Simply put deferred cost is an accounting term. While I am intending this to be a business management post it is not a personal business accounting one but thoughts on economic ethics.
If we are to define deferred costs in a GAAP accounting context then an example would be; if you pay $1,000 in February for March rent, then it is a deferred cost in February. It’s initially recorded as a prepaid expense however once March arrives, you consume the asset and change it into a rent expense. This is really just balance sheet gymnastics. Another example would be you purchase a Truck for $20,000 that truck is not an expense but is put on the balance sheet as an asset. Now let’s say the said truck has a usable life of 5 years then each year you would move one-fifth of the value of the truck from the balance sheet to the expenses for that year because in said year you consumed one-fifth of that truck’s usability.
Hopefull,y you understand the concept. In genera,l I want us to understand a deferred cost as an expense we incur that has not yet been realized.
The deferred costs I want us to think about here is impacts on our economy and environment from the comodification of resources in unethical manners. Let me break that down in easier terms.
Let’s say you are a tree farmer and your crop is White Oak trees for sawing barrel staves. Your crop takes 88-146 years* to grow large enough to harvest. The timber industry has lots of math and data to project management expenses and average harvest rates for this but lets say Americans stop drinking lots of bourbon and instead vodka gains popularity. The price of white oak falls over a generation and now it’s time to harvest. You sell at a market rate based on a supply and demand commodity report and go back to managing your forests. But unbeknownst to you the next-generation replacement costs will be more than what you sold for in the moment. You took a financial hit that will now be a future expense even though in the moment it was market rate.**
This type of scenario exists on all levels of Western consumerism. Your cordless drill manufactured at $1 per day wages took more value to produce than is being charged and in this case with someone’s actual time on their clock of life. The lumber industry is especially bad for this when it comes to lumber imports. The typical framework is a lumber company finds a cool resource (mahogany) harvests indiscriminately until the material is endangered from over-harvesting and then moves on to a new country to find a cheap replacement to fill the demand they created with an unsustainable price. Sapele*** is our best example of this at the moment. The countries left behind essentially pick up the expense of re-foresting or the major expenses of not reforesting.
What I want to communicate here is that the “everyday low price” mentality we have been fed leaves lasting ripples down the line. Those ripples are the expenses to make up the difference or we could say deferred costs. For craftspeople who want to build items too last generations, this is an important part of who we are. While buying the Luban hand plane or the $6 a bdft sapele may feel like a win in the short term it is simply pushing off the real costs of those items for later. In many ways, it’s no different than the Ikea end table for your customers.
One exercise I practice is when shopping, let’s say I go to a Rockler. I will look at the item on the shelf look at the price and think, could I make this for that? If the answer is no I ask; who is not getting paid?
*age determined on a 22” diameter tree with 8 rings per inch and averaged between managed and unmanaged forest averages (charts here)
** The USDA has lots of resources to understand demand projections against re-growth potential Here
*** Concerns on Sapele Here
Wonderful writing as always, thanks for sharing your thoughts. I’ve been thinking a lot recently about how these artificially low prices for things based on hidden costs or costs pushed onto low paid workers have poisoned the well for craftspeople, they have really skewed people perception of what a reasonable price for something is. As I’ve started selling some of my work and trying to figure out pricing I had a lot of feelings about my prices being too high, but as I reflect on the above points I realize it may be that the prices of many things are too low and drag the “reasonable cost” curve down for everyone.
The tragic reality of economics being divorced from ethics, and the concomitant demand for never-ending economic growth being divorced from the limits of natural growth.