Accounting: Direct vs. Indirect Compensation

CoursesAccounting
LanguageEnglish Language

Transcript

00:22

gets paid right Well that's the theory Sorta So let's

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think about Ford the car company Not those watery things

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in Norway Meat blob He was supposed to be named

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Bob but his dad screwed up on the birth certificate

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anyway Blob is afford employees who shapes the final edges

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of the engine block The fourth secured onto the frame

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of the car making sure the pistons go up and

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down very smoothly So the engine you know works That

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guy's about as core to your manufacturing business as it

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gets Call him Mr Direct as in direct expense Now

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meet nastily a similar birth certificate snafu there She's a

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lawyer who ensures that the paperwork you've submitted which shows

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your crash test dummies aren't riddled with bumps and bruises

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was properly received by the government That gal overseas A

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lot of the communications paperwork between Ford and the Feds

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and yeah you might have downsized her awhile ago but

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she's been with company thirty seven years and she's best

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buds with a bunch of people inside and outside The

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company called her Mrs Indirect Why does this distinction matter

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Well because many corporations account for employees who are direct

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differently from those who are in direct as in costs

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you know to the company making the stuff they make

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Think about how the notion of gross margin works The

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really important stuff happens above the line The rest is

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all about shipping and tracking and selling and meet a

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ring and measuring and all that stuff but not making

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not making the core product that the company actually lives

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on Tio survive You can't build a Ford car without

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Mr Direct without a properly secured engine and the Pistons

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actually work in the car would well just not go

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In fact it would probably blow up But without Miss

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Indirect afford would be just fine Probably for a decade

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Maybe forever Miss Indirect is really just overhead and the

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cost of keeping her working would usually be put into

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a different area Definitely not in the gross margin calculation

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because Mr Direct is needed to make the engine and

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miss Indirect is not If you're ever wondering you want

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to be Mr Direct not miss Indirect So moving on

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what our pensions and they're kind of related here you'll

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get why they're a good example of an indirect compensation

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Well unless you live on Mars you've heard about pensions

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and a wide range of legal ethical political and social

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arguments surrounding them Their controversial in part because of the

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way in which government workers who get them ignore their

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value when they begged the public form or tax dollars

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form or annual compensation for them That is a given

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government worker who works eight months a year might complain

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that they only make forty five thousand dollars but in

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reality they get an additional eight grand a year in

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pension contributions I'ii forced savings and or investment and another

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five grand a year in health benefits another two grand

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a year in other benefits so that in fact it

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cost taxpayers to pay that government workers something more like

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sixty grand a year to work eight months rather than

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forty two grand And if you extrapolated the money for

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those eight months Well it would equal liberate to something

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more like a ninety thousand dollars a year Job or

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90000 in cost to the company employing them But it

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doesn't behoove the government workers to point out all of

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these facts during election season So they just quote that

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forty two thousand dollar number and hope that at least

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for a while the population feels charitable toward them and

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votes in tax hikes So what exactly is a pension

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Well it applies to both corporate America and the government

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and in both cases a pension is essentially forced savings

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for the employees of whoever dot com A given secretary

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makes fifty six thousand bucks a year in salary and

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has a pension of ten grand a year at ten

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thousand dollars is not paid to her directly Instead the

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pension money is invested on her behalf usually in a

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traditional mutual fund or index fund Well why doesn't her

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employer just give her the ten grand so she can

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invested on her own Well there really two reasons behind

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this structure The first reason revolves around the idea that

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employees will be earning less money in their old age

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than they were in the prime of their careers like

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in their thirties forties and fifties The marginal tax rate

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in our progressive tax system is much higher for higher

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dollar amounts earned like you pay a higher percentage of

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your hundred thousand dollar earned than you did on your

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thirty second thousand dollars Got it So when people withdraw

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their pension money from whatever amount it has compounded to

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over the course of their careers investing it well it

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will likely be taxed at a lower rate than it

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would be or would have been had the employees made

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sixty six thousand dollars a year in salary instead of

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that fifty six thousand dollars plus the ten thousand in

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pension contributions Right So it's a little bit of attacks

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edge there and a certainty that then we don't have

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millions of people who weren't disciplined and didn't save money

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for retirement wandering the streets and living in station wagons

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down by the river Yeah second reason for this structure's

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existence is that when it comes to the discipline of

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actually saving money to many people in this country are

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simply complete idiots Rather than trying to avoid a future

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as a destitute old person living in that station wagon

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You know right here in the Winnebago camp in the

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cheap parking space they decide to take that nice business

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class trip to Hawaii every year Instead they just figure

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uh they'll figure it out later forcing people to have

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a savings not at the end of their lives Mama

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government essentially protects her citizens or at least a large

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handful of them from being a social eyesore and a

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liability to the rest of the responsibly taxpaying citizenry who

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actually did save for old age and didn't do that

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Hawaii trip so expensively every year Well structurally Just think

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of pensions as incremental cost to the company and hiring

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employees And at this stage of the game don't worry

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about the politics of everything fell just a Jew fast 00:06:05.628 --> [endTime] Shmoop