Oil and gas. Gas and oil. They make our cars go and they heat our homes. All in all, they’re pretty useful to have around, if we do say so ourselves. But oil and natural gas are finite resources—that means there’s only so much of them in the world. So oil and gas companies are always looking for the next great source of that ooey gooey nectar of industry, and those exploratory efforts can get expensive.
When cost accountants evaluate how much moolah these companies are spending on their exploratory efforts, one method they might use is called the “full-cost method.” This method basically takes every dollar spent, regardless of whether the effort was successful or not, adds it up, and capitalizes it. In other words, even if our latest geological survey of a potential oil field yields absolutely nothing, the costs associated with the survey are considered capital and not an expense. This can make our company look like it has a higher net income than it actually does. Which isn’t bad for us, because if our net income seems higher, we’re more likely to attract investors.
Which brings us to our next point: if we’re on the investor side of this whole situation, it would behoove us to do our homework if we’re considering buying into oil or gas. If we see that a company uses the full-cost method instead of the “successful efforts” method, which counts those failed ventures as expenses, we might want to dig a little deeper before we buy and make sure their financial picture is as rosy as it appears.
Related or Semi-related Video
Cost Accounting: What is a Cost: Cost Ve...1 Views
And finance Allah shmoop what is a cost as in
a cost versus and expensive Shmoop think about life as
a grand tradeoff You decided Teo really go for it
and fulfill your dream of becoming a figure skater for
your shining fifteen minutes of fame in the Olympics and
a few years of you know Disney on Ice afterwards
And that well you spent eighty hours a week for
a decade on the better part of your youth on
the ice spinning and twirling and doing that infinity thing
From age eight to twenty you spent the most precious
resource You had time dedicated to the mission of winning
an Olympic gold medal being the best skater you could
be and pretty much ignoring everything else While that time
the time you spent skating was a cost you had
a precious resource your time and you spent it all
pretty much on the ice You could have spent the
same amount of time learning how to code in Java
or C plus plus and or swift If you like
doing the iPhone app that's the language they use Or
you could've spent it mastering chemistry and biology and a
mission to cure cancer Or you could have spent it
mastering the meaning of the meaning of the meaning of
things and been a lawyer defending the rights of the
poor the downtrodden and the innocent But no you spent
your resource is on the ice Big cost They're hoping
for audience applause and some kind of satisfaction for having
landed on your feet Well that allocation of your precious
resource your time was a cost What's the ultimate cost
opportunity cost Yeah like you for went the opportunity of
being a cancer cure or a defender of the poor
the downtrodden or ah the next Mark Zuckerberg to instead
be skater So cost is a sacrifice of resource is
cost is a philosophy and event not necessarily even tracked
It's kind of a commitment to one thing over another
right So that's cost on what's expense Well not nearly
so Pete Those laden inhuman in a kind of sad
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are hopefully revenues Teo upset it expenses Just a line
item on an income statement with numbers It's not where
dreams go to die Or uh maybe just held out
for a while to be revisited later in life or 00:02:22.333 --> [endTime] being put you know on ice
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