Accounts: Their Construction and Interpretation for Business Men and Students of Affairs

By William Morse Cole | Go to book overview

CHAPTER TEN
THE GENERAL PRINCIPLES OF COST ACCOUNTING

THE discussion of the last three chapters has indicated some of the problems that accounting has to solve. We see by it that though the bookkeeping may be absolutely correct, that is, may produce correct balances and proper correspondence of debits and credits, unless good judgment is used in determining to what accounts items should be debited or credited and how the debits and credits should be interpreted, the results will be misleading or at least uncertain. We may now, having seen the sort of thing that we need, begin at the other end of the line and see by what processes we may get it. It is noteworthy that up to this point we have been concerned only with the value of resources and the amount of profits. Practically as important, however, is the question of the comparative productiveness of different sources of profit and the comparative expense of different methods or processes or services. We have still, therefore, to discover the general principles underlying the record of earnings and of cost.

The first problem in constructing a system of accounts is always this,--what separation shall be made between different sorts of revenue and different items of cost? The fundamental principle may be well exemplified by a very simple illustration, of a sort familiar to every one.

Suppose you are the owner of a sawmill, turning out nothing but boards with the by-products of edgings, slabs, and sawdust. Every revolution of the saw brings sawdust, edgings or slabs, and boards. If you keep no account of any cost except labor, fuel, and general expenses, and if you keep no account of receipts except the miscellaneous account of merchandise, you are far from knowing whether every part of your business is paying what it should. For example, the question must arise very soon in the operation of the mill whether it is better to sell the edgings, to dump them into the stream--provided you are not likely to get into difficulty with riparian owners,--

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