' METHODS OF CONDUCTING 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 a 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. 
2 Interest is not usually applied to working capital as a cost. 
