Analysis of an Economic Activity (140517)

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www.truevaluemetrics.org

MULTI DIMENSION IMPACT ACCOUNTING (MDIA)

MDIA Analysis ofan Economic Activity

@truevaluemetric

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My 'ah-ha' moment was when I became clear about the difference between these three ideas:

Cost

C:\TVMwebsite\WebsiteTrueValueMetricsOrg\TVM-papers\MDIA-Diagrams\MDIA-Pres-B-Analysis-of-an-Economic-Activity-140517.odp

Analysis of an Economic Activity

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Cost, Price



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Cost, Price, and Value.



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The way cost and price are used incorrectly in the media is appalling, and as a result much of the discussion of important issues is not at all useful.



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For example: Much of the discussion of the 'cost' of healthcare is really to do with the price of healthcare



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For example: Much of the discussion of the 'cost' of healthcare is really to do with the price of healthcare.

It was back in the 1980s that I first expressed the ideathat the biggest 'cost' in modern business and for society in general and the economy is 'profit'!



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These are the money accounting elements:● Cost …........ cost of sales● Price …........ revenue ● Difference … profit

These are the value elements of MDIA:● Value consumed;● Value produced / realized● Valuadd

Value is, of course, a multi-dimensional idea!



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These are the money accounting elements:● Cost …........ cost of sales● Price …........ revenue ● Difference … profit

These are the value elements of MDIA:● Value consumed;● Value produced / realized● Valuadd

Value is, of course, a multi-dimensional idea!

Work by PwC in the UK is going in the same direction, but broadly from an organization-centric perspective.



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Payroll … a cost for businessEvery business person understands that in the money profit accounts, the cost of payroll is an expense that reduces the profits.



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Payroll … a cost for businessEvery business person understands that in the money profit accounts, the cost of payroll is an expense that reduces the profits.

When productivity improvement makes it possible to reduce the payroll, the the profits go up.



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Payroll … Impact for people and societyBut the benefits derived from payroll are in society as wellas in the business.



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Payroll … Impact for people and society

But the benefits derived from payroll are in society as well as in the business.The impact on the individual when he/she loses his/her job and no longer is earning $40,000 a year is bigger than the impacton the business profit.

The individual and the family are not getting an amountof $40,000 from the job remuneration.

The community does not have this money flowing through the local businesses.

The profit of the organization has increased by some amount… $20,000 (that is $40,000 less (say) $20,000 (the annualized cost of the productivity improvement investment

The negative impact on society is $200,000 made up as follows:* The impact on the individual … $40,000;* The impact on the family … $40,000 ; and* The local multiplier impact on the community (probably between 2 and 4 (say 3) … $120,000



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Purchased materialsFor the organization, purchased materials have a money cost, and this cost reduces profit by the money cost of the purchases. Efficient processes and product design reduces this cost and increases profit.



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Purchased materialsFor the organization, purchased materials have a money cost, and this cost reduces profit by the money cost of the purchases. Efficient processes and product design reduces this cost and increases profit.

But purchased materials also carry within them the whole history of the supply chain which must be taken into account. This may bedone using a trucost standard values. These incorporate the value (supply) chain profile for each purchased material.

For MDIA there is the comprehensive 'value consumption' metrics rather than simply 'money cost'.



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Products soldFor the organization, in the money accounting, the products sold have a price, which translates into revenue. There is also money based cost of sales and a computed gross margin and profit.

These products sold also carry within them the whole history ofthe supply chain to this point.

From this it is possible to determine the impact on people andplanet associated with each product.

There is a positive social impact embedded in the product as a result of jobs and pay. This may be offsets because of dangerous workplace conditions and other issues.

There is a negative impact in the supply chain because of impact on the environment

* Resource depletion … * Environmental degradation … associated with extraction* Environmental degradation … associated with transportation* Environmental degradation … associated with refining* Environmental degradation … associated with burning fuels



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Products boughtFor a consumer, the price paid is the main metric.

The consumer is willing to pay the price because they think that the 'value' of the product is higher than the price.



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Usually a consumer does not give much thought to the 'trucost' of the product. Trucost is a cost that goes beyondjust money transactions, but incorporate externalitiesthat have impact on people and planet.

This is not part of the 'conversation”!



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The perceived 'value' of the product would be different if the'trucost' of the product was easily and generally accessible as easily as everything else associated with selling the product.



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The perceived 'value' of the product would be different if the'trucost' of the product was easily and generally accessible as easily as everything else associated with selling the product.

The key to this is 'easy'. Price is easy. Advertising makes perceived value 'easy'. MDIA's standard values has to makethe 'trucost' value easy!



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Energy usedEnergy is a critical input for the modern economy.

In the United States per capita GDP is around $50,000 and per capita carbon emissions associated with energy use is around 20 tons CO2e.

In Europe the same GDP of around $50,000 is associated with carbon emissions of around 8 tons CO2e.



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This shows: 1) energy is a very important input2) relative to Europe, the United States is wasteful and/or terribly inefficient.

This shows also the importance of energy policy. The UShas had a low price low tax policy for energy. Europe hashad a high price high tax energy regime.



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This shows: 1) energy is a very important input2) relative to Europe, the United States is wasteful and/or terribly inefficient.

This shows also the importance of energy policy. The UShas had a low price low tax policy for energy. Europe hashad a high price high tax energy regime.

In the end, the United States is at a global disadvantage.



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Energy usedWhile energy is a critical input for the modern economy, fossil fuels have a significant negative impact on theenvironment. These include:




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The negative impact on society of renewable energy sources is negligible compared to fossil fuels.

The world needs to embrace a paradigm change forenergy so that renewable energy becomes the norm rather than the exception.



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The negative impact on society of renewable energy sources is negligible compared to fossil fuels.

The world needs to embrace a paradigm change forenergy so that renewable energy becomes the norm rather than the exception.

Enough solar energy hits the planet every hour to powerthe present energy intensive economy for a year!



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May 2014

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www.truevaluemetrics.org@truevaluemetric


Analysis of an Economic Activity (140517)

Economy & Finance

Transcript of Analysis of an Economic Activity (140517)