ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos

Accounting: Direct vs. Indirect Compensation 2 Views


Share It!


Language:
English Language

Transcript

00:00

Accounting Allah shmoop direct versus indirect compensation Well everyone likes

00:09

to get paid right There are very few retail clerks

00:12

working pro bono So how do people get paid Who

00:16

has power inside of a corporation like who makes the

00:19

most money The more power and impact the Maurin employee

00:22

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

00:26

think about Ford the car company Not those watery things

00:29

in Norway Meat blob He was supposed to be named

00:32

Bob but his dad screwed up on the birth certificate

00:35

anyway Blob is afford employees who shapes the final edges

00:38

of the engine block The fourth secured onto the frame

00:41

of the car making sure the pistons go up and

00:43

down very smoothly So the engine you know works That

00:47

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

00:51

gets Call him Mr Direct as in direct expense Now

00:56

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

01:00

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

01:04

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

01:07

was properly received by the government That gal overseas A

01:10

lot of the communications paperwork between Ford and the Feds

01:14

and yeah you might have downsized her awhile ago but

01:17

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

01:20

buds with a bunch of people inside and outside The

01:22

company called her Mrs Indirect Why does this distinction matter

01:27

Well because many corporations account for employees who are direct

01:30

differently from those who are in direct as in costs

01:34

you know to the company making the stuff they make

01:36

Think about how the notion of gross margin works The

01:39

really important stuff happens above the line The rest is

01:43

all about shipping and tracking and selling and meet a

01:45

ring and measuring and all that stuff but not making

01:48

not making the core product that the company actually lives

01:52

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

01:55

Mr Direct without a properly secured engine and the Pistons

01:59

actually work in the car would well just not go

02:02

In fact it would probably blow up But without Miss

02:05

Indirect afford would be just fine Probably for a decade

02:09

Maybe forever Miss Indirect is really just overhead and the

02:13

cost of keeping her working would usually be put into

02:16

a different area Definitely not in the gross margin calculation

02:20

because Mr Direct is needed to make the engine and

02:23

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

02:27

to be Mr Direct not miss Indirect So moving on

02:30

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

02:33

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

02:37

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

02:39

and a wide range of legal ethical political and social

02:42

arguments surrounding them Their controversial in part because of the

02:45

way in which government workers who get them ignore their

02:49

value when they begged the public form or tax dollars

02:51

form or annual compensation for them That is a given

02:54

government worker who works eight months a year might complain

02:57

that they only make forty five thousand dollars but in

03:00

reality they get an additional eight grand a year in

03:02

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

03:06

five grand a year in health benefits another two grand

03:09

a year in other benefits so that in fact it

03:11

cost taxpayers to pay that government workers something more like

03:14

sixty grand a year to work eight months rather than

03:17

forty two grand And if you extrapolated the money for

03:19

those eight months Well it would equal liberate to something

03:22

more like a ninety thousand dollars a year Job or

03:26

90000 in cost to the company employing them But it

03:29

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

03:32

these facts during election season So they just quote that

03:35

forty two thousand dollar number and hope that at least

03:37

for a while the population feels charitable toward them and

03:40

votes in tax hikes So what exactly is a pension

03:44

Well it applies to both corporate America and the government

03:46

and in both cases a pension is essentially forced savings

03:50

for the employees of whoever dot com A given secretary

03:56

makes fifty six thousand bucks a year in salary and

03:59

has a pension of ten grand a year at ten

04:01

thousand dollars is not paid to her directly Instead the

04:04

pension money is invested on her behalf usually in a

04:07

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

04:10

employer just give her the ten grand so she can

04:12

invested on her own Well there really two reasons behind

04:15

this structure The first reason revolves around the idea that

04:18

employees will be earning less money in their old age

04:21

than they were in the prime of their careers like

04:23

in their thirties forties and fifties The marginal tax rate

04:26

in our progressive tax system is much higher for higher

04:29

dollar amounts earned like you pay a higher percentage of

04:32

your hundred thousand dollar earned than you did on your

04:35

thirty second thousand dollars Got it So when people withdraw

04:38

their pension money from whatever amount it has compounded to

04:42

over the course of their careers investing it well it

04:44

will likely be taxed at a lower rate than it

04:47

would be or would have been had the employees made

04:49

sixty six thousand dollars a year in salary instead of

04:52

that fifty six thousand dollars plus the ten thousand in

04:55

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

04:58

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

05:00

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

05:03

for retirement wandering the streets and living in station wagons

05:06

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

05:09

existence is that when it comes to the discipline of

05:12

actually saving money to many people in this country are

05:15

simply complete idiots Rather than trying to avoid a future

05:19

as a destitute old person living in that station wagon

05:22

You know right here in the Winnebago camp in the

05:25

cheap parking space they decide to take that nice business

05:28

class trip to Hawaii every year Instead they just figure

05:31

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

05:34

a savings not at the end of their lives Mama

05:36

government essentially protects her citizens or at least a large

05:40

handful of them from being a social eyesore and a

05:43

liability to the rest of the responsibly taxpaying citizenry who

05:47

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

05:50

Hawaii trip so expensively every year Well structurally Just think

05:53

of pensions as incremental cost to the company and hiring

05:57

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

05:59

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

Up Next

American Literature 3: The Poe Must Go On (Part 1)
629 Views

What do you get when the guy who wrote “The Raven” makes a serious effort to write in verse? Poe-try… Now, when you’ve detached your eyes f...

Related Videos

American Literature: Incidents in the Life of a Slave Girl
8968 Views

Incidents in the Life of a Slave Girl, abridged. Ready? Go.

American Literature: Emily Dickinson
4355 Views

Emily Dickinson: Along with Van Gogh, proof that you’re never really famous until you’re dead.

American Literature: No Paine, No Gaine
114 Views

So the revolution was pushed along by… pamphlets? Sure, what the heck, let’s go with it.

American Literature: Give Me Liberty or Give Me Death, But I'd Prefer Liberty
291 Views

We’ll take one order of liberty, but hold the death.