Suite 1, 25 Westerton Road, Glasgow, G68 0FF


December 15, 2009

A Christmas Carol (The Accountant’s Version)

“Humbug”, said Ebenezer Scrooge, Fellow of the Institute of Avaricious Accountants, as he counted out the coins on his desk. The candle barely gave enough light and the fire glowed down to its last embers. Shadows gathered round his hunched form.


“I’m not making enough”, he grumbled. “It costs me £12,000 per annum to maintain my portfolio of slum dwellings in the slovenly state their tenants deserve, and I work for 48 weeks of the year, 5 days a week, which is 240 working days a year. If I work 7 hours a day, that is 1,680 working hours per year. So, if I need to earn £12,000 per annum just to break-even on my outlays, that means I must earn are £7.14 per working hour to cover my costs. I’m not making enough profit”.


Was that the clanking of chains he heard in the distance ?


“Whoa”, came a ghostly echo. “Scrooge, Scrooge”.


“Who is it”, said Ebenezer, sitting upright and pursing his lips.


“It’s Marley, Scrooge, Marley”, came the ghostly reply.


“Bob Marley ?”, said Scrooge, remembering his dreadlock days in the ‘70’s.


“No, Jacob Marley you idiot !. Your former partner”. A pale figure appeared, floating in front of Scrooge’s desk.


“Jacob Marley, my partner, dead these seven years. How is that possible ? Did you get the chain recycling contract when you died then ?”.


“Scrooge !” roared the spectre. “These chains are the penance for my crimes”.


“I don’t helping banks make loans to people who can’t afford to pay them back a crime”, said Scrooge. “It’s expanding access to the capitalist economy. And we got generous bonuses for our hard work”.


“Yes”, said Marley sardonically. “And we scarpered pretty quickly when the repayments were due !”.


Scrooge grinned at the fun they’d had, but Marley was having none of it. “Scrooge, there are no bankers bonuses where your heading ! Change your ways while there is time. I am come to warn you of the error of your ways”.


“What do you mean ‘error’ ?”, asked Scrooge. “I am an accountant. We don’t make errors: only generally accepted accounting adjustments. Humbug”.


“You are talking rubbish, Scrooge”, said the ghostly voice. “You are talking about Absorption Costing – having to make at least £7.14 an hour”.


“So ?”, said Scrooge. “If a contract takes me 2 days to write, the full absorption cost of that contract is £100 – 14 hours at £7.14. But I only make the £150 fee if the creditor signs up. If he or she doesn’t sign, I make nothing. If only 50% of my contracts get signed, then the expected value of this two days work is only £75 (50% x £150). Result: misery. I cannot afford to continue with these wretched contracts. I cannot afford to do anything that earns less than £7.14 per hour”.


“Rubbish”, said Marley, as pale and cold as snow. “Stop wasting all this time calculating your fully absorbed cost per hour. You pay your bills monthly, so your outgoings are, in fact, £1,000 per month (£12,000 divided by 12). That means that you have to earn £1,000 per month to breakeven, and whatever you earn from writing contracts is a contribution to these fixed costs of £1,000 per month, as well as a contribution to your profit.


“That is Marginal Costing. I am not saying that constantly writing these shabby unemployment insurance contracts is the best way for you to make a living. If you want to supplement your income you might try some consultancy work – that’s pretty easy: just turn up at the client and look quizzical. They’ll soon buckle and pay up for your little-needed advice. But you don’t need to worry about trying to calculate different absorption rates for different activities. Under this marginal costing system everything you earn is a contribution to fixed costs and profit.


“And you can make this system of marginal costing more useful by allocating attributable overheads to particular projects or income streams. Note the word “attributable” here: this not some semi-random means of dividing fixed costs by the number of hours (or whatever) to get an absorption rate. It is allocating fixed costs, which can clearly be attributed to Value Stream activity, to that Value Stream.. Any costs which cannot clearly be allocated to a specific activity remain as corporate overheads”.


Scrooge’s mood lightened a little. “I’ve heard of this. This system of attributing certain fixed costs to the revenue streams which cause them, and then using marginal costing to calculate a contribution for each activity, is what Shillinglaw called Attributable Contribution Costing. The surplus of contribution over the attributable fixed costs being called Attributable Contribution”.


“Yes”, said Marley. “But remember that there is no attempt to calculate an absorption rate for the activities. Attributable Contribution Costing makes marginal costs more meaningful by allocating attributable fixed costs to the activities which cause them, but it still retains the basic simplicity of marginal costing, and it avoids the nightmare task of continually having to check the accuracy of absorption rates (or explain over or under absorption to colleagues)”.


“So I could identify the main Value Streams in my business”, murmured Scrooge, a flicker of a smile on his lips, “and allocate the fixed costs to the Value Streams that are responsible for incurring those costs, and where they can be managed”.


Marley nodded – insofar as apparitions made of paranormal matter can nod. “Many of your fixed costs will be attributable to products, services and Value Streams, but others will remain at Chief Executive level. These are the corporate overheads which arise as a result of company policy and which an only be altered by the authority of the Chief Executive. Your Value Stream managers –Bob Crachitt and Tiny Tim, are then responsible for generating a target Value Stream Profit, or contribution, which goes towards the corporate fixed costs and your profit”.


“Nice”, said Scrooge. “This attributable contribution really could make life easy for me. Each month I set Bob and Tim a target to earn for their Value Streams and after that I am in profit. No need to worry about costs per hour, and no need to spend days setting absorption rates. Now, I can use the time to harass Bob Crachitt and Tiny Tim to achieve their Value Stream profit target. I’ll enjoy that !”.


“Yes”, came the ghostly echo, but it was already fading. Scrooge was no longer interested in the ghost of his long dead partner, and the Ghost of Christmas Past wouldn’t even get a look in. His mind was whirring.


He ran to the window and flung it open. Dawn was breaking. “Absorption costing is extremely complicated”, he shouted to a startled rubbish sweeper. “It is prone to inaccuracy; causes endless over- and under- recoveries; is impossible to understand by non-accountants; useless for decision making; and completely unrelated to issues of responsibility for costs and revenues”.


The man stared at him. Scrooge continued his merry song. “Absorption costing ties up resources, confuses everybody and doesn’t achieve anything !. It’s nonsense. I’m a changed man. I have my life back. There is hope for me yet !”.


He reached into his pocket for a sovereign to toss to the man, but then hesitated. He was an accountant after all. He turned from the window.


“Where’s Crachitt ?”, he muttered. “I’ll make an Value Stream Manager of him yet”. And he strode across the room to look for his Bob Marley records.



Season’s Greetings to everyone and apologies to Dickens fans.



Reference :   Gordan Shillinglaw, “Managerial Cost Accounting”. Richard Irwin Inc. 1982. ISBN 0-256-02597-5