With recent events in Ukraine, the world has faced a sharp rise in fuel prices. This applies to individuals and business. Here in Ireland where I live, our government has reduced the taxes on fuels, which in turn reduce the at pump price.
Repsol, a Spanish company has taken an interesting initiative. They have reduced prices of fuel by 10c per litre, but only if you pay using their app Waylet. Thinking as a management accountant, I am thinking this is quite smart on their part. I am guessing, but I would assume that paying via the Waylet app reduces many costs – such as payment processing fees, or cash handling fees for example. Thinking as a manager with a more strategic hat on, maybe Repsol are attempting to make all payments cashless, and this is a way to move more people towards their Waylet platform. Regardless, I would be confident the reduction of 10c in price is compensated by an equal cost saving somewhere.
The are many examples of how Covid 19 is affecting business. An article in the Irish Times of 18/11/2020 provides a nice example, from Dublin Zoo. We all love a visit to the Zoo – well, I certainly do – but we probably never stop to think about the costs of running a zoo.
According to the Irish Times article, Covid 19 has left a €10 million hole in the finances of Dublin Zoo, and it costs €500,000 per month to feed and care for the animals. Looking at recent annual reports, the annual income of Dublin Zoo is about €20m. That would mean about 30% of the the income is used to cover feeding costs (500000 x 12 = €6m). This is a fixed cost, as the animals must be feed and cared for. If income has fallen to zero in recent months due to Covid 19, it is easy to see how Dublin Zoo – or any zoo – could get into financial trouble quite quickly.
First of all, let me say I am no expert on the area of social housing, so I apologise in advance if I am missing some key points in the debate. Second, this blog post emerged as I searched for some thoughts on cost effectiveness. The post may be a little Ireland-centric in context, but I am sure Ireland is not the only country where the sale of new homes is taxed.
Housing is an ongoing problem in Ireland, and the issue of affordability is often mentioned by the media, governments and other actors. While searching for some material on cost effectiveness, I found several articles which suggested that more affordable homes/social housing could come from local authorities taking on the building themselves. This makes some intuitive sense in that a construction firm’s profit margin does not need to be paid and thus the cost per house may be lower. However, this made me think of two things:
- When I was younger (30-35 years ago) local authorities began to phase out building and maintenance of homes as third parties could do so more efficiently and at a lower cost. Thus, an infrastructure to start doing so again is not there, needs to be built (pardon the pun) and will cost money.
- The VAT rate on new homes is 13.5 % presently. Thus, if a person pays €350000 for a new home, €42,630 is VAT and must be paid over to the government – assuming a developer builds/sells a house. If a local authority (e.g. a city) built a house for re-sale, as far as I know VAT is still included in the price. If it were renting the house to a tenant – again as far as I know – it is not chargeable, but VAT on the cost of building cannot be reclaimed.
You may be thinking, so what, as the VAT can be used by the government to build more houses, or even be paid back to the purchaser – I do not believe we can be sure the former would happen (unless ring-fenced), and the latter does not happen as far as I know.
Taking the above two points, it is questionable if house building by governments is more cost effective. If we consider VAT as a cost to the end-purchaser, surely some scheme which reduces or eliminates VAT in certain circumstances would result in more cost effective housing regardless of who builds them?
A simple answer to the question posed in the title above is yes. This is because such customers use up more time and resources and should be charged more. If you have learned activity-based costing or activity-based management in your studies of management accounting, you will also know that such techniques try to allocate costs based on the resources used. Thus, a more time-consuming customer will pay more.
Of course, it is not that simple. You may not be able to charge customers more, or your business may be a service provider with back-end or post sale support. The latter case is what inspired me to write this post. My better half works for a large financial institution. She often tells me how customers are asked several times for the same thing e.g. documentation to prove their address, their age or even their identity. Some seem to ignore requests, not provide full information or deliberately try to hide some information. Getting back to the customer a second or more times adds to cost. Thus, the management accountant in me thinks I should charge these customers more. In normal circumstances no organisation would. But what if, as a bank for example, I asked a customer three times to provide a scan of their passport for identity purposes and each time they blanked out the date of birth? This would imply much more effort (and cost) was needed than should be. If it were up to me, I would say to the customer “ok, €/$/£25 please, as you as wasting time”. I guess no banks would be gutsy enough to do something like this, but maybe it would make for greater efficiency as customers would comply more the first time. I am just using a bank as an example here, I am sure there are many other scenarios where customers could be dissuaded by threat of a greater price/charge like this.
Cost need to be managed. This is term I have probably heard or said many hundreds of times in my life as an accountant and teacher. Managing costs requires two things 1) a knowledge of costs and how costs are structured in the business, project or product and 2) managers. We probably take both of these for granted, but there are some classic examples of when one, other or both do not apply.
If you have ever been involved in a building project, or built your own house, you will know that construction costs are notoriously difficult to manage. Just think of any large building project in your country, was it delivered on time and within budget? Sometimes the answer is yes, but when it is no, it can be a resounding no. Take for example the Berlin airport which is due to be open on 31/10/2020 – probably the worst time in aviation history to open an airport due to the present pandemic. This project started back in 2006, and it is being opened at a cost which is billions in excess of plan. So what went wrong? I could probably write a book about it, but in essence bad management. Of course a large project may be late and over budget, but in the case of Berlin airport, the delay is about a decade and the cost overrun about 3 times. A BBC News article provides a good summary, and I will give some examples. First, there were changes during construction due to plans not including shops for example. This added time and money. Te question has to be how did the “managers” not notice a part of the airport which can give 50% of revenues was not there? Second, there were issues due to there being no specialist contractor, rather many smaller ones who the managers hoped could be compelled to reduce costs. However, not having a single point of contact in a the form of a specialist contractor implied the project management was very complex – and thus costly.
This is just a brief summary. Have a search around to find out more. Here is a nice article on the technical side, or here from CNN – which includes a final cost estimate of €7.3 billion (original plan c. €2 billion)
I hope a local distillery near my home does not mind me using their graphic above. As we are all dealing with the effects of the Covid 19 pandemic, I was really impressed to see how small local distilleries in Ireland (and indeed elsewhere and some large ones too) have changed to producing alcohol based hand sanitiser.
Many businesses cannot adapt their products to the current scenario, but the example of distilleries is a really good one. The Listoke Distillery is manufacturing and selling hand sanitiser at cost. Not only is this a good thing for society, it also in my view makes business sense. As the header of this post suggests, it is better to be “ticking over” and covering costs than losing money and not covering fixed costs. I would also bet that many of us (and certainly yours truly) will remember these local small businesses that helped us out in these strange times and, hopefully, they will see increased revenues and growth. Meanwhile, with costs covered, at least they have a good chance of surviving.
By the way, I’ve just bought my second bottle of sanitiser – accompanied by a bottle of gin of course.
If you have studied management accounting, or perhaps read some of my previous posts, you will know the word cost can have many meanings and descriptions. For example, a cost can be fixed, variable, mixed or opportunity.
In this post, I would like to think more about what the word cost can mean outside the world of accounting. The etymology of the word cost is from Latin constare which means to stand firm, stand at a price, which seems to suggest its origins are associated with business transactions. However, today cost can also be used to describe many non- business things. For example, the Alberta oil sands in Canada may have quite a high extraction cost in money terms, but also have and/or will have a large cost in terms of environmental impact.
As I write this post, many of us are working at home due to the global Covid 19 pandemic. This also provides a good example of the many meanings of the word cost. It is perfectly summed up in a phrase I heard on radio “we can count the cost in money now or in more lives lost later”. This comment was in response to plans (or lack of plans) by governments to respond to the pandemic and being more concerned with economic impacts.
These two short examples show cost has meanings which are perhaps commonly understood, and thankfully are becoming more and more a part of business decision-making- which is a good thing of course.
Telecommunication services in Ireland used to be provided by the State, through various entities. The most recent entity is eircom, now a private firm. eircom were one of the earlier providers of free email accounts, but that is about to change as the company now wish to charge €5.99 per month for email accounts. Well, there is no such thing as a free lunch as the saying goes.
But let’s put on our accounting hats for a minute. There is of course a cost involved in hosting email accounts – servers, cooling, power, buildings. This may have been okay when eircom was a state company and there was less of a profit motive. Gmail is free I hear you say; it is not, you give your data to them to make money from. So eircom probably need to recoup some of their costs, and that seems like a good accounting decision, The price does seem a bit high though – about €4.86 next of VAT will be earned by eircom. To me, it seem more like a prohibitive price, and the real objective to force email account holders to move to other providers.
In my previous post, I mentioned being part of a local voluntary committee, and our efforts to bring a Christmas market to my local town. It’s all going well, but as we near our first year end, it has become apparent to me how important it is for us to plan better for the following year.
Like many voluntary organisations, we are probably still finding our feet. While I keep track of the monies in my role, what I do not have is the full picture of what monies will be spent. To be fair none of us do, as this is the first time we have organised this event and none of us within the organisation have prior experience of such an event. However, a budget is exactly what will bring us together and help us focus for next year. By the end of the Christmas period, we will know what costs we have incurred to host the market and these can be the basis for discussions for the coming year. Then, with a budget in place, we can start to plan for what we need to achieve and of course we can keep a control on things. If you read any management accounting textbook you will see pros and cons of budgeting. To me the biggest advantage of preparing a budget in this small voluntary organisation is that we can all talk from the same page – i.e. the communication value of the budget.
I am a Treasurer on a local committee, whose task it is to bring a Christmas street market to my local town.
We raise sponsorship from local business and in turn the street market will boost Christmas trade it is hoped. Of course to do this, we need the approval of various local authorities, one being our county council. To hold the market, we need permission to close streets, and guess what, there is a small opportunity cost of doing this.
The street has about 15 parking spaces, which are chargeable at a rate of say €1.50 per hour from 08:00 to 18:00. The local council makes the assumption these spaces will be filled – which is probably quite fair – and the have to be paid for the parking revenue lost. This is a classic opportunity cost example, as they lose revenue by granting permission to hold the market, and thus are choosing one option over another. They probably could also add on lost revenues from tickets for illegal parking – I’d be quite sure there are more than one of these each day – but I will keep quiet on that one 🙂
Yes, there are some whiskies produced in Taiwan, and they are winning some awards and grabbing attention in the whisky world. I wrote an article on The Conversation recently which looks at how Taiwanese whisky producers have some costs and cashflow advantages over other producers. You can read it here. Sláinte
In the past few days, the Thomas Cook travel company has gone into administration – meaning it’s banks have taken control to recoup monies they have lended. The company dates back to 1841, and is (or was) a well-known brand in the holiday/tour sector.
Of course, here I am interested in the management accounting angle, with a teaching focus. There will no doubt be plenty of comments on the failure, but let others write that. A quote in The Sun (ok not the best source, I acknowledge) noted “the firm has been struggling with a £1.6 billion debt for years. It needs to sell 300 million holidays a year to break even.” I am not sure about the accuracy of the “300 million holidays a year” to break even, but regardless, it is quite likely Thomas Cook would have had to sell a lot of holidays to cover the costs of servicing a large debt (and making repayments) on top of its ongoing costs. What is probably more interesting it the operating leverage within a firm like Thomas Cook.
Operating leverage refers to the percentage of total costs which fixed costs compared to variable costs. If fixed costs are higher in proportion to variable costs, this is referred to as high operating leverage, and more profit is made from each incremental sale. More variable costs, on the other hand, is termed low operating leverage and results in a smaller profit from each incremental sale. Where would Thomas Cook sit on this scale? Well, it likely had high fixed costs (debt servicing, fuel, staff, lease payments on aircraft etc), so is probably on the high operating leverage end of the scale with lots of fixed costs. But, the package holiday (or even the airline sector) is historically a sector with low profit margins. With high fixed costs and low margins, this means a firm like Thomas Cook needed substantial sales volumes and cost controls to keep going (or even break-even) without further funding. It seemed not to be able to do this – 2018 loss after tax was £163m, 2017 profit was £12m, 2016 profit £9m, not great on revenues of about £8 billion.
In recent years in Ireland, business insurance costs have been increased dramatically due to increasing volumes of claims against them. In some cases, the costs have increased so much that the businesses have simply closed. This post is more about the smaller claims, claims for refunds or costs incurred because a product or service was not up to scratch.
I will use Ryanair as the example here. Despite all the criticisms levelled against it, it remains one of my favourite airlines. They run a tight operation and keep costs to a minimum. They also do not payout refunds or claims unless they have to, this is the fun part for me. In a recent Irish Times article, there are details of a customer claiming €222 for taxi fares incurred due to a Ryanair mistake. The company fought it, but the passenger pursued through a small claims court and got their money refunded. Fair play to the passenger.
Recently I was subject to a delay on a Ryanair flight from Bristol. Some passengers, those who were UK citizens I later found out, were offered £5 refreshment vouchers. I was not, and followed up. To be fair to Ryanair they said if I could produce a receipt, they would refund me.
Now the accounting part. In both examples above there are a lot of costs already incurred in having a customer service function to deal with such issues. Let’s deem these as sunk costs. Once a claim is initiated, then I think we could see the situation as an instance of activity based costing perhaps. In my own case, I sent three emails and I can guarantee the cost of dealing with me was way more that the price of a cup of coffee I was seeking to claim. In the case of the passenger taxi fares, costs of engaging solicitors by Ryanair would have far exceeded the cost of the refund had they simply paid it based on the passengers receipts.
The point I am trying to make is that while I fully agree that firms should not just pay refunds without any basis, there is likely some value at which it costs more to defend a refund claim than simply pay it – with vouched receipts of course, not like me and my coffee. But, if you are not getting satisfaction from a company if you feel you should get a refund, apart from legal options, you can always waste their time a little and get some satisfaction that way.
I am sure you have read or heard stories in your country about political leaders or CEOs spending large amounts of money on expenses – hotels, meals etc. I have read a lot of such reports in recent weeks and just wanted to give a view on it.
To me, and much of this is based on experience, the first principle to me is simple – no receipt or invoice, then any expense should not be reimbursed. Doing this sets a basic principle which is easily understood. I have heard some comments over the years that there is a cost is running an expenses reimbursement system, which may exceed the value of the expenses, so why bother. This may be true in some cases, but I do not agree.
A second principle to me is a basic accounting one – business expenses only. The idea of say using a business credit card for personal lunches or whatever at a weekend goes against the entity principle. This principle means only items for the business should no part of the accounting for that business.
Third, the expense, once for the entity should be reasonable, but what is reasonable? This is where common sense must apply. Let’s take hotels as an example. It may be that a room for €100 per night is ample for any business person, but in some cities this may not be enough for even a basic hotel. But, if I were to say €1000 per night, you would probably think that is a bit too much. Of course you may have read reports of business leaders and political figures spending many thousands of Euro/Pounds/Dollars per night on hotels. Is this reasonable? Personally I do think some of these people could be a bit more modest!