Question

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?

Instructions

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

Answer 1

Position: Cost Accountant

1. Opportunity cost should be considered for use of truck for providing the service since inception and hence should be a part of pricing the services.

2. For use of Barn, the Land and mother's services cost of these should be considered only when the same becomes chargeable. In initial phase i.e inception of business, it is difficult to achieve breakeven.

Therefore: Pricing should include the opportunity cost for use of truck.