Capitalizing Inventory, aka Why Do We Have Zero Valued Items?

The financial accounting in the game seems fairly advanced. And yet, the general opinion seems to be that the financial reports (FINIS, FINBS) are not useful, and should not even be taken seriously. Which is bizarre, because as far as I can tell they are accurate, and in a game where you are managing a company, how can your financial statements be useful to no one?

I think a big part of this stems from the fact that when we produce items, they are assigned a value of zero. Note that when we buy items, they are assigned the value we paid for them. This is the only scenario in which zero value items occurs, as far as I can tell: we cannot sell anything at zero, and even our starting package items are given some value.

This leads to strange scenarios: Imagine my buddy and I buy the inputs and consumables at identical prices in order to produce some BSE & MCG at our identical bases. I produce 12 BSE, and my buddy produces 12 BSE. Then my buddy sells me his 12 BSE for exactly the cost it took him to produce… the game would say my (now) 24 BSE are worth half what it actually took to produce them since it averaged my zero cost 12 with his full cost 12.

Or, if before I buy my buddy’s BSE, I construct a RIG. Since the BSE & MCG were self-produced and valued at 0, my RIG has a book value of 0 as well. Then I buy my buddy’s BSE & MCG, again at cost, and construct a second RIG. This one will have a book value equal to the production cost, even tho they actually took exactly the same costs to produce.

I spend the next week producing as many BSE as I can. All are worth zero, and my expenses for the week are enormous: the value of all the inputs and consumables go straight to negatively hit my bottom line. I show a huge loss, and (according to my books) have absolutely nothing to show for it. My inventory is worth nothing.
But the next week, I sell all of them. I post enormous revenue, and zero expenses. What a windfall for my company!

Meanwhile, if instead my buddy produced the BSE, and I just bought them at cost as they were ready the first week, my income statement would be neutral. My balance sheet would show a transfer from cash to inventory. At the end of the period, I would show neither loss nor profit, since I had in effect done nothing to actually realize a loss or gain yet.
When I sell the BSE next week, however, I will then show revenue according to the price I can get for the goods, and an expense according to the value of the inventory sold off. The profit or loss will be exactly equal to the difference in sale and purchase price of the goods, which is actually the values I want to see.

I propose that items we produce be priced as the sum of the inputs’ values and the (pro-rated) value of the consumables consumed during production.
Input values we already have.
The value of the consumed consumables we have as well: each facility has worker requirements, and at least some consumables were consumed for any production to have occurred. The value to assign for each consumable consumed to support the facility is then:
rate of consumption (units/time) * production duration * consumable value.

I believe this change will produce the following benefits:

  1. The value on each item in your inventory is your actual break even point, externalities like shipping notwithstanding. By selling the item for that amount, you will recover the cash you directly expensed to obtain it in the first place (currency adjusted). Always.
  2. Your Inventory line on FINBS is, similarly, the amount you need to recover upon sale to show any profit. Our inventory is our primary asset, the exploitation of it our primary source of profit. It should directly reflect this fact.
  3. Your actual gross margin for a period is directly calculatable from FINIS: Material Sales - Materials Delivered = exactly how much more you received than you expended for goods sold this period.
  4. Your Result period to period will reflect your total economic activity that period, and not the mix of selling self-produced vs purchased items. Delays between production and sale will be less noticable on FINIS.
  5. Your Base Sections line on FINBS will derive from the actual amounts you directly spent to obtain the component parts, and not just the ones you bought.
  6. Similarly, the Depreciation of Buildings expense line on FINIS will be the true loss incurred that period (according to whatever formula is currently being used here, but at least the base value is not arbitrarily lower if you self-produce and prefabs).
  7. The Worker Supplies expense line on FINIS will reveal how much you lost due to blocked facilities and cancelled orders wasting consumables.
  8. Similarly for Material Consumption and the waste of inputs.

To realize this change will require some additional transactions, which I detail below.

Implementation Details

To my best understanding, the current system works as follows:

  1. When consumables are consumed for any reason (i.e. removed from your inventory), their value is deducted from Inventory on the balance sheet (FINBS) and added to your Worker Supplies expense line on the Income Statement (FINIS).
  2. When you start production, the inputs’ values are deducted from Inventory, and added to your Material Consumption expense line.
  3. When production finishes, nothing happens. Ostensibly, the outputs’ zero value is added to Inventory.
  4. When the produced goods are sold, the proceeds increment Material Sales (FINIS) & Cash (FINBS), and decrement Inventory (FINBS) & increment expense line Materials Delivered (FINIS). If its just self-produced goods, the change to Inventory & Materials Delivered is zero, of course.

One way to implement my proposed change follows.
I add a “Materials in Progress” balance sheet account (Current Asset), but you could get away with just using Worker’s Supplies and Material Consumption as now, and moving the values to Inventory at output creation. I think a FINBS line to catch this currently unrecognized asset is more elegant, but it is not necessary.

In the current scheme, there are no recorded financial impacts due to facility stoppage, but if we are to capitalize only the consumption actually producing the goods there will need to be:

  1. When consumables are consumed, their value is deducted from Inventory and added to Materials in Progress. These values need to be tracked by each facility generating the consumption. This is already done to produce each facility’s efficiency figure, now there is also a consumable value to track with it.
  2. When you start production, the inputs’ values are deducted from Inventory, and added to Materials in Progress.
  3. When production finishes, the value of the outputs (i.e. the sum of the inputs & the pro-rated consumables) is deducted from Materials in Progress and added to Inventory.
  4. When a facility is blocked for any reason other than lack of consumables, or consumables are consumed while blocked, deduct the facility’s remaining consumable value from Materials in Progress and add to Worker Supplies.
  5. When a facility ceases being blocked, deduct its remaining consumable value from Worker Supplies and add to Materials in Progress.
  6. When production finishes, deduct from Materials in Progress and add to Inventory, the value being split across the outputs.
  7. When a production order is cancelled, process any successful outputs as above, move any residual consumable consumed value so far from Materials in Progress to Worker’s Supplies, the value for any returned inputs to Inventory, and the value for any non-returned inputs to Material Consumption.
  8. When the produced goods are sold, same as before: the proceeds increment Material Sales (FINIS) & Cash (FINBS), and the cost of goods sold decrement Inventory (FINBS) & increment expense line Materials Delivered (FINIS).

I believe this covers all new transactions.

People talk about the absolute necessity to use external spreadsheets to calculate your costs to produce. For basic cases, or even as a sanity check, the game could provide this information instead of divorcing it from the inventory.

I hope this resonates with you. I’d love to hear what people think.

1 Like

While I totally understand why you suggest this, the big question to me is where to draw the line:

You elaborated in quite some detail why you want to activate output based on input materials and labor costs. But in the same treatise you mention that transport costs should not be included. Interestingly, because you care so much about book values of buildings, you also neglect the depreciation of those buildings. Or the Admin Center fees you had to pay for production. Or the trade fees if you bought the input materials. Or upkeep for the CogC to get your production efficiency to where it is.

In short: The book value of your output materials still wouldn’t reflect the break even line. It would be more akin to something called “Deckungsbeitrag” in German accounting (afaik it isn’t all that popular in anglo-saxon accounting, direct translation is contribution margin), meaning that is describes how much “contribution” to your company’s overall result you got left over after you’ve deducted certain components of your overall costs.

Let’s assume for the moment we really factored in all the costs. Anything can be prorated in some way or another, so we developers could come up with a formula to “value” materials. Then there are two things that could happen:

  1. People still need their spreadsheets because they disagree with the way be do the costing.
  2. The game becomes super boring because it does all the math for you.

So we opted for the minimalist approach: If you “destroy” material to produce something, that material is gone. Its value has evaporated unless you can actually sell it for a higher price. Giving it a value before selling it would always be theoretical.

I perfectly understand why that might be frustrating in some cases, especially when constructing buildings from materials you manufactured yourself. But I doubt we’ll deviate from our “accounting practice” anytime soon.

Thanks for the thoughtful response. My list was not exhaustive because I do not have exhaustive knowledge of the game. Not because I intentionally excluded them. Thank you for pointing some additional possible costs to include.

Transport is not included because it is not necessary for the item’s production: you can produce it without it. Production fees are necessary, and you’re right they should be included. CogC upkeep contributions should not, because they are not necessary for the item’s production.

I’m not sure what trade fees are, but are they not already included in the valuation of purchased inventory? If not, then I’m fine leaving them out.

Including the building depreciation occurring during production is interesting, and I had not thought of it. My first reaction is to not include it, since it occurs regardless of whether you produce the item or not.

The core intuition for me is “What am I committing into this output when I click the Create Order button?” The inputs, the production fee, and the consumables are all obvious contributions. I am open to discussing others.

When I said break even line, I did not mean for your company to produce a perfect Result of zero. The intent is to provide some tracking of what you directly invested to produce that item.

The analogy is to the purchased item that you then resell. What is its valuation? Your purchase price. Makes sense: while there may have been all sorts of tangential costs associated with you executing that purchase, the purchase price of the item is what you need to recover, at a minimum, to justify the cost of the purchase. It is directly and intrinsically tied to the item.

So, what’s the natural analogue for produced items? What did you have to spend directly to obtain the item? Clearly, zero is a poor representation of this.

For your two concerns:

  1. The intent is not to abolish spreadsheets, but to aid. All spreadsheets are models (until we get an API, maybe). This change would provide several points of verification that your model was tracking your activity.
  2. I’m not sure what you mean by this exactly. But I don’t think people play this game because they want to manually figure out the cost of virtual inventory, a lot.

I do not understand the difference between assigning a value to an item you obtain by “destroying” cash, vs obtain by “destroying” items that have a known cash value.

And this difference is not negligible. By mixing these two philosophies on the same line items, the financial statements become unreadable. The item valuations are inscrutable, almost arbitrary.
If you don’t want to value inventory, why give it a value at all, ever?

The point of a financial statement is to provide high level insight into the company’s past performance and current status, right? With the current system, only purely trade companies get that, since only they get to capitalize their inventory. For a pure producer company that made everything themself, they are forced to operate on a cash to cash basis, like they’re running a lemonade stand with no books, no asset tracking.
And for hybrid companies, what I imagine are the vast majority of players, the two systems are mixed haphazardly onto the same financial statements, providing data with no information.

Genuine question, are you able to use the financial statements as they are?

I love the idea of robust financial statements in a game like this. It fits perfectly, and at first glance it appears you had already done all the work. Pretty much everything I might want is already a line on the reports.
But by mixing two philosophies on how to track inventory, the primary source of revenue, the work is undone.
If the financial statements are not useful for what I expect is your view of the typical playstyle, why have them?

Maybe that’s where the root to our differences in opinion lies: A play-style in which one produces everything themselves, essentially playing independently from the rest of the economy, is possible, but not the intended game design goal. In fact, over the early alphas, a lot of effort went into making this play-style less attractive.

At the end of the day, for most players of a business sim, at least one of the goals is profit. And profit is usually generated by having a higher revenue than you have expenses, independent of how or when you (de-)value your assets. If we’d activate production costs, you’d just have the cost of materials sold on sale. And if we don’t, you have material expenses during production. What matters in both cases is the price at which you sell the final product.

I’m not sure we actually have a difference in opinion, actually. Or at least not on so fundamental a design point as that.

That quoted comment was meant to help demonstrate the two scenarios in which the current accounting allows FINIS and FINBS to produce information: when the method of valuing inventory is consistent at all times.

However, the quote then goes on to point out that pure producers end up with a very weak and almost pointless set of financial statements; statements that are nothing more than a report of what cash they spent and received each period. There is no reason to have a FINIS in such an accounting. Your whole company is, by definition, exactly equivalent to your cash holdings at all times, so there is no real meaning of gross margin or profit. The only question is did your cash go up or down? The FINBS suffices for such simple accounting. You can even delete the inventory line.

But, no real-life pure producer company would do this, of course. Some attempt would be made to track direct input costs to inventory, and for good reasons. Often to adhere to tax law, but also all the business reasons I mention as “benefits” in the first post.

I’d like to contest your comment that “What matters in both cases is the price at which you sell the final product.” It matters only in relation to the costs incurred in realizing that sale price. This is the definition of profit, no? If I make 100 BSE this week at a cost per unit of 500, the current system show a loss of 50,000. If I then sell all 100 next week at a price of 400, I show a profit of 40,000? Does this seem correct?

But the disadvantages of using cash to cash accounting for companies with tangible assets aside, the bigger problem is that I’d wager zero players in game are pure trader or pure producer (maybe kawaii is pure trader hah). You’ve successfully made such pure playstyles unattractive (and I agree with you completely on this design choice).
But for the hybrid majority, I don’t even know what to call their accounting. For them, you activate both the production (purchase) costs, and you have the cost of materials sold on sale, blended together according to the particular mix or purchased vs produced in recent local history which cannot be directly detected anywhere in the reports. The resulting blended numbers are therefore… useless, aside from saying whether you have more or less cash now than at period start.

So, I suppose my suggestion is two-fold:

  1. Please unify the capitalization of inventory, so the financial statements figures are understandable.
  2. I suggest that produced inventory be valued according to the direct costs necessary and intrinsic to the good’s production, as previously presented. This will satisfy the previous request, and will considerably increase the usefulness of a number of already existing game systems for all players.

I think this is an oportunity to flesh out the game’s internal coherence. It would allow players to better understand the consequences of their in-game actions, and help validate external models.

But I also understand this may not be a First Access priority. No one’s game is broken without this (except mine, kind of :wink: ). I’m mostly wondering if you see the value in this, and when it might get attention.

And whenever that is, I would happily discuss further on the details. As we’ve already explored a bit, there’s certainly some decisions the reporting and valuing.
Now I have to go check if there’s a “Provide Accounting System Design Input” perk teir. :slight_smile: