§ 3. Examples of joint costs. A woman at the death of her husband is left with an excellent, well-furnished house and a scanty income. For sentimental or family reasons, what ever they be, she is determined to keep the house in any case, tho it is larger than she needs. To lighten the burden of taxes, repairs, and family expenses, she wishes to let some rooms if she can at anything above cost. Now what is cost in that case? To her it would consist of, first, the price of the extra service that must be hired, of the extra washing, light, and heat, of the extra wear and tear on furniture, linen, etc., as compared with leaving the rooms empty, and sec ondly, enough additional to make it "worth while" for her self—either in merely psychic terms, trouble, or in this plus the worth of her time in doing something else that might pay better. She would not need to count a fair normal return on the original cost, or the present cost, of new rooms and fur niture, for she has them and intends to keep them in any case. It is only the extra cost attributable to taking roomers that need be considered, and the minimum addition to her income need be no more than the meagerest pay at which she values her own services. This minimum price of bare cost, yielding nothing to the main investment, may be also the maximum she can get if there is little demand for rooms in the neighborhood. If, however, there is a brisk or growing demand for rooms of that kind, the price she can get may be higher in any degree, up to the point where more houses will be built, and rooms let at prices that include a full esti mate of the cost of building, of new furniture, etc. The price at that point may be called a normal supply price, or normal cost price; but before there has been tine to build new houses the price of room rent might go much above, as it had before been much below, this normal cost.
Another illustration of the same problem in a different set of conditions may be helpful. An autobus service was begun between a small city and a village a few miles away. A few months later the proprietor declared it did not pay the cost of running it, which he estimated to be $7.50 a day, including repairs, interest on the cost of the car, depreciation, etc. This was $1.87 for each of the four round trips, whereas on some trips the receipts were nothing at all. He admitted, however, that it would be a mistake to count the cost and receipts of each trip separately, and that the success of the whole enter prise depended on maintaining a regular, dependable service, even tho sometimes the car traveled empty. The light trips were helping to secure the traffic that paid on the heavy trips, on some of which, every week, receipts were as much as $5. Taking all the receipts of the service together, however, there was still a deficit of a few dollars a week on the average, which the owner had to make up out of the earnings of his garage. After the auto service was started it helped to advertise the garage, and many bicyclists and autoists along that line who had never come to the garage found it a very convenient place to send for repairing and for supplies. The increased profits of the garage about offset the loss on the bus service. Another new kind of business was developed, as the autobus in summer was often hired for parties to the shore at $15 to $20 a day, and at such times a smaller car could be sent on the regular trip. And there were some other incidental advantages that at length converted a tale of loss into a story of business suc cess.
§ 4. Main classes of costs. These two cases present in comparatively simple form the problem which every larger business involves in very much more difficult form. The total
costs of any business are roughly distinguishable as fixed costs (or fixed charges) and variable costs. Fixed costs are those which remain unchanged on the business as a whole, or on some department, no matter what the size of the output. There are some costs, as the rent of office, factory and store, salary of manager and clerks, etc., which would go on if nothing were sold, unless the business were closed. Variable costs are those which are attributable solely and exactly to particular units of product, rising and falling exactly in proportion to the output.t In truth, costs share these characteristics in a great many degrees, are more or less fixed or variable, and are never (or with very meager exceptions) either absolutely fixed or absolutely variable.
The variable costs are also called direct because put upon the particular unit of goods, and the fixed costs are correspond ingly called indirect, or overhead charges. It is a very diffi cult matter, and yet one of very great importance, to arrive at principles and practical working rules by which in each business the various elements of cost may be allocated to dif ferent departments, classes of goods, and particular units of I "Variable" does not mean that the unit price of the factor neces sarily changes, e.g., that the wage paid per piece for making the articles varies; nor "fixed" that the unit price of these factors is unchanging. The meaning is that in the one case more are needed, and in the other the amount needed remains unchanged, regardless of the size of the out put.
output. For this end a special art of cost accounting has been developed, and a special class of expert cost accountants. The principal elements of costs distinguished in cost accounting are represented in Figure 46.
Flo. 48. Elements of cost. This figure may be taken to represent either the total costa of a year's business or the costs of a particular unit of goods. In the first sense the whole rectangle represents the total receipts from sales. Of these, the part marked 1 repre sents deductions from sales which are pseudo-receipts (mere bookkeeping items) and might be first deducted, leaving the rest of the column to be distributed among costs and profits. (See items below.) Some of these items are differently classified by cost accountants. "Cash discount," allowed to customers for prompt payment of bills is, perhaps for convenience rather than logic, in cluded by some in fixed charges. "Doubtful accounts" is, together with "depreciation on plant" (see fixed charges), included in an other general class of "reserves" set aside to cover these items. "Outward freights," those paid on goods shipped to customers as a part of the agreement at sale, might per haps more logically be counted as a selling cost At the bottom are shown the most variable elements of costs in manufacturing, which are materials (8) and direct labor (7), the kind employed directly on the prod uct, and which in large part can be em ployed and discharged as need requires. Then come the manufacturing overhead (8), which includes general factory expenses, as factory office supplies, heat, light, power, repairs, and renewals; labor, indirect, such as foremen, porters, cleaners, messengers, watchmen, teamsters; salaries of superin tendent or master mechanic, and clerical help on shop accounts (as distinct from the work of the general administration or of the selling department) ; and depreciation of tools and machinery as distinct from the general plant.