January 25, 1917 



JiK 



^ Uniform Hardwood Cost Accounting -jfe- 



Editor's Note 



,, " The following is an address delivered by F. H. Hoskins, Morehouse, Mo., at the annual meeting ot the Gum Lumber 

 Manufacturers Association at Memphis, Tenn., January 20. Mr. Hoskins is chairman of the Cost Committee of the 



clSS0C13,Ll0Il> 



In submitting a report on a uniform cost 

 system, or accounting system, for use in the 

 production of hardwood lumber, we realize 

 there are a number of objections in the 

 minds of some operators — some of whom 

 may be members of this association — who 

 have installed cost systems — to taking the 

 fatter up. The feeling no doubt exists 

 among some that their businesses are unique 

 and that no system can be devised that 

 would give them the true costs. It is true, 

 no doubt, that some lines of manufacture 

 Jend themselves more readily to the instal- 

 lation of a cost system than others but we 

 believe also that no line of manufacture is 

 so complicated that a system cannot be de- 

 vised which will give reasonably accurate 

 results. In his book on ' ' How to Find Fac- 

 tory Costs," C. Bertrand Thompson makes 

 the following statement: "A cost system is 

 the most valuable bit of insurance the con- 

 cern can have, for it is an insurance against 

 expensive mistakes and when properly in- 

 stalled and operated, the expense of this in- 

 surance is really worth more in proportion 

 to its benefit than that of any other kind." 

 And again: "The most evident reason for 

 an accurate cost system is the necessity of 

 covering more than the cost of the product 

 in the sale price." 



There are those in the lumber business who advocate a daily cost 

 statement showing whether or not the day's operation has been 

 profitable, and, on the other hand, there are those who advocate 

 the keeping of costs in such a manner as to have a continuous sta- 

 tistical record of the cost and selling values of lumber from mouth 

 to month and year to year. It is the last mentioned method which 

 we advocate and which will be made the basis of our report. We 

 believe it is possible to adopt and maintain a universal or uniform 

 system of cost accounting in this business. When an association 

 such as ours has established a system whereby statistics of such 

 vast importance and profit for its membership as has been the 

 case thus far have been furnished its members, it has gone a long 

 way toward standardization. The question of the standardization 

 of a cost system sneh as some associations have done, it would 

 seem, would be a proper question for discussion and thought. 

 Where a business is non-competitive the need of a cost system is 

 not so much realized, bnt in a competitive business such as ours it 

 is not sufficient for one manufacturer alone to know his cost, but 

 it is to each member 's advantage to know that his competitors are 

 able to accurately figure their costs. As stated by Roger Babson, 

 "a man who does not know his costs muddies the water for those 

 who do; because, while he will finally go bankrupt and thus be 

 eliminated, still his competition is disastrous while it lasts, and 

 even if he is eliminated, some other person is likely to take his 

 place." 



The cost of installing and maintaining a cost system should be 

 considered just as much as an investment on which a fair return is 

 to be expected, as is the case where improved machinery is in- 

 stalled to take the place of old, worn-out, or out-of-date machinery. 

 It is necessary for the business man's success that he know on 

 what articles he is making a profit and on what he is incurring a 

 loss. Competitive conditions are seriously disturbed where losses 

 on one or more articles are recovered by profits on others. A man- 

 ufacturer should know the cost of every article manufactured, and 

 in the case of lumber, this would mean the different kinds of wood 

 manufactured, and he should also see that every article manufac- 

 tured bears the proper share of the general overhead expense. 



The Federal Trade Commission is keenly alive to the value of 

 accurate cost information, and is urging manufacturers to deter- 

 mine their costs accurately in the interest of better trade condi- 

 tions. It believes that anything that is of benefit to an industry 

 is of benefit to the public, and it has publicly stated that it is of 

 the opinion that the nearer cost systems average uniformity the 

 more valuable will be the results. 



Systems and cost statements innumerable, showing every con- 

 ceivable phase of the cost of manufacturing lumber and how these 

 costs should Tje arrived at, have been presented for discussion in 

 the past, but there is still little uniformity of opinion among lum- 



F. H. HOSKINS, MOREHOnSK, MO. 



bermen or lumber accountants with regard to 

 certain essential features of the business, and 

 it is somewhat of a job to devise a single 

 system that will adequately take care of 

 the costs in every mill, as we must bear in 

 mind that the requirements of different, 

 mills vary, and also that each lumberman 

 has his own, generally very definite, ideas 

 on the subject. 



A cost system is useful even though it is 

 incomplete, but its efficiency depends very 

 largely upon the schedule of accounts be-, 

 hind it. 



The cost of producing lumber, like every 

 other article manufactured, is divided into 

 three elements, namely: Material, labor and 

 expense. We shall not go into the discus- 

 sion in this report of direct and indirect 

 material, and direct and indirect labor, but 

 these details can be worked out in the in- 

 stallation of a cost system which, we hope, 

 will grow out of discussion and informa- 

 tion obtained, of which this report should 

 be the basis. We recommend the installa- 

 tion of a cost system departmentalized as 

 follows: Stumpage, Logging, Manufactur- 

 ing, Yarding, Sales, Shipping, Overhead. 



If the charges to these different accounts 

 have been properly made, the final results 

 should be fairly accurate. 



Stumpage 



Stumpage should be figured at market value. In determining the 

 market value we must consider the quality of the timber, its acces- 

 sibleness and distance from market and what it would cost to re- 

 place the stumpage under similar conditions at the then particular 

 time. We do not feel that it is fair to consider stumpage at its 

 original cost value alone. 



Logging 



We recommend a system that will enable you to readily ascertain 

 the cost of the logs, delivered to the mill, of each particular kind' 

 of wood. This should be reflected in the cost statement whether 

 the timber is owned outright by the operator or whether it is 

 purchased from outsiders. We think that the logging expenses 

 can very profitably be divided as follows: Timber cutting; Feed; 

 Hauling; Skidding; Loading; Spur and main line haul; Spur track 

 construction, repairs and maintenance; Locomotive, skidder and 

 rolling stock operation, repairs and maintenance; Supplies of all 

 kinds; Depreciation; Overhead. 



The details of an operation of this kind can be left to the in- 

 dividual operator, bearing in mind that the idea is to determine 

 the total cost of each different kind of logs delivered to the mill. 

 Whether the skidder or tramroad should be considered as a sep- 

 arate department might be left to the operator. The cost of the con- 

 struction of new spurs or tramroads should be kept separate, and the 

 life of the tram should be estimated according to the timber adjacent 

 thereto, and a depreciation charged yearly so that when the timber has 

 been removed, the cost of the tram will have been entirely elimi- 

 nated, with the exception of the steel rail. And we also recom- 

 mend that a depreciation on the steel rails should be made so that 

 at the end of the plant operation the rails will have been 

 charged off. 



The above general factors of the log cost can be further sub- 

 divided, if desired. For instance, the operation of the tramroad 

 could be further subdivided to show the cost of labor, fuel, oils 

 and lubricants, tools and other supplies, repairs and maintenance 

 of locomotives, repairs and maintenance of cars. 



At the end of each year an inventory should be taken of the 

 logs on hand put out by the logging department, and a profit and 

 loss statement prepared showing the operations of the logging 

 department for the year. 



Manufacturing 



After the logs have been delivered to the mill by the logging 

 department, we would suggest that the logs be scaled as they go 

 into the mill, and a record kept of the scale and tabulated and 

 entered into a permanent record each day in the office. The log- 



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