DETERMINATION OF METHOD 15 



In this example the difference between interest on capital 

 at current rates and the net returns on the farm shows 

 a ' loss ' of 5 per cent., and this gives the measure of the 

 proportion of the increase necessary in the selling price to 

 indicate the cost. In cases where the difference is a ' profit ' 

 there will be a proportionate deduction from the selling 

 price. It is clear that the method must involve the inclusion 

 of all outgoings in arriving at the net returns, together with 

 an allowance for the farmer himself either as a manual 

 worker or as manager, or in both of these capacities ; 

 otherwise the price would have to exceed 21eZ., in the long 

 run, to make it worth the farmer's while to remain in the 

 business. 



One obvious objection to this method of costing is that 

 the result is not true cost, but cost plus interest on capital. 

 Interest on capital is an allocation of profits, not a charge 

 against cost, and its proper place is in the Profit and Loss 

 Account, and not in the Cost Sheet. But if the method 

 of calculation is otherwise useful this is not a serious objec- 

 tion, as due allowance can always be made for it in the inter- 

 pretation of the results arrived at by means of Laur's 

 system. 1 The most serious criticism of his method is that 

 it is a guide only to price. It is important to have such 

 a guide, but the main function of book-keeping is to provide 

 an analysis of cost, so that waste may be detected and 

 so that the manager may be able to consider means for 

 effecting economies in production by an examination of 

 the cost at all stages. This is quite impossible with the 



1 It is a common error in cost calculation to include interest on capital. For 

 example, an account will be presented showing the cost of a wheat crop as 12 

 per acre, to which will be added 12s., for interest on capital at 5 per cent. Apart 

 from the fact that this is wrong in principle, it is also wrong in point of fact, 

 for the capital sum of 12 invested in the wheat crop is not required in its entirety 

 for twelve months, and a day-to-day calculation of the sum invested and of the 

 interest on it would be needed if the true amount of interest calculated at 5 per 

 cent, were required to be given. In the case of the wheat crop mentioned here 

 the interest charged represents, probably, more nearly 20 per cent, than 6 per 

 cent. This inaccuracy is absent, of course, from Laur's method of costing, though 

 the objection to the principle of including any rate of interest in calculations of 

 cost of production still remains. See p. 57, post. 



