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Grand Rapids, MI | There is an old addage in business that says "you can't manage what you don't measure" I believe this is more true today than ever, especially as computers and the like decrease our cost to measure.
A comment on the drug store. I think the "bean counter" may need to go to b-school... Store space in this example sounds like a fixed cost, that is unless the store owner had an option to reduce his costs by using a smaller amount of space. Actually in this case the cost of space would be a "step-wise" cost. If the peanuts were pulled and nothing more lucrative replaced them...then the decision was as foolish as the story makes it sound. Quite simply the cost of the space is sunk if the cost of it cannot be reasonably reduced. Now if the "bean counter" knew from sales studies at other stores that eyeglass repair kits would make 10 times as much money for the store owner in that space, it may not matter that a few bags of peanuts got stale.
So to your question of making all your decisions based on profit alone...of course not. I will note also that it depends on how you define profit. A business will likely make wrong decisions much of the time if it bases decisions on "accounting profit" To make these kind of decsions one needs to minimally understand the concepts of Marginal Revenue and Marginal Cost and how to figure and apply them.
Bottom line is that I do believe costs do need to be allocated to various enterprises to get a full picture of the business. One needs to be aware, however, of their cost structures. Specifically one should try to get a handle on whether costs are fixed (and over what period), step-wise, variable, etc. Simply alocating costs blindly among enterprises and making a decsion based on accounting profit may do more harm than good.
Edited by lorenk 12/21/2009 16:57
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Enterprise Accounting... is it needed?
