The True Cost of the Polar Vortex
Jan 27, 2014
As I was doing my nightly reading, I came across the following article from MSN news “Deep freeze may have cost economy about $5 billion”.
My initial reaction to this article was, “who came up with this figure and how was it calculated?” I ask this question often. Evan Gold was quoted in the articles as stating, “there’s a lot of economic activity that didn’t happen. Some of that will be made up but some of it just gets lost”.
I understand the concept of cost very well, but a specialist in “business weather intelligence” I am NOT. However, I am very curious to know what was taken into consideration to arrive at this figure. From a very LIMITED perspective, it makes sense that there were two days out of the year that costs were not incurred and revenues were not being generated. In one hand and out the other. So, there is really no loss, right? When you look at the viewpoint of my employer, William Vaughan Company, there were two full days when employees were not able to physically report to the office to work. In theory, the Company did not incurring any costs because there were no employees’ wages to be paid when they are not working, right? No computers booting up, no coffee brewing, no lights on, so the utility meters were not running either. Due to the lack of “production,” employees did not generate billable hours thus, there was inevitably no revenue for those two days either. Seems like a wash, doesn’t it?
In simple terms, it is not a wash. The Company still incurred fixed costs that it must somehow be paid, even if the employees were not able to produce:
- The occupancy for the building (even though no one could get through the snow to get to it)
- Some employees are salaried, so despite the fact that they were not working, they will still receiving a paycheck
- Insurance and property taxes for the building still must be paid
- Utilities, even though they will be “lower” because the computers, lights, and coffee pots were not on, there still remains a fixed component that is being incurred.
So, bottom line is we did not generate any revenue during the polar vortex, but we did incur a minimum level of costs that will still have to be covered. From a traditional “accounting” profit calculation, we lost money for those two days!
The other concept to take into consideration just as Gold said, the revenues that were not billed from that day are just gone forever, AS ARE THE VARIABLE COSTS. So, was the $5 billion calculated using those assumptions, or does it try to quantify the “missed” revenues too?
There are so many different methods we could use to try and define the cost of the Polar Vortex. Let it serve as an example of how you might approach your decision making process when defining costs for any number of situations.
Categories: Cost Accounting