The gentleman above is Michael D Higgins, the Irish president – of course he is well known to me and other Irish people, but just for the benefit for others you might read my blog.
In October, there will be a presidential election and Michael D is up for a second term of office most likely. In recent months there has been a lot of media attention as of how much the presidential office costs to run. The office does not have much power, but is a great representation of Ireland as a country. According to the presidential website, the cost is about €3.6 million per annum. The vast majority of this consists of staff and travel costs. However, in various media outlets I have heard numbers being mentioned about the costs of the police officers and army associated with the presidential office. At the link above, these count for about €250,000 in 2017.
So what you say! Well, are these costs relevant to the cost of the presidential office? Would they be avoided if the office ceased to be? I doubt it, as the army and police would be put back to their normal duties. So this is a simple example of costs not bring relevant, and thus they probably should be excluded from any comments or analysis. I would guess too that the kind of simple analysis I have done here might be applied to many other political figures. What is probably most important though is that the costs of the office of the Irish president are now being discussed and new controls and checks may result – which is a good thing.
In Part 1 two weeks ago, I wrote about currency. Here, I’ll explain how “miners” help a cryptocurrency like bitcoin be useable.
To be honest, I had no idea until recently what bitcoin mining actually means – and remember bitcoin is just one cryptocurrency, but I will use it here as an example.
Some weeks ago, I visited a friend of mine who owns and runs a technology maintenance firm. His office is always full of various parts of computers, but on this visit I noticed the office was quite warm and there was a hum of computer fans. So, I stuck my head around a corner and I seen something like what is in the picture above. So, joking I said, “what are you at now, mining bitcoin?”. “Yep” was the reply. So I took the opportunity to lean on my friend for some explanations.
The bottom line for me as an accountant, is that a “bit-coin mining rig” like that in the photo costs about €3,000 and can earn about €500 per month before energy costs – I will come back to these costs in a later post. So what the hell is it and what does it do I hear you ask? In my previous post, I established that bitcoin is not really a currency (yet) in the sense of dollars, euro or pounds. It also does not have a central bank behind it, or commercial banks taking it on board as a major currency. So this creates a problem, which in essence is if I want to pay you one bitcoin, how is this to be done – and remember bitcoin is an electronic medium, there are no paper notes.
Well, if I were to pay for a coffee with my credit/debit card, there is an extensive payments processing system behind the payment – think of the credit card machine, Visa/Mastercard/Amex systems and ultimately the retailer’s bank. Also, you may know that for every card transaction, the retailer is charged by the bank so they never get the full value of a card sale. For a bitcoin payment, where is the system? This is where the “miners” come in. A miner is someone who essentially processes bitcoin payments. My friend mentioned above told me the steps roughly are as follows:
- you get a rig (like the picture above). The faster the better, so rigs tend to use the fastest available memory cards – think about the graphics in a gaming console – these use really fast memory.
- Join a mining community
- Start solving hashes (encryption puzzles)- that is, process and verify bitcoin transactions. This includes working with blockchain, which will be explained in an upcoming post.
- Get a commission for each transaction
- Transfer the commission to a bitcoin wallet – for example, the Coinbase app
- Transfer to your bank account as you see fit.
So, in essence, a bitcoin miner like my friend is taking the place of the commercial banks and/or credit companies and processing payments. It is basically a form of distributed computing.
So from an accounting perspective what does this mean? Well, not very much actually. But, and this is a big but, would/could we trust people like my friend to effectively become a banking system. Personally, I am not sure. We have decades of regulation around our banking systems, and even with all the oversight, it still fails from time to time. The counter-argument could be something like the redundancy of systems or devolvement of the now rather central power of the banking and finance systems. But I’m not so sure just yet.
My next post will explain the basics of encryption.
When I teach Activity-based costing (ABC), one of the example sectors often given to students is healthcare. Just in case you don’t know, ABC is a costing technique which allocates cost to products or services based on resources used by the product or service. If you think about healthcare, even in a standard medical procedure, no two patients are the same and use more or less drugs, time, hospital resources etc. Thus ABC appears useful – one patient may use more resources than the other and so cost more.
Of course, healthcare systems around the world vary. Some are fully funded by taxation, some are fully private. In Ireland, the system is mainly a public one, but unfortunately, it is not great in terms of access to treatment. So, if you can afford it, you can have private medical insurance (US style, but less costly) and this gives you more options. With this in mind, here is my recent experience which made me think about ABC and write this post.
Last year, I spent 11 days in a hospital for some heart surgery. Thankfully all is well. I am lucky enough to have health insurance. About three months post-surgery, I received an advice from my insurer stating how much the hospital had been paid – about €25,000. Phew, thankfully I did not have to find the cash for that! The advice was interesting in that showed little sign of ABC techniques – and as my hospital was one of the more advanced and modern I would have expected it to use ABC, to be honest. What the advice showed was a charge per day, with this charge being higher for two days in intensive care. Otherwise, there is little else. Unfortunately for me, I had some complications which required more drugs and attention from staff, so I took up more time and resources than some of my hospital mates (trust me, you make some good friends in hospitals). But this is not reflected in the cost. I suppose on balance things work out for the hospital and it may not matter, but to me, this simple example is a prime case where ABC could be used easily. If it were, then maybe health insurance costs would be a lot less in some cases – but that’s a whole other debate.
Having said all of the above, research on ABC use shows it is often less than 20% in practice. So maybe I should not be expecting its use in my hospital at all.
I’ve been quiet recently on here due to some illness. While I’ll and having some time on my hands I began to ponder the cost of medicine and where I live ( Ireland ). I know we are one of the more expensive places to buy medicine in Europe, but here I’m not going to refer to any price indices or similar. Instead I’m going to try to quickly break down the costs of doing business in two countries – Ireland and Spain – to explain price differences. A business manager might do this regularly to gauge the competition. To give an example of the price difference, I know that a common prescription pain killer costs €26 in Spain versus €42 in Ireland. Some medicine I use myself costs about €12, versus €23 in Spain. And just tonne clear, these two examples are for identical nongeneric medicines.
The first is taxes. I found that most medicines in Spain have 4% VAT, whereas most in Ireland are at 0%. So we can rule this out. Second, a tax consultant in Spain told me that to purchase a pharmacy in the city I stayed in would cost about €2 million. This is due to limits on how many pharmacy licences there are. This cost results in high depreciation from an accounting perspective, and is similar to Ireland. Third, by my guess, all other costs like labour, rent, light etc are cheaper in Spain, probably 10-50% less. So this leads me to one remaining thing – profit margins. The profit margin would be spit between the pharmaceutical company, a distributor and the pharmacy itself. Without insider information, it is very hard to know what these margins are. Having said that, they must be a large explanatory factor for the price difference.
And for the fun, to give a more marked price difference. I recently saw a TV programme on the cost of medicine in the US. It not the cost of a monthly supply of insulin at $900. This was quite unaffordable for pensioners on a low income. Many who are near the Canadian borders drive across to Canada, where the price of the same product is CAD$ 120.
Of course, I’m doing a quick and dirty, non- scientific analysis here. But business is full of gut instinct and similar, and my experience and gut tells me profit margins are a huge explainer for medicine price differences between countries.
In my daily work as an accounting academic, income across many papers and articles which explore the broader role of accounting in society and out daily lives. Lisa Jack from the University of Portsmouth writes about the role of accounting in the food supply chain. This is a very interesting area, as information on costs and margins is crucial in the food sector. She has just published an article on the recent contamination of eggs in some
European countries – you can read it here. It gives a good overview of how accounting is entwined in this and other food issues, and how it could help.
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.