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Tag Archive | Relevant costs

Costs of the Irish president

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.

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Costs of discontinuing – the Irish Water example

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Image from wikipedia

Any student of management accounting  (or management accountant) will be able to tell you about the costs/revenues which are relevant to decision-making.  It is not very often a clear cut example appears in the media however.

One really good example is the cost of discontinuing Irish Water – a public water utility formed three years ago in Ireland. The utility has been plagued with political interference and has become the topic of much debate in political circles.

In late February/early March of this year, the utility became a bargaining tool in the formation of a new government. Media reports started to note how much it would cost to discontinue the utility. One reasonably good media report puts the cost at up to €7 billion – see the report here The report draws on internal Irish Water figures, which include the following costs and revenues:

  • paying off staff
  • sunk costs of €670 million – cost such as business systems and meter installation
  • over €3 billion in benefits forgone – lost revenues and future cost savings over the term of the current 5 year strategy of Irish Water.

Including the sunk costs is incorrect, as sunk costs are not relevant to a decision such as this – well maybe they are for political circles! Including the future revenues and cost savings is correct. These are future savings/incomes which will be lost if the utility is discontinued. It seems wise to continue with the utility, as otherwise a lot of money will go down the drain – excuse the pun.

 

Relevant costs and revenues – opening a barber shop earlier?

One Saturday morning recently I went along to one of the two local barber shops to get a haircut. I usually like to get out early so I was in my local town about 9:30. For my last haircut I tried a the newer of the barbers, who to build up business had a loyalty scheme where you get your fifth haircut free. But it did not open until 10:00, so I went to the other barber ( who opens at 9:00 ) and I made up my mind I’ll stick with this one.

Now let’s talk accounting. The newest barber is in a high rent shopping mall. They also want to build up a customer base. The older one probably pays less rent or maybe none. Now let’s assume the new barber is thinking if opening at 9:00 to attract early birds like me. What costs and revenues are relevant to this decision in – in other words, what are the marginal costs and revenues. The revenue is easy – simply all extra revenue generated e.g. 5 extra cuts at £/€10 per cut = £/€50 And costs? The main cost would be labour of any employees, say £/€20. Other minimal costs would be utilities (power, water) and any hair products like gels or creams, say £/€5. So in this simple example a profit of £/€25 is made. Hang on, what about other costs like rent? These are not relevant as these will be incurred even if the shop is closed. This kind of decision is made by businesses quite regularly and while my barber example is simplifying things, such decisions can make a huge difference to profits. Why? Simply because all additional revenue contributes to profits and once fixed costs like rent are covered, each extra sale (haircut in my example) means more profit. So make these types of decision as best you can in your business. Obviously, if your figures are showing a loss, the course of action might be the wrong one – maybe the new barber in my example thinks no customers will come before 10:00, so he’d loss all labour costs!

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