Bullish Inventory Levels for July: An Opportunity?

It seems some of the biggest news on the US economy comes from a July report of business inventories. They are up! A full 1 % rise in inventories has optimists looking for a brighter sales record to continue as well. Inventory levels were slashed during the recession and have been slowing expanding in the last year. However, the 1% July inventory increase was significantly larger than expected.

Business inventories are managed carefully as carrying costs have a compelling impact on the bottom line. Carrying costs include finance, insurance, security, spoilage, storage, handling, property taxes and other related costs associated with carrying inventory. These costs are soemtimes divided into four categories: finance costs, ownership costs, risk costs and overhead costs. From these it is clear the cost of inventory goes far beyond the initial product cost from the supplier.

Opportunity costs are a factor for business inventory levels as well. Although not treated as a cost on a financial statement, the decisions companies make with where to invest their capital send distinct messages to economists and industry experts. It provides an insight into companies' decision making processes and may indicate future economic conditions. It is the opportunity cost with inventory that adds importance to the July inventory report. Rather than investing capital in other areas, businesses are betting on sales and as such are beefing up inventory levels. This provides a hopeful insight into a possible continued economic expansion.

Sample Test Question: Task 1-B-4

Masford Company's board has been presented with options for business expansion. One option is to expand inventory levels across all product lines, which will require borrowing at 9% interest. Another option is to invest in a new product with an expected return of 12%. Mashford Coporation's board decided to invest in additional inventory this month. Using the opportunity cost approach, the cost to finance the inventory is:

A) 12%

B) 9%

C) 3%

D) 21%

Taxes Matter

I sat next to my CPA at the movies last Friday night. With a booming accounting business one might wonder, as did I, how he managed to have time for date night with fewer than seven days before his biggest day of the year. Turns out he didn't have time for a date night, but rather a few date hours. He stole away from the office to catch a movie with his wife. And then it was back to his desk where he had already been working until midnight for a couple weeks. Today or tomorrow will be his first break from that schedule. However, don't mistake my ramblings for pity. I paid him $440 to do our taxes this year. Granted, we don't file a 1040EZ, but I don't think our return is too complicated either. And his vacation to Kauai is already scheduled for next week. Poor guy. He deserves it though. I guess.

Whether or not you filed for a refund in February, or are sending a big check today, or even if you filed for an extension, April 15th commemorates the day of taxes. And I have yet to meet someone that is happy to pay more taxes than they are required to do so. Even the IRS has basically given up on that idea. Was there a box on my tax form in which I could enter a number for an additional tax donation I'd like to make to the government? If so, I missed it.

When it comes to procurement, a cost/benefit analysis includes a review of the total cost of ownership (TCO) of an acquisition. And part of those costs are often taxes. But taxes are a given and, unless you have a tax-exempt status, there is no legal way to avoid paying them.

Or is there? Consider two scenarios in which taxes may be limited or avoided. First, a lease/buy analysis. In some states, taxes are only paid on the monthly lease payments and not the total value of the acquisition as they would be in an outright purchase. Some leasing agencies are tax-exempt and there-by save their tax-exempt customers thousands in reduced interest (http://www.dasny.org/telp/index.php#supersearchresult). A full review of all possible lease options would be wise when considering a lease decision including: operating lease, financial lease (full payout, partial payout, lease/purchase), leveraged lease, master lease, wet/dry lease, or sale and leaseback. And while financial factors are often key, there are other factors to consider as well including operational factors, ownership benefits, limitation of supply, termination, insurance, and more.

Secondly, in many states, taxes vary based on goods and services, and among services, taxes may vary based on the type of service being provided, particularly technical services. At one company, they often require detailed invoicing from their suppliers in order to avoid over-payment of taxes on services that are not taxable, or are taxable at a reduced rate. These invoicing requirements are discussed before purchase. In addition, the Statement of Work (SOW) is completed prior to purchase and will detail the services to warrant and justify the various tax classifications. Working closely with their internal tax department specialists, and by consulting tax consultants when needed, they have easily saved hundreds of thousands of dollars in the past two years by avoiding the overpayment of taxes that were not owed. This was done by managing their suppliers and the procurement of services with tax ramifications in mind.

Whether personally or as an organization, obviously you should file your taxes and pay what you owe. But when you begin your next cost analysis of a possible lease of a new acquisition, or when procuring services, consider all your options and make sure you understand the applicable tax laws so that you can determine an accurate TCO among the other factors in your decision.

CPSM Study Guide 1: Task 1-B-4: Perform cost/benefit analyses on acquisitions

Will Activity-Based Costing Impact Your Next Vacation?

Spirit Airlines has rocked the travel scene once again. From the carrier that was the first to introduce checked baggage fees, comes a new fee. On April 6, 2010 Spirit Airlines announced they will begin to charge up to $45 for carry-on baggage. Such a notification has created an uproar all the way to the US Senate where some are already working to ensure that “items essential to people’s health, work and safety can be carried on board without extra fees.” (Bloomberg Business Week, April 13, 2010, Spirit’s Carry-On Bag Fees Draw Senate Legislation)

However, one may wonder if such a bold decision by CEO, Ben Baldanza might have come about after a review of overhead costs and, specifically, activity-based costing (ABC). ABC is a cost management method for attributing indirect costs to the activities that drive cost. (ISM Glossary)

Certainly, the weight of baggage in overhead bins contributes to additional fuel costs. In addition, according to Ben Baldanza, there are other indirect costs associated with carry-on baggage including, “Longer security and boarding lines, injuries from overcrowded overhead bins, delayed flights and passenger frustration.” (USA Today, April 13, 2010, Opposing view: A win for everybody)

It is one thing to use activity-based costing to identify activities that drive costs in an organization. It is another to directly pass those costs onto the consumer that carries out that specific activity. Time will tell if such an attempt by Spirit Airlines will be successful, if other carriers will follow suit, or if legislation will be introduced banning the carry-on baggage activity-specific fees.

CPSM Study Guide 1: Task 1-B-4: Perform cost/benefit analyses on acquisitions