I am going on a trip of moderate length. I fill my gas tank for $40 and drive out to Blurfless State Park to camp out for a week. When I get home, the price of fuel has gone up considerably, the same amount of gas now costs me $48. So how much did the fuel for my trip actually cost me? Was the earlier $40 was a replacement of the gas that I had used up over the previous week or two, or is the $48 for what I will use this next week or two? Do I split the difference and call it $44 for the trip? How is this figured?
The fuel you used on your trip is your cost basis. You have to consider that the vehicle’s fuel load at the start was zero, so the model is put fuel in, use fuel up; repeat. There was never a magically free tank of gas to start with, making all fuel usage “after the fact,” as it were.
Only in accounting jiggery-pokery, like renting, does the fuel you replace form the cost basis.
Your trip cost you $40. Your next tank’s worth of driving cost you $48. No connection, financially.
Thinking further about this - most such calculations are not so cut-and-dried. I think the fair way to calculate the fuel cost of a trip is first-in, first-used. If you fill the tank several times at different prices while you take ten discrete trips, the cost basis would be that of the “oldest” fuel’s cost. Some trips would straddle fuel purchases at different prices and thus require a two-part calculation.
If it really matters. Other than theoretically, only fuel cost and miles driven as aggregates make sense.
I have an ODB II reader plugged in, sitting on the dash, which can display cost-per-mile in real-time. Which is entirely useless, because it is in real time, so the number just jumps all over the place. Though, there are several aggregation displays that can read out overall cost over a time frame (previous day, today, current trip, tank). Those all calculate based on a price you put in when you fill the tank. But I still see the cost of replacing what is used as somehow relevant.
Only in accounting cost on a rolling basis for a two-party system. If it’s your money, your gas and your miles, the aggregate cost is perfectly accurate, over time. If it’s really important for you to have a mile-by-mile cost, it’s the cost of the fuel you are actually burning, not the future cost of its replacement.
If I own a power station, and I want to know my short-run marginal cost of generating power (this is the price at which it is worth my while to generate), I calculate this based on the replacement cost of fuel, not at whatever price it may have cost me when I bought it last year.
Similarly, the effective cost of driving to the campsite can be expressed in terms of how much better off you would be now if you had stayed at home.
Replacement cost tends to be relevant to decision making. Should I go? If I do, it will cost me $48 to refill the tank; if I don’t I can save $48.
That’s not necessarily wrong, but again, I don’t see it matter in a single-payer system. You have ten gallons of gas you bought for $40. That cost will never change. To think of the 20 miles each gallon will take you has having the cost of the replacement fuel is a useful calculation in making judgments, but the cost of actually driving those 200 miles is still $40.
It would matter in a rental car - the cost of the fuel in the car is irrelevant to you, but every gallon you use comes out of your pocket at the current rate. But looking at it that way for a self-owned, self-funded car is accounting calisthentics - only useful if fuel changes so much and so often that waiting out an “expensive” day to buy fuel on a “cheap” day makes more than a small percentage of difference. Gas prices generally change so slowly that you will pay pretty much the same price for each tank no matter how you stagger your driving and buying.
In the accounting world, there is a divide between financial accounting, in which one reports the results of operations to the investors and potential investors, and managerial/cost accounting, in which one determines the best direction to take the business.
Whether one uses Last-in First-Out, First-in First-Out or a weighted average method for financial reporting, you stick to it and don’t change between reporting periods. Or you could change, but you have to re-report all your prior years’ data that’s being shown in comparison to the current years’. So if you had to report the cost of your trip to your investors, you would have already agreed on how you associate the cost of gas acquired at various times to the operations of the trip. Which method is irrelevant, as long as it’s consistent and disclosed.
For Managerial accounting, you are thinking about the future, and attempting to determine how much something will cost you if you pursue it. You generally will use whatever cost you think is most appropriate based on historical trends. If you are planning a trip over Memorial Day that will require you to get gas at jacked up prices, you will plan the trip having those prices in mind, even if you already got the fuel that you will actually be using on the trip. If you don’t need to fill up on the trip itself and can wait to replace the fuel so as to get a more normal price, it doesn’t matter that the gas that you’re burning that weekend would be more expensive if you had to replace it right then.
So you mean the trip to the park used up the $40 of fuel…
Well you figured out that you can do it various ways.
But since you will only take a little bit of fuel to get to buy it at $40 (assuming this is a small town, big city, or weekend midweek , or both, price variation)… its really not the case that you must buy $48 …you could just buy a a quarter of a tank at the expensive price and then fill up at the cheaper price…
If you are forced to fill up, eg due to the risk of hurricanes or something, then you could put the extra cost down to safety, or put it down to the trip to the state park…
I suppose that you must also consider whether the trip displaced any other driving you might have done. If you took two weeks to go to the park instead of driving to work for two weeks, then the fuel to go to the park might have been a smaller additional expenditure for you (or might even have saved you commuting expenses during those two weeks). On the other hand, if you would have just sat in your back yard for those two weeks, all of the fuel used would be an extra expenditure. And if you made up for those two weeks you took off of work by going into work on weekends…
Flow assumption - Lifo, Fifo, Weighted average, or others - are used to value inventory. Goods manufactured or bought, still on hand as of a balance sheet date and held for sale to customers. Not relevant when thinking about charging costs to operating results, which is done are based on actual.
Managerial accounting ties into financial accounting, it’s done for insights into actual operations, usually with more detail than is needed for financial accounting. If the two don’t tie together at an aggregated level then one is wrong. Which one?
How much is something going to cost, what’s going to happen? That’s budgeting and financial planning and analysis. In companies large enough to have people that do only this, it’s really separate from the accounting department.
It’s not impossible in accounting to have an inventory of consumable supplies. Fuel is certainly one of those types of items. Lubricants, cleaners, pesticides, might also be tracked that way. Spare parts are another common example. It doesn’t have to be for resale specifically; an accrual basis company could still calculate an asset held in reserve and expense it as used.
The bottom line for the OP’s question is that there are multiple acceptable options available for accounting for these things. If procedures are documented, followed and disclosed properly, then that becomes the “correct way” for that particular company.
When a customer buys an item off my shelf that’s been sitting there for six years, I don’t care how much I paid for it back in 2009. I care how much it’ll cost me to acquire another one when I restock my shelf tomorrow.
You’ve changed the playing field from personal economics to retail. You might as well jump to corporate capital investments.
For most of us, a tank of gas is a momentary commodity we will use up in no more than a couple of weeks, more likely a week or even a few days. You’re always going to need more; for anyone living in a commute-based life, it’s as essential as air. Under those circumstances - not in some narrow theoretical construction that might allow for storing that cheap tank of gas as some “investment” against an era of more expensive gas - it’s just one entry in a long string of fuel costs for that… year, say. The price rarely changes more than a cent or two per week, sometimes a whopping five cents. Unless you’re going to buy gas in bulk when its $2.99 and only tap your reserve when pump prices go over $3.50, you’re going to have to buy each tank at whatever market rate is that week.
Most of us do not have the luxury of “saving” our cheap gas by not driving in a week when the replacement cost would be higher; we just try to fill up when it’s a little cheaper and stretch a tank when there’s a spike.
The only sensible ways to evaluate such a running cost is as you use it - the OP’s trip cost $40, plain and simple - or as an averaged value over the year or other fiscal period. I don’t think there’s any value in trying to play the game so closely and at such a small, unavoidable level as ‘$40 vs $48’ on one trip and two tanks of gas.
Now… if you’re buying fleet fuel by the kilogallon, completely different story. Much more so if you’re a fuel trader. But consumer-level, tank-by-tank, no way to do more than trivial reserve/use choices? Each mile costs you what the cost of the fuel going through the injectors costs.
ETA: The only small-scale example might be if the driver can choose between driving or taking mass transit, and can live from price bottom to price bottom on buying gas. I know some people do more or less that. But that again changes the picture, and the nature of the gas, from a necessary commodity to something of a specialty purchase/luxury. It also has to accommodate the fixed costs of the car, which remain the same whether it’s being driven or left home.
