I probably don’t need to explain the title of this short post, it’s quite obvious. Any business needs to appreciate all costs of the products or services it delivers.
- In past years, manufacturing has shifted to some degree to lower cost locations such as China, and the Foxconn relationship with Apple is a classic case. In the case of a product like an iPhone or iPad, it’s quite easy to see how the assembly costs are probably the higher component, and as they are small, distribution costs are low. But as a recent article in Forbes shows, transport costs are often a reason for manufacturing being close to market. In the article, there is mention of Foxconn planning to $10 billion plant in the US to build larger displays – for say 60 inch TVs. The article notes that the cost of capital in the US is similar to anywhere else, and labour costs and relatively low, although higher than China. However, the transportation costs would be much lower for such larger displays and thus it makes sense to build a new plant in the US.
Recently, it seems United Airlines got themselves into a bit of a bad public relations scenario by ejecting passengers (with force) from a domestic US flight. I’ve never used United and based in this, I never will, as it seems they commonly overbook flights.
First, in the age of technology we live in, how the hell a system allows overbooking I cannot fathom. Maybe if a smaller replacement aircraft transpired in an emergency, I can understand, but this would not be an overbooking issue.
You can read an article about the event at the link above, but here’s a brief rundown:
- United over book
- They look for four volunteers
- They offer $400, then $800
- Nobody volunteers
- They forcibly remove four passengers
And all of this to get their own crew to a location for the next day – this alone says a lot about their ability to manage the business, not having a standard way to get staff, or reserving x seats for staff.
Back to management accounting, and we know that an avoidable cost is one which can be eliminated by not doing something e.g. close a production line. We also know that in the long term, all costs are avoidable. So what about the United story. Well, one thing that will no doubt happen is a string of expensive law suits – and I personally hope United get screwed. This is an avoidable cost, and surely are the costs associated with the apparent regular overbooking. I’d even have a wild guess that it may have been cheaper to charter an aircraft for the staff than what this will ultimately cost United. Even $5000 a passenger to entice volunteers would be cheap too, or maybe $50000. Regardless, United need to find a long term solution to avoid such costs. They have apparently now increased the offer to passengers to $10,000 to give to give up their seats.
The Health Service Executive (HSE) is responsible for Ireland’s public health service. It has been the subject to criticism over the years for being inefficient and it is one of the largest items of public expenditure.
Thankfully, I have not been a frequent user of HSE services – that is, I have been generally healthy. My son had a mild concussion recently, so we had to attend the A &E department in our local hospital. On attending A & E, every patient is charged €100. The idea of this fee is two-fold 1) to stop the use of A & E by people with non-urgent issues and 2) to help reduce budgetary cost pressures. Both of these are fine in my view.
So, good law-abiding citizens as we are, we asked to pay as we entered. We were told “come back when you leave”. So we did, and were told “we’ll post the invoice”. So now, reflecting on this as an accountant, that’s two opportunities missed to collect payment. Then we get the invoice. There is no bank account details on it, and I cannot pay online. I have to call a number which was always busy. I could pay at a Post Office – fine if I am not working or have one close to work – I do work and I don’t have one close. Eventually we paid! If I do a quick media search I can find one hospital owed €600,000, and some reports from a few years back suggest the HSE are owed €200m . Apparently, people who do not pay are pursued, but how much does this cost? A lot more than the amount collected perhaps, which is not good for a cost stretched organisation.
To me, the process of payment should be much easier. Twice we asked at the hospital. I did not check if they had a credit card machine there, but why would they not. Why can I not pay online or to a bank account, or by PayPal? I shared my story with some friends, and they tell me some hospitals accept online payment. This made me even more annoyed, not even a common system! The lesson here is, and it applies to all businesses and organisations, you have to collect monies owed. The first thing then is to make it easy to pay, and to me the HSE fails badly in this regard.
This blog post appeared in my LinkedIn recently. Have a read. It’s basically claiming that British accountants are worse than their American counterparts because they don’t use technology as much as. Now, I’m a big fan of technology, but I’m also old enough to have worked before the internet and all other things which make our life easier (supposedly). The author of the blog should know that all technology is a series of instructions in some or other code, and that code is only as good as the person writing it! We are becoming way too reliant on technology and it’s no harm to do it the old way, or use less technology from time to time. If I were recruiting an accountant tomorrow, while their grasp of technology would be something I’d look out for, it’s not the only thing.
And to end, Irish accountants are best 😀
IAG, or the International Airlines Group, is the the parent of Aer Lingus, British Airways and Iberia. In my university, we were lucky enough to have their CEO, Willie Walsh, speak to us before Christmas.
Some things he mentioned are relevant to this blog, and of course interesting. One thing Mr Walsh noted was how only in recent years has the airline sector actually made a return on capital. This must be attributable in some way to a focus on cost by the sector in recent years. The chart below from IATA shows what I mean. As you can see, the cost of capital was higher than the return until 2014.
As my last post indicated, a focus on cost and efficiency has been a feature of the airline sector in recent years. To give another example, Mr Walsh cited an example of using two larger aircraft on a route without a loss in passenger capacity. So fuel, crew and capital cost all decrease in such a scenario. In addition, it freed up a slot at London’s Heathrow airport, which can then be used to generate more revenues.
A few weeks ago, I read a nice article in The Telegraph by David Millward on one of my favourite topics, airlines and all things to do with airports – I was born close to Dublin Airport and it was a big part of my growing up.
Anyway, many of us have witnessed the phenomena of low-cost airlines emerge of the last 20-30 years, and as an accountant it’s the constant actions to reduce costs that amaze me. As Millward said in his article, one of the things that airlines have done is unbundle. This means you get the basic fare from origin to destination for as low as possible. If you want more you pay more. This is fine by me, on a shorter flight, but now as longer-haul low-cost carriers appear I am not sure – I have no experience yet, so I dare not say. The low-costs have of course eaten into some of the legacy carrier market, but they have also expanded the market by making flying more accessible. Millward suggests that the low-costs have by now probably stripped out all they can to reduce costs, but the legacy carriers can do more – if they wish. I read another article recently which mentioned how WestJet, a low-cost transatlantic carrier remove the in-flight screens to save 500 kg in weight and thus save fuel. They replaced the screens with a wi-fi system and the BYOD idea – most people have their own device on-board anyway. Surely such simple steps could be taken by any carrier.
A review report by the Irish National Transport Authority published in 2016 makes for some interesting reading. It highlights the issues faced by many rail companies world-wide in that not all routes are profitable. When this occurs, many States subsidise services in the general public and social interest.
The 2016 report includes an interesting use of a breakeven approach to identify poorer performing routes. The analysis calculated the cash per journey required to breakeven. This was done by taking total cash costs less revenue divided by the passenger journeys on each route. The report notes that all government subvention, capitalisation, depreciation and exceptional costs were excluded. It identified four poorly performing routes, as shown below.
What this graphic shows taking the first route as an example is that about €550 per passenger journey is needed to cover what we might classify as the running and maintenance costs.I like its simplicity, and I don’t think anyone would be prepared such a fare. Using such figures, the rail company or the State has to decide if it can subvent to that amount on an on-going basis. The latter to routes seem to be more workable in terms of a combination of increased fares, cost cuts and/or subvention.
Probably my favourite (spectator) sport is motor cycle road-racing. There aren’t too many places it still happens – doing 180mph on public roads is not for everyone – but thankfully it still happens here in Ireland, the Isle of Man (IOM) and a few other places.
The IOM TT is probably the pinnacle of road-racing – it’s two weeks of fund each June. imagine my delight when I read an article featuring news on the 2016 TT and creative accounting! The article notes the number of TT visitors for 2016 to be similar to 2015 – based on data from the IOM government. The article also suggested a revenue of £738 per visitor for the economy, based on this same data. In the comments beneath the article, the fun starts.
One comment notes:
“This year’s TT races in June brought a £4.1 million benefit to the island’s exchequer, according to government figures just released.” OK, so that is the claimed revenue, now let’s see the total costs. And by total, I mean the total cost to the island not just the cost of TT preparations. How much for a fatality or serious injury involving medevac? How much for the road closures and effects on businesses as well as the public? These are real costs and the list goes on.
I note the total expenditure of £738 pp is not broken down into for example travel costs and monies spent on island. Therefore that figure is meaningless If the figures of £31.3M, £22.5M and £4.1M are based on the £738pp they are also meaningless. Creative accounting it is for sure. In addition, if the government can come up with a figure for the benefit to the island they must be in possession of all costs, such as DOI, medical, policing, helicopters etc. So why do they never produce such figures?
These two sharp commentators highlight many things -the subjective major of accounting, where costs and revenues are attributed, and what are the relevant costs, for example. I’ll be using this example in my teaching at some future point.
I read a nice article in the Financial Times recently on the cost of buying a vineyard. The article is investment focused, but mentions that given costs of production, wine prices and annual sales in bottles, the investment will breakeven in a few years – meaning the investment is recouped. If you have studied management accounting, you’ll be aware this not breakeven in the way you many have learned it – fixed cost/contribution per unit. It is not very different though. In essence, the investment is regarded as a fixed cost, with the contribution per unit being the annual contribution which can be made from sales of wine in a year. It’s not a perfect measure, but a good enough rule of thumb to help make an investment decision.
On July 14th last, it was reported on the BBC website that the total cost to BP of the Deepwater Horizon oil spill back in 2010 was totalling $61.6 billion – quite an amount. If you look back at the media websites/newspapers over the years you will see the amount rising over time.
Just out of curiosity, I had a look at the most recent financial statements of BP to see what they include on this. Two things came to mind before I looked at the accounts 1) the amounts involved here are material and 2) it spans many reporting periods, so IAS 10 Events after the Reporting Period would probably kick in. Looking at the accounts to 31.12.2015, they contain a separate note which itemises the events of the event on each of the three financial statements. You can see the accounts here – look at note 2. It is quite detailed and I do like how they have shown the effects, and the note is quite detailed. It is not very often such significant events occur, and as far as I can see BP have done a good job on this note. It certainly should provide an investor with enough information to decide whether to invest in the company or not – a key criteria of what financial statements should do.
Regulation of charities in Ireland is not as good as it could be – we have some legislation waiting to be enacted since 2009 as far as I know. But laws cannot prevent what happens within an organisation from happening; they can only penalise after the event.
So what bugs me? Well, the title of this post really – it is something I picked up from the print media in recent weeks. I am sure I have said somewhere on this blog that accounting is the language of business, so what about accounting for charities? My own opinion is that charities must have proper accounting, and there are accounting standards already in place for charities. But I often wonder should we be careful and not allow charities to become too much like a business? For example, we should be using accounting in charities to drive efficiencies, not necessarily monitor revenue and costs like in a business. Nor should we be using accounting just to get funding for a charity. In short, what I am trying to say is that we need to be careful and try to not let accounting (and other commercial sector notions) detract from what a charity should be.
In recent years many operations – both business and public sector – have been closed or reduced in capacity to save costs. Closing an operation is one of the topics I often teach too. When I teach, the basic message is to focus on the fixed costs, and how much can be reduced or eliminated. Of course, some labour costs are increasingly seen as fixed – and this may be a more certain feature in the public sector.There may also be some hidden or unforeseen costs, which are often not included in the analysis. Let me give you two recent examples, both of which are from the public sector.
In Ireland, the government closed down 139 Garda (police) stations due to economic woes. Most of these closures were in rural areas. The total annual cost saving is estimated at just over €500,000 – see here. This is likely due to the fact that only the only savings were operating costs of the stations e.g. light and heat were the only real costs saved. Police staff and equipment simply moved to another station – where costs may have been incurred to accommodate them. There is a big hidden cost though, which is increased rural crime. While there was probably no money value on this cost in any cost estimates prepared, I’d be quite sure it is higher than closing stations. Recently, the decision to close has been reversed.
A second example comes from Lambeth council in London who closed two libraries – see here . According to a report in the Guardian, the daily security cost is higher than the cost of keeping the libraries open. There seems to have been some protests against the closure of one library in particular, which drove up the costs. This unforeseen cost, if included in the closure decision might have changed things.
Have you ever noticed how some Eco items cost more than, shall we call them traditional items? For example, eco building materials like some insulations are much more costly than the traditional materials. Or more efficient appliances such as heating boilers cost more. What bugs me a little is, if our goal to is to reduce energy consumption, reduce CO2 or live more sustainably, then why are many things that could helps us so costly?
Two reasons come to mind as a management accountant. First, there may have been some capital costs incurred by manufacturers to produce newer and more sustainable products, which are included in the price. These costs may decrease over time as economies of scale creep in. A second reason is that although the costs may be higher, there may be savings to take into account. For example, an certain insulation maybe be twice the cost, but it can seriously reduce your heating bills over the several decades.
You have probably heard about the amount of fruit and vegetables wasted in the food supply chain. This waste “occurs” for three main reasons. First, in less developed countries, poor transport and storage can result in waste. This also happens in larger developed countries, where distances mean fruit/veg cannot survive the trip. Second, the exacting standards imposed by retailers as to the size and shape of fresh fruit and vegetables causes growers to simply dump large quantities each year. Third, end consumers throw away perfectly good food.
Personally, I grow some fruit in a small suburban garden. We never but jam, as I make enough for the household for the whole year. We have 2-3 months worth of pears and apples, and some years the “leftover” fruit become wine – blackcurrant wine is quite nice. So, from a small say 10m2 plot, I can do all this and have zero waste. On a commercial scale, things are different. The waste is immorally high, primarily due to the exacting standards of retailers. I can tell you that the apples and pears I grow may be all shapes and sizes, but they taste so much better than anything I can buy in the supermarket – and my neighbours all agree.
To give a snapshot of how much perfectly good fruit and vegetables we waste each year as a race, National Geographic (March 2016) provides some stark numbers. In total, 53% of fruit and vegetables never makes it to the market – 20% is lost at the farm due mainly to exacting standards, 19% is uneaten and discarded at home, 3% lost in transit/storage, 2% lost in processing (canning/baking) and 9% discarded by wholesales and retailers. Add to this the resources used to harvest and prepare what is wasted – 70 times the oil lost in Deep Water Horizon and enough water to fill the Volga, and that’s just one year in the US alone. To add another number, the annual total food waste (all foods) could feed 2 billion people.
From these stark numbers, what can (management) accountants do? Recently, some documentaries on British TV featured vegetable growers saying the loose perhaps £100,000 per month worth of vegetables – assuming it could be sold at market price. Nowhere is this accounted for, not in their accounts, in supermarket accounts, in our national accounts (GDP). What if these accounts included the cost of waste? I’m sure if they did, we would all stand up and take notice.