Overhead cost

“ Overhead Charges.—In figuring on the cost of a completed device, machine or product so that a selling price may be put on it which will insure a handsome profit the cost of the stock, of the breakage of tools, of the labor, or production, and of the power—gas, electricity, water or coal—are all easy to keep track of. ”

“ Overhead means a proportionate charge against each production of the cost of maintaining the entire organization, including all expenses, many of which have nothing to do with the actual making of pictures. ”

“ The overhead expense is the same for each employe and each machine, consequently the cost of the finished product is affected by the factor of time. The piece worker who fails to maintain the rate of production established as standard in his or her trade, is not a profitable worker. ”

“ Direct costs are sometimes called prime costs. The cost elements which can almost invariably be applied directly to the product are material and labor. The sum of these two items constitute, therefore, the prime or first cost of the product. The other items of cost which are incurred in the factory or with which the factory is chargeable are variously called factory expense, overhead, or burden. These indirect costs cannot be charged directly to any specific product, and so they are shared by the entire factory output. ”

“ A marked falling off in production means a perceptible increase in the cost per unit for overhead expense. For example, we will suppose that a manufacturer has $50,000.00 invested in machines operated [76] by piece workers. One of the definite items of expense to be apportioned to the product of these machines is interest, at say five or six per cent. If production falls to one-half of the normal quantity, because one-half of the machines are idle, the amount of this one item of expense that must be borne by each unit of production is doubled. ”

“ Thus limited, it is desirable, whenever practicable, that the burthen should fall on those to whom the service is rendered; that the expense, for instance, of roads and bridges, should be defrayed by a toll on passengers and goods conveyed by them, thus dividing the cost between those who use them for pleasure or convenience, and the consumers of the goods which they enable to be brought to and from the market at a diminished expense. ”

“ In this very dynamic aspect of modern life, one observes a tremendous increase in demand for the costly and enervating indulgencies of conspicuous expenditure and a more than proportionate decrease in the productive powers which contribute to the synchronous supply of the staples of life. Here, indeed, resides a fundamental problem in national cost accounting. ”

“ But more to the point is the fact that, although one may calculate what a cost is, and of course all of our costs are carefully calculated, no one knows what a cost ought to be. One of the ways of discovering what a cost ought to be is to name a price so low as to force everybody in the place to the highest point of efficiency. The low price makes everybody dig for profits. We make more discoveries concerning manufacturing and selling under this forced method than by any method of leisurely investigation. ”

“ In fixing a uniform price for identically the same labor or material, whether on a small poverty-stricken road or a main trunk line, no serious injustice is done, provided the price fixed is one which, from a strictly engineering standpoint, is a reasonable figure for cost of reproduction. The differences in class are due, not to special differences in cost of physical property, but rather to differences in earning ability on account of good or poor territory served, efficient or inefficient management, or other reasons not connected with the physical structure ”

“ Value runs from finished product to agents of production, labor, and instrumental goods, and land. Avoiding needless complications from a discussion of interest as a factor in cost—a doctrine on which the Austrians, say Wieser and Böhm-Bawerk, are not agreed,—it is enough to point out that high wages or high rents, which limit production in any given industry or establishment, are high because the land and labor in question have alternative uses, because other industries, or other [Pg 71] competitors in the same industry, bid for them. Cost-curves, then, are reflections of demand-curves. ”

“ While, also, the rates for the low-value articles may not cover every item in the so-called cost of service, they do contribute to the revenue an amount which might otherwise have to be made good by the fixing of higher rates on goods in other classes. ”

“ Practically no cash investment whatsoever was ever made in establishing or organizing an express company, nor in equipment to conduct its business. Every dollar of value there is in equipment and other tangible assets of the express companies today—and hundreds of millions besides—has come from the people—has been taken from the people for handling their express business at rates ranging from two to five times the actual cost of handling. ”

“ A suddenly enforced increase of even one hundred per cent in the haulage and delivery cost of product would put hundreds of our most serviceable industries on the financial rocks.
2. A business man or a business industry that has been giving us thirty cents in manufacturing cost for our fifteen cents in cash is certainly deserving not only of a hearing but of a vigorous, robust, militant support. ”

“ If, again, I over-estimate the cost to me, and ask a price greater than your estimate of the value to you, there is no bargain, and I have lost the opportunity of earning a price measured by the real cost of the performance, so that the cost of my mistake again falls on me; while, the market being open, and a thorough adjust ment of supply to demand being established, others will make a juster estimate, whose services you will procure and you will suffer no inconvenience. Competition will regulate any disposition on my part to overcharge. ”

“ But we must not therefore suppose it to be necessary that the supply should actually be either diminished or increased. Suppose that the cost of production of a thing is cheapened by some mechanical invention, or increased by a tax. The value of the thing would in a little time, if not immediately, fall in the one case, and rise in the other ”

“ Low prices, according to all standard writers on political economy, are the direct results of a contracting currency, and a consequent increasing scarcity of money, and the cost of production is not only greatly increased by inability of the producer to obtain money except at high rates of interest, but the terms upon which money can be had at all are often so exacting as to discourage permanent improvement. ”

“ It is this arbitrary shifting of cost-burdens, coincident with recent price fluctuations, that accounts for the prevailing outcry against advancing costs of living. Naturally, individuals and groups who fare badly in the process of pecuniary readjustment are prone to complain, and those who account an accelerating balance of income over costs are sanguine.
Whether the United States has reached or passed the industrial condition of maximum per capita productivity is a mooted question; some who have given much study to the problem of production are inclined to support an affirmative conclusion. ”

“ But the problems would have been easier to handle, if the public generally were a little less disposed to think in terms of averages, and a little more in terms of margins, if we all of us instinctively realized that the cost that really matters is the cost at which additional production is profitable under the conditions ruling at the time, or in the immediate future. ”

“ Price changes, which may be traced to an increased gold supply and the consequent depreciation of the dollar, react upon the cost of living only as certain reciprocal advantages and disadvantages are shifted among persons whose money incomes rest upon actual or implied contractural relations extending over the period of price change. For this reason, advancing prices are peculiarly advantageous to the debtor class, composed mainly of bonded business corporations, virtually discounting their obligations at an annual rate commensurate with the increase in prices. ”

“ There is one important group of enterprises which suffers an especially severe check from this cause in conjunction with high prices—the group which depends primarily upon the demand for industrial equipment. In the earlier stages of prosperity, this group usually enjoys a season of exceptionally intense activity. But when the market for bonds becomes stringent, and—what is often more important—when the cost of construction has become high, business enterprises and individual capitalists alike defer the execution of many plans for extending old and erecting new plants. ”

“ Several years are usually required before they obtain a sufficient amount of business or earnings to cover operating expenses, including depreciation and a reasonable rate of interest upon the investment. The amount by which the earnings fail to meet these requirements may thus be regarded as deficits from the operation. These deficits constitute the cost of building up the business of the plant. They are as much a part of the cost of building up the business as loss of interest during the construction of the plant is a part of the cost of its construction. ”

“ Cost of operation constantly is compared with fixed charges, the interest with the capital investment. Expensive improvements on railroads, the straightening of curves, the tunneling of mountains, the reducing of grades, the replacement of lighter by heavier rails, have been made possible by a fall in the rate of interest. A fall in the rate of interest disturbs the equilibrium that has been arrived at, between the cost of operation, the amount paid for wages, coal, etc., and the income on permanent investment. ”

“ Other experts, who reject the factor of interest unearned during the period of development, build their estimates of going value upon the cost of attaching new customers to the business, a cost not taken from the books, but merely presumed or estimated at widely variant amounts. ”

“ With respect to the first of these propositions, it may be observed, that the cost of any article to the purchaser includes, besides the ratio of the supply to the demand, another element, which, though often of little importance, is, in many cases, of great consequence. The cost, to the purchaser, is the price he pays for any article, added to the cost of verifying the fact of its having that degree of goodness for which he contracts. ”

“ Fluctuating scales of prices determined by fluctuating conditions of competition, supply and demand, and power of coercion, will give place to "the fair price" fixed by concerted community action and revised from time to time in order to preserve a right balance with the general scale of cost of raw materials and cost of living. ”

“ There are those who maintain that the obligation of the consumer is one rather of replacement-building for building, machine for machine. According to this view depreciation should be based on replacement cost rather than actual cost. The replacement theory substitutes for something certain and definite, the actual cost, a cost of reproduction which is highly speculative and conjectural and requiring frequent revision. It, moreover, seeks to establish for one expense a basis of computation fundamentally different from that used for the other expenses of doing business. ”

“ If the operating expense decreases at a less rate than does the productive output, then these tell-tale percentages automatically increase also, which the manager is quick to note, and mean a falling-off in the economy with which the plant is being operated, for increased expense means increased cost of production. ”

“ As we advance from the smaller chain, the proportionate value of the work to the worth of the material becomes less and less, until at the numbers 2 and 3, these two elements of cost balance each other: after which, the difficulty of the work decreases, and the value of the material increases. ”

“ Unfortunately, when the wage-earner assumes the cost of operation he has the same sad experience. Needless to say his carrying charges are heavier than a generation ago, reflecting the higher prices of land, utilities, construction and finance. Worse still, interest charges, which form about one-half of the current expenses, are far higher, as pointed out above. Depreciation, which involves repairs, is higher, because repairs are chiefly an item of skilled labor. Taxes, whether national, state, county, or municipal, are excessive. ”

“ Such is the cost of materials and labour at the present period; it is true that the above scale is drawn from "credit prices;" but let every part of a manufacturing concern be carried on for money only, which is rarely the case, still the deduction from the whole cannot be more than 71⁄2 per cent. ”

“ But if the cost-curve is rising because of a fall in the value of money, then the demand-curve will be rising also, and production will not be checked. The general law as to the relation of cost to demand and supply assumes a fixed value of the unit of cost, the dollar.
To the Austrian economists we owe a rational theory of costs which gives the money-outlay concept more than a merely empirical basis. First, they see in costs not causes, but results. Value causation comes ultimately, not from the side of supply, but from the side of demand. ”