METHODS OF COISTDUCTHSTG COST STUDIES. 27 



tates the charging of interest on the capital concerned in order to 

 arrive at the correct result in considering the combining of various 

 enterprises into the proper farm organization. That interest may be 

 used in commercial accounting for similar purposes is stated by 

 Gerstenberg. 1 He states that "In general it is desirable to include 

 interest in cost where materials must be stored for long periods while 

 the seasoning process is being completed and where it is desired to 

 show the effects of variations in the amount of capital employed 

 and in the lengths of the periods during which the capital is employed." 



Further use of this common practice in farm cost accounting is 

 found in the adaptability of the figures thus obtained in comparing 

 the efficiency of various parts of the farm business on different farms. 

 Many farmers rent their farms for cash, others for a share of the 

 product, others pay interest on mortgage indebtedness, ' others own 

 their farms entirely free from debt, while still others pay different 

 forms of rent for various parts of their farms. To compare various 

 factors of efficiency on these farms it is essential to have them on a 

 common basis. This should be considered a secondary reason for 

 the inclusion of the interest in the cost of conducting the business. 



In any case, interest on all forms of fixed farm capital 2 should be 

 kept separate, where practicable, and perhaps for the sake of clear- 

 ness considered a supplementary cost rather than an operating 

 expense, whether the interest is actually paid or not. 



One particular point in dispute regarding the charge of interest is 

 the rate that should be used. This assumes a very definite importance 

 when it is considered that many a farm business has a capital value of 

 from fifty to one hundred thousand dollars, the interest on which 

 is often larger than the labor income or the so-called farm profit 

 computed from the year's operations. 



The point often has been raised that one is not justified in arbi- 

 trarily selecting a rate that it is assumed the capital should earn, 

 thereby dividing that which is commonly referred to as profits into 

 "interest " and "profits. " The position is taken in farm cost account- 

 ing that this practice is at least as valid as the common practice 

 of assuming arbitrary salaries for personal services rendered in a 

 business. Going rates of interest in communities are well known, 

 and for comparative purposes the fixing of the rate at one-half or 

 even 1 per cent higher or lower than the money possibly might be 

 obtained for does not materially affect the usefulness of the results. 



The rate usually used by the Office of Farm Management and 

 Farm Economics in its northern agricultural studies has been 5 

 per cent upon the entire farm capital and in its southern studies 

 7 per cent, the difference being due to the regional difference in the 

 interest rates on well-secured mortgages on farm property. 



1 Principles of Business, p. 763. 



3 Interest is not usually applied to working capital as a cost. 



