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)
Accounting for Alcohol – part 14 “The Monastery of Silos and its wine cellar in Ribera del Duero through its accounting books (14th, 18th and 19th centuries)”
This is a brief summary of chapter 14 in our book, written by Lorenzo Maté, Begoña Prieto and Alicia Santidrián. This chapter details the activities at the Monastery of Silos relating to wine and its production, control and consumption through its accounting books. The monastery is a Benedictine monastery of Silos and was founded in the 11th century. The Rule of St Benedict has general rules on the moderate consumption of wine, and the account books at the monastery give some detail on what was consumed and what it cost.
The chapter reveals records from 1338. These accounts have information on the harvests of wheat and wine production. In the account, the incoming (recebta) and outgoing (despensa) of goods in kind (bread, wine) were noted first; and then income and expenditure in monies. A total of 1,550 16 lire pitchers were received during the year and over twice that was consumed (the being locally produced). The total cost is noted at 4,140 maravedis. Sample accounts from later years are also given and these tend to show more detail. The authors also provide a detailed chart of all the books of account of the monastery and outline how these books were used for various forms of accountability. For example, the Father General of the Valladolid congregation received accounts every six months, which were audited by monks having “intelligence in accounts”. The Father General also made two visits to the monastery during their four-year term of office. Such visits were a control mechanism, and the chapter provides some details on comments made during a visit in 1826.
According to a report on Fortune, the US Army accounts certainly do not eek of military efficiency. The report notes “the Army made $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 trillion for the year”. That’s trillion, with 12 zeros, yes!
The military is of course the biggest spender of government funds in the US. The budget for 2017 is nearly $600 billion (that’s 9 zeros), but the errors noted above seem to have been accumulating over time. The Fortune article notes:
- The Army lost or didn’t keep required data, and much of the data it had was inaccurate
- there has been no way to know how the Defense Department – far and away the biggest chunk of Congress’ annual budget – spends the public’s money
- DoD and Army managers could not rely on the data in their accounting systems when making management and resource decisions
- the Army lacked receipts and invoices to support those numbers or simply made them up.
If this were any normal business, I would have to say it seems to be lacking in minimal and even simple accounting and management controls. But there again, one can imagine how difficult it may be to “control” spending in war zones, or even trace assets or expenses. I can’t imagine an auditor for example going to Iraq or Syria to verify a tank or similar asset has actually been lost