January 25, 1910 



V-'^-'^^^^'^''*^^''^^''^^^'^^ 



^ Cost of Log Run Gum F. O. B. Cars ^ 



Editor's Note 



The following is an address delivered by F. R. Gadd of the Wisconsin Lumber Company, Chicago, before the Gum 

 Lumber Manufacturers' Association in session at Memphis, Tenn., January 15, 1916. 



At the convention held in this city a year 

 ago I submitted a scheme of accounts and 

 explained in detail the manner of distributing 

 charges to the different accounts. You all 

 doubtless remember this discussion, so I am 

 not going into this detail again at this time, 

 but will talk more along general lines, espe- 

 cially as I understand my remarks are simply 

 intended to start the discussion on the sub- 

 ject which should prove beneficial to all of us. 



In the first place, the subject of this dis- 

 cussion, "What Is the Cost of Log Run Gum 

 F. O. B. Cars," is peculiar in itself. Usually 

 the question is asked "What does it cost to 

 manufacture different grades and thicknesses 

 of lumber?" The cost of log run lumber 

 f. o. b. should not be difficult to obtain. It 

 requires a system of accounts to which, the 

 charges having been properly distributed, the 

 results will show the total manufacturing cost. 

 By this I mean an average cost of all lum- 

 ber produced, or the log run product of the 

 mill. 



There is no doubt that there is a consid- ^''- ^- <-iADD, 



erable difference in the cost of sawing various kinds of woods; tliere 

 is also probably a difference in the sawing of different thicknesses, 

 but how to get at it I have never been able to figure out, and as to 

 the cost of producing the different grades out of a given log, I be- 

 lieve it costs precisely as much to place a high-grade board ou board 

 cars as one of the lowest grade, except possibly quarter-sawed stock. 

 If in any way you attempt to apportion the cost between high and 

 low grades, it can be done only ou an arbitrary basis, and when you 

 do that you immediately destroy the cost principle at the outset. This 

 is a matter of opinion and may not be in accordance with your views. 

 If this opinion is sound we are then back to where we started, and 

 find that the correct cost is on a log run basis; or, in other words, an 

 average cost where stumpage and all cost of manufacturing the dif- 

 ferent kinds of woods into lumber are thrown into a melting pot and 

 averaged. I am quoting a portion of these remarks from a new and 

 excellent book upon "Lumber Manufacturing Costs," written lay 

 Arthur F. Jones of Milwaukee. 



It is possible, however, to adjust this average cost of all woods to 

 the extent of the differential in stumpage values. For instance, we 

 wiU assume the average cost of manufacture is $10.00. To this the 

 stumpage on gum of, say, $2.00 can be added, making a total cost 

 of gum lumber produced $12.00; or the stumpage on oak of, say, 

 $G.00 can be added, making a total cost of oak lumber produced $1G.OO. 



For inventory and selling accounts, where 

 profit and loss figures are required, it is pos- 

 sible to make a fairly accurate distribution of 

 this average cost over different grades. It is 

 presumed that every manufacturer keeps an 

 accurate tally of the amount of lumber cut 

 eaeli month and the amount of each grade of 

 each kind of lumber. To illustrate this I have 

 prepared a few charts which I will explain. 

 Tliis practice was illustrated not long ago in 

 an article written by R. B. Goodman, and pub- 

 lished in the various trade papers, although 

 we have been using a similar system in our 

 business for some time. 



First determine the market value f. o. b. 

 mill; next the percentage of different grades 

 cut; multiply one by the other which gives 

 you a figure representing the percentage of 

 market value for each grade; total up this 

 column and you have the total log run market 

 value; deduct from this the cost of produc- 

 tion and j'ou have your profit or loss; deduct 

 this profit or loss from the market value of 

 each grade and you have the stock or in- 

 ventory value of each grade, and as it is the market value, less 

 profit, it is for all practical purposes the cost value. If the 

 theory that it costs as much to produce a low-grade board 

 as a high-grade board is sound, it is reasonable to figure that the 

 profit on one might arbitrarily be considered to be the same as ou 

 the other, and that is what I have done here. In pricing an inventory, 

 something of this kind is absolutely necessary. You may have nothing 

 left in the yard but low-grade lumber which it would obviously be im- 

 proper to price at the average cost. In illustrating this I have used 

 only the FAS and common grades. Other grades, and possibly thick- 

 nesses, can be added if production figures are obtainable. 



As the lumber is shipped out add dry kUn and planing miU ex- 

 pense, if any, and cost of shipping. As the market price f. o. b. 

 mill changes it is obvious that profits will change if the manufactur- 

 ing cost remains the same and the inventory values will change cor- 

 respondingly. This is very likely to occur, but if in shipping out your 

 hmiber you charge off against your sales the oldest lumber on hand, 

 according to the books, the results will average themselves over a 

 period of time, provided of course that the inventory be subject to an 

 annual review. 



jS'ow, a few words as to cost systems. Systems and cost statements 

 innumerable, showing every conceivable phase of the cost of manu- 

 facturing lumber and how these costs should be arrived at, have been 



CHICAGO, ILL. 



EQUALIZATION OF SELLING VALUES TO COST OF PRODUCTION 



Selling 

 value 

 f. o. b. 

 Grade mill 



FAS ?15 



No. 1 Common 12 



No. 2 Common 10 



No. 3 Common 6 



Percent- 

 age of 

 grades 

 cut 

 20 

 40 

 25 

 15 



Amount 



.$ .S.OO 



4..'<0 



2.50 



.90 



Selling value 



Cost of production. 



.$15.10 

 . 12.00 



Profit or loss $ 3.10 



Selling 

 value 

 Cost of f. 0. b. 



production Amount Grade mill 



$15.80 $3.16 FAS $''0 



12.80 5.12 No. 1 Common 16 



10.80 2.79 No. 2 Common 14 



6.80 1.02 No. 3 Common 8 



Selling value $15.20 



Cost of production 12.00 



Profit or loss $ .3,20 



FAS $25 



No. 1 Common 20 



No. 2 Common 15 



No. 3 Common 8 



$12.00 Selling value $17.95 



Cost of production 12.00 



Profit or loss $ 5.95 



$12.00 



$12.00 



—25- 



