Commercial cost accounting as applied to retailing

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Authors Sibley, Judson Standish

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Commercial cost Accounting As Applied to Retailing

byJ. S. Sibley

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Submitted in partial fulfillment of the requirements for the degree of

Master of Arts

In the college of Liberal Arts and Sciences of the\N ■ ' \ " \

Universityof Arizona

1986

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tiBRARl

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ACKNOWLEDGMENT

The writer wishes to express his apprecia­

tion to Professor R. M, Howard, of the Economics Department, University of Arizona, for his many helpful suggestions In the preparation of this thesis. He wishes to acknowledge his Indebtedness to Professor A, H» Otis, Chairman of the committee on Graduate Study, University of Arizona, for re­viewing the material, and his subsequent advice.

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TABLE OF CONTENTS

CHAPTER PAGEI INTRODUCTION • ........................ 1

Th® Retailer and hie Fonottona.,........ 1Criticleme against the Retailer........ . 2Lack of Control In Retail Store®......... SBeneficiaries from Lower Costs............ 4

The individual retailer,.,...... . 5The wholesaler and other distributors. 5The consumer........................... 5Society................. ............ • 6

The Scope of This Study.......♦;.......•• 7History and general principles ofcost accounting................. 7

Commercial cost methods and records... 7Expense classification and distribution 7 Managerial control through costs...... 7Application of cost accounting principles to a retail b u s i n e s s . 7

II HISTORY AND GENERAL PRINCIPLESOF COST ACCOUNTING..................... 8

Definition....................... 8History and Development • ............... 9Functions of Cost Accounting............ • 10

Cost finding..................... 10Control of Inventories.............v.. 11Classlfteatton and distributionof expenses..... . 11

Basis for comparison..•»•............. 12Fixing responsibility.................. 15

Advantages of cost Accounting............ 15Elimination of waste and concealedlosses .. . . . . ........... 15

Lower costs of distribution..... ... 14Index of profitable goods.......... 14Aid In determining price policies....• 15Timely reports........ 15Give effective control............... 16Permit accurate planning.............. 16

Uhtforra Methods of Cost Accounting....... 17Influence of trade associations....... 17Legality of the use of coats.......... 19

CHAPTER PAGEIII COMMERCIAL COST METHODS AND RECORDS. ....... SO

Lack of Tkilversal System.................. SOFit system to the business.... .......... 81

Inventories..............,,..... 31Perpetual Inventory.................... SIEstimated Inventory.................... 25Physleal Inventory,................. 24The retail method, of Inventory,,....... 85

Purchases................................. 27P r o c e d u r e ^ ^ . 27Discounts.. . . . . i i ; 28

Sales..V,. . . . . . . . . . . . . . . . . . . . . . . 2 9Net sales. . 89Cost of sales acootmt. . . . .M• 50Gross margin........................... 50Sales analysis... .... ........ ...... .... 38

'...Tuxiiover.................... . . .,.......... 34Methods of calculation;......;,..;....; 54Importance of turnover.................. 38

IV EXPENSE CLASSIFICATION AND DISTRIBUTION... 57Classification........................... 57

Purpose...... ................ 57The Controllers' Congress plan......... 57

Systems of Expense Classification......... 58Functional classification.. . . . . . . . . • 5 8Natural classification................. 40

Distribution and Prorat ton of Expense..... . 42Direct and Indirect expense....... 42Bases of proratlon.................... • 44Distribution of expenses,.............. 44

V MANAGERIAL CONTROL THROUGH COSTS.......... 48Balance Sheet............................. 48

AnalysIs and comparison................ 48Profit and Loss Statement................. 52

Analysis and comparison................ 52Subsidiary reports.................... 55

Relationshlps between Statements.......... 56Use of Graphic Charts.... ................ 57Budgetary Control........... ............ • 57

Forms of budgets•••,*.... . 58Advantages of budgetary control........ 60

CHAPTER . ' PAGEVI APPLICATION OF COST ACCOTWTIHG

PRINCIPLES TO A RETAIL BUSINESS.......... 62A Fuel and Building Material Business...... 68

Present s t a t u s . . • 62 "Unit" cost system.................. 68Inadequacy of present system............ 63

Proposed Cost System...................... 64Departamntallzat lon..................... 64Perpetual Inventory..................... 64Purchases............................... 66Sales................ 67Expenses.............................. ♦ 68

Control through Reports.................... 70Monthly summary................... ..,.. 70Financial statements.................... 70Budgets......................... 72

Conelusion............................. 73

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COMMERCIAL GOST ACC0UH7IWI AS APPLIED TO RETAILIMG

CHAPTER ImRomcf imr

THE RETAILER AMD HIS PDNCTI01ISThe retailer eame into existence with commerce itself*

He was the first merchant, and today he is essential to com­merce. Originally, to retail meant to out again, or to di­

vide into p i e c e s T h i s conception leads to an economic

reason for retailing, for the retailer buys a quantity of goods which he believes the consumer will demand. Be divides these goods into quantities which the consumer will purchase. The retailer, thus, is identified by his direct sales contact with the individual consumer.

The final function in distribution is performed by the retailer. He arranges to have the merchandise ready for the consumers at the time, the place, and in the quantities re­quired by them. To perform this function, he forecasts the needs of his trade, assembles the goods demanded, stores them, and arranges for prompt deliveries. He, moreover, must finance these operations, bear the consequent risk, and create

a demand for his services.2 He, therefore, performs all of

the marketing functions. For these services the retailer is

iciark, “Principles of Marketingtt, p.185.Ibid., p.185.

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eeonomicaliy justified in expecting a margin of profit.

CRITICISMS A Q A m f TEE RETAILERAll people, being consumers, have felt the effects ef

high prices, particularly during late years. Due to the fact that the retailer is the last link in the chain of distribu­tion, he has been the one who has extracted the high prices from the consumer, naturally there has been considerable

outcry that the retailer is to blame for the high cost of living, and that he Is exacting exhorbitant profits. When his

profit and loss statement is examined, its high gross profit

tends to substantiate this charge, but a careful analysis re­veals that it is usually without foundation in fact, for operating expenses generally wipe out a large part of this gross profit leaving a very low net profit or, only too often, a net loss. • .

While the retailer may be averaging a very low rate of

return on his investment, that does not answer the charge as to his inefficiency. There is much room for improvement in re­tail methods. Excessive and poorly selected stocks, inefficient salesmanship, costly services. Inadequate accounting systems, lack of control, and lax credit requirements are some of the sources of heavy losses due to his negligence. Admittedly not all are alike in this respect, for they vary in efficiency just as they vary in size. Some stores have made tremenduous improvements in their methods, but criticisms are leveled

against the retail store in general S

LACK OF CONTROL IH RETAIL STORESMany mazmfaotorlng businesses schedule their ppodua»

tlon so that om department Is timed to keep with another, , and all eork togetWr for a oommon purpose at the lowest possible cost. In most retail stores, there Is searoely any planning done to oo•ordinate purchases, sales, stock on hand, expenses, or financial requirements. Without adequate re­cords and standards toward which to work, much of the effort Is expended In a haphazard fashion. One difficulty has been that methods of control have not been generally developed andmade available for retailers. Then, too, the small retailers

• . : ■ - ■■ - : '■ ' ' . ' , .

have not had the kind of training that would enable them tograsp the meaning of the new methods. A common occurrence is that of retailers basing their selling prices on comparisons

SwDuring the last few years the retail stores have been severe­ly criticized, because of the wide margin which exists between the raanufaeturer*a price and the price to the consumer. Da some instances this criticism has resulted in investigations by the government of the retailer's mark-up. Through these government investigators, the research activities of retail trade associations, and the studies of the research bureaus of different universities, it has been well established that, al­though the retail stores do show a wide gross margin, their percentage of profit is relatively small in comparison with in­dustry in general. Although there are certain elements of waste and inefficiency for which the retailer may be held re­sponsible, the high cost of distribution to a large measure ia the result of the large number of services which the retail store performs for the consumer. The major portion of the crit­ic ism has resulted because of the failure on the part of the general public to consider the cost of service in the same light as the cost of merchandise*. (Fri, "Retail Merchandising11 p.560.)

with competitors prices,and trust to look that inventory time

will reveal the hoped-for profits.^The average retailer will have to adopt the methods of

hie suoeesefttl rival, if he Is to hold hie own In competition.

The progressive retailer la not satisfied In knowing that he has made a profit. Be,wants to know where that profit same from, what hie sales were, hie costs of doing business, how this years rate of profit compares with that of last year and the reason for the difference, and many other facts about his business. Because he learns these facts, studies his problems,

and applies their solutions, he is successful in his business#

BENEFICIARIES FROM LOWER COSTSAmong the efficient methods in retailing which tend to

lower costs is the one considered at length in this thesis, namely, commercial cost accounting. Economies employed by the

Roger W. Babeon may** “There are a million and a half retail­ers in the United States today. One hundred thousand of these are doing a profitable business; four hundred thousand more are doing a fair business; but a million of these retailers are barely struggling along, A large proportion of these million are operating at a loss if their books were kept properly. Those who are not operating at a loss are merely getting day wages and small day wages at the best.

Some say that there are a million too many retailers and the solution is to eliminate several hundred thousand of them. Perhaps so, but I seriously doubt if this is the proper way to solve the problem. Surely an army would not be strengthened by dividing it in half, and there are none too many retailers.It, however, is true that these retailers are not working ef­ficiently. The solution of the problem lies not in eliminating a million retailers, but in showing those retailers how they can work efficiently and how they can be of the greatest pos­sible service’*. (Printer’s Ink, June 7, 1923, p.65)®Gerstenberg, “Principle's of Business", p.714.

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retailer should result in benefits to himself, the middlemen,the oonstmer, and soolety.

The individual retailer. - Introduction ofbetter methods by the inefficient retailer will permit him to operate at low­

er costs #6 Part of this saving will be refleeted in his In­creased profits. He will them be able to render better ser­vice to the consumer, and pay his bills more promptly to the jobber. He can them enjoy a better standard of living, feel a greater respect for himself, and secure a better rating In his community.

Wholesaler and other distributors. - The retailer is apt

to pay the jobber more promptly because of his greater ability to pay, as a result of his economies* The jobber. In turn, can make quicker payment to the wholesaler or other agency, and

the latter, In turn, to the producer. A saving in Interest and discounts may take place all along the distributive chain* Moreover, a threatened loss to them through the failure of an

Inefficient retailer la averted*

The consumer* - All of the savings resulting from the re­tailer’s economies will not be retained by him If the more efficient methods become generally employed by retailers• For competition will tend to force a lowering of selling prices which will be enjoyed by the consumer. Efficient methods are quite certain to result In Improved service and greater satis­faction to consumers.

6mBetter Retailing", p.B.

6

Society* — Our economic society today Is composed of many Inter-dependent units, one of which Is the retailer# If retailers, in general, are conducting business at lower costs, competition will bring about lower prices to the consumers# ..

As a oohsequence of this, one of two things or a combination of them will result• If the demand is elastican Increased

supply of the particular goods or services will be absorbed in the market, approximately the same amount of labor and capital being employed as before* Second, If the demand Is Inelastic, the same amount of goods or services will be sup­plied with the use of leas capital and labor# thereby releas­ing these productive forces for the production of other com­

modities* Thus, with a given supply of capital and labor, society may enjoy a greater sum total of utilities for the satisfaction of Its wants,

A less comimi condition is that of the retailers or pro­ducers being able to hold up the selling price through monopoly, In this event/ the consumer Is protected to some extent, by his

freedom of choice and power of substitution,

Sometimes a business continued to be operated at a loss.It would appear that the public profits from this situation, but investigation discloses that such Is not the case, over a period of time. For when a business falls, loss Is extended to society as a whole.The Immediate effect Is felt by the bankers and wholesalers, who may have extended credit, and by employees who must seek new positions. This risk must

usually be paid for through higher Interest charges and wage rates. Also, a new owner, prevlded one appears, and the former owner must adjust themselves to a new environment, with eorres* ponding loss in time, money, and efficiency. When a business, therefore. Is eendueted at a loss, except temporarily, soon*

ontle. waste results. Society at large would benefit more If the capital and labor were diverted from the unprofitable enter­prise Into other channels of production and distribution where they were more efficiently employed.7

THE SCOPE OF THIS STUDYThe subject of commercial cost accounting as applied to

retailing will be developed In the succeeding chapters under the following topics:

History and general principles of cost accounting Commercial cost methods and records

Expense classification and distribution Managerial control through costs Application of cost accounting principles to

a retail business

^Copeland, "Principles of Merchandising”, p.SSl.

CHAPTER IIHISTORY AND GENERAL PRINCIPLES OF COST ACCOUNTING

DEFINITION"Cost accounting is a branch of general, commercial,

or financial accounting whereby the three components or el­

ements of cost — direst material, direct labor, and burden,

overhead, or expense — are calculated for the product made or service rendered in such manner that management can secure accurate and prompt informat ion regarding, and can exercise intelligent and prompt control over, the activities of the business."1

There Is a general impression that cost accounting is a separate branch of accounting, and Is little concerned with general accounting. But the contrary is true, for cost account­ing is the application of accounting principles in greater de­tail than la usually found in general accounting. The cost re­cords are "tied into" the general accounting books by means of controlling accounta, so that a thorough understanding of the principles of controlling accounts is necessary to a mastery of the subject of cost accounting.2

Cost accounting differs from general or financial account­ing in that, while general or financial accounting undertakes

^Sailers, "Accountants' Handbook", p.594.^Lawrence, "cost Accounting", p.3.

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to show the total profit end loss of the business as a whole, the purpose of cost accounting is to give detailed informa­tion of the eoat of a given product* Job, department, or pro­cess, and to analyse this cost into its component parts.5

HISTORY AHD DEVELOPMENTThere, is no well defined history of cost accounting as

a science. It Is an outgrowth of the factory system and grew out of the need for more accurate knowledge as to cost of manufacturing products. Ho doubt its greatest stimulus was given by Frederick W. Taylor, the father of modern scientific industrial management, whose great work was begun between 1880 and 1890. Hr. Taylor was largely Instrumental in introducing motion study, time study, standard instructions, routing sheets, progress charts, and the use of cost statistics into production. There has been compiled a large body, ef literature dealing with industrial accounting and cost methods. Up to the present time, however, little of a complete or authoritative nature bee been written pertaining to cost accounting for otherthan Industrial undertakings.

• ■ . ■;

While cost accounting originated in the factory, it is no longer confined to industrial enterprises. It is being used in­creasingly in wholesale. Jobbing, and retail establishments. And, in fact, in all kinds of businesses, as shown by the growth In the use of uniform accounting systems by the members

5Jordan end Harris, "Coat Accounting", pp.3-4.

10

of many trad# association*.The term Me©m»erei&l oost accountii^’' is used to dif*

• .1 ■ i •

ftreatlete this field from industrial coat accounting. The most notable contributions to commercial cost accounting are the publications of the Controllers’ Congress of the National Retail Dry Goods Association. These publications contain some of the principles and procedures which represent the best current practice among the more progressive stores. Some rea­sons for the lack of such literature dealing with mercantile costs are that large scale retailing is a comparatively re­

cent development, "one man* management which sueeeeded under former conditions of competition often believes cost methods unnecessary, and other eoneerns consider^their methods are to

be guarded from eompetitors^ There is reason, however, to be­lieve that eommerolal eoet accounting will be increasingly Important, The effects of keen competition are already felt in all lines of trade. Any advantages through more efficient methods are eagerly being sought. One man control is frequent­ly impossible and old methods are often undesirable. Increased development and Interest in cost accounting In the mercantile field is certain.

FUNCTIONS OF COST ACCOUNTINGCost finding. - The cost of an article is the sum of all

expenditures for nominal, or expense, elements incurred in its

production and sale. If any of these expenditures are omitted

• 11 ■

from Its o®8%, the cost will be understated to that extent $ if anythin other than these expenditures is included in its cost, the cost will be overstated to that extent.

In some commercial enterprises where the goods sold are uniform and similar so that they can be properly considered as like units, such as tons where a retail concern sells coal only, then unit costs may be derived. For unit costs in re­tailing are the operating costs of handling one pound, gallon* or other unit of goods sold; they are valuable for purposes of comparison. In most mercantile establishments unit costs cannot well be obtained, as in a grocery store, due to the variety of goods serried| but costs can be found for all phas­es of the business operation.

control of inventories. - Through perpetual and retail. ,■ - ■ ' . ' ■- ' '

methods of Inventory* a constant record of goods on hand ispresent with a check available when a physical inventory is- . • - -taken, giving knowledge of loss through shrinkage, pilferage, or error. ■ ■ 1 ' - ; ' : ■ '

Classification and distribution of expenses. — Expenses

are classified according to purposes for which the data are collected. The main purposes are to aid in computing costs end to aid in controlling the different classes of expense.6 There

are no universal classifications of expenses for retail stores,

^Lawrence,”Cost Accounting", p.2."Hedge, "Retail Accounting and Control", p.133.

but usually the operating expenses are divided into divisions aesordtog to activity such as: Buying, Selling, Administration, and Delivery, Then, eaoh of these divisions is divided into subdivisions according to the nature of the expense, as: sal­aries and wages, rent, supplies, and depreciation.

To gain control over the diverse goods handled in most stores, it is frequently necessary to separate merchandise by lines, sometimes imaginary, into departments which are treat­ed as individual units. To obtain information, as gross margin, turnover, profitable lines, etc#, it is necessary to keep sep­arate departmental records of sales, purchases, and inventories if the volume of sales is sufficient to warrant distributism of expenses to departments, that is advisable, but usually that condition occurs only whom ,ttthe major expenses may be . found for each department without an arbitrary allocation,?6

When expenses are distributed, they should go to the selling department for which they were incurred. Expense items which were not incurred directly for some department should be prorated to the different departments on one of the following bases: volume of sales, volume of coat purchases, value of space used, or other appropriate base,7

Basis for comparison. - "cost accounting Is not an end in Itself, It is a diagnosis of business ills, not a cure for

Jyri, "Retail Merchandising", p,40,^Ibld*, p.82.

■ *12" *

X

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them."® With caste Immm# the ammgement can use them as a basis ofcomparlson with like costs for different periods far

the business as a whole, by Its departments and sections, by commodities, units, etc. Goats may be compared with those of another store or averages of many stores which possess com- parable costs. Though It Is necessary to be sure that the costs of other stores are comparable.

Fixing responsibility. - As responsibility for definite units of. a business are fixed, efficiencies are rewarded and inefficiencies are eliminated. Men and goods are found to be profitable or not. Standards of performance are set up with re­sulting benefits to the business. As, for Instance, a salesman may apparently be selling a large volume, but inveetIgatIon m y

ahow that hie average sale Is low and the goods sold are mere­ly staples carrying a low rate of profit.

ADVANTAGES OF COST ACCOUNTINGElimination of waste, concealed loaaes. ete. - Of 1,777

stores of various types reporting to the Harvard Bureau of Business Research, 471, or S7 per cent, sustained a net loss

as a result of their 1983 operations.9 While department stores

are generally considered most efficient, this same Harvard Bureau received returns from 151 department stores with sales over one million dollars In 1922, their total expenses varied

A / ' ''jailers, "Accountante' Handbook", p.6S5."Frl* "Retail Merchandising", p.50

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from 28 per sent to 59 per cent of net sales,10 The best means

of detesting the causes of variations in expenses and of loss is by obmmeroial cost aeeemitihg. The perpetual inventory will disclose loss due to overstocking, the carrying of duplicate lines of goods, pilferage, errors, and different forms of in­ventory shrinkage, cost records and analysis will reveal In­efficiencies in men and methods. ■

Lower costs of distribution. - While the greatest ad­vances have occurred in industrial cost accounting, the appli­cation of cost principles are enabling the wholesaler, jobber,. and retailer to operate at lower costs, the savings being re- fleeted into lower selling prices to the consumer. As en ex­ample, we find that the tendency is now to carry smaller stocks with higher turnover.

Index of profitable goods. - as securing net profit is ....

the motive force of business enterprise, the eonsentratlon on profitable lines of goods is desirable when and where possible. The detailed information of the oost reeorde enables manage- ment to detect profitable and unprofitable lines of goods. A store operating without a cost system might be making a fair net profit but not know the Bourse of eush profit. An inves­tigation might show certain lines to be Unprofitable which weres * ■ \

"guessed8 to be profitable. The aim of cost account 1 % is to eliminate such guesswork.

10Ibld., p.89.

. 1# -

Aid In determining price policies* - There is a tendency to overestimate the advantage of cost systems as a means of es­tablishing selling prices. Selling priced frequently determine

11costs. Cost accounting can point out the price at which there

is no profit on sales. But valup exists in the mind of the con-earner only and depends upon the importance which he attaches toa good as a means of satisfying his wants, what the consume*will pay for an article determines the upper level of prices,

12and the cost of selling determines the lower level.

However, with accurate cost data at hand, the management can decide on price policies. Decision might be made as to the desirability oft a large volume of sales with a low rate of net profit per unit, the handling of private or nationally ad­vertised brands, the stocking with.expensive or inexpensive merchandise, an "economy* basement, a "no sale" policy, price- cutting, and many other policies.

Timely reports. - Coat reports must deal with current periods .if they are to serve for managerial control. Post­

mortem cost information may tell why something happened but not prevent its occurrence.15 Monthly financial statements - profit and loss statement, balance sheet and other reports - can be prepared without taking a physical inventory, for per­petual inventories are kept with a cost accounting system.

ii ■rsallera, "Accountants1 Handbook", p.636. riFrl, "Retail Merchandising", p.317.^Laneburgh, "Industrial management", p.472.

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Often a monthly physical inventory,is not practical because of the time ani expense involved. Comparisons of costs and pro­fits can b© made with other periods for the same business, and for the same periods with other establishments.

Give effective control# - We read that "knowledge is power" and Prentice-Hall’s slogan is "knowledge is back of all achievement". So adequate cost systems permit management to

really direct their enterprises and not just let them take their natural,courses. Cost reports cannot bring beneficial results of themselves, they are inanimate. They need to be studied by the management and translated into the aotion toward which they point. Examples of managerial control aret fixing indi­vidual and departmental responsibility, and fixing maximum andminimum limits in perpetual inventories. •- ' ■ ' ' . ' - ■

Permit accurate planning, - cost systems permit the manage­ment to take a broad view of the entenn»iee •: Plans or budgets for the future cam be drawn up in the form of tmrshandising plans, which may contain items as to purchases and sales per month, rate of stock turn, per cent of mark-up and mark-down,

etc. A merchandise plan is to serve as a guide rather than control, and should be flexible.14

V/hen budget costa and standard costs have been figured, the management can work out an intelligent financial plan, as they will know the approximate expenditures that will be made

^Pri, "Retail Merchandlaing", p.SOf.

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and tshe probable reeelpta# Capital' requirements for fixed and current funds can be computed with resulting savings.

UNIFORM METHODS OF COST ACCOUHTIBOInfluence of trade associations. - Trade association#

have been working for uniform methods of cost accounting dur­ing the past few years, especially in the manufacturing Indus­tries. The most important step In the retail field has been tak­en by the controllers1 Congress of the National Retail Dry Goods Association which has worked out and adopted a system of cost control. The member stores sent in their data, from which monthly reports were compiled at the New York headquarters and distributed to the members. During 1928, however, this work of

compiling and distributing this information was turned over to

the Federal Reserve Banks in the twelve districts. Each month these Banks compile a wide range of statistical data which are of great value to the department stores and to business in gen­eral. An index of purchasing power of the people and trends of business are being developed.^® The educational campaigns In­augurated by various trade associations have served to greatly increase the interest in cost accounting. Several other asso­ciations of stores exchange detailed data among themselves, such as the Specialty Stores Association and the Associated

Merchandising Corporation.16 One asaooiation has a monthly

^Controller's congress,"Report of Sixth Annual Convention", 16Fri, "Retail Merchandising", p.344. pp.52-55.

- 18 -- 17Expense Review, which Includes expense data as to departments.

Besides these associations of stores, there are several

research bureaus making periodic detailed expense studies with respect to different kinds of storesi The Harvard Bureau of Business Researeh is the foremost of these. It gathers and analyzes the expenses and net profits of stores of different kinds. The advantage of being eo-ordlnated with other stores In the Bureau reports has led many stores to adopt uniform ac­counting methods.

The Department of Commerce, under Herbert Hoover, has done much for cost accounting by aiding the formation of trade as­sociations and assisting In various ways* The Chamber of Com­merce of the United States has conducted a campaign to encour­age uniform cost methods*

Uniform methods of cost accounting are those systems of cost accounting which are based on the same interpretation and

application of accounting principles. Such methods are only practical In the same line of trade or manufacture. . While the system adopted by the trade association may not be a per­fect one for all stores in that association, the fact that many stores do adopt that system brings a wealth of Information which when resolved Into averages for the benefit of the members, presents a valuable source of comparison for the Individual stores. . ‘ : . ; 17

17Ibid., p.345.

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Legality of the uae of eoafca. - While the Federal Govern­

ment favors the introduction of uniform cost accounting by trade associations, it does object to its use as a means of "price-fixing*# The Sherman Act, the Clayton Act, and the Fed­eral trade commission Act attempt to maintain the competitive system In production. These acts are enforced by the Federal

Trade Commission and the Department of Justice, who take actionmm

In ease of suspected low violation? °

Legality of the use of coat figures was first passed upon by the United States Supreme Court in the Maple Flooring Manu­facturing Association case in June, 1925, though the ease ofthe United fypothetae of America in August, 1923, was impor-

10tant# Various court decisions are summed up in the followingconclusions of W. B. Lawrence (C#P*A.) who says? "the collec­tion and publleation of cost data by trade associations seems within their legal rights provided,

(a) The information is collected and published in such manner that the data of Individual concerns cannot be known to competitors.

(b) Such publicity is given to the published information as to render it available to those without the industry who may be interested in it.

(e) Mo uniform rate of profit or other medium for the translation of eoete into uniform selling prices is furnished.

(d) The composite cost data are published in such manner as to be a guide to conditions and an incentive to individual action as opposed to collective action. •

"It must be borne in mind, in considering the legality of collective cost work, that the test lies in the result achiev­ed, as that is the surest guide to the intent of the parties concerned. If the result is active competition, not merely apparent competition, the legality of the effort becomes evi­dent t if, however, the result is an approach to absence of com-. petition, the legality of the effort becomes open to question,!’20

-^Lawrence, "cost Accounting", p.426. J®Ibid., pp.427-433. tiVIbld., pp.434-435.

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CHAPTER IIICOMMERCIAL COST EKTBOOS AID RECORDS

LACK OP UHIVERSAL SYSTEMCost systems can be profitably introduced into most all

forms of busineas enterprise. Those applicable to industrial concerns are usually much more extensive than those of mer­cantile concerns, but the same general principles apply. Middlemen engaged In different steps of the marketing pro­cess will need different systems. Retail stores of varying types, and even those of the same type, w i n need systems specially adapted to their peculiar needs. One grocery store operating on a "cash and carry" basis, and offering little In the way of service, should not have the same records as a gro­cery offering credit, delivery, and various extra services.

As the real purpose of Installation of coot systems le to give the management needed Information for control, the sys­tem should be formed with that aim in mind. It is possible to "over-eystematIse" as well as to "under-symtematlse". Nothing Is to be gained by compiling records which the management will not use or understand, or making reports which will not give needed Information. The expense of Installing and maintaining a cost system should not be greater than is warranted by the

SI «

benefits to be derived. An experienced hand Is neeeieary to draw ap a proper ooat system for a business.

Fit system to the business. - A preliminary study of a2business is needed before a system should be planned for it.

ihe cost system must be fitted to the operations of the busi­ness, not the opposite. As the nature and volume of the opera­tions vary, so must the cost system vary.

After a system has been worked out, the best results are obtained by securing the co-operation of the office force eon- eerned, so that the adjustment of the system to the business

ee . , - . :

may be perfeeted and understood.0

A number of cost methods and records will now be consid­ered! namely, those used for inventories, purchases, sales, and turnover. .

INVENTORIESPerpetual Inventory. - Among the various records kept

in cost accounting, that of perpetual inventories is of primary

importance. The perpetual or running inventory In retail stores Is a subsidiary record which gives control over merchandise, and permits a dally knowledge of stocks of goods on hand. With these records, stocks may be regulated by means of piece con­trol and sometimes by dollar control as well.4 The record,

Altman, "cost Records, p.5®Eggleston and Robinson, "Business Costs”, p.43.^Basset, "Accounting As an Aid to Business Profits," p.4. *Brlseo and Wingate,"Retail Buying", p.54.

which is usually kept on cards* generally.shows a minimum limit, and when that limit is reached hy the balance on band* a new purchase is made of the article*.Sometimes a maximum limit and the amount to order is also indicated In the record* A simple example of pieee control follow*$

- 2 2 -

ArticleSymbol

- sacks of Huron Cement- XlB

Maximum - 1000 Minimum - 100Quantity to order - 50

Date Ordered Received Withdrawn Balance

jan. 2 8 3 BOO

200TOO

8 4- - ■ ■ • - - - -

60 650

A atook record by dollars could be made similar to the one above,' or be eoatolned w 1th it. When values are shown, they may be compiled on the first-in, first-out theory, or on an average cost per article theory.5 in the first case, the cost of the oldest goods in stock governs the costing of sales, with the balance on hand priced at the cost of the last goods received.

The advantages of a perpetual Inventory arei1. It provides a check on physical inventories#2. It shmis the Iw b due to shortage, stealing,

;or error.3. It aids the buyer in ordering,4* It makes possible a smaller Investment In

' ■ . . ' : merchandise. . ' . •, .. .

5Finney, wPrinciples of Accounting, Vol.l,eh.28,p.lT.

S3

5. It lessens the ohanee of being out of goods.6. It discloses slow selling merchandise.7. It aids In preparing monthly financial statements.

Adjustment of the balance on hand Is made when a physicalInventory shows a shortage or overage.

This method la not generally used In small stores. With large stores, more depends on the records, and perpetual In­ventories have frequently been Installed. Though the ’’retail method® of Inventory, which will be explained later. Is sup­planting It In many large department stores.

Estimated inventory. — Merchandise Inventories, with the possible exception of the physical Inventory, are more or less of an estimate of stock on hand. To satisfactorily control a business, reliable monthly financial statements are needed.6 If the amount of detail, expense, or other reason has caused a business to be without stock records, then an estimated In­ventory may be determined.

An estimated or "gross profit® method of "approximating" an inventory is based on the assumption that the per cent of gross profit should be approximately the same In successive

periods.7 Supposing the rate of gross profit during the past five years has been uniformly 29 per cent of the sales, then 89 per cent Is assumed to be the rate during the last period.

Ssioholson, "Profitable Management", p.102"Finney, "Principles of Aeeountlng, Vol.I,ohep.28,p.l2.

- 24 -

An Illustration follows:Phfsleal Inrentory of January let.Purchases during January Total

Deduct approximate cost of goods sold:Sales for January #20,000.00Leas estimated gross profit:

(approximate rate of gross profit 29%)22% of $20,000.00 5,800.00 14,200.00

Approximate Inventory » January 51st, 45,8o0.00; . , ' ' ' ' ' ' '

Some uses of estimated inventory are:j' ' ■

1. To provide information necessary for the prepare- tion of periodic financial statements.

2. To enable auditors to verify inventories to whiehthey must eertlfy,

... - . '3. To facilitate adjustment of fire losses.

, 4. To imrease the accuracy of turnover figures (ex­plained under "turnover")•

Physical Inventory. — The taking of a physical inventory of the merchandise is necessary to determine the profit or loss of a store or a department. If a perpetual inventory is main­tained, it needs to be checked by an actual count sad valua­tion of the Items - a physical inventory.8 Due to the time and expense involved, a physical inventory is usually taken one# a year, at the close of the accounting period* Accuracy is of primary importance, and a carefully thought out plan and list of instructions to those taking the inventory are advisable,

80reene, "Principles and Methods of Retailing", p.97.

#50,000.0010,000.0060,000709

« 88 -

Thevaluation of Inrentortee according to the Bureau of Internal ReveniH must be on either of two bases t

1. cost.8. Cost or market, whichever Is lower.

By coot Is meant the invoice price plus all expenditures incurred in placing the commodity in a condition to be sold.For Instance, the drayage and freight may be added to the in­voice price. By market price is meant the present cost to re­place the article - not the price at which it may be sold.9

Although great care is used in obtaining the physical in­ventory, there Is apt to be a shrinkage - as shown by the dif­ference between the book and physical Inventory. Some of the causes of shrinkage are: dishonesty of the public and theemployees, errors, nature of the goods, etc. A definite allow­ance for shrinkage in each department is often set up, and If this percentage is exceeded, its cause is sought.

The retail method of inventory. — The leading department stores of the nation have recently adopted the retail method of inventory, and there Is a tendency for more stores to follow their example.

A record, usually for each department, is maintained show-

treasury Department, Bureau of Internal Revenue, Regulations 65, Articles 1612-1614.Should the reader desire a more detailed consideration of the terms and methods mentioned, the following references arerecommendedtSailers, "Accountants* Handbook", P.S8S-577.Finney, "Principles of Accounting", vol.l, chap.28.Montgomery, "Auditing Theory and Practice", vol.l, p.117-160.

86 *

log beginning inventory and parebasee during the period at cost and retail or selling price, changes in selling pries and other factors are accounted for, so that at the end of an

accounting period, when tales are deducted from the total the

remainder Is a book inventory at retail figures.Once or twice a year, a physical inventory is taken at

retail price only. This Inventory is compared with the book re­tail Inventory and discrepancies In the book Inventory adjust­ed. The physical inventory figure is reduced by a calculated percentage to derive the cost of the inventory on hand. The accuracy of the method is attested by the fact that its use in preparation of Federal Income Tax returns was approved in Treas­ury Decision 5068, issued August 16, 1920.3,0

The advantages of the retail method are as follows t1. Ease In taking selling price imrentory*2. Provides control through check with physical

inventory.S. Valuable in ease of fire loss due to book in-■ - .. ventory.4. Provides necessary information for monthly finan­

cial statements, .

Treasury Department, Bureau of Internal Revenue, Regulations 45, Article 1588.

A thorough understanding of this method, which is rather in­volved, can he gained from the following references:

Controllers* Congress "Standard Method of Accounting for Re­tail Stores", vol.I$ "Report of Third Annual Convention", pp.56-61; "Report of Fourth Annual convention". pp.lR. 44-4 6 * 124-128; "Report of Fifth Annual Convention", p.47; "Report i Sixth Annual convention", pp.84-87; Fri, "Retail Merchandising *. pp.98-115. ^ '

The dteadhrmateies of the retail method are as follows:

1. The records are rather expensive to maintain*2. It Is not adapted to all lines of budlnees*5. It depends on a system of averages and thus is

liable to Inaeenraeles*Ita mae oill probably be more common in the futures as

for many stores its advantages outweigh its disadvantages.*1

PURCHASESThe purchase of merchandise is made by a buyer or a pur­

chasing agent. He should know what, when, where, and how much

to buy* He gains this information from records and expertense.

Procedure. — Procedure in buying varies. A proper method is for a department buyer to make out an order, and secure the

approval of the merchandise manager or hie representative. The

order may be given direct to a representative of the vendor, or sent to him. The order, with its purchase order number, should be written on a standard form. When the vendor fills the order, he should place the purchase order number on his in­voice and mark It on the packages of merchandise shipped, for idenCifleatlon of the order. When the goods are received from

the vendor* it is important that the receiving department should check the quantities of merchandise received with the vendor’s invoice. This eheck may be made directly on the vendor’s in-

^^Fri, "Retail Merchandising’’, pp.114-115.18Greene, ’’Principles and Methods of Retailing", pp.76-82.

voice or by means of a "blind check", in which case the goods are listed, and that list is later cheeked with the vendor's invoice. The vendor's invoice is them checked with the pur­chase order as to quantities, terms, and prices. The amount.of the invoice should then be credited to the vendor’s account andcharged to the Merchandise Inventory or Purchases account of

- 13 ■the department ordering the goods.

Discounts.— Purchase discounts are certain percentages deductible from prices quoted to the retailer. Three classes of purchase discounts are cash, trade, and quantity discounts.14 Cash discounts, inducements to pay cash, are not usually in ex­cess of two per cent, and are best treated as financial income on the profit and lose statement. The other two dismounts are properly considered as a reduction of the cost of goods pur­chased. A cash discount of two per sent in ten days with full payment to be made in thirty days, makes the taking of a dle- count advisable, for then the possible saving is equivalent to thirty six per cent per year less the cost of securing funds necessary to take advantage of the same.

A trade discount is a deduction from the catalog selling or list price quoted by the vendor. Besides tending to main­tain uniformity in the selling price, it makes possible, through the medium of discount lists, a change in quotations without the expense of publishing a new catalog. A quantity discount

^Brisco and Wingate, "Retail Buying", p.230.^Lincoln* "Applied Business Finance", p.640. .

- 28 -

29

Is a deduction which Increases In size ulth the quantity of merchandise ordered, care needs to he exercised by the buyer

against letting larger quantity discounts unduly Influence the size of orders given.15

SALESVolume of sales Is a great governing factor In retailing.

Because of Its Importance, sometimes managers lose sight ofthe real goal o£ business enterprise, net profit, and failure

- ■ ' ...results.

Met males. - Met sales Is the remainder after sales re­turns and allowances are deducted from gross sales. It Is a very significant figure and la the basis upon which most per­centages and analyses of sales are calculated. This base M s been widely adopted so as to permit comparison between stores as well, as between departments. "Retailers have also adopted the practice of figuring the mark-up pereeatage on the retail price rather than on the cost price, as was formerly done".16 The Improper use of percentages and the failure to state the basis on which such percentages are calculated often result In confusion and errors. As an example of variations due to bases used, 25 per cent on the selling price equals 35-1/5 per cent on the cost price. Maintaining the net sales figure as a base of 100 per cent lessens errors and difficulties.

^national Cash Register Co., "Better Retailing", p.20 .16Prl, "Retail Merchandising", p.52.

m ' 50 «"

C@#t of sales aoooant. - Am extra column entitled "east of sales" Is sometimes added to a sales Journal. When sales

are entered, the east af those sales Is also entered, for a record is kept of the cost of all goods handled In some busi­nesses. This procedure la not common but can be followed out when there Is a relatively small variety of merchandise sold.

At the end of the month the total of the column Is posted to a cost of sales eecount in the general ledger. The total of cost of goods returned Is credited to the eoet of sales account.

Then the balance Is closed to the trading account by a debit to trading and a credit to the cost of sales account.

The use of this account makes It possible to draw up month­ly financial statements without the aid of a physical or a per­petual inventory. Beginning inventory plus purchases and less cost of sales leaves the cost of goods which should be on hand at the close of the period.^

Gross margin. - Deducting the total cost of merchandise sold from net sales leaves gross margin. Some stores have be­gun using the term gross margin In place of gross profit, for the word "profit" carries the erdng meaning to people who do not understand the terminology. The cost of the sales that are made really includes operating expenses as well as the cost of merchandise. "Profit" is best used when eon#lderl%% net profit which is the difference between sales and cost of merchandise 17

17R It tollhouse and Clapp, "Accounting Theory and Practice",Unit II, p.150.

ylus operating expenses.18Some of the controllers of retail store# have recommend­

ed that retailers should Include operating expenses as a part of the coot of sales, and have no gross profit or margin fig­ure . This statement would leave only net profit, and might he desirable so far as publicity purposes. However, it would not be advisable for the purposes of management, for the gross margin needs to be known as an aid in pricing goods and for control. ,

The percentage of gross margin varies greatly between different types, and within the same type of retail stores. Results from many bulletins of the Bureau of Rseearsh, Harvard University, show results whieh are tabulated below.

Pereentage of Operating Expense, Gross Margin, and Met Profit in Different Types of Stores,1®

Net Sales » 100 per CentType of Store Gross

Ma^laOperating

- Expecse . -HetProfit

Year

Department 2775 27.1 •VSpecialty 31,9 29.4 2.6 1922Jewelry 36.4 i;9 1923Shoe. t@,l 20,1 0.0 1922Grocery 19.1 17.3 1.8 1925

54,0 27.6 6,3 1919■ Hardware 27.1 21,0 5.8 1919Gen1! Mdse. 19.0 1S,S 3.4 1918

These figures would tend to show that the average mer-

J^Fri, "Retail Merchandising", pe56. igXbld., p.68.

- 32 -

chant wist make from 25 to 30 per cent gross margin on sales to cover operating expenses, and produce a reasonable net pro­fit.

Sales analysis. — The class If le&tlon and analysis of sales data varies with the business and the Information desired. There are several bases on which the sales may be analysed«

1. By departments, commodities* or sections,2. By terms of sale,3. By price ranges,4. By methods of delivery,

. 5. By salespeople.Analysis by selling departments or their sections, or by

commodities, Is essential for a store handling a large varietyof merchandise* The desired detail and Information can be ob-talned from the males slips of the smaller units of a business*A selling department may be that of men’s clothing with its

emotion of men's shirts. A commodity analysis could be made ofcoal, wood, and tee in a business selling those materials.

*

Analysis by terms of sale might be as to; sash, sales on seeem^, C.O.D., installment, on approval, etc# . Increase in cash sales is usually desirable but investigation may show that the increase is due to greater severity in the credit depart­ment, and that good credit customers have been-lost.21

- a*"- - ' - - ' - - ' ' " : ' --Me Kinsey, "Bookkeeping and Accounting", vol.n, pp,840-886.*0ontrollers1 Congress, "Fourth Annual Convention Report".

; pp.82-87* ; .. .. : : .

Sales on aeeonofc ml#it Insrease unduly, due to more lenient

©redit terms, or a general business depression*The stu# of price ranges Is apt to show that too many

different price lines are carried. Price ranges refer to dif­ferent souse or levels of prices, whteh vary by gradations from low to high.82 The number of items In each range or line may be more Important than the amount in dollars, as the num­ber of pairs of shoes in each price range in a shoe department.

Method of delivery refers to mall, parcel poet, express, freight, or delivery by the store equipment* Analysis would show the. costs and effeettveness of each method. Results might prove that deliveries could be made more eeonomlcally by con­tracting with an independent delivery com^ny than with the store equipment, or that efficiencies could he Introduced re- dueing present costa.

Analysis by salespeople is very Important. Sales are usual ly recorded according to the person making the sale, for the paying of a commission according to amount of salve la a oom- nron practice. Analyzing these sales by salesperson permits the making of an estimate as to the person's efficiency and value

to the business. One clerk's results can be measured by that of another in the same department, not only by dollars of sales, but by numbers of sales made, average sale, sale of staples or speeialtlea, average number of items per sale, per­centage of sales returns to sales, ete.

^Prt, "Retail Merchandising", pp.177-178.

«*' 54 •

ftmiOVER , ' : • : . ' . . , ,"Tiumover is fcho number of times capital in the form of

etoek*in-trade is reinvested in stook-ia-trade during a given period."^ word "turnover" is used in different though* when referring to other than turns of stook. It must be qualified to be properly used. Because of this possible con­fusion* a new term "stock turn" has been coined which is com­ing into more common usage in retailing.

Methods of calculation. - There are two methods of fig­uring turnover $

1. Divide net sales for the period by the average

inventory at selling prices.2. Divide net sales at cost by the average inventory

y-v ; / : •: , ' ;■ . ■■ - ' ' • . ' •at cost.The calculation of the average Inventory is important,

for an incorVeet average causes an error in the rate of turn­over. The most oosmon average inventory is found by dividing the sum of the beginning and closing inventory of the fiscal year by two. The Harvard Bureau of Business Research* in its study of retail stores, uses that method because most stores use that basis* But the rates of turnover are then higher than would be the case if monthly inventories were averaged.24 The

averaging of monthly inventories results in a more accurate

^Sailers*, ■Accountants* Handbook",p.366. ; v. ;. '®«Frl, "Retail Mtrehandisihg", p.124

rate of turnover. The reason is that the inventory taken at the start and end of the ealealar year* when •most stores take physioallnventory and close their booksf is uniformly smaller

than the inventories taken throughout the year.Due to the nature of the merchandise handled, it is found

that turnover is higher in some classes of stores than in others A newspaper stand might have a turnover of 500 times a year and

consequently need only a relatively small working capital.shlle

a jewelry store would be more apt to have about one turn a year and, therefore, need a relatively large working capital.; Importance of turnover. - HInereasing stock tim^over has

been found to be the surest road to prof its.1,85 With greater

turnover the stock bee<mes smaller in relation to sales. Small­er stocks mean saving in interest, insurance, and taxes. One

third to ons half of the operating expenses are fixed, and, within the maximum limit of existing facilities, do not vary with sales. Selling expenses do Increase, but usually not in proportion to sales. Thus an increase in turnover tends to in­crease net profits and the return on the investment.-"

Investigation by the Bureau of Business Research of Har­vard University of several types of store# Indicates that an inoneaslng turnover Is accompanied by a relative decrease in the total expenses, and an increase in the rate of net pro­fits under average condition. One of the resulting tables • . '■ ’ : ; .. .. . ' . , ' .. 25Brlteo and T/ingate, "Retail Buying"f p,306.

follows !

Percentage of Expenses, Grogs nsrgln, and net Profit In 1923, in Department Stores with Set Sales of

; V' -.:-'$liC)QO OOO and Over According to Rate ofStock Turn*

llet Sales = 100 Per Cent.

O d t ■ '

Stock Turn Less 3-5.9 4 Timesthan 3 Times Time and Over

Huatoer of firms : 39 ' - .. 62 61Salaries and wages 16.6 15.4 14.7

■ Rental®v . ' - ' ■ 5.2 2.7 2.6Advertising 2.9 2.9 3.0Interest 2.4 1.9 1#4Traveling 0.4 0.4 0.4Losses from bad debts 0*1 0.2 0.2Total expense 30.5 28.4 27.1

Gross margin 35.1 32.1 31.3Hat profit 2.6 3.7 4.2

The average retailer is learning that his profits are not what they should be. He is seeking to find the way out of his difficulty w ithout very much trouble and expense on his part.He realises that the largest stores have installed find are de­

veloping extensive systems of eoets and records, such as are briefly considered in this and the following chapters. When he realises that the largest establishments cannot afford to be without adequate records, he may take the truth home to himself# With general adoption of more efficient methods of control, com­petition la apt to force the lowering of prices. This will bring

about the elimination of those retailers who fail to make use of such more efficient methods of control*

^Bulletin Ho.44.

- 57 •

CHAPTER IVEXPE1SB CLASSIFICATIO*. AMD DISTRIBOTIOH

CLASSIPICATIOH .Purpoae. - One of the moat important and difficult phases

of adequate aecounting for large mercantile establishments is

the classification and distribution of expense.There are two main purposes of classifying expense data. These aret

1, To help find the costs and profits by selling depart­

ments or sections,2. To permit control of the different kinds of expenses.

Knowledge of the costs and profits for each selling sec­tion make it possible for the management to test various mer­chandising policies. Perhaps it is found profitable to expand certain lines of merchandise, while others should be discon­tinued.

The second main purpose of classification is to permit ex­pense control. The way this is brought about is by making some person responsible for each group of expenses. to accomplish this, expense standards are set or expense budgets made up,Ex­penses also need to be analyzed according to their nature, as, salaries, advertising, and aupplies,1

The controllers * congress plan. - The introduction of sys-

^Hodge, "Retail Accounting and Control”, pp.153-152.

• 58 **

terns of expense classifications and distribution in retail stores has been a comparatively recent development. A few years ago only rarely did two Independent owned stores use the same classification and method of distributing expenses* For this

reason the Controllers' Congress of the National Retail Dry

Goods Association drew up a standard system of classification and distribution of expense, which was adopted by the leading

department stores and many others throughout the country* The

Harvard Bureau of Business Research uses this classification

in many of their investigations.The plan as finally agreed upon was a compromise and an

adaptation of the various systems in use during 1922. While not considered perfect. It was believed that the classification marked a great advance In accounting. It would permit compar­isons and exchange of valuable information. The complete plan was to furnish a uniform system of accounting and expense for all retail stores. With small stores expense could be treated as belonging to the business as a whole, while in large stores, the expense would be distributed to eaeh department, The ex­pense classlfleatlon of the Controllers' Congress is followed throughout the remainder of this chapter.

SYSTEKS OF E3CPB8SE CLASSIFICATION

Functional classification. - The five group classifica­

tions of expense follow closely the natural operating functions of a retail store and afford comparison and control. They are

t

- s e ­as follows t Administrative, Ooeupanoy, publicity. Buying, and Selll^i (Including Delivery)# The letters A,0,P,B,S, are the. designated symbols for each group classification, and are to be prefixed to all Items of expense charged direct to selling

departments.The activities of the store are classified under the five

subdivisions according to the following lists:

Administration. - general administrative expense Includ­ing executive offices, aeeounbing offices, credit offices, superIntendency, and general store expenses.

Occupancy. - Items applicable to maintaining the premises occupied Include supervision, operating, housekeeping, protec­

tion, warehouse, heat, light, and power.Publicity. - General and circular advertising, windows,

and Interior decoration.

Buying. - Merchandise office, outside buying offices, receiving, and stock rooms.

Selling. - General selling, adjustment, mail and telephone orders, shipping rooms, garage, automobile, and other delivery.

The system of accounting Is planned for use by four olass­es of stores: A,B,C,D. The Class A stores are small, B and 0larger, while the D stores are the very largest. The function­al classifications are also divided into subdivisions varying with the size of the store.2

2More detailed explanation oan be found In the following re­ferences: Controllers1 Congress,"Standard Method of Accounting for Retail Stores”, vols.I, II; "Report of Fourth Annual Con­vention".

40

lafeural olasslfloatloaf — The small unit store with one man performing all the functions of buying and selling, does not require the functional class if loat ton, and the natural div­ision alone Is necessary. If the business Increases in else, the functional groupings may be added.

The natural divisions of expenses are those divisions or

accounts to which expenses are naturally classified or charged. Usually the natural divisions are first determined or known, be­fore the functional classification Is applied. Large stores must

be separated Into departments with appropriate records for the same. The natural divisions, then, provide accounts to which de­partmental expenses may be distributed. There are fourteen natural classes of expense under each of the five functional

groups i

IT Salaries and wages. - This Includes all compensation to employees for salaries, wages, commissions, and bonus.

■ . -V * ' -2i Rentals. - This includes all rents paid plus Interest

on improvements for premises occupied, though not owned, and interest on valuation of owned premises, together with charges for taxes. Insurance, depreciation, or other appropriate charge.4

3. Advertising. — All newspaper, periodical and program space, street-car cards, billboards, catalogs, circulars, elee- trto signs, and other means of obtaining direct advertising value•

I Ibid. ■ . , ' ' ■- 'See foot-note under "Interest".

- 41 —

4 .Taxes* — Taxes and licenses.6. Interest. - This item Includes the interest on horpswed

money and on the net investment in the business exeept that on real estate and improvements on leased property provided for under rent.5

6. Supplies. - This item includes all supplies, suoh as

water, gas, fuel, subscriptions to publications, and all ether materials needed for the operation of the business.

7. Service purchased. ” When purchased from outside sources, heat, light, power, and delivery are included under this item.

8. Unclassified.— Under this heading is included such #*• ponses as membership dues, entertainment, Inspection fees, dona­tions, and welfare work, which are not definitely provided for under other captions.

9. Traveling, - Traveling expenses incurred in connection with the operation of the business, including buying and selling.

10. C©wmnieation, — This heading includes all postage (ex­cept parcel postage bn packages), telephone, telegrams, andcable charges.

11. Repairs. - All repairs for which depreciation is not provided.

5Stores differ as to ownership of the property occupied and used. To gain uniformity in treatment of interest, the interest charges in the Controllers1 Congress plan have greater scope than many accountants would favor. The charging of Interest as a cost of expense, except where actually paid out is a contro- versal subject in accounting. See Sooveil,"interest as a Cost", entire book! Clark',"The Economies of Overhead Costs",pp.66-69s Lawrence,"Cost Accounting",pp.818-884.

- 42 -

12. Insursnoe. - This item includes the eoet of all forms of inauranoe oovering losses sustained from fire, lia­bility, sprinkler leakage, use, occupancy, life, and theft.

15. Depreciation. - This caption includes the amount con­

sidered as covering amortisation, wear, tear, and ©bsolesenee••

of buildings, leasehold, bad accounts, fixtures, and equipment, 14. Professional services. - This heading includes the cost

of professional services purchased, such as % law, accounting,

secret service, collection, advertising, and other miscellan ­eous services.

The fourteen natural classes may be divided into subclass­es, according as the sise of the enterprise requires. As an ex­ample, salaries and wages are divided into salaries, wages, commissions, bonuses, and other subclasses. In fact, for thelargest type of store, about four hundred accounts are provld-

%

ed for possible use. Because of the large number of accountswhich may be used, a system of numbering has been devised to

' • ' •“ - • '

aid distribution of the expenses.

DISTRIBUTION AND PROBATION OP EXPENSEDirest and indirect expense * — Expenses, which clearly

originated in and are due to the activities of a department,

are called direct expenses. Indirect expense or "overhead" is the expense incurred as a result of the general operations of

the business. Direct should be distributed directly to the

6Lawrence, "Cost Accounting", PP.21,22,

« 43 -

appropriate expense accounts of the particular department. Indirect expenses must be applied to the different depart­ments of the business In some Indirect manner. The management should always know whether or not a selling department Is pay­ing a profit. To gain this Information, a means must be found for charging the department with Its Just share of every ex­pense.

All expenses are originally charged either to selling de­partments, or to service or non-selling departments. The

charges to service are then redistributed to the selling de- 7partments. For Instance, If the Adversttlng Signs department

made some signs for the Ribbons department, the cost of those signs should be computed and charged to the Ribbons department,

nSome authorities disapprove of the policy outlined above. One

states:"There are five factors or principles which must be con­sidered In deciding upon a method of expense distribution:(1) Question of responsibility; (2) Susceptibility to analysis; (3) Economy of time and effort; (4) Accuracy; (5) Expediency." (Hodge, "Retail Accounting and Control", p.174.)"General executive expenses, however, should not be allocated

to selling sections. This Is a group of expenses which are com­pletely outside the control of the selling section heads, the merchandising manager, or of any of the functional managers.And there Is no longer basis of determining the Incidence of this group of expenses on the selling departments. The net oper­ating profit of the various selling sections,therefore,should be obtained without including In the expenses charged to the section any portion of general executive expense. This group of expenses may be deducted from the total of the net selling pro­fit for the store as a whole, before arriving.at the final net operating profit. Similar treatment should be g i v e n * s u c h items as Income taxes, capital-stock taxes,directors r fees,.... since there Is no basis of attributing them to one function, rather than to another. Also there is no basis of determining in what proportion these expenses benefit the selling depart­ment. Like the general executive expenses,therefore,they should not be distributed at all." (Ibid,, p.177.)

44

and eliminate this coat free the total operating expenses of the Advertising Signs department.

Bases of preration. - The Indirect items of expense are prorated to the different selling departments on one of the following basest

1, Volume of sales,2, volume of eostpurehaaes.3, Average stock,

4, Value of space oooupled.r •- ■ 5. Space used. ■ ' '

6. Packages delivered and returned.7. Value of equipment used.8. Total transactions,

9. total charge transactions.The Class "A-1 stores use only the first four bases, the

Class ”B” stores the first six, the Class "c" stores the first seven, and the Class "D" stores use all nine bases.

Distribution of expenses. - The principal Items of ex» pense are distributed as followst

Administrative, ~ These expenses, exsept Insurance, in­terest, and taxes, are prorated to the selling departments on the basis of the net sales of eaeh department. Insurance, In­terest, and taxes on merchandise are prorated on the has Is of the average stock on hand throughout the period. In Class ttA" stores, ail administrative expenses are distributed on the basis of net sales.

• 45 -

Oaoupanoy. - Rentals are the largest Item tmier os* oupancy. To determine the amount of profits and for purposes of comparison, the consideration of rentals needs, to be uni­form, whether the operator leases, owns, or partly owns the properties used. The management includes rentals on owned pro­perties used by a business, in the expenses of a merchandising enterprise to determine the amount of profits arising out of merchandising operations. The amount of rental may be determin­

ed by considering the rental value of similar near-by pro­perties, and by figuring a proper return upon the apparent

oreal estate value of the property.

After all rentals are determined, the next procedure should be to decide upon the relative values of different parts of the premises. Consideration should be given to the

value of the. show windows, street floor, basements, upper floors, and most favorable locations. Then the rentals, with practically all other ooeupancy expenses, are distributed according to theproration bases* value of space occupied and amount of space

„ “ ' ■ - . , ' , ■ . ■ . • ■ ... ■used. •Publicity. - The expense# of the window display depart­

ment, which includes all operating costs inclusive of floor space rent, should be charged directly to the selling depsrt-

AAccountants disagree as to the propriety of ohargiig rental on owned property. SUeh charges need to be deducted from Fed­eral Income Tax returns as they are not allowable deductions. Reference* Treasury Department, Bureau of Internal Revenue, Regulations 65, Articles 101, 661.

• 46 *

ment on the haela of arbitrary rallies of eaeh window, accord­ing to display value, and the number of days the window Is used.®

Advertising for the benefit of specific department# should be charged directly, when possible, to the particular selling department concerned. General advertising should be distribut­ed on the basis of volume of sales. Class "A" stores distribute all publicity expense, except window rental, on the basic of volume of sales.

Buying. - The salaries, traveling, and other direct ex­penses Incurred by the buyers should be charged to the depart­ments for which the expenditure was made. Other than direct buying expenses are charged to the different departments on the basis of volume of cost of ptsrehases.

Selling. - Salaries, wages, and other forms of compensa­tion to salespeople are distributed to the selling department# direct. All other selling expenses, with the exception of de­

livery expenses In the larger stores, are distributed on the volume of sales basis. Delivery expenses in the larger stores are placed on the beets of peekeges delivered for the different departments. Consideration is often given to their else, weight,g .•-In cons treat to this method of window rental there is the practice of many retail stores of making no charge for window rentals, but to distribute window expenses to the celling de­partments on the basis of neb sales. The theory being that the windows should be used to fcttact trade te the whole store rather than to any particular department. (Prl; "Retail Mer­chandising”, p.86)

47contents, value, or other factor In giving packages a relative weight upon which to base the delivery charges to the various

departments e .<

10SOURCE OF INFORMATION FOR EXPENSE DISTRIBUTION.

ExpenseInvoices

orPurchases

Supply Pay Roll AdjustmentsRequi* Salaries for Fixedettloha ami Charges and

Wages Other Expenses____ 1 ______ J

'journals

CashReceipts-Credits*

Divide into five Functional Groups and then into Sell- ing Departments

Take off ‘ Trial Balance, sep­arate by five Func­tional Group Class­ifications and then by departments

Trial Balance of Expanse Distribution

General Ledger -Record should agree -------- --- — J with Controlling

Account in General Ledger_____

10Controllers1 Congress, "Standard Method of Accounting for Retail Stores", vol.II, p.42.

48

CHAPTER V

MAT!ACERIAL COHTROL THROUGH COSTS

BALANCE SHEETThe balance sheet Is one of the financial statements pre­

pared by the accounting department to meet the requiremente of management, investors, creditors, and government regulations. The balance sheet Is a statement of the financial condition of the business at a given time. It contains a summarised list of the assets, liabilities, and proprietorship of the business and

their values. Due to custom and peculiarities of the various types of business there is no uniformity In the form of balance sheets.

Analysis and comparison, - Hot only does the management

need up to date Information, to be able to successfully direct the enterprise, but It needs detailed Information with analysis

and comparison. One of the most common comparisons sought from a balance sheet Is the ratio of current liabilities to current assets, called the working capital ratio or current ratio. The working capital Is the excess of current assets over current liabilities. The current ratio Is frequently considered for credit purposes. This ratio Is not always what is seems. .The

general belief has been that a two to one ratio was evidence

1 'oaiiers, *Ae0ountants* Handbook", p.520.

that a builnaas was on a firm foundation. But investigation2shows It Is not so signIfleant as It formerly appeared.

Factors influencing the size of the current ratio are: type

of the business, time of the year taken, terms of sale, rate

of turnover, stage of the business cycle. The type of the business causes a variation In eapltal requirements, such as

inventory*, The management strives to have merchandise stocks low at oertaln times of the year and high at others. A ratio

which 1® high enough at one period in the business cyole may

be too low at another. Other ratios which are sometimes use­ful, particularly in comparing different periods, aret

Ratio of current assets minus Inventory (leaving

"receivables") to current liabilities.Ratio of notes payable to accounts payable.Ratio of owned capital to borrowed capital.

Ratio of capital to fixed assets,Ratio of fixed assets to current assets*3

The computation# of ratios Is illustrated in the follow­ing balance sheet *

* 49 -

*Gttthmann, "Analysis of Financial Statements", pp.151,152. ^Discussion of these ratios can be founl In* Bliss,"Financial and Operating Ratios In Management*, entire book; Guthmann. "Analysis of Financial Statements", pp.161-171; Finney, Principles of Accounting", vol.I, chaps.4,6.

THE BiQRAM TRADIH0 GOMPAliY4Balanoo Sheet

December 31, 19®8

- 50 -

Assets,Current Assetsi

CashAccounts Receivable Motes Receivable Merchandise

Total Current Assets Fixed Assets:

Fixtures and Equipment LandBuildings

Total Fixed Assets Total Assets

Liabilities Current Liabilities:

68*836 Accounts Payable 26,940 Motes Payable 15,070 Total

18,2504,841

mrjm:24,845 Mortgages Payable 1191696 Total Liabilities

■ " 'Capital:31,935 Preferred Stock 12,000 Common Stock 45,500 Surplus 89,435 Total capital

2057185 Liabilities ai

40.00075.000

& s tCapital gflfijafi-

The current ratio is 119,690 : 25,091 or 5.2 to 1The ratio of current receivables to current liabilities Is

94,845 : 23,091 or 4.1 to 1The ratio of notes payable to accounts payable is 4,841 :

18,250 or .3 to 1The ratio of owned capital to borrowed capital Is 136,034 :

73,091 or 1.9 to 1The ratio of capital to fixed assets is 136,034 : 89,436

or 1.6 to lThe ratio of fixed assets to current assets is 89,435 :1 119,690 or .7 to 1

Further information as to various factors is necessary before the above ratios can be definitely known to reflect a satisfactory condition of the business. With no unfavorablefactors disclosed, the business would appear to be in a satis­factory position.

There is a possibility of using too many as well as too

few comparisons and analyses. Statistics should not be pre­

pared which are not used, or susceptible to explanation and understanding.

Ibid., ehap. 4, pp.83,24.

- 51

A good form of comparison is found In Comparative Balance Sheets• A usual form is as follows %

THE INGRAM TRADING COMPART5

Comparative Balance SheetsAs at December 31, 1921 and December 31, 1922.Assets

Current Alsetst cashAccounts Receivable Iotas Receivable Merchandise

Fixed AssetsiFixtures and EquipmentLandBuildings

Total AssetsLiabilities

Current Liabilitiest Accounts Payable Notes PayableMortgages Payable

Total Liabilities

Increase or 1981 1923 Decrease (#)

i 37,155 16,470 7,520

41,685iwpiso52*83526,94015,070

i M

$. 15,680 10,470 7,560 16*840 (*)

58,0008,000

28,90031,93512,000

664,00016,600W ^ 5 5

(*)

80,18520,200iStSis 18,850

4,841237%!50,000Tstim

1,935 (*)

50,000

Capital:Preferred Stock Common Stock Surplus Total Capital

Total Liabilities andCapital

35.00080.000 16,345l3lfME

40.00076.000 81,054

6,0005,000 (»)4,689

209,125 37,395

The above form would present a very general picture of the financial structure of the business, indicating the gen­eral trends. More columns can be added to a comparative bal­ance sheet, thus extending the scope of the study.

Ibid,, ehap.4, pp.23,24.5

- 52 •

PROFIT AID LOSS STATUES?The sieond of the two most Important financial state­

ments is the profit and loss statement. "The profit and loss

statement states the senses of changes In net worth that have taken place during a given period of tltiti as the result of pro- fits earned or losses sustained." The fact that monthly fin-

f ' ' - ..ancial statements can be prepared is one of the momt Valuable

features of cost accounting. With fresh and detailed informa­tion, the management is in a favorable position to direst the

enterprise* ' ’ ' . ■ ■ - ■'Analysis and eomparIson* - Important eomparIsons are form­

ulated by considering net sales as 100 per cent and comparing the other items in the profit and loss statement with it. These ratios are of greatest significance when compared w ith those of other periods or with other stores having comparable condi­tions# The most Important of these percentage# are t

Percentage of gross margin to sales.

Percentage of each expense item to sales.Percentage of total expense to sales.Percentage of net operating profit to sales.Percentage of net profit to sales

These percentages will be of great value when used in a comparative statement of profit and loss. Then a comparison .

®Lawrence, "cost Accounting", p.5."Bliss, "Management Through Accounts", pp.560-578,Finney, "Principles of A©counting", vol.l, ohap.4.

• 85 '

will be made directly between percentages of differentperiods. Differences will be detected and analysis can be

'made in order to determine the reason for a marked change, The following is an example of the form of a comparative profit and loss statement:

THE INGRAM TRADING COMPANY Condensed Profit and Loss Statement

Shewing Per Cent of Each Item to Met Sales - and A Increase or Decrease in Per Cents - 1921 - 1922,°

1921 1922 Increase orDecrease (*)

Amount % of Neti Amount #of Net in Rates fromSales Sales ini

Cross Sales §167,268 100.520 194,084 100.842 .388#Less ReturnedSales andAllowances 865 .820 1.620

192,46%.842 .322

Met Sales iee,*oo 1007000 100.000Less Cost ofGoods Sold 116,480 70,000 158,874 72.000 2.000

Cross Margin •on Sales 49,920 50.000 53,890 28.000 2.000(a) !Less SellingExpenses 25,622 15.398• 25,948 13.482 1.916(a)Net Profit .r' ""r”on Sales 84,298 14.602 27,942 14.518 .084

Less Adminis­trative Ex­penses

Met Profit on14,946 8.982 11,271 5.856 3.126(a)

Operations 9,552 5.680 16,671 8,662 3.042Less Met Fin­ancial Ex­pense 731 .459 1.588 .822 .383

Net Profit foi the tear

%

§8,681 5,181# $15,089 7.840# 8.659#

8Ibid,, chap.4, p,15.

i

x.

54 -

The profit and loss statement can be presented by de­partments to give a composite picture of the business. In the following form

Month of_______ _________ Year to Date

Depart-Sales Gross

Margin% on Sales

Sales GrossMargin

fo on Sales

sent -Sis Last Y|ar Year T L T L T L T L T L

Eo. 1 2 5

epo.

? r 1 1 $ $ 0

Totals

iDeduct Total Expenses

> " e” $ “T

Set Operating t Profit i i % i ■■ $ $ %

Hote - T indicates this year, L Indicates last year- - ■ : * , ' ■ '

These comparisons present to the management a detailedpicture of the operation of the business by departments and as a whole• The management te thereby enabled to judge and direct the individual departments.

• SB -

Subtldlary reports* - Reports made tap of detailed por­tion* of the profit and loss statement are known as schedules#® The reason for preparing eohedules le that If all such de­tails were Included In the profit and loss statement, it would become so lengthy and difficult to follow that its value would be lessened, An example of the form of a schedule followst

THE ISORAM TRADING COMPANYComparative Schedule of Selling Expenses

1921 - 1982 10 , %Increase or Decrease(«)

from 1981, - ■ • - i m

Ineuranoe , $ ■ ^ 5 2Taxes 30Advertising 10,080Salesmen's Salaries 9,000 Salesmen's TravelingExpenses - ' . • 5,686Mieeellaneoue Selling

Expenses _ 315Total ■ ■■ ■ , ' ■ ###*##

tsToo;48

11,38#6,6007,325

Amount

18 60.0070# 6.64

2,500(*) 27.78(a)50.82

Such a sohedule fxmiahes the details of expose whisharc frequently heeded to disclose the causes of abnormal in­creases in expense. %ende of expenoeo are indicated to the management by the use of the following form:

comparative Statement of Expenses Net Sales » 100£

iatural Month or April ~ Year to Date---Divisions of Expense This Year Last Year This Year Last YearSalaries and Wages 1 15.2# $2660.. 15.4#. $7600. 16.1# *7750. 16.4#

other items omitted

MoKinsey,"Bookkeeping and Accounting”, pp.697,698 aoFInney,“Principles of Accounting", vol,l,ehape4, p.19.

• 56 •

Additional records that may be arranged, are daily# week­ly# or monthly statements of department sales, together with

comparative figures for any period desired.

RELATIONSHIPS BETWEEN STATEMENTSThe balance sheet and income statement should also be con­

sidered together to obtain certain comparisons.12 Some of

these comparisons are named and examples cited from the pre- cedding financial statements of The Ingram Trading Company for December 31, 1922. The list followst1. Ratio of net profits to capital - 15,089 j. 136,034 ■ 11.1$ .2. Ratio of operating profits to total eapttal employed -

16,671 : 209,125 - 7.97$.3. Turnover of total capital - 192,464 : 209,125 or .92.4. Turnover of Inventories - 138,674 : 24,845 or 5.65. Turnover of plant Investment - 192.464 : 89,436 or 2.2.6. Turnover of accounts receivable - $192,465 * 300 days $642,

dally sales 15,070 (accounts receivable) * 642 * 23 days that average sales are outstanding and uncollected.

7. Cost of borrowed capital - consideration is given to dis­count or premium and expenses of sale and retirement of fixed liabilities.

8. Cost of all capital employed. Information on the last twocomparisons are not obtainable from The Ingram Trading Company's statements.13

While it should be borne in mind that all comparisons and analyses will not be needed for every business, the use of others than those mentioned may be advisable in a particular enterprise.

iiAAn extensive list of reports for a department store are to to be found in Hodge, "Retail Accounting and Control", pp.62-66. 1,5Sailers, "Accountants' Handbook”, pp.521-327.t,Bliss,"Management Through Accounts",pp.68-91. xoIbid., p.68.

- 57 -

OSE OF GRAPHIC CHARTSMany managers fall to realise the extent to ohteh eoet

data can be made useful In their planning. Perhaps the dost accountant has not sold the idea of the value of eoet figures to the executive. He can frequently find an effective Instru­ment In the graphic chart. Pictures have appealed to mankind since the earliest times. Thus a prastlsal means of drawingattention to facts and figures Is found through the language

:of pictures. Graphic charts generally require less time and are easier to understand than tables of figures. "Cost account­ing constantly looks beyond the present and attempts to pre­dict the future In the light of the performances of the past."I*

Hence graphic charts are especially valuable In clearly bring­ing out relations and tendencies. Such charts depict the peaks and hollows Indicated by the various data* General underlyings trends are discovered, the knowledge of which Is of great value fc o. management •

BUGGETARY CONTROLAll business enterprises make some plans for the future.

The future sales, financial requirements, and approximate ex­penses may be estimated. When this planning Is made in accord­ance with the time element. It becomes budgeting.

l^Lawronse* "Cost Accounting", p.325.References for extensive readings on graphic charts are ao followss Ibid., pp.325-345;Karsten, "charts and-Graphs!,, entire book.

"Budgetary control rasans the dtreetton of all the opera­

tions of a store by means of specifio plans prepared in advance.These plane, which are contained in an instrument called a ■ . ■ ' •• ■ ■

"budget", are a series of estimates on each of the majoractivities of the business over a definite period of time."16 The budget period, in theory, should cover one complete cycle in the operations of the business, m practice, a six months

period is found to be better adapted to retail business. The

six months time is usually divided into units of months, though a week la sometimes the unit employed. The procedure in obtain­ing budgets varies. Usually, the department heads carefully < make estimates that are reviewed by an executive and the budget committee, which may be composedof the departmental or function­al managers.The budgets may need revision to conform to the other estimates or the Judgment of the budget executive and

the committee• When the budget is approved, it becomes the standard toward which to strive. As time elapses and the estimates prove incorrect, the reasons for the variations are studied and the future estimates may be varied to meet the new conditions.The need of adjustment to meet such new situationsemphasises the importance of flexibility in the budget.

17Fornis of budgets. - Budgets may be applied to almost every

1®Frl, "Retail Merchandising", p«89.17Discussion of budgets and budgetary control can be found in the following references:

Controllers * Congress,"Report of Fourth Annual Convention", pp.48-56| Chamber of Commeree of the United States, Domestic Distribution Department, "Planning tour Business Ahead";Hodge, "Retail Accounting and Control", pp;154-170;McKinsey, "Budgetary Control", entire book.

. 89 .

phase of store operation, though the principal forms of budgets are: sales, merchandise, expense, financial, and advertising.

Sales budget.• A sales budget is a plan for estimating future sales for a given period in light tif past, present, and future conditions. An usual form contains a record of sales by months for the proceeding year, estimate for this year, and actual sales for this year. This budget contains a report foreach department and the totals for the store.

18Merchandise budget. — This one is an extension of the

sales budget. With the sales estimate knom, purchases are planned for the same periods with the aid of perpetual inven­tory records. Turnovers, mark-ups, mark-downs, etc., may be

estimated and recorded. When the estimates vary from the actual results* purchase estimates and requirements for the future periods are adjusted to conform to the new conditions. The two main purposes of the merchandise budget of plan are; (1 ) to aid the buyer in regulating his purchases for the different periods; and (2 ) to give the controller an estimate as to the amount of revenue from sales and the cost of merchandise com­ing into each department during the period.

Expense budget*®— Estimates are prepared of the expenses of each department or section, and any expenditure beyond the budget limit must be especially authorised. Usually monthly re-

"&®tallIBrohandlslng", pp.187-209.1%ood references on expense budgets are; University Journal of Buslness,Jtine 1985, "Periodic Expense Report"; Hodge, "Retail Accounting and Control", pp.154-170.

ports are required to show the relation between planned and actual expenditures,Through the exchange of expense data be­tween stores with comparable costs and the studies of various organizations, there have been established standards of operat­ing costs which serve as dependable guides In establishing an

:expense budget.

Financial budget.— After the proceeding budgets are de­termined, the financial program Is planned from an estimate of the cash receipts and disbursements, whleh comprises the finan­cial budget.

Advertising budget. - This form Is a special type of budget. It is usually planned In conformity with the sales estimate.

There may also be a complete co-ordinated budget for all store activities. A requisite for such a plan would be that all departments be operated on complete budgetary control.

Advantages of budgetary control. — There are certain ad­vantages found in budgeting, as:

1. A better understanding of the business operationsIs fostered,

2 . Co-operation should be facilitated,3. Responsibility is fixed,4. Standards are set by mutual consent,5. Administration Is simplified,6 . The tendency toward "snap judgment" Is lessened,7. A definite mark Is set for accomplishment.

- 60 -

- 61

Inference should not be drawn from this H a t of ad* vantages, that budgetary control is a cure for all business troubles. Budgeting cannot take the place of adequate executive control, it is only an air toward that end. Favorable condi­tions are needed for its proper functioning. Failure may re-

suit from the following causes? lack of co-operation of the employees? non-enforcement of standards? insufficient time allowed for its fair trial by a buciness? and its becoming inflexible.

Some forms of budgets are employed by the large department

stores but their use is limited in retailing. Today education and improved methods are being introduced into the retail field faster than ever before. The different forms of budgets will aid the efficient retailer to maintain his position in the face of strenuous competition.

OHAPrm viAPPLICATION OP COST ACCODHTINQ PRINCIPLES

TO A RETAIL BtBIMISg

A FUEL AND BUILDING MATERIAL BUSINESSPresent statue* - The business selected for study to

one which sells and delivers fuel and general building mat­

erial except lumber. The office Is located at the yard where the materials are received and stored. The business leases the real estate occupied. The office organization consists of the two partners, and a bookkeeper-stenographer. The yard force consists of a yard foreman with the three or four men who deliver materials with auto trucks. Extra laborers are em­ployed during rush periods. The volume of sales averages about $100,000 per annum.

The taking of a physical inventory occurs on December 31st of each year, and it becomes the only inventory record secured. The drawing up of financial statements takes place only at that time. A double entry system of bookkeeping Is In operation with the olerleal work performed by the bookkeeper and super­vised by one of the partners.

"Unit" cost system. - At present the business uses a form of "unit" cost system. It considers all the materials sold as equivalents of ton unite. Material such as coke, coal, plaster, cement, and lime, which comprise the greater part of the com-

- 62 -

modltlea handled, Is, of course, directly computed In tons.

The management places clay products, roofing, fuel wood, brick, and the other materials in ton unit equivalents based on study and experience. For Instance, one thousand brick may be equiv­alent to three ton units. In deciding upon the ton unit for the different materials, it gives consideration to weight, value, care and time required for handling, and bulk of the commodity.A monthly sheet Is prepared with a record of the dally de­liveries In ton units obtained from the sales slips. The totals of this sheet show the number of units of each commodity de­livered during the month. .

. Meanwhile a record of all expenses is kept on expense

sheets under seventeen classifications, with their totals re­

corded in their general ledger controlling accounts. Dividing the total monthly expenses by the total number of ton units , delivered In that time, will result in a unit cost for dis­

tributing each ton unit of material, •Inadequacy of present system. - The partners have found

, It advisable to add new lines of builders* supplies during the past years, and expect to add more In the future. ihe new build­ing supplies such as various kinds of roofing, wall board, metal lath, hearth tile, waterproofing, and similar commodities can­not be accurately segregated Into equivalent ton units. The feasibility of a new method of arriving at costs Is to be In­vestigated by one familiar with the operations of the business. The outlines of the resulting cost system are sketched In the remainder of this chapter.

- 65 -

64 -

PROPOSED COST SYSTEMDepartmentalization. - °ne of the first changeb proposed

results In ttee separation of the business into departments on

a commodity basis. The stock naturally divides into the follow-: .. : ' , :

inging departmentst coal, coke, wood, brick, clay products, roofing, sacked material (plaster, lime, and cement), metal lath, and specialties. Records for Inventory, purchases, and sales are to be maintained by departments. Inasmuch as the

major items of expense^ such as salaries and wages, cannot be properly charged directly to the departments, any method of proratIon would be merely an approximation. Therefore, the

cost and time involved in expense allocation will be eliminat­ed until such time as the business has reached sufficient size to justify the departmentalisation of expenses. Operating ex­penses will be deducted from the total gross margin to obtain

the operating net profit of the business as a whole.

Perpetual inventory, - a perpetual inventory is to be in­

stalled because it is an aid in purchasing and maintaining thestock on hand, detection of loss and shrinkage, preparation of■ :: ■ - ■ - . ■ .monthly financial statements, increasing the rate of turnover,

■ x- , -and in otherwise controlling stock.

The bookkeeper uses a card index file and keeps it up to date. He employs a card for each kind and size of commodity sold. cards should be filed by departments and in alphabetical order. The form follows{

65

ArtieDepar

oltT

ib .Sax.tment — : ■■ '■ Min. — — —

On order Kedelved 1Quantity On HandOrderSo.

Quantity miltPrice

quantity Delivered Quantity value

1

At tib® top of the card appears th@ reaxImiam and minimum quantity to have on hand at any timo. When the balanee On hand reaches the stated minimum, an order should be placed for the amount indicated beside the word "order®• At the time the stock of any item reaches the minimum, a physical Inventory of that item should be taken and cheeked against the balance 3 on the card. If necessary, the card balance should be adjusted to agree with the actual count taken. The quantity on order and the purchase order number, are filled in upon placement of the order with the vendor. The quantity received, with the

unit price, is taken from the vendor*s invoice, upon its being checked, and from sales returns. The quantity delivered comes from the daily sales slips. The quantity balance on hand be­comes available as each addition or deduction from stock occurs.The value bn hand, Its computation being on the first-in first-

. ' • . out basis of cost valuation; is extended only at the end ofthe month for the monthly Inventory.

Purchases. - Purchases are supervised by one of the partners, who remains in the office. Purchase order forms, numbered consecutively, must be filled out, in duplicate, for each order given, the original being sent to the vendor, and

66

tho duplicate filed in the “unfilled orders” file. The vendor’s Invoice must be checked with the duplicate purchase order as to temo, prices, quantities, and qualities. When the shipment is received, the yard foreman lists the goods as to quantities and notes the condition of the shipment. In case of breakage in transit, the railroad company la notified and a claim filed. Meanwhile the foreman’s list of items received

requires checking against the vendor’s Invoice* The bookkeeper enters the.latter in the Accounts Payable register. And the duplicate purchase order is removed from the "unfilled order*

file and placed in the "filled order* file.

The Accounts Payable register resembles a "voucher re­gister" except that no formal vouchers are made out, the in­voice or other evidence of Indebtedness serving instead.

Accounts Payable Register (left page)EntryHo.

DitV Creditor TTreaTVAccountsPayable

Fata-- E3sT. Pure 616 ee------Date cneek

Ho.Folio Dept. Amount

Operating Expeheed I bundry Debits IRemarksfoiio Glass. Amount Account Polio Amount Ho.

In order to obtain a record of the purchases by depart­ments, a "Departmental Purchases Sheet" is prepared with a

column for each of the nine departments of the business. The

* m

merehandtae i^robaae entries In the aeeoonts payable register are then distributed on the departmental analysis sheets the sura of the letter's totals should check with the total merchan­dise purohases column In the accounts payable register# After the monthly entries are completed and the departmental totals posted to the general ledger* the bookkeeper files the depart­mental purchases sheet In a binder.

As an alternative to the use of departmental purchases sheets, the accounts payable register could be designed with special columns for each department• The purchases* then would be distributed directly to the columns in the reglstdr. The’. operating expense* likewise* could be recorded In special columns in the apcounts payable register* These extra columns would result In an enlarged register which might be more bulky and complicated than would be desirable.

Sales, - The merchandise sales are all entered In the sales journal from sales .slips. The bookkeeper posts the totals of the columns to the general ledger accounts Involved, Be carries the Individual charge sales to the accounts receivable ledger. The sales returns and allowances, kept by departments, occupy apart of the journal. The sales journal Is outlined below.

Sales for the Month of-— --— -1926Date

Sales]Ho. Polio Same Terms

AccountsReceivable

TTash—Sales Departments Dally

Sales' ' ...

68

Because of the present sales organization, no other

analysis of sales Is continuously maintained. Although from

time to time, analysts may be made as to: the age of the ac­

counts receivable, the character of sales by each salesman, the causes of sales returns and allowances, or other details.

Sales discounts are treated In the same manner as pur­chase discounts, l.e., both considered as financial Items and not Included as operating expense and Income on the profit and loss statement.*

Expenses. — The major expenses, such as for buying, sell­ing, and delivery, are expended for all departments collective­

ly. These expenses, thus, cannot be allocated directly or by accurate proratIon to the different departmenta. Uhttl the business grows sufficiently so that salesmen and buyers are assigned to definite departments, the expenses must be treat­ed as belonging to the business as a whole.

The expenses, however, are classified into seventeen

divisions. These divisions with their component elements of expense follow:

1. Office salaries. — salaries of partners and bookkeeper.2. Yard salaries and wages. - Salaries of foreman, and

truck drivers, end wages of extra laborers.3. Advertising. _ All forms,4. Rentals. — All rents paid for premises occupied, to­

gether with taxes paid on leased property.5. Taxes. - All taxes paid, except those Included under

rentals.6. interest. - Six per cent Interest on net worth,

Interest paid with Interest received deducted.

1An excellent treatment of cash discounts is given by couohman in "The Balance Sheet", pp.246-253.

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7. Insurance. ~ All forma.8. Supplies. _ Office supplies, stationery, subscrip­

tions to trade periodicals.9. Repairs. — Those repairs not provided for under

automobile and truck repairs, depreciation, oradditions to fixed assets.

10. Loss. - Dueto shrinkage, unnecessary breakage,pilferage, mid shortage.

11. Depreciation. - On buildings, equipment, leasehold,and bad accounts.

12. Light, heat, power, and water.IS. Communication. - Postage, telephone, and telegraph.14. Gasoline and oil. ** For motor oars used in the

business.15. Automobile repair and maintenance. — For motor cars

used in the business.16. Professional services. — Collection, traffic, legal,

and other professional services rendered.17. Miscellaneous, — Donations, membership dues, enter­

tainment, and other forms of expense for whichthere is no separate division.

The expenses are entered in the accounts payable register as they are incurred. One column only being used to record the same therein. However, an expense distribution sheet, which

contains a column for each one of the seventeen divisions of

expense, is inserted into the accounts payable register. As the expense item is carried from the accounts payable register to the proper column in the expense distribution sheet, the bookkeeper enters a check mark in the folio column. At the end of the month, the totals in,the distribution sheet should equal the total of the operating expense column in the ac­counts payable register. The latter total is posted to the Operating Expense Controlling account in the general ledger, while the distribution sheet may be placed in a post binder;

Small items of expense, payable in cash from a petty cash fund, are recorded In and classified according to the

70

expense elaseifteatton In the petty eaeh reoord. Open re* plentshment of petty cash, the expenses are berried to the aeeounts payable regtster and the dlotrtbntton sheet.

CQOTIO& T H R O W REPORTSMonthly summary. - The account books provided for the

business are: general ledger, accounts receivable ledger, sales register* accounts payable register, sash book, petty cash book, and general journal. At the end of each month, these'.' books are posted, including the totals of the columnar jour­nals. The merchandise inventory is obtained from the per­petual inventory cards :though the general ledger has no re-

" . ' . ' . • ' ' '

cord of it. m order to simplify the $x*oeedure, the closingof the nominal accounts occurs but once a year, on December 3BLat, then they are closed out to the Profit and Loss account• A trial balance is drawn qff monthly, and a working sheet pre­pared with adjustments which permit the preparation of monthly

■ ' ■■■■ : O • • . .financial statements.

Financial statements. — The balance sheet shows the fin­ancial condition of the bustnees as a whole at the close of each month. The statement of profit and loss shows the net re­sults of the operations for the year to date and the current month expressed in financial terms. Both statements are ob­tained from the monthly working sheet. The balance sheets forthe current and the prior month are set up in comparative

■ ' * " '• -

Greer, "Chain Store Accounting*, pp.177-198.

(

form for purposes of obmperlson. The profit and loss statement will be shown in comparative form as below $

• 7 1 -

Month of April Year to DateT m s rear Last Year This Year | fast fear

Met Sales F | I W $ pToBF" ^ |1WF | A "piooF "

As these reports do not give enough detailed information,a monthly analysis by departments Is made as followst

Monthly Analysis of Operations during March, 1926

fight'Gross SalesLoss: Returns & Allowances Het Sales

Dost of Goods Sold: ;^ginning Inventory PurchasesLess:Final inventory Cost of Goods Sold GrossHarginon Sales

Coal

Operating Expenses for the business:Office Salaries Yard Salaries and

WagesAdvertising Rentals Taxes Interest Insurance Supplies Repairs LossDepreciation Light, Heat, Power and Water

Communication Gasoline and Oil Automobile Repair and

Maintenance Professional Services Miscellaneous

Total Operating Expenses Het Operating Profit___

otDe

I C

Total for the Bus in* s

; The annual rate of turnover by departments eon be oaloulated from these monthly analysis sheets*

Budgets» — Budgets will be installed for a thorough trial to determine their value for this business* One reason for giving these budgets a trial is that much of the data re-

quired to maintain them already appear# in other records* The estimate of sales and purchases are to be recorded for each department by months* The sales budget follows:

Record of Sales:(1) Last Year(2) Estimate(3) Actual Sales this Year

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ns: g i r l f m S I —

c o a l tstToT

Entries are made on the form as follows: in the space (1), the amount of the actual sales of ooal for the respective months

of the preoeeding year, in the space (2), an estimate by months for the current period, and in (3)^ the actual sales by months for the current period as the data becomes available. The totals are carried out to the right in the record. A similar form has been found advisable for the budgeting of purchases.

The estimates are made for six months periods in advance*At the end of each month, when the actual figures for the month are obtained, the estimates for the succeeding months must be adjusted to meet the new conditions. The knowledge gained from the budgets should give a oloser knowledge of the turnover and

• 75 —

requiremente of the business. Having an estimate "of "the amount of purchase requirements for each month, apportionment of the Items of atook required in each department oan be computed from the perpetual Inventory, which contains a record of piece

control.’’The nearer the buyer oan judge the needs and demands

of his trade as to quality, quantity, and price, the quicker he can dispose of his stocks, and get his capital back through sales. This, If It la done profitably, is practically the whole science of merchandising."®

An advertising budget Is to be prepared for the business as a whole. Monthly estimates will be based on the sales

estimate. Until investigation shows a change should be made, advertising will not be permitted to exceed 2 per cent of net

sales In any one month, except in an emergency.

COHCLUSIOH

Any cost system Installed In a business Is apt to need . " v ■ : ■ •■■■. ■ ■■■.. • " .

adjustment from time to time to meet the needs of the enter­prise. So, in the system outlined above, adjustments, elimina­tions, and expansions will be necessary. Particularly, as the business grows, changes will be advisable. Any cost system, moreover, should be so constructed, that it may be modified

and expanded easily with an Increase in the volume of business, rather than being replaced.%Frl, "Retail Merchandising", p.187.

74

Separate studies will be made of different phases of the operations of this establishment. For Instance, an In­

vestigation of the costs of delivery may show them to be out cf

line with costs of similar companies. If sufficient economies cannot be introduced, investigation may show that lower costs

with adequate service can be secured by hiring or contracting with outside delivery agencies for all or part of the delivery service.

Cost accounting systems for fuel and building material dealers may be Introduced by trade associations or other

agencies. If one of those systems can be adapted to the busi­ness discussed here, that new system would probably be In­stalled to obtain the benefits from the exchange of Informa­

tion. It, thus, becomes evident that commercial cost aocount-

ing Is still In the process of development. The fundamental

principals, however, underlying the whole structure of account­

ing remain constant, although the outward form will be apt

to change greatly within the next decade.

. 75 .

BIBLIOGRAPHY' ' '

BOOKS* Especially applicable to the subject

Altman, George T. - cost Records• The Ronald Press Company,He* fork, 1924.

« Basset, W.R, - Accounting as an Aid to Business Profits.A. W.Sha* company, Chicago and He* York. 1918,

* - Taking the Guesswork out of Business.B. C. Forbes Publishing Company, He* York. 1924.

Bell, W.E. • Accountants * Reports. The Ronald Press Company,He* York. 1981.

* Biles, J.H. — Financial and Operating Ratios in Management.The Ronald Press company, New York. 1985.» • - Management Through Accounts. The Ronald Press

company, He* York. 1924.* Brisco. Horrls A. and Wingate, John W. - Retail Buying

(Merchants1 Retailing Series). Prentice-Hall, Inc.,He* York. 1985.

* - Retail Receiving; Practice (Merchanta1 Retailing Series). Prentiee-Hall,Ihe•, Hew York. 1925.e Carthage, P.I. - Retail Organisation and Aecounting Control.Modern Principles and Practice. International Text-book Company, Scranton. 1984.

Clark, Fred E. - Principles of Marketing. The MacMillan Company, He* York. 2985.

Clark, John M. — The Economics of Overhead Coats. TheUniversity of Chicago Press, Chicago. 1985.

Couohman, C — The Balance Sheet. The Journal of Accountancy, Ino., He* York; 1984.

copeltod, M.T. - Business Statistics. Harvard University Press, Cambridge, Massachusetts. 1917.

- Principles of. Merchandising. A.W.Sha* Company, He* York. 1924.

Dlnsmore, John C. - Purchasing Principles ahd Practice. Prentloe-Eall, Ino.f He* York. 1922.

» Eggleston, DeWltt C. and Robinson, Frederick B. - Business Costs. D. Appleton and Company, HevYtirk. 1921.

Esquerre, P.J. - The Applied Theory of Accounts. The Ronald Press Comjmny, Hew York. 1921.

- 78

Field, Clifton C. - Retail Buying, Harper and Brothers,Hew York. 1917.

Ftlene, Edward A. - The Way Out » A Foreoest of Coming Changes In American Business end Industry. Doubleday,page and Company, Hew York. 1988.

Finney, H.A. - Principles of Accounting, Volume I. Prentice* Hall, loo.* Hew xork, 1923,

Frederlok, J.G, - Business Research and statistics, D. Appleton end company. Hew York. 1922,

* Fri, James L* — Retail Merchandising - Planning and control(Merchants * Retailing Series). Prentice •Hall, mo,.Hew Xork. 1926.

Oerotenberg, c.W. - Principles of Business. PrenfcIce-Hall,Ino,, Hew York. 1922.

Gordon, W.D. and Lockwood, J. - Modern Accounting Systems,; John Wiley and Sons, me.. Hew York. 1924.

Greene, J,H, - principles and Methods of Retailing# McGraw- Hill Book Company, Hew York. 1924. Book

* Greer, Howard c. - Chain Store Accounting. HeOr aw-Hill, company.Hew York, 1924.

Guthmann, H.G. - Analysts of Financial statements. Prentlee- Hall, mo.. Hew York. 1928. .

* Hayward, Walter S. - The Retail Handbook. McGraw-Hill BookCompany, Hew York. 1924.

* Hodge, A.C. - Retail Aeeemitlng and control. The universityof Chicago Press, Chisago. 1928.

Jordan, David F. - Business Forecasting* Prentlae-Bail, me.. Hew York. 1921# »

Jordan, J.P., and Harris, G.L. w Cost Accounting Principles and Practice. The Ronald Press company, Hew York. 1920.

Kareten, Karl G. - charts and Graphs, Frentiee-Hall, Ino.,Hew York, 1923.

Hester, Roy B. - Accounting Theory and Practice, volun»s I,II, III. The Ronald Press company. Hew York. 1922.

- Deproatatlon, The Ronald Press company.Hew Ywk. 1934,

Lan#bur#d%* R*H, - mduatrlal Management. John Wiley & Sons, mo.. Hew York. 1923.

* Lawrenoo, W.B. - cost Accounting. Prentice-Hail, Ino,,Hew York. 1988.

Lincoln, B.R. - Applied Business Finane#. A,W.Shaw company, Chicago and Hew York. 1983.

— Problems In Business Finance. A.W,Shaw company, Chicago and Hew York, 1921*

Montgomery, R.H. - Auditing, Theory and Practice, Volume I.The Ronald Press Company, Hew York. 1919.

Moody, Walter D* - Auditing and Cost Accounting. LaSalle Extension university, Chiesgo. 1910.

MoKtnsey, James 0. — Bookkeeping and Accounting, Volumes I,II, Series A. South-Western Publishing company, Cincinnati. 1921.

Me Kinsey, James 0« w Managerial Aceount log. Volume I, The miveraity of Chicago Press, Chicago. 1964,

~ Badgetary Control. The Ronald Press Company, lee York. 1623.

and Meech, Stuart P. - controlling the Pinamiea of a Business. The Ronald Press company, lew York. 1923.

lioholson, J.L. - Profitable Management. The Ronald Press Company, New York. 1983.

and Rohrback, J.P.D. - cost Accounting. The Ronald Press Company, Hew York. 1919.

Hyatrom, P.H. - The Economics of Retailing. The Ronald Press Company, Hew York. 1916.

Paten, W.A. and Stevenson, R.A. ~ Principles of Accounting.The MSeMillan Company, Hew York. 1918.

Rittenhouse, C.P. - Elements of Accounts for Individuals, Professional Men, and Institutions. McSraw-Hill Book Company, Hew York. 1918.

and Clapp, p.F. - Accounting Theory and Freettee, Ttoit II. MeOraw-Hill Book Company, How York.1919

Salters, Earl A. - Accountants' Handbook. The Ronald Press Company, Hew York. 1983.

- Depreciation. The Ronald Press Company,Hew York. 1923.

Beoveil, C.H. - Cost Accounting and Burden Application.D. Appleton and Company; 1916.

- Interest as a Cost. The Ronald Press company. Hew fork. 1924.

.Seerlet, Horace. — Selling Expenses and their Control.Front Ice-Hall, Inc., Hew York. 1922.

Walter, Frederick W. - The Retail charge Account. The Ronald Press Company, Hew York. 1922.

Wlldman, J.R. - Principles of cost Accounting. Hew York miverslty Frees, Hew York. 1918.

BIBLIOGRAPHYMAGAZINES

* Especially applicable to the subject

* Babson, Roger W. - (Dlsousalon of the questions Are theretoo many Retailors?). Printers Ink, June 7, 1925.

* Basset, W.R. - The Right and Wrong Ways to Readjust anInventory. System, March, 1981.

Buoklln, Walter S. - Office-Expense Budgeting that Saved 35#. System, July, 1923.

* Burnet, A.R. - Trade Associations and Business Statistics.Administration, December, 1921.

Conner, W.L. — Five Rules We have Weed to Lower Truck costs. System, March, 1926.

Bisque, Brice P. — Making Hand-to-Mouth Buying Profitable. System, October, 1824,

Duffle, Charles E« - How Costly, Are Our Profits. Business(Burroughs Adding Machine Company,Detroit),August,1985... . - By Knowing Our Costs. Business,

- - . ■. September, 1985* - • ■ ■ ' - ' . : -Farrell, M.O* and Heywood, J* — A Sound Way to Charge De­

preciation. System, August, 1982.* Fllene, E.A. - How a Buyer Can Answeri When? How Much? What?

System, December, 1923.* Frazer, G.E, — controlling a Business with a Budget, System,

June, 1923.* Gibson, Harvey - What Shall Wq Do About High Costs? System,

• March, 1921. , ■ ■ ■ ■ -. . 'Greenwood, G.W. — On What Should Selling Prices Be Baaed?

Administration, March, 1988;Greusel, S,c. - We Know Our Earnings Daily. System,December, 1984 Hamilton, W.H.l . — Daily Stock Control. System,September,1926•

* Hodge, A.c* — Expense Allocation. The University Journal ofBusiness (The School of Commerce and Administration of the university of Chicago), June, 1925.

— W e of Estimates in Control of Merchandising Operations. The University Journal'of Business(University of Chicago), September, 1925,

% Jacobs, I.R* — Our Records Tells Us. System, January, 1985#Kemp, Fred J. - Ask the Order - It Knows. Business (Burroughs

Adding Machine Company), February, 1923.* Lewis, A.L. - How I "Guess” What We *11 Do Next -.Year. System,

April, 1921.* Little, A,H. — He Merchandises by Formula. Business (Burroughs

Adding Machine Company,Detrolt), November, 1922.

.79

MacDonald, J.H,- Budgeting the Outgo♦ Business (Burrou##Adding Machine company, Detroit), September, 1925.

Manning, A#B. - Fixed Property Accounting, Parts I-IV.Administration, January,- April, 19^8,

Matherly, W.J. - costs of Labor Turnover. Administration, y . April, m s .

McMnsey, J.O. - Organization and Procedure for Budgetary Control* Administration, December, 1981*

McNeil, John C. - Practical Accounting for the Retailer*The Black Diamond (A journal for the coal trade),Chicago* A series of articles printed during the first half of 1986.

Montgomery, F.H* - Our Sales Must Fit Our Budget. Business(Burroughs Adding Machine Company, Detroit),September,192§.

Mullin, F.c. - Figures for Fords. Business (Burroughs Adding Machine Company), February, 1923.

* Palmer, J.L. - Periodic Expense Report. The University Journalof Business (Chicago), June, 1925.

* Pelton, d,tt* - Cost Accounting Increases Profits. Managementand Administration, March, 1985.

Self ridge, H.G. - The Right Way to Cut Expenses. System,.June, 1924,

Self ridge and Company, — Stock Taking Errors Do Hot Worry Us Now. April, 1925.

Simmons, A.e , — A Policy that Simplifies Store Management, System, June, 1925,

* Slavltt, Alexander - Rader %o#e Sls Costs, Business(Burroughs Adding Machine Company,Detroit),August,1922,

Smith, C.J# — On Every TTuok-llle We Save 7 Cents. System,Juno, 1924.

Stock, A.F. - Advantages end Disadvantages of the Estimated Cost System. Administration, January, 1922.

Thompson, Q.Q. - Correct Costs at Little Expanse. Management and Administration, November, 1924.

* Verner, A.W. — Cutting Guesswork Out of Management. System,August, 1920.

Vleh, W.F. — why the Budget. The Journal of Accountancy, September, 1925.

Weissman, H.B. — Cost Control of Delivery Operations. Administration, April, 1922.

** Willy#, John Hi - How We Cut Overhead 80%. System,Septeid)er,1986. Wilson, Paul.H. - An Equitable Plan for Paying Office Workers

by Results, System, October, 1984.

- 80 -

, BIBLIOGRAPHY • BULLETINS AND REPORTS

Chamber of Commerce of. the Uhlted States, DomesticDistribution Department, Washington# No Sate on the fellow*Ing publications, probably 1925:

Retailersf Expenses Planning Your Business Ahead Merehandiee Turnover and stock Control

Controllers1 congress of the National Retail Dry Goods Association. Executive offices, 200 Fifth Avenue,New York. The Reports of all the six annual conven­tions, the Sixth being*In 1925, are especially applicable to this thesis. Their Standard Method of Accounting for Retail Stores published in two volumes in 1922, is re­commended for study. Among the noteworthy articles ap­pearing in the annual reports are the following:

Blanks, T.L. - Skeleton Plan of Accounting for a Small Store. Fourth Annual Convention Report, p.96.

Briscoe, N.A. - The Education of the.Controller.Third Annual Convention Report, p.82.

Clarkson, f.R. — The Use of Statistics In the Department Store. Third Annual Convention Report, pp,80-83.

Hunter, W.j• — The Proper Methods of Prorating Delivery Department Costs * Fourth Annual convention Report, pp.117-119.

Haskell, C.C. - Advantages and Disadvantages of The Retail System. Fourth Annual Convention Report, pp.124-126.

Kelly, A.J. - Receiving Room Methods. Fourth Annual Convention Report, pp.38,36*

Pitksthly, Thomas - Exchange of Information between Non-competitive Stores. Fourth Annual convention Re­port, p.94.

Scull, B.H. — Analysis of Sales Records. Fourth Annual Convention Report, p.82.

Federal Trade commission, Washington. A System of Accounts for Retail Merchants. January 1980.

Harvard university, Bureau of Business Research, Cambridge, Massachusetts. Bulletins, Numbers 35, 36, 37, 38, 41,43, 44, 47, and 50.

• 81 -

,,atl0£ L n ^ e= - ^ laTiZ: l%lD m °hl0' BeuerNebraska, The university of, College of Business Administra­

tion, Lincoln, Nebraska Studies in Business,Bulletin Number 7 - Trade Practices and Costs of the Retail Coal Business in Lincoln, Nebraska, in 1922 - published in November, 1923.

Northwestern University, School of Commerce. Bureau of Business Research, Evanston, Illinois. The Control of Expenses and Profits in the Retail Merchandising of Clothing by Horace Seer1st, 1922.

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