Understanding sustainability through an accounting lens – guest post 1 by Dr Stephen Jollands
Guest post #1 by Dr Stephen Jollands
It is very interesting that Martin’s story of the wasted portions of condiments on an airline flight is a very simple setting to think through the complexities of the issues we face around sustainability. But before we examine Martin’s example further we first need to think about what exactly sustainability is and more importantly what it is not. The first question to ask is what is it that we are trying to sustain? While this may appear as quite a straight forward question the answer is not as most expect. Sustainability is about sustaining humanity. Put simply we need the ecosphere in which we live but it does not need us. This leads to an interesting understanding of a nested system view of the world. That is the economy resides in our societies and our societies in turn reside within the ecosphere. Thus no ecosphere then no society and in turn no society then no economy.
With having worked out what it is that we are trying to sustain we still need to investigate a few more things before we can put forward a concrete definition. In order to do so I need to introduce the ecological footprint, which is an accounting tool that measures the biologically productive area required to sustain a given population. This has been calculated for the entire world with the formula being the total biologically productive surface area divided by the population of the world. The result of this calculation gives us what is referred to as each individual persons Earth share. That is it provides us an indication of the average amount of biologically productive surface that we each have available to us to provide all that we need and want as well as absorb all the waste we generate. Based on 1996 data we know that the Earth share per person was roughly the size of one football field and this is not even taking into account the space required for other species we share our planet with.
To draw an appropriate conclusion from the above calculation of the average Earth share we need to draw an analogy between the ecosphere and a business. With a business we invest capital from which we expect to earn some form of interest. It is this interest that we expect to use to pay for the things we need and want to live from. However, in some situations we understand that the interest we earn may not be enough to support what we want and therefore we may decide to withdraw some of the capital. This is fine as long as we understand that we are doing this (and hence the need for good accounting) and that we understand that if we keep removing capital then the business will eventually go bankrupt. So it is with the ecosphere. Interestingly environmentalism first started to gain traction with space exploration back in the 1960s when it became very clear from the photos taken from space that we live on a finite planet. Hence we can view the ecosphere as having a finite amount of natural capital from which we derive natural interest (usually through interactions with the energy produced by the sun). So in terms of our Earth share this requires deriving everything we need from the football field without depleting the existing resources on that football field. However, the ecological footprint calculation based on 1996 data showed that our resource throughput (measuring resources being taken from the ecosphere as well as waste that the ecosphere is required to re-assimilate) was 20% over the levels of natural interest. This has increased to 50% over the levels of natural interest based on 2008 data. Put simply it would take one and a half years to generate the resources we consume within a year and thus we are currently, and potentially irreversibly, depleting the levels of natural capital, the very thing we require to keep sustaining us.
We can therefore define sustainability as humanity not over-consuming the resources available to them and thereby irreversibly depleting the levels of natural capital while at the same time ensuring an equitable and fair distribution, both within the current generation as well as across all future generations, of the resources available. Hence returning to Martin’s analogy it is not only the amount of things we waste that we must be aware of but also the levels of resources we utilise. Hence, what would the ecological footprint of Martin’s flight look like or in other words what was the amount of biologically productive surface area required to sustain this flight?
In the next post (as Martin has been kind enough to allow me to post two) I will briefly overview experiments around accounting for sustainability. As part of this we will investigate how well the measure up against accounting for a world of finite resources. We will even see that successful examples like the ecological footprint have inherent weaknesses that require us to question whether business that are serious about engaging with these issues may actually require a series of sustainability focused controls to guide their efforts.
Finally in closing, the large part of what I have written above is based on one easy to read book that I would suggest is the perfect place to start for anyone wishing to learn more about these issues:
Wackernagel, M., Rees, W.E., 1996. Our ecological footprint : reducing human impact on the Earth. New Society Publishers, Gabriola Island, B.C.
Sustainability – an accountant’s brief thoughts
Sustainability is a huge issue for us all, not just for accountants. It is not my specific area of expertise, so over the next few weeks Dr Stephen Jollands, University of Exeter, will be writing a few guest posts on my blog. He will give you much more on sustainability actually means, but let me tell you what inspired me to ask Dr Jollands to write some stuff.
I was travelling back to Ireland on an Aer Lingus flight recently. It was an early flight, so I ordered a breakfast, some muffins and drinks for my kids and a tea and cake for my wife. So we started to eat. As I was eating my breakfast I realised I had a portion or marmalade I did not want to eat just then, and portions of salt/pepper I did not use, and some plastic cutlery and some milk. So I thought why not bring some of it home and use it for lunch – which I duly did. Then I started to think about how many similar items would be simply waste on the flight. And, thinking further, the effort (and cost) that goes into produced all these portions is simply wasted too. This, I thought is completely daft, and here it come, not sustainable. All sorts of questions came into my mind – why do we waste so much, why do the flight attendants not ask if you want certain portions, how much money is wasted in this one flight, what natural resources are wasted etc.
This simple everyday experience of mine shows the kind of issues that might be part of the broader sustainability field. I’ll leave it up to Dr Jollands to give you some more insights over the coming weeks.
A graphical look at business performance – Apple Retail stores
I have written quite a few posts on performance management of firms and how management accountants can use both financial and non-financial performance measures. One thing I have not thus far mentioned is the actual presentation of such information. I am not one of those people who uses the bells and whistles and products like Powerpoint, but I do appreciate that information presenting in a short, concise format. One way to do present information in a clear way is to use a graphical format. So, here I give a great example which a kind reader of my blog referred me to.
We all know how successful Apple Inc are. Now you can look into their annual reports and analysts presentations to get a view of how much money they make. But wouldn’t you love to know what Apple’s managers get to see on a regular basis in terms of the company performance. That is, what kind of performance measurements might they use and report on internally. Below you’ll see a great infographic on the performance of Apple’s retail stores. The data shown is self-explanatory, so I will not detail it here. When I first saw this graphic, I thought wow, wouldn’t this be a great internal performance measurement tool. Of course, we don’t know if Apple actually prepare something like this infographic, but it is certainly quite effective at getting the message across.
From onlinemba.com, see http://www.onlinemba.com/blog/apple-stores/
Accounting textbooks for free!
A while ago, I promised some Facebook friends to review some text books from bookboon.com, a website where you can download free accounting books. Given my teaching and research area is management accounting I choose the text on Managerial and Cost Accounting. As I am an author myself, I have had quite a bit of experience in both writing and reviewing text books. So, I will try to be critical but fair. So here goes.
First, the authors seem well experienced and qualified to write the text, so that’s good. The writing style is pretty clear, although it uses US English (not an issue, just a minor comment). There are a total of 21 chapters (see below for the full contents), which covers the vast majority of the important management accounting topics. Now to be fair, I have not read all chapters word-for-word, but the text does seem to cover all topics pretty well at an introductory level. The authors use some graphics to explain stuff and give normally one example of a technique per chapter.
So far so good, but now for the downsides. I suppose it must be remembered this a free text. And even though it is free, it is actually quite good in terms of basic content. But it does fall down on what I as an author/lecturer would expect of a textbook. The pitfalls are in the area of exercises within the text (I know there is a separate book of exercises, which I have not reviewed yet) and basic things from a pedagogical nature – learning objectives, key terms, real life examples and so on. The content, as I said previously, is also at an introductory level and for the more advanced or specialist management accounting courses simply would not be enough – for example, there is little is no references to academic research. The downloaded file also has adverts, which I can live with, but some might find this annoying.
And finally, as I am a bit of a techie, I tried to download the book first on my Android Tablet (in July 2012). This did not work. I actually think this is a major pitfall. Why? Well, the book is absolutely fine for a non-specialist introductory course in management accounting or accounting. The audience for this book is less likely to be those in universities in developed countries (although I have nothing to verify this, but I am quite sure that it would be difficult to challenge the embedded text books), but more so developing countries. I have read in The Economist and several other sources that countries like India are considering given cheap (less than $100) tablets to students with texts pre-loaded. This text would be ideal for such students to introduce them to the basics of management accounting, with the more traditional texts helping them in more advanced areas.
So my overall opinion, a reasonable book for the fact that it is free. But, I would suggest it is most suitable for introductory courses and get it working on tablets.
Table of Contents of the book.
Part 1. Introduction to Managerial Accounting
1. Managerial Accounting
1.1 Professional Certifications in Management Accounting
2. Planning, Directing, and Controlling
2.1 Decision Making
2.2 Planning
2.3 Strategy
2.4 Positioning
2.5 Budgets
2.6 Directing
2.6.1 Costing
2.6.2 Production
2.6.3 Analysis
2.7 Controlling
2.7.1 Monitor
2.7.2 Scorecard
3. Cost Components
4. Product Versus Period Costs
4.1 Period Costs
5. Financial Statement Issues that are Unique to Manufacturers
5.1 Schedule of Raw Materials
5.2 Schedule of Work in Process
5.3 Schedule of Cost of Goods Manufactured
5.4 Schedule of Cost of Goods Sold
5.5 The Income Statement
5.6 Reviewing Cost of Flow Concepts for a Manufacturer
5.7 Critical Thinking About Cost Flow
Part 2. Cost-Volume-Profit and Business Scalability
6. Cost Behavior
6.1 The Nature of Costs
6.2 Variable Costs
6.3 Fixed Costs
6.4 Business Implications of the Fixed Cost Structure
6.5 Economies of Scale
6.6 Dialing in Your Business Model
7. Cost Behavior Analysis
7.1 Mixed Costs
7.2 High-Low Method
7.3 Method of Least Squares
7.4 Recap
8. Break-Even and Target Income
8.1 Contribution Margin
8.2 Contribution Margin: Aggregated, per Unit, or Ratio?
8.3 Graphic Presentation
8.4 Break-Even Calculations
8.5 Target Income Calculations
8.6 Critical Thinking About CVP
9. Sensitivity Analysis
9.1 Changing Fixed Costs
9.2 Changing Variable Costs
9.3 Blended Cost Shifts
9.4 Per Unit Revenue Shifts
9.5 Margin Beware
9.6 Margin Mathematics
10. CVP for Multiple Products
10.1 Multiple Products, Selling Costs, and Margin Management
11. Assumptions of CVP
Part 3. Job Costing and Modern Cost Management Systems
12. Basic Job Costing Concepts
12.1 Cost Data Determination
12.2 Conceptualizing Job Costing
12.3 Tracking Direct Labor
12.4 Tracking Direct Materials
12.5 Tracking Overhead
12.6 Job Cost Sheets
12.7 Expanding the Illustration
12.8 Another Expansion of the Illustration
12.9 Database Versus Spreadsheets
12.10 Moving Beyond the Conceptual Level
13. Information Systems for the Job Costing Environment
13.1 Direct Material
13.2 Direct Labor
13.3 Overhead and Cost Drivers
14. Tracking Job Cost Within the Corporate Ledger
14.1 Direct Material
14.2 Direct Labor
14.3 Applied Factory Overhead
14.4 Overview
14.5 Financial Statement Impact Scenarios
14.6 Cost Flows to the Financial Statements
14.7 Subsidiary Accounts
14.8 Global Trade and Transfers
15. Accounting for Actual and Applied Overhead
15.1 The Factory Overhead Account
15.2 Actual Overhead
15.3 The Balance of Factory Overhead
15.4 Underapplied Overhead
15.5 Overapplied Overhead
15.6 Influence of Gaap
16. Job Costing in Service, Not For-Profit, and Governmental Environments
16.1 The Service Sector
16.2 Capacity Utilization
17. Modern Management of Costs and Quality
17.1 Global Competition
17.2 Kaizen
17.3 Lean Manufacturing
17.4 Just in Time Inventory
17.5 Total Quality Management
17.6 Six Sigma
17.7 Reflection on Modern Cost Management
Part 4. Process Costing and Activity-Based Costing
18. Process Costing
18.1 Process Costing
18.2 Comparing Job and Process Costing
18.3 Introduction to the Cost of Production Report
18.4 Job Costing Flows
18.5 Process Costing Flows
18.6 Job Costing Flows on Job Cost Sheets
18.7 Process Costing Flows on Cost of Production Reports
19. Equivalent Units
19.1 Factors of Production
19.2 An Illustration of Equivalent Units Calculations
19.3 Cost per Equivalent Unit
20. Cost Allocation to Completed Units and Units in Process
20.1 Cost of Production Report
20.2 Journal Entries
20.3 Subsequent Departments
20.4 The Big Picture
20.5 FIFO Process Costing
21. Activity-Based Costing
21.1 Pros of ABC
21.2 Cons of ABC
21.3 The Reality of ABC
21.4 A Closer Look at ABC Concepts
21.5 The Steps to Implement ABC
21.6 A Simple Analogy
21.7 A Case Study in ABC
21.8 Study Process and Costs
21.9 Identify Activities
21.10 Determine Traceable Costs and Allocation Rates
21.11 Assign Costs to Activities
21.12 Determine Per-Activity Allocation Rates
21.13 Apply Costs to Cost Objects
21.14 What Just Happened?
21.15 A Great Tool, But not a Panacea
The importance of integrating cost and risk into decision making
Olympic Stadium at Stratford, London (Photo credit: Wikipedia)
It’s always great to find and example of where some simple planning and management accounting type work would have done quite a bit for a particular company or decision.
During the summer just past, a great example came to life. The London 2012 Olympics have come and gone, but I’m sure you can imagine such an event needed a lot on planning. Mostly, the games went fine. However, a few weeks before the games kicked off, a story broke about how G4S would not be able to deliver the number of security personnel they were contracted to provide. You can read more on the BBC website here, but in a nutshell G4S racked up losses of £30-50m. Why? Well it seems to boil down to not been able to recruit enough new staff and train them within the timeframe, and thus G4S have to cover the cost of army personnel provided instead. According to the BBC, the value of the contract was £280m and one would think there should be scope for profit in this. I wonder did anyone ever ask this key question: What if we cannot recruit enough staff? If this question was asked, then the next question might be: how much will it cost us if we cannot provide enough staff. These two relatively simple questions might have forced managers at G4S to think about the risk of this happening and the costs. This does not mean they would have not faced the problems and costs they did, but at least they may have been more prepared to deal with the problem as it happened – or better still planned better from the start.
Business recovery plans – a must, but a cost?
This summer, customers of the Irish based Ulster Bank faced 3-4 weeks of problems getting paid and paying bills as the banks payment system failed. Customers had to queue to get cash from their accounts and go to other banks to pay bills- see my post 2 weeks ago about how some countries are limiting the amount that can be paid in cash; these limits would be too low to pay a mortgage in Ireland for most.
When I worked in a paper firm, I was involved in the decision to set up a simple business recovery plan. At the time, I was IT manager at a plant with about €30m turnover and 150 staff. The whole place was more or less run by a single system which managed sales orders, production planning and invoicing. We had a server onsite which done all this. This was not always so, so once I realised we were so dependent on a single piece of hardware/software I initiated a discussion with the plant management board to get a recovery plan in place. To keep it brief the cost of having a server available to us at any location within 4 hours was €7000 per annum. As part of the contract we could also do a free trial run once a year to test how long it would take to recover our systems. I always remember the production manager saying this was a cheap deal as if we had no systems we would basically loose wall customers within a week. And all we did was made cardboard boxes. Surely a bank should have a much better system in place. The cost does not really matter in the decision, it’s much more about the list revenue and lost customers.
The photo by the way comes from a friends Facebook page .
A story of change – in a Dire Straits song!
Telegraph Road (Photo credit: Wikipedia)
As part of my research work, I like to study how organisations and their management accounting practices change over time. And, I particularly like to frame my research as a story of change. I like the stories of how things change (or don’t) as these stories quite often get to the bottom of things quickly, or summarise everything that happened in a brief and concise way. Of course, when I am in research mode, there are often many thoughts flying around in my head. Recently, I was doing some work on how technology has changed the role of management accountants. I put on an old CD I had from Dire Straits (Love over Gold, 1982) and as I was listening to the first track, I realised, hang on this is a story of change. The song is Telegraph Road, here are the lyrics:
Telegraph Road lyrics
Songwriters: Knopfler, M;
Telegraph Road is nowadays US Route 24 in Michigan. The song tells the story of how what was once a dirt track, became a telegraph line route, and ultimately a highway with all the associated development. When I actually realised the story this song tells, I started to think, okay it was only written 30 years ago, but look how much has changed in even that short time. I thing it’s time Mark Knopfler wrote a new version! By the way, if you don’t know the song, it’s about 15 mins long and has some really cool guitar pieces.
Another cost-volume-profit example – supersize portions
In June this year, I was watching a programme called “The men who made us eat more” on BBC. It told the story of how super-size portions and combo-meals came about in fast-food chains like McDonalds, Burger King and other similar ones. One of the participants mentioned how the profit margin on the extra portion (or the additional products in a combo-meal) is huge. He explained why, and the explanation is again an application of understanding costs and volumes (or CVP).
Let’s take the example of a portion of french fries. If we think about the cost of a regular size portion first. The variable cost would be mainly the ingredients, i.e. potato, packaging cost and maybe energy costs. There would be quite a few fixed costs – all the costs associated with the running of the restaurant, including staff costs (they need to be paid even if there are no food orders). Now if we make the portion size larger, the additional cost will be very small – some extra ingredients, a slightly bigger package and that’s about it. But, the price increase is proportionately much higher than the cost increase usually. Thus, by encouraging a customer to super-size or buy a combo-deal, profits can rise at a much faster rate than the corresponding increase in costs.
A cost-volume-profit-example – a child care facility
The BRiC charging (Photo credit: fe2cruz)
In this and the next post, I will give you two simple examples of cost-volume-profit (CVP) analysis in action. CVP analysis, or sometimes it’s called break-even analysis, is a useful decision tool for any business to understand effects of cost changes or sales volume changes on underlying profit.
The first example relates to small Montessori school run by someone I know. In Ireland, preschool children get some free childcare and the owner of the facility gets paid €250 per child per month. The Montessori in question is insured to have 11 children with one staff member, but beyond this a second employee is needed. The full capacity of the school is 15 children and the extra employee costs €620 per month. This is a fixed cost. If you do some quick calculations, you can see that it takes 3 children (€ 750) to cover the employee cost. Thus, the owner needs to have 11 or less children with one employee, or 14 or more with two employees. So you can see how the fixed cost increase affects the volume needed to keep profit levels stable. There may of course be some additional variable costs with more children, but I am ignoring these to keep the example simple.
An innovative approach to pricing – life cover at a fixed price
(Photo credit: aWee)
Any business needs to understand its costs to be able to set a price – at least that’s one of the key things I would tell my students when I teach management accounting. Of course, another key point to mention is that sometimes the price will be dictated by the market the business is in.
If you read any of my posts, you know I like to give examples of topics I am interested in or teach. The Irish economy is not doing the best still, so I think it would be fair to say that consumers are price conscious and looking for a good deal. This means the market is leading the price to an extent. So what can you do as a business in this case. One thing is to try to reduce costs so that you make a profit at the market price. Another option is to change the product/service you offer – and I cam across a great example of this recently.
A new website emerged called www.10eurolifecover.ie. Normally, if you want to buy life assurance, you go to a broker/website and give the amount of cover you want – say €100,000. Based on things like your age and health, you get a price for the amount of life assurance cover requested. What this website does is fixes the price at €10 per month, and then tells you how much cover you can get for that amount. The idea seems like a great way to price in a market where consumers are probably more concerned with what they can afford than with the amount of cover they get.
Expense tracking – there’s an app for that
To keep track of the many things I do, I have to take notes. For example, all the posts on this blog are noted somewhere first and then I write about them when I get time. I use a product called Evernote, which is just brilliant. I can do anything I want in this app in terms of taking notes. And, like all apps there tends to be adverts for related products from time to time. One I found interesting (but don’t use) is Expensify. This app seems to be very useful for track this annoying expenses. You can see more here on the app’s features. One thing it might be really useful for is those annoying fuel receipts small businesses have. For example, a sole trader might have 2 or 3 receipts for diesel each week, which are probably paid for in cash. These receipts frequently get lost and are a pain to store too. So it might be useful to use a product like Expensify to take a snap shot of these and store them. You can also use the app to track mileage, so this might be useful for small companies whose employees may get paid mileage.
Related articles
- Expensify Trips: Track your itinerary from your expense report (expensify.com)
- Apps I’m digging lately (intomobile.com)
Strategic scorecard – a useful tool from CIMA
A short post today – holiday season.
You may know about tools like the Balanced Scorecard which are used by many organisations to monitor performance from financial and non-financial aspects. Here is another type of scorecard, developed by CIMA, which may be quite useful to managers and boards of directors when trying to formulate a strategy. The tool prompts managers to consider the business model of the organisation and reflect in the external environment, risks/opportunities, implementation and options available. Have a read of a document prepared by CIMA/CGMA by clicking this link .CGMA Strategic scorecard_T1 FINAL . This document explains the scorecard quite well.
Related articles
- The Vision and Strategy of Balanced Scorecard (unicomseminarsltd.wordpress.com)
- 5 Valuable CGMA Resources for Business People (aicpa.org)
Is accounting sexy?
CIMA, Financial Management, Oct 2004.
A few months ago, I was at a workshop which consisted of publishers/editors and accounting academics. I was a bit late and when I arrived one of the editors asked me to introduce myself as follows ” tell us a little bit about yourself, where you are from and what makes accounting sexy?” First two questions, no problem. The last one, well thankfully I am a CIMA member and remember the series of adverts in 2004 from their Financial Management magazine. The ads (see the picture to the left) were for accounting software and featured a dominatrix and the caption “is your procurement strict enough”. I loved that ad! In one foul swoop it got rid of the dull and boring stereotype of accountants. Of course, some CIMA members did not like it at all and wrote to the editors. This complaining perpetuated the dull image of accountant and inspired a further article entitled “Miss Backlash” – see here.
So now for a completely unscientific experiment – I show just a few examples by the way
1. If I Google “is accounting sexy”, I get a good few interesting results:
A blog, accountantsaresexy.com – a bit dated
A blog post with the title The Surprisingly Sexy Chart of Accounts
A you tube video, JustThrive Makes Accounting Sexy – YouTube
2. If I google “sexy accounting”, I get some similar results to #1
I also get some pretty dodgy stuff.
3. If I google “sexy accountant”
The results are getting to beyond a PG rating! But a quick glance at the image search result throws up this ! You can decide for yourself on the sexiness (or otherwise).
So is accounting sexy? I don’t know to be honest, but I hope this short reflection puts a smile on your face. Now back to those ledgers……
(If you want to know more on the images of accountants, check out the work of Baldvinsdottir et al)
Technology and new business-models – taxi despatching
I always like to read about new ways of doing business, or new technology can change existing businesses. You may have seen how various new technologies have helped the taxi-sector. For example, in London you can send a text from a smart phone requesting a taxi and your position can be pin-pointed by the GPS within the phone. Now let’s take this a step further and add an app to the smart phone and then the way the whole taxi industry operates could change? How you might ask. This post from the Babbage blog on Economist.com explains why. In several European countries, taxi users can now use apps to request a taxi. The apps ping the nearest cab, and once a customer accepts a particular offer they can track the taxi progress. All the taxi needs is the same app effectively. This changes the way business is done in the sector as the taxi dispatcher is effectively cut out of the picture. I don’t know about other cities, but I can tell you that a taxi dispatcher would charge its drivers in the order of €200 per week or more in Dublin. For this, the driver (who suffers all risks of owning and paying for the cab) gets fares directed to them usually through some system installed in their cab. Now, if I were a self-employed taxi-driver you could cut out that cost by using an app, I’d be giving it some serious consideration. Of course, as the post notes, taxi dispatchers are not seating idle and a race is on between taxi dispatchers and app developers!
Can decisions be driven by cost alone?
As an accountant, it is too easy to condition yourself to only think about costs when making decisions. Of course many business decisions must consider things other than cost, such as market share, customer satisfaction, quality and so on. I am often looking for examples of how decisions are made in organisations, which seem to be on the basis of cost alone and ignore important qualitative factors.
In May of this year, what seems like a great example of a tough decision which was influenced by cost came to light. The Irish government made a decision on at least re-opening talks with drug companies on whether or not to make a skin cancer drug called Ipilimumab – better known as “Ipi” – available through the public health system. The re-opening followed public pressure. It is what happened before this which provides the example of the tough decision. In September of 2011, it was recommended to the government that the drug should not be made available as it was not cost-effective. The drug costs approximately €80,000-90,000 per patient and according to reports at the time, might prolong life by 3-4 months. Now, I would not like to be the person making that decision I must say. But, from my external view, it would seem the decision was based on cost alone. What about the benefits? Three or four months may be invaluable to a family. And to put my accountants hat on, what would the cost be of not treating the patient. I’d have a wild guess that a three or four-month hospital stay costs way more than €90,000, so there are bound to be some cost savings if a patient is healthier. As I said, I would hate to be making these kinds of decisions, but it does show how cost information can be used in complex decisions where many other factors are at play.
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