Vignettes offered for entertainment purposes

We were with Mom on Monday. She vastly prefers Judge Judy to any of the soap operas that air at 12:30. Judge Judy reruns from 2012-2015 run in that time-slot.

One of the cases Judge Judy officiated over involved two men who were working out in a gym. One of the men was doing squats with 210 pounds and he lost control of the weight. It dropped down from shoulder height, rolled across the gym and pinned the other man's legs against a stack of weights on a Nautilus machine.

Judge Judy ruled in favor of the man who was injured to a tune of $2600 dollars.

The man who was ruled against pointed out that the gym's paperwork had members sign a waiver because working out with weights is inherently risky and members had to accept responsibility for being aware.

The question that was NOT asked was...was the man who was injured wearing ear-buds?

Dropping 210 pounds of dumb-bells from five-feet makes a big noise.

If the man who was injured was wearing ear-buds then had abrogated his responsibility to maintain situational awareness and was at least partially culpable.

Earbuds and Hand-free-everything were a "young-person" thing in 2010. Judge Judy never considered the possibility because it was foreign to her experience.

Automobile seats

Multiple models and makes of driver's side, automobile seats were recalled in the mid-1980s because they suddenly started collapsing backwards.

In extreme cases, vehicles that were rear-ended (collision) ejected the driver through the rear window. Some of the drivers were even wearing their seat-belt. The seat tipped backwards and the driver shot backwards as if by a cannon.

How could multiple corporations with very professional engineering and testing facilities all have this same problem?

The load environment changed.

 

Major fast-food restaurants realized that drive-through windows cost less-per-diner and more than half of their sales volume was delivered through the window.

Franchisees were told to install drive-through windows or lose their franchise.

Before 1984, a few drivers paid tolls. Typically they kept coins in the ashtray and fished out a couple of quarters at each toll booth and pitched them into the basket.

The new-fangled drive-through windows at fast food emporiums were totally different. Drivers had to pull out their wallets. They braced their feet against the firewall, planted their shoulder-blades against the top of the vertical seat bun and ARCHED their body to lift their butt out of the seat so they could fish out their wallets. Very high, rearward loads were being input into the seats high on the rear seat bun. Visualize a claw hammer pulling out a nail.

The bolts that held the front of the seat tracks were fatiguing and ripping out of the body sheetmetal.

A load condition that simply never happened in 1979 was now happening between once-a-week to twice-a-day for the majority of Americans and the change happened in less than five years. Some of those American weighed 300 pounds.

A small thing, drive-through windows. But it changed how automobile seats were attached to the body in very fundamental ways.

Cost death spiral

There was a large factory in an old, legacy city. The city taxed the factory at a very high rate so voters did not have to pay high taxes.

Approximately 50% of the factory was dedicated to making a low-volume, boutique sports-car. Approximately 35% of the factory floor-space was dedicated to making rear axles for a model with a volume of 500,000 per year. The rest of the factory was dedicated to making bumpers.

In accordance with time-honored, Generally Accepted Accounting Principles, the overhead (office space, security, taxes, engineers, secretaries, depreciation) were allocated on the basis of time-card hours. Since the boutique sports-car employed 80% of the hourly employees it was saddled with the vast majority of the fixed costs.

Note that "management", that is salaried employees, do not have time-cards. They are overhead.

The boutique sports-car was vastly more popular than expected. The firm sold three-times as many vehicles in the first year as had been forecast. Sales eroded rapidly after that, partially because the product was not very refined in its first couple of years. Production of the boutique sports-car was suspended after five years of production.

Because of rapid evolution in robots, the robots used to make the sports-car were not salable. They were old-tech. The firm decided to turn off the lights, mothball the 50% of the plant that made the sports-car and to continue to make axles and bumpers. The robots were scrapped-in-place and depreciated for tax reasons. Depreciation is a cost. That cost was rolled into the facility depreciation-and-maintenance costs.

Since the number of hourly employees, and 80% of the time-card hours disappeared, the bean-counters increased the overhead per time-card hour by a factor of five even though the axle and bumper operation did not consume a single additional square-foot of factory floor-space.

The over-head per time-card hour now dwarfed the employees wages and the cost of his benefits.

The industrial engineers were very busy. Automation projects that had not been economically viable when the axle employees (for instance) were only carrying 15% of the costs of the facility were suddenly justified when the axle employee's "costs" inflated to comprehend that they were now carrying 80% of the factory's costs.

Automation increases fixed costs. There is more equipment to depreciate. Automation reduces labor. There were fewer man-hours to amortize the increased costs against. The bean-counters made the necessary adjustments by increasing the additional costs-per-time-card-hour.

The increased toll justified even more automation.

The bean-counters were stunned to learn that the bumpers could be purchased for less than it cost, by their reckoning, to make them. The bumper operation was phased out.

The axle operation struggled along for a couple more years before it too was phased out.

The city refused to reduce the building assessment and property taxes from what it was when 3000 hourly employees worked in the building. Their thinking was that the firm had screwed them by outsourcing the work and depriving the city of the income taxes they received from the 3000 employees, many of whom did not live in the city.

The firm leveled the building.

The city still refused to lower property taxes.

The firm took them to court and eventually received some tax relief.

 

If you peel away the extraneous details of the story, you realize that the root of the problem is the crude way that "overhead" or "fixed costs" were handled. It made sense to assign it by time-card hours back in 1925 when GAAP was developed because most of the cost was direct labor and fixed costs were a thin sprinkle on top. 

Tools were cheap and rudimentary. Tasks were simple and repetitive so few supervisors were needed. Workers were legion. Buildings were dark and heated by waste heat from the steam engine that powered the assembly line or overhead shafts.

By the 1980s overhead was typically twice the cost-per-piece as direct labor and the labor was not always in the same building as the fixed costs. For example, in a modern automobile factory, a Paint Shop will cost a half-billion dollars due to emissions requirements and will employ about fifty employees per shift because most of the processes are automated. People still hand wipe and inspect the vehicles before the process. They apply sealer to the joints. They inspect and repair vehicles before shipping to Final Assembly.

On the other hand, the Final Assembly operations employs more than five-hundred per shift and the Shop cost less than $100 million to setup. That is, 20% of the cost of the Paint Shop and ten-times as many employees.

The distortions caused by GAAP's primitive understanding of costs resulted in bean-counters making multiple, sub-optimal decisions in adding automation and then killing potentially viable enterprises. If you take several steps backwards, you can see something similar in the First World countries with decreasing numbers of productive employees and ever-increasing numbers of drones.

The number of productive employees decreases due to ever-increasing administrative and regulatory burdens. Operations are outsourced. The number of drones increase.