It is not safe to draw conclusions without a further investigation of tbe facts, for it may happen that a large proportion of the inventory is in raw materials which the concern has accumulated at advantageous prices for use in later periods. In other instances, business organizations accumulate stocks of raw ma terials in excess of their own requirements at ad vantageous prices, which enable them to sell some of the raw material \ to other less fortunate manufac turers.
The purchasing agent of one of the large public service corporations at the beginning of the Euro pean war purchased immense quantities of raw cop per at prices varying from 14 to 18 cents a pound. A large part of the copper was subsequently sold to other manufacturers who had not anticipated their requirements, at prices substantially over cost. How ever, the comparison between the total sales and the final inventory ought to be made. In the light of other information one may judge whether or not the management is efficiently employing its liquid capital.
16. Distinction between cost and all capital or value consumed in business operations is technically expense, the material and labor that enter into the manufacture of a product are usually known not as expenses, but as costs. General out lays in a factory, other than material and labor, while commonly known as factory or overhead expenses, are also a part of costs. The selling and adminis trative expenses form the technical expenses of a business.
This distinction between cost and expense is not very clearly defined, and frequently the two terms are used synonymously. The distinction is one of con venience rather than of necessity. The details of cost accounts have been covered in the Text on "Cost Finding." We are interested in them only in so far as they affect the preparation and interpretation of financial statements.
17. Distinction between expenditures and disburse ments.—Business men in their dealings quite nat urally come to regard every transaction from a cash standpoint. Income from this point of view is held to mean the receipt of so much cash, and expense is not considered an expense until the money is actually paid over. True enough, all revenue, if collected, will ultimately be realized in the form of cash and all ex penses will ultimately be paid in cash. But there is
a fallacy in considering that at any particular instant of time, a business is entirely on a cash basis. Ma terial may be received and consumed long before it is paid for, and it is often paid for long before it is received. On the other hand, sales may be made which will not bring in any cash for some time. Therefore expenses and disbursements do not neces sarily synchronize.
'18. Elements of first element in the cost of the goods sold or in the operating expenses is the cost of the material consumed. This is found by adding to the inventory at the beginning of the pe riod, the purchases during the period, and deducting from the aggregate, the amount of the raw material on hand at the end of it.
All transportation charges incurred in delivering materials and supplies upon the premises are part of the cost of such materials. The expense of the purchasing department is often distributed over the purchases made, a rateable portion being assigned to the materials consumed, and the balance to the in ventory on hand at the end of the period and is thus carried as a part of the inventory value of raw ma terials. If an inspection department is maintained for the purpose of making tests of the quality of the material received, the expense of this department, as well as the expense of the receiving department, form an additional element in the cost of the material consumed. In other organizations it is customary to pass the raw material thru a store room, and in this event, a rateable proportion of the expense of operat ing the storeroom is assignable to each unit of mer chandise.
In practice it will usually be difficult to assign defi nitely to each unit of materials or supplies consumed, a rateable proportion of the expense of operating the purchasing, inspection, receiving and storeroom de partments. In many cases, the entire cost of opera ting these departments during the period is charged as an expense of the current period. When this ex pense is fairly uniform from period to period, there is probably no great error in following this practice, as it would not make any difference after the initial pe riod.