicating your position regarding this situation. Provide support for your view.

Need Help any this and please share your thought about this. Very appreciate who help share their thought. Thank you!!

Answer 1

No, these charges are not to be recorded

Accounting perspective - Eventhough as per the revenue recognition principle, expenses should be recorded during the period in which they are incurred regardless of when the transfer of cash occurs, In this scenario there would be no transfer of cash, hence there would be no outflow of economc benefits requiring entry in the books of accounts.

Taxation perspective - Expenses that are not incurred cannot be adjusted with the revenue of a business so as to arrive at the income chargeable to tax. Only expenses that are incurred during the year can be adjusted. These expenses would never be incurred and are only notional.

Yes, these charges are to be recorded

Costing Perspective - In a normal business the sale price is computed after adding a margin to the Total cost incurred. When these charges (Storage and assistant) would be incurred subsequently (when parents stop providing services free of cost) the price quoted to the customer might show a huge variance when compared to that of preceeding year's quote which did not have such charges. Hence it would be better to quote the prices after adding these charges notionally to avoid reduction of sales in the future.