Cost and Reasonable Rental Value

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I. Purposes of the Brief
This brief amicus curiae does not address the merits of the predatory pricing allegation against BuyGasCo Corporation ("BuyGasCo"). It speaks only to the nature of the cost accounting system that we, as students of accounting, think to be appropriate for addressing the issues presented by cases of this general type. We offer our views on this subject out of concern about the allocation of indirect costs used in assessing the appropriate gasoline cost value in State of Florida v. BuyGasCo Corporation, 2003-05143 (D. FL. 2003). We regard the allocation system employed in that opinion to be inconsistent with systems in common practice. Use of that system has a potential adverse effect on both the motor fuel retailing industry and the motor fuel market. It should not be employed in judging the issues in the Florida v. BuyGasCo dispute. This brief aims to aid the court in constructing a more appropriate framework for resolving the indirect cost allocation issues presented by the case. Before proceeding with a discussion of this framework, it may be helpful to the court to know that we agree with the view expressed in the initial decision: that BuyGasCo's cost for regular grade gasoline exceeded their price. We understand that the court is currently considering BuyGasCo's motion for appeal and that the motion relies heavily on the cost accounting system developed by Dr. J. T. Humboldt. Although we agree with the accuracy and fundamentals of Activity-Based Costing systems such as Dr Humboldt's, we disagree with his allocation methodology and calculations.

II. Background
The Florida Motor Fuel Marketing Practices Act (MFMPA) determines motor fuel cost for non-refiners as the actual invoice price, including associated freight charges and taxes, plus direct labor and reasonable rental value of the outlet attributable to fuel sales. The invoice price by its nature can be directly attributable to each grade of gasoline at a per gallon rate. As such, this cost will be referred to as the "direct cost" for the remainder of this brief. On the other hand, labor and rent (also referred to as "indirect costs") cannot be directly attributable to each grade at a per gallon rate. It is the methodology of creating attribution rates for these indirect costs that is the point of contention between the parties.

From the hearing, the plaintiff alleged that the indirect costs vary in direct proportion to the number of gallons of gasoline sold per month. Consequently, they allocated the costs based on the average amount of gasoline sold per month. The results of this approach were shown in Plaintiff's Exhibit A (Exhibit 1). Exhibit 1

Plaintiff's Exhibit A
Calculation of Costs and Profits for BuyGasCo Corporation's Gasoline Products Prepared by Mr. Donohoe, CPA

RegularPlusPremiumTotal
Avg Monthly Gallons Sold342,203127,12098,178567,501
Percent of Total60.3%22.4%17.3%100.0%
Avg Monthly Indirect Costs$20,006$7,432$5,739$33,177
Cost Per Gallon$0.0585$0.0585$0.0585

PriceDirect CostIndirect CostProfit(Loss)
Premium$1.43$1.22$0.0585$0.1515
Plus$1.36$1.20$0.0585$0.1015
Regular$1.23$1.18$0.0585($0.0085)

In contrast, the defendant stated that the resources that generated the indirect costs were used equally by each grade of gasoline. As a result, they first allocated the indirect costs evenly to each grade then divided by the average amount of gasoline sold per month. The results of their analysis were shown in Defense's Exhibit 1 (Exhibit 2). Exhibit 2

Defense's Exhibit 1
Calculation of Costs and Profits for BuyGasCo Corporation's Gasoline Products Prepared by Mr. Faranhat, CPA

RegularPlusPremiumTotal
Avg Monthly Indirect Costs ($33,177/3)$11,059$11,059$11,059$33,177 Avg Monthly Gallons Sold342,203127,12098,178567,501
Cost Per Gallon$0.0323$0.0870$0.1126

PriceDirect CostIndirect CostProfit(Loss)
Premium$1.43$1.22$0.1126$0.0974...
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