In Figure 17 (page 148) is shown a classified analy sis of the cost of production, including selling costs, as it occurs in an average manufacturing plant. Only typical items are shown, since the detail in which it is necessary or desirable to take account of expense depends entirely upon the industry and the size of the enterprise; one very large factory in this country has no less than 130 expense accounts. As the size of an enterprise increases, all items of expense assume greater importance and segregation be comes more and more imperative. Each factory expense account should be designated by some num ber or symbol similar to those used for production ac counts, as explained in Chapter IV, and no charge should be made against any account unless it is authorized a written order from the proper of ficial. The classification given in Figure 17 is in gen eral accord with the practice of skilled accountants and cost keepers. To distribute logically the great majority of these accounts among manufacturing ex pense, general office expense and selling expense, is not, as a rule, difficult in any particular case ; but there are a few items on which all cost keepers and accountants are not agreed, concerning which more detailed discussion may be helpful. These are rent, interest, taxes, insurance, defective material and spoiled work, lost time, engineering and development, repairs and improvements, patterns, drawings and small tools, and depreciation.
8. Theoretical consideration of interest and rent.— To the accountant rent and interest are identical, since rent is money paid to a capitalist for the use of buildings or equipment, while interest is money paid for the use of capital. There is a considerable difference of opinion, however, among accountants and cost-finding experts as to the way in which these items should be cared for in the accounts. Some authorities would not include either of them in the details of factory costs but would add them to the total factory costs, carrying the transaction in the general ledger. Others would include all such items in the factory costs as a true part of the cost of pro duction. Some would include rent but not interest as a part of factory costs, but this view is not reason able, considering the similarity of the two items.
The argument advanced by those Who would ex clude rent and interest from factory cost is that these items being attributes of capital are in the nature of a division of profits, and should therefore be accounted for by deducting them from profits. The argument is also advanced that the manner in which the capital is obtained can in no way affect the actual cost of manufacture. It is urged that the manufacturer may provide all of the capital, or that he may borrow a part of it from others, dividing a part of the profits of the enterprise with these other capitalists, in the form of rent or interest, but that no part of these items is a logical part of the costs.
Now, it is true that to the man who lends facilities or money, rent and interest are in the nature of profit, but to the manufacturer who has borrowed these facilities or money, rent and interest are simply debts that must be, paid before he can obtain a profit. So far as simply securing this profit is concerned, it makes no real difference to him whether these items are dis tributed in the costs or are added to the costs before fixing the selling price. If the clerical work is ac curately done the result will be exactly the same in either case.
9. Practical consideration of interest and rent.— It should be remembered, however, that the purpose of cost finding is not to decide theoretical points in economics, but to allocate all expenditures so that the cost of each article shall be segregated as far as pos sible, and so that it will be possible to tell which lines of production are paying and which are not. If, now, the manufacturer is producing his goods with borrowed money, on machinery of varying value, housed in buildings of varying cost, it is obvious that, unless rent and interest are distributed against the product in proportion to the use made of the facilities of the plant, he can form no definite idea as to the comparative profit-earning values of his several lines of product. There is just the same reason, in fact,
for distinguishing, in these matters, between different departments or machines of the same factory, as there is in distinguishing between different factories owned by the same man, tho he may have borrowed from the same source all the money with which to erect his dif ferent factories. In the case of a simple continuous industry it is not necessary, of course, to distinguish so finely in these matters, since each unit of product bears the same amount of each kind of expense.
It will be noted, however, that when money is bor rowed for commercial purposes, and not for invest ment, or use in manufacturing facilities, the status of interest paid upon such indebtedness is different. Thus, if the commercial department borrows money so as to be able to extend credit to customers whose accounts are due, or if money is borrowed at a low rate to discount purchase invoices at a higher rate, such interest and discounts have no relation to the cost of production, but belong to the general, or sales, accounts and should be considered accordingly.
10. Interest on owned capital.—The case where the manufacturer owns his plant would seem, at first sight, to be somewhat different; for here, appar ently, he does not need to include interest charges on his investment, in computing either his factory cost or his total cost. A brief reflection, however, will show that the case referred to is only seem ingly different. If the owner of an enterprise cannot make a profit over and above interest charges on his investment, it would be easier for him to lend his money to some other person, who would pay him such interest and assume all the risks and responsi bilities of the business. The owner could then work for some one else and earn a wage. These facts would seem to indicate that the wages of an operating owner should also be considered a part of the cost of production and should not come out of profits. It is clear, of course, that the manufacturer who owns his plant has a great advantage over one who rents his plant, since the latter must make a minimum profit to meet his interest charges, while the former is not necessarily in any danger, even tho his investment does not pay him the market rates of interest. From the standpoint of practical cost finding it would seem clear that a reasonable allowance for interest on the investment should be distributed in the factory costs, if for no other purpose than to determine the com parative profit-earning capacity of the several lines of output.
This general principle was approved by a com mittee on uniform cost accounting of the National Machine Tool Builders' Association, which recom mended that interest at the rate of at least five per cent on the investment be distributed in the burden, where the manufacturer owns his own plant. This committee recommended also that where the manu facturer rented his facilities, or borrowed his capital, the rent and interest should be included in the factory costs, in accordance with the arguments presented in Section 9 of this chapter.
These views, as before noted, are not held by all cost experts and accountants. Tho the practice of including interest and rent in costs is now common, it is argued that the inclusion of these items in the fac tory costs may raise the total costs above the market price, and that it is better to defer such charges till the end of the year, or such other period when the general books are closed, and then to make whatever allowance is desirable. In reply to this argument it may be said that costs are costs, and that it is far better 'and safer to determine them as accurately as possible, and then, if they cannot meet the market prices, proceed to re duce them by economies, or better methods, till the desired margin is secured. A careful comparison of the earnings of each tool with the interest on the in vestment involved, would often lead to the discarding of the tool, a change in the product, or a higher charge for the services of the tool.'