I think you misunderstood the situation. The company had a business office in Manhattan and a printing office in Brooklyn. Then they closed the Brooklyn office and moved the printing into the existing Manhattan office.
Obviously their overall expenses were reduced by this move. They were now only renting one office instead of two.
The company’s overall rental expenses decreased, but that particular imprint was now using much more expensive Manhattan space instead of relatively cheaper Brooklyn space. It makes sense to allocate some of the Manhattan space to that imprint since it was actually using the space.
Accountants care. Making the goal ending department level spending on books was an absolutely terrible goal. The goal should be to buy the optimal number of books.
The problem you haven’t addressed is *how *do you allocate the cost of the books? Hitachi decided to allocate the cost based on how much each department actually used the books, which was the proper way to handle it.
There is often a disconnect between accounting for things in a way which is
Logically consistent and GAAP compliant when viewed from above given the status quo behavior
versus
Likely to cause managerially desired behavior in the future.
Going back to Hitachi’s firm’s library example …
The idea that management wants to reduce duplicative departmental spending on unneeded books makes good sense business sense. The challenge is to define the accounting process such that giving both the central library *and * all the using departments only simple high level instructions, like “maximize departmental profitability by our internal measures” will automatically produce the “right” level of spending on books so everybody has enough for legit use and nobody has an excess to their needs.
By doing a ham-handed job, management set up an incentive structure which stymied their goals. And the accountants duly kept score of the ensuing fiasco. Which amounted to them cheerleading from the sidelines to “waste MORE money!!! waste MORE money!!! Yaay Team Yaay!!!”. And departmental managers (including the library manager) responded with a hearty “We’re following Coach’s orders *and *making our cheerleaders happy. We’re Number One!! We’re Number One!!!”
When in fact the company was really in deep number 2 at that point.
THAT is the crux of the problem.
The solution is for managers to ensure the marching orders and the accounting system BOTH drive towards the desired behavior from your subordinates.
And it is, IMO, Accounting’s role to recognize the standard traps where incentives are skewed, and to point out clearly to management the pitfalls whenever management starts to set up a skewed-incentive system. If Accounting can’t or won’t do that, it’s not really Accounting; it’s just Bookkeeping with delusions of grandeur.
Did they wind up buying the optimal number of books? Did their engineers get access to the books they needed to do their jobs efficiently?
No and No. Ergo, whatever they did was not the “proper” anything, because it didn’t help the business run better.
I don’t care how it’s allocated, as Little Nemo suggested, do it the same way you allocate janitorial services. Or, should each employee keep track of the number of times they use the toilet, so their department gets an appropriate charge for water and sewer usage?
Accounting exists for two reasons, reporting and incentives. You need to properly report things to the government, executives, and shareholders, and you need to provide proper incentives to the workforce and management.
Charging an engineer to use a book is bad because it creates an incentive that says “don’t use books”. If the goal is buying the optimal number of books, why provide a direct incentive to not use books at all? Using books makes engineers efficient, you want them to use books, what you don’t want is 10 copies of the same book.
There’s no evidence whatsoever that the Hitachi didn’t end up with a great outcome. The best we know from Hari Seldon is that is worked perfectly fine, but we could never really know without some actual facts.
And those are not the two reasons for accounting. Making a department pay for the services it uses does not result in a department using none at all. That’s a completely absurd conclusion. It forces it to evaluate critically what it actually needs instead of making a decision as if there were no costs when in reality the opposite is true.
The decision should be whether or not to buy the book, not whether or not to read the book. Buying the book is what costs money. Charging per read is putting the decision point at the wrong place.
Bingo. And in this example, it meant that people in the company wouldn’t use a resource that, at that point in time, was a free resource to the company, because the internal pricing structure made using this free resource* too expensive for the individual departments,* so they went out and spent new money to duplicate the existing free resource because it wasn’t free to them.
Sorry, Fuzzy, but this is just crazy.
Yeah, I didn’t really pick up on the point that they were charging just to access the books. I withdraw my vigorous defense of that one.
Easy to overlook. No biggie.
This can be hard to understand, so it might be helpful to express it another way.
If revenues are the same, and no efficiency is lost after the consolidation, the company is absolutely better off paying one rent instead of two rents. But that doesn’t mean that the consolidation was the best decision possible. New information came to light.
So apparently there was enough room to consolidate the imprint into the Manhattan headquarters… but then what the hell were they doing with that space before? Why were they renting so much expensive space? Instead of consolidating the offices, they should’ve been renting significantly less space in the first place, at significantly less cost. They were using more than they needed, and that waste was being hidden by how successful the main business was.
If they had enough space for the imprint, then they should never have been renting such a large area. At Manhattan rates, the savings they should have made from using smaller quarters would have more than made up for the bit of extra non-Manhattan rent from using two locations. One location can be cheaper than two stupidly inefficient locations, but two svelte operations is better yet. What happened with the “unprofitable” imprint is that the accounting became much more precise with the new information they had available. When the imprint was assigned its fair share of the rent cost, the reality of the old inefficient situation emerged. The new information was that they had way more room than they originally needed. The business learned they had been blowing cash on expensive space they didn’t actually need. (Or maybe they already knew that, but the accounting didn’t adequately reflect that reality before the consolidation.)
That waste was always present, and the consolidation – although it made the company better off than before – also revealed that there were potentially even better options available.