selling a considerable proportion of his output at a small price over and above the direct cost excluding overhead expense, thereby reducing his unit costs and making more profit than he would have made on the smaller output. It is, however, safe to say that it would be dangerous to attempt to carry out any such procedure without an accurate knowledge of direct, overhead, and selling costs.

In the limits of this paper it is hardly possible to do more than supply this outline of the general practice of commercial cost keeping, but there are important questions as to the treatment of certain items which may be here considered.

Accountants frequently have to give opinions as to the propriety of including rent and interest in costs. In theory these two items are identical, rent being the sum paid to a capitalist for the use of land or buildings, and interest being his compensation for placing his natural product or his accumulated savings at the disposal of the manufacturer. Both items are therefore in the nature of a division of profits, out of which alone they can be met, and they should therefore be strictly excluded from costs. In practice, however, the effect of the laws of supply and demand is such that one capitalist is frequently able, as has been shown, to compound with another capitalist for his share of profits and to obtain instead a fixed payment independent of what ultimate profits may be. This fact seems, however, hardly to justify the treatment of these items as cost, but rather that they should be treated as an advance by one capitalist to another of a proportion of the profits which the former expects to realize, this proportion being accepted in full settlement of a fluctuating and doubtful future sum. This principle is recognized in the form in which railroad accounts are now prepared, where both rentals of leased lines and interest on borrowed money of all kinds are treated as a charge against the income from operations after the same has been ascertained, that is, as a distribution of profits.

In the case of manufacturing companies no such clear recognition of this principle is found, and rent for factories, etc., where paid, is always treated as an item of manufacturing cost or expense, while interest, an exactly similar item, is more usually treated as a charge against or division of profits. This method of charging rent as an expense has led to a claim that it is properly so treated, and that therefore when a manufacturer owns his premises and pays no rent an estimated amount corresponding

to the value of the use should be charged into and considered as part of the cost thereof. This sounds plausible but it is believed that a nearer approach to theoretical accuracy is to be found in the railroad practice of considering all rentals, at least when there is a natural division between rent and other service, as a charge against or division of profits.

If two manufacturers have identical facilities for manufacturing the same article and adopt the same methods and at the same expense, it is certainly not reasonable to say that the manufacturing cost of the one who rents his facilities instead of owning them is higher than that of the other who owns them; but it is reasonable and correct to say that the former, who has a smaller personal investment, is sharing his profits with the capitalist who contributes the facilities.

Similarly, in the case of interest, the manner in which capital is provided cannot affect cost of manufacture. A manufacturer may provide all his own capital or he may obtain some part of it from other capitalists who either take equal risks with himself o prefer in some way to limit their risk. The profit when ascertained has to be divided between the different capitalists according to the terms agreed upon, but no part of it should be an element of cost, nor should the method of its division be a factor in determining selling price.

This question of rent serves to show the difficulty if not impossibility in practice of laying down any hard and fast rules based upon economic principles, which are to so great an extent theoretical. Rent has so far been considered only as relating to the provision of manufacturing facilities, land, etc.; but an industry exists in which capitalists erect buildings and let them out in whole or in part to others for offices, residences, and other purposes incident and necessary to business enterprise of all kinds. Rent of a factory is clearly a distribution of profit, but it is difficult in practice to make the same claim for office rents, and yet the arguments seem almost identical. A general distinction may perhaps be made between rent paid for the use of premises which forms a direct and integral part of the manufacturing operations and that paid for premises which are merely incidental thereto; and a further distinction lies in the frequent inclusion in rent of the price for other services such as light, heat, elevator service, cleaning, depreciation, etc., all of which involve labor and profit, just as these items are involved in the purchase of material. No

general rule can be laid down beyond suggesting that wherever an item of rent appears to consist mainly of a direct division of profit it should be so treated and only considered as part of cost when it seems to be mainly a composite item of labor, material, and profit representing service rendered.

Some confusion in relation to these two items of rent and interest is found in the relation of the profits of a corporation or an individual to the profits of the business which is carried on. The latter should be identical under the same conditions of manufacture, whatever the financial arrangements may be, but the former is affected materially by the share of such profits which is distributed to others in the shape of rent and interest, as well as in commission or other payments dependent in any way upon profits. The claim is frequently made that in ascertaining the cost of a product all these factors should be taken into consideration, but this it is believed is a fallacious argument based on a mistaken idea of what constitutes profit in the abstract, as distinct from its division among the ultimate owners or stockholders. The point is an important one in so far as it may affect selling price and reasonable profit; for it certainly would not be reasonable that a manufacturer who had by hiring his factory, raising loans, sharing profits with his employees, and such kindred operations, distributed a considerable portion of his profits should then raise his prices to an amount in excess of his neighbor's who had decided to provide all his own facilities and not to share his profits with anybody.

The question is frequently raised whether distribution of profits made to employees under profit-sharing schemes, or contributions to pension funds, are proper items to include as part of manufacturing costs. This question must be answered in the negative. Labor has already received its subsistence and this is properly included as cost; any further distribution to labor, whether by way of a share of profit or a provision for old age or sickness, represents the share of labor in the profit. It must sooner or later be recognized by manufacturers that such distributions of profit to labor can only be made out of the share of profit that goes to capital, and ought not to be met by increasing the selling price to the community, unless it should appear that on general grounds the total remuneration in the way of profit to labor and capital combined is unreasonably small.

One of the important purposes served by accurate costs is to

enable a manufacturer to ascertain his profits when a considerable part of his product remains unsold. Profits can only be made out of the sale of the article manufactured; and such a factor as a general rise in prices of material and labor, after the completion of manufacture but before sale, cannot constitute profit. Hence, in ascertaining profit at any time it is essential that what is not sold should be carried over at exact cost, this cost being manufacturing cost in the condition in which the products actually are. It may also happen that products sold in advance have not been completely manufactured and cannot therefore be delivered; in the latter case the cost of manufacture so far as completed and the cost of sale together represent the amount expended on the product; and, provided there is every prospect that the total cost when completed will be below the selling price after deducting cost of sale, this is the amount to carry forward. There are, however, products which must be kept for a certain time before they can either be submitted to further manufacturing processes or sold; in such cases it is customary to take up as part of the cost of the products on hand a reasonable interest on the manufacturing cost for the period for which the products may have to be so held in stock. This is an exception to the established rule, based not only on economic theory but on sound practice, that interest is not part of cost; and it is in effect taking up part of the ultimate estimated profit before it is earned; although if this addition be limited to so much of the interest as has actually accrued to lenders of capital there may be no anticipation of the profits of the corporation or individual manufacturer.

Contracts are frequently entered into on the terms that the price is to be fixed at actual cost plus a percentage thereon, and disputes sometimes arise as to what constitutes cost. These disputes are almost always due to carelessly drawn contracts, the parties thereto and their legal advisers frequently having a very loose idea of the principles involved. The importance of a clearly drawn contract is evident in view of the conflicting views on such subjects as rent, interest, bonuses, commissions to employees, and many other similar items; and if a proper form of contract exists no dispute is likely to arise. In the contrary case, however, the elementary principles of costs may be relied upon to solve the difficulty. If a manufacturer enters into such a contract, it must be assumed that he has all the facilities necessary for carrying it out and that no charge for the use of those facilities, other

than actual wear and tear thereof in the course of carrying out the contract, can be allowed as an item of cost. Similarly, no charge can be allowed for rent or interest or other items, which, according to the theory laid down, represent a share of profits on the operations. It is on these items that disputes generally arise rather than on the more complicated questions of proper distribution of burden, upon which manufacturers and contractors are usually much better informed.

During the last decade competition and the increased demands of labor have materially increased manufacturing costs, and manufacturers have recouped themselves by raising prices to the consumer. Having reached the limit in this rise which the consumer will endure, they are now leading a general attack upon the railroads of the country, alleging that the latter, which have up to the present endeavored to meet higher prices and higher labor by the introduction of economies and without any material increase in rates, should be prohibited from now raising these rates to a point which will enable them to maintain the extremely reasonable return so far yielded upon their investments. A comparison between the cost and selling price of manufactures and of transportation respectively may show that if unreasonable profits are being made it is not by the railroads but by the manufacturers; and full inquiry may well result in establishing that the extra share of profits now given to labor under profit-sharing and pension schemes has not been met by the manufacturer by a reduction in his possibly unreasonable share of the profits, as it should have been, but by an increase in prices to the consumer. No investigation into the railroad rate question can be considered complete which does not take into consideration the margin between cost and selling price, not only in transportation but in all manufacturing concerns. No such investigation can be properly undertaken without a sound understanding of the principles and elements that are involved; and it is hoped that the inadequate attempt here made to set forth some of these principles and their practical application may lead to a discussion which will be of material value as a contribution to the important question which is now agitating the country.