forwarded message from John Conover

From: John Conover <>
Subject: forwarded message from John Conover
Date: Thu, 17 Oct 1996 00:46:14 -0700

One of the United States greatest legacies to the posterity of western
civilization; the phrase "creative accounting."


BTW, Accounting is interesting-like chemistry; the science of
exceptions, depending on where you are. In the US, the way you
calculate product cost is to take the cost of manufacturing and
distribution operations, (fixed cost, variable cost, cost of sales,
etc.,) per unit time, and divide it by the number of pieces
manufactured in that time, ie., if everything remains the same, the
product cost is the same, irregardless of the number of parts
made. This is unique. The rest of the world calculates product cost on
how much it would cost to manufacture one more piece of product, (ie.,
incremental cost, which in the electronics industry is virtually cost
of sales,) ie., if everything remains the same, product costs decrease
as the volume goes up.  In the semiconductor industry, manufacturing
is virtually all the cost of logistics-there is about a teaspoon of
sand in your PC for the variable cost-with astronomical fixed
cost. Once you have your fixed cost paid for the accounting period,
the cost of producing one more IC is, essentially, the cost of
sales. In the US, each IC made in a time period is loaded with a
fraction of the fixed cost. In the rest of the world, not so. So, if
you use Asian or European accounting theories, and sell the product in
the US, it is called dumping-even though the costs of operations are
the same. It also means that if you do international business, you
will have to maintain two sets of books for taxation, and your
profitability of the ROW will be better if you are an established
producer, with large volumes, and much worse if you are just entering
the market. This is why the Japanese always run a semiconductor
facility at capacity, (actually, well the decreasing returns,) and
then sell the product for the best price they can get, AKA,
dumping. And this is what makes DRAM pricing for your PC fluctuate by
a factor of 5 between good times and bad times. (Case in point? in
June 1994, 8 meg 70ns Toshiba simms cost about 340 bucks. In June of
1995, they were 60 bucks. And now rising.) The Orient has always used
incremental costs, but the EC has only used it for about a decade, or
so. The reason for the change was the works by the economist Brian
Arthur at Stanford, on incremental returns, (adopted as SOP in the EC
by no later than 1999.) It is more expedient, (mathematically from a
statistical point of view,) to relate incremental costs to incremental
returns. And, in case you are curious, it can be shown that using
incremental statistical mechanics, (ie., fractal analysis,) that an
economy can grow. Unfortunately, if you use fixed cost analysis, it
can be shown that an economy can not grow. A bit of an enigmatic
contradiction since we know that, statistically, economies do
grow. (Arthur's PHD dissertation was on macroscopic policy of the
growth of emerging economies. You can catch it at, or the Santa Fe Institute at BTW, in Europe, you can also add the
incremental cost of maintenence into your product. If you buy a
Grundig TV, by legal mandate it is supposed to last 10 years, and the
manufacturer is responsible for 10 years. If it breaks, the service
call, all parts, etc., are picked up by the manufacturer. You can add
an estimate of this into your tax liabilities as a cost of doing
business, and then adjust your taxes a decade from now.

Funny how accounting and business theories differ around the world.


John Conover,,

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