cial standing, too much reluctance about stating the facts. But the business man, large and small, may as well make up his mind to get his house in order, and to be able to present detailed data to his banker, wholesale jobbing house, and the producer of his raw materials. For in the future he will not be able to receive credit or loans unless he is not only sound financially but can show that he is conducting his business intelligently and knows why he is in busi

ness.

Ignorant competition is most dangerous to the development and success of our country. The Clayton Act and the Federal Trade Commission Act have no control over this menace. It is estimated that 90 per cent. of the manufacturers and merchants in Germany know absolutely what their goods cost to manufacture and sell. If you compare our figures, which show, according to estimates, that only 10 per cent. of our manufacturers and merchants know what it costs to manufacture and sell their products, you have one answer as to why Germany has been successful in developing such a high standard of efficiency in manufacturing and distributing its products, not only in Germany but in the markets of the world.

If business is to continue to be done under a system of competition rather than of monopoly, then fair competition is absolutely essential to sound business. There are certain unfair methods of competition used by competitors which the government

can stop. But the competition which is most insidious and dangerous is that which results from an inadequate knowledge of costs. As has been said, laws cannot reach this difficulty. It is a matter of internal organization of each factory, and until the matter is taken up enthusiastically by business men themselves, permanent results cannot be obtained.

The lack of adequate cost accounting systems covers up inefficiency in many of our factories. Manufacturers go along day after day including among their assets outworn patterns, machinery, and equipment which have nothing more than junk value. They disregard the gradual depreciation of their factories and do not realize that it is necessary to provide against the time when new machinery and new buildings will be required in their businesses. It is only a matter of time until such manufacturers come to financial ruin. No factory can continue to exist which does not provide for its own maintenance and perpetuation.

If this lack of system resulted merely in the elimination of the inefficient it might be regarded as an economic benefit. But in effect it reacts disastrously upon the efficient manufacturer. While the inefficient manufacturer is going down the hill to destruction he is cutting prices right and left and demoralizing the market. If the efficient man is to continue in business he must meet this reckless competition, and in doing so he very often is forced to sell at or below his cost. The demoralization thus spreads

throughout the entire industry and discourages the introduction of efficient and improved methods of business.

This condition very often results in widespread depression in the business world which inevitably reacts disastrously upon the public. Business slows up, labor is injured by inefficient methods or thrown out of employment, and all those activities of life which depend vitally upon our producing industries pass through a crisis. Banks suffer because of losses through bankruptcy and receiverships, fair competition is destroyed, stocks depreciate, and the whole fabric of business crumbles. The public in the end pays the cost. Just as any locality is seriously injured by an epidemic of sickness causing death and disaster, so in business failure the community suffers from business death and disaster.

CHAPTER II

FUNDAMENTALS OF COST ACCOUNTING

'N THE history of American business an excuse

IN

can be found for the prevailing lack of adequate

cost systems in our factories. In a country like Germany, where competition is keen, manufacturers have learned from experience that if they are to exist at all they must know accurately what their goods cost and what prices they must charge in order to maintain and perpetuate their businesses. In this country, however, at least until recent years, profits have been large, in fact so large that a manufacturer did not need to concern himself about costs. He could quote his prices and feel reasonably sure that there was an ample margin between these prices and his costs. This condition was in part due to American tariff policies and in particular to the home market which offered a lucrative field for practically all goods which American manufacturers might produce.

This happy-go-lucky period of American business, however, is past. Manufacturers who began in business when the margin of profit was large and on that account succeeded in making fortunes, have seen their profits gradually dwindle until now in many cases their industries are earning nothing more than mere

interest upon the capital invested. Competitors have sprung up in practically every line and the question of efficiency has been forced more and more to the front.

Even in our smaller manufacturing industries personal supervision of the plant is not always possible. The only reliable way in which an executive can determine the efficiency of his plant is through an adequate system of cost accounting which returns to him at stated periods statements which reveal in a moment the condition of his business.

New methods are being introduced and improved machinery installed in a progressive factory every day, with a view to reducing costs either by the elimination of waste or by increasing efficiency. It is impossible to know whether the introduction of these improvements is reducing cost unless the manufacturer knows not only what his total cost is, but exactly what items make up the total. Items of cost are frequently lost track of when the total is considered, while if the items were properly segregated it would be possible in many cases to reduce them materially, and in some instances to eliminate them altogether.

Not only manufacturers, but merchants, should have accurate cost systems. Forces are at work which will eliminate those who persist in inefficient merchandising methods. Competition in this field, as in manufacturing, is reducing the margin of profit and demanding as a price of survival the strictest