m 
 
 PRINCIPLES 
 
 OF 
 
 COST 
 
 By J. W. McCALL 
 
 PRINTED AND CIRCULATED BY THE 
 BUREAU OF PUBLICITY 
 
 NATIONAL CANNERS 
 ASSOCIATION 
 
 BEL AIR, MARYLAND 
 
PRINCIPLES OF COST 
 
 ADDRESS BY 
 
 MR. J. W. MCCALL, GIBSON CITY, ILLINOIS 
 
 DELIVERED AT 
 
 NATIONAL CANKERS CONVENTION 
 
 MILWAUKEE 
 
 1911 
 
 PRINTED AND CIRCULATED BY THE 
 BUREAU OF PUBLICITY 
 
 NATIONAL CANNERS ASSOCIATION 
 BEL AIR, MD. 
 
PRINCIPLES OF COST. 
 
 Mr. President and Gentlemen: 
 
 Unfortunately, I am on the program for a paper on the theory 
 of cost, which is a topic of such vital interest to every member of 
 the canning fraternity that I feel altogether unqualified to handle 
 the subject in a manner which its importance deserves. However, 
 having been assigned this task, I will use my best endeavors to 
 throw some light on the matter, and to especially dwell on some 
 phases of a science of cost-finding which, I am inclined to think, 
 have unfortunately escaped the attention of many packers. There 
 seems to be a tendency upon the part of the packer to underesti- 
 mate, rather than overestimate, his cost; with a view of making 
 himself believe that he can undersell, or at least meet the price of, 
 competitors. The worst-fooled man is the man who fools himself, 
 and the sooner every packer gets his business established on the 
 basis of his own cost, as determined and proven when his books 
 are closed at the end of the year, the quicker will the canned-goods 
 industry get down on a stable and profitable basis like that enjoyed 
 in many other lines of manufacture. 
 
 The utter lack of system and knowledge of determining cost has 
 become a topic of paramount importance in many lines of manu- 
 facture and merchandising within the past few years, and a great 
 deal of time and thought has been directed towards perfecting and 
 simplifying cost-finding in many branches of trade. This is true 
 not only of the manufacturer but of the merchant as well. It is a 
 subject which each and every manufacturer and merchant must 
 master before success rewards his efforts. 
 
 The wholesale grocer, for instance, prior to the time when he 
 had mastered this subject, was content, in many instances, to do 
 
 3 
 
 384492 
 
business on a 10 per cent gross profit basis; but since becoming 
 aware of the fact that it cost him 8 per cent, on an average, to 
 handle his merchandise, he quickly saw that it was necessary for 
 him to receive more than 10 per cent gross profit or he would little 
 more than break even at the end of the year. 
 
 The subject is now being carefully studied by the retail grocers, 
 and many of the journals affiliated with them are laying great 
 stress on the importance of the merchant knowing what it costs 
 him to do business. One of the leading grocer papers that I have 
 in mind has gone so far as to maintain a cost-finding department, 
 wherein it is educating the merchants upon this most vital and im- 
 portant subject. This work is very commendable, and in my 
 opinion should be taken up by journals affiliated with other lines 
 of industry, and some light on this subject, together with the im- 
 portance of it, should be driven home with each issue. 
 
 A little over a year ago, I was appointed on a committee, to- 
 gether with your worthy president, Mr. L. A. Sears, and Mr. C. W. 
 McEeynolds, of Kokomo, Indiana, to prepare an article on the 
 principles of cost to be read before the Western Canners' Associa- 
 tion in Chicago, and the paper which I am now reading is sub- 
 stantially the same as the one read before that association, and 
 before going further into the subject, it is my desire to inform 
 you that much of the matter which is to follow was furnished by 
 Mr. Sears and Mr. McReynolds, and it is my wish that they receive 
 due credit therefor. 
 
 Accurate cost-accounting has been neglected by many manu- 
 facturers in sundry lines, and several decades ago was not of the 
 paramount importance that we find it to-day; in those days compe- 
 tition was less keen, and the manufacturer would put a price on 
 his product that he knew to be high enough to yield him a good 
 profit after allowing liberal leeway in his supposed cost, but those 
 ideal days for the manufacturer no longer prevail, and we find 
 ourselves face to face with economic conditions which are bound to 
 be the undoing of the manufacturer who is not ready and willing 
 to meet them by studying any article, book or document that will 
 
 4 
 
in any manner throw light on this important problem. He can 
 afford to neglect nothing which will aid in the accuracy and ease 
 with which his cost of production is to be determined. Here is a 
 matter in which guess-work will not do, and where a fraction of a 
 cent, in the ultimate findings, is of serious moment. 
 
 Mr. A. H. Eevell says : " Considering the importance of figuring 
 cost of products to the finest fraction, the ordinary methods of com- 
 putation are surprising. When it is remembered that the price the 
 manufacturer is to receive for his product, and consequently the 
 extent of his profit, depends upon the exactness with which he is 
 able to arrive at the cost of production, no argument will be needed to 
 make plain to the uninitiated the importance of this factor in the 
 manufacturer's office system. However, I cannot refrain from 
 affirming that here is the common stumbling-block, so far as the 
 accounting methods of the manufacturer are concerned." 
 
 I think that Mr. Chas. J. Watts has hit the bull's-eye, as far as 
 canners are concerned, when, in his work on cost-accounting, he 
 says : " To devise a simple, effective and economical system for 
 securing accurate factory costs is a problem many manufacturers 
 have yet to solve. In these days of fierce competition, the average 
 maker of a standard line of goods is tempted to use the selling 
 price of his competitors as a guide in determining his own. 
 
 " But he cannot be certain that the results obtained by this means 
 will insure a profit under the conditions peculiar to his factory. 
 He is at all times confronted with the idea that his competitors may 
 be more progressive, and that the systems employed by them may 
 facilitate the operations in their factories and thus reduce the cost 
 of production. With this uncertainty of his competitors' methods 
 and systems, he cannot with safety base his cost simply on their 
 selling prices. 
 
 " Again, the manufacturer who operates his factory on the basis 
 of the cost of material and of flat labor, adding a percentage to 
 cover non-productive labor, manufacturing expense and general 
 expense, as well as contemplated profits, is no nearer solution of 
 the problem of factory costs than the one relying simply on the 
 prices charged for similar goods by other concerns." 
 
 5 
 
This brings the problem right home to the canners, and it is an 
 unquestioned, though unfortunate, fact that most prices quoted by 
 them are based upon those of the competitor who was anxious to get 
 his books filled with future orders, and quoted prices on futures 
 early to get in ahead of the others. 
 
 It does not follow that all packers who come onto the market 
 later with their prices will quote just the same prices as the packer 
 who anticipated them; but the last packer on the market will take 
 the price of his competitor as a guide, he will reason to himself 
 that he can get the same price for his product, or he may think 
 that he is entitled to a few cents per dozen more, or possibly less 
 than that of his competitor; but the fact remains that he uses the 
 first-named prices, rather than his own cost of production, as a 
 basis upon which to fix his selling price. 
 
 We fully recognize the fact that prices on canned goods are fre- 
 quently regulated by the time-worn rule of supply and demand; 
 this more generally applies to spot goods, however, and futures 
 cannot be said to be so much affected thereby. 
 
 The lack of accurate information regarding cost of production 
 is responsible for many packers actually seeking to close future 
 contracts for their products, in which they are bound to net a sub- 
 stantial loss. There is some shadow of excuse for a packer who is 
 compelled, through force of circumstances, to sacrifice some of his 
 spot holdings in order to liquidate obligations, or perhaps for other 
 causes, but it is unquestionably the height of commercial folly for 
 him to contract for the delivery of goods, yet unpacked, at prices 
 that he does not know will make him a profit, and he cannot pos- 
 sibly know where is the dividing-line between profitable and un- 
 profitable prices unless he knows accurately his cost of production. 
 
 I will venture the assertion that there is no class of manufacturers 
 to-day who maintain selling prices so near the danger mark as do 
 the packers of canned goods, and in few branches of manufacture 
 are the lines so hazardous. It is the one class of manufacturers who 
 are content to merely exist, and who base selling prices on precedent 
 rather than on actual cost of production determined by a proper 
 system of accounting. 
 
 6 
 
It is not the purpose of this report to cast reflections on the 
 business ability and sagacity of all the packers, for I know that 
 many of them now have very complete accounting systems,, and I 
 am indebted to several of them for information used in formulating 
 my recommendations for a system to be adopted by those packers 
 who have not yet put an adequate system into effect. 
 
 I am also indebted to many other authorities on economics and 
 cost-accounting for some of the matter contained in this report. 
 
 As I understand my duties, they are to outline the fundamental 
 principles of cost-finding, rather than to say arbitrarily that the 
 cost of packing corn, tomatoes, peas or what not, is so much per 
 dozen. If the actual cost on some articles were mentioned in this 
 meeting, without going into detail as to the method used in de- 
 termining the figures, many packers would be skeptical, and would 
 say, offhand, " Those figures are too high, and I know that I can 
 pack goods at a lower cost"; therefore, I have decided to confine 
 my remarks to the " Principles of Cost " and make suggestions 
 which I hope may prove of value to members of the fraternity and 
 enable some of them to figure a little closer on cost than they have 
 in the past. 
 
 I wish to say that I have studied the systems of several cost- 
 accounting experts, and the underlying principles are all the same, 
 though some of them express some phases of the problem in different 
 terms. 
 
 I wish to impress upon the members of this association, that they 
 can each and every one of them install in their business a system 
 of cost-finding which will be accurate enough for all practical 
 purposes. The packer with a small business, and packing only one 
 line of fruits or vegetables, will find the task much more simple 
 than the packer with an extensive and varied assortment of prod- 
 ucts; yet the principles involved are identical. The packer who 
 cans only corn, for instance, knows that his entire operating cost, 
 from purchase of materials to depreciation on plant, is chargeable 
 to his Canned Corn Account, which stands the burden of the entire 
 works; it is, therefore, a simple matter to determine the cost on 
 
 7 
 
any article packed when " burden " or " overhead " charges do not 
 have to be apportioned to several lines. 
 
 The most essential thing in cost-finding, to the packer, is not to 
 overlook any one item which enters into the cost of his product; and 
 instead of satisfying himself with the " prime " or " factory " cost, 
 he should determine the " cost to make and sell." 
 
 Most authorities on cost-finding divide the problem into three 
 divisions ; viz. : 
 
 1. Prime cost, or cost of all materials used plus the direct labor. 
 
 2. Burden, ofttimes called " general " or " overhead " expense. 
 
 3. Selling, or cost to market the product. 
 
 The subdivisions under the above heads are as follows : 
 Material Cost : 
 
 1. . 
 
 2. . 
 
 3. Box. 
 
 4. Cans. 
 
 5. Caps. 
 
 6. Solder. 
 
 7. Sugar. 
 
 8. Salt. 
 
 9. Tomato sauce. 
 
 10. Meat. 
 
 11. Labels. 
 
 12. Tissue. 
 
 13. Direct labor. 
 
 14. . 
 
 Burden : 
 
 15. Salaries. 
 
 16. Interest. 
 
 17. Insurance. 
 
 18. Taxes. 
 
 19. Fuel, light and water. 
 
 20. Maintenance. 
 
 21. Sundry supplies. 
 
22. Sundry expense. 
 
 23. Indirect labor. 
 
 24. Spoilage. 
 
 25. Loss in accounts. 
 
 26. Rents. 
 
 27. Legal services. 
 
 28. Depreciation. 
 
 29. Storage. 
 
 Selling Cost: 
 
 30. Brokerage. 
 
 31. Travelling. 
 
 32. Salaries. 
 
 33. Advertising. 
 
 34. Demonstrations. 
 
 35. Samples. 
 
 36. Discounts. 
 
 37. Office supplies. 
 
 38. Postage. 
 
 39. Freight. 
 
 40. Express. 
 
 41. Telegraph and telephone. 
 
 Actual Cost: Total of the above. 
 
 PRIME COST. 
 
 Prime cost, or cost of all materials used plus the direct labor, is 
 the first great factor in the cost of an article to the manufacturer, 
 and great care should be exercised to see that each and every article 
 of raw material used in a product is charged against it. While 
 some of the items may appear small and of little consequence, you 
 will find that in a pack there are a number of such items, and in the 
 aggregate the total is considerable. 
 
 Every material entering into your production may be classed as 
 raw material. Mr. H. C. Carey says in his manual of social science : 
 " What, however, is raw material ? In answer to this question, we 
 may say that all of the products of the earth are, in turn, finished 
 
 9 
 
commodity and raw material. Coal and ore are the finished com- 
 modity of the miner, but the raw material of pig iron. The latter is 
 the finished commodity of the smelter, yet only the raw material 
 of the puddler and of him who rolls the bar. The bar, again, is 
 the raw material of sheet-iron ; that, in turn, becomes the raw 
 material of the nail and spike. These, in time, become the raw 
 material of the house, in the diminished cost of which are con- 
 centrated all the charges in the various stages of passage from the 
 crude ore lying useless in the earth, to the nail and spike, the ham- 
 mer and saw, used in the construction of a dwelling." 
 
 I think that special stress should be placed on the items of raw 
 materials, and that the packer should be impressed with the fact 
 that the waste in raw materials is a very important factor in hit* 
 prime cost, and frequently amounts to several cents per dozen on 
 the cost of his product. 
 
 On account of this uncertain item of waste, it is practically im- 
 possible for a packer to determine a close approximation of his 
 cost, except by closing his books once a year and determining the 
 actual quantities of raw materials bought and paid for, and dividing 
 the amount by the actual number of cases of goods packed and 
 marketable, to find the cost per case. 
 
 I think there is too much of a tendency among packers, in their 
 haphazard method of determining cost, to base their raw-material 
 cost on some test runs, whereby they find that a ten of corn will 
 make 650 cans, for instance; and to lose sight of the important fact 
 that they annually pay for many tons of corn, as well as other 
 vegetables or friuts, which never go into cans, but which are sorted 
 out on account of being too mature, or imperfect in other ways. 
 
 There is no fixed rule by which such waste can be figured, as it 
 depends almost entirely upon the caprices of the elements and the 
 season. The waste on other items of raw material is worthy of 
 consideration. While it is seldom as great as in the perishable fruits 
 and vegetables, nevertheless there are thousands of cans bought and 
 paid for which are not used. They may have become jammed, or 
 perhaps rusted, or may have been rendered useless through some 
 
 10 
 
other cause. The same will apply to boxes, labels and almost every 
 other article of raw material purchased by the packer. 
 
 Mr. Chas. J. Watts, systematize! and factory-cost accountant, 
 says : 
 
 " Cost on material may be subdivided as follows : 
 
 Cost of Material: 
 Material. 
 Freight, 
 Express. 
 Drayage. 
 
 " The elements of freight, express or drayage are constituents of 
 cost of material. In figuring on material the cost at the factory is 
 first taken; to it is added the laying down the material at your 
 factory door. There may be either freight or express charges and 
 also drayage charges at one or both ends of the line. 
 
 "Transportation charges of whatever kind, on raw material, 
 should be so distributed as to be borne proportionately by material 
 incurring the expense. If they are not, and freight, express and 
 drayage are made general charges, an article may be put out bear- 
 ing a disproportionate burden of such charges wrongly placed." 
 
 Transportation cost should be charged against each item of raw 
 material as it is received. The can account should be charged with 
 freight on cans, also with the expense of unloading and stacking 
 the same. The same practice should be carried out with every other 
 item of raw material received. 
 
 I recommend that every packer keep a stock book. In this stock 
 book should be a debit record of all raw materials received at the 
 f actory, each character of material entered under its proper account. 
 When supplies are drawn from stock to be used in the course of 
 manufacture, the stock accounts should be credited with the 
 materials thus drawn, and the finished-commodity account, for 
 which the materials are used, should be charged therewith. Not 
 only is this important in your cost-accounting system, but the stock 
 book is an up-to-date inventory of all raw materials, and is in- 
 valuable as a reference to guide you in purchasing supplies. 
 
 11 
 
Book accounts should be kept for each article of raw material 
 which is used in any quantity. The corn packer should have an 
 Ear Corn Account, against which he should charge all of the corn 
 bought from farmers. If he raises his own corn, he should charge 
 the rent for the land on which the corn is grown, against this ac- 
 count; likewise the team hire and other farm expense incident to 
 growing and delivering the crop. He should charge his Tomato 
 Account with all farm rents, expense, etc., incurred in growing and 
 delivering tomatoes; and so on down the entire list of fruits or 
 vegetables grown. 
 
 The packer who owns the land upon which he grows his canning 
 crops should charge rent for the same against the proper account, 
 just the same as though he had to pay the rent out to others; and 
 the amount of rent thus charged should be based on the prevailing 
 rates existing in that locality. 
 
 Such items as cans, boxes, labels, sugar, salt, solder and fuel 
 should also have special ledger accounts. 
 
 For minor supplies, such as flux, salamoniac, lubricating oils, 
 belts, hose, coppers, etc., there should be a Sundry Supplies Account, 
 which properly comes under the head of burden and will be taken 
 up later. 
 
 The second factor in prime cost is direct labor, sometimes termed 
 productive labor, and is denned by Mr. C. E. Woods as " that labor 
 employed in a plant, whose efforts are directed solely to processing 
 material into a product for sale." 
 
 Non-productive, or indirect labor, is "that labor which is em- 
 ployed in a plant, whose efforts are not applied to the processing of 
 material into a product for sale." 
 
 To further quote Mr. Woods : " This division should be strictly 
 lived up to for the reason that the opportunity for lessening costs on 
 a given output requires exactly so much productive labor, and this 
 cannot be varied except by a very small percentage. The amount 
 of non-productive labor employed on a given output is, to a great 
 extent, a question of administration, and consequently is subject to 
 a much greater percentage of variation than is productive labor." 
 
 12 
 
Direct labor is the one concerned in prime cost. Indirect labor 
 is one of the subdivisions of burden, and will be taken up in its 
 proper place. 
 
 Direct labor should be charged against the proper finished-com- 
 modity account, and we recommend a system of time-keeping which 
 records the actual amount of labor directed to each of the same. 
 All labor directed to the production of canned corn should be 
 charged against the Canned Corn Account, and if a laborer's time 
 is directed to several accounts during one day, such as corn and 
 tomatoes for instance, his time card should show the number of 
 hours chargeable to Canned Corn and the number of hours charge- 
 able to Canned Tomatoes. This entails a little more work for the 
 time-keeper, but it is of absolute necessity if an accurate cost- 
 accounting is to be made. 
 
 By the use of such time cards your bookkeeper can segregate the 
 items when making up the pay-roll, and make the proper charges 
 against each of the finished-commodity accounts. 
 
 The more care you exercise in strict classifications of your pay- 
 roll, the more accurate will be your cost-findings. It is desirable 
 to have as little of the pay-roll as possible classified as indirect 
 labor ; as this is one of the subdivisions of burden, it must be spread 
 over your entire output, and if you charge items to indirect labor 
 that should properly be charged against some finished-commodity 
 account, your ultimate cost-findings will be incorrect. 
 
 Most packers are now familiar enough with the "prime cost" 
 division of the subject to permit me to take up the second and more 
 important division, called burden, and its subdivisions. 
 
 When I refer to burden as being of more importance, it is not 
 to convey the impression that one element of cost is of any greater 
 moment than any other constituent part thereof, but because of the 
 fact that in this division lie the pitfalls which are most likely to 
 effect the correctness of your cost-accounting. 
 
 BURDEN. 
 
 Burden is often referred to as " overhead " cost, and is frequently 
 considered as an indeterminable quantity, and of only passing im- 
 
 13 
 
portance; but allow me to assure you that of the three divisions of 
 cost, it is the one which decides the success or failure of the manu- 
 facturer. It is like unto the stealthy assassin who sneaks upon a 
 man in the prime of life and stabs him to the heart; thus the very 
 life-blood of many an apparently successful business has eked away 
 and left only a lifeless skeleton of what might have been a profit- 
 able enterprise. 
 
 We cannot urge too strongly that every member of this associa- 
 tion take proper cognizance of the importance of this item, and 
 bear in mind that it has just as much bearing on the cost of pro- 
 duction as have cans, boxes or any other item. 
 
 No packer would presume to arrive at even an approximate cost 
 of his product without taking into consideration the exact cost of 
 his cans; it is obvious that the cost of any one item entering into 
 the total cost of your product is just as important as any other item 
 for the purpose of accurate cost-finding; therefore it is just as 
 essential that you know your exact burden cost per dozen, as it is 
 to know the can cost per dozen, as you cannot determine the cost 
 of your product without the consideration of both. 
 
 Burden is made up of a number of accounts which bear indirectly 
 upon the article manufactured, and has nothing to do with the 
 principle materials, direct labor or selling expense, and may be 
 divided as follows: 
 
 Salaries. 
 
 Interest. 
 
 Insurance. 
 
 Taxes. 
 
 Fuel, light and water. 
 
 Maintenance. 
 
 Sundry supplies. 
 
 Sundry expense. 
 
 Indirect labor. 
 
 Spoilage. 
 
 Loss in accounts. 
 
 Rents. 
 
 14 
 
Legal services. 
 
 Depreciation. 
 
 Storage. 
 
 As before mentioned, the packer with one line can very easily 
 charge all of these items against his one line, but when he packs, 
 say, 50,000 cases of corn, 30,000 cases tomatoes, 15,000 hominy and 
 10,000 pumpkin, how is he going to apportion it to make each line 
 bear its proper share ? 
 
 There is a tendency on the part of many packers to make their 
 principal product stand the entire burden, and not charge the 
 proper amount against their so-called " side lines." In this manner, 
 they overestimate the cost on the former and underestimate the 
 cost on the latter. 
 
 We have striking evidence of this practice in the prevailing low 
 price quoted on baked beans, pumpkin, lye hominy, etc. Usually 
 these articles are packed as side lines, and the packer figures that 
 he has his overhead expense or burden to carry anyway, and he 
 therefore packs these side lines without considering this element of 
 cost. This practice is manifestly incorrect and unfair, as each item 
 packed should stand its just portion of the burden. 
 
 There have existed various methods of apportioning the burden 
 to the various lines, but the percentage plan seems to be the one 
 recognized as the most correct by cost-accountants. Some authori- 
 ties hold that burden should be apportioned on a pro rat a basis, and 
 that it should be figured at so much per case, and the same amount 
 of burden charged against each case of goods packed, whether it be 
 Petit Pois Peas or Standard Lye Hominy. Obviously this system 
 is incorrect, as the case of Petit Pois Peas may represent three times 
 the investment of the case of Hominy : it is apparent that the actual 
 cost of interest, insurance, spoilage, taxes, etc., is say three times as 
 great on the Petit Pois Peas as on the Hominy. Therefore, the 
 percentage plan is recognized as the most correct. 
 
 For the purpose of determining the per cent of burden which is 
 chargeable to each line, let us first find the approximate value, at 
 selling price, of the yearly output of each article packed; the ratio 
 
 15 
 
of the total value of each line to the grand total of the aggregate 
 of all lines packed represents the per cent of burden chargeable to 
 each line. For instance, a packer's yearly output is as follows, viz. : 
 
 10,000 Extra Sifted Peas @ $1.35 $27,000.00 
 
 20,000 Standard Peas @ 1.00 40,000.00 
 
 10,000 Pumpkin @ .45 9,000.00 
 
 10,000 Tomatoes @ .80 16,000.00 
 
 8,000 Hominy @ .50 8,000.00 
 
 Total $100,000.00 
 
 It is at once apparent that 27 per cent of the burden is charged 
 againt Extra Sifted Peas, 40 per cent against Standard Peas, 9 per 
 cent against Pumpkin, 16 per cent against Tomatoes and 8 per cent 
 against Hominy. 
 
 Now let us assume that the aggregate of all expenses which go to 
 make up burden is $10,000.00; thus we find that the proportion 
 chargeable to Extra Sifted Peas is represented by 27 per cent of 
 $10,000.00, or $2700.00, or 13% cents per dozen cans for the 10,000 
 cases of Extra Sifted Peas packed. 
 
 By carrying the figures out through the entire line, we get the 
 following " burden " charges per dozen for each line, viz. : 
 
 Ex. Sftd. Peas 27* of $10,000 = $2,700. -s- 20.000 doz. = 13^c. per doz. 
 
 Sftd. Peas 40*" " = 4,000, -*- 40,000 " = lOc. " " 
 
 Pumpkin 9*" " = 900, + 20,000 " = 4^c. " 
 
 Tomatoes 16*" " = 1,600, -*- 20,000 " = 8c. " " 
 
 Hominy 8*" " = 800, * 16,000 " = 6c. " " 
 
 The amounts thus determined, plus the prime cost (material and 
 direct labor), make what is called "factory cost," and when the 
 selling cost is added, we have " the cost to make and sell/' to which 
 we must add our desired profit to arrive at our selling price. 
 
 We will take the different accounts of " burden " and treat them 
 separately. 
 
 Salaries. To this account should be charged the salaries of all 
 the executive officers, the superintendent, shipping clerk or any 
 person or persons on salary whose attention is spread over the 
 various lines. 
 
 16 
 
Interest. This item requires no special comment. 
 Insurance. To include insurance of all kinds, such as fire, tor- 
 nado, credit or accident. 
 
 Taxes. Here we have another item that is self-explanatory, and 
 might be charged in the sundry-expense account rather than to open 
 a special account for taxes, as the account would usually have only 
 one or two entries a year, and it is hardly worth while to give this 
 item an account to itself. 
 
 Fuel, Light and Water. To this account should be charged all 
 fuel used for power or heating, such as coal, wood and gasoline. All 
 electric current for power or light should also be charged to this 
 account. 
 
 Maintenance. This account should properly be divided into two 
 accounts: (1) Maintenance of Buildings, and (2) Maintenance of 
 Machinery. Against the former should be charged all bills for re- 
 pairs on buildings, including labor thereon. Against Maintenance of 
 Machinery should be charged all materials and work necessary to 
 keep the machinery in proper working order, such as new steels for 
 cappers, repairs for corn cutters or any other machines, also belting, 
 lacings, sprocket chains, etc. 
 
 Sundry Supplies. This account should include such items as 
 machine and engine oils, cotton waste, lamp globes, mittens, knives, 
 baskets, flux, soldering coppers, rubber hose and those many small 
 articles which must be bought or replenished each year. 
 
 Sundry Expense. This account to include such items as tele- 
 phone rent, express, freight and drayage charges on sundry supplies, 
 travelling expenses to conventions, meetings, etc. It might also in- 
 clude taxes and legal services, as well as other items of expense 
 which cannot properly be charged against the other accounts. 
 
 Indirect Labor. This is labor which is general in character and 
 is not Aharged to any finished commodity. Night watchman, fire- 
 man, teamster, etc., properly come under this head. 
 
 Spoilage. This item more appropriately might be charged 
 directly against the account which is concerned, Canned Corn, Peas, 
 
 17 
 
Tomatoes or what not, and the result be more accurate than running 
 it through the Burden Account. 
 
 Loss in Accounts. This is an item to be taken care of, and while 
 sometimes it is small, again it is a matter of great concern, and we 
 think should be based on the averages in use by the credit in- 
 demnity insurance companies, which is one-sixth of 1 per cent on 
 the volume of business done, as this is the average percentage of 
 losses on accounts, covering a period of ten years. 
 
 Rents. This account will not include farm rents where they can 
 be charged against a special account, such as Corn, Tomatoes, Peas 
 or any other vegetable grown on such rented land. It will include 
 such rents as office, barn, factory, etc., and if the packer does not 
 have a great number of such rent items, he might simplify matters 
 by charging them to Sundry Expense. 
 
 Legal Services. This item might better be charged against the 
 Sundry Expense Account, as very few packers employ enough " legal 
 services " to render it advisable for a special account. 
 
 Depreciation. Depreciation has been defined as a lessening in 
 value from age and contributory causes. In this account we have 
 a very important one, and at the same time one which is overlooked 
 by most packers. The longer a packer remains in the business, how- 
 ever, the more he is impressed with the fact that he must replace 
 this machine or that, he must have it built over, or in many in- 
 stances he must discard the machine entirely, and replace it with 
 something more modern. In many instances the machine thus dis- 
 carded is not worn out, but on the other hand is in fairly good 
 working condition; but improved methods have rendered it useless, 
 and the packer has been compelled to purchase a new machine, of 
 some character, and the old one has been consigned to the junk pile ; 
 it is dead. 
 
 I will venture the assertion that there is not a packer present, 
 who has been in the business fifteen years, who is now using a single 
 piece of machinery in his plant that he used fifteen years ago, with 
 the possible exception of engines and shafting, and a great many 
 
 IS 
 
of them have re-equipped throughout in the last ten years. What has 
 become of the old machinery which was installed at a great expense 
 when new ? It has simply been consumed, gentlemen, just as effect- 
 ually consumed as the coal, the cans, the boxes and everything else 
 which you have bought and put into your pack. The only difference 
 is that many supplies purchased are consumed in a day, a week, or 
 possibly a year, but your machinery (and buildings may be included 
 in this connection) has lasted five or ten years; but it is consumed 
 and gone and therefore has been a factor in your cost just the same 
 as those articles and supplies which are consumed in a shorter period. 
 
 A certain per cent of the cost of machinery and buildings should 
 be charged off each year for depreciation, and the amount thus 
 charged off should be added to the cost of your pack. 
 
 Fire insurance companies have a fixed scale upon which to figure 
 depreciation on buildings and machinery, and those of you who have 
 had fire losses have doubtless been surprised at the reckless manner 
 in which their adjusters knock off 15 per cent here and 30 per cent 
 there for depreciation on your property. 
 
 It is obvious that this loss by depreciation must be covered each 
 year by considering it a portion of cost, and you should place your 
 selling price at a figure to amply take care of it. 
 
 The per cent of depreciation varies on different characters of 
 buildings and machinery; for instance, the depreciation on a brick 
 or stone building, with slate roof and cement floors, is not nearly 
 so great as that on frame buildings. The following percentages are 
 given by Tiffany, a recognized authority on depreciation : 
 
 "Brick buildings, slate or tin roofs, used as manufacturing es- 
 tablishments, where there is heavy-running machinery, especially 
 when used as planing mills and for the manufacture of sash, doors 
 and blinds, wagons, hubs, spokes, furniture, chairs and other wood 
 work, depreciate yearly to a greater extent than those used for 
 less hazardous purposes, and a fair estimate to these classes would 
 be 4 per cent. Frame buildings under similar conditions depreciate 
 5 per cent. With shingle or gravel roofs, occupied for same purposes 
 as described, brick buildings depreciate annually 4% per cent; if 
 frame, 6 per cent." 
 
 19 
 
You will note that the percentages mentioned by Mr. Tiffany had 
 reference to buildings containing hard-running machinery at very- 
 high speed, so that the incidental vibration was a great factor in 
 fixing the percentages. 
 
 Most canning factories are equipped with some high-speed 
 machinery such as corn cutters, blowers, fans, etc., and also have 
 one factor for depreciation which is absent in the wood-working 
 shop; namely, water and steam. How many times have you had 
 to patch up or replace rotten floors in your factories, due to rot 
 from the absorption of moisture from water and steam ? Not only 
 do they contribute to the short life of a floor, but they are equally a& 
 damaging to a metal roof. It is my opinion that the depreciation on 
 buildings used for canning factories is fully as great as that men- 
 tioned by Mr. Tiffany on buildings containing wood- working ma- 
 chinery, and only those canning factories possessing cement or 
 composition floors should be rated lower. I recommend the follow- 
 ing table of percentages for depreciation on buildings used for can- 
 ning factories ; viz. : 
 
 Brick, stone or cement building, slate or tin roof, cement 
 
 or composition floors (where water is used) 3 per cent 
 
 Brick, stone or cement buildings, shingle, gravel or 
 
 composition roof, wood floors 5 per cent 
 
 Frame buildings, any character of roof, wood floors. ... 6 per cent 
 
 Husking-sheds, or other sheds, on brick, stone or cement 
 foundations 5 per cent 
 
 As to the per cent of depreciation on machinery, I will say that 
 it is a much more complicated proposition than depreciation on 
 buildings, and depends largely on the care taken of it. We will 
 each of us base our opinion on the life of a machine on our own 
 experience with such, and at the same time there will be a great 
 variance of opinions. For instance, you ask two farmers for their 
 opinion on the life of a binder; the one who leaves his binder in 
 the field where he got through using it, and does not touch it again 
 until the next harvest, will probably say from three to five years, 
 
 20 
 
while the fanner who takes his binder to his tool house when through 
 with the season's work, cleans and oils it thoroughly and stores it in 
 a dry place until the next harvest, will probably say from ten to 
 twelve years. Likewise there will be a variance in the opinions of 
 packers relative to the life of canning machinery. I have seen some 
 packers use such great care in cleaning, oiling and painting their 
 machinery, when through with a season's work, that it will look 
 almost like brand-new when they put it into operation the following 
 season; and on the other hand, I have seen others who, like the 
 farmer who leaves his binder in the field, leave all of their machinery 
 dirty and filthy, and wait until the next season to clean it. It is 
 needless to say that the last-mentioned packer finds it necessary to 
 purchase a great many new parts when getting his machinery in 
 readiness for his next season's operations. 
 
 There is one thing that the packer who takes good care of his 
 machinery cannot get away from, however, and that is the death of 
 machinery as previously mentioned; therefore, depreciation and 
 amortization should be considered jointly. No matter what par- 
 ticular care he takes of his machinery, he now and then finds that 
 he has a machine which is out of date, and which must be replaced 
 with a machine of greater capacity, or one requiring fewer operators, 
 that he may get his labor cost down on a footing with his competi- 
 tors; thus he has a dead machine, which must be consigned to the 
 junk pile or possibly traded in on the new machine at a price slightly 
 higher than scrap iron. 
 
 Tiffany gives the average life of a steam engine, properly set and 
 under the exclusive charge of a competent engineer, as twenty years, 
 therefore the depreciation would be 5 per cent. A steam boiler, he 
 claims, will not average more than ten years, hence 10 per cent 
 depreciation would apply thereon. 
 
 The life of most special machinery in use by canners, we would 
 say, will not exceed ten years, and while it is true that the deprecia- 
 tion on cast-iron steam chests or retorts should not be placed so 
 high, to offset this we have the machinery that has died on our 
 
 21 
 
hands after one to five years' use. So it appears to me that 10 per 
 cent depreciation on machinery should be charged off annually. 
 
 Now to compensate for a portion of the depreciation thus charged 
 off, on both buildings and machinery, the item of maintenance, 
 previously referred to, must be considered. The percentages of de- 
 preciation just given are based on the assumption that no money 
 or work is spent on the buildings or machinery in the way of up- 
 keep or repairs ; but we are all aware of the fact that large sums are 
 spent annually for this purpose, and such expenditures should be 
 deducted from the depreciation charged off, as the buildings or 
 machinery have been renewed to the extent of maintenance. 
 
 Let us assume that the cost price of your buildings is $25,000.00, 
 and that they are of that character of construction which places 
 them in the 5 per cent depreciation class; the amount to charge off 
 would be $1250.00, but we turn to our maintenance account and 
 find that during the year we have put in a new floor at the cost of 
 $500.00, window lights amounting to $10.00, have painted portions 
 of the building and have spent a total of, say, $1000.00 on main- 
 tenance of buildings. This $1000.00 should be deducted from the 
 $1250.00 depreciation, leaving only $250.00 net to be charged off. 
 Let us go still further and assume that our maintenance account 
 showed that we had spent $2500.00 on repairs and betterment during 
 the year. It is apparent that we had increased the value of our 
 buildings in the sum of $2500.00 less the annual depreciation of 
 $1250.00. An instance of this kind would therefore show a net 
 increase in the building account of $1250.00, making it $26,250.00, 
 instead of the original $25,000.00. 
 
 The same practice should be followed in the depreciation of ma- 
 chinery. In this manner both items of depreciation and main- 
 tenance are fairly and equitably taken care of, and this plan meets 
 with the approval of most cost authorities. 
 
 Storage. This is another of those items that may be charged 
 against other accounts at times, as you will know whether your 
 storage bill is for corn, peas or tomatoes, and it may be charged 
 against the proper account at once. 
 
 22 
 
Bear in mind that no charge should at any time be made against 
 any of the accounts comprising burden, if it can be charged to any 
 of the finished-products accounts. 
 
 It is now near the time when most packers close their books for 
 the year and take off their annual balance sheets. I urge that each 
 and every packer take his accounts and go over them in detail, 
 making the proper charges against each of his finished-products 
 accounts, and that he ascertain his " burden " or " overhead " cost 
 and apportion it to his several lines as suggested by me. 
 
 It is my opinion that there are a number of packers who do not 
 close their books and take off an annual balance sheet, but are con- 
 tent to see how much money they have in the bank after the year's 
 pack has been delivered and obligations paid ; and if there is a fair 
 balance, they assume that they have made a profit on all lines packed 
 by them during the year. This line of reasoning may be far from 
 correct, as it is possible, and even probable, that they have made a 
 profit on one or two lines and sustained an actual loss on others, 
 but so long as the business has shown a profit in the aggregate, they 
 are not aware of the losses on the unprofitable lines, and assume that 
 they are making a profit on everything they pack. 
 
 I cannot urge too strongly that every packer maintain an account 
 for each of his finished products, for instance, Canned Corn, Canned 
 Tomatoes, Canned Pumpkin, etc.; and that each such account be 
 charged with those items which properly belong to it; and, when 
 he closes his books at the end of his fiscal year, that he determine the 
 proper burden and selling cost chargeable to each line, and that 
 they be charged with it. 
 
 It is not necessary that every packer open the same number of 
 accounts, and under the same titles as I suggest, but I do hold that 
 the principles outlined are essential and correct. 
 
 I recommend that each packer who is not fully informed on his 
 cost, go into the matter very carefully with his bookkeeper and 
 arrive at the cost of his product, along the lines suggested, before 
 naming a selling price. 
 
 I think that if this course is followed it will result in more profit- 
 
 23 
 
able prices being realized all down the line, and will add thousands 
 of dollars of profits to the packers as a whole, and will save many 
 others from bankruptcy, who are now drifting that way, and won- 
 dering why. 
 
 Some of you will possibly be surprised at the actual cost of pack- 
 ing goods when the cost is figured on a scientific and correct basis; 
 and I request that you reserve your criticism until you have com- 
 puted your own cost upon the same basis, which I insist is funda- 
 mentally correct. After you do this, I think you will have no criti- 
 cism to make. 
 
 Bear in mind that when your goods are all packed and in the ware- 
 house, your expense has not ceased. The cost of marketing many 
 articles, in this country, actually exceeds the cost of production; 
 and while this is not true of canned goods, nevertheless the cost of 
 marketing them is of great importance. I will, therefore, now call 
 your attention to a number of items which go to make up selling 
 cost, which I have divided into the following heads : 
 
 Brokerage. 
 
 Travelling. 
 
 Salaries. 
 
 Advertising. 
 
 Demonstrations. 
 
 Samples. 
 
 Discounts. 
 
 Office supplies. 
 
 Postage. 
 
 Freight. 
 
 Express. 
 
 Telegraph and telephone. 
 
 Brokerage. This is an item which is very familiar to you all, as 
 most of you sell your goods through brokers on a 2 per cent to 3 per 
 cent commission basis. This means an added cost of 1% cents to 
 3 cents per dozen, depending on the price that you get for your 
 goods, and the rate of brokerage which you pay. I will add right 
 
 24 
 
here, however, that the most economical method of marketing your 
 product is through the brokers. 
 
 Travelling. This is an item of expense which may be large or 
 small, depending on whether you have a number of travelling sales- 
 men on the road, or just call on your trade occasionally with a view 
 to maintaining a personal acquaintance, or to placing your annual 
 contracts. It is an item, however, that very few packers are able 
 to eliminate entirely, and frequently will amount to anywhere from 
 20 cents to 40 cents per case where the packer maintains a force of 
 specialty salesmen who work the retail trade and turn their orders 
 in to the jobber. 
 
 Before any work of this kind is put into effect, the packer should 
 use every effort to post himself on the cost of specialty work; and 
 this cost should be added to the price of his goods, if he expects to 
 remain in business. 
 
 Salaries. This pertains to salaries of persons engaged in the 
 sales department only, whether it be for officials and clerks who 
 solicit business direct from the office through correspondence, or 
 salesmen on the road calling on either the wholesale or the retail 
 trade or both. 
 
 Advertising. This is an item of sales expense which is becoming 
 imperative, if the manufacturer wishes to standardize his brands, 
 and create a demand for them in a big way, at profitable prices, re- 
 garless of market conditions. This is a phase of the marketing of 
 goods, however, which should be taken up with an efficient adver- 
 tising agency and thrashed out thoroughly before it is attempted 
 at all. 
 
 While advertising is the road to success for meritorious goods, 
 if the plan is framed up along the right lines, with the proper ap- 
 propriation on each case of goods sold, and the proper selling 
 price placed thereon, yet it is a hazardous undertaking for the 
 packer inexperienced in this method of selling, and who has not the 
 advantage of the counsel and advice of some advertising agency 
 which has proven its ability to handle matters of this character 
 through its success in handling other accounts. This is such an 
 
 25 
 
important question, however, and as it is to be the subject of another 
 paper to be read at this convention, I will say no more about it here 
 except that the expense of advertising, whether large or small, must 
 be added to the cost of your goods. 
 
 Demonstrations. This is an item of expense that will probably 
 not interest a great number of the packers, as I am of the opinion 
 that very few of them adopt this obsolete method of introducing 
 goods to-day. It is a very expensive method, and is not permanent 
 in its results unless followed up by supplementary advertising. 
 
 Samples. This is an item of expense which is common to all 
 packers, and the liberal way in which brokers call for them is prima 
 facie evidence that they have large families; but be this as it may, 
 the matter of samples is a considerable item of expense and to most 
 packers amounts to several hundred cases of goods per annum. Do 
 not overlook this item when you reckon your cost. 
 
 Discounts. This item, which I have put under the head of selling 
 expense, doubtless should more properly be an item of burden and 
 may be classed under either head at the option of the packer; but 
 handle it as you may, it is an expense of several cents per case on 
 your product and must be taken into account. 
 
 Office Supplies. This has reference to those office supplies used 
 directly in the sales department, and this expense will depend upon 
 the system in use in your office. 
 
 Postage. While this item of expense is here considered under the 
 head of sales, it is not, of course, all properly chargeable against this 
 department, but such a large percentage of your postage is expended 
 on letters relative to the sale and delivery of your goods, that this is 
 probably the most appropriate place to consider it. 
 
 Freight. The freight considered under this head is that which is 
 paid for the delivery of your finished product when the same is not 
 sold upon a factory basis. 
 
 Express. This item covers express charges on samples and ad- 
 vertising matter, or any other express charges incidental to the sale 
 of your goods. 
 
 26 
 
Telegraph and Telephone. As most of the items of telegraph and 
 telephone have bearing on the sale and delivery of goods, the expense 
 of the same should be charged against sales. 
 
 I think that the different accounts that I have outlined under 
 the three heads of prime cost, burden and selling cost, will cover 
 practically every item of expense of the ordinary packer, and I wish 
 to assure you that when they are all considered you will find an 
 actual cost to make and sell your product away in excess of any cost 
 basis that you may have wherein you have failed to include them. 
 
 As to the absolute correctness of my classification of accounts 
 under the three divisions, this is a matter of small importance; for 
 instance, I may have placed a certain item of expense under the 
 head of burden, and you may be of the opinion that it should be 
 classed under the head of prime cost, or possibly sales cost, and you 
 may be correct; but by all means recognize each and every account 
 mentioned in this paper as a legitimate item of expense which must 
 be considered somewhere in your accounting, if you expect to arrive 
 at the actual cost of your goods. 
 
 In conclusion, I will say that the matter of cost-finding is not 
 necessarily a complex or difficult one. Systems can be employed 
 which go to the extreme in detail, and, on the other hand, very 
 simple methods can be put into successful operation ; just remember 
 that every dollar that you spend in your business is an item of cost, 
 whether it be a subscription to a Fourth of July celebration or in 
 payment for a car of cans. The packer who considers all of these 
 will not be far from right in the final analysis. 
 
 27 
 

 
UNIVEESITY OF CALIFORNIA LIBRARY, 
 BERKELEY 
 
 THIS BOOK IS DUE ON THE LAST DATE 
 STAMPED BELOW 
 
 Books not returned on time are subject to a fine of 
 50c per volume after the third day overdue, increasing 
 to $1.00 per volume after the sixth day. Books not in 
 demand may be renewed if application is made before 
 expiration of loan period. 
 
 10m-4,'23 
 
38449^ 
 
 UNIVERSITY OF CALIFORNIA LIBRARY