PS3 Loss Down to Just Eighteen Bucks
- Thread starter Logan Westbrook
- Start date
Probably not.Crazy_Bird said:
R&D is expensed in the quarter it's spent (i.e. you can't capitalize that expense). Revenues apply in the quarter they're earned (sales) and variable production costs are capitalized to inventory until they're expensed in the form of cost of goods sold during the quarter the unit is actually sold. If anything, expensive production of old items still in inventory would only increase the negativity of their contribution margin.
This is, of course, assuming they're not using LIFO (Last In First Out) cost accounting or using unique identification and holding on to old models (which... why would they do that?). I don't know how it works in Japan, but justification has to be provided in the U.S. for LIFO, and I doubt they'd meet standards. Besides, considering the fact that all the original models they produced were eventually discontinued, this would have little effect, because all their early inventory has now been sold.
The only thing that they could really benefit from now after suffering a loss earlier is accelerated depreciation and amortization of assets utilized in production, which would result in a large expense immediately after aquisition followed by a lesser expense currently.
So, unless there's a huge disparity in depreciation costs, they probably are actually substantially reducing production costs.
It's liek this example i would guess.Radelaide said:
It costs me 1000$ to build a factory and develope a console.
Then it costs me 10$ in materials and labour to make a console on my factory.
I sell my consoles for 20$
So when the first consoel is made, it has cost me 1010$ and sold fo 20$ putting me at a 990$ loss.
When i've made a hundred consoles, it has cost me the initial 100 for the factory and development, and 100x10$ to manufacture the 100 consoles.
So it'll have cost me 2000$ total I sell the 100 consoles for 20$ a piece, (total = 100 x 20 = 2000$) and now my profit/loss is 0.
From there on, every console i sell will cost me 10$. and make 20$ when is ell it, hance i'll make a profit of 10$ for every console sold past the forst 100.
Rememebr that the cost PR. console for sony decreases with every console manufactured, cause some of the costs are one-time investments, like building a factory, and developing the stuff for the machine.
Thanks for the insight. I'm happy that a fellow accountant is puzzled about these numbers as well. I looked up what Wikipedia [http://en.wikipedia.org/wiki/PlayStation_3#Sales_and_production_costs]has to say about it.PhiMed said:
In a nutshell: It has nothing to do with anything financial related (depreciation, pricing, LIFO/FIFO) but they did "only" reduce their production costs. Enormously.
I am surprised that they calculate the decrease in production cost (and miscalculate that heavily in this case). I am aware that the games are supposed to subsidize the consoles but their expectations were a little tiny bit overoptimistic it seems.
But then again who knows how thing might have looked before launch...
I doubt that's what they're talking about. They're talking about a reduction of variable costs. Costs of factories are generally capitalized, meaning they're recognized as an asset, not a cost. Then the value of the asset is decreased over time until its "book value" is zero. The decrease a company recognizes each year is called "depreciation" and that's the cost of the factory that ends up being included in unit cost.teisjm said:
In your example, if they were going to depreciate the factory over ten years, each year they would recognize $100 in depreciation. This cost would be spread out over the units they produced that year. After one year, they would have "expensed" $100 of the cost of the factory, and their factory would now have a "book value" of $900. So if they made ten units that year, they'd break even that year, even though they still haven't actually made the cost of the factory back yet.
If they did it the way you're suggesting, then units they produced in past years would retroactively become cheaper to make, because you're spreading the total cost over the total number of units you've ever produced, so the cost of the factory included in each unit would decrease every time you finished one. Of course the units you've already produced didn't become cheaper to make three years later. You didn't go back in time and spend less money.
Now, increasing your production enough to minimize your fixed cost per unit isn't news. What they're talking about is they've been able to decrease their variable costs. There are several aspects to this:
The materials they use,
the labor of the people who assemble and inspect the consoles,
the labor of the people who maintain the machines in the assembly line,
the energy required to run the factory,
the costs of fixing or disposing of consoles that don't pass inspection,
the money they pay to ship the units once produced, etc.
These costs are called variable because they tend to be associated with higher production levels, i.e. make more units, spend more money on these things (total, not per unit).
There are several ways they can reduce variable cost per unit. Here are a few:
Reduce line changes - Factories that produce more than one item have to occassionally swap from one type of unit to another. I think they've got two models right now, and I doubt they have dedicated factories for each one. Cutting down on these changes minimizes "dead labor" (people being paid to stand around while the change is occurring).
Using cheaper/fewer materials - the slim is decidedly lighter than the old models, so there is probably some of this here, but I'd be surprised if the materials in the slim changed from one quarter to the next.
Taking advantage of the labor learning curve - the longer someone does a job, the better they get at it, and the faster they get. Laborers are usually paid by the hour. Faster, more efficient work=lower assembly costs and fewer product failures.
changing production methods to produce them more quickly or dependably - Production is a process, and someone has to decide what actions are performed and in what order. If actions can be combined, moved around, or eliminated to improve quality and speed, this will also reduce your cost.
There are other ways to do this, but these were just a few off the top of my head.