THE INDIA RUBBER WORLD 



[March 1, 1920. 



The Rapid Rise in the Cost of Equipment — An Important Factor 

 in Rubber Production Cost Accounting. 



/)'v /-• " '. .Ilii^yn-Schmidt, Consulting Economist. 



THE RECENT INCREASES ill till' cost of all industrial equip- 

 ment is bound to play an important part in the cost 

 accounting policies of our rubber factories during the 

 present year, and others to come. There is hardly a unit of 

 equipment that has not been touched by this rise. Industrial 

 machinery has gone up at the rate of one to two hundred 

 per cent, building expenditures are up at least 150 per cent, 

 and the great range of industrial supplementary equipment, part 

 of which is a product of the rubber industry as belting, has 

 seen advances of at least 100 per cent during the last few 

 years. These advances in the cost of equipment, although well 

 known to all manufacturers in the rubber industry, neverthe- 

 less seem not to have made a permanent impression upon the 

 minds of the financial experts of this industry. Hardly any 

 precautions have been un- 

 dertaken to meet the situ- ^ 

 ation and the majority of 

 rubber factories are still 

 estimating manufacturing 

 cost upon a basis of ma- 

 chine depreciation much 

 below that which is re- 

 quired by actual condi- 

 tions. The loss naturally 

 falls upon the shoulders 

 of the rubber industry. 

 But, in addition, there is 

 the very real danger of 

 the industry weakening 

 its financial position in 

 such manner as to c(airt 

 unavoidable disaster if 

 steps are not taken to 

 correct the situation. 

 EXISTING CONDITIONS. 



The condition as exist- 

 ing to-day is best ex- 

 plained by an assumed 

 example of a rubber fac- 

 tory having a machinery 



equipment costing $200,000 during the year 1914. If this fac- 

 tory is operated upon the general practice of charging 8 per 

 cent to the depreciation fund every year, it has to add to its 

 annual manufacturing expenditure $16,000, which amount would 

 have to be set aside for purpose of renewing the equipment 

 after it has become unsuitable for the purposes of the enter- 

 prise. Experience has shown this policy a very sound one in 

 normal times, and allowing 10 years' life to the machinery 

 equipment, a provision of 8 per cent for depreciation would 

 amply cover this factory against loss from this account. It is, 

 therefore, employed without any criticism, and no fault could 

 be found as long as depreciation really proceeded at the rate 

 of 8 per cent and also as long as the price of the equipment 

 rerriains approximately the same. Both essential conditions 

 for the safe operation of the 8 per cent equal depreciation rule 

 do not work to-day. 



The war has changed the fundamental industrial conditions 

 and the rubber factory under consideration has, most likely. 

 not only experienced a more rapid rate of equipment deprecia- 

 tion than that indicated by a depreciation charge of 8 per cent, 

 but it also can not hope by any means to purchase its equip- 



ment at the end of the customary ten years — the year 1924 — 

 at tlie same purchase price of 1914. It is fairly certain that 

 the equipment in question will lose its manufacturing effective- 

 ness considerably earlier and that it will cost approximately 

 $400,000 to replace it when this time has come. This factory 

 then has to show at the best only a repurchase fund of $200,000 

 allowing for accumulated interest of investment, and it will 

 have to find additional funds to put the factory back upon the 

 same basis of efficiency that it had during 1914. The factory 

 has lost a matter of $200,000 in ten years of operation or 

 $20,000 per annum. Incidentally, it has also charged $20,000 

 every year below its actual manufacturing cost. 



Such a loss would be a heavy one in any industry ; it is, 

 however, especially dangerous in the case of the rubber indus- 

 try where competition 



Have You Provided for the Accelerated Depreciation of Machinery 

 EoviPMENT Caused by Forced Employment During the War? 



very active and where in 

 consequence there is a 

 strong tendency of shad- 

 ing prices. During the 

 war, of course, consider- 

 able profits have been 

 made by many rubber 

 factories, but it is doubt- 

 ful whether a sufficient 

 amount of these profits 

 has been set aside for re- 

 serves above the usual 

 depreciation fund in every 

 instance. The chances in 

 fact are that profits have 

 been divided more lavish- 

 ly than usual, considering 

 the need of the share- 

 holder for larger earnings 

 in view of the high cost 

 of living and the general 

 increasing personal ex- 

 penditure. 



The danger now is that 

 the rubber factories will 

 go to the other extreme and after having made big profits for 

 a few years will try to cut their profits lower than it is safe 

 for the profitable operation of their enterprises, in an endeavor 

 to meet growing competition and a possible decline in the volume 

 of orders. With such a possibility in view, it is essential that 

 the industry should know its working cost to the fraction of 

 a cent and that no miscalculation should be made, as might 

 easily occur if the present practice of charging depreciation 

 cost is continued. 



A CHANGE OF ATTITUDE RECOMMENDED. 

 A new inethod of charging depreciation, therefore, seems to 

 be urgently required. Such a method to be really useful must 

 not be too complicated, and it must fit every condition so that 

 it can be einployed uniformly. The principle in the development 

 of such a method must be a complete change in the attitude 

 of our accountants and factory owners with respect to the 

 depreciation factor in the annual account sheet. The general 

 feeling towards the depreciation charge is to-day one of gentle 

 leniency. To charge depreciation upon equipment permits the 

 factory to make less profits in the eye of the taxation officer; 

 incidentally, the slow writing olT of the equipment provides the 



