Buygasco

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

Regular Plus Premium Total

Avg Monthly Gallons Sold 342,203 127,120 98,178 567,501

Percent of Total 60.3% 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

Price Direct Cost Indirect Cost Profit(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

Regular Plus Premium Total

Avg Monthly Indirect Costs ($33,177/3) $11,059 $11,059 $11,059 $33,177

Avg Monthly Gallons Sold 342,203 127,120 98,178 567,501

Cost Per Gallon $0.0323 $0.0870 $0.1126

Price Direct Cost Indirect Cost Profit(Loss)

Premium $1.43 $1.22 $0.1126 $0.0974

Plus $1.36 $1.20 $0.0870 $0.0730

Regular $1.23 $1.18 $0.0323 $0.0177

III. Refined Costing

Both the Plantiff and the Defendant allocate all indirect costs from a single cost pool using what is referred to as a simple costing system. This system is often imprecise as it distributes costs on the basis of a single variable when there are typically several factors involved, particularly when there are multiple end-products sold.

To address this imprecision, we offer a refined costing system which reduces the use of generalized averages in the allocation of costs. In general, this is accomplished by first dividing the indirect costs into homogeneous pools so that we can more appropriately distribute them. Second, these cost pools are allocated on the basis of the driver of that cost segment which ensures that costs are more accurately tied to their source. Thus, a refined costing system is preferable as it ultimately delivers a more correct cause-and-effect relationship between costs and their sources.

Although this system is preferable, it has some disadvantages. First, refined costing systems require more information about the nature of the costs involved, and often gathering this information results in additional costs for the firm. Second, even with a broad range of data available, some averaging and estimations are still necessary. So, without outside motivation, such as the MFMPA, small firms retain simple costing systems.

IV. Dr. Humboldt's Refined Costing System

In his analysis for the Defendant, Dr J. T. Humboldt proposed BuyGasCo adopt a refined costing system one which could be used in an appeal of their case. In his system, Dr Humboldt proposed using three