HARDWOOD RECORD 



37 



The idea struck the other manufacturers as being something that 

 was desirable, if it turned out to be practicable. They have not 

 yet agreed to go into the plan, and the matter of the division of 

 expense, the disposition of other kinds of lumber than those listed 

 as specialties, and other matters of the kind are still under dis- 

 cussion. The expenses, it has been agreed, must be shared in pro- 

 portion to sales; smaller lots can be sold by the central organiza- 



tion at a charge similar to that of the brokers, and fixed before- 

 hand, and most of the other details can also be taken care of. The 

 big question just now is whether it is necessary to merge the 

 identity of the producers under the name of the sales organization, 

 or let the selling ofBce represent each individual producer in turn. 

 The former plan appears to be the more practicable. 



G. D. C, Jr. 



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Cost Accounting in the Sawmill 



Determining the cost of production of a given grade of lumber is 

 a problem which most sawmill men have given up in disgust. As a 

 matter of fact, it is an impossible proposition although in practice 

 it must be treated, for purposes of bookkeeping if for no other 

 reason. Though the method used be arbitrary, there is need for 

 hitting upon one which will coincide with the facts as closely as 

 possible. 



There can be little doubt that there are many errors in keeping 

 track of sawmill expenses and the cost of production of lumber. 

 In fact, a large concern which operates a sawmill and appears to be 

 fairly prosperous admits that its books show a loss of something like 

 $7,500 a year on its manufacturing operations, and that this is made 

 up for only in the sales department. The figures are gotten by 

 fixing a scale of prices, adopted several years ago, upon the output 

 of the mill and comparing the total valuation of the lumber, 

 appraised in this way, with the cost of production. 



The fact that the concern can overcome this sizable sawmill loss 

 after the lumber reaches the yard suggests that the scale of values 

 used in appraising the product of the mill may be out of line. And 

 yet the company believes that the figures are close enough to the 

 market to warrant their use. If this is correct, the mill is losing 

 enough money to make investigation of its operations mandatory, 

 although it is conceded to be well managed and to be operated 

 efiiciently. 



Getting back to first principles, it is obvious that the actual cost 

 of production of one grade of lumber is the same as that of another. 

 Thus the only absolutely correct basis upon which to figure cost is 

 with reference to the log-run production. When it has been deter- 

 mined what the cost of manufacturing the lumber, log-run, is, a 

 relation must be established between the values of the various grades 

 to enable the sums of those values to equal the log-run total. 



In other words, as a theoretical proposition, the millman must 

 value his firsts and seconds. No. 1 common and No. 2 common lum- 

 ber in such a way that when his production of those grades is 

 figured at the end of a given period, their total will equal the cost 

 of operating the mill. They will be a correct analysis of the cost 

 of production, although, as stated, it can be only theoretical, and 

 its correctness must depend upon the accuracy of the operator in 

 fixing his arbitraries. These should be somewhere between the 

 actual cost of production, on the one hand, and the market value, 

 on the other, since to go outside of this range will immediately 

 introduce error. However, if the arbitraries used are consistent, and 

 the cost of production is greater than the value of the lumber thus 

 turned out, there is evidently something wrong in the mill. 



Another question which must be considered in connection with 

 production costs is the value of the logs which are used. If the 

 log buyer is successful in getting the timber at a good price, the 

 profit shown by the transaction after the logs are delivered and 

 graded should be credited to the log department and not to the 

 milf^ and on the other hand a poor lot of logs should go into the 

 mill at their actual value, even though a higher price was paid for 

 them. Thus if a lot of logs is bought for a lump sum, they should 

 be valued before being manufactured as a means of preventing 

 either the skOl of the buyer or his failure to secure good material 

 from entering into the apparent results of the operation of the mill. 

 The production of given lots of logs should be determined, instead 



of manufacturing without knowledge as to the origin of the logs 

 or attempting to check up the results of a given lot. There is a 

 wide variation between the results of different days' work, some 

 sawmill owners finding that it varies from as much as $150 loss to 

 a profit of that amount. It is likely that the large amount of the 

 variation depends entirely on the variation in the character of the 

 timber, since the varying efficiency of labor is not likely to make 

 as much difference as that. 



Since there is so great a difference in the kinds of timber, it 

 seems to be desirable, if not necessary, to number logs and get a 

 close tab on the results of manufacturing them. Thus if the output 

 of a given lot turns out to be deficient, there will be a guide as 

 to purchases to be made in that section in the future, while the 

 same consideration applies to unusually good results. Certainly 

 good and bad should not be mingled indiscriminately, the mill- 

 owner thus depriving himself of the knowledge which may explain 

 a good day 's run or suggest the reason for a bad one. 



A rather effective method of keeping a check on the sawmill is 

 to pay it for manufacturing the same rate which is paid custom 

 sawmills. It is assumed that the custom mills are making money, 

 since they would otherwise not work for the price charged, and the 

 mill of the owner is compelled to produce on that basis, and make a 

 profit, or an investigation is undertaken for the purpose of finding 

 out the reason why. This saves the necessity for much analysis, 

 since no reference is made to the value of the lumber produced. 

 The only requirement is that the gross income from the log-run 

 production shall be sufficient to show a profit on the investment, 

 depreciation and maintenance expense, plus the cost of operating 

 the mill. If that is done, the result is satisfactory. If not, the 

 inevitable leak in the mill is looked for. 



It is conceivable that a mill might make a good showing in this 

 way when it would fail to show a profit where the value of the 

 lumber produced was figured against the cost of the timber and the 

 expenses of operating the mill. In fact, the method has so many 

 advantages that, as a solution of the problem of handling the cost 

 of production, it is to be recommended, especially for the concern 

 which does not desire to increase the amount of clerical work which 

 is necessary for the operation of anything like a real system for 

 determining this factor. 



If one were able to figure averages based on say ten years' experi- 

 ence and the production of hundreds of hardwood mills, it might 

 be possible to determine the proportion upon which to base the 

 arbitrary values given various grades. That is to say, if the actual 

 results of manufacture were shown, a sufficient quantity being 

 figured to eliminate unusual cases, it could be told with fair accuracy 

 how much of each grade a given quantity of logs ought to produce. 

 Knowing the proportions of each, and the market value of each 

 grade, the percentage of the total value of the log-run production 

 to which each grade is entitled might be determined. 



Establishing proportions of this kind would be difficult, however, 

 particularly as the character of timber manufactured is gradually 

 becoming poorer, so that the proportion of upper grade lumber is 

 becoming smaller and low-grade stock larger. But at the same time 

 it would be a valuable aid in determining intrinsic values, compared 

 with the present method, which consists of using market values as a 

 base instead of the values established by the cost of production. 



