Oil and gas. Gas and oil. They make our cars go and they heat our homes. All in all, they’re pretty useful to have around, if we do say so ourselves. But oil and natural gas are finite resources—that means there’s only so much of them in the world. So oil and gas companies are always looking for the next great source of that ooey gooey nectar of industry, and those exploratory efforts can get expensive.
When cost accountants evaluate how much moolah these companies are spending on their exploratory efforts, one method they might use is called the “full-cost method.” This method basically takes every dollar spent, regardless of whether the effort was successful or not, adds it up, and capitalizes it. In other words, even if our latest geological survey of a potential oil field yields absolutely nothing, the costs associated with the survey are considered capital and not an expense. This can make our company look like it has a higher net income than it actually does. Which isn’t bad for us, because if our net income seems higher, we’re more likely to attract investors.
Which brings us to our next point: if we’re on the investor side of this whole situation, it would behoove us to do our homework if we’re considering buying into oil or gas. If we see that a company uses the full-cost method instead of the “successful efforts” method, which counts those failed ventures as expenses, we might want to dig a little deeper before we buy and make sure their financial picture is as rosy as it appears.
Related or Semi-related Video
Cost Accounting: What is a Load Factor?1 Views
and finance Allah shmoop What is a load factor All
right people You know those wide load trailer's right know
and not the NFL linemen These wide loads they're just
like normal trucks on ly wider like maybe twenty percent
thirty percent wider If you're moving this fine two bedroom
with a den from here to here well you'd better
figure in plenty of room for the extra with it'LL
take during the mountain pass turns Okay well that's sort
of how load factors factor into proper cost allocations in
a company you have to add in the load will
load Factors generally measure how much a given system can
handle like it's used a lot in airlines The load
factor measures how full airplanes are when they fly Like
if you have three hundred seats on a plane and
it flies with two hundred passengers Welcome Your load factor
is about sixty six point seven percent That's two hundred
divided by three hundred The term also gets used in
energy output Like the load factor measures How much energy
is getting used now compared to the maximum output possible
Well the key factor in both these common examples how
much are we using Our resource is that's key question
Can we get Mohr out of what we have Okay
you have this airplane you flight with a hundred empty
seats The fuel costs the cost for the pilots the
flight attendants the peanuts the thin foam pillows They're all
essentially the same with two hundred passengers as they are
with three hundred So whatever you can do to get
a plane full well that's probably worth it Cut prices
have ticket raffles for publicity whatever it takes Or you
own the grill factory not a barbecue joint A dental
office Yeah these bad boys you've purchased five Ortho bought
five thousand units the latest in robot dental implant technology
They fully replaced those pesky human orthodontist You had to
pay two hundred grand a year The Ortho Baht can
install five grills in a typical eight hour day It
costs five hundred bucks a day to operate the machines
and that includes power maintenance appreciation and the grill itself
Meanwhile the office costs one hundred grand a month and
overhead and that includes renting the office space insurance magazines
for the waiting room WiFi marketing Free grill work for
your family salary for the receptionist and so on Though
you've been looking at the possibility of getting the robo
receptive about X nine The current receptionist is your cousin
Jenny though so well you can't pull the trigger just
yet anyway All that stuff rolled together two hundred grand
a month all in You have to pay that amount
no matter what Plus the costs of powering up the
ortho bots comes to fifty Grand Mohr a month That's
five hundred a day times five days a week and
four weeks a month Time Five robots Yeah that's fifty
grand so the office costs hundred fifty thousand dollars a
month to run Meanwhile you have the capacity of five
hundred grilling and plants a month That's a five a
day for each of the five bodies Time Five days
a week times four weeks In a month we'LL a
grill implant costs two thousand dollars to perform raw materials
on that implant or seven hundred fifty bucks Each one
has a gross profit of twelve hundred fifty dollars ignoring
all the other load factors there So if the machines
run at full capacity you'LL have gross profit of six
hundred twenty five thousand dollars or twelve hundred fifty times
five hundred procedures Then you subtract one hundred fifty grand
overhead and you're netting four hundred seventy five grand a
month before taxes and such Yeah not bad But that
figure only counts if you're at full capacity a load
factor of one hundred percent Well it gets trickier if
that load factor is lower So let's say the load
factor for a month comes in at only twenty percent
Like you only do one hundred procedures in a month
We'LL then gross profit is only one hundred twenty five
grand and you gotta subtract out there in the one
hundred fifty grand in fixed overhead And oh now you're
twenty five thousand bucks in the red Well at that
point you might think about taking some steps to increase
the load Factor lowering prices toe fifteen hundred procedure But
note that the gross profit if you lower prices on
each one well then that drops to seven hundred fifty
bucks But if it pushes the load factor from twenty
percent tough fifty percent well then it might be worth
making the change Two hundred fifty procedures times seven hundred
fifty equals one hundred eighty seven thousand five hundred dollars
and you subtract the overhead of one hundred fifty and
then you're back in the black of thirty seven five
a month Well on the other end if your load
factor gets too high it might be time to expand
capacity So say your typical month runs at ninety percent
Load factor Then prom season comes up in A bunch
of teenagers want grills for their prom pictures Demand is
twenty percent higher than normal but you can't absorb all
that demand You have to turn people away And wow
that's expensive to dio So if load factor starts to
get too high might be time to add another ortho
bod Just don't get tempted by the Recep Toba Next
time you're browsing it Robot Corp We'LL never hear the
end of it at Thanksgiving If you give your cousin
the boot Yeah no
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