management - accou-al-ting - Strategic Finance

MANAGEMENTACCOU-AL-TINGPUBLISHED BY THE NATIONAL ASSOCIATION OF ACCOUNTANTS/ JANUARY 1969

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Uniform Cost Accounting Standards in Negotiated Defense Contracts /

A Conceptual Framework / Systems in a Growth Company / Variances

from Standard Cost / Investment of Excess Cash / Market Mix: The Key

to Profitability / Holding Gains and Losses / Clerical Work Control

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MANAGEMENT ACCOUNTINGPUBLISHED BY THE NATIONAL ASSOCIATION OF ACCOUNTANTS I JANUARY 1969

A CONCEPTUAL FRAMEWORK FOR ANALYZING AND EVALUATING 9MANAGERIAL DECISIONSBy K. Fred Skousen and Belverd E. Needles, Jr.

Based on an operational approach to problem solving, the decision evaluationmodel presented in this article is intended as a frame Of reference in develop-ing the information usable in management decisions.

MANAGEMENT SYSTEMS IN A GROWTH COMPANY 12By Carl J. Thomsen

There is a need for understanding of Management Systems in a fundamentalway —as the beginning of a management revolution.

MISUSE OF STANDARDS IN DECISION MAKING 14By Robert W. Rosen

It is minimum total cost, not minimum operating cost, which is of primaryconcern to the decision maker.

THE NAT URE AND IMPORTANCE OF VARIANCES FROM STANDARD 16COST OF PRODUCT IONBy Oswald Nielsen

Significance of a cost variance relates to such factors as size of gross margin,inventory turnover and change in magnitude, rather than the size of variancerelative to the standard cost itself.

UNIFORM COST ACCOUNTING STANDARDS IN NEGOT IATED 21DEFENSE CONTRACTSBy Elmer B. Staats

Toward better guidelines for the use of alternate methods in reporting the costof performance under negotiated contracts with improved comparability, re-liability and consistency.

UNIFORM ACCOUNTING STANDARDS FOR GOVE RNMENT 26CONTRACTORSBy Steve E. Richardson

Uniform accounting standards —are they needed —and will they work? The au-thor traces the legislative action leading to the GAO Feasibility Study andsuggests that each of us examine this subject.

MARKET MIX: THE KEY TO PROFITABILITY 28By Clarence J. Ostalkiewicz

The information system presented here effectively demonstrates the effect ofproduct and market mixes on profit contribution. It also highlights changingconditions and trends.

MANAGEMENT ACCOUNTING /JANUARY 1969 1

2

SHORT -TERM INVESTMENT OF EXCESS CASH 31By Donald E. Snelling

Commercial paper, bankers' acceptances and negotiable certificates of depositare the money market instruments discussed in the article. Some basic issuesof corporate short -term investment policy are also covered.

COMPUTER TIME - SHARING 36By Brandt R. Allen

This article is addressed to the manager. It describes how time - sharing works,why it seems useful, how other firms are now using it and how their usage islikely to change in the future.

ON RELIABILITY STRATEGY IN ELECTRONIC DATA PROCESSING 39By Donald R. Thomas

On -line information systems require sophisticated error detection and recoverymethods on a pre -audit basis.

CLERICAL WORK MEASUREMENT TECHNIQUES IN A CONTROL 43SYSTEMBy Charles D. Winslow

This review of the various techniques includes illustrative examples of their ap-plication. The discussion also covers the key elementsofthe related reporting.

ACCOUNTING FOR POULTRY PROJECTS 48By Charles T. Smith, Jr.

Based on a study ofthe poultry operations ofan integrated feed manufactur-ing company, this article sets forth a simplified method of accounting.

MOTOR FREIGHT MANAGEMENT REPORTING 53By Jesse W. Atwood

Assignment of all costs and revenues on a responsibility basis.

HOLDING GAINS AND LOSSES ON EXECUTORY CONTRACTS 55By Joseph F. Wojdak

A refinement or improvement in the computation of holding gains and lossesis possible by using current cost in valuing assets.

DIARY OF A PERIPATETIC SECRETARY 61Dr. McLeod's wry comments depict exciting era ofNAA growth.

HOW ETHICAL ARE BUSINESSMEN? 63Survey of 1800 businessmen indicates vast majority are more honest thantheir public image.

BENTLEY COLLEGE OPENS NEW CAMPUS 6552- year -old accounting college moves to new site in Waltham, Mass.

NEW INTEGRATED MANAGEMENT ACCOUNTING PROGRAM 68

DEPARTMENTS

DATA SHEET items of interest for businessmen 4READERS REACT letters to the editor 6RECENT PUBLICATIONS book review notes 59CLOSE UP focus on members in action 66CHAPTER/MEMBER NEWS all about chapters and members 70

Views expressed herein are authors' and do not represent Association policy unless so stated.

MANAGEMENT ACCOUNTING /J ANUARY 1969

M A N A G E M E N TACCOUNTINGVOL. L NO. 5 JANUARY 1969

Published monthly, for members only, by theNATIONAL ASSOCIATION

OF ACCOUNTANTS505 Park Avenue, New York, N.Y. 10022

EXECUTIVE DIRECTORRawn Brinkley

PUBLISHERDonald M. Woodard

EDITORStephen Landekich

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Second class postage paid at New York, N.Y.To ensure uninterrupted mail service, pleasenotify us immediately of any change ofaddress. Send present address label and newaddress, including Zip number, to MemberRelations Department. Allow six weeks forchange. Price $1.25 per copy; $10.00 peryear. Subscriptions available only to NAAmembers and to college -level accountingstudents.

Copyright © 1969 by theNational Association of Accountants

MANAGEMENT ACCOUNTING /JANUARY 1969

CommentOnce in a while we take a step forward by improving our publication in termsof its general appearance, format and layout. The most recent change, inSeptember 1968, was preceded by our first major improvement, implementedin September 1965. It was then, three years ago, that we adopted our presentname and introduced this page.

This stepwise upward movement is closely related to our progress in contentquality. As a matter of fact, it is our continuously rising standards in terms ofcontents that prompts us to bring up the appearance to a correspondinglevel. Though less dramatic, perhaps hardly appreciable at times, our efforttoward better article quality is our constant concern. For we assume that anart icle attracts and holds the reader 's at tention primarily by virtue of its use-fulness. While we are in this vein, let us briefly review our latest volume, usingthe topical index as our basis, as we did in the earlier comments on the sametheme.

Each year, we list and topically classify the articles that have appeared in thetwelve issues of the respective volume. Our latest annual topical index waspublished as Section 4 of the August 1968 issue. As usual, the index also includedother technical publications (research studies and monographs) issued by NAAduring the same one -year period.

Volume XLIX (September 1967— August 1968) of our publication contains119 articles, 40 letters to the editor and 137 book review notes. Each article islisted in the topical index under one or more subject headings. Articles referringto a particular industry are also listed under the respective industry headings.

There are 264 entries in the latest index -204 entries under 47 subjectheadings and 61 entries under 33 industry headings. A summary breakdownof the list ings under subject headings is given below:

1. General topics— accounting, financial statements, cost accounting, etc. -45entries (23 %).

2. Topics related to balance -sheet and income - statement items —fixed assets,profits, inventories, etc.-33 entries (16%).

3. Major management accounting techniques —data processing techniques,statistical and mathematical methods, return on investment, direct costing,budgeting, etc. -84 entries (41 % ) .

4. Major purposes served by these techniques— management, productionplanning and control, financial control, pricing, mergers, et c. -37 entries(18 %).

5. Various minor topics -5 entries (2%).

These categories are arbitrarily established, but they are consistent withthose used in previous years' comments. A comparison with the preceding year(see Comment in the October 1967 issue) shows an increase of 10 entries ongeneral topics, with no significant change in other areas. The detail comparison,however, reveals a few interesting changes in terms of articles on individualtopics (the numbers in parentheses refer to Vol. XLVIII): 8 (0) on cash flow,3 (0) on production measurement, 4 (1) on mergers, 11 (6) on return oninvestment, 12 (7) on statistical and mathematical methods, 18 (22) on dataprocessing, 2 (6) on taxes, etc. Some of these changes probably indicate eitherthe problem areas of immediate concern in the respective year (cash flow,capital expenditures) or a trend toward newly developing techniques coupledwith somewhat decreasing interest in the familiar ones.

Data S h e e t JANUARY 1969

AICPA Board CommentsOn SEC Pr oposed RulesCommenting on the proposed regulationsof the Securities & Exchange Commissionto require fuller financial disclosure bysegments of a business, the AccountingPrinciples Board of AICPA declared itself"very much concerned." The Board said itsupported fuller disclosure but suggestedthe SEC should delay new rules untilresearch in this area has been completed.In particular, the Board pointed out thatproblems involved in reporting on segmentassets were so significant that it advisedsuch disclosure should not be imposednow. Many Board members also thought the107o rule for reporting segments too low.The Board noted that it expects to make a"definitive pronouncement" in the futureon the need for, and extent of, disclosureof supplemental information by diversifiedcompanies, based on its analysis ofvoluntary disclosure efforts and theconclusions of current research activitiesand further study.

NAM Oppose s Rule sThe National Assn. of Manufacturers alsoopposed the SEC proposed amendments,citing some of the same reasons made byleading accounting organizations. The NAMconcluded that "Issuance of the amendmentsin their present form could lead toundesirable consequences from the point ofview of the businessman, the investingcommunity and the general public." Theorganization urged delay in issuing theregulations.

Boar d on Earni ngs Per ShareThe AICPA has proposed that companies showtwo kinds of earnings - per -share figureson financial statements. Under theAccounting Board proposal each incomestatement would present primary earningsper share — earnings based on each shareof common stock — and, if residualsecurities exist, equivalent shares ofcommon stock attributable to residualsecurities. The Board also proposed thatearnings - per -share figures be included inthe financial statements which arecertified by independent auditors.

D. &B. Plans Data ServiceA computerized data service to providemarket profiles on three million of thenation's leading businesses is planned byDun & Bradstreet, Inc. The profile wouldinclude street and mailing address, lineof business, number of employees, salesvolume, credit rating, state, city andcounty geographical code and the year thebusiness was started. The service will bein operation in February 1969.

Study Anal yze s Ef fec ti ve Executi veThe most highly successful executives arethose who have specialized early andgeneralized at the graduate level,according to a new research study whoseresults were unveiled at the 37thInternational Conference of the FinancialExecutives Institute. The study,conducted by A. T. Kearney & Co.,management consultants, indicated thatless effective executives were more likelyto confine themselves to a "business"curriculum. The study also concluded thata sizeable portion of the $6 billion spentannually by American corporations fortraining appears to be wasted. FEI plansto publish the full report.

Course in Systems and Proc edur esA new 50- lesson home study course insystems and procedures is now being madeavailable from North American Instituteof Systems and Procedures. Furtherinformation on the course, which i ssponsored and copyrighted by the Systemsand Procedures Assn., may be obtained fromNorth American Institute of Systems andProcedures, Dept. M.A., 4401 Birch St.,Newport Beach, Calif. 92660.

Ac c ount i ng Sys te m for Smal l B ank sA realistic accrual accounting system canand should be developed for smallerbanks contends the Bank AdministrationInstitute which has just issued a manual,"Realistic Accounting and Reporting inthe Smaller Bank." "It seems the time hascome when the financial reporting ofbanks must portray assets, liabilities,and income and expenses in a current,realistic relationship," the manual says.

4 MANAGEMENT ACCOUNTING /JANUARY 1969

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Passive IncomeTo the Editor:

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A Conceptual Framework forAnalyzing and Evaluating

Managerial DecisionsA FRAMEWORK FLEXIBLE ENOUGH TO COPE WITH A GREAT VARIETY OF PROBLEMS

By K. Fred Skousenand Belverd E. Needles, Jr

If we assume that management is in-creasingly faced with complex anddiverse decisions, then it follows thatsome frame of reference for viewingthese decisions might be helpful. Fur-ther, if we assume that the managementaccountant is to assist management insolving its wide range of problems bygathering, organizing, interpreting, andcommunicating relevant data for man-agerial decision - making purposes, it maybe contended that the managementaccountant needs a frame of referencefor developing and organizing this data.

j_

'AK. FRED SKOUSEN

is Assistant Professor of Accountingat the University of Minnesota, Min-neapolis, Minn. Professor Skousen, aCPA, holds a B.S. degree from Brig-ham Young University and M.A.S.and Ph.D. degrees from the Univer-sity of Illinois. He has published pre-viously in another accounting journal.


The purpose of this paper is topropose such a conceptual frameworkwhich may be useful for analyzing andevaluating managerial decisions. Ourintention is to have the framework aidin making original decisions as well asin evaluating the results of past decisionsonce they have been put into effect. Wecall the framework a Decision Evalua-tion Model (DEM) and base it on anoperational approach to solving prob-lems.

An "Operational Approach"

A framework which is useful for theabove purposes must be flexible enoughto cope with a great variety of problemsand circumstances. Not only are theyvaried, they are dynamic, continuallychanging. To provide the frameworkwith required flexibility, an operationalapproach is employed.

The operational approach is a logicaland scientific approach to problemsolving.' In essence "operationalism" 2

means that having established a specificpurpose, one can develop concepts andmeans to accomplish that purpose.Therefore, the key elements of theoperational approach are: (1) a specific

1 Ma n y o f F . S . C. No r th ru p 's b as ic id eas , d irec t edto ward business decision - making problems, a r e em-bo d ied in t h e ap p ro ach p ro pposed here. See F . S . C.No r th ru p , Th e Logic of t he Sci ences and t h e H u -man i t i es, MacM ill an , New Yo rk, 1947, Ch ap te r I .

2 Th is t e rm is des cribed in some de ta il in connec-tion with an opera tion al co n cept o f in co m e in No r-ton M. Bed fo rd 's book. I n come Determi nat ionTh eo r y : An A cc o u n t i n g Fr a me wo r k , Addison -Wes-ley , R ead in g, Mas s. , 1965, p p. 67 -70, 73.

objective and (2) relevant concepts andmeans to achieve the desired results.In an accounting sense this means de-velopment of useful data and methodsof analysis to accomplish the specificpurposes for which the information isto be used.

This approach to solving businessproblems recognizes that single, rigidconcepts and methods will not be ad-equate-for every purpose and situation,especially in an increasingly complexand changing business economy. In-

I

BELVERD E. NEEDLES, JR.

is Assistant Professor of Accounting atTexas Technological College, Schoolof Business Administration, Lubbock,Texas. He was formerly on the re-search staff of the American HospitalAssociation, Chicago, Ill. ProfessorNeedles is a CPA and holds BBA andMBA degrees from Texas Technologi-cal College. In February 1969 he willreceive his Ph.D. from the Universityof Illinois.

stead, concepts are considered relativeto the set of operations with which theyare connected. Thus, as P. W. Bridge -man states, the proper definition of aconcept is not in terms of its properties,but in terms of the operations withwhich it is associated.3 This provides forthe flexibility to adjust to a changingenvironment.

A Decision Evaluation Model

Our Decision Evaluation Model ispresented diagrammatically in Exhibit1. It consists of four major divisionswhich act upon and influence the de-cision process and subsequent results.These divisions are as follows: (1) theobjective, (2) the evaluation criteria,(3) the quantitative—qualitative analy-sis of information inputs and (4) there- evaluation.

While the framework is presentedvery simply here, it may be expanded tothe complexity desired, depending on

a P . W . Brid ge in an , Th e Lo g i c o f M o d e r n Ph y s ics ,Mac Mil lan , Ne w Yo r k , 1927, p . 6 .

Exhibit 1DECISION EVALUATION MODEL

10

the objectives and detailed purposesbeing considered, by adding more ex-ogenous and endogenous variables anddetailed classifications within the quanti-tative and qualitative sectors.

As will be noted, the framework isconceived in an environment charac-terized by risks and uncertainties.4 Thus,because the future is not known, theobjectives, decisions and actions of themodel are all influenced by probabilities.A measure of probability is determinedby associating certain events with aclassification structure. Judgment mustenter into the process of making as-sociations because decisions are madeconcerning what constitutes an eventand where it should be classified .5

ObjectiveAffecting the decisions and actions of

men are certain underlying needs andmotives. This is also true for a complex

4 Fo r a ca re fu l dist inc t io n between th e t e r m s r is kan d u n cer t a in ty , see F r a n k H . Kn igh t , R i s k Un -cer ta i nt y , a nd Pr o fi t , Ho u gh t o n Mi ff l in , N ew Fo r k,

1921, pp. 19 -21.

Mo t i v a t i o nsG o a l s

Objective

rG�♦A

Evaluat ioon W

C r i e r i s

Qu a n t i t a t i v e Qu a l i t a t i v eAnalysis , Analysis

De c i s i o nRe- evaluation Process:

r - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Ac t i o n

Obje c t i v eRelevant Information

co nce r ni ng ResultsDesired Results

I n t e r - . -v e nt i o n - P -- • Decision

organization such as the business enter-prise whose existence rests on how wellit satisfies the needs of the peopleforming it. Many writers have pointedout that the business enterprise has notonly multiple goalse, but also a hierarchyof goals.' These general goals affect thechoice of specific objectives in an opera-tional approach to decision analysis andevaluation.

The importance of a specific objectivebased on the general goals should notbe minimized. Before any evaluation ordecision can be made, the specific ob-jective and purposes of the decisionmust be clearly recognized and setforth.8

Thus, a statement of the objective,a list of the specific questions whichneed answering, and a summary of therelevant facts and data required toanswer the questions and meet theobjectives are the foundation of thisoperational framework. Such a state-ment should be as detailed as is neces-sary to clearly set forth the problemwhich is to be solved. This will not onlyprovide a record of the purposes andobjectives of a certain action, but willalso require a more systematic andlogical approach to the solution of aproblem.

The specification of a specific objec-tive has the advantage of reducing othergoals in the firm to constraints orminimum requirements to the problemat hand. The other goals must be satis-fied at some minimum level while tryingto reach this objective.

Evaluation Criter iaThe evaluation criteria division of the

framework consists of standards forjudging the adequacy of potential ac-

8 Churchman, for instance, defines the probabilityf of an event as "... the measure of the degree to

gwhich the event is substantiated in thebeliefs of a~ definition ofoprobability in erms of be l ie f ot opin-

ionseems to provide the scientist with a convenientand powerful method of studying nature —espe-cially the nature of the decision - maker.' C. WestChurchman, Prediction and Optimal Decision,Prentice-Hall, Englewood Cliffs, N.J. , 1961, pp.150, 151.

See for instance N. M. Bedf ord and N. Dopuch,"The Emerging 'theoretical Structure of Account-ing' , Business Topics, Autumn 1961, pp 60 -70;Richard Eells, The Meaning of Modern Business,Columbia University Press, New York , 1960; Al-bert Hanterback, Man, Motives and Money, secondedition Cornell University Press, Ithaca, N. Y.,1959; herbe rt A. Simon, On the Concept of Or-ganizational Goal," Administrative Science Quar.terly,June 1964, pp 1.22; and George W. Stock.ings, " Institutional Factors in Economic Thinking,"

R American Economic Review, March 1959, pp. 1 -21.\

I N. M . Bed fo rd , " Management Mo t ives an d Ac-co u n tin g Meas u r em en t s , ' Qu a r t er ly Re v i ew ofBu s i nes s an d Eco n om ics I I I , Au tu m n 1963, pp.35 -45.

9 Alth o ugh it is not dis cu ss ed in th is paper, it isrecognized that it is through the organizationalstructure of an enterprise that goals and objectivesare attained.


counting information. The developmentof a coordinated group of such criteriaor standards has been discussed recentlyin at least two studies, one issued by acommittee of the American AccountingAssociation9 and the other developed byHoward J. Snavely.10 The committeehas developed a set of four standards:relevance, verifiability, freedom frombias, and quantifiability. The standardof relevance is the primary criterionunder this scheme and requires that in-formation be directed toward a specificpurpose, that is, information should beassociated with the actions it is designedto facilitate or with the results it isdesired to produce.

The committee recommends that atrade -off might exist in the applicationof the standards: Adequate fulfillment

...does not require complete adherenceto any one or all of these standards un-der all circumstances. It is possible torealize them more fully in some casesthan in others. Further, it is basic to rec-ognize that different uses call for differ-ent degrees of adherence." 11

Snavely, on the other hand, has effec-tively argued that there should be ahierarchy of criteria, that is, somecriteria are more widely applicablethan others. He suggests that usefulnessis on the highest level of the hierarchybecause it is unrestricted in its appli-cability. This statement asserts that datamust be useful before it qualifies foraccounting information. To be useful,Snavely urges that data must meet allsecond level criteria which are "mutuallyexclusive and singularly powerful." 12

Thus, there can be no trade -off onthis level. He suggests that the reasonthe AAA's statement must accept thepossibility of a trade -off among thestandards is because the committee hasmixed second and third level criteria.

These important studies leave somequestions unanswered, such as, are thesecond level standards truly indepen-dent, must they be independent, whatis the place of verifiability and freedomfrom bias in accounting, are thereother standards, and can methods bedeveloped which will allow effectiveapplication of the standards? Answersto these and other questions may not be

A Statement of Basic Accounting Tkeor? Ameri-can Accounting Association, Evanston, Ilf., 1966,pp. 7 -13.

]U Howard ] Snavely,• "Accounting InformationCrite ria," The Accounting Review, April 1967, pp.223.232.11 A Statement..., op.cit., p. 8.19 Snavely, op. cit., p. 232.

immediately forthcoming, but researchshould continue in this area because ofthe important place that informationcriteria occupy in a decision evaluationmodel.

The evaluation criteria division of theframework serves a dual purpose. First,based on the specific objective, thecriteria are used as guides in selectingthe methods that will most likely pro-duce the information (both quantita-tive and qualitative) required for theparticular decision. The search for datais aided from its initiation. Effort can bedirected toward the best possibilities.Second, during the accumulation of dataand at its completion, data gatheredwithin the quantitative - qualitative phaseof the framework may be judged on thebasis of the criteria standards in order toensure that it meets them sufficientlyto be useful in the decision process.Certainly, accountants usually attemptthis type of evaluation on an informalbasis, both consciously and unconscious-ly, but a formal system of criteriaand a recognition of its role in thedecision framework should aid theentire process.

Quantitative—QualitativeAnalysis of Information Inputs

Exhibit 1 shows the important in-teraction between the quantitative andqualitative factors within the frame-work. The ideal is to quantify as manyof the qualitative factors as possible.While some subjective elements willalways be present in decision - making,the use of modern mathematical tech-niques and especially the use of com-puters makes it feasible to quantifymany factors which previously weremerely as given and treated as qualita-tive factors.

More specifically, the quantitativesector of the framework deals primarilywith objective facts and figures. It isconcerned with assignment of revenuesor products, divisions, or responsibilitycenters; with various cost classificationsand allocations; and with the mathe-matical and statistical methods of mak-ing revenue and cost analyses. On theother hand, the qualitative sector is con-cerned primarily with subjective factorswhich are difficult to express in quantita-tive terms. However, even here, subjec-tive probabilities should be used to givequantitative expression to qualitativefactors. The use of subjective probabili-ties, where it is feasible, gives properrecognition to past experience and

quantifies the assumptions made. Thus,it forces one to think more logically andanalytically. Better decisions are theproduct of such an analysis.

The Decision Process

In the final analysis then, managerialdecisions should be based on analysesand judgement of both quantitative andqualitative informational inputs whichhave been directed toward a specificobjective and have met certain evalua-tion criteria. After such decisions havebeen implemented and results gener-ated, there is need for re- evaluation ofthe process.

Re- evaluation

The re- evaluation process is centered,as is all the operational approach,around the objective which is in turnsubject to the constraints mentionedpreviously. This process, which consistsof two steps, has the advantage of beingable to use the previous analysis informa-tion and any subsequent informationthat may be relevant to the problem.

The first step is the correspondencetest which has the task of comparingthe results with the objective. It seemslikely that the results will be examinedon some statistical sampling basis. Thecorrespondence test can have two possi-ble outcomes. First, if no difference ora non - significant difference is the out-come, the re- evaluation process ends atthis point. Second, if a significant differ-ence is the outcome, this informationis forward to the next step.

The second step is the interventiondecision which is concerned withwhether or not to take action that willaffect the results in the future. This isa separate process from the correspond-ence test and may result in one of threepossible courses of action. First, theremay be a decision to take no action.For instance, the correspondence testmay reveal that the goal is being ex-ceeded or if the goal is not being met,it may be the result of reasons not with-in the control of this part of theorganization such as changes in con-straints arising from other goals withinthe firm. Second, there may be adecision to take action and change theoriginal decision, thus affecting theresults in the future. This decision isbased on the objective, the previous in-formation collected in making theoriginal decision, any additional infor-

(Continued on page 15)


Management Systems in aGrowth Company

A FRESH VIEW OF HOW TO ORGANIZE AND INTERRELATE MANAGERIAL ACTIONS

By Carl J. Thomsen

In current management literature thewords "Management Systems" and"Management Information Systems"appear frequently. Does this reflect onlya fad?

Is the current interest in Manage-ment Systems only a fad as was thepopularity of long -range planning in themanagement literature and managementseminars of the early 1950's? Top man-agers demanded an emphasis on long -range planning, and their subordinatesresponded with accumulations ofnumerical projections of billings andprofits which were reviewed at carefullyselected resorts in remote locations toassure concentration on .the long termwithout the distraction of meeting to-day's performance goals.

Then during the middle 50's,thoughtful managers became disen-chanted with their long -range planningefforts. They began to ask themselves,"Is this really long -range planning ?""Is it serving our purposes ?" And theanswers generally were "No." This dis-enchantment brought a lull in thepopularity of long -range planning. Dur-ing this lull, managers thought aboutlong -range planning in a more funda-mental way and evolved the approacheswhich are beginning to be used current-ly. The difference between the popu-larity of long -range planning in the early1950's and today is that now long -rangeplanning is looked upon as a fundamen-tal management process with emphasis

12

on how to accomplish goals rather thanmerely to express them.

There are some disturbing indicationsthat the current interest in Manage-ment Systems is like the interest in long -range planning of the early 1950's. Theincreased popularity of ManagementSystems in management literature andseminars is nearly fantastic. Anotherconcern leading one to the feeling thatinterest in Management Systems maycurrently be only a fad is the too fre-quent emphasis upon tools and tech-niques rather than upon the goals to beachieved. Also, there is too little interestin understanding of Management Sys-tems in a fundamental way.

Or, is the current interest in Man-

CARL J. THOMSEN

Senior Vice President in charge of Or-ganization and Management SystemsDevelopment Activity, Texas Instru-ments, Dallas, Tex. Mr. Thomsenjoined Texas Instruments in 1946 af-ter serving as an officer in the NavalReserve. He is active in the affairs ofRensselaer Polytechnic Institute fromwhich he graduated.

agement Systems the beginning of amanagement revolution? There are thosewho do feel that we are entering upona management revolution, althoughtheir names for it may differ.

The Management Revolution

The following will indicate whyreference is made to a managementrevolution rather than just a cybernetic,information, or industrial revolution.For this purpose, the author refers to oneof the basic organizational philosophiesof Texas Instruments. This companybelieves that the business must beProduct - Customer centered, and identi-fies as line functions those most closelyrelated to this Product - Customer center—the create, make and market func-tions. Creating identifies the develop-ment and design of products; makeidentifies production; and market —theidentification and anticipation of thecustomer's needs. These are the main-stream actions of a business. Activitiessuch as control, personnel, procurement,accounting, industrial engineering, aresupporting and performance- enhancingfunctions serving the three line or mainstream efforts of the business.

With create, make and market inmind, the first industrial revolution isrecognizable as concerned almost en-tirely with only one of the three; it wasa drastic departure from the past in theway actions were organized to makeproducts. Over nearly several hundredyears, mechanization —and in the lasttwo decades automation of production


—has progressed to the present exten-sive computer control of productionprocesses in some industries. Mechaniza-tion and automation though are onlyhigher degrees of structuring of actionsto make products.

Now though, one is beginning to seeautomation in the create function too.For example, a number of electroniccompanies —and TI is one — currentlyare developing their capability to designcomplete electronic circuits by com-puters. Computer programs identify thecomponents required, determine theiroptimum location in relation to oneanother and then run a maze of likelyinterconnecting paths to determine thebest one.

With growing automation in thecreate function and substantial increaseof automation in the make function, itis inevitable that one's interface withcustomers, the market function will besubstantially influenced too. One ex-ample of this is TI's Supply Companyhaving a communications terminallocated in some of its customers' plants,so that predescribed industrial supplyitems can be ordered.

Thus far the organization of actionsto create products, to make them andto market them has been emphasized.There is also concern with a signifi-cantly higher degree of structuring ofthe actions in the supporting and per-formance enhancing functions, such asaccounting and control, of businesses.This conglomeration and interrelationof the organization of actions in themainstream, supporting and perform-ance- enhancing functions of a businessis the Management System of that busi-ness. This leads to the definition ofManagement System as "How a man-ager organizes actions to use the re-sources of a business to accomplish itspurposes within a particular environ-ment." It is with this broadly definedManagement System that the manage-ment revolution is concerned. Its impactis broad.

Impact of the ManagementRevolution

Major impact of the managementrevolution is by the very nature of itsbreadth; that is, the opportunity formanagers to take an entirely fresh viewof how they organize all the actions andinterrelate them in a business to achievetheir objectives. This is the truly dis-tinguishing characteristic of the man-agement revolution, and it is much more

encompassing than merely information,cybernetics, or industrial revolutions.

How a particular manager organizesactions to accomplish his purposes isexpressed in these four forms:

1. In the first form, how he organizeshis own actions to use his inherentcapabilities — including his motivat-ing and innovating capabilities.

2. In the second form, with his depend-ence upon the abilities of other per-sonnel, how he organizes people. Itis expressed in the conventional man -to -man organization pattern withwhich all are well acquainted.

3. In the third form, the organizationof actions by systems and machinesis expressed. As the degree of struc-turing of actions becomes higher, itis more difficult to separate systemfrom machine because the machine(for instance, the computer) or-ganizes actions (in the form ofcomputer programs) .

4. And the fourth form of expressionis the organization of actions toobtain and apply information andknowledge from the environmentprescribing the arena within whichall other actions are being organized.

One can think of the particularbalance among these four expressionsof how actions are organized as repre-senting a particular manager's style ofmanaging. The management revolutionwill alter significantly the styles thathave been seen so far in business ex-perience.

GAINS. The effects of the impact of themanagement revolution upon Manage-ment Systems and style in terms ofgains and problems include:

1. Progress in the development ofmanagement systems will requirefirst that objectives and purposes forthose systems be clearly stated. Asa consequence, the actions of in-dividuals affected by new manage-ment systems should be moredirected. The consequent reductionin misdirected effort could providethe opportunity to make a sub-stantial gain from the relatively loweffectivity of present business enter-prise.

2. In a world where the needs forhighly skilled and professionallytrained individuals have exceededand portend to continue to exceedthe ability to supply them, the gapbetween the two could be narrowedas managers organize their own and

their subordinates' actions to ac-complish purposes more effectively.As advanced management systemsstructure more of the actions ofmanagers, they should become freeto apply their capabilities to con-ceiving new ideas to solve problems,and to realize opportunities in areaswhere they previously have had littletime. Perhaps this freedom andreapplication of managers' effortsmay result in higher growth ratesfor individual businesses and of theeconomy as a whole.Managers' new freedom and reap-plication of talents could give themthe satisfaction of using more oftheir inherent capabilities.

P R O B L E M S . Some of the problems are:

An aspiring manager ten andcertainly twenty years from nowwithout substantial training in Man-agement Systems, Management Sci-ences, and the use of computers, willnot realize his aspiration. A managertoday who aspires to higher manage-ment levels ten to twenty years fromnow and who has not received suchtraining will be replaced by thosewho have. There will be the inevita-ble strains of obsolete managers di-recting subordinate managers whoare better qualified in the science ofmanaging.With so much emphasis upon thetools and upon newly acquired tech-niques, there is the danger of ourlosing sight of the purposes whichthose tools and techniques shouldhelp one achieve. As defined earlier,management systems organize ac-tions to achieve purposes, and in-cidental thereto there is concern forthe organization of information andthe use of computers. Failure toappreciate that Management Sys-tems are how actions are organizedto accomplish purposes leads to amisplaced emphasis upon the tools,such as computers.The task of developing advancedManagement Systems will be oneof the most difficult undertaken in abusiness institution's history. Therewill be many false starts. There willbe the inevitable disenchantmentwith something which is new. Therewill be swings from wild enthusiasmto highly restricted efforts, but ef-fective advanced Management Sys-tems of a quality expressing the



Misuse of Standardsin Decision Making

VARIABILITY MAY BE AS SIGNIFICANT AS THE STANDARD ITSELF

By Rober t W. Rosen

Are standard costs and times really andconceptually valid for decision makingand control? It has already been dem-onstrated that least standard or actualcost is not an appropriate cri terion forselecting among alternative choiceswhen the most efficient resource hasless capacity than the amount of workto be done., Second, overattention to"cost" has generated the notion thatminimizing cost will maximize profits orrate of return. Where costs and revenue,or costs and inventory, are interrelated,as in the case of setting productionquotas, then minimizing cost is notalways coincident with maximum prof-i t s or ra t e of r e turn .

Basically, standards are averages. Onedifficulty which arose as a result of usingonly the average or standard is that ob-jective techniques could not be used todetermine whether an observed variancein actual cost was statistically signifi-cant. Consequently, rules of thumb,such as variance of $100 or 5 %, wereestablished to determine whether thevariance was significant, i.e., whetherfurther investigation was justified. Inshort, accountants usually disregard thedeviations about the standard which isthe very data needed to determinewhether a significant variance has oc-curred.

1 Robert W. Rosen " Accountant—Spare That Va-riance!," N.A.A . bulletin, November 1961, p. 91.

14

Use of Standards in DecisionMaking

The use of standards to select amongalternatives can lead to many pitfalls.Waiting line models provide interestingexamples. Deviations about the stand-ard (machine) time can cause the aver-age amount of in -bank inventory, aver-age waiting time, and carrying cost toincrease by 100% over what they wouldbe if no deviations existed.2 Similarly,the frequency and magnitude of stock -out or runout is much less for the caseof zero deviation.

In general then, operations withgreater deviations about average orstandard machine times incur extracosts in the form of greater in -bankinventories, stockout, or both. It is per-fectly possible, and very probable, thata machine which is faster and thereforehas a lower average time and cost may,by virtue of its variability, generategreater carrying and runout costs. As a

Y E . S . Bu ffa, Mo d er n Produ ct ion Mo n a me en t ,second ed it ion , J o h n W iley , New Yo rk , ,� anuary

1965, pp. 730 -734.

ROBERT W. ROSEN

is Visiting Professor, San Diego StateCollege, San Diego, Calif. ProfessorRosen holds a B.A. degree from ColbyCollege, Waterville, Me. and a Ph.D.degree f rom the University of Pitts-burgh. He is the author of a numberof articles which have appeared in ac-counting periodicals.

result, the total combined cost of usingsuch a machine could be significantlylarger than a slower machine withhigher operating cost but less variabilityin output. Hence, using the standardtime or cost only, which neglects thevariability about the standard, wouldlead to the wrong decision, i.e., a highertotal cost. Obviously, it is minimumtotal cost, not minimum operating cost,which is of primary concern to the deci-sion maker.

It would be tedious and unnecessaryto show in detail that deviations aboutthe computed standard must be con-sidered in choosing among alternativesand when preparing pro forma estimatesof the expected profit from a given setof proposa l s . T h u s , it is qu i t e possib le ,

for example, for sales to increase sub-stantially and for unit cost to remainconstant, while profits decrease. Suchresults might occur when the incremen-tal sales exhibit marked variability, lead-ing to larger inventories, more laborturnover, greater use of overtime, orsome combination of all of them.Standard cost, as currently employed,would not reflect these other costs andwould thus overstate the potentialprofit.

Similarly, one could demonstrate thata deliberate reduction or fall in salesaccompanied by a sufficient decrease invariability could yield larger profits eventhough standard or operating cost perunit remained constant. As a final ex-


ample, one can also show that it mightbe more profitable to buy from a vendorwho quotes a longer average deliveryperiod, but less variability, than onewhich delivers faster but with greatervariability about the average deliverytime.

Neglecting the variation or dispersion

Conceptual Framework(Continued from page 11)

mation available, and certain otherconsiderations. These other considera-tions are such things as the likelihoodof failure in the attempt to change, theextent and effects of disruption of theprocess that is now in operation, theeffects of a change on other parts of thefirm, time restrictions, and the relative

Management Systems

(Continued from page 13)

management revolution are not go-ing to be developed without acontinuing commitment of effort tothem. For this reason, it is hopedthat the possible tendency towardManagement Systems being first afad can be avoided. Perhaps theexperience with long -range planningin the 1950's can help to at leastminimize any period of disenchant-ment with Management Systemsdevelopment. It can be minimizedif those in business organizationsand those in educational institutionswill seek to express a science ofManagement Systems which can bereadily communicated. Withoutsuch an underlying body of logicand knowledge, it is only naturalto expect that concentration willcontinue on the "easier to under-stand" tools and some techniques.With individual systems being de-veloped as parts of networks ofsystems, the need will be for menwho can see a business as a whole.It was interesting to hear JamesWebb say in a dedication addressabout a year ago, "To see a manat all you must see the whole man."

about computed aggregates, averages,percentages or standards often resultsin suboptimal decisions, or worse. Whydoes this deficiency exist and continueto exist? Partly, the problem is thatconcepts useful for bookkeeping pur-poses have been misapplied to decisionmaking. A concept which is useful for

values of possible successes or failures.Third, the decision may be made tochange the objective due to changedconditions or to an unrealistic originalobjective.

The Objective Restated

The Decision Evaluation Model isnot a new technique for solving prob-lems, nor can it compensate for basicweaknesses in data or decision - making

This might be reworded, "In thefuture, to see a business at all wemust see the whole business." Toofew men have this ability.

5. Development of Management Sys-tems will bring together managerswho know their businesses, andsystem designers and managementscientists who have substantial pro-fessional competence in their fields.A communication problem betweenthese two exists currently and amajor problem will be to facilitatethis communication in the yearsto come.

6. This management revolution will becreating a new environment inwhich people will be working. It willbe an environment some will see asstructuring their actions far beyonda point where they retain theiridentity as individuals in a businessorganization. If the environmentcreated deserves this characteriza-tion, or if there even a widespreadfeeling that it should deserve it, theadvanced management system de-velopment efforts will have failed.To avoid such failures, it will benecessary for those whose actionsare being structured to participateto the maximum extent possible inthe development of advanced man-

the former may be quite misleading orincomplete for decision making.

Such deficiencies would diminish ifdevelopments in related fields, such asWaiting Line Theory, were studied todetermine the implications for data col-lection and reporting, or advising man-agement.

techniques. Rather, it is a structuredviewpoint, a frame of reference, for ana-lyzing decisions, both prospectively andretrospectively. The framework's opera-tional approach gives it a flexibilitywhich, it is hoped, will stimulate newthoughts concerning the many relation-ships involved in management decisionsand will aid, ultimately, in achieving itsgoal of reducing the uncertainty sur-rounding those decisions.

agement systems, the systems whichwill organize their actions. But thesesame systems— properly conceiveddesigned —will create opportunitiesfor managers and others to use theirinherent capabilities to a muchhigher degree than we have everknown. The opportunity of creatingsuch an environment is the fasci-nating challenge in management sys-tems development. The environ-ment created will be in sharp con-trast with business environments ofthe past, and that change char-acterizes the management revolu-tion.

Conclusions

This discussion began by questioningwhether the current interest in manage-ment systems was a faddish interest, orwas it at the beginning of a managementrevolution —and it could be both. Someof the current interest is undoubtedlyfaddish, and as a consequence theremay be a time of inevitable disenchant-ment with advanced management sys-tems development. Such a reaction maybe only a necessary early stage. Duringthis management revolution, all willhave much to learn —much to under-stand— before we realize and appreciateits benefits.

MANAGEMENT ACCOUNTING /J ANUARY 1969 15

The Nature and Importance ofVariances from Standard Cost

of Production*

TOWARD MORE CLEARLY DEFINED EXPRESSIONS OF WHAT MAKES A VARIANCE SIGNIFICANT

By Oswald Nielsen

Generally, it is assumed that analysisand treatment of variance is singularlyimportant in the operation of a stand-ard cost accounting system. It is furtherpresupposed that large variances mustbe recognized by some special processof analysis, proration, or presentation.Contrarily, small variances may be ig-nored because of the insignificant resultsto be expected from such treatment.

Whatever their merits, these assump-tions and procedures are based uponsuperficial considerations of the magni-tude of the variance figure itself. It isthe purpose here to explore the natureof such suppositions and appraise theirvalidity.

Recognizing that cost variances maybe either qualitative or quantitative, thisdiscussion will be concentrated on thequantitative factors, specifically address-ing itself to quantitative significance.First, those that are significantly in ex-cess of standard (unfavorable) will becovered. Those that are significantlyless than standard ( favorable) will betreated only incidentally here.'

I David H. Li makes a clear statement of the con-cept of favorable and unfavorable variances in hisAccou nt ing for Ma n ag emen t An a lys i s , Charles E.Merrill, Inc., Columbus, Ohio, 1964, p. 293.

The author is indebted to the firm of Webb &Webb, certified public accountants, for financialsupport to make this study possible. He also ac-knowledges valuable assistance from Barbara Man-chester Vendelin and Charles T. Horngren.

16

Quantitative vs. QualitativeAspects

In distributing "quantitative" and"qualitative" variances it may be helpfulto indicate the sense in which theseterms are used here. Quantitatively, avariance is presumed to be expressed asa certain number of dollars and cents(although it could just as well be statedin non - monetary quantities), regardlessof what the cause of the variance maybe. The qualitative significance of vari-ance is presumed to be associated with(a) those characteristics which havegiven rise to it or (b) the nature of the

OSWALD NIELSENSan Francisco Chapter (Minneapolis1944), Professor of Accounting, Stan-ford University, Graduate School ofBusiness, Stanford, Calif. ProfessorNielsen, a CPA, received a Ph.B. de-gree from the University of Chicagoand a Ph.D. degree from the Univer-sity of Minnesota.

impact of the variance on the operationto which it pertains.

Frequently the quantitative signifi-cance of variance is the one that receivesbasic treatment, while the qualitativesignificance of it often is ignored. Thefollowing discussion relates to the sig-nificance of variance, first from thequantitative aspect and then with anappraisal of the qualitative significanceof variance.

The treatment of quantities of vari-ance has its impact on the preparationof the traditional financial statements(whether distributed internally or ex-ternally) and on such other external re-porting as is done for income tax pur-poses. In outside reporting and state-ment presentation, the treatment ofvariance essentially involves overall con-siderations, in contrast to the segmentedtreatment required for internal controlpurposes. Any examination into thecomponents of a variance may disclosedetailed significance, even though theoverall total of variances is not neces-sarily significant. Conversely, an aggre-gation of small variances, insignificantindividually, may be significant. Hence,the managerial implications of the vari-ance and its treatment may be some-what different from what it would befrom the standpoint of overall reporting.

From the standpoint of overall state-ment presentation it is only if a variance


is significant quantitatively that it gainspractical significance qualitatively. Inthis sense, qualitative significance at-taches largely to the problem of whatmay be done about the variance, evento the extent of indicating the locus oforganizational responsibility for it. Theremay be qualitative significance to quan-titative small variances, such as "for theprinciple of the thing," which might ap-ply if there are moral or ethical consider-ations at issue. Any qualitative consider-ations will be limited to those aspectsthat rest with management, assumingthat there will be no idealistic qualitiesat stake.

Literature on the Subject

In the literature on variance analysisit is preponderantly assumed that onlya large variance ought to be scrutinized.This approach, thought of as an appli-cation of the "principle of exceptions"in cost control, implies that a small vari-ance does not deserve managerial consid-eration. It is for this alleged reason ofinsignificance that small variances mightwell be disposed of by direct charges tocost of sold goods, and thus allocated tothe period of incurrence. In this respect,variance is considered to be large orsmall in relation to the standard costfrom which it varies.

Some writers are disposed to handlevariances on the basis of whether theyare above or below standard costs. Intypifying this group, Clinton W. Ben -nett2 suggests that all variances of actualover standard cost might well be addedto cost of goods sold in the period inwhich they occur but that variances ofactual under standard should be appor-tioned between cost of goods sold andinventory. This essentially conservativeattitude ascribes to the process of valua-tion of inventory those figures that willreduce its value. Bennett relates this ar-gument to his discussion of the valua-tion of inventories at the lower of costor market. Obviously, this viewpoint em-phasizes the qualitative nature of thevariance, its directional quality ratherthan its absolute or relative magnitude.

Another approach involves treatmentof variance according to whether thereis external or internal responsibility forit. This treatment, as described by JohnC. Blocker,3 suggests that any variance

o Wyman P. Fiske and John A. Beckett, Editors,Industrial Accountants Handbook, Prentice -Hall,Inc., New York, 1954, p. 339.

John G. Blocker, "Mismatching of Costs andRevenues," The Accounting Review, January 1949,pp. 33.43.

of actual labor or overhead costs fromstandard might appropriately be chargedto cost of goods sold on the theory thatthe firm itself has responsibility for themagnitude of these supposedly internalcosts. This theory further assumes thatprice variances of materials result fromexternal forces operative in the marketand consequently justify the distributionof variance between cost of goods soldand inventory. These arguments are de-fective according to Blocker in that theydo not provide a logical basis for distinc-tion between variances properly charge-able to current periods and those whichmust be apportioned to future periodsthrough inclusion in the inventory valu-ation. If there is a flaw in the reasoningbehind this viewpoint, it stems fromfailure to distinguish clearly betweenforces which are external to the businessand those which emanate from withinthe business itself. It appears to evademany questions on the responsibility forprice, wage rate, quantity, efficiency, andgeneral overhead variances, such as ca-pacity and budget variances which maystem from complex forces.

The arguments just cited are inquiriesinto the responsibility for variances andin that respect have merit. But theirmerit does not extend to a determina-tion of the treatment of variance accord-ing to its significance in modern man-agement and reporting.

Although he looks upon variance asthe "prime product of standard costs,"William W. Voorhees4 reasons (in1950) to the effect that variances needto be expressed in both percentages andabsolute numbers because one may belarge while the other may not necessarilybe so. Outside of this realization, hegives no indication of the characteristicsof a variance which make it worthy orunworthy of consideration.

Shillinglaw5 summarizes the way inwhich variances might be disposed of ina three -part set of alternatives:1. to pro -rate variances between sold

and remaining inventory, presum-ably on the basis of the sale, (He in-dicates the result in this case to bethe same as if all cost analyses weredone after all information for theperiod under review had been avail-able at the time of the disposition ofthe variance.)

4 Lillian Doris, Editor, Corporate Treasurer's andController's Handbook, Prentice -Hall, Inc., NewJersey, 1950, pp. 198 -199.G Gordon Shillinglaw, Cost Accountingo; Analysisand Control, revised edition, Richard D. IrwinInc., Homewood, Ill., 1967, pp. 533.36.

2. to allocate variances to the periodof its occurrence, and

3. to carry period variances forward tobe offset by variances in opposite di-rections in subsequent periods.

These references to current literaturesuggest that much remains to be donetoward formulating more clearly definedexpressions of what makes a variancesignificant in modern reporting andanalysis. The following discussion en-compasses some of the factors whichbear upon the importance of variancein analysis and reporting.

Variance and Cost of Goods Sold

The importance of the disposal ofvariance as far as cost of goods sold isconcerned, is that of making propertemporal determination of cost of goodssold. The assumption that a small vari-ance relative to standard cost of manu-facture can be added to cost of goodssold for the year of occurrence withoutany distortion of net income from oneyear to another is probably true if thevariance is a small one relative to grossmargin as well. This is not true if thegoods enter into the market at a smallmargin of gross profit, for in such a casethe variance, although small relative tothe cost of goods sold, is large relativeto the margin of profit. In such a case,the factor which determines whetherthe variance is significant enough to beapportioned between cost of goods soldand inventory is the size of the variancerelative to the margin of gross profitrealizable on the production and sale ofthe goods and not on the size of thevariance relative to the standard cost ofproductions Table 1 suggests this.

A similar situation is shown in Exhibit1 and Table 2. It will be noticed herethat the ratio of a given amount of vari-ance to standard cost of goods sold isrelatively small, whereas the same vari-ance bears a ratio to standard gross mar-gin that increases at a rapidly accelerat-ing rate as the gross margin decreases.The variance declines in significancerelative to the standard cost as the latterbecomes a larger proportion of salesprice. As thus viewed, the rate of de-cline is slow. Conversely, that same vari-ance increases in significance relative tothe standard gross margin as it declinesrelative to sales price. It aproaches infin-ity as the percent of gross margin ap-proaches zero.

I The same approach has been taken concerning de.preciation. Although it might be insignificant rela-tive to sales it may be large relative to net income.


Table 1*MODELS OF VARIANCE IN INDUSTRY

Model Number1 2 3 4

Sales $100,000 $100,000 $100,000 $100,000

Cost of goods sold (@ std.):Beginning inventory 5,000 40,000Production @ std. 70,000 60,000

Subtotal 75,000 100,000

Ending inventory 6,000 40,000

Cost of goods sold (std.) 69,000 60,000

Gross margin (std.) 31,000 40,000Variance 2,000 5,000

Gross profit (after variance) 29,000 35,000Marketing and administrative expenses 26,000 20,000

Net income $ 3,000 $ 15,000

30,000 10,00060,000 80,000

90,000 90,0005,000 40,000

85,000 50,000

15,000 50,0003,000 8,000

12,000 42,0002,000 10,000

$ 10,000 $ 32,000

Percent variance is of:Sales 2.0% 5.0% 3.0% 8.0%

Standard cost of goods sold 2.9 8.3 3.5 16.0

Standard gross margin 6.5 12.5 20.0 16.0

*A total variance of $5,000 is assumed in all of the illustrations that follow.

Exhibit 1VARIANCE RELATIVE TO STANDARD COST OF GOODS SOLD VS.VARIANCE RELATIVE TO STANDARD GROSS MARGIN

60

50

40

Percent30

20

10

Standard 0gross margin(thousands)

Cost of goodssold @ standardcost(thousands)

18

Ratio of varianceto standard gross

margin

Ratio of variance tostandard cost of goods

sold

50 40 30 20 10 0

50 60 70 80 90 100

The ratio of variance to standardgross margin is greatest as the variancerelative to standard cost of goods soldbecomes a minimum. Thus the criterionfor determining the significance of vari-ance relative to cost of goods sold, i.e.,the size of variance relative to standardcost, may give the opposite impressionto what it should.

In the case of a large variance, oneagain seeks such a distribution of vari-ance between cost of goods sold and in-ventory that there will be no distortionbetween periods in either of the two. Inthis respect the prevailing attitude seemsto be that large variances should be ap-portioned between cost of goods soldand remaining inventory. In this caseit is not the size of the variance thatmakes this apportionment importantbut, rather; the rapidity of turnover ofinventory. The faster the turnover ofinventory, the less important it is to dis-tribute variance between cost of goodssold and inventory. If there is a largevariance relative to standard cost, andthe gross profit margin is also large, thenvariance apportionment is important.But in such a case it is also possible thata slow inventory turnover goes with thehigh gross profit margin. Hence, it isnot the rate of gross profit that is thedetermining factor in variance appor-tionment. Instead, it is the rate of turn-over of inventory.

The assumption that a significantamount of variance will be allocatedproportionately to cost of goods sold andto remaining inventory on hand bearsfurther exploration. One approach is torelate this assumption to the turnoverof inventory. The data shown in Table3 are indicative of the significance ofvariance in such a situation: the morerapid the turnover, the less significant

is the apportionment of variance be-tween cost of goods sold and inventory.

If turnover is slow so that the goodswould be sold in a third rather than asecond period then the allocation of alarge variance relative to gross marginof profit is especially serious in that thedistortion in gross margin extends overa prolonged series of periods. However,if the gross margin is small, it is alsopossible that the inventory fabricated inone period will only be carried over tono more than the next period. As turn-over approaches infinity, the need forvariance to be distributed to inventorydisappears.

In arriving at a cost of goods sold fig-ure, it is assumed that the historical cost


of goods sold is not also the repositoryfor losses due to downward fluctuationin cost of replacement of inventoriesand that there is no reason why inven-tory should be valued at the lower ofcost or market in the process of arrivingat cost of goods sold.

To put it another way, as is done inTable 4, a model is prepared which in-dicates what may happen as the rate ofturnover of inventory changes. This isshown in terms of a growth or declinein inventory. Thus, as it is seen, as aninventory increases or as the decreasebecomes smaller from period to period,the effect (which is equivalent to a les-sening of the turnover of inventory)upon the gross margin of apportioningvariance between inventory and cost ofgoods sold increases. With respect toallocation, the greater the percentagechange in inventory, the more signifi-cant does the variance become.

As far as cost of goods sold is con -cerned, the need or lack of need for theallocation of variance between cost ofgoods sold and remaining inventory de-pends upon:1. Size of the variance relative to gross

profit in cases where variances aresmall relative to standard cost.

2. Rapidity of turnover of inventory incases where variances are large rela-tive to standard cost of production.

3. The larger the share of productiondevoted to increase in inventory themore is the net income figure af-fected by the appointment of vari-ance between inventory and cost ofproduction.

When variance is apportioned to in-ventory, it does not find its way into theincome determination for the period inwhich the variance occurs. Rather, itfinds its way into income measurementwhen the goods to which it is proratedare sold.

In Table 5, an attempt has been madeto show the effect on working capitalof apportioning part of variance to in-ventory. The inventories of $40,000 areshown as increased. Thus, in this situa-tion, if we refer to the variance thatapplies in Table 4, Column 3 and makean apportionment between cost of goodssold and inventory, there remains $1,775(of $5,000) to be apportioned to inven-tory as shown in Table 5. This increaseoccurs not only in inventory, but also incurrent assets and working capital, andit will be seen that the percentage effecton current assets and working capital,of course, will be relative to the propor-

tion of inventory included in currentassets and working capital. In this illus-tration, inventory is the highest pro-portion in the first column and thesmallest proportion in the second col-umn. The effect upon current assets andworking capital decreases as the vari-ance declines relative to the magnitudeof these items.

The Rates of Change in Salesand Production

The importance of variance analysisas it applies to the co- determination ofending inventories and cost of sales isillustrated by a statement by the Na-tional Association of Accountants (for-merly the National Association of CostAccountants) to the effect that:

"The statement of inventories atstandard cost will, of course, affect theperiod -by- period profit figures when asubstantial portion of the actual cost ischarged against income of the currentperiod through the closing of variancebalances to cost of sales or other profit

Table 2

and loss accounts. This effect will bemost marked when sales and productiondo not move closely together. However,the revision of standard costs may can-cel out the effect of writing off vari-ances."7

In this case, the presumption is thatthe lack of synchronization betweenproduction and sales determines whetheror not the allocation of variance betweeninventory and cost of sales is important.This is true to the extent that there arevariations in the rates of change in salesand production of such significance asto slow down materially the rate ofturnover of inventories. With significantlessening of the turnover of inventories,large variances will increasingly enterinto the joint determination of cost ofgoods sold and inventories. The oppositesituation of lessening the need for thisallocation of variance exists if the ratesof change in the sales and production are

R How Standard Costs Are Being Used Currently,National Association of Accountants, New York,1948, pp. 13 -14.

VARIANCE RELATIVE TO STANDARD COST OF GOODS SOLDVS.

VARIANCE RELATIVE TO STANDARD GROSS MARGIN

Standard gross Standard costmargin of goods sold

Thousands Thousands50 5040 6030 7020 8010 90

0 100

Ratio of $5,000 variance to standard:

Gross margin Cost of goods10.0% 10.0%12.5 8.316.7 7.225.0 6.350.0 5.6

00 5.0

Table 3VARIANCE RELATIVE TO TURNOVER OF INVENTORY

Turnover = 3 Turnover = 9Sales $100,000 $100,000Std. cost of goods sold:

Beginning inventory @ std. 30,000 10,000Production @ std. cost 90,000 90,000

Goods available for saleEnding inventory @ std.

Cost of goods sold @ std.

Gross margin @ std.Variance apportioned to sold goods

Gross margin after variance allocationEffect of apportionment of variance is to

increase gross margin

120,000 100,00030,000 10,000

90,000 90,000

10,000 10,0003,333 4,445

$ 6,667 $ 5,555

33.3% 11.5%

Assuming a FIFO inventory basis, the slower the turnover of inventory the more is the effectof the allocation of variance between inventory and cost of goods sold in determination ofthe gross margin.


such that sales overtake production, withits consequent acceleration in the turn-over of inventories.

Variance and Inventory ValueIf inventory is valued at a first -in -first-

out cost, the recent cost would be allo-cated to inventory while the earlier costswould be allocated to cost of goods sold.In such a case, if variance occurred inthe early part of the year, it would beallocated to cost of goods sold on thebasis of when it happened, which wouldmake variance insignificant as far as in-ventory expression is concerned.

There might be several reasons forthis type of treatment. One might bethat earlier variances were efficiencyvariances, which had been eliminatedas time progressed. Another might bethat the variances at the early part of

the period resulted from the existenceof unrealistic standards and that vari-ance had been eliminated through revi-sion of standards to more nearly cur-rently realistic figures. Also, varianceoccurring at one time of the year mightbe the result of seasonal operations. Inany such case variance is unimportantas far as inventory valuation is con-cerned.

If inventory is valued at the lowerof cost or market, then any variance willhave a significant bearing upon inven-tory valuation if it is a credit variance.In such a case the credit variance, asBennett suggests, might be deductedfrom inventory, so as to make cost ofgoods sold larger than it would be underalternative methods of valuation. How-ever, if such credit variances occurredearly in the year and the logically alter-

Table 4.

VARIANCE RELATIVE TO CHANGE IN SIZE OF INVENTORY

Decrease No change IncreaseSales $100,000 $100,000 $100,000

Std. cost of goods sold:Beginning inventory @ std. 40,000 30,000 20,000Production @ std. 70,000 90,000 110,000

Goods available for sale 110,000 120,000 130,000Ending inventory @ std. 20,000 30,000 40,000

Cost of goods sold @ std. 90,000 90,000 90,000

Gross margin @ std. 10,000 10,000 10,000Apportioned variance 3,000 3,333 3,225

Gross margin after variance $ 7,000 $ 6,667 $ 6,775

Effect of apportionment is to increase gross margin 30.0% 33.5% 32.3%

Assuming a FIFO inventory basis, any amount of variance is more significant relative to ex-pression of gross margin the greater is the proportion of manufacturing costs devoted toaccumulation of inventory; or, in other words, the more the inventory turnover slows down.

Table 5VARIANCE RELATIVE TO WORKING CAPITAL EXPRESSION

(FIFO BASIS)

Inventory @ std. costOther current assets

Total current assetsCurrent liabilities

Working capitalApportioned variance of $1,775 raises:

Inventory toTotal current assets toWorking capital to

Percentage increases are:InventoryCurrent assetsWorking capital

$40,000 $40,000 $40,00010,000 60,000 60,000

50,000 100,000 100,00030,000 30,000 60,000

$20,000 $70,000 $40,000

$41,775 $41,775 $41,775$51,775 $101,775 $101,775$21,775 $71,775 $41,775

4.5% 4.5% 4.5%3.6% 1.8% 1.8%8.9% 2.6% 4.5%

native cost (i.e., relative to market) isFIFO, then any favorable variance oc-curring at the beginning of the yearshould not be credited to inventory.This would only be the case if thefavorable variance occurred at the endof the year. Debit variances regardlessof when they would occur, would not beadded to inventory under Bennett's the-ory. However, if standards reflect cur-rent values and the variance is signifi-cant as far as cost of goods sold is con-cerned, then the variance should bereflected proportionately in cost ofgoods sold and inventory. If inventoryvalues are relatively low, then it is allthe more important to allocate a portionof variance to inventory in order to re-flect inventory values according to thecost of goods sold formula.

In those cases where inventory is val-ued by LIFO or base stock methods,variance tends to be unimportant in thedetermination of inventory and insteadbecomes entirely allocable to cost ofgoods sold. This is true with the pos-sible exception of certain possible caseswhere the turnover of inventory de-creased greatly. Even in such cases,which would reflect serious decline inthe saleability of goods, the valuationwould perhaps shift to some reflectionof realizable values, again eliminatingvariance as an important factor in valu-ation of inventories.

An Insignificant VarianceComprising Several SignificantVariances

An insignificant variance in itselfmight be the total of several varianceswhich are material in size. If this is thecase, then the variance should bebroken down to isolate the significantones in the sequence, so that they maybe subject to analysis and scrutiny. Inthis circumstance, again, variance be-comes significant for cost analysis de-pending upon whether it is significantrelative to the gross profit margin in thecase of low gross profit margin goodswith a rapid turnover or whether, in thecase of high gross profit items, theamount of turnover also remains slow.

SummaryThe attempt made here is to demon-

strate a lack of validity in ascribing thesignificance of cost variance to its sizeand to the cost standard itself. Instead,significance relates to such factors assize of gross margin and turnover andchange in magnitude of inventories.


Uniform Cost Accounting Standardsin Negotiated Defense Contracts

GAO BEGINS QUEST FOR UNIFORM COST ACCOUNTING STANDARDS

By Elmer B. Staats

Early in the Spring of this year, theGeneral Accounting Office was extremelybusy from one end of the United Statesto the other conducting a comprehensiveseries of reviews in connection withvarious "anti- poverty programs" of theOffice of Economic Opportunity andthe Department of Labor. We had re-ceived this assignment under amend-ments to the Economic OpportunityAct in December 1967. By Spring, there-fore, we were heavily engaged on thisproject, one of the most comprehensivethat the GAO has undertaken. At thesame time, of course, we were carryingon dozens of other audits and reviews ofactivities of the Executive Branch of theGovernment as we regularly do as anarm of the Legislative Branch.

Under the circumstances, we were notperhaps quite prepared for action takenunexpectedly in May by the HouseBanking and Currency Committee. Fol-lowing hearings by the Committee on arelatively routine bill to extend the De-fense Production Act of 1950, whichcomes up biennially, the House Com-mittee reported the bill with an unusualamendment.

The amendment directed the Comp-troller General to develop uniform ac-counting standards to be applied to allnegotiated prime contract and subcon-tract procurements by the Departmentof Defense in excess of $100,000 —in-cluding standards by which an accurateshowing of production costs and profits

by individual orders could be deter-mined.

Little information concerning thisproposal had been available prior to thetime the Banking and Currency Com-mittee reported the bill. There hadbeen no invitation to Government agen-cies or representatives of industry andthe accounting profession to makeknown their views. The bill was passedby the House on June 4, 1968 in theform recommended by the Committee.

J

ELMER B. STAATS

is Comptroller General of the UnitedStates, Washington, D.C. He gradu-ated from McPherson College, re-ceived an M.A. degree from the Uni-versity of Kansas and a Ph.D. degreefrom the University of Minnesota. Hehas served under four Presidents asDeputy Director of the Bureau of theBudget, as Executive Assistant Direc-tor, and as Executive Officer of theOperations Coordinating Board, Na-tional Security Council. Mr. Staats re-ceived the Rockefeller Public ServiceAward in 1961. He is a previous con-tributor to MANAGEMENT ACCOUNT-ING.

As I mentioned, the General Account-ing Office at the time was concentratingmuch of its energies in the direction ofthe comprehensive OEO review. GAOhas a February 1, 1969, deadline oncompletion of this assignment. We werenot expecting a new assignment of suchlarge proportions and unforeseeable de-mands. Of course, to all of us here thechallenge of applying uniform cost ac-counting standards in negotiated defensecontracts is as clear as a bolt of lightning.However, after the thunder rolled away,we recovered our auditor's aplomb with-out unreasonable loss of time and pre-pared to make our views known on theproposed legislation when the time camefor the Senate to consider the bill.

The Committee amendment to theDefense Production Act extension hadits origins in testimony by two witnessesbefore the House Banking and CurrencyCommittee: Mr. Price Daniel, Director,Office of Emergency Planning, and ViceAdmiral H. G. Rickover.

The Admiral's testimony was fre-quently critical of the manner in whichGovernment procurement was being ac-complished, as well as of groups in-volved. These included elements in theDepartment of Defense, industry, andthe accounting profession.

It is not necessary here to review indetail the Admiral's testimony. It is,perhaps, best summed up with regard toaccounting practices by his statements:

that "the lack of uniform account-ing standards is the most serious


deficiency in Government procure-ment today ";

2. that "industry will not establish suchstandards because it is not to theiradvantage to do so ";

3. that the accounting profession "hashad ample time and opportunity toestablish effective standards" butpays "only lip service to the con-cept"; and

4. that "if uniform accounting stand-ards are ever to be established theinitiative will have to come fromCongress."

Admiral Rickover then recommendedan amendment to the Defense Produc-tion Act "to require contractors to ac-count for costs under Government con-tracts in accordance with a uniform ac-counting standard." He also recom-mended that the legislation "require thatdefense contractors provide a report ofcosts and profit for each contract over$100,000."

When the Senate Banking and Cur-rency Committee conducted its hearingsin June about a dozen witnesses testified,including the General Accounting Of-fice, and the Committee received almost100 statements and letters. While a fewfavored the legislation, at least :n part,the overwhelming weight of views ex-pressed by witnesses opposed the legisla-tion. It should be recognized that theopposition may have been predicatedupon the belief or understanding thatthe bill was directed to uniform account-ing systems rather than cost standards.

The Proxmire AmendmentFollowing the hearings„ the Senate

Committee reported the House bill butdeleted all language having anything todo with "uniform accounting standards."However, when the bill was debated onthe Senate floor, Senator William Prox-mire of Wisconsin offered a modifiedamendment designed to accommodatesome of the objections raised and recom-mendations offered during the testi-mony. Senator Proxmire's amendmentwas adopted by the Senate, agreed to bythe House, and became law July 1, 1968,as part of Public Law 90 -370.

The Proxmire amendment providesthat the Comptroller General, in co-operation with the Secretary of Defenseand the Director of the Bureau of theBudget, shall —and here I shall quotethe language of the statute—

"...undertake a study to determinethe feasibility of applying uniform cost

accounting standards to be used in allnegotiated price contract and subcon-tract defense procurements of $100,000or more. In carrying out such study theComptroller General shall consult withrepresentatives of the accounting pro-fession and with representatives of thatsegment of American industry which isactively engaged in defense contracting.The results of such study shall be re-ported to the Committees on Bankingand Currency and the Committees onArmed Services of the Senate and Houseof Representatives at the earliest prac-ticable date, but in no event later thaneighteen months after the date of enact-ment of this section."

This is GAO's charter for the feasi-bility study we have now undertaken.We must make our report to the Con-gress by December 31, 1969.

The major compromise, of course, isfound in the elimination of any require-ment for establishment of uniform ac-counting standards and the substitutionof a "study to determine the feasibilityof applying uniform cost accountingstandards ..." Also, this was the firsttime the word "cost" appeared in theproposed legislation in conjunction withaccounting standards.

The Problem of Comparability

The problem of attaining compara-bility of accounting results has been onewhich accountants have been attempt-ing to solve for many years. As long agoas 1932 a committee of the AmericanInstitute of Certified Public Account-ants and representatives of the stock ex-changes met jointly to consider ways toimprove corporate accounting and finan-cial reporting and achieve better com-parability of financial statements. Theconclusion reached at that time was thatthe arguments against attempting to es-tablish a detailed set of accounting rulesto become binding on all corporations ofa given class were overwhelming.

Since that time, accountants havecontinued to be concerned with theproblem of uniformity and compara-bility of financial reports and today thesame conclusion, stated in differentterms, still prevails for the reason thatdiversity in accounting among independ-ent business entities is a basic fact.

The concept of uniformity, particu-larly as it relates to the costs and profitsof Government contracts, is an attrac-tive concept. There are potential bene-fits and advantages to be attained. Thesewill have to be weighed however against

possible increased costs, loss of supplysources, and burdensome duties of as-suring compliance and reviewing results.

Over the years, the General Account-ing Office has not been unmindful ofthe need for firm and well developedguidelines for contractors to follow indetermining costs under Governmentcontracts. We have worked closely withthe Department of Defense toward thatend. We long have believed that beforeany requirement is established by lawthat uniform cost accounting standardsbe developed for imposition on Govern-ment contractors, considerable researchand study would be necessary. The prac-ticability of developing uniform cost ac-counting standards, the variations andmethodology involved in the variousproduction processes and managerialtechniques, and possibly the detail inwhich such standards should or could beprescribed, all would have to be de-termined.

I need hardly remind you of the ex-tremely complicated definitions, ques-tions, and related problems we face inthe preparation, execution and final de-termination of this study and what itwill include. As we all know, defensecontracts cover an almost unimaginablerange of products and services rangingfrom very large single items such as one -of -a -kind warships and space launch ve-hicles to small items such as hand wea-pons and special tools produced by thetens of thousands.

Many Types of IndustriesAffected

The electronics, food, aerospace, steel,aluminum, machinery and scientific in-strument industries, among many oth-ers, are involved. The contracts repre-sent a diversity of products such as serv-ices, scientific research, development ofnew products, production of hardware,chemicals, and some not even recogniz-able by laymen.

Almost as great a diversity is found inthe manufacturing processes used by thecontractors and as great a variety ofmanagement techniques is used in con-trolling their production.

Contractors' accounting systems aredeveloped to satisfy the contractors' ownrequirements with respect to productionmethods, managerial techniques, andother needs imposed by the type of in-dustry, its board of directors, and itsstockholders. Each accounting systemserves several purposes not all of whichare defined with the same degree of im-

22MANAGEMENT ACCOUNTING /JANUARY 1969

portance or degree of need even in thesame industry.

Government contractors range fromthe nation's largest business enterprisesto the smallest of the small businessmen.Many single contractors produce a va-riety of products for Government con-sumption under as great a variety ofmanufacturing processes and managerialmethods.

Our Approach to the TaskNow I would like to say a few words

about our approach to the task. First, Iappointed a Special Assistant to devotefull time to this project until it is com-pleted. He is Mr. William A. Newman,Jr., for many years the Director ofGAO's Defense Division.

Second, in keeping with the provi-sions of the law, we have formed a co-ordinating committee composed of rep-resentatives of GAO, Department ofDefense, and the Bureau of the Budget.

Third, we have —as the law provides—begun consultations with representa-tives of nine national accounting andindustrial associations. These include:

The National Association of Account-antsThe Federal Government AccountantsAssociationThe American Institute of CertifiedPublic AccountantsThe American Accounting AssociationThe National Society of Public Account -IntsThe Financial Executives Instituter'he Machinery and Allied Products In-ItituteMe Associated General Contractors ofkrnerica, andPhe Council of Defense and Space In-lustry Associations

With few exceptions, all of theseIssociations are participating, in somenanner, in the feasibility study. Theirooperation is gratifying, to say the least.JVe will meet with representatives ofether national professional and trade;roups as their interest becomes knownD us.

With some contractors, Governmentcork represents a totality of the compa-Iy's business; with others, it is only araction of their total business. For thoseor which Government business repre-ents a large share of their total volume,ny burdens imposed by such Federalequirements would be borne along withhe present requirement of technical

specifications and delivery dates.However, the argument has been

made that for those contractors forwhom Federal procurement representsbut a small part of their total volume,the addition of another Federal require-ment such as we are discussing mightresult in some of them refusing to acceptfurther Government business and a dry-ing up of valuable sources of supply.

'Phis is an endeavor, therefore, inwhich we feel the advice and counsel ofthe professional accounting and tradeassociations is of paramount importanceto its success. We will be leaning heavilyupon these consultants and associations.

In addition, special consultants aremaking conceptual studies on cost ac-counting standards.

Purposes of GAO StudyWhat are the objectives of the feasi-

bility study? The coordinating commit-tee has prepared a statement of suchobjectives.

Study will be directed to the feasi-bility of applying uniform cost account-ing standards as a means of enhancingthe comparability, reliability and con-sistency of cost data used for negotiatedprocurement contract purposes. Suchpurposes include:1. preparation and evaluation of cost -

reimbursement claims under cost -type contracts;

2. preparation of pricing proposals andrelated cost data support for negoti-ated contracts and repricing pro-posals under escalation, incentive,price redetermination clauses; and

3. preparation of claims under contractterminations and contract financing.

Feasibility will be judged in terms ofthe capability of the standards to pro-vide valid cost data generally acceptableand fair to all parties in an expeditiousand economical manner.

To be feasible, the standards must beworkable rather than merely having aquality of being possible without anyconsideration of the short and longrange implications, both from the view-point of the public and private sectors.

Major differences among various Gov-ernment agencies in the promulgationof cost accounting standards will be iden-tified and analyses made of the reasonsfor these differences.

The feasibility study will include con-sideration of those factors which bearupon the administrative costs of imple-menting uniform cost accounting stand-ards.

The study will not concern itself withthe cost /profit consequences on negoti-ated contracts. It will not attempt to re-late the prescription of uniform cost ac-counting standards to the various re-porting requirements of the Govern-ment other than indicated above orstand in judgment of the adequacy ofsuch reporting.

Because some accounting terms, suchas "accounting standards" or "account-ing principles;' are not universally un-derstood, it seemed necessary that theterm "cost accounting standards" andthe term "uniform" which are includedin the basic statement be defined for thepurposes of our study.

We have adopted the following defi-nitions for these terms:

COST ACCOUNTING STANDARDS. As usedin this study, "cost accounting stand-ards" will embrace the related prin-ciples, standards, and general rulesof procedures and the criteria for theirusage. "Cost principles" suggest self -evident truths and axioms which have adegree of universality and permanenceand which underlie, or are fundamentalto, the derivation of cost accountingstandards. "Cost accounting standards"relate to assertions which guide or pointtoward accounting procedures or applica-ble governing rules. Cost accountingstandards are not the same as standard-ized or uniform cost accounting whichsuggests prescribed procedures fromwhich there is limited freedom to de-part. Since the legislative history sug-gested Section XV of ASPR as a possi-ble satisfactory starting point and Sec-tion XV includes many general rules ofprocedures, the tens "cost accountingstandards" is considered to include allthree concepts; namely, principles,standards, and general rules of proce-dure.

UNIFORM. The term "uniform" in thephrase "uniform cost accounting stand-ards" should also be defined in terms ofthe legislative history. For the purposeof this study, "cost accounting stand-ards" shall be deemed to be uniformwhen stated with the goal of achievingcomparability, reliability, and consist-ency of significant cost data in similarcircumstances and with due regard tothe attainment of reasonable fairness toall parties concerned in such circum-stances.

In considering the feasibility of ap-plying uniform standards we are mind-ful of the trials and tribulations withinthe accounting profession in reaching

IANAGEMENT ACCOUNTING /JANUARY 196923

agreement upon what constitutes "gen-erally accepted accounting principles."We will look to our consultants andprofessional organizations to identifythe relationship between "generally ac-cepted accounting principles" and "costaccounting principles."

Four -Step ApproachBriefly, here is our four step plan of

approach:FIRST STEP. We are conducting re-

search as to the nature of cost account-ing standards and their interrelationshipto generally accepted accounting prin-ciples.

The National Association of Ac-countants plans to make available to usthe results of a research project nowunder way. This involves identificationof cost accounting practices applied toGovernment contracts and is being per-formed by Dr. James Bulloch, Univer-sity of Michigan. NAA has agreed toformulate a statement of its recom-mended approach to cost accountingstandards. The statement would pointout the appropriate role of economicand engineering as well as accountingconsiderations in support of manage-ment's decision - making requirements.

The American Institute of CertifiedPublic Accountants has undertaken aproject to determine the relationship ofcost accounting principles to "generallyaccepted accounting principles." TheAmerican Institute also is studying de-preciation accounting and inventory ac-counting.

The Defense Contract Audit Agencyhas agreed to review for us the ArmedServices Board of Contract Appeals andcourt decisions which tend to establishcost accounting principles through theirinterpretation of "generally accepted ac-counting principles."

As a consultant to the ComptrollerGeneral, we have obtained the servicesof Dr. Robert N. Anthony of HarvardUniversity, until recently Assistant Sec-retary of Defense, Comptroller. He willstudy the Armed Services ProcurementRegulation, Section XV, in an effort toseek ways and means of establishingimproved criteria and guidelines for theuse of various cost accounting principles.

We have engaged the consulting serv-ices of Dr. William J. Vatter, Universityof California, who has made cost ac-counting a lifelong pursuit, to prepare apaper setting forth certain basic ideas.We hope he will organize and present,from a distillation of what is accepted

cost theory and practice, those generali-zations that underlie cost analysis —gen-eralizations to serve as standards forcost classification and assignment.

The Federal Government Account-ants Association plans to study implica-tions of the development and applica-tion of uniform cost accounting stand-ards as they relate to the full -range ofGovernment activities. The FGAAstudy will include the areas of procure-ment, contract estimating and pricing,and financial reporting and programmanagement.

The General Accounting Office willidentify differences in the application ofcontract cost principles represented inthe Armed Services Procurement Regu-lation, the Federal Procurement Regula-tions, and other implementing regula-tions by the several Government pro-curement agencies.

SECOND STEP. We will seek attitudesand opinions from industry concerningthe entire problem of adopting "uni-form cost accounting standards." Wehope to obtain some information con-cerning corporate attitudes and opinionsthrough the use of a questionnaire. Thiswill be designed to indicate from repliesprovided general attitudes of industry totwo aspects of our study: (1) the feasi-bility of applying "uniform cost account-ing standards" to negotiated defensecontracts, and (2) what industry thinksof the present cost principles and pro-cedures contained in ASPR Section XV.

We also will try to get a judgmentfrom industry, if possible, on costs in-volved in adopting "uniform cost ac-counting standards" and information onindividual experiences with the severalGovernment procurement agencies as todifferences in the cost principles whichthey have adopted.

THIRD STEP. We will attempt to accu-mulate reliable information on variouscost accounting methods and practicesof industry relating to what we considerthe more controversial or more difficultareas to the achieving of uniformity. Wewill see what light can be shed uponthese problems by means of the fol-lowing two actions, taken or planned:

GAO survey. Through our own GAORegional Offices and the regional officesof the Defense Contract Audit Agency,we have made a survey of the problemareas encountered in the application ofthe Armed Services Procurement Regu-lation, Section XV.

Questionnaire to industry. We expectalso to elicit from industrial firms—

several hundred Government contractorsand firms performing no Governmentwork— information on cost accountingmethods and practices. This will bedone through the use of a questionnairenow being developed with the assistanceof Dr. Robert K. Mautz, a consultantto the Comptroller General, who is cur-rently at the University of Minnesota.

It is planned that an independentorganization, probably a university, willhave full control of the receipt, tabula-tion and evaluation of the results of thisquestionnaire. This organization will becharged with responsibility of holdingall responses confidential and makingavailable to the Comptroller Generaland others, summaries and tabulationsonly. Thus, individual respondents in noway can be identified. This also will bethe case with specific illustrations orparticularly cogent comments includedin the questionnaire findings.

The Comptroller General will issuethe approved questionnaire which willbe forwarded to respondent companiesor organizational segments, throughtheir chief executives.

At the present time a first draft of thisquestionnaire prepared by Dr. Mautz,assisted by members of our staff, is un-der consideration at our WashingtonOffice.

As soon as completed the revised draftwill be submitted to the participating .trade associations, professional account-ing organizations, and our coordinating .committee for comment.

Upon receipt of their replies and rc-visions completed as may be desirable,a limited test of the practicability of thequestionnaire by submission to a fewindustrial organizations, will be made.Final approval of the questionnaire will

be made by the Comptroller General.

This questionnaire will:

1. ask for identifying information toprovide bases for classification intabulating responses,

2. seek factual information about costaccounting practices followed by re-spondent contractors which will en-able the research staff to discernboth patterns of similarity amongcompanies and industries and signi-ficant dissimilarities,

3. request indications of acquaintancewith and experience under ArmedServices Procurement RegulationSection XV and evaluations of itseffectiveness both in general and in


terms of selected specific provisions,and

4. provide an opportunity for expres-sions of opinion on such matters asthe nature of "uniformity," themeaning of "cost accounting stand-ards," and the overall feasibility ofestablishing and applying "uniformcost standards."

Throughout the questionnaire, an ef-fort will be made to obtain answers re-lating to practices followed in account-ing for U.S. Government contracts sepa-rate from practices followed in account-ing for non - government work. Thisshould help to judge the necessity, ifany, for separate standards for U.S.Government contracts.

Individual companies from whom da-ta will be requested will be selectedfrom:

1. lists of large, medium, and smallgovernment contracts prepared bythe Council of Defense and SpaceIndustry Associations (CODSIA),and Strategic Industries Association;

2. a listing of prime government con-tractors for fiscal year 1968 havingcontracts over $100,000 prepared byDOD and DCAA; and

3. a listing of companies having little orno government contracts furnishedby the Financial Executives Insti-tute.

rouxzx STEP . We will get an evalua-tion of Section XV of the Armed Serv-ices Procurement Regulation as to itspossible suitability as a starting pointfor the development of "uniform costaccounting standards."

The legislative history of the act cre-

ating the GAO study (Public Law 90-370) indicates the intent of Congressthat we explore the possibility that theArmed Services Procurement Regula-tion, Section XV, could be used as astarting point for the development of"uniform cost accounting standards." AsI have indicated, we have asked variousprofessional accounting and trade or-ganizations to study Section XV to iden-tify its strong points or its weak points;to express opinions as to its suitabilityas a starting point; and to suggest whatwould be needed if it were used as abasis for developing uniform cost ac-counting standards.

ConclusionWhile I may not have made the point

as directly as I might, or perhaps force-fully enough, let me say in conclusionthat this study is an undertaking of un-known—as yet — possibilities for prog-ress by Government and, I believe, byindustry and the accounting profession.

The 20th century is a time when mendo things that have not been done be-fore. This dictum applies quite as muchto the accounting profession as to anyother.

There has been, as we all know, ineffect a raising of protesting hands atthe prospect of uniform cost accountingstandards, a verdict before the evidenceis in that such a thing cannot be donebecause it never has been done. Havewe not heard this before?

Doubtless it will take time to findand understand ways to develop moreuniform accounting practices in the di-verse area of negotiated defense con-tracts. Through research, review and ap-

plication of the facts uncovered and un-derstood to the test of feasibility orpracticality, I am hopeful that our studywill produce concrete results. For ex-ample, I believe a great service could berendered to the accounting professionif better guidelines for the use of alter-nate methods could be developed forcontractors in reporting the cost of per-formance under negotiated contractswith improved comparability, reliabilityand consistency.

This year's step is to see what we canfind out —as the law requires. All of ustogether must take this step; you in theprofession, we in Government, those inhundreds of industries from whom wemust receive the basic information. Themore support we give each other, themore responsive all parties and individu-als are to this undertaking, the surer wewill be of the facts we uncover and themore satisfactorily we should be able toapply these facts toward improving fi-nancial management of the Federal Gov-ernment's procurements.

I would urge that each and every oneof you give the subject of "uniformcost accounting standards" seriousthought. Keep in mind that "feasibility"as we view it does not mean merelvhaving the quality of being possible.Nor does "uniform" mean simply astrait jacket. In my opinion, we shouldbe working toward a goal of lesseningthose alternative methods just men-tioned and prescribing the conditionsfor the use of those alternatives. If thiscannot be done, put yourselves in ourshoes and ask: "What can the GAOtell Congress that will not adversely re-flect upon the accounting profession ?"


Uniform Accounting Standards forGovernment Contractors

LEGISLATIVE ACTION INITIATES GAO FEASIBILITY STUDY FOR UNIFORM ACCOUNTING STANDARDS

By Steve E. Richardson

Government contractors are making ex-cessive profits and, as a result, drasticchanges should be made in accountingpractices! This is the opinion in somegovernment quarters that has caused re-cent legislative action in the form of arequired accounting study to be madeby the General Accounting Office. Theaccounting study proviso is attached toP.L. 90 -370, a Senate bill recentlysigned into law by the President to ex-tend the Defense Production Act of1950 for another two years. This articlewill trace the history of this legislation.

Recent Legislative Action

During brief hearings held in thespring of 1968, the House Banking andFinance Committee reviewed a recom-mendation of the Administration to ex-tend the Defense Production Act for anadditional two years beyond June 30,1968. During testimony for support ofthis recommendation, Vice Admiral H.G. Rickover, Director of the Naval Nu-clear Propulsion and Reactor Programsfor the Navy and the Atomic EnergyCommission, charged that defense con-tractors are currently earning exorbitantprofits and that, to a significant extent,such profits are concealed by the factthat contractors are not required to useuniform methods of accounting withrespect to their defense business. Hisstatement was based on a limited sur-vey which he had made and on whichhe based his claim that defense profits

26

rose 25% during the period 1964 to1967.

At the conclusion of his testimony,the Admiral urged the Committee toenact a law that would require con-tractors to adopt "uniform accountingstandards" on all negotiated defenseprocurement in excess of $100,000.

It is interesting to note at this pointthat other recent findings were in directcontrast to Admiral Rickover's charge ofexcessive profits. The Logistics Manage-ment Institute, on the request of theDefense Department, had recently re-leased a study of defense profits. Theirreport disagreed substantially from thatof the Admiral's in that they, LMI,

STEVE E. RICHARDSON

DenverChapter 1965, is Financial Ac-counting and Credit Manager for BallBrothers Research Corp., Boulder,Colo. Mr. Richardson, who is a CPA,received a B.A. degree from Southeast-ern Louisiana College, Hammond, La.and has done some work toward anM.B.A. degree at Louisiana State Uni-versity, Baton Rouge, La.

noted that defense contract profits de-clined steadily during the past ten yearsand are now lower than profits on com-mercial business.

The Committee hearing was ad-journed shortly after the Admiral's re-marks, apparently without any addition-al testimony from other interested gov-ernment agencies or industry, in eithersupport or rebuttal of the Rickovertestimony. Representative Patmore,Committee Chairman, and Representa-tive Gonzalez, an outspoken Congress-man in favor of tighter controls overdefense contracting, introduced a bill,H.R. 17268, which, in addition to ex-tending the Defense Production Act fortwo years, also required the adoption of"uniform accounting standards" by gov-ernment contractors for all negotiateddefense contracts exceeding $100,000.The committee rejected the bill in fa-vor of a modified provision which di-rected the GAO to develop and recom-mend a set of uniform accountingstandards to Congress. These recom-mendations were to be given within oneyear. The House subsequently passedthe revised version of H.R. 17268, re-quiring the GAO accounting study.

On June 18, 1968, the Senate Bank-ing and Finance Committee conductedpublic hearings on that portion of H.R.17268 relating to the proposed uniformaccounting study by the GAO. Industrywas invited, for the first time, to testify.It was very evident during the hearings,that there was agreement between indus-try and many government witnesses


that the proposed study by GAO wasnot necessary and, more important, thatthe development and use of uniformaccounting standards is impracticable tosay the least.

Interested PartiesLet us look at the positions taken by

the three most interested parties.T H E M A C H I N E R Y AND A L L I E D P R O D -

UC TS I N S T I T U T E ( M A P I ) . This organiza-tion presented a viewpoint from in-dustry. In its formal statement, theInstitute debated four main proposi-tions:

The proposal is ill- defined. "Uni-form accounting standards" is aphrase without standing in account-ing literature, although the MAPIstatement necessarily assumes thatrequirement of a "uniform account-ing system" is intended.Evidence in support of the proposalis both conflicting and scanty, rest-ing essentially upon the unexam-ined testimony of one man.Adoption of the proposal would re-sult in two sets of books, bring theproducts of such a system into con-flict with SEC and IRS authority,pose almost insoluble problems forauditing books and certifying state-ments, intrude upon an essentialmanagement prerogative and, in thelong run, add substantially to thecost of government contracting.Lacking adequate time for publicreview, it is altogether untimely toadopt such a simplistic solution to aproblem of surpassing complexity.

D E P A R T M E N T O F D E F E N S E . The De-partment of Defense was very sharp inits criticism of the proposed "uniformaccounting standards." Referring to thissubject, Assistant Secretary of DefenseMorris said in part:

"In our view, it would be neitherfeasible or desirable to prescribe a stand-ard accounting system for defense con-tractors. Accounting systems must be

designed for the environment in whichthey operate; and they differ with theway a company is organized, with thepreferences of its management, with theproduction processes, and with a num-ber of other factors. Few, if any, in-formed persons would support the ideaof having the government prescribe a`system.' There is a need for `stand-ards' in the sense of `principles.' In theDefense Department, such standards al-ready exist in Chapter XV of the ArmedServices Procurement Regulation."

G E N E R A L A C C O U N TI N G O F F I C E . In hisstatement to the Committee, Frank H.Weitzel, Assistant Comptroller Generalof the United States, said:

"Contractors' accounting systems aredeveloped to satisfy the contractors' ownneeds with respect to production meth-ods, managerial techniques, and otherneeds imposed by the type of industry,its board of directors, and its stockhold-ers. Each accounting system serves sev-eral purposes not all of which are definedwith the same degree of importance ordegree or need in the same industry.

"Government contractors range fromthe Nation's largest business enterprisesto the smallest of the small business-men. Many single contractors producea variety of products for Governmentconsumption under as great a variety ofmanufacturing processes and managerialmethods.

"With some contractors, Governmentwork represents the totality of the com-pany's business. In others, it is only afraction of their total business. Uniformaccounting standards could be burden-some to a contractor whose Govern-ment work represents only a part of histotal production or produced goods forthe Government not related to or com-patible with his commercial business. Itcould be costly both to the Governmentand the Contractor to apply differentaccounting standards to his Governmentand commercial work.

"...However, for those contractorsfor which Federal procurement repre-

sents but a small part of their total vol-ume, the addition of another FederalGovernment requirement such as a uni-form accounting standard for that smallpart of their business, might result inmany of these refusing to accept furtherGovernment business and a drying upof valuable sources of supply."

The GAO Feasibility StudyAfter testimony from representatives

of government, industry, and the ac-counting profession, the Senate Bankingand Currency Committee approved abill extending the Defense ProductionAct, but excluding the GAO studyamendment. However, a compromiseamendment, introduced by SenatorProxmire on the Senate floor, wasadopted and later agreed to by thehouse. In general it directed GAO tomake a feasibility study of the proposed"uniform accounting standards" and re-port its results to the Senate Bankingand Currency Committee at the earliestpractical date, but no later than 18months from enactment of the bill. Thestudy is to be made in cooperation withthe Secretary of Defense and the Di-rector of the Bureau of the Budget, andshall include consultation with repre-sentatives of the accounting professionand that segment of industry activelyengaged in defense contracting.

On July 1, 1968, President Johnsonsigned the measure to extend the De-fense Production Act for two years andrequiring the GAO to perform the "uni-form accounting standards" study.

ConclusionIt would be a redundancy for this

writer to attempt to point out the prosand cons of this issue since the propo-nents of both sides have done so in detail.However, I would suggest that each ofus examine this subject as professionalaccountants and businessmen, and astaxpayers. "Uniform accounting stand-ards" —are they needed —and will theywork?


Market Mix:The Key to Profitability

ALLOCATION OF PRODUCTION CAPACITY REQUIRES AN OPTIMUM MARKET MIX AS WELL AS OPTIMUM PRODUCT MIX

By Clarence J. Ostalkiewicz

The only requirement for making aprofit is that sales dollars exceed actualcosts and expenses. In most companies,the ratio of selling price to cost variesnot only with the various product linesand the specific products included ineach product line, but also with the typeof market or customer to whom eachproduct is sold. Since the ratio betweenselling price and costs differ with thevarious products and markets, the con-trol of these mixes is the key to profita-bility, especially when these productsare competing for plant capacities.

The purpose of this article is to pre-sent a method of developing and dis-playing management information in amanner that will effectively demonstratethe effect of product and market mixeson profit contribution and also highlightchanging conditions and trends. Devel-opment of meaningful product andmarket -mix information helps to estab-lish production priorities and results inthe use of available capacities to bestadvantage. This information is also usedfor concentrating sales efforts in marketsoffering the greatest contribution toprofits.

The Information System

The schedule shown in Exhibit 1should be an integral part of the month-ly operating statements. Its purpose isto measure the results of marketingmanagement's responsibility towardmargin contribution. This schedule will

also supply the marketing manager asummary analysis of his activity. Beinga summary, this schedule should be sup-plemented by a more detailed reportshowing the same information on eachmarket by the products in each productline ( Exhibit 2) .

The analysis of market by productreport should be further supported by adetail audit trail (Exhibit 3) showingeach transaction making up the analysisof market by product summary so thatdeviations can be traced back to thespecific transaction actually showing thecustomer that caused the change.

Following is an explanation of thecolumns of Exhibit 1 that require ex-plaining:

`r

CLARENCE J. OSTALKIEWICZ

Providence Chapter (Boston 1947), isChief Financial Officer and Control-ler, Providence Pile Fabric Corp., FallRiver, Mass. Mr. Ostalkiewiez gradu-ated from the Bentley School of Ac-counting, and holds B.B.A. and M.B.A.degrees from Northeastern University,Boston, Mass.

% PRICE DEVIATION. The purpose ofthis column is to indicate changes inproduct prices. If the margin contribu-tion of this product line in this markethas changed due to changes in sellingprices, the percent of price deviationwill change from the previous month.The difference is the effect of thechange on the margin contribution. Thepercent figure shown here is meaning-less in and of itself. Its only value is tocompare the amount of change from theprevious period or predetermined profitplan. The price deviation is calculatedby establishing a standard selling priceon the master cost deck. The importanceof the standard selling price is not theprice itself, rather that it is consistentlydeveloped and is not changed eventhough selling prices may be changed.It is recommended that the standardselling price be established at a higherprice than the product is now beingsold for, so that sales at normal priceswill show a minus price deviation. Inthis type of situation, a 10% or 20%price deviation will designate normalprices. The use of higher standard sell-ing prices will forestall the confusioncaused when the price deviation is some-times positive and sometimes negative.

% mix. The purpose of this column isto quickly point out changes in marketas well as product mix. The figures inthis column always indicate what per-cent this item represents of its owngroup. The figure on the total divisionline is the percent this division is of thetotal company. The figure on the total

28 MANAGEMENT ACCOUNTING /J ANUARY 1969

Exhibit 1

ANALYSIS OF MARGIN CONTRIBUTION

PriceReturns

and Payment Net % Standard %Di rect

Se l l i ng Fre i gh tGrossMargin

%

MarginDIVISION I Deviat ion B i l l i n g s Allowances Discounts Sales Mix Cost Margin Margin Expenses Out Contr i bu t ion Cont ri but ion*duct Line A

i s t r i b u t o r L3.3 296,165 2,796 5,332 288,037 38.7 204,219 29.1 83,818 L4,402 2,940 66,476 23.1Jobber 4.6 39,080 420 702 37,958 5 .1 24,597 35.2 13,361 1,898 370 11,093 29.2House Account 17.2 87,451 1,032 1,571 84,848 11.4 63,891 24.7 20,957 20,957 24.7nu fac tu re r 22.1 249,966 2,841 4,490 242,635 32.6 196,049 19.2 46,586 7,279 39,307 16.2e t a i l e r 2.6 33,476 122 606 32,748 4.4 20,369 37.8 12,379 2,292 360 9,727 29.7Government 32.1 59.L28 1,074 58,054 7.8 52.191 10.1 5,863 5,863 10.1Tota l Product Line A 17.6 765.268 7,211 13.775 744,282 34.8 561,316 24.6 182,964 25,871 3,670 153,423 20.6

I Line BJobber 3.5 98,417 1,147 1,720 95,550 15.3 57,617 39.7 37,933 4,775 1,911 31,247 32.7Di s t r i b u t o r 12.2 270,808 3,155 4,733 262,920 42.1 170,372 35.2 92,548 13,146 5,258 74,144 28.2nu fac tu re r 22.3 190,402 2,218 3,327 184,857 29.6 139,013 24.8 45,844 5,546 40,298 21.8Reta i l e r 2.2 50,174 585 877 48,712 7.8 28,204 42.1 20,508 2,436 1,461 16,611 34.1Government 29.8 33,449 390 585 32,474 5.2 29,162 10.2 3,312 3,312 10.2

Tota l Product Line 8 15.6 643.250 7,495 11,242 624,513 29.2 424,368 32.0 200,145 25,903 8,630 165,612 26.4

-duc t Line C

ITota l Product Line C

-duct Line D

5.1 89,885 1,047 1,571 87,267 20.3 60,127 31.1 27,140 4,363 1,745 21,032 24.121.8 156,745 1,826 2,739 152,180 35.4 122,201 19.7 29,979 4,565 25,414 16.71 .1 62,432 727 1,091 60,614 14.1 38,672 36.2 21,942 6,061 1,818 14,063 23.232.4 133.721 1,558 2,337 129,826 30.2 117,103 9.8 12,723 12,723 9.825.4 442.783 5.158 7.738 429,887 20.1 338.103 21.4 91'784 14,989 3,563 73,232 17.0

Di s t r i bu to r 6.7 79,860Manufacturer 22.4 156,217Reta i l e r 3.4 43,432House Account 17.0 70.752

Tota l Product Line D 15.3 350.261

TAL DIVISION I 18.4 2.201.562

product line indicates the percent thateach product line bears to the division.The figure on each market line repre-sents the percent that this market repre-sents of its product line.

D I R E C T S E L L I N G E X P E N S E S . The pur-pose of this column is to change thesales represented on each line with anvvariable selling expenses that are createdby the sales, such as commissions androyalties.

F R E I G H T O U T . The purpose of this col-umn is to charge the sales represented onthis line with any applicable freight out.This column is significant if the freightpayment policy or terms are differentwhen selling through the various mar-kets.

930 1,396 77,534 22.8 59,314 23.51,820 2,730 151,667 44.6 128,614 15.2

506 759 42,167 12.4 31,157 26.1824 1.236 68.692 20.2 56,877 17 2

4,080 6.121 340,060 15.9 275,962 18.8

3,944 38.876 2.138 742 37 6 1 599 749 25 2

GROSS '_MARGIN C O N T R I B U T I O N . Thepurpose of this column is to display theamount of dollar contribution to fixedoperating expenses contributed by eachmarket and product line based on stand-ard costs. The net margin contribution(after variances from standard costs) isnot displayed in this schedule becausethe responsibility for variances fromstandard cost is assigned to the manu-facturing and purchasing managementand not the market management.

Implementation of the SystemThe information system described in

this article is accomplished through theuse of a computer. This type of analysiswith its detail manipulation may also be

Exhibit 2

MARGIN CONTRIBUTION: ANALYSIS OF MARKETS BY PRODUCT

DIVISION I

Product Line AMarket- Distributor

Fargows

Widgets

Gerbets

Kofets

Guffikes

Spordts

Total Distributor

18,220 3,877 1,550 12,793 16.523,053 4,550 3,033 15,470 10.211,010 2,952 1,265 6,793 16.111,815 11.815 17.2

_64,098 11,379 5,848 46,871 13.8

538.991 78.142 21.711 439._138 20.5

possible without a computer, but thiswill probably not be practical, except ina situation where the average dollarvalue per order is high, so the total vol-ume is represented by a small amountof transactions to be analyzed.

The development of margin contribu-tion information through a total com-puter system will also generate the abil-ity to produce other valuable analyses.In a total system the original source in-put into the system should be the cus-tomer order. This information is thensupplemented with additional inputthrough the billing system. With this in-put it is not only possible to generatethe information and reports discussedhere, but also the same program should

Price Standard Credit Cost ofQuantity Deviation Sales Billings Allowances Sales Sales Margin

52,857 1 0 . 0 87 , 31 1 78 ,493 609 77 ,884 52 ,188 33 .0

27 ,082 9 . 2 37 ,712 34 ,243 390 33 ,853 21 ,840 35 .5

15 ,473 20 .4 33 ,266 26 ,480 176 26,304 23 ,472 10 .8

36 ,043 19 .7 62 ,699 50 ,348 608 49 ,750 38,467 22 ,7

23 ,612 1 2 . 1 45 ,825 40 ,280 375 39 ,905 23 ,622 40 .8

31 ,429 11 . 2 74 ,686 66 ,321 632 65 ,683 44 ,630 3 2 . 1

186 ,496 13 .3 341,499 296,165 2,796 293 ,369 204,219 31 .4


Exhibit 3DETAIL AUDIT RAIL ANALYSIS OF MARKETS BY PRODUCT

Customer Invoice Standard Billing Standard TotalDIVISION I No. No. Price Price Cost Quantity Billing

Product Line AMarket- DistributorFargow 06A1792 C13947

Fargow 08A9437 C14282

Fargow 06A8267 C14353

Fargow 09A4218 C14372

Fargow 12A6172 C14401

Fargow 14A1792 C14428

Fargow 06A4829 C14503

Fargow 02A3246 C14741

Fargow 08A8124 C14764

Fargow 12A3231 C14847

Fargow 1OA6282 C14898

Total Fargow

Commission ■

1.6667 1.5000 .9873 4,941 7,412.58 370.63

1.6667 1.4225 .9873 10,278 14,623.14 731.15

1.6667 1.5000 .9873 2,308 3,462.00 173.10

1.6667 1.5000 .9873 3,215 4,822.50 241.13

1.6667 1.5000 .9873 4,432 6,648.00 332.40

1.6667 1.5000 .9873 2,100 3,150.00 157.50

1.6667 1.5000 .9873 5,040 7,560.00 378.00

1.6667 1.5000 .9873 8,450 12,675.00 633.75

1.6667 1.5000 .9873 7,145 10,717.50 535.89

1.6667 1.5000 .9873 1,748 2,622.00 131.10

1.6667 1.5000 .9873 3,200 4,800.00 240.00

1.6667 1.4850 .9873 52,857 78,492.64 3,924.65

be used in conjunction with the back- changing trends immediately. reflect not only the discount allowedlog of open orders and the orders booked A further use of the same infonna- but the length of the terms, to reflectduring the month to produce a dupli- tion is to generate sales statistical re- the amount of money committed.cate analysis of margin contribution for ports by salesman and customer ana- Additional reports can also be easilythe backlog of unshipped orders and 1} zing product line sales and showing generated, such as a customer dollaralso the margin contribution of that the margin contribution by each cus- role, both alphabetical and descendingmonth's bookings. The information tomer for the month and year (Ex- value, showing sales and margin contri-about the margin contained in the back - hibit 4). The percent margin shown bution in all of these sales reports. Lastlog and incoming orders creates the should be the actual margin on the year's information can be easily addedability to accurately forecast the follow- sales, adjusted by commissions paid and after the first of the year by storing theing month's operation and signals payment terms. Payment terms should information on tape or punched cards.

Exhibit 4CUSTOMER SALES ANALYSIS

Salesman C. Smith

A.B.C. CompanyProduct Line AProduct Line BProduct Line D

Total

B.C.D. CompanyProduct Line CProduct Line D

Total

Total SalesmanProduct Line AProduct Line BProduct Line CProduct Line D

Total

M o n

Last ThisYear Year

e a r t o d a t

Last ThisMargin Year Year Margin Quota

5,456 6,423 24.73,0814,720 7,220 32.9

13,257 13,643 29.8

20,462 22,481 24.1 24,00032,470 13,070 33.7 30,00046,028 52,468 17.7 48,000

98,960 88,019 23.2 92,000

13,461 12,620 22.0 42,742 39,471 22.1 45,0008,420 32,616 14,620 15.6 36,000

21,881 12,620 22.0 75,358 54,091 20.1 81,000

66,723 74,832 22.9 283,172 297,821 23.1 301,00036,473 22,746 32.8 152,782 121,718 32.7 160,00044,167 51,436 23.9 167,342 184,620 24.1 175,00047,347 38,662 16.8 201,428 172,234 16.5 220,000

194,710 187,676 23.7 804,724 776,393 23.9 856,000


Short -Term Investmentof Excess Cash

EVALUATION OF SELECTED INSTRUMENTS IN RELATION TO SHORT -TERM INVESTMENT POLICIES

By Donald E. Snelling

This paper is oriented toward a discus-sion of the use of corporate short -termcash in the following domestic moneymarket instruments: commercial paper,banker's acceptances and negotiable cer-tificates of deposit. These money mar-ket instruments constitute a major por-tion of prime investments available forcorporate investors. These instrumentsare also relatively unfamiliar to manycorporate investors who conservativelyinvest in United States Governmentobligations and Federal Agency issues.This selected group of instruments isalso considered by many investors asmiddle -of- the -road investments betweenUnited States Government obligationsand short -term tax - exempt securities.

Basic to any investment program isthe development of corporate policiestoward short -term investments andspecific guidelines for the portfolio man-ager's use in administering short -terminstruments. This paper will also coverbriefly some basic issues of corporateshort -term investment policy, as thispolicy might apply to the instrumentsdiscussed in this paper.

In my opinion, the instruments cho-sen for discussion in this paper belongin nearly every liquid short -term invest-ment portfolio. I have used these instru-ments regularly in the portfolio that Imanage for my company. More, man-agers of corporate cash positions wouldprobably use these instruments if they


were aware of the characteristics andadvantages of these instruments.

Objectives and Policies

A company's financial managementmay wish to invest excess cash in in-come producing instruments, however,often it is difficult to determine exactlywhat corporate cash is excess to require-ments: Excess cash should only be de-termined after relating cash forecastingand planning to management's objec-tives and policies. The cash flow of thecompany and the objectives of the man-agement tend to control the amount ofcash available for short-term invest-ments, the type of investment instru-ments that may be used, and the length

is Financial Analyst, Esso StandardEastern, Inc., New York, N.Y. For-merly, Cash and Portfolio Managerfor Cities Service Oil Company, Tulsa,Okla. Mr. Snelling received a B.A. de-gree from the University of the South,Sewanee, Tenn. and an M.B.A. degreefrom the University of Tulsa, Okla.

of the maturities in the corporate in-vestment portfolio.

The alternative of leaving funds withthe banks must be considered, sincethese balances might earn benefits inpresent services and loans, as well asfuture lines of credits and borrowings.The management's desires for futurefinancing and financial services must bethoroughly considered before corporatecash is assumed to be excess and movedinto short -term investments.

The type of instruments that arechosen for investment are determinedin part by management's objectives con-cerning quality of credit, liquidity,safety from price fluctuation, and yieldthat they expect in their short -term in-vestments. Many financial advisors willassert that safety of principal should beforemost in any short -term investment.After surety of principal the liquidityaspect of the instruments should be con-sidered. The cash manager should real-ize that funds must be able to be freedimmediately in the event an unexpectedcash requirement develops. Yieldsshould be the last consideration in anyshort -term investment program. Theextra one - eighth percent which may beearned with an instrument which maylose your principal is ultimately notworth the risk.

The corporate cash picture is furthercomplicated by the overall outlook formoney- market rates. An outlook for ris-ing interest rates will probably influencethe corporate portfolio manager to in-

31

vest in shorter maturities and moreliquid investments. The reverse posturemight be taken if interest rates weredeclining or were predicted to declinein the near future. These general pointsshould be kept in mind when the in-dividual investment instruments are dis-cussed in the following sections of this

paper.In summary, the degree of risk a

corporation should take in searching forhigher returns with corporate portfoliofunds is really the major question facingthe manager of a short -term investmentportfolio. There must be a constantbalancing of risk and return by the cashand portfolio manager. Prudent diver-sification and sophisticated portfoliomanagement can offer greater earningpotential; however, all investment deci-sions must be guided by careful judg-ment as to the necessary mix of quality,liquidity, and safety.

The instruments selected for thispaper have varying degrees of quality,liquidity, safety and yield potentialsboth between the different issuers of theinstrument and between the differenttypes of instruments. These points willbe covered in the following sections oncommercial paper, banker's acceptancesand negotiable certificates of deposit.

Commercial PaperThe commercial paper market dates

back to the eighteenth century, how-ever, it was not developed to a marketas we know it today until early in thetwentieth century. Commercial paperusually refers to single name, unsecuredpromissory notes of industrial, commer-cial, and finance companies sold on adiscount basis. A relatively smallamount of finance company paper mayalso be sold on an interest bearing basisyielding identical income at maturiy.

Industrial and commercial companiesissue notes only at certain times of theyear coincident with seasonal needs orother current transactions. Financecompanies use the open marketthroughout the year, and thus issuepaper daily.

Investors in commercial paper gen-erally use the National Credit Office'srates in determining the quality of thedifferent alternative investments. Thissubsidiary of Dun and Bradstreet, Inc.rates companies "prime," "desirable"and "satisfactory." There is a definitepreference for the prime issuers in themarket and consequently the primecompanies have an advantage in interest

rates and obtain substantial amounts offunds through the commercial papermarket. For example, a leading money -market bank lists sixteen companieswhich their financial analysts continu-ally evaluate and promote as the best ofthe prime companies. To handle theirpapers, this bank insures that the issuershave bank lines of credit in the amountof the paper outstanding or have finan-cial guarantees from unquestionablebackers.

Commercial paper may be purchasedthrough a number of dealers, the majorone being Goldman, Sachs and Co. ordirectly from a group of larger financecompanies. Purchases may also be madethrough most major banks who in turnwill contact the dealer or issuer.

For purchases of $50,000.00 or more,most banks will not charge any transac-tion fee or custody fee if the purchaseris a bank depositor. For purchases lessthan that amount, some banks charge a$5.00 fee and have a skipped day deliv-ery on the security. Dealers and agentsusually operate on a .0025% to .01%spread between what they charge theseller and what the investor bids for thepaper. This charge is nominal and stillallows the borrower to obtain funds atrates lower than the prime rate. It alsoallows the company to have flexibilityin the amount of borrowings to pay forat any one time, eliminates compensat-ing balances, and allows the firm toobtain funds considerably below theprime rate.

These unsecured promissory notes areusually sold in bearer form. However,registered notes may be obtained if thepurchaser desires. Quotes are usuallymade on a yield basis to the nearestone - eighth percent. Actual yields oncommercial paper are slightly higherthan the quoted yield since the note issold at a net price to the investor on adiscount basis from par computed on a360 day discount table (i.e. 270 days at578% is actually 6.146%). Purchasesand maturity values are usually made infederal funds.

The rate structure of the marketvaries constantly. However, certain re-lationships are usually maintained. The-oretically, commercial paper has aslightly higher risk element than treas-ury bills, federal agency notes, banker'sacceptances and certificates of deposits,and, therefore, usually sells at a slightlyhigher yield to attract investors.

Another relationship in rates is main-tained between finance paper and in-

dustrial paper. In short maturities (lessthan 90 days) the rates may be com-petitive; however, in the four to sixmonth maturity range, the yield forindustrial paper is usually considerablyhigher. Other top rated, but lesserknown paper bears slightly higher yields.Usually long maturities bear higherrates than short maturities. Also, imme-diately after major tax and dividenddates or fiscal or monetary policies im-plemented to restrict the money supply,the rates tend to rise substantially.

Commercial paper offers maturityconvenience as well as higher yields.Maturities can be designated on anyday between 5 and 270 days in financepaper. (Occasionally companies will ac-cept maturities of less than five days.)Industrial and commercial companiesusually offer maturities between 30 and180 days. Notes may be purchased indenominations from $5,000 to $1,000,-000. Amounts can be purchased up to$10,000,000 on any maturity date with-out much difficulty.

There is no tax shield in the use ofcommercial paper as an investment be-cause the discount earned is subject toall present federal income taxes and alsoto levies imposed by states. Any gain ona sale is considered an ordinary gain andnot a capital gain.

There is always a question of market-ability as well as tax status in the pur-chase of an instrument. There is noorganized secondary market in this com-mercial paper because there is no re-quirement for this market. Unlike billsor certificates of deposit, there is no riskof capital loss, since most issuers of com-mercial paper have buy back provisos,which enable the investor to sell thepaper back to the issuer without loss ofeither principal or interest. This repur-chase agreement is for unexpected cashneeds of the investor. As a general rule,if this agreement is abused for specula-tive purposes, the purchase of the abusermight not be accepted in future trans-actions.

The security and safety aspect of aninvestment instrument is also important.By definition commercial paper is an un-secured promissory note; however, theindustrial, commercial, and finance com-panies that have access to the commer-cial paper market enjoy exceptionalcredit standing. As mentioned before,most dealers require 100% bank linesof credit for paper outstanding on com-panies handled.

Several other unique features of prime


commercial paper make this instrumenthighly attractive. For simplification,these unique characteristics will be de-scribed with Ford Motor Credit Com-pany being the example. If Ford MotorCredit Co. notes are purchased forthirty days or longer, a customer willreceive three -day rate protection, four-teen -day advance placement facility, anda ten -day extension option.

Under a three -day rate protection thecustomer receives the benefit of any up-ward revision of the rate schedule thattakes place within three business daysfollowing the date of the note. Whensuch a revision takes place, the investorreceives the advantage of the higher ratefrom the date of the increase to the ma-turity date of the note. When largesums are involved in a volatile marketthis feature can mean substantial addi-tional earnings.

The fourteen day advanced facilitymeans that Ford Motor Credit Com-pany will accept orders up to fourteendays prior to the date the note goes onthe books ( the settlement date) . Thisassures the investor of the rate availableat the time the commitment is madeand protects him against any decline ininterest rates that may occur betweenthe placement date and the settlementdate. Conversely, if there is an upwardrevision of rates during this interim pe-riod, the investor will receive the higherrate applicable at the time the transac-tion is closed. This feature in reality isa further extension of the three -day rateprotection.

The third major feature mentionedabove is the ten day extension period.This feature means that the issuer willextend once for a period of up to tencalendar days, at the original rate, if thenote has been held for thirty days orlonger.

Another technical and mechanicalfeature that is offered by most commer-cial paper issuers is the "hole in the

Table 1

middle provision." This feature is help-ful if the investor wants to convert hisholdings in commercial paper to cashfor a short period. For example, a notecan be requested at the higher 90 dayrate with a repurchase agreement thatthe issuer will take back this note for aspecified period and then re -issue it tothe original purchaser at the end of thatperiod. The purchaser receives his cashwhen he needs it and also receives the90 -day rate instead of a 60 -day rate, a5 -day non - interest period, and a 25-day rate, which normally would give asmaller overall return on the investment.

It is interesting to note the relativelyhigh yield that commercial paper hashad over the last several years. Table 1shows average gross yields and spreadsbetween treasury bills and bankers' ac-ceptances, federal agencies, finance pa-per and certificates of deposit.'

Commercial paper is a prime instru-ment for a short-tern investment andshould be used extensively for shortmaturities. If purchases are restrictedto "prime" companies, the security andsafety of the investment are very good.The interest yield is usually above in-struments of similar short-term qualitiesand, therefore, a profitable investment.Every corporate portfolio managershould have this option available tohim in placing his short -term invest-ments.

Bankers' AcceptancesThe bankers' acceptance is a unique

financial instrument used mainly to fi-nance international trade. A prime bank-ers' acceptance is also a money marketobligation of top quality and is regard-ed as an attractive instrument by hold-ers of short -term funds. This instrumenthas always been an important mediumof investment for foreign funds. In re-

1 An Analytical Record of Yields and YieldSpreads, Salomon Brothers and Hutzler, New

York, 1967, pp. 19 -22.

AVERAGE YIELDS —THREE MONTH MATURITIES

Year Bkrs.Months Bil ls Accepts.

1964

Jan -Dec. 3.54 3.761965Jan -Dec 3.93 4.191966Jan -Dec 4.81 5.371967Jan -Dec 4.30 4.81

*Secondary Market Certi ficates of Deposit.

Fed. Finance Cert i f*

Agencies Paper Dep.

3.73 3.85 3.87

4.14 4.24 4.31

5.22 5.39 5.43

4.60 4.93 4.99

cent years the bankers' acceptance hasalso, to an increasing extent, becomeattractive to domestic investors.

A bankers' acceptance is a time draftdrawn on and accepted by a bank.When the drawee bank accepts thedraft, it constitutes an irrevocable obli-gation of the bank. This acceptance alsoshifts the credit risk of the transactionfrom the seller to the accepting bankwhich has substituted its own creditstanding for that of the buyer.

There are many ways in which ac-ceptances may be originated, but thefollowing is a typical illustration. If afirm in the United States wanted to fi-nance the import of goods from abroad,it would arrange to have a local bankissue a commercial letter of credit in fa-vor of the foreign exporter. The letterof credit would state the details of theshipment, terms, and the amount forwhich the exporter might draw a timedraft on the bank. The exporter dis-counts his draft at his foreign bank,which has been notified of the letter ofcredit agreement by the American bank.The shipping papers and the draft arethen sent to the American bank wherethe draft is stamped accepted and signedby an officer. The draft is now a bank-ers' acceptance and may be kept in thebank's own portfolio, or it may be soldto a customer of the bank or sold to adealer at the posted bid price.

In addition to importation and ex-portation activities, acceptances may beused to finance the following types oftransactions: shipment of goods be-tween foreign countries, domestic ship-ments, domestic or foreign storage ofreadily marketable staples secured by anindependent warehouse receipt and dol-lar exchange with banks of approvedforeign countries.

The cost of acceptance financing con-sists of the commission charged by theaccepting bank and the interest chargeinvolved in the discounting of the un-derlying draft. The merchant's cost forthe money loaned to him is the bank'scommission for guaranteeing the bill,plus the market bid rate of the dealerwho buys it. For prime customers theminimum commission charge is gener-ally a flat fee of 1.5% per annum, buthigher rates are charged for other cus-tomers.

In evaluating the liquidity of an in-strument for short -term investments thecorporate portfolio manager shouldstudy the market for this instrument.Over the years a broad market has been


established for the purchase and sale ofbankers' acceptances. There are aboutone hundred banks that accept draftsof sizable amounts. The bulk of theseacceptances are generated by banks inNew York City and San Francisco.There are also six dealers in bankers'acceptances, all of them are located inNew York City, and all but one of themare also government bond dealers.

One unique feature of the bankers'acceptance market is the dealers postedrate. Rates are scaled by maturities ona simple discount interest basis. Ratesare posted to the nearest 1/s of I% ona 360 -day year with normal maturityrates varying at 30 days, 90 days and120 days. The spread between the bidand asked sides is usually 1/ 9 of I%. Itmay be noted by the investor that ac-ceptance rates change rather infrequent-ly, thus enabling the short -term investorto make investments plans and commit-ments more easily.

The acceptance market has alsoproved capable of absorbing largeamounts of selling in relation to thevolume of items outstanding. It alsomay be noted that the Federal ReserveBank of New York is an active accept-ance market participant. It purchasesacceptances of maturities up to ninetydays for its own account as well as longermaturities for member bank and foreign -central -bank accounts. Another import-ant function of the Federal ReserveSystem in this market is the provisionof allowing member banks to discount,or offer as collateral for advances, ac-ceptances of not longer than ninetydays' maturity.

An investor should also be aware ofone flaw in the market. Dealers do notnormally purchase acceptances that ma-ture in twenty -one days or less. This re-stricts the outlets for sales of short ma-turity bankers' acceptances.

The bankers' acceptance is usually is-sued in bearer form with payment be-ing made in New York Clearing HouseFunds. Friday is an exception when pay-ment must be made in federal funds.Maturities are mainly within 90days, although some maturities can bepurchased up to 180 days. The amountof acceptances available on any one ma-turity is sometimes not sufficient to meetcorporate demands. However, accept-ances with maturities up to 90 days nor-mally can be purchased on each businessday in amounts up to $ 5 million.

Bankers' acceptances are offered usu-ally in odd denominations. The rangeis from a few dollars to one million dol-

lars or more. One disadvantage of pur-chasing this instrument is that morepaperwork is required to handle theseinvestments when compared with othershort -term securities.

Another point for evaluation is thetax status of the bankers' acceptance.Under present tax laws, the discountearned on an acceptance is subject to allpresent federal and state income taxes.Any gain on the sale is also an ordinarygain and not a capital gain.

Safety and security of principal is alsoforemost in any investment decision andshould be considered carefully in rela-tion to bankers' acceptances. "Authori-ties on the short-term investments haveuncovered no record of an investor sus-taining a principal loss on an acceptanceof an American bank." 2 Since the ac-ceptance is drawn for a specific periodof time and is not subject to renewal,the investor is secured to a real transac-tion of definite duration, with the par-ties involved being fully liable to thebank for payment at maturity. The pay-ment of the acceptance at maturity isthe irrevocable obligation of the accept-ing bank as well as all other parties in-volved in creation of the instrument.These elements of security make the ac-ceptance a very sound and secure in-vestment.

During the past several years, bank-ers' acceptances have maintained sub-stantial yield margins over treasury billsand federal agencies. Exhibit 1 illus-trates the range of yields in bankers' ac-ceptances from 1966 through 1967. Ref-erence to the chart in the section oncommercial paper will also illustrate theyield spread between bankers' accept-ances and other popular short-term se-curities. The yield and security forbankers acceptances are very sound.Marketability and liquidity are also quitegood, even though the market is rela-tively narrow when compared to otherinstruments.

In summary, one might suggest thatthis option for investment be availableto the corporate investor and that heuse it prudently when rates for this in-strument surpass those of commercialpaper and certificates of deposit. In myopinion, bankers' acceptances should beunderstood and used more by the insti-tutional purchaser.

Negotiable Certificates of DepositOf the three instruments included in

this paper, probably, this instrument isR Bankers' Acceptances for the Institutional In-stitutional Investor, Merrill Lynch, Pierce, Fennerand Smith, Inc., New York, 1966, p. 2.

the one that is most familiar to thereader. The advent of this new money -market instrument took place in Febru-ary, 1961. Negotiable certificates of de-posit were only issued on a relativelylimited scale prior to this date. Thisinterest bearing, negotiable and market-able time certificate of deposit, (com-monly called a CD) was introduced ag-gressively by the larger New York Citybanks to attract some of the short -termcorporate funds that otherwise would beinvested in United States Treasury dis-count bills or other moneymarket se-curities.

In recent years many corporate treas-urers have become aware of the value ofdormant demand deposited which maybe placed safely into income producingshort-term investments. When corpora-tions started to become large buyers ofU.S. treasury bills and other short-terminvestment media, commercial banks inmoney- market centers, such as NewYork and Chicago saw a relative declinein demand deposits. The negotiabletime certificate of deposit representedan attempt by the commercial bankingsystem to attract corporate funds witha view toward regaining deposits andincreasing lending potential.

The maximum interest rates at whichcertificates of deposit may be issued arefixed by the Board of Governors of theFederal Reserve System under Regula-tion Q and, in the case of New YorkState banks, by the provisions of Gen-eral Regulation Number 3 of the NewYork State Banking Board. The FederalReserve Board raised the maximum per-missible rate to 61/ 4 % on all time de-posits and certificates of deposits onApril 18, 1968. One stipulation set bythe Board for these CD's at this rate ofinterest was that maturities must be ofthirty days or more.

The banks issue these instrumentscontinuously to meet their current re-quirements. The prevailing interest ratestructure, the individual bank's moneyposition and management's desires formore deposits are all factors which influ-ence the issuance of certificates of de-posit. One advantage of this instrumentis that the investor has an opportunity tochoose the date of issuance and, moreimportantly, the date of maturity. Thisinstrument is normally issued in unitsof $1 million for institutional investors.Smaller denominations are sometimesissued by banks outside the money cen-ters; however, $1 million CD's are theusual unit of trade. As a general rule,larger corporate buyers prefer to trade


in units of $1 million and such a unitwill usually attract a better bid in thesecondary market than one of a smallerdenomination.

When moneymarket rates for otherinvestment media are below the ceilingset by the Federal Reserve Board, banksare usually willing to negotiate their in-terest rate from the rate posted. Theability of the investor to receive a pre-mium rate will depend to a great extenton the overall relat ionship the investorhas with the bank. In any case, the pur-chaser must pay for the instrument infederal funds. The interest rate is usu-ally based on a 360 -day basis with inter-est being paid at maturity; however,some banks outside the money- marketcenters will only issue their instrumentson a 365 -day year basis.

Certificates of deposit may be issued

in either bearer or registered form, trans-ferable in the latter case by a bankguarantee of the endorsement. The formof the instrument is at the option ofthe purchaser.

Since the inception of certificates ofdeposits in early 1961, a good secondarymarket has been developed. The second -ary market is maintained by dealerbanks and dealers in government secur-ities. The major secondary market deal-ers are Discount Corporation of NewYork, First Boston Corporation, andSalomon Brothers and Hutzler. Mostof the trading in CD's has been in thoseissued by major banks in New YorkCity, Chicago, and other money- centercities. Certificates of deposit issued bybanks outside those centers do not en-joy as large a degree of marketability.

From an investors standpoint, the sec-

Exhibit 1SELECTED SHORT -TERM INTEREST RATES

Per

8

7

7

E

E

ondary market offers liquidity for pres-ently held certificates of deposit, as wellas a market from which to buy instru-ments at a sl ightly higher interest ratethan those offered by comparable issu-ing banks.

As with the other two instrumentsdiscussed in this paper, the certificate ofdeposit is subject to all present federalincome taxes and state taxes.

Another point that should be re-viewed when discussing this instrumentis the security and safety of principalfiords which are placed in certificates ofdeposit. This instrument is an unsecuredmoney - market security. 'The credit andcapital position and the general standingof the bank of issuance represents thesecurity and safety factors for this in-strument. This instrument is informally


knt

.00

. 5 0

.00

. �

PRDIECOMMERCIAL P RB ¢ LARGE

1947PAPER BANKERS' 90 DAY4- 6 -EONTN ACCEPTANCES CD1a.,M FlnOIB

4 - /S.00 V. U 1f 6 t 3 . 6 0

s a a M & 6 i l i a v . a J/7 S o o Y . 6 1 Y . d t i l l

AR S o o y.da 1.11 Y.00r So o 9 1 1 9 . p J A S

0 4 G Soo Y d t w. t t Y OIi3 d. Do f. ad 11.06

S . . J }.dI S i r J 1 . 3n r A3 f Jd S 90 J i s

l l w 3 4 / 3 '111 X 1 0 Fio L / J y t d S J o 3.1717 X.13 Y.df - r l 0 f . o dd9 J V r. /J X. SID V 1 3

A S.So J S Xlro Y Yet J . f a S 3J .f. 6 d *-JO

/S 5.19 5.31 6 . 6 5 y.SS.7A 563 6.50 5.63 4..f0

+ i 1 s63 J , X . 4.0

.50

.00

.50

.00

.50

.00

•50data plotted are averages of rates available for the wok mdtag; Dec.

2 1 18 2 30 13 27. 0 ' 24 10 24 7 2 1 5 19 2 16 3 0 l

J •

r Cent

8.00

7 . 50

7.00

6.5o

6.Oo

5.50

Sept. O M . NOV. Dec. Jan . Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Jan . Feb. Mar. Apr.• AVERAGES OF RATES9AVAILABLE 1967 1968

N SOURCE: SALOON BROTHERS AND HVDZLER Prepared by Federal Reserve Beak of St. LouisSECONDARY MARKET RATE ON 90-DAY PRIME CD -S.


Computer Time-Sharing

TIME - SHARING SEEMS USEFUL. IT PROMISES MUCH MORE IN THE FUTURE

By Brandt R. Allen

Computer time - sharing, once an exclu-sive service for scientists and engineers,is fast becoming important to the busi-ness manager. This is a service that oneordinarily buys on an incremental basisfrom a service bureau (vendor). Thesevendors offer a variety of services andit is important that the manager con-templating use of time - sharing under-stand them in order to select the vendoror vendors most appropriate to hisneeds. Some of the more importantvariables are introduced in this paper.

Communicating with theComputer

From management's point of viewthe use of time- sharing is similar inmany ways to that of a TWX system.The firm leases an inexpensive terminal(such as a teletype) and a communica-tions line ( with time - sharing the com-munications line is actually an ordinarytelephone line— nothing more, nothingless) . Just as the TWX system allowsyou to send and receive messages fromother TWX terminals, the time - sharingsystem allows you to send and receivemessages from a computer, in this casea special time - sharing computer. Thiscomputer is ordinarily owned and oper-ated by a vendor such as GE or IBM, butthe computer may actually be hundredsof miles away. You are billed on the ba-sis of the amount of time you actuallyspend connected to the machine (andthere might be some minimum monthlycharge —such as $100) . Since differentvendors use different types of computersand often specialize in different types of

service, many businesses often use sever-al vendors. This is possible because thecommunication between the computerand your terminal is through the tele-phone system —to use another computeryou merely dial another number. Theterminal is thus a general purpose inputdevice to a variety of services providedby these vendors.

Until recently communicating with acomputer has been very difficult —any-one who has had to deal with computerprogrammers, systems analysts and com-puter operators knows the difficulty ofgetting even a simple problem solvedon the machine. Time - sharing has beendesigned to significantly minimize thiscommunication problem. In fact, it isthe result of an attempt to provide com-puting power to the man who has aproblem (rather than a programmer) —even if he has never worked with a com-puter before.

Let's look at an example— suppose

BRANDT R. ALLENis Assistant Professor of Business Ad-ministration, Harvard University, Sol-diers Field, Mass. Professor Allen re-ceived S.B. and M.B.A. degrees fromthe University of Washington and aD.B.A. from Harvard University.

we take a simple discounting problem:What is it now worth to be able to re-ceive $1,000 in five years at an interestrate of 7 %? We certainly do not need acomputer to solve that but we will tryit anyway as an example. We rememberthat the present worth (W) of anyamount (A) in the future is

W = A /(1 + K)"where K is the interest rate and x isthe number of years in the future. Forour problem

W = $1,000 / (1 + .07) 5

To solve this on the computer we gothrough the following steps:1. Switch on the terminal (teletype)

and dial the computer's telephonenumber.

2. When the connection is made, thecomputer will ordinarily type helloand ask who we are (for billing pur-poses) .

3. We type our account number andare now ready to enter our problem.

All we must now type is:

TYPE 1000/(1 + .07) A 5

and the computer will type out the an-swer:

1000 /(1 + .07) A 5 = 712.99

The little triangle is the computer's wayof signifying exponentiation. Anotherway to do this would be the following:

SET N = 5SET K = . 0 7SET A = 1000TYPE A /(1 +K)AN

again the machine would respond with

1000 /(1 + .07) D 5 = 712.99


If we carry this example one step fur-ther we can produce a "program" whichwill work for all problems of this type.We will give each line a number andadd another step:

1.1 DEMAND A,K,N1.2 TYPE A /(1 +K) A N

Then all we need to do to "run" thisprogram is type "RUN." The "demand"step allows us to type in any amount(A) , interest rate (K) and number ofyears (N). Here is an example: (whatyou type is underlined)

R U NA = 1500K =.09N =20

150010 + .09) A 20 = 267.65

The words like DEMAND, TYPEand SET are commands that one mustlearn like a foreign language. There areonly a dozen or so and can easily bemastered in a few hours. Indeed manyof the current users of time - sharingknew nothing about computers or pro-gramming prior to their use of the sys-tem.

Furthermore, most time - sharing ven-dors have hundreds of standard pro-grams already written which one mightuse. This is perhaps the easiest way fora company to start using time - sharing.Most businesses subscribe to severalvendors. One reason for switching fromvendor to vendor is to use different pro-grams in their library. Suppose you havea sales forecasting problem and VendorX has a multiple- regression program inits library—just call Vendor X and usethe program. If later on you wish to usea program from Vendor Y —just call.

Why Is Time-Sharing Useful?Perhaps we should now look at why

time - sharing seems to be useful forbusiness problems. Some of the reasonsfor its rapid growth are indicated below.

C O N V E N I E N C E . A remote terminal canliterally be installed wherever there iselectric power and telephone circuits.Many business subscribers have termi-nals in their offices —some in theirhomes. There are a number of portableterminals on the market which can beoperated from any standard telephonewithout special installation.

P R O G R A M S W R I T T E N Q U I C K L Y. On aconventional (batch) computer, pro-gram development is often a matter ofweeks or months. Time - sharing can cutdrastically into this delay —many usersreport problems solved in a fifth or a

tenth the time it would have requiredon a batch machine.

P R O G R A M S R U N Q U I C K L Y. This is peI-haps the most noticeable feature of on-line computing— whenever it is neces-sary to run a program it can be done inminutes or even seconds. Compared totime - sharing, running a program on abatch computer is like placing eachphone call you make through an opera-tor who takes from thirty minutes tofour hours to make each call. Of course,rapid response is not without its premi-um; it may cost considerably more thanconventional processing for a particularrun with the current generation of on-line systems.

EASY T O G E T S TA R TE D . While it maytake months or years to install a con-ventional computer, most businesses canacquire on -line service in a matter ofweeks or even hours. And it is just aseasy to divest yourself of this capabilityif it fails to meet your needs.

R E N T A L . Much of the growth of time-sharing must be ascribed to accountingconvention. A manager might fight forthree years to justify an in -house com-puter, programmers, analysts, machineoperators and necessary space. Yet oftenhe can, without question, expense twoor three hundred dollars per month foron -line computer service. Remote ter-minals are typically rented; computerand telephone line charges are comput-ed on a usage basis; in short, every-thing is expensed and nothing need gothrough formal capital expenditure pro-cedures.

S I M P L E — E A S Y T O US E . From the ex-ample presented earlier, the reader willnote that many programs are almostEnglish -like in nature. This simplicitycomes at a price, however; most time-sharing systems cannot match the per-formance of even modest conventionalmachines in various categories: speed,size of program, amount of data, etc.This need not always be the case andwill tend to be of lesser significance inthe future.

M A N - M A C H I N E I N TE R A C TI O N . ThiS IS

probably the most important feature ofon -line computing systems: the problemsolver (not an analyst, programmer ormachine operator), communicates di-rectly with the machine. Hence, the de-cision maker is not plagued with variousintermediaries —he works directly withhis problem and the machine. Thisman - machine interaction frequentlyleads to ideas, insights and an under-standing of the relevant problem varia-bles and their interrelationships that

have not been possible using conven-tional methods — either with or withouta computer.

How Is Time-Sharing Used NowSome of the current business applica-

tions of time - sharing are listed below:

Production SchedulingInventory ControlBudgetingSales ForecastingCost AnalysisPricing StrategyBusiness SimulationMarket EvaluationFacilities PlanningLead -time ProjectionsMerger AnalysisPersonnel SchedulingCash -flow ForecastingProduct Costing

Time - sharing is used in many smallfirms which have never been able to jus-tify even the smallest in -house compu-ter. At the other extreme there are verylarge companies, where the use of time-sharing is growing rapidly.

What Will Be Availablein the Future

Looking ahead (three years is "longrange" in this industry), there is a greatdeal of effort to considerably expand theservices provided by the time - sharingvendor. There will be more vendors —many on a national basis. At least sixestablished vendors have announcedplans for or are already "national dis-tributors."'

A number of others are known to bemoving in this direction. Although therewill undoubtably be some fatalitiesalong the way, all of the signs indicatea growing number of both small andlarge vendors.

There is a trend toward bigger andfaster machines, at lower rates, and withthe capability to "converse" with manymore types of remote terminals. Theperformance gap between time - sharingcomputers and batch computers willtend to narrow.

With increased competition, im-proved computers (hardware), betteroperating systems (software), economiesof scale and lower communication rates,the cost to the user must certainly bereduced. While current charges are gen-erally from $15 -30 per hour, they maybe in the $5 -15 range in the next threeyears.

1 Genera l Elec t r ic , I B M , Un iv er s i t C o m p et in gCom pany C o m •S h are , Ty m s h are , I T , a n d W h it e ,W eld an d C o .


One of the current weaknesses oftime - sharing, for the business user, isthat he could not store and assess largeamounts of information. Vendors arealready beginning to provide storage forvery large and in some cases unlimitedcollections of data.

Vendors with multiple machines willdevelop means to "interconnect" themso that when one fails or is overloaded,another can take over the work. Theuser is given service with much higherreliability. Such interlocking should al-low national and multi - national firms touse the computer network to collect,process and transmit data and at reason-able cost. Not only could such a systembe used to collect information such assales reports, but management controland information reports could be pre-pared and, when ready, the recipients'terminal could be dialed and the reportprinted. Of course, this capability isavailable now, with human operatorsand one of the wire services.

As the number of vendors increasesand competition becomes more intense,some will begin to specialize in certaintypes of service (this is already takingplace today, although on a small scale).This specialization will be along a num-ber of lines. Some will concentrate oncollecting and maintaining special data,such as basic economic data, marketinganalyses or financial data. Others willdevelop special programming languagesfor a particular group of users such asaccountants, financial analysts or civilengineers. In appealing to special usergroups, the vendors may provide col-lections of programs of particular inter-est to that group. We might find allthree: special data files, special languagesand special library programs.

What to Look for NowAlthough there are hundreds of varia-

bles to consider in selecting a vendor,at least the following require particu-larly close attention:

Cost vs. PerformanceVendor's Library and ServiceAvailability and ReadabilityCOST — PERFORMANCE. BIlefly stated

the question is simply, what do you getand how much does it cost? With re-spect to cost you will find that not onlyare the rates different for various ven-dors, but the method of computationmay be different. Generally vendors billon any or all of three items:1. Connect time. The total elapsed

time from the time you dial into thecomputer till you disconnect.

Z. CPU time. The total amount (usu-ally measured in seconds) of actualcomputer time: i.e., you may beconnected to the machine for anhour while working on a problem,but you might only use 30 secondsof actual computer time ( CPU =Central Processing Unit) .

3. Storage charges. Programs and datafiles can be stored "on- line" forready access. This storage is typi-cally billed on an average- volume-used basis.

In addition there may be minimummonthly charges, special billing pack-ages (such as unlimited usage of one"line" or terminal with so much storagefor, say, $ 500 /month) , and other com-binations of the above three measures.For example, one vendor might havethe following rate schedule:1. No charge for CPU2. $12 /connect hour from 8:00 a.m. -

6:00 p.m. weekdays, $8 /hr. at othertimes.

3. No charge for X units of storage perdollar of connect time. $3 /monthfor all units of storage above that.

In comparing various vendor rate sys-tems, one mustalways be reminded thatthe basic computer speeds themselvesmay be quite different. Consequentlyyou may find a vendor with a relativelylow rate who also has a relatively slowspeed machine. With respect to per-formance, the basic question is: Whatcan the system do? What programminglanguages are available? Is there a simplelanguage such as BASIC, CAL, orJOSS; and, is there a more powerful onefor experienced programmers? It isnecessary to have both —the easy onefor beginners and those who are not pro-fessional programmers, and the morepowerful one for jobs that require betterperformance. The easy languages sacri-fice some performance ( such as speed)for convenience, the more powerful aremore difficult to use.

Important performance factors otherthan speed and ease of use are:1. File storage. How much storage is

available, how convenient is it touse, are there special file mainte-nance languages such as a text editor?

2. Flexibility. Can multiple users inremote locations easily provide datato central files? Can reports be di-rected to various users (can the com-puter call up a user at a certain num-ber, turn on his terminal and leavehim a report), and can multiple us-ers interact simultaneously using

separate terminals? Does the system"grow" with the user? Does the sys-tem allow you to use different typesof input /output terminals —or mustyou use one supplied by the vendorand thus be unable to use anothervendor's systems?

3. Variable Speed Response. Can youdirect the system to respond quickly(at high cost) or slowly (at moder-ate cost) or at its convenience (atlow cost) ? The requirements for aspeedy response are not always thesame. Although this is not a featureon many of the current systems, itis very important and will becomemore so in the future.

VENDOR'S LIBRARY. How many pro-grams are there in your problem area —how good are they (do they have errors,do they do the job the way you want itdone, are they efficient, easy to use,flexible)? Can they be modified?

SERVICE. What can the sales and sup-port people of the service bureau reallydo for you? Does the vendor have good,well written, easy to use manuals for allprogramming languages, subsystems, op-erating system and libraries? What canand will the support people actually dofor you —write programs, make changesin the system?

AVAILABILITY. Is service available 24hours a day, seven days a week, or is theservice bureau only "open" on weekdaysand for limited periods of time? Evenif the machine is running —will youalways be able to "get on" or does thevendor run his operation such that theentire machine is busy during most ofthe day? Time - sharing machines have acapacity in terms of the total number ofsimultaneous users. If a vendor is heav-ily loaded, you may have difficulty get-ting on the machine. Even if you geton, a heavily loaded machine will notperform as well as a lightly loaded one;you thus pay more for less service.

RELIABILITY. This has always been amajor problem with commercial time-sharing vendors. Reliability problemsmay inconvenience you in any of threeways: the system may be inoperablewhen you wish to use it; the machinemay malfunction with or without noti-fication while you are using it; and mal-function may lead to the loss or damageof programs and data files saved in yourlibrary. Most vendors have improved re-liability to the point where malfunctionoccurs only several times a year and lostprograms or files can generally be re-



On Reliability Strategy19

in Electronic Data Processing

LET THE COMPUTER CHECK THE DATA ON A PRE -AUDIT BASIS

By Donald R. Thomas

For some years American business hasused electronic accounting devices in thepursuit of faster, more precise results inthe control of specific item accounting.However, the old processing systems,implemented with accounting machines,in most cases were converted to EDPwith little change in the basic systemslogic which relied heavily on generatingaudit trail for after - the -fact audit.

The use of "post audit" conceptswhich were functional in the accountingmachine punched card environmentproved to be more difficult in a compu-ter magnetic storage media. Most of thedifficulty occurring in this area was dueto a lack of confidence in unseen recordsand necessitated the processing of anentire file when making a change to asingle record, something generally notconsidered with punched card files.

The cost of program preparation anduse of file maintenance and review pro-grams sometimes exceeded the savingsgained through increased processingspeed. The cost of error correction be-gan to rise although it was often a hid-den expense. These conditions continueto prevail in some computer installa-tions.

A more satisfactory approach wouldbe the employment of a strategy to im-prove the reliability of proper applica-tion of transactions on a pre -audit basisto each item of account while eliminat-ing much of the manual efforts.

An Alternative Approach

Solutions to data collection problemsare normally linked to the accountingobjectives and to the personnel responsi-ble for control. The most opportunetime to correct errors is during the ini-tial phase of processing. This is not al-ways as easy as it sounds since we maynot all be blessed with a capable staff.

Some organizations have clerks whosepowers of observation can uncover mostif not all erroneous entries. We are allfamiliar with such expressions as "GoodOld Charlie, I can always count on hisreport being correct!" or "The ABCCompany never makes a mistake!"

It is this grade of assurance thatshould exist in data processing systems.

DONALD R. THOMAS

until recently was a Data ProcessingConsultant on the staff of Ernst 6Ernst, Los Angeles, Calif. He is pres-ently associated with Coldwell, Banker6 Company. He is a graduate of theUniversity of Arizona with notableexperience in industrial accounting andon -line computer systems design.

Once this has been accomplished, propermeasures can be adopted to eliminateerrors or at least alleviate the undesir-able effect of error. For example, prob-lems arising from poorly generated dataoften can be alleviated by:1. automated pre- keying of some data

elements,2. use of check digited numbers and

entry devices,3. certification of data through re-

dundance in entry elements,4. reasonability tests on data values

and5. any combination of the above in

varying degrees.

The Pre -Audit MethodPre - keying of some data elements has

worked well in most payroll time cardapplications or where high volume in-ventory transactions exist. It has proveneffective in hospital patient accountingwhere transaction documents are eitherpre - punched or pre - printed with the pa-tient number. Public utilities have madeextensive use of this principle in theirreturn document in billing operations.Where data already exist in some ma-chine readable form, a high degree ofreliability is natural and other controlssuch as check digit or redundancies willadd little to the confidence level pro-duced by this means.

A check digited number is designedprincipally to point up an inherent er-ror of a single digit or transposition.Handwritten entries or transfers from


other documents represent the dominantsource of errors which this device de-tects. A simple arithmetic calculation onthe number determines its validity. Spe-cial attachments on data keying devicesare available which can virtually elimi-nate encoding errors employing thistechnique. Where data is fed directlyto the computer or some large magneticstorage device, the value of the checkdigit takes on added significance. If anentry to a computer demands immedi-ate response, the key argument must becorrect in order for the response to bemeaningful.

Reliability of the data can be im-proved also by developing logical asso-ciation between data elements. Supposeinventory transaction data contain in-formation such as item number, classcode, quantity, source or location, usingdepartment, job or budget allocation.Based on specific conditions, certain re-lationships between data elements canbe established that add credence to theacceptability.

Here are some of the logical analysesperformed by clerks which can be trans-ferred to automation:

1. Class code. Certain inventory classitems have restricted departmentaluse.

2. Quantity. Each inventory itemgenerally develops a relatively fixedusage pattern.

3. Source. Some items are purchaseonly. Others are machined to order.Still others are stock.

4. lob allocation. Limit of quantitiescan be pre - established by job re-quirements.

5. Department. Production depart-ment's quantity usage may differwidely when compared to researchdepartment quantities.

Proper research for logical relation-ships would produce an almost limitlessnumber of associations, some of whichcould become quite complicated. Thismethod of error detection has been usedin clerical operations for years. Whenan illogical condition exists, it is oftenpossible to recognize what the error isby just looking at the data without re-searching other documentations. Com-binations of unique characteristics ofdata elements can be said to provide anatmosphere of redundancy.

It is this characteristic which lendsitself so well to automatic error correc-tion. With historical reference storedin the computer it is conceivable thatan erroneous item number can be cor-

rected by an association of class number,source, and department usage. Supposethe use of a check digit proves a num-ber to be incorrect. Other data elementsof the transaction, in association witheach other, can provide a means of cre-ating a valid number. This is done byconsidering what effect the most likelycause of errors would have on the num-ber, and by changing the digits until thenumber is valid and reasonable in lightof the associated data elements. Theprobability of that number being cor-rect can be assessed and, based on suchprobability, a decision can be made asto whether or not processing should

occur.A good example of this technique is

found with the Social Security Admin-istration. They were continually plaguedwith errors in the account numbers ofquarterly returns not produced fromcomputer files. Returning erroneous en-tries to the employer was costly to boththe employer and the Agency. Todaywhen a name ' number discrepancy oc-curs an analysis is performed on thenumber to find if only a single digit er-ror in account number will reflect acondition where a name-'number matchis possible. The analysis is repeated foradjacent digit transposition. The Agencyhas at its disposal the added data ele-ment of employer identification numberwhich is also used as part of an identifi-cation process. This method of auto-matic correction proves to be highly ade-quate if not perfect in posting wages toan individual's account.

Employment of these techniques canlimit and often prohibit errors fromever entering a data file or at least pointup conditions which require the exer-cise of human judgment. The exacttechniques and extent of their usesshould be determined by nature andcauses of errors; this will improve themeasures of reliability of the data itself.

Particular attention should be givendata elements which form the matchingargument of a data file; the elementwhich provides the key to retrieval ofstored data. Check digits and pre - keyingof file identifying numbers have ad-vanced accuracy in this regard.

Quantities such as dollars, number ofitems, volumes, etc., can be tested forreasonableness or it may be establishedthat the quantity being tested would notprovide a material discrepancy if leftunchecked. It would not be expectedthat the processing of a million dollarproduction inventory would be held up

because a small discrepancy existed inan inventory item costing twenty -fivecents per thousand. By the same tokenit would not be reasonable to acceptquantity without some reconciliation ofdiscrepancies in expensive items.

Practical Application

Here is an example of how these tech-niques can be used to advantage. Theapplication is the accounting for large -scale research and development projects.It involves the time reports of upwardof two thousand research engineerswhose handwritten time reports are of-ten incomplete and the accuracy ques-tionable. Preprinting of employee num-bers on the documents eliminates someproblems. However, the manual entriesof department, job and project are diffi-cult to control on any reasonable clericalbasis.

Given these conditions, a system canbe developed to perform some clericaloperations automatically. To do thisproperly, the computer must validatethe department, job and project numberaccording to a predetermined schedule.If some of the entries are missing or in-correct, it is quite reasonable to makeallocations of time and expense to theproper account. Proper notation of arbi-trary distributions should be given toaccounting for review. The computersystem then records the number andvalue of these decisions and if either ofthese numbers becomes significant,processing is aborted and correcting en-tries are required before the postingtakes place.

There are always some entries thatdo not contain sufficient information tomake any reasonable distribution. Theseitems must be recorded for manual proc-essing to the completed report providingthat they do not exceed some materiallimit of the total being processed. Theprocessing should not be permitted tocontinue if there is an excessive numberof transactions with incomplete data.

Another checking device which canbe used in this situation would be tolimit the number of transactions of anearlier period. The bulk, if not all ofthe processing, should carry a commondate. Provisions can be made for ac-ceptance of corrected transactions ofsome prior period. This technique wouldprevent transactions from being appliedto the wrong accounting period.

These data error detection methodshave proven successful in the past. How-ever, they do not often appear in the


proper balance that produces confidentresults. It should be noted that each er-ror problem in automated data process-ing must be solved in accordance witha degree of accuracy consistent with dol-lar expenditure, as well as the legal,moral or business obligations pertainingthereto. For instance, the Social Secur-ity Administration can live with someerror in the posting of earnings sincean individual has the ability to requesta record of earnings at any time and itis relatively easy to establish proof ofearnings at a later time, if necessary.There are instances, however, wheremore responsibility to data is essential,such as accounts payable or receivableapplications.

There are some practical aspects tothe use of arbitrary allocations in generalledger accounting. Consistency of appli-cation, materiality of the amount, andthe effect on costing analysis are someof the factors taken into considerationin allocations and distributions.

Since consistency is generally a prod-uct of experience, it is easy to see wherea new clerk has difficulty applying soundjudgment criteria to situations in thesame way as the individual who "grewup with the job." It is also experiencewhich promotes the ability of an indi-vidual to communicate with other de-partments such as purchasing, person-nel, production, etc. If further automa-tion of clerical functions is to be effec-tive, then experience must be a vitalpart and a factor of computer operations.If a reduction of manpower is to be rea-lized, then the automated system mustduplicate or simulate the communica-tion ability, the capability experienceaffords, and the qualities or reliabilityand confidence, qualities most desirablein any clerical position.

Solving the AccountsPayable Problem

To further illustrate the applicationof these concepts let us consider someof the procedures that are found in anaccounts payable application. First, thereis a demand which in turn creates thepurchase order. The order is forwardedto the accounting department and pro-vides authority to make payment on re-ceipt of the merchandise. The purchaseorder must be filed to await the receiv-ing document and invoice. As each doc-ument arrives, the file is opened and up-dated. When proof of receipt and theinvoice are available, a clerk is expectedto compare, extend, stamp, mark distri-

bution, staple and otherwise process. Agood deal of human judgment and re-call is utilized. For instances, the aver-age employee should recognize the du-plication of invoices, especially if theamount is significant. Human detectionof price variations in open order itemsis a normal presumption. An adept officeworker is expected to retrieve any docu-ment for inspection and processing atany time. All of these things are part ofthe application.

With the introduction of automatedprocessing the menial tasks of tabulatingand extending were relegated to ma-chines. Modern data storage devicesmake possible the full implementationof automation and make good use of thebetter qualities found in manual ac-counting which management under-stands and trusts. For example, valid no-tice of purchase can be recorded in ma-chine readable form, readily available tothe computer system. This should beunder several file headings such as pur-chase order number, vendor name, itempart number or description, and perhapsrequisition number or department.These cross references ensure ready ref-erence to future file transactions andare no more than what we would expectof a good manual system.

Receipt of shipment can be directedto the computer files on either purchaseorder number, vendor name or partnumber, to quickly identify the transac-tion. Invoices should also identify withthese cross reference computer files. Asthe three elements are recognized andverified, payment can then proceed with-out clerical intercedence. The duplica-tion of document handling can be sub-stantially reduced and the need for thetime consuming collation of documenta-tion almost eliminated. Since cross indexof physical documentation is maintainedin the machine, substantial, if not tra-ditional, audit trail still exists.

These concepts can be carried a fewsteps further. Manual intervention in ac-count distribution can be substantiallyreduced by maintaining historical rec-ords of prior transactions with vendors,specific merchandise, and historical orstandard allocations. Use of these char-acteristics in computer programs canproduce comparable results to that of"Good Old Charlie" who has gracedthe halls for thirty years. Of course, even"Charlie" seeks higher authority uponoccasion and this is also as it should bein an automated environment.

A Few Specific ProblemsIt is impossible to respond herein to

all questions which this approach in-vokes. However, an attempt will bemade to answer what is considered themost imposing problems.

How can separate filing of source doc-umentation be substantiated? The desireto perform regular and thorough inter-nal audits has always existed. The em-ployment of this concept would createa greater need for implementation. It ishoped that planned statistical samplingwould minimize the workload whileproviding a measured level of confidencein the automated results. Completecross reference can be obtained by ap-plying a physical storage reference num-ber to every document.

How are situations handled which donot conform to predisposition? No at-tempt should be made to develop arigid all encompassing system. Dataprocessing systems should emulate hu-man judgments and therefore recognizesome limitations. One asset of a goodclerk is the recognition of authoritativelimits. A system should be dynamicenough so that as the historical data(experience) increases more mechanizedprocessing becomes possible.

Would the employment of these tech-niques require large -scale computers?Not necessarily. The basic requirementswould be some type of mass auxiliarymagnetic storage device for data. Aspeed /cost relationship must be consid-ered in the actual equipment configura-tion.

What differences occur in data proc-essing between "pre- audit" and "post -audit" approaches? There are many, themost important of which are these:1. "Post- audit" assumes data entering

a system is correct until proven im-plausible, while "pre- audit" tech-nique makes no assumption as todata validity until some measure ofthe probability of it being correct isestablished.

2. "Post- audit" must rely on devicesand techniques such as key verifying,batch control and proof lists for er-ror detection. Computer "pre- audit"should result in more qualified datawith less clerical time involved inthe function than is required in"post- audit" techniques. It would beconcerned more with logical pre-sumption and responsibility.

3. "Pre- audit" should employ the com-puter where it excels . . . speed and ac-


curacy. Human involvement shouldbe limited to the function of judg-ment and only in those cases whichdo not conform to predetermineddisposition. Unfortunately, many"post- audit" systems attempt tohave clerks check the computer ra-ther than the more desirable ap-proach, that of computer checkingthe data.

What are the expectations and impli-cations of technical advancements inthe light of these concepts? Future dataprocessing should enhance the use andexecution of these principles. The singlegreatest deterrent to the fully integrateddata processing system is no longer thelimit of available auxiliary storage, butthe cost and speed. The implementationof these concepts require the use of massstorage and rapid access to voluminousinformation. Prospects for abundant, in-expensive and fast data storage are verypromising. Any one of several methodsnow in development could provide theanswer; for example, laser beam storageor cryogenic circuitry.

Short -Term Investment


designated prime or non - prime, depend-ing on the standing of the issuing bank.Usually prime certificates will care- aslightly lower rate of interest than theirnon -prime counterparts.

Under Federal Reserve restrictions inRegulation Q, a bank cannot purchaseits own certificates of deposit for in-vestment; however, it may act as anagent in acquiring them for their cus-tomers. A bank may purchase, either forits own account or for the account ofcustomers, certificates of deposit issuedby another bank. It should be noted thata bank is permitted to make a loan se-cured by its own certificate of deposit, ifit charges an interest rate at least twopercent above the rate at which the cer-tificate was originally issued.

Looking Toward the Future

Much emphasis of late has been givento "on line" information systems. In-formation called out in this way de-mands the use of some "pre- audit" tech-nique. Financial institutions use severalmeans of account identification in theirresponse computer systems. Airline res-ervation systems have successfully em-ployed various verification techniques.It is possible to envision more wide-spread utilization of advanced tech-niques for checking data.

The advent of Computer Utilities of-fers possibilities of purchasing computertime without the responsibility of equip-ment or operating personnel. This auto-mated processing outlet has the massstorage and machine availability to jus-tify the implementation of some of themore sophisticated error detection andrecovery methods. This relatively newcomputer environment offers the oppor-tunity to perform the data collectionand information retrieval that more ade-quately produces the reliability and con-

The certificate of deposit is usuallypriced to yield a higher return than gov-ernment obligations and slightly lessthan bankers' acceptances and commer-cial paper. Table 1 in the section oncommercial paper gives'a general pictureof the trend in yields when certificatesof deposit are compared with other in-struments during the last several years.

As a general rule, the certificates ofdeposit should be bought on major com-mercial banks in the money- centers ofNew York and Chicago. When availableat a premium yield they should bebought in the secondary market andheld to maturity. If money market con-ditions are relatively normal and thecorporate investor wants to buy a cer-tificate of deposit directly from the is-suing bank, then he should be willingto negotiate and not be willing to ac-cept the posted rate as sacred.

fidence levels which are so necessary forgood quality, low cost administration.

As new methods evolve, accountingadministrators undoubtedly will findthemselves more concerned with infor-mation storage and retrieval. The prep-aration of financial and operational re-ports will continue to grow morecomplex and data more voluminouswhile manual review becomes more im-possible. As this occurs, it should be-come evident that many of the "oldmanual controls" are still appropriate inconcept but inadequate in the face of anincreasing volume of transactions.

The ability to perceive the salientqualities in a good working manual sys-tem along with the imagination to pre-serve those qualities in a meaningfulform are the basic precepts for inventingsolutions to problems in automated datasystems. There is no magic formula fortheir success. A well -laid plan of attackon the problems of a system will likelyproduce the best results. Use of strategyrather than force should be less costlyand more effective.

ConclusionCommercial paper, bankers' accept-

ances, and negotiable certificates of de-posit have their place in a corporateshort -term portfolio. Once the amountof excess cash available has been deter-mined, the corporate portfolio managerhas the task of selecting the desired mix-ture of quality, liquidity and safety,while striving for a satisfactory returnon excess funds.

The corporation should continuouslyappraise the objectives of its investmentportfolio in terms of the role it plays inthe overall financial policy. One mustremember that the ultimate expecteduse of the corporate excess cash will bethe principal determinant in balancingrisk and return. One must conclude thatthe most effective policies for the short -term portfolio require the best of man-agement's financial planning talents.


Clerical Work MeasurementTechniques i n a Control System

MECHANIZATION IS NOT THE ONLY ANSWER TO RISING OFFICE COST

By Charles D. Winslow

Many of us have been confronted, atone time or another, with some of thefollowing problems:

1. Presenting budgets to others, or re-viewing ones prepared by others,which call for an increase in per-sonnel

2. Requesting or reviewing overtimeauthorizations

3. Evaluating the payoffs or costs ofproposed methods or procedurechanges

Clerical Work Measurement is ameans of controlling clerical costs. Sim-ply stated, it is a technique to measurethe effectiveness of costs spent on cleri-cal employees. Clerical Work Measure-ment recognizes several ways to reduceor control clerical costs.

O R G A N I ZA TI O N . Improvements in theorganization are accomplished by re-viewing the organizational structure andclarifying functions to eliminate dupli-cations of responsibility, combining du-ties to increase flexibility, improving theoffice layout to correspond as closely aspossible to the flow of work, and estab-lishing realistic ratios of supervision topersonnel being supervised.

SYSTEMS & P ROCEDUR ES. The objec-tive is to simplify the flow of paperwork,avoid over - fragmentation in the flow,eliminate all unnecessary tasks andshorten the work cycle.

Many a company goes through thesetwo phases and stops. However, unless

we go one step further and measure thework, we cannot be certain that we havethe most efficient operation, nor do wehave the tools necessary to analyze someof the problems previously mentioned.

Work Measurement

Work measurement has two compo-nents—a measure of the volume ofwork, and a measure of the time re-quired to complete the work. The timerequired to complete the work can beexpressed in two ways. For example,typing an invoice may require two min-utes or it may be stated as so manyunits that should be processed in an

CHARLES D. WINSLOWColumbus Chapter (Cleveland 1963),is a practicing MTM Association in-structor. He is a Manager in the Ad-ministrative Services Division of Ar-thur Andersen 6 Co., and is in chargeof these activities at the firm's Colum-bus, Ohio offices. Mr. Winslow, aCPA, holds an A.B. degree from Dart-mouth College and an M.B.A. degreefrom the University of Michigan, AnnArbor, Mich.

hour. In this case, 30 invoices shouldbe processed in an hour.

The measure of volume for the workelement must furnish a good basis formeasurement and must reflect accuratelythe actual procedures and volumes in-curred. For example, in an order entrysystem, the work unit could be eitherthe customer order or the number ofline items on the order. The choice ofthe unit would depend on the averagenumber of line items per order and thevariation from that average.

Work measurement techniques canbe classified as either predeterminedstandards or actual performance stand-ards. Actual performance standards canbe either historical or current.

Predetermined time values are usedto establish standards by analyzing themotions required to perform the joband applying time values to them fromreference tables. Predetermined stand-ards are relatively inexpensive to apply.They require no pace judgment, theyare consistent between analysts and re-quire a minimum of employee interrup-tion. They require, however, extensivetraining to administer. A minute analy-sis of the motions is necessary so thatusefulness is limited to high - volume,repetitive tasks. In addition, they arenot tailor made to the company's needs,so that their accuracy is open to ques-tion by supervisors.

Historical data standards are derivedby analysis of past performance. Thismethod of setting standards is relatively


low in cost and is useful for nonroutinejobs. It creates a minimum of employeeinterruption, and is generally acceptableto supervisors. However, built -in in-efficiencies are perpetuated and adequatedata is frequently not available. Thestandards developed do not recognizepace or lost time and, therefore, they donot result in precise standards.

Work sampling, sometimes called"ratio delay," uses random observationsto determine the relative time spent onthe various work elements. Work sam-pling is relatively inexpensive and isuseful for both routine and nonroutinejobs. Standards can be established in ashort time. Little employee interruptionis experienced. The standards are easyto adjust for procedural changes. How-ever, work sampling cannot be appliedto a large number of operations becausethe number of observations requiredbecomes very large.

Work sampling standards are set bydividing the total available time intothe separate duties based on the ratioof the number of observations of eachduty to the total number of observa-tions. A pace rating factor may or maynot be introduced. If pace rating isused, the observed time multiplied bythe pace rating factor gives the correctedtime. By dividing the total number ofunits processed into the corrected time,the unit time is developed.

Batching is used to set standards bygiving employees work in small unitsand observing the time taken. Batchinghas good supervisor acceptance, elimi-nates fine detail, eliminates lost timefrom the data collected, averages easyand difficult units, is relatively inexpen-sive to apply and provides a method ofcontinuing control after the standardshave been set. It cannot be used, how-ever, for nonroutine duties.

In the log sheet method of workmeasurement, employees record theiractivities throughout the day. Thesheets are summarized to set the timestandards. The use of log sheets requireslittle training. They provide detail abouthow all the time in a department isspent, they are applicable to nonroutineduties and they provide a means ofcontinuing control. However, they maycontain errors, either accidental or de-liberate. Employee annoyance is createdby interference of their routine, thecollection of data is time - consuming,and employees can adjust actual time tobury personal and lost time.

Time study is analysis and measure-

Table 1

LEVELING OF WORK FLOW

TypicalReceiving

Pattern

Monday 200Tuesday 40Wednesday 160Thursday 90Friday 110

ment of the work elements through theuse of a stopwatch. Time study hasbeen widely accepted in industry andresults in extremely precise standards.Standards are quickly set on simple,routine jobs. A stopwatch may create avery unfavorable employee reaction inthe office. It is costly to apply and itrequires extensive training and consid-erable pace judgment. Accuracy is opento question by supervisors.

Micromotion is used to set standardsby analyzing motion pictures of thework performed. It provides a detailedanalysis of the work, and good employee

Exhibit 1

EFFECT OF BALANCED WORKLOAD

INVOICES

500

400

300

200

100

Typical ProposedProcessing Processing

Volume Volume

200 12040 120

160 12090 120

110 120

reaction is generally experienced. It is,however, quite slow and expensive andis limited to simple manual operations.Micromotion requires pace judgment.

As indicated throughout this discus-sion, each measurement technique hasits advantages as well as its disadvan-tages. There are no hard and fast rulesin selecting techniques. Many times,combinations of the techniques areused. The important point is that thecontrol aspect of the system is wherethe emphasis generally should be placed,rather than on the mechanics of es-tablishing the rate. After the various

1 3 5 7 9 I I 13 15 17 19

DAY


work measurement techniques havebeen applied to the activities, it isnecessary to determine the performancerates for each of the work elementswhich are rated and to develop thefixed time allowances for the nonratedjobs.

Control

Now that activity rates have beenestablished, we can turn our attentionto developing a system of control andthe types of reports used to continuethe control.

The first step in establishing controlis to take the backlog of work awayfrom the employees. This accomplishestwo things. First, we now control theemployees so that the work cannot beexpanded to fill all the available time.Whenever the supervisor is not awarewhat the backlog is, and where volumesfluctuate on a day -to -day basis, the em-ployees' effort will expand and contractaccordingly (Parkinson's Law). Aboutthe only time the supervisor is aware ofa backlog is when it becomes criticaland the employees ask for help or thecustomer complains about service. It isnot uncommon for employees to processthe easy things first and leave the diffi-cult to last, when they control the back-log. When the control of the back-log is taken away from the employees,difficult conditions are highlighted andspecial action can be taken. Knowingthe backlog leads us into the next im-portant control tool — leveling the workflow.

A typical pattern for receipt of docu-ments in the mail is shown in Table 1.Monday is typically a high - volume day,in this example 200 documents. Tues-day is generally a low- volume day,shown as 40 documents in this example.Many times it is the practice of com-panies to process all of the work re-ceived each day on the same day. As canbe seen, Monday requires considerablymore work than Tuesday. By determin-ing exactly how many hours are requiredon each day, it becomes very obviousthat some work could be carried overfrom day to day, so that the sameamount of work can be performed eachday. In this example, 120 documentseach day could be processed ratherthan processing them as received. Thismeans that immediately we can reduceour capacity from 200 documents perday to 120 documents per day, a reduc-tion of forty percent.

The variation, shown in Exhibit 1,

Exhibit 2ACTIVITY REPORT WITH VARIABLE AND FIXED WORKLOADSWEEK ENDED FEBRUARY 21

PERFORMANCE HOURS REQUIREDVOLUME RATE HOURS STANDARD ACTUAL

VARIABLE WORKLOAD

Sort and File Receiversand Purchase Orders 15,000 125 120 128

Process Invoices for Payment 10,000 50 200 210

Audit Vouchers 1,250 15 83 89

403 427

FIXED WORKLOAD

Supervision 37 37Secretary 37 37Other Fixed Duties 25 25

Training, Quality Control, etc. 37 37

Special Projects

PERSONAL ALLOWANCES-HOUR/EMPLOYEE/WORKING DAY)

TOTAL HOURS REQUIRED

143 143

38 38584 608

NET AVAILABLE HOURS17 Persons @ 8 Hours Day Plus Overtime and TemporaryLess 40 Vacation, 32 Sick Leave, and 0 Loaned 600

UNACCOUNTED FOR HOURS 24

Exhibit 3ACTIVITY REPORT FOR SMALL VARIATION IN WORKLOADMONTH OF FEBRUARY

STANDARD VARIATIONS ACTUAL

HOURS FROM STANDARD HOURS

Prepare Financial Reports 135 5 140Analyze Budget Variances 726 (13) 713Prepare Statistical Supplement 500 -- 500Maintain Computer Controls 234 9 243

Prepare Monthly Journal Entries 422 (10) 412

Miscellaneous Dutues 268 15 283Supervision 158 -- 158

Total Regular Productive

Requirements 2,443 6 2,449Reliefs at k Hour /Employee/

Day Worked 153 0 153

Vacation and Sick Leave 202 (10) 192

Training and Special Projects(Detailed Attached) 58 46 104

Hours Available but not Utilized -- 27 27

Available Hours (17 People Standard

Plus 69 Overtime and 0 BorrowedLess 0 Loaned) 2,856 69 2,925


Table 2WORKLOAD CONTROL SHEET

M T W T F Total

Carry over 0 8 0 4 1 0New in 20 4 16 9 11 60Available 20 12 16 13 12 60Carry over 8 0 4 1 0 0Completed 12 12 12 12 12 60

in the number of invoices received byan accounts payable department eachday through a one -month cycle is anactual case. As can be seen, the numberof invoices received varies from ap-proximately 220 to approximately 460per day. With the rule of processingeach day's invoices on the same day,the department is staffed for a capacityof 460 invoices per day; but an averageof only 330 invoices are received eachday. If the capacity is reduced to 330invoices per day, a backlog would becarried over on some days. As can beseen, the backlog would never exceed,or even approach, one day of work; andin some cases no work would be left.

In terms of hours, the effect of level-ing might appear as shown on the

Exhibit 4

weekly workload control sheet in Table2. On Monday, twenty hours of workwould be received; but because of thereduced capacity, only twelve hourswould be completed; leaving eight hoursfor the next day. On Tuesday, fourhours would be received. As twelvehours could be processed, there wouldbe no backlog of work. On Friday after-noon, the backlog would again be de-pleted. Within the week, we wouldhave processed the same total numberof invoices and by using a controlledbacklog the manpower requirementwould be reduced by approximatelyforty percent.

Even in those companies whereeverything received today must be proc-essed today, leveling is still appropriate.

ACTIVITY REPORT FOR SMALL VARIATION IN WORKLOADANTICIPATED WEEKLY POSITION REQUIREMENTS

Instead of leveling the volume, however,the hours available are leveled. This isaccomplished by moving people fromfunction to function, based on the vol-ume requirements of the functions. Ob-viously, this flexibility requires employ-ees to be trained in multiple functions.

ReportingWe have discussed the various work

measurement techniques used to developactivity rates and the application of therates to the workload. The final successof any work measurement program,however, depends upon setting up anaccurate system to report the results ofthe program to management, so thatthey will know how well the organiza-tion is meeting the standards and theobjectives which have been set forth.Various forms of reports can be pre-pared for this purpose.

A simplified example of a weekly ac-tivity report is shown in Exhibit 2. Itseparates the variable workload fromthe fixed workload. The volumes andrates are shown for the variable duties.Auditing of vouchers is performed atfifteen per hour, requiring eighty-three

ACTIVITYHOURLY

RATEFIRST UARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER

VOLUME HOURS VOLUME HOURS VOLUME HOURS VOLUME HOURS

A 10 680 68 510 51 380 38 1,000 100

B 20 -),000 1, 0U 1 -,800 90 2,400 120 1,600 80

C

Fixed

Supervision

30

--

--

2,700

--

--

90

40

37

2,400

--

--

80

40

37

2,700

--

--

90

40

37

3,000

--

--

100

40

37

Total Workload 335 298 325 357

Vacation,Illness, Holiday

Total Requirement

40

375

40

338

80

405

48

405

Positions (Net ofPersonal Allowance) 10 9 12 12


standard hours with eighty -nine hoursactually taken.

In the fixed workload, certain activitiescannot have detailed standards devel-oped. In this case, training is necessaryonly when new employees are in thedepartment. When time is available, aquality control program can be conduct-ed. This is an area where excess hourscan be absorbed.

The net available hours are comparedto the total standard hours. Severalfactors, such as overtime, vacations, andillness can affect the available hours,so these are detailed.

The key indicator of employee utili-zation is unaccounted -for hours, whichis the difference between net availablehours and total standard hours. It isthe trend of this indicator that deter-mines when personnel changes are re-quired. For example, the policy couldbe stated that when unaccounted -forhours consistently exceed thirty-sevenhours per week, one person will be takenfrom the department.

The report in Exhibit 3 is an exampleof a monthly report for a departmentwith very little variable workload. Thenature of this department is such thatmost of the work is nonrated. Actualtime is being maintained, however, bydaily reporting. Any significant varia-

Computer Time - Sharing


stored. However, it is still a major vari-able to be considered when comparingvendors.

At a different level is reliability of theservice bureau as a business. There area great many small, undercapitalizedvendors who are struggling to stay in

tions from the standard for the monthmust be explained. This departmentalso has frequent special duties whichcannot be rated. Actual time for theseitems is reported in detail. Should theexpected volume of special duties notdevelop, steps would be taken to re-duce the staffing in the department tothe required level to perform the workthat is available.

By using the activity rates developedand the anticipated volume, it is pos-sible to determine the total man -hourrequirements for the department (seeExhibit 4) . The hourly rates multipliedby the expected volumes, together withthe fixed duties, give the total directman -hour requirements. With the ad-ditional allowances for vacations, sickleave, and personal time, the totalweekly hours required for each quarterare determined. The total hours arethen translated into the number of po-sitions required, based on an eight -hourday.

Once the proper staffing has beendetermined, job descriptions should beprepared for each position. These jobdescriptions should reflect an evenlydistributed workload. In addition, thesedescriptions help to pinpoint respon-sibility for the various duties, somethingwhich is frequently vague, both in the

business. You ought to ask yourself: willhe be in business next year? Unfortu-nately, not all of the current service bu-reaus will survive the next eighteenmonths.

Summary

Time - sharing is here to stay. For thefirst time, the business manager, or hisstaff assistant, is able to use a computer

eyes of the supervisor and of the em-ployees. Supervisors frequently do notknow all of the minor jobs in the de-partment, so the job descriptions clarifythese.

ConclusionAlthough work measurement does

offer cost- reduction benefits, it doeshave other benefits also:

1. We can expect better office disci-pline when employees know what isexpected of them and when super-visors know the status of the work.

2. We can expect better customerservice by realigning work flows,leveling work volumes, and elimi-nating nonessential activities.

3. We can equate the present costs ofoperation with alternate methodsmore factually.

4. We can provide facts for use in re-assigning employees, preparing jobdescriptions, and in determiningstaff requirements when volumefluctuates.

In summary, work measurement tech-niques provide us with the tools tohandle some of the problems whichface us in the office. We can now workwith facts instead of opinions, look atcauses instead of effects, and expectreasons instead of excuses.

directly and many businesses are findingit attractive to their needs. Some man-agers are using time - sharing with goodresults. It promises much more in thefuture. Its disadvantages, real or ima-gined, are of lesser importance, primari-ly because of the cost of experimenta-tion. However, it will be found that trialand termination, if necessary, can besmall —both in time and expense.


Accounting for Poultry Projects

THE GOAL IS TO PROVIDE THE INFORMATION BEFORE IT IS TOO LATE TO DO ANYTHING WITH IT

By Charles T. Smith, Jr.

Most farmers today continue to accountfor their poultry operations on a "cash"rather than on an "accrual" basis. Whilethis widespread use of "cash basis" ac-counting no doubt results from the ex-tremely advantageous tax benefits whichcan be legally realized therefrom, mostfarmers and integrators now realize thecrying need for determining the actualvalue of their poultry inventory and theactual profit or loss realized during a par-ticular accounting period from each typeof poultry project.

The purpose of this article is to setforth a simplified method of accountingfor poultry projects on an accrual basis.This paper is based on a thorough studyof the poultry operations of an integrat-ed feed manufacturing company. In thiscase, the company not only raised theirown poultry, they also furnished out-side growers with baby chicks, feed andsupplies. These farmers supplied theirchicken houses and their labor; and theywere paid fixed fees per bird, per poundof meat, or per dozen of eggs produced.

Cash Versus Accrual BasisAccounting

A strict or hybrid cash basis methodof accounting for poultry projects ren-ders a company's or farmer's financialstatements misleading and almost mean-ingless. Under a strict cash basis of ac-counting, it is possible to accumulatehundreds of thousands of birds withoutany inventory value. The feed and sup-plies are expensed as purchased, and thelabor and overhead are expemed as in-curred. On a strict cash basis, baby

chicks have no cost basis if they arehatched from eggs laid by the farmer'sown breeder hens.

The accrual basis of accounting forpoultry projects is the only manner inwhich a company's or farmer's financialstatements can be presented in accord-ance with generally accepted accountingprinciples, and in such a manner thatthey can be properly understood andevaluated.

Cash basis accounting never indicatesthe final profit or loss on poultry proj-ects. A hybrid system sometimes pro-vides the final profit or loss on poultryprojects after it is too late to do any-thing about it. The accrual method ofaccounting for poultry projects described

CHARLES T. SMITH, JR.

Western Carolinas Chapter (Piedmont1957), is Vice President — Finance,Henderson Advertising Agency, Inc.,Greenville, S. C. Mr. Smith holds aB.A. degree from Duke University andC.P.A. certificates from both Northand South Carolina. Prior to joiningHenderson in 1967, he was a managerin the Greenville, S. C. office of Peat,Marwick, Mitchell 6 Co. He is a pre-vious contributor to MANAGEMENTAC.cOUNTING.

in this paper will provide the informa-tion needed to evaluate the various poul-try projects while they are in process.This is extremely important since someprojects run as long as thirteen or four-teen months.

Various Techniques RequiredBecause of the many diversities in the

different types of poultry projects, it isnot possible to account for each projectin exactly the same manner. In order toproduce the information needed to prop-erly evaluate the poultry operations,individual cost records must be main-tained for each project. The accountingused for the different types of projectsmust take into consideration the varia-bles and complexities of each. In thisconnection, a few types of poultry proj-ects have been reviewed and a suitablesystem has been devised for each.

Each system automatically providesfor the valuation of inventories on theaccrual basis at actual cost. In addition,the proper matching of income and ex-pense is accomplished. The reporting isdesigned in such a manner that one canproperly evaluate both the completedand incompleted projects at the end ofeach monthly accounting period. Day -to -day information is also readily avail-able from the project records.

Broiler CostsThe accounting for broiler project

costs is relatively simple. It is merely amatter of accumulating and capitalizingall costs incurred until the birds are sold.The difference between such accumu-lated costs and the sales price of thebirds results in the profit or loss.


A ledger card should be establishedfor each broiler project. The cost of thebaby chicks, feed, medicines, and farmlabor and overhead (or producer's com-pensation, if projects are maintained onoutside farms) , etc., should be postedthereto. At the end of each accountingperiod, the inventory value will consistof the total capitalized costs on thiscard, provided they do not exceed mar-ket value.

A summary report should be preparedand reviewed by management at theend of each four -week accounting pe-riod. This report should furnish the fol-lowing information required to analyzethe broiler projects properly:

Project No.LocationNo. of birdsAge (in weeks)Accumulated costs at period endSales price -Total and per birdCost -Total and per birdProfit (loss) -Total and per bird

Turkey Growing Project CostsThe accounting for turkey growing

project costs is similar to that outlinedabove for broiler projects. The cost ofthe poults, feed, medication, grit, pro-ducer's compensation (or farm labor andoverhead if project is maintained oncompany's farm) , etc., should be postedto a ledger card established for eachproject. At the end of each accountingperiod, the inventory value will consistof the total capitalized cost of this card,provided they do not exceed marketvalue.

A report similar to the report forbroiler projects should be prepared andreviewed by management at the end ofeach four -week accounting period.

Laying Project CostsWhile accrual accounting for broiler

and turkey growing projects is rathersimple, accrual accounting for layingand breeder projects is somewhat morecomplicated. However, an effort hasbeen made to present the accrual ac-counting methods for these more com-plex projects on as simple a basis as pos-sible so that this system might be of useto farmers as well as to the more so-phisticated accountants of integratedcompanies.

We shall assume that a companymaintains commercial egg producingprojects on its own farms and that com-pany owned birds are also serviced by anumber of outside producers. Outside

producers are paid established fees forraising the pullets; and the companyfurnishes the feed, medications, etc. Atabout twenty to twenty -two weeks ofage, the pullets on these outside producers' farms are moved to laving pro-ducers' farms who are compensatedbased on the dozens of eggs producedby the flock. In determining net profit

each project should be charged with allexpense, including the producers' com-pensation, and the cost of pullets, sup-plies and feed.

The following system will provide aproper basis of accounting for these lay-ing projects.

P U L L E T S . The cost of the baby chicks,feed, grit, medicine, producer's compen-

Table 1DEPRECIATION CHART -LAYING FLOCKS

InventoryNo. of weeks Age of hens Depreciation valuehens laying (in weeks) percentage percentage*

1 23 .5 99.52 24 1.1 98.43 25 1.5 96.94 26 1.7 95.25 27 1.9 93.36 28 2.0 91.37 29 2.0 89.38 30 2.2 87 .19 31 2.2 84.9

10 32 2.2 82.711 33 2.2 80.512 34 2.2 78.313 35 2.2 76.114 36 2.2 73.915 37 2.2 71.716 38 2.1 69.617 39 2.1 67.518 40 2.1 65.419 41 2.1 63.320 42 2.1 61.221 43 2.1 59 .122 44 2.1 57.023 45 2.1 54.924 46 2.0 52.925 47 1.9 51.026 48 1.9 49.127 49 1.9 47.228 50 1.9 45.329 51 1.9 43.430 52 1.9 41.531 53 1.9 39.632 54 1.8 37.833 55 1.8 36.034 56 1.8 34.235 57 1.8 32.436 58 1.8 30.637 59 1.8 28.838 60 1.8 27.039 61 1.8 25.240 62 1.7 2-3.541 63 1.7 21.842 64 1.7 20.143 65 1.7 18.444 66 1.6 16.845 67 1.6 15.246 68 1.6 13.647 69 1.6 12.048 70 1.5 10.549 71 1.5 9.050 72 1.5 7.551 73 1.3 6.252 74 1.3 4.953 75 1.3 3.654 76 1.2 2.455 77 1.2 1.256 78 1.2 0.0

*Percentage to be applied to accumulated cost of pul lets through 22 weeks of age after de-ducting estimated salvage value of cul l hens.


sation (or farm labor and overhead, ifproject is maintained on company'sfarm), etc., incurred until the pulletsreach twenty -three weeks of age shouldbe capitalized. A separate ledger cardshould be maintained for each flock ofbirds, with a different code for each typeof expenditure.

At the end of twenty-two weeks, thecards should be closed out, and the totalcost of the pullets should be transferredto a laying project. Even though pulletsmay be transferred to outside layingproducers' farms before they reachtwenty-three weeks of age, the pulletproject should not be closed out and thelaying project should not be establishedbefore the end of twenty -two weeks.

LA YI N G H E N S . For each laying project,the actual cost of the twenty -two weekold pullets is accumulated on a ledgercard. No further costs for feed, produc-er's compensation, farm labor and over-head, etc., should be capitalized sinceincome will be derived from sales ofeggs. In addition to this ledger card, twoother ledger cards will be required foreach laying project. A ledger card shouldbe established for income from egg sales.Another ledger card should be estab-lished for expenses incurred after thehens reach twenty -three weeks of age towhich the cost of feed, medicine, produc-er's compensation, farm labor and over-head and depreciation would be charged.

The twenty -two week cost of thepullets, net of estimated salvage value,must be depreciated over the income -producing life of the hens (averagesabout 56 weeks) . In this connection, a

depreciation chart for laying flocks(Table 1) has been developed for usein depreciating the cost of the hens forboth reporting and inventory valuationpurposes.

This chart was developed by summa-rizing the various grades of eggs pro-duced, by individual weeks, by repre-sentative laying flocks and obtaining atotal retail sales value of such eggs, byindividual weeks, using the average salesprice of eggs for the year. Percentages ofthe weekly sales value to the total salesvalue were computed.

By computing the depreciation per-centages in this manner, proper recog-nition is given to the lower value ofsmaller size and lower quality eggs pro-duced in the early and late laying stages.This would not be true if only the quan-tity of eggs produced were considered.

This type of chart should be revisedat least once, and preferably twice, eachyear using the current year's averagemarket prices and several representativelaying projects.

The "inventory value percentage"noted on the chart should be applied tothe twenty -two week cost of the pulletsafter deducting the estimated salvagevalue of the cull hens ($30 per bird isused in this example) computed usingan average mortality factor (a 15% mor-tality factor is used in this example) .Let us assume that the twenty-two weekcost of 5,000 pullets was $6,000 andthey are now 50 weeks of age. The in-ventory value would be $3,555, com-puted as follows:

Exhibit 1

SUMMARY OF LAYING (OR BREEDER) PROJECTS

50

Cost of pul lets $6,000Less salvage value of 5,100 cul l

hens (15% mortal i ty factorused) (ad $.30 1,530

$4,470

Inventory value percentage at50 weeks of age per chart(Table 1) 45.3%

$2,025Add salvage value

computed above 1,530

Inventory value $3,555

The depreciation expense would berecorded at the end of each accountingperiod. A four -week accounting periodis recommended. The debit would beposted to the laying project expenseledger card; and the credit would beposted to the "twenty-two week cost"ledger card.

C O ST R E P O R T I N G . A detail cost reportshould be prepared at the end of eachfour -week period, summarizing the indi-vidual project inventory values and prof-it or loss for the current period andtotal to date. A report similar to theone presented in Exhibit 1 will providethe information needed in this area.

In order to properly match incomeand expense, it will be necessary to ac-crue receivables for eggs sold but notpaid for at the end of each accountingperiod rather than recording them on acash basis. In addition, the outside pro-ducer's compensation and profit- sharing(if any) must be accrued at the end ofeach accounting period.

As a general rule, companies have lit-tle control over the eggs produced bylaying flocks on producers' farms. "Hen-

Project No. LocationNo.

of HensAge

(in Weeks)ActualCost (1)

LessDepreciation

InventoryValue

E or Poul[ SalesTotal ExpensesIncl. De ,n Net Profit Loss

CurrentPeriod (2)

Totalto Date (3)

CurrentPeriod

Totalto Date

CurrentPeriod

Totalto date

TOTAL

Notes:(1) Twenty -two weeks cost of laying hens, twenty -eight week cost of breeder hens, and thirty -week cost of turkey breeders.(2) The value of the commercial (or hatching) egg inventory at the end of the accounting period less the value of such inventory at the

beginning of the accounting period should be included herein to reflect accurately the net profit (or loss) of each project.(3) The "Total to Date" figure taken from the project ledger card should be increased by the full amount of the ending inventory.


day production" charts should be pre-pared on each outside producer's flock.These charts should be prepared on acurrent basis and reviewed both as tomortality and egg production. Such re-views by experienced poultrymen canindicate potential problems of disease,smothering, etc. In addition, internalcontrol over eggs produced would bematerially strengthened since major va-riances from the standard productioncurve pre - printed on the chart will indi-cate where investigations are necessary.

Turkey Breeder Project Costs

We shall assume that a company'sturkey breeder projects consist of 1,000to 2,000 hens and about 100 toms, andthat these turkeys are removed from thecompany's regular growing projects atabout 20 -22 weeks. The hens start lay-ing at about 30 weeks and lay for fourto five months after which the turkeysare sold for about $ 3.00 each. The com-pany pays a hatching fee of five centsper egg set and either sells the day oldpoults or places them on company grow-ing projects.

THIRTY -WEEK COST. The accountingfor turkey breeder project costs is some-what similar to accounting for layingproject costs. A ledger card should beestablished for each breeder project. Allcosts for the hens, toms, feed, supplies,grit, medicine, etc. incurred until thehens become thirty weeks of age shouldbe capitalized. The hens and toms trans-ferred from growing projects should be

transferred at the actual average cost ofthe birds per such projects' cost records.

After the hens reach thirty weeks ofage, no further costs should be capital-ized since the hens will be producinghatching eggs. We assume that produc-ers are compensated at the rate of $ 3.00per hen started and that this entire$ 3.00 payment is made when the tur-keys are sold. Since the salvage value ofeach cull hen is also about $ 3.00, wesuggest that no accruals for producers'compensation be made on the projectsand that no salvage value be consideredin depreciating the laying hens. If itwere not for the average mortality fac-tor of 10 %, the income received fromthe sale of cull hens would almost ex-actly offset the expense for producers'compensation. The amount involved(about $300 per 1,000 birds) is toosmall to consider.

In addition to the ledger card dis-cussed in the preceding paragraph, twoother ledger cards will be required foreach project: (a) for income from thesale of hatching eggs and /or poults and(b) for expenses incurred after the hensreach thirty weeks of age, to which thecost of feed, supplies, medicine, depre-ciation, etc. would be charged.

BREEDER HENS. The thirty-week costof the laying hens must be depreciatedover the income producing life of thehens (averages about 20 weeks) . In thisconnection, a depreciation chart for tur-key breeder flocks should be used in de-preciating the cost of the hens for both

Table 2DEPRECIATION CHART- TURKEY BREEDER FLOCKS

InventoryNo. of weeks Age of hens Depreciation valuehens laying (in weeks) percentage percentage

1 312 323 334 345 356 367 378 389 39

10 4011 4112 4213 4314 4415 4516 4617 4718 4819 4920 50

7 937 867 796 736 676 615 565 515 465 415 365 315 265 214 174 134 93 63 33 0

reporting and inventory valuation pur-poses. ( See Table 2.)1

COST REPORTING. The hatching eggs orpoults sold but not paid for must be ac-crued at the end of each accountingperiod. Poults placed on companyowned growing projects should be trans-ferred from the breeder projects to thegrowing projects at actual cost. Since theactual cost per poult cannot be com-puted on each breeder project until ithas been completed, we suggest that a"standard actual cost" based on pastrepresentative breeder project costs beused for this purpose. Such standardshould be adjusted periodically as actualcosts change.

A summary report similar to Exhibit1 should be prepared and reviewed bymanagement at the end of each four -week accounting period.

Breeder Hen Project Costs

The accounting for breeder hen proj-ect costs is very similar to the accountingfor turkey breeder projects as outlinedabove. All costs for the birds, feed,medication, supplies, labor, etc, shouldbe capitalized through twenty-eightweeks of age. After that time, no furthercosts should be capitalized since thehens will be producing hatching eggs.Two other ledger cards will be requiredfor each project, and these will be main-tained in the same manner as for turkeybreeder projects.

The twenty- eight -week cost of thebreeder hens, less the estimated salvagevalue of the cull hens, should be depre-ciated over thirty-two weeks, the averageincome producing life of the hens. Forthis purpose, a depreciation chart shouldbe developed.

The cost reporting for breeder henprojects should be handled in the samemanner and on the same report (Ex-hibit 1) as for the turkey breeder proj-ects.

Commercial and Hatching Eggs

The value of the commercial andhatching egg inventories must be con-sidered at the end of each accountingperiod if the laying hen and breederproject reports are to present the oper-ating results of each farm and eachproject accurately. Such eggs should bevalued at market value less the cost ofmarketing.

1 The author may be contacted directly for informa-tion regarding a similar depreciation chart for"Breeder Hens."


Analyzing Farm Operations

The Poultry Sales and Cost of Salesreport (Exhibit 2) should be preparedat the end of each four -week accountingperiod, supplemented by the summariesof individual project results. These re-ports furnish management with the in-formation required to properly analyzeand evaluate the farming operations ona current basis. The summaries of indi-vidual project results have been designedin such a manner that average unit costsand sales prices can be easily computedif such information is desired.

LE D GE R C A RD C OS T C O DE S . Followingis a listing of the cost elements whichshould be considered:

Code Cost element01 Original cost of baby chicks, pullets,

poults, etc. (the original number ofbirds should be noted)

02 Actual cost of feed (number of tonsshould be noted)

03 Cost of supplies04 Cost of grit05 Cost of medicine06 Producer's compensation07 Insurance08 Depreciation09 Other (explairQ

A L L O C A T I N G O V E R H E A D . Throughoutthis paper, it has been noted that pro-ducer's compensation should be chargedto the various poultry projects if theyare being serviced by outside producersand that company labor and overhead

Exhibit 2POULTRY SALES AND COST OF SALES

S a l e s :Co mm erc ia l eg gsHa tc h in g eg g sP o u l t sBaby c h i c k sB r o i l e r sTu rk ey sC u l l h en s and t u r k e y s

Co s t of s a l e s :Beg in n in g in v e n t o r yPu r c h a s e s - fe edPu r ch a s e s - baby c h i c k s , p o u l t s , e t c .Farm ex p e n s es a l l o c a t e d to p r o j e c t s ( s e e * )Le s s en d in g in v e n t o r y

Th e o r e t i c a l c o s t of s a l e sFarm ex p e n s es n o t a l l o c a t e d to p r o j e c t s

Ac t u a l c o s t of s a l e s

Farm ex p e n s e s :O u t s id e p r o d u c e r s ' co m p en s a t io nS a l a r i e s and wagesPe n s io n p la nD e p r e c i a t i o n

B u i ld i n g sFarm eq u ip m en tAu to m o t ive eq u ip m en t

R e p a i r sG a s o l in e and o i lL ig h t and powerFu e l o i lP a y r o l l t a x e sTax es and l i c e n s e sGroup h e a l t h in s u r a n c eGe n e r a l i n s u r a n c eS u p p l i e sF e r t i l i z e r and s eedTe lep h o n eM is c e l l a n e o u sD e p r e c i a t i o n of l a y e r and b r e e d e r f l o c k s

should be charged to the projects if the}are maintained on company -ownedfarms. Labor costs should be allocatedto the individual projects based onactual or estimated labor hours charged.

All expenses which can be attributedto specific projects should be chargedthereto. The remaining overhead itemscan then be allocated to the poultryprojects based on a percentage of directlabor. The Poultry Sales and Cost ofSales report ( Exhibit 2) has been de-signed in such a manner that manage-ment can determine the accuracy ofsuch overhead allocations at the end ofeach accounting period.

Continued on page 54

C u r re n t Pe r io d Year to DateTh is Over (Un d er) Over (Un d er) Th i s Over (Un d er) Over (Un d er)Year P r i o r Year Bu d ge t Ye ar P r i o r Year Bu d ge t

To t a l fa rm ex p en s es - -Le s s fa rm ex p e n s es a l l o c a t e d to p r o j e c t sFarm ex p en s es n o t a l l o c a t e d to p r o j e c t s $

( s e e ab o ve)

* R e p r es e n t s o ve rh e ad a l l o c a t i o n s ch a rg ed to p o u l t r y l e d g e r c a r d s on an e s t im a t e d b a s i s .


Motor FreightManagement Reporting

A CLOSE LOOK AT THE REPORTS OF EACH DEPARTMENT

By Jesse W. Atwood

The key to management reporting inour company is the assignment of allcosts and revenue on a responsibilitybasis.

Our organization is divided, roughly,into three divisions: Division 1, Opera-tions, both over - the -road and terminal,maintenance, safety, industrial relations,etc.; Division 2, Sales and Traffic, andDivision 3, Accounting, EDP, Finance,and Cost Controls. The operations ofthe company, including terminal oper-ations, maintenance, industrial relations,etc., have executive heads who report tothe president.

Salesmen report through district salesmanagers, divisional sales managers,and ultimately to the director of sales.We also have directors of governmentand military sales, Canadian sales, mar-ket research, and national account sales,who report to the director of sales. TheAccounting, EDP, Finance, and CostControl are under the supervision of thesecretary- treasurer.

The operation of our company isdivided into two types. One is theIntra -South operation and the other isthe East -South operation. As a result,sales and operations functions are di-vided into Northern and Southern divi-sions. At the top level there is a directorof sales and a director of operations towhich both the Northern and Southerndivisions report.

In 1960, our company constructed alarge consolidated terminal in Charlotte


which serves as a break -bulk point forfreight moving both southbound andeastbound. In addition, this terminalserves the industrial areas of Gastoniaand Charlotte. The company has alsoconstructed a large maintenance shop inCharlotte. This consolidated facility isthe hub of our complete operation, andit is tied to the outlying points with acommunication system of teletype andvoice telephone circuits operating fulltime.

Management ReportingManagement reporting is best ex-

plained by a close look at the reports ofeach department.

COST CONTROLS. Budgets are preparedby Cost Controls for all departmentsin the company beginning in Novemberof each year when an estimate of busi-ness for the coming year is submittedby the Sales Department. From thisand other information, a projected in-come and expense statement is madeand a budget established. The budget

JESSE W. ATWOOD

Charlotte Chapter 1965, is Director ofData Processing, Akers Motor Lines,Inc., Gastonia, N.C. Mr. Atnvood re-ceived a Certificate in Data Processingfrom Data Processing ManagementAssociation and a Certificate in Busi-ness Administration from the Univer-sity of North Carolina.

allowance for each expense item is basedon the item which created the expense.

After the projected income and ex-pense statement and budget have beenestablished, meetings are held with eachexecutive and his staff to review thefigures to determine if they are realistic.If the figures are rejected, the executivemust give his reasons why he can-not perform within the figures whichhave been established. After these fac-tors have been weighed, it is determinedwhether or not the reasons are justified.If they are, a revised basis is set up forthe particular expense involved and theexecutive responsible for it is given anew budget. He is expected to operatewithin the basis which has been estab-lished for the items of expense underhis control.

To keep the executive appraised ofhis position with regard to the forecast,he is given a budget report each monthwhich reflects all the expenses for whichhe is responsible, the budget allowance,and actual expenses incurred, and towhat extent he is over or under hisbudget allowance for each expense item.

We give operating personnel eachweek and each month a ComparativeStatement of Expenses and Statisticsfor each terminal location. This state-ment reflects various items such as totallabor cost per hundredweight, platformlabor cost and production, and pick -upand delivery labor cost and production.This is a very comprehensive guidelinefor the terminal managers, and thevwatch it very closely to keep their

53

terminals operating profitably and effi-ciently. Of course, the operating exec-utives also use this information in spot-ting terminals which seem to be gettinginto trouble.

M A I N T E N A N C E . The maintenance de-partment is provided with reports whichgive a breakdown by individual units ofthe cost as to parts, labor, and outsiderepairs. It also receives reports that re-flect unit repairs both as to dollaramount and cost per mile as well asfuel gallons and M.P.G. These figuresare provided by both current month andlife - to-date, and YTD in the case offuel. These reports are also furnishedwith the same information by type ofequipment grouped by date placed inservice.

O P E R A T I O N S . Some of the reports fur-nished Operations have already beencovered, including budgets and com-parative expenses. In addition to thesereports, they are provided with othermanagement reports:1. Point -to -Point Traffic Analysis re-

port shows shipments, weight andrevenue per month by terminal forboth outbound and inbound traffic.The detail point -to -point informa-tion from which this report is com-piled is sent to Market Research foranalysis. The report is also run forboth volume and LTL each quarter.

2. Analysis of Shipments Handledshows shipments, weight and reve-nue by weight groupings.

3. Over - the -Road Penalty Pay reportsare provided weekly and monthlyon this cost which is coded into thevarious charges such as breakdowns,layovers, etc.

Poultry Accounting(Continued from page 52)

Summary

Very little information has been pub-lished with respect to accounting forpoultry projects. It is hoped that thispaper will make some contribution tothe financial management of companies

4. Commodity Reports are providedfor ICC reporting purposes, as wellas for our own information.

5. Empty Miles Report provides emptymile dispatches for determination ofequipment utilization and balanceproblems.

Standards have been established foreach of our terminals by the DistrictOperations Supervisors and TerminalSupervisors. These standards are usedby management in conjunction withweekly operating reports to appraise theoperating performance of each terminalweekly. At the end of the month, eachterminal manager is provided with amonthly operations report so that hemight compare his performance withprevious months and year -to -date.

SALES AND M A R K E T R E S E A R C H . Manyof the reports provided for Operationsare also provided for Sales and MarketResearch, since balance and cost are ofvital interest to Sales. Sales and tonnagereports are also provided. They showthe current month's tonnage, previousmonth's tonnage, current year -to -datetonnage, same month previous year,and previous year accumulated tonnage.These reports are issued by salesmen, byterminal, national accounts, and specialaccounts to the persons concerned. Theygive each salesman a ready reference ofhis accounts and assist him in planninghis sales efforts. The analysis and com-parison of sales information is becom-ing increasingly important at all levelsof motor carrier management.

TR A F F I C . Many of the reports alreadycovered are also provided for Traffic. Inaddition, reports on the Southern MotorCarriers Rate Conference, Continuous

and farmers with large or medium sizedpoultry operations. It is doubtful thatthe cost of a detailed system of this typecan be justified in smaller poultry op-erations.

Accounting for poultry projects on anaccrual basis enables management toevaluate properly the performance of thevarious projects in progress. The inven-

Traffic Study, Reciprocity Traffic, andan ICC Annual Report of CommodityStatistics are provided.

C L A I M S . An automated system hasbeen developed for the Claims Depart-ment, which acknowledges and docu-ments all claims received, and writesthe checks for approved claims. By-products of this system provide claimsstatistics and outstanding claims by agegroups, also paid claims by cause, ter-minal, container, weight, amount, andcommodity groupings. These reportsare used by terminals, operations super-visors, claims department, etc., and havebeen an asset to our claims program.

A D M I N I S TR A T I V E SE R V IC E S . In addi-tion to the previously mentioned re-ports, we also provide accounts receiv-able reports, payrolls and related reports,health, welfare, and pension reports,depreciation reports, interline payableand receivables statements, fuel reports,general ledger, and company car expensereports.

In 1963, Akers purchased a UNIVAC1004 computer, and in 1965 it wasmodified to a 1005 with paper tapeinput. Several of the reports coveredin this article are produced as a resultof tape input to the computer, and theremainder by card input.

ConclusionMotor Freight Management Report-

ing has to be tailored to the needs ofthe individual company, as requirementsvary in each company. The system de-veloped at our company has provensuccessful; however, we are constantlystriving to improve our managementreporting.

tory valuation techniques conform togenerally accepted accounting principlesand, therefore, are acceptable for bothinternal and external reporting purposes.The analytical reports enable decisionsto be made as to future courses of actionon the basis of reliable cost informationand realistic projections of alternativesthat present themselves.


Holding Gains and Losseson Executory Contracts

IF CURRENT COST IS USED IN VALUING ASSETS, THE COMPUTATIONS SHOULD BE EXTENDED TOINCLUDED EXECUTORY CONTRACTS

By Joseph F. Wojdak

Measures of holding gains and lossesmay be improved, or further refined,by firms that have executory contractsthat contain established prices. Thispaper explains why this improvementis possible, and illustrates how it maybe accomplished. The term "executorycontracts" is to be interpreted as re-ferring to executory contracts that con-tain fixed prices, or formulas for fixingprices, which can be objectively em-ployed in the computation of holdinggains and losses.

No attempt will be made to arguethe advantages or disadvantages of his-torical cost versus current cost. Thisquestion has been adequately discussedelsewhere in the literature. Rather, theposition is taken, that if current cost isused in valuing assets, and holdinggains and losses are computed, a refine-ment or improvement in the computa-tion is possible. This refinement takesthe form of extending the holding gainand loss computation to executory con-tracts. The result of this extension is amore comprehensive and more usefulcomputation.

Holding Gains and Losses

In connection with the use of currentcost for valuing resources or assets of afirm, holding gains and losses arise whenassets are purchased by a firm and heldduring periods of changes in their spe-

cific prices' above or below historicalcosts. The objective in reporting hold-ing gains and losses is to separate, with-in a fiscal period, profits and losses aris-ing through the use of assets, from prof-its and losses resulting from the holdingof assets.

For external financial reporting pur-poses, it is not presently consideredgenerally accepted practice to value as-sets at current cost, and thereby reflectholding gains and losses. Therefore,]folding gains and losses are presentlycomputed for internal reporting pur-poses only.

Executory Contracts

An executory contract is a contract

is Assistant Professor of Accounting,The Pennsylvania State , University,University Park, Pa. Professor Woi-dak, a CPA, holds B.S. and M.B.A.degrees from University of Scrantonand a Ph.D. degree from LouisianaState University. His articles have ap-peared in accounting periodicals.

that is yet to be performed, or onewherein a party binds himself to do,or not to do, a particular thing. Anexecuted contract, on the other hand,is one in which nothing remains to beaccomplished by either of the parties, orone in which the object of the agree-ment is performed and everything thatwas to be done, according to the termsof the contract or agreement, is done. Acontract may be partly executed andpartly executory, and may be executoryas to one party and executed as to an-other. Therefore, the term executorycontracts refers to contracts or agree-ments under which performance is notcomplete by one or more of the con-tracting parties.

Contracts are made frequently andhave become such an integral part ofthe day -to -day operations of businessenterprises, that their large numbers anddollar values are often unnoticed. Onewriter has very aptly described themodern day corporation as a "bundleof contracts." 2 This bundle of contractsincludes contracts, both oral and writ-ten, for the purchase and sale of goodsand services, contracts for the lease of

1 This definition of holding gains and losses is incontrast to that used by E. U. Edwards and Phil ipW. Bell in, The Theory and Measurement ofBusiness Income, University of California Press,Berkeley and Los Angeles, 1967, pp. 235, 276. Theydefine holding gains and losses to also includegains and losses from changes in the general pricelevel.2 Pearson Hunt, Charles M. Williams, and GordonDonaldson, Basic Business Finance: Text andCases, Richard D. Irwin Inc., Homewood, Ill.,1961, p. 37.


both real and personal property, em-ployment contracts, bond contracts, andall the other myriad types and varietiesof contracts that will be found to be inforce in any dynamic enterprise. Thesecontracts can cover any period rangingfrom a few short minutes to the entirelife of the corporation. In many casesthese executory contracts can involvematerial dollar amounts. For a particularfirm, large numbers of these contractscan be executory in whole or in part atany given moment.

Current Practice and Principles

To date, holding gains and losseshave not been computed on executorycontracts. Perhaps, this is because exec-utory contracts are not recognized infinancial statements as assets and lia-bilities, according to generally acceptedaccounting principles. A specific casein point is accounting for leases:

"The question of whether assets andliabilities should be recorded in con-nection with leases of this type is, there-fore, part of the larger issue of whetherthe rights and obligations that existunder executory contracts in general(e.g., purchase commitments and em-ployment contracts) give rise to assetsand liabilities which should be re-corded."

"The rights and obligations related tounperformed portions of executory con-tracts are not recognized as assets andliabilities in financial statements undergenerally accepted accounting principlesas presently understood. Generally ac-cepted accounting principles requiredisclosure of the rights and obligationsunder executory contracts in separateschedules or notes to the financial state-ments if the omission of this informa-tion would tend to make financial state-ments misleading." 3

These principles may be somewhatinvalidated by the fact that many leasesare currently capitalized in financialstatements as assets and liabilities. Inthe controversy over lease capitalization,with one exception, writers fail to dealeffectively with the executory contractissue.4

8 Accounting Principles Board, Re¢orting of Leasesin Financial Statements of Lessee, Opinion No. 5,American Institute of Certified Public Accountants,New York, September 1965, p. 30.

1 The one exception is Professor Mvers in Account-ing Research Study No. 4. He takes the positionthat under the type of lease contract which he sug-gests should be capitalized (financial type lease)substantial )erformance has taken place and, there-fore, these eases are no longer executory contracts.

Generally accepted accounting prin-ciples permit the recognition of holdinglosses on purchase contracts:

"Accrued net losses on firm purchasecommitments for goods for inventorylosses should, if material, be recognizedin the accounts and the amounts there-of separately disclosed in financial state -ments."5

It should be noted that purchasecontracts are not considered to be assetsand liabilities in financial statementsbecause they are executory contracts. Inspite of this fact, -it is permissible torecord holding losses on purchase con-tracts in financial statements. Holdinggains are not similarly recognized infinancial statements.

Theoretical Support for theRefinement

If executory contracts, in which pricesare fixed, or which contain formulas forfixing prices, are ignored in the compu-tation of holding gains and losses, theholding gain or loss may be reflected inthe wrong period. In other words, theholding gain or loss may be reflectedin some period after the asset is re-corded for accounting purposes, ratherthan in the period in which the pricechange and, hence, the holding gain orloss occurred. In terms of the objectiveof the holding gain or loss computation,there does not seem to be any compel-ling reason why a holding gain or losson any executory contract, which canbe computed with a reasonable degreeof objectivity, should not be reflectedin the period in which the price changeoccurs. In the case of many executorycontracts, this recognition can takeplace in a period prior to that in whichthe related asset is recorded in the ac-counts.

In studying the realization concept,the 1964 Concepts and Standards Re-search Study Committee stated, withrespect to holding gains and losses, that:11 .. the effect of changes in value ofall assets, other than goodwill, that canbe supported by adequate evidence berecorded in the accounts."

"Holding gains and losses representchanges, over a time period, in valuesof assets and liabilities held during thatperiod."

"Gains and losses from price changes

5 Accounting Research Bulletin No. 43, AmericanInstitute of Certified Public Accountants, NewYork, 1961, p. 34.

would be recognized in the period whenthe change in value occurs, rather thanin the period when the asset is sold." 6

The addition of holding gains andlosses on executory contracts to otherholding gains and losses does not appearto violate any of the preceding state-ments. Certainly, the fixing of the pricein the contract provides an objectivebasis for the computation. The fixedprice should be adequate evidence tosupport a change in value, if subsequentcurrent values are available.

It might be argued that the defini-tions of the terns assets and liabilities,in the preceding quotation, act as con -straints in recognizing holding gainsand losses. In other words, because ex-ecutory contracts are not considered tobe assets and liabilities, according togenerally accepted accounting principles,holding gains and losses should not becomputed on them. Several points arerelevant to this argument. For example,the computation of holding gains andlosses is itself outside the realm of gen-erally accepted accounting principles.Furthermore, if the "future service po-tential" concept of assets is used, exec-utory contracts may even qualify asassets and liabilities which should bereflected in financial statements.

An Example— Purchase Contractsfor Inventory

At any given moment many firmswill have outstanding commitments topurchase inventory. There is also a note-worthy trend toward increased use oflong -term contract buying for inven-tory.7 Hence, the dollar amount ofholding gains and losses on purchasecontracts may be significant.

To permit an objective determinationof holding gain or loss, it is preferablethat prices and quantities be fixed inthe purchase contract. In fact, stabilityof price and assurance of supply for theduration of the contract are among theprimary advantages of buying underlong -term purchase contracts.

A numerical example can be used toillustrate how a holding gain or loss ona purchase contract normally occurs.For purposes of discussion, assume that

9 1964 Concepts and Standards Study Committee —The Realization Concept, "The Realization Con-cept,' The Accounting Review, April 1965, pp.312, 318 -319.

r A recent survey of more than 200 purchasing ex-ecutives from 21 different industries, reported that95% of the executives indicated they used long-term buying contracts. Further, contract buying hasnearly doubled in the ?ast five years. See JohnGreenberg, "More P.A. s Turn to Contract uy-ing," Purchasing Magazine, February 23, 1967, pp.46 -49.


on January 1, 1966, 50 units of inven-tory were purchased by Sample Com-pany under a contract in which theprice was fixed at $1 per unit. The cur-rent cost of the inventory at the end of1966 is $60 and when the inventoryis delivered on July 1, 1967, its currentcost was $70. At the end of 1967 thecurrent cost was $75 and when the in-ventory was sold by Sample Companyon March 31, 1968 for $100, its cur-rent cost was $85. This information isshown in Table 1.

It can be seen in Table 1 that con-ventional income reporting (using his-torical cost) would reflect an operatinggross profit of $50 in 1968 when theinventory was sold. However, the ad-vocates of current cost would maintainthat at the end of 1967 there was again from holding the inventory of $25.Further, during 1968, there was a hold-ing gain of $10 and a gain from sale ofthe inventory of $15.

Some writers distinguish betweenrealized and unrealized holding gainsand losses." Thus, some may proposethat the $25 holding gain in this illus-tration be completely ignored in finan-cial statements until realized throughthe use of the inventory in productionand other operating activities. Thisgroup would not recognize the $25 hold-ing gain until 1968.

Others feel "no useful purpose isserved by delaying recognition of hold-ing gains and losses until realized. "aFurthermore, the 1964 Concepts andStandards Research Study Committee,in studying the realization concept,unanimously recommended that hold-ing gains and losses be recognized inthe accounts, regardless of whetherthey are realized or unrealized.10 Ac-cordingly, the $25 holding gain in theillustration is properly recognized in1967.

In the computation of holding gainsand losses, in the example being dis-cussed, recognition should be given tothe fact that the price of the inventorywas fixed by contract in 1966 at $50.Therefore, a holding gain accrued dur-ing the year, since the current price was$60 at December 31, 1966.

" Edgar O. Edwards and Philip W. Bell, op. cit.,pp. 111.115.

"Robert T . Sprouse and Maurice Moonitz, A Ten-tative Set of Broad Accounting Principles for Busi-ness Enterprises, Accounting Research Study No.3, American Institute of Certi fied Public Account-ants, New York, 1962, p. 17.

10 1964 Concepts and Standards Research StudyCommittee —The Realization Concept, op. cit., pp.319, 321 -22.

Table 1TRANSACTIONS DATA FOR PURCHASE CONTRACT

1966

Date: Jan. 1

Current cost $50

Transaction: Signedpurchasecontract -price $50

Profit using:Historical cost: — 0

—

Current cost:Operating income — 0

—

Holding gain — 0—

Current cost andrecognizing executorycontracts:

Operating income —0—Holding gain $10

Admittedly, the merchandise was notdelivered until July 1, 1968 and wasnot available for use by the firm untilthat time. However, the holding gaincomputation attempts to distinguish in-come derived by holding assets fromthat derived through use of assets inoperations. In addition, as modified inthis discussion, the computation alsoattempts to distinguish income derivedfrom holding rights to receive assets atprices different than the current costprices, from income derived throughuse of assets in operations.

Thus, a holding gain accrued to thefirm during 1966 in the amount of $10,since the price change took place dur-ing that period. Failure to recognizethis $10 holding gain results in itsrecognition being improperly deferredto 1967 or 1968.

Methods for Implementingthe Refinement

There are at least two ways in whichthe refinement or improvement in thecomputation of holding gains and lossescan be implemented, i.e., by capitaliza-tion of the executory contract, or by aspecific adjusting entry at the end of aperiod.

CAPITALIZING EXECUTORY CONTRACTS.

If executory contracts were capitalizedin the accounts, at the date the contractwas negotiated or signed, holding gainsand losses could be computed on thesecontracts in the same manner as onany other asset. However, with the ex-ception of stock subscription contracts

1967 1968

Dec. 31 July 1 Jan. 1 Mar. 31

$60 $70 $75 $85

(none) Delivery (none) Sale ofof inventoryinventory at $100

—0— $50

—0— $15

$25 $10

—0— $15$15 $10

and lease contracts, which can be con-sidered to be installment purchases ofproperty, generally accepted accountingprinciples do not permit recording ofexecutory contracts in the accounts.Thus, this procedure for implementingthe refinement may not be a particularlyattractive alternative to some. However,many are beginning to critically examinegenerally accepted accounting principleswith respect to executory contracts, es-pecially since it is now considered ac-ceptable practice to capitalize somelease contracts. Hence, the possibilityof achieving the proposed refinementin the computation of holding gainsand losses by this means is greatly im-proved.

SPECIFIC ADJUSTING ENTRY. As men-tioned previously, generally accepted ac-counting principles permit such an ad-justment in the case of holding losseson purchase contracts for inventory.This type of adjustment is permitted,despite the fact that purchase commit-ments are not considered to be assetsand liabilities, according to generallyaccepted accounting principles. Per-haps, similar adjustments could be madeto recognize holding gains, as well aslosses on purchase contracts and holdinggains and losses on other types of ex-ecutory contracts.

There are at least two different pointsin time at which this adjustment mightbe made. The first point would be atthe close of the first period followingthe negotiation or signing of the con-tract. The holding gain or loss would

MANAGEMENT ACCOUNTING /J ANUARY196957

be computed for the span of time fromnegotiation to close of the period. Incases where cancellation is feared, thisprocedure might be objected to on thegrounds that the possibility of the con-tract being cancelled is not precludedby the fact that the price of the con-tract is fixed. In the event of cancella-tion, part or all of the recorded holdinggain or loss may never arise under thecontract. For this reason, it might beargued that perhaps holding gains andlosses should only be computed on ex-ecutory contracts which are noncancel-lable.

In the case of many contracts, theexpectation of cancellation may be veryhigh. Therefore, recognition of a hold-ing gain or loss prior to performanceunder the contract may be inadvisable.In these cases, another adjustment pro-cedure could be employed, which wouldstill represent a significant improvementin the computation and, at the sametime, give recognition to the possibilityof cancellation. In such an instance, theadjustment would not be recorded inthe accounts until the contract iswholly or partially performed, and thenonly to the extent performance hastaken place. At the time the asset isrecognized in the accounts, any holdinggain or loss which should have beenreflected in prior periods can be re-corded on that part of the contractwhich has been capitalized. This gainor loss can be reflected by charging orcrediting retained earnings or preferablysome holding gain and loss account,such as "Prior Periods Holding Gainsand Losses on Executory Contracts,"with a corresponding charge or creditto the account of the asset (or an ap-propriate asset valuation account)acquired.

Holding Gains and Losses onOther Executory Contracts

The illustration used in the previoussection was limited to a single form ofexecutory contract, i.e., purchase con-tracts. However, measures of holdinggains and losses on other types of execu-tory contracts may also be improved byapplying the same procedures suggestedfor purchase contracts.

Long -term construction contractswould seem to present an interestingand challenging opportunity to computeholding gains and losses on an execu-tory contract. A large number of con-struction contracts are of the lump -sumand unit price variety, under which con-

tractors agree to do certain specifiedthings at fixed or agreed upon prices.

Assume that on October 1, 1966 theSample Company enters into a contractwith a construction firm to have a new,all steel, plant constructed. Price of theplant is fixed by contract at $600,000and is made up of the following ele-ments: $200,000 labor, $200,000 steel,$100,000 miscellaneous materials and$100,000 profit. For the sake of sim-plicity, assume that, according to thecontract terms, when the building isone -half complete a $300,000 paymentmust be made and when fully completethe remaining $300,000 payment is due.These completion dates are June 30,1967 and June 30, 1968. By December31, 1966, the close of Sample Compa-ny's fiscal year, the building was only2 5 % complete. Therefore, Sample Com-pany has not yet been billed by thecontractor, nor have any cash paymentsbeen made. Finally, assume that duringNovember, and at approximately thetime construction began, the price ofboth labor and steel to be used in con-struction increased 10 %, thereby caus-ing the current cost of the contract torise from $600,000 to $640,000.

If the simplifying assumption is madethat labor and steel costs are incurredevenly over the term of the contract,when the contract was half complete,half the total labor and steel costs havebeen incurred. In this case, the appro-priate amount of holding gain to recog-nize would be one -half the total, or$20,000. A charge to the asset, "Con-struction in Progress" (or an appropriateasset valuation account), and a creditto "Previous Periods Holding Gains onExecutory Contracts" account wouldaccomplish the needed adjustment.

Holding Gains and LossesPresently Computed on SomeExecutory Contracts

Two other types of executory con-tracts present a somewhat different sortof problem in terms of the holding gainand loss computation: stock subscrip-tion contracts, and leases which can beconsidered installment purchases ofproperty. They are recorded as assets atthe time the contracts are entered into.

In the case of stock subscription con-tracts, stock is not issued to the sub-scriber until the subscription contracthas been fully paid. Following the tra-ditional treatment, the subscription con-tract is regarded as an asset by the cor-poration, even though it represents an

executory contract. Computation ofholding gains and losses on stock sub-scriptions receivable may be of doubtfulvalidity since a transaction in one's ownstock is a capital generating transactionrather than a revenue generating trans-action. Therefore, perhaps no holdinggain or loss accrues if the market price ofthe stock, under subscription, changes.

In the case of leases, the asset,"Rights to Leased Property," can be re-valued at current cost along with otherassets and a holding gain or loss com-puted on the lease contract. Thus, itwould seem that existing procedurespermit the computation of holdinggains and losses in some executory con-tracts. If it is permissible to include oneform of excutory contract in the holdinggain and loss computation, why not alsoinclude other forms? The only objec-tion to this proposal appears to be thatmost other executory contracts are notrecorded as assets according to generallyaccepted accounting principles. Grant-ing this objection, a specific adjustingentry can still be used to record theholding gain or loss.

Summary

In summary, the historical cost figureneeded for the holding gain and losscomputation is objectively determinablein the type of executory contract dis-cussed in this article. In addition, theextension of the holding gain and losscomputation to executory contracts ap-pears to represent a significant improve-ment or refinement in that computation.As refined, the computation is morecomprehensive, more logical and assuresthat the holding gain or loss will be re-flected in the proper period.

Several executory contracts are cur-rently being examined for possible in-clusion in financial statements as assetsand liabilities. Presently, at least twotypes of executory contracts (leases andstock subscriptions) are capitalized infinancial statements. Holding gains andlosses on one of them (leases) would beincluded in the computation as it ispresently made. Most other contractsare not presently recorded as assets inpublished financial statements. How-ever, following the generally acceptedpractice of recording holding losses onpurchase contract, perhaps a specific ad-justing entry can be used to record bothholding gains and losses on all executorycontracts which contain fixed prices forthe goods and services which are the ob-ject of the contract.


Recent Publications

BUSINESS INFO RM ATIO NPRO CESSING SYSTEMSC. Orville Elliott and Robert S. WasleyRichard D. Irwin, Inc., Homewood, Ill.60430, 1968, revised edition, 606 pp.,$12.65.This updated text provides much de-sired knowledge for both novice andpractitioner about information systemsof today. The appendix contains charac-teristics of electronic equipment and aglossary of terms which are especiallyhelpful.

A UD I T I N G & EDPGordon B. DavisAmerican Institute of Certified PublicAccountants, Inc., 666 Fifth Ave., NewYork, N.Y. 10019, 1968, 344 pp.,$12.00.This book, result of efforts of a specialAuditing EDP Task Force of the Insti-tute's members, was chaired by GordonB. Davis. It provides knowledge andguidance for auditors whose clients usecomputers for record purposes. Thisbook suggests auditing methods in un-tested areas, provides source materialsfor training and informational purposes.The presentation of technical materialis made readable through illustrations,flow charts, and an adequate glossary.

S A M P L I N G M A N U A LF O R A U D I T O R SInstitute of Internal Auditors, Inc., 6060Wall St., New York, N.Y. 10005, paper-bound, 1966, 14pp., $15.79.Originally developed by the auditing de-partment of Lockheed Aircraft Corpora-tion, this manual is designed as a work-ing tool for the internal auditor.

V A L UA T I O N OF STOCKAND WORK -IN- PROCESSThe Institute of Chartered Accountantsof Scotland, 27 Queen St., Edinburgh,

2, Scotland, paperbound, I968, 32pp.,$2.00.While study presents British practice, ithas interest to American accountants aswell.

A C C O U N T I N G METHO DSAND CO NT RO LS FO R T H ECO NSTRUCTIO N INDUSTRYHarry W. WolksteinPrentice -Hall, Inc., Englewood Cliffs,N.J. 07632, 1967, 296 pp., $19.95.This work provides a useful source -bookfor the accountant interested in special-ized problems of the construction indus-try.

R E P O R T O N C E R T A I NP E T R O L E U M I N D US T RYA C C O UN T I N G P RA C T I C E S

American Petroleum Institute, Divisionof Finance Accounting, 1271 Ave. of theAmericas, New York, N. Y. 10020,1967, paperbound, 30pp., $1.00.This booklet presents findings from asurvey of company practice in account-ing for six transactions which are usuallysignificant in interpreting financial state-ments issued by petroleum companies.

O B JECTIVES ANDST AN DA RD S O FPERF O RM ANCE INFIN AN CIA L M AN AG EM E NTErnest C. MillerAmerican Management Association,Inc., 135 W. 50th St., New York, N.Y.10020, paperbound, 1968, 109 pp.,$10.50.Issued as No. 87 in the series of AMAResearch Studies. Although this topic isnot new in theory, application is on theincrease to promote management un-derstanding and as a means of motiva-tion. Applications are most effective inimproving performance or making inno-vations in a few major or critical activi-ties. Illustrated check lists or guidesare provided.

FI NA N SI M

A Financial ManagementSimulationPaul S. Greenlaw and M. William FreyInternational Textbook Co., Box 30,College Dept., Scranton, Pa. 18515,1967, paperbound, 200pp., $3.75.This is a computer simulation designedto incorporate concepts and techniquestaught in college courses in financialmanagement.

DISCO UNTED CASH FLOWM. G. WrightMcGraw -Hill Book Co., 330 W. 42ndSt., New York, N.Y. 10036, 1968,178¢¢., $7.50.This book provides a clear exposition ofdiscounted cash flow techniques in theirapplication to capital investment deci-sions. American readers will find someof the material such as that on taxes,describes British practices which differfrom those prevailing in the U.S.

A N I N T R O D U C T I O N T OC RI T I C A L P A T H AN AL YS ISK. G. LockyerPitman Publishing Corp., 20 E. 46th St.,New York, N.Y. 10017, 1967, 134 pp.,$4.00.This is the second edition of a short andreadable work for the would -be user ofcritical path analysis techniques.

CRITICAL PATHSCH EDULINGManagement Control ThroughCPM and PERTJoseph HorowitzThe Ronald Press Co., 15 E. 26th St.,New York, N.Y. 10010, 1967, 254 pp.,$8.50.This book aims to steer a course be-tween highly technical and very elemen-tary presentation of its subject matter.


G UIDE TO CO STRED UC TI O N T H R O U G HCRIT ICA L P ATHSCH EDULING

James L. Riggs and Charles O. HeathPrentice -Hall, Inc., Englewood CliffsJs,N.J. 07632, 1966, 221¢¢., $17.50.While much has been written alreadyabout CPS, this book provides a clearexposition of the subject.

EVALUATING , SELECTING,AND CO NTRO LLING R&DPROJECTSBurton V. DeanAmerican Management Association,Inc., 135 W. 50th Street, New York,N.Y. 10020, paperbound, 1968,127 pp.,$6.00, (non- members $9.00).Issued as AMA Research Study 89, thisreport on methods used by selected com-panies comprises a useful source ofideas for the manager concerned withresearch and development.

PURCH ASING ECO NO M ICSHarold FearonAmerican Management Association,Inc., 135 W. 50th St., New York, N. Y.10020, paperbound, 1968, 16 pp., $2.00,(non - members $3.00).Issued as No. 116 in the series of AMAManagement Bulletins. This attempt tocondense a substantial portion of thesubject matter of economics into a 16page pamphlet will perhaps be useful ifit arouses interest in further study bythe reader who has no previous ac-quaintance with subject.

ENG INEERING ECO NO M YAnalysis of Capital ExpendituresGerald W. SmithIowa State University Press, Ames, Iowa50010, 1968, 652 pp., $11.95.The author uses the quantitative ap-proach to discuss the many managementand economic problems of capital ex-penditures. This text and reference bookshould prove useful to students of engi-neering, management, business, eco-nomics, and decision - making planners.

CO M PUTA TIO NALARITH M ETICLlewellyn R. SnyderMcGraw -Hill Book Co., 330 W. 42ndSt., New York, N.Y. 10036, 1968, 368pp., $6.95.Problems and answers are included. Aseparate problem book to improve thestudents' progress is available.

TO P ICS IN I NTE RM E DIA TESTATISTICAL M ETH O DST. A. BancrofttIowa State University Press, Iowa 50010,1968, volume one, 129 pp., $4.95.This text, enriched with many illustrat-ed tables, presents methods through theuse of models and other assumptionsand restrictions. Research methods arethose actually used by research scientists,biologists, public health workers and en-gineers. Stress is on application as con-trast to theoretical.

PROB LEM S INPROB ABILITY THEO RY,M ATH EM ATICALSTA TIS TI CS AND T H EO RYO F R A N DO M F U NC T I O N SW. B. Saunders Co., West WashingtonSquare, Philadelphia, Pa. 19105, 1968,481 pp., $14.50.Edited by A. A. Sveshnikov. Translatedby Scripta Technica, Inc., ConsultingEditor Bernard R. Gelbaum. Originallypublished as a textbook in 1965 in Mos-cow, this book is addressed to studentsof theory of probability and statistics.Problems with solutions range from thesimplest combinatorial probability prob-lems in finite sample spaces through in-formation theory, limit theorems andthe use of moments.

EFFECTIVEPRESENTATIO NSHow to Present Facts, Figures,and Ideas SuccessfullyEdward HodnettParker Publishing Co., Village SquareBuilding, West Nyack, N.Y. 10994,1967, 225 pp., $7.95.The author suggests rules to improvespoken or written presentation of one'sthoughts. For emphasis he suggests visu-al aid techniques.

C O M M U N I C A T I N G FO RL E A D E R S H I PGeorge de MareThe Ronald Press Co., 15 E. 26th St.,New York, N.Y. 10010, 1968, 283 pp.,$6.00.This book offers much encouragementand knowledgeable tips for effective ver-bal and written communications to va-ried audiences. Good writers are notborn but excel through much practiceand cultivation.

C R E D I T M A N U A L O FCO M M ERCIAL LAWS 1968National Association of Credit Manage-ment, 44 E. 23rd St., New York, N.Y.10010, 1968, 728¢¢., $15.00.This is a convenient and up -to -datereference work.

H O L Z M A N O N E ST A T EPLAN NINGRobert S. HolzmanPrentice -Hall, Inc., Englewood Cliffs,Js,N.J. 07632, 1967, 375¢¢., $16.00.This book aims to be an integrated studyof all elements in estate planning (em-phasis is the author's) . Attention is fo-cused upon what can be done while theowner of an estate is still alive.

DIG ES T O F WA REH O U SECO ST CALC ULAT IO NSA N D H A N D L I N GSTA ND AR DSMarketing Publications Inc., 1207 Na-tional Press Building, Washington, D.C.20004, 1967, booklet, 16 pp., $3.00.

SOCIAL SE C U R I T Y A N DPRI VAT E P EN SIO NS ATTH E CRO SSRO ADSCrisis or Compromise?Machinery and Allied Products Insti-tute, 1200 Eighteenth St., Washington,D.C. 20036, 1967, paperbound, 53 pp.,$1.00.

READINGS IN MANAGERIAL AC-COUNTING appeared as a Recent Pub-lications item in the September, 1968,issue. Subsequently, its publisher advisedus that the book is not for sale or avail-able to the general public.

BUSINESS FINANCIAL MANAGE-MENT, which appeared in the October,1968, issue: authors should have beenlisted as G. W. Cooke and E. C. Bo-meli.

60 MANAGEMENT ACCOUNTING;J ANUARY 1969

At a convention held during the early years of the Association, first president, Major J. Lee Nicholson. The others cannot beDr. Stuart C. McLeod (right) was photographed walking next to identified. See story below.

Diary of a Peripatetic Secretary

DR..McLEOb'S WRY COMMENTS DEPICT EXCITING ERA OF NAA GROWTH DURING FIRST 25 YEARS

"Doc has left us. Ill since last October,he passed away at Dunvegan, his homenear White Plains in WestchesterCounty, New York, at 5:45 on theafternoon of April 15. During his illness,as during the previous 25 years of hislife, his thoughts and plans were forN.A.C.A. and the men and women whomake up the organization which meantso much to him."

Thus began the obituary of the Na-tional Association of Accountants' firstsecretary, Dr. Stuart C. McLeod, whodied in 1944. The impact of his per-sonality upon the young organization isincalculable. As the obituary noted,

"From 1919 until his death —a quarterof a century during which industrial ac-counting reached its maturity —Dr.McLeod served as the Secretary andguiding spirit of N.A.C.A. He saw theinfant grow to healthy maturity; heguided its steps during periods of doubtand indecision; he gave it spirit and pur-pose and a body of policies which willcarry through the years."

In this, the 25th year since his deathand the 50th Anniversary of the or-ganization he helped to build, it is ap-propriate to reprint some of the humorand wisdom of the man who was notonly a brilliant administrator but a very

capable writer. In the early years ofgrowth, "Doc" McLeod barnstormedaround the country visiting chaptersand attending Association meetings. Heonce referred to himself as a "peripateticsecretary." Following are some excerptsfrom his "diary," The Secretary's Cor-ner, published in the NAA BULLETIN.

March 15, 1934. Golf is not my onlyweakness. I am also a great curler. Abunch of us were having lunch the otherday and one of my curling friends andmyself were expounding at considerablelength on the glories and joys of curling.One of the boys who had been listeningpatiently, if not enthusiastically, finally


remarked, "I suppose the reason youScotsmen are so fond of curling is thatit is rather difficult to lose a curlingstone."

November 15, 1934. [After two weeksof steady, uninterrupted travel.] Friday,November 2 —En route to New York.Still alive and almost conscious. I didnot plan this artistic trip or merry-go-round. This was the work of our stand-ard -cost President, who must have beena little fuzzy on his variables at thetime -7,786 miles, 9 chapter meetings,9 board meetings, 180 holes of golf, athousand laughs, and hundreds of happyreunions, all in two weeks. 'Taint rightunder the N.R.A... . Everywhere wewent we were received with the mostcordial hospitality and consideration.

March 15, 1935. Scranton Chapter isacquiring a unique reputation for rareand unusual methods of entertaining itsspeakers and guests. I think I mentionedthe experience which Tom McNieceand I had there about a year ago whenwe were in competition with a weddingon one side, a high school graduatingclass on the other, and the KnightsTemplars fore and aft. It was a galaoccasion. But this year they did an evenmore distinguished job for ProfessorDohr of Columbia, who spoke at theFebruary meeting. I am indebted toCharlie Beacham for the graphic ac-count of the occasion.

"It seems that just as Professor Dohrwas getting under way the lights sud-denly went out. By pulling back thewindow curtains they were able to getsufficient illumination from the streetlights to proceed. But a few minuteslater they were interrupted by some loudexplosions underneath and the crash offalling glass. A couple of explosionsmean very little to a group which hasbeen toughened by Knights Templarbands, so the meeting proceeded. A fewminutes later there was a wild flurry offire sirens, and most of the apparatus inthe city was soon parked underneaththe windows endeavoring to extinguishthe fire which had followed the ex-plosions. Professor Dohr, being accus-tomed to class room disturbances, wasnot nonplussed by a few fire engines,but when smoke commenced to driftinto the room, it was decided to moveto quieter, if less intriguing, quarterswhere the meeting was finally com-pleted to the satisfaction of everyone,including the firemen."

June 15, 1935. When the noble ex-periment was finally eliminated from

our Constitution, there were quite afew of our deluded citizens who jumpedto the conclusion that it was then per-fectly legal for them to consume theiralcoholic poisons when and where theywished. If you think there is anythingin this belief, you should travel acrossthe United States a few times and tryto keep track of the rules which thedifferent states impose upon transcon-tinental traffic. It would take a coupleof detectives, three or four lawyers, anda ouija board to solve the puzzle. Youmight be able to get a cocktail beforedinner, but by the time you got to thedining room it would be illegal to havea glass of beer with your meal.

January 15, 1936. Rod Reed, in hisDaily Column in the Buffalo Times,recently wrote as follows: "EdwardD'Anna's band, which gives those Ni-agara Falls concerts, includes a man whoplayed at the funeral of Queen Victoria,a drummer without whom the late Lil-lian Leitzel would refuse to appear inher famous circus aerial act, two Tus-carora Indians, and a couple of cost ac-countants." Just another example of theharmony which has always existedamong cost accountants.

Stranded in Springfield

April 15, 1936. This has been aneventful winter. In fact, I believe it isabout the most strenuous season I canrecall. I cannot blame it entirely uponour respected President, because, inspite of some of the libelous remarkswhich have been circulated, he really isa most soothing and restful companion—part of the time. It is just possiblethat the gathering years may have some-thing to do with it, but I prefer toblame it on the weather. We have cer-tainly had our share of snow, ice andblizzards on our winter travels, and, asa climax, I succeeded in getting myselfmarooned in the Springfield flood... .We were in no particular discomfort atthe Kimball Hotel, which is on highground and has its own electric plant,but our sphere of activities was strictlylimited and a bit monotonous. Therewere about 30 of us all trying to thinkof some smart way of getting out. Itried to get a plane in Springfield and,failing in that, phoned the office to tryto get me one in New York, but therewere none available. All the planes wereout taking photographs or deliveringfood in the flooded areas. I had a Na-tional Board meeting scheduled forFriday night and I did not want to

spend the weekend in Springfield.I became acquainted with a couple of

press photographers in the hope that Imight be able to fly out with them, butthey were staying so long as any pictureswere possible. However, I finally got abreak. A couple of the photographerscame to me about 5 o'clock on Thursdayand said they thought they could getme to Boston on a mail car if I wouldagree to deliver a package of film totheir representative there. They weretrying to move the mails. We had somedifficulty getting into the station be-cause the sewers had all backed up bythat time. But we finally made it andthey got me on the car, and, after arather weird journey of six hours, wearrived in Boston. I delivered the filmin due course, and they very kindly sentme copies of the pictures a few dayslater, so that I have a permanent sou-venir of what I hope is my last adven-ture this year.

January 15, 1937. I saw a most un-usual sight the other day — something Ihave never seen before and probablywill never see again —a complete rain-bow. I was flying back from Washingtonand we were above the clouds. Suddenlythere appeared below us a completerainbow, that is a rainbow which wasa complete circle, in all the gorgeousrainbow colors. To make it even moreremarkable, the shadow of the airplanewas in the center of the circle. You cantake it from me, it was quite a spectacle.Perhaps I should not have mentionedit, I can just hear some of my venomousassociates remarking, "It won't be longnow. That is just the first stop on theroad to pink elephants."

February 15, 1938. If I might be per-mitted the liberty, I would offer a sug-gestion to the League of Nations. Ifthey were to direct the powerful moraland intellectual force which theybrought to bear on the Ethiopian andChinese situations to an even furtherstep in the progress of civilization, theymight acquire an island somewhere re-moved from human habitation andequip it with all the props of civilizedwarfare, such as muddy trenches, barb -wire, and poison gas generators, andthen when two countries have a differ-ence of opinion and their diplomats areunable to talk one another to death orpunch one another on the nose, theymight transport their fighting forces tothis island and settle the question with-out murdering thousands of uninterestednoncombatants. They might even fi-


nance the expense of such an enterpriseby providing exhibit space for munitionmanufacturers and selling admissions tothe higher officials of state who have noopportunity to become acquainted withthe joys and pleasures of civilized war-fare by personal contact.

January 15, 1944. Under the circum-stances inevitably your thinking getsaround to this matter of life and death—a most fertile field for intellectualspeculation.... There are many schoolsof thought as to what, if anything, liesbeyond the dark curtain and none ofthem is susceptible to proof. On the oneextreme are those who claim that life ismerely one step in a continuous chemi-cal transformation or transition. On the

other extreme are those fortunate soulswho are able to accept on Faith alone afirm belief in a future life of unendingpeace and tranquility. In between thereare innumerable theories and beliefs,many of them carried down through theages from classic and pagan philoso-phers. Personally, I have no deeply root-ed convictions which are capable of proofbut it has always been difficult for meto accept the idea that anything as in-teresting as life with its marvellouslyintricate stage settings, so complete fromthe smallest insect in the grass to thestupendous lighting effects and orches-tration; with its unbounded opportuni-ties for human development and happi-ness and adventure, could be only an

isolated accident preceded by nothingand succeeded by nothing. After all, thespan of life is merely a flash in thescheme of eternity and it seems to methat all the planning and all the con-struction which surround it would be afutile and illogical waste of effort unlessit led to something. Put me down as be-lieving there is something beyond thecurtain although I have no idea what itmay be and I have no proof to supportmy belief

...I have always looked on

life as a glorious adventure to be livedto the utmost day by day on the princi-ple that the fullness and contentment ofeach day was the sequel of the dayswhich preceded and that each day wasa preparation for the days to come.

How Ethical Are Businessmen?

SURVEY OF 1800 BUSINESSMEN INDICATES VAST MAJORITY ARE MORE HONEST THAN THEIR PUBLIC IMAGE

Price -fixing in the electrical manufac-turing industry, sensational stock frauds,disclosure of inside corporate informa-tion for personal gain —the businessscandals of the last decade have beenblazoned in headlines far and wide.Created in a large part by such stories,the public image of the businessman isthat of a ruthless competitor quite will-ing to stretch the law, or even break it,in order to make a profit.

How true is this image? Are business-men as unethical as critics say? Do theyhave a double standard of morality —one for the home and the other for theoffice? A new book, An Honest Profit *,by Raymond Baumhart, S.J., takes ahard look at the prevailing public imageand comes up with some interestingfacts.

Father Baumhart, who is executive

• An Honest Profit: What Businessmen Say AboutEthics in Business by Raymond Baumbart, S. J.Holt, Rinehart and Winston, Inc., New York,N.Y. $5.95.

vice president and professor of manage-ment at Loyola University, Chicago,decided to ask businessmen themselvesabout ethics in business. In three re-search projects providing the basis forthe book, he got replies from 1,800managers and business executives. Morethan 100 volunteered information inpersonal interviews while 1,612 filledout lengthy questionnaires.

There is, according to the researchcompiled by Prof. Baumhart, a wide dis-crepancy between what students thinkbusinessmen will tolerate and what theexecutives themselves say they will tol-erate. For example, 85% of the busi-nessmen respondents regard it as unac-ceptable behavior for a salesman to padhis expense account by $500. But only17% of the students given the samequestionnaire thought that the typicalbusinessman would regard such paddingas wrong.

Another interesting phenomenon was

revealed by the questionnaires. In a hy-pothetical case situation involving aquestion of ethics, one -half of the re-spondents were asked what they woulddo, while the other half was asked"What would the average businessmando ?" The attitude reflected in the resultsis summed up by the author as that of"I'm more ethical than he." The ma-jority of the businessmen asked whatthey would do took the ethical position,but those asked what the average busi-nessman would do indicated he wouldprobably act unethically.

The fact that businessmen do act onprinciple at times when doing so maybe expensive to the company was borneout by interviews. Many of the execu-tives and managers queried cited exam-ples of actions that they had taken onprinciple without reference to profit.One president told how he had had anopportunity to sublet a facility at a bet-ter price than he was getting but he


turned down the offer because he knewit came from a gangster- dominated out-fit. A principal in a management con-sulting firm refused to do a study for acompetitor of a former client because"it would have meant dealing in infor-mation which basically belonged to thefirst company, and so there was an obli-gation on me to keep those secrets."

Several of the businessmen were con-vinced that making decisions on princi-ple was not necessarily unprofitable inthe long run. They pointed out that thehabit of making ethical decisions hastwo good effects. It creates a chain reac-tion throughout an organization, influ-encing the actions of subordinates andonce the word gets around, the manageror other executive who refuses an un-ethical offer will not be approachedagain. The author suggests that "Thebusinessman, who so often has his fail-ures reported, also deserves to have hisvirtuous acts catalogued."

The interviews pointed up an incon-

gruity which may have in the past mili-tated against the publicizing of princi-pled actions by corporation executives.Of those who said they had acted onprinciple, most admitted that they hadjustified such actions to the stockholdersas financially- motivated rather thanethically- motivated. In doing so, theytacitly assumed that stockholders wouldnot understand actions taken for purelyethical reasons.

What causes a businessman to actethically or unethically? Most of thosequeried in the survey gave as the mostimportant reason for making ethical de-cisions "a man's personal code of be-havior." Reasons of less importance cit-ed by the businessmen were "formalcompany policy," "the behavior of aman's superiors in the company," "ethi-cal climate of the industry," and "thebehavior of a man's equals in the com-pany."

On the other hand, when asked whatinfluences a businessman to make un-

Change of Address Form

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ethical decisions, most blamed the be-havior of a man's superiors in the com-pany and the ethical climate of theindustry. Some 98% of the respondentsagreed with the statement that "Soundethics is good business in the long run."They cited four reasons for this ration-ale: customers and repeat sales; em-ployees, union, and low turnover; goodreputation, and consistent behavior.An Honest Profit focuses on a num-

ber of dilemmas for the business com-munity. For example, most businessmenadmit that government interventionoften helps business behavior but U.S.businessmen generally oppose govern-ment action. Many will admit that somesort of code or guidelines should be setup in some industries but few want theGovernment to administer such a code.Those businessmen who do businessoverseas often agree to pay kickbacksbecause it is the custom but regard thesame practice in the U.S. as unethical.

The research showed that unethicalbehavior is more common in industrieswhere there is severe competition thanin others. Should such an industry adopta code of ethics in order to amelioratethis competition? What sanctions wouldbe used against those companies whichrefused to abide by the code?

In another area, the author examinesthe question of ethics as related to thereligion of respondents. His conclusion:there was no significant difference inresponse to ethical problems betweenreligiously affiliated businessmen and theunaffiliated. On only one question, theuse of call girls to influence clients, didthe unaffiliated executives indicate theywould be more tolerant of an actionconsidered unethical by others.

As the author points out, there iswidespread confusion about ethics inbusiness and much needs to be done inthis area. There has, however, been agradual improvement in businessmen'sbehavior, he concludes. He cites threesignificant trends in business ethics:progress in knowledge about businessbehavior, about the motivation of busi-nessmen, and about the application ofethical principles to industrial situations."But basically, though improvement canbe aided and hastened by external meanslike voluntary codes of ethics and gov-ernmental agencies, business behaviormust be improved from within, man byman. A businessman is a man before heis a manager, and the more ethical, rea-sonable, and human he is, the betterman and manager he will be."


New campus of Bentley College featuresNew England brick and classical arches.Design is of Georgian period.

•

View of Bentley College Student Center is shown above. The center contains diningfacili t ies for 1,100. Below is the Baker Vanguard Library which provides shelving for150,000 volumes with expansion fac il it ies for 100,000 more.

Bentley College Opens New Campus

52- YEAR -OLD ACCOUNTING COLLEGE MOVES TO NEW SITE IN WALTHAM, MASS.

Bentley College, which has specializedin educating leaders in accounting andfinancial management for the past halfcentury, moved in one giant step to anew campus last November.

At dedication ceremonies, Robert C.Weaver, former Secretary of the Depart-ment of Housing and Urban Develop-ment, congratulated the college admin-istration for its leadership in planningthe campus. He said, "As the debateabout the role of higher education againwaxes loudly, there is again advocacy ofuniversities which are aloof and removedfrom social problems. In my opinionsuch advocacy is specious. Certainlytraining in business education cannot,

and should not, be unconcerned with, orremoved from, concern for the economy.Those who have so much to do with theoperation of enterprise must also be con-cerned with the philosophy, structure —and yes —the values of the economicsystem. Also, professional training be-comes meaningless unless it is developedwith an appreciation and understandingof the institutional patterns which de-termine the structure and operation ofthe world of business."

Twelve new buildings designed in thecolonial architecture of the Georgian pe-riod welcomed students as they arrivedon campus for the fall term. The largestprofessional college of its kind in the

world, with 4,000 students, Bentley willbe able to accommodate 6,000 studentsin both day and evening divisions.

Bentley President Thomas L. Mori-son, who served as president of the Na-tional Association of Accountants dur-ing 1967 -68, praised college officials fortheir "dedicated response to the chal-lenges posed by the many details of theenormous project." The new campus islocated nine miles west of Boston nearWaltham. It contains a total of nearly350,000 square feet of space and in-cludes dormitories, a library, classroombuilding, student center, a faculty -ad-ministration building, and a computercenter in Lindsay Hall.


The Honorable Kyu Sup Chung, consul general of the Repub-lic of Korea, described the role of American business in theKorean economy at Wednesday morning session.

McLeod Societyin MiamiHONORARY GROUP HOLDS ANNUAL MID -YEAR MEETING

In the 35th year of its existence, the Stuart Cameron McLeodSociety held its 1963 mid -year meeting at the Doral CountryClub and Hotel in Miami, Fla., last October. After a series ofmorning technical sessions, the members and their wives en-joyed themselves playing golf and relaxing in the sun. Morethan 100 members and their wives attended the three -dayevent.

Speakers included George M. Ferris, Jr., manager of Ferris& Co., and a governor of the New York Stock Exchange; El-mer B. Staats, comptroller general of the United States, andthe Hon. Kyu Sup Chung, consul general of the Republic ofKorea. (Portions of Mr. Staats' address are published else-where in this issue.) As a change of pace, the Society dinnerwas held in the form of a Hawaiian Luau served at poolsidewith Island melodies recreating the atmosphere of Polynesia.The Society's membership includes past national officers anddirectors of the National Association of Accountants. It isnamed after the first secretary of the Association.

George M. Ferris was the speaker at the Monday session. Mr. Stock Exchange. His views on investments and the stock ex-Ferris, who is manager of Ferris & Co., is a governor on the N.Y. change were highly informative.


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During the three -day meeting Paul M. Herring presented a Anniversary of the Society and the 50th Anniversary of NAA.$1,000 check to the NAA Memorial Education Fund. Mr. and L. -r., John D. Harrington, president of the Stuart Cameron Mc-Mrs. Herr ing made the cont r i but ion on the 100 th Anniversary Leod Soc iety; Execu t i ve Di rec tor Rawn Br i nkl ey; Mr . Herr ing,

of their firm, the Kutztown Foundry & Machine Corp.; the 35th Society vice president, and President James E. Meredith, Jr.

At the luau when awards were presented, John T. Kokos (left) Emma Bunck, wife of member Victor Bunck. In background ispresented the Ladies Gold Tournament low net trophy to Mrs. Russell W. Hardy, national controller.


New Integrated ManagementAccounting Program to Be Introduced

UNIQUE 2 -WEEK COURSE OFFERED FOR FIRST TIME BY UNIVERSITY OF TEXAS AND NAA

A new two -week program in integratedmanagement accounting, designed spe-cifically for managers and executives inthe accounting function, will be heldat the Stagecoach Inn, in Salado, Texas,from April 27 through May 9, 1969.

Sponsored jointly by the Universityof Texas Graduate School of BusinessAdministration and the National As-sociation of Accountants, this programrepresents a significant step forward byNAA in providing for the continuingeducation needs of its members. Theprogram, by combining the efforts of amajor school of business and NAA, pro-vides an excellent opportunity to studyrecent developments in accounting andto learn how to integrate the variousconcepts, practices and techniques intoa cohesive system of management ac-counting.

Program ObjectivesThe primary purpose of the program

is to provide the participants with athorough understanding of integratedmanagement accounting. Participantswill study the latest techniques for pro-viding management current and relevantinformation for planning and control.More specifically the program is de-signed to:

• Develop an awareness of the eco-nomic environment in which businessenterprise operates and its significancefor business management;

• Develop the perspective and abilityto think about and identify the infor-mation needs of management in allfunctional areas;

• Develop a thorough knowledge ofthe recent developments in managementaccounting concepts and techniques andtheir interrelationships;

• Develop an understanding of thevarious techniques and practices andtheir application in planning and con-trolling activities at all levels of man-agement; and

• Develop practical and operationalinsights into designing an integratedmanagement accounting system for thespecific business enterprise.

Study Program and FacultyThe major topics for study in the

program are:• Long -range profit planning —ob-

jectives, techniques and implementation,• Capital expenditure management

— objectives, techniques and implemen-tation,

• Annual profit planning and cost -volume -profit analyses,

• Cost behavior patterns,• Standards for costs and revenues,• Direct costing and contribution

accounting,• Flexible budgeting for planning

and performance reporting,• Scientific inventory management,• Quantitative techniques for plan-

ning and decision making,• Management information system.A special feature of the program is a

computer -based business simulationmodel that participants will use to applymanagement accounting techniques toa practical business situation.

The instructional staff for the pro-

gram will be selected from the account-ing faculty of the University of TexasGraduate School of Business Adminis-tration and from the Continuing Edu-cation staff of the National Associationof Accountants. In addition, speciallectures by authoritative speakers willprovide additional opportunities for in-vestigating and discussing selected topicsof general interest to the group.

Who Should AttendThe program is designed to meet the

professional development needs of theexperienced accountant at the managerlevel and above. It is intended speci-fically for accountants at the divisionand plant controller level and for con-trollers of small and medium -sized com-panies, who are faced with new respon-sibilities in the areas of long -rangeplanning, capital budgeting, inventorymanagement, etc., or who are facedwith the problems of revising, inte-grating or designing a management ac-counting system.

The program is limited to those withat least two years experience in theaccounting function at the managerlevel. This common background in ac-counting permits the development of aprogram which builds on the profes-sional knowledge and experience of theparticipants and permits a more exten-sive and in -depth coverage of the indi-vidual topics.

Candidates for the program must berecommended by their companies, andapplications must be received by March10, 1969. Individual participants will be

C8 MANAGEMENT ACCOUNTING /JANUARY 1969

selected and notified by March 20. At-tendance at the program will be limitedto 40.

Accommodations and Facilities

The program will be held at thehistoric Stagecoach Inn on the OldChisholm Trail in the Texas hillcountry, approximately 50 miles fromAustin. Participants will be housed atthe Inn and all classes will be conductedthere.

The fee for the program is $800, ofwhich $600 will defray the cost oftuition, books and supplies, and $200 isfor room and board, double occupancy.For single occupancy, $40 extra will becharged.

The entire fee is payable upon ac-ceptance into the program. For com-plete details of this program write toNAA or complete the form below andmail it to the Continuing EducationDepartment, NAA, 505 Park Avenue,New York, N. Y. 10022.

This is the second in a series of two -week programs designed to prepare ac-counting and finance executives forpositions of greater responsibility intheir companies. The first, the AdvancedManagement Program, was held inMay 1968 under the co- sponsorship ofthe University of Michigan GraduateSchool of Business Administration andNAA. This program will be repeatedthis spring, June 1 -13. Further detailswill be published in the February issue.

------------------------------- - - - - --

Gentlemen

Please send me a copy of the brochureon the Integrated Management Ac-counting Program for Accounting Ex-ecutives and Managers.

Name

Title

Division, Plant or Office

Company

Street Address

ci ty

State Zip Code


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Chapter /Member News

Commemorating the 25th Anniversary of Williamsport Chapter chapter president. Standing, John H. Jenkins; Harold Keyser;at a special meeting in November were, I. -r., seated, Brooks R. Donald M. Woodard, NAA publisher and director of meetingProbst; I. Wayne Keller, past national president and speaker; management; Harry M. Habbel, and Rollin Tinsley. The seal inRichard E. Cromley, chapter president; William Ferrara, past background was woven out of carpeting by Magee Carpet Co.

Perfect attendance awards were recently presented to Harry A. President William P. Walsh. Mr. Grube, who was the secondGrube and Clint Norris by Brooklyn Chapter. L. -r., Past Presi- president of Brooklyn Chapter, attended every meeting fordent George E. Prescott, Mr. Grube, Mr. Norris and current more than 35 years; Mr. Norris, for more than 27 years.

70MANAGEMENT ACCOUNTING /J ANUARY 1969

Emeritus Life AssociatesPAUL M. ANDERSON, New York.HAROLD T. BAIL, Washington.W I L L I A M C. BARBEE, Washington.EVAN E. BLAIR, Youngstown past presi-dent.ROY E. COUNCILMAN, Baltimore.JOHN W. COWLES, San Antonio.ELMER A. ETLING, St. Louis.WILSON E. GARY, Baltimore.JOHN R. HORNUNG, Oakland County.GEORGE N. JANIS, New York.OSCAR W. KAHMER, Baltimore.STANLEY C. KONEY, Union County.DAVID J. LANDSBOROUGH, Houston.HERBERT L. PARDOE, New York.KAREL S. PHAFF, Member -at- Large.HAROLD A. RAYMOND, Boston.WILLIAM C. SIMONSON, New York.RALPH L. WAY, Lehigh Valley pastpresident. Stuart Cameron McLeod So-ciety.JESSE D. WETSEL, Mid- Hudson.CHARLES F. WICKER, New York.

Promotions and New PositionsJ. L. ANDERSON, Akron, is now managerof sales and commercial accounting forB. F. Goodrich CO. . . . TERRY CROUSEwas promoted to accounting manager ofthe new B. F. Goodrich plant in HoneaPath, S.C. . . . RALPH N. GUNVALSENhas been named manager of finance -Europe for International B. F. Goodrichwith offices in Frankfurt, West Ger-many.CORNELIUS J. KEANE, Albany, has beenpromoted to manager of manufacturingaccounting at Scott Paper Co.

Roy A. ANDERSON, Atlanta, has beenpromoted to assistant treasurer at Lock-heed Aircraft Co.HAROLD A. GRANT, Bangor - Waterville,has been promoted to manager of ac-counting at Great Northern Paper Co.MERLE BORDERS, Battle Creek, has beenappointed administrator of LakeviewGeneral Hospital.

CHARLES ALLGOOD, Birmingham, hasbeen promoted to assistant vice presi-dent, Exchange Security Bank.LORNE R. WAXLAx, Boston, has beenappointed controller of the Gillette Toi-letries Co.

ARTHUR J. KUKLA, Bridgeport, was re-cently appointed assistant treasurer ofNational Distillers & Chemical Corp.

JOSEPH T. STEHLE, Butler Area, hasbeen promoted to vice president of Pitts-burgh National Bank.

THOMAS N. GRAY, Central Arkansas,has been promoted to cashier of theFirst National Bank.... BEN D. MOOREwas named controller of the Union Na-tional Bank Building. . . . GLENN L.STOUT is now assistant vice president ofthe Union National Bank.

M. C. COSTA, Charleston, was promotedto director of the accounting division inthe planning and comptroller depart-ment of the Naval Supply Center.

RAYMOND ARMSTRONG, Cincinnati, waspromoted to manager of accounting atMosler Safe Co.FRED COVARRUBIAS, Cleveland,has beennamed president and chairman of theboard of a new company called Compu-teI Business Management.... HERBERTH. EGLI has been appointed vice presi-dent- controller, Smith - Corona MarchantDiv., S CM Cor p . . . . W. E . P RIT T Swas promoted to manager at Ernst &Ernst.

R. H. BARRETT, Columbus, Is nowpresident of the Barrett Corp. ... PAULWEIS was promoted to vice president ofbusiness operations of the ColumbusDiv.,North American Rockwell Corp.

GALBRAITH ELLISDes Moines Lancas te r

DONALD L. FINFROCK, Dayton, has beenappointed assistant controller, SuperFood Services CO. . . . B. K. PARNELLis now controller for the Metal ProductsDiv., Armco Steel Corp.. .. R. J. NiEsshas been appointed manager, advertisingand marketing services, for the Indus-trial Products Div., of National CashRegister Co.HARRY CARLSON, Des Moines, has beenappointed a partner at Peat, Marwick,Mitchell & CO.... ALEX M. GALBRAITHwas elected treasurer of Meredith Pub-lishing Corp. . . . LEON GARDNER hasjoined Campbell Industries as controller.

T. L. BRACEY, Detroit, has been pro-moted to resident controller of Kelsey -Hayes Jackson plant.. . . Ronald W.GRESENs has joined the Detroit EdisonCo. as assistant general auditor.

JAMES WRIGHT, Dubuque Tri- State, is

now a partner in the Badger State Bank,Cassville.

CHARLES W . JARRETT, Evansville, hasbeen named controller at Faultless Cas-ter Co.

K. W. SOVEREIGN, Fox River Valley,has joined the Henry Pratt Co. as cor-porate controller.WILLIAM VAIL, Florida West Central,has been promoted to manager, productline finance, Honeywell, Inc.

JOHN H. SHROAT, Indianapolis, has beenelected a partner of the Geo. S. Olive& Co.

ALBERT H. CHRISTOPHER, Knoxville, isnow corporate controller, The Day Co.

R. LESLIE ELLIS, Lancaster, was recent-ly elected a vice president of the Arm-strong Cork Co. He will continue ascontroller and director of managementinformation.

JOHN J. LURIE, Long Island, is now con-troller of Continental Extrusion Corp.

WALTER NEEL, Memphis, was promot-ed to suggestions and awards adminis-trator— Memphis Region of the U.S.Post Office. . . . MARION PERRYMANwas promoted to vice president- opera-tions department of Union Planters Na-tional Bank of Memphis.... D. L. VAL-ENTINE is now general manager of Hart-well Brothers.

A. BRUCE CLFARE, III, Mid - Florida,wasrecently named supervisor of consolida-tions in the accounting department ofFlorida Gas Co.

LLOYD W. BROWN, Milwaukee, is nowaudit manager of Touche, Ross, Bailey& Smart. . . . RICHARD K. HOMAN wasnamed assistant cashier at Marshall &Ilsley Bank.

.. .

OSBORNE JOHNSON hasbeen promoted to president and treas-urer of C. G. Schmidt, Inc.. .. MYRONT. KUBCZAK is now manager of corpo-rate accounting at Rex Chainbelt, Inc.

OLAF A. BAKK, Minneapolis, has beennamed a principal of Arthur Young &CO. . . . JOHN C. BRUNK was recentlypromoted to manager of budgets andcost accounting with the Control DataCorp. . . . BARTON C. BURNS Is nowvice president of Travelers Equity Sales,Inc. . . . ROBERT W . CHRISTENSENwas named controller at SpectacularProducts, Inc.... JAMES B. DOYLE hasjoined International Dairy Queen, Inc.,as corporate controller. .. . LLOYD W.GROBEL was promoted to general opera-


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World's Largest Financ ial &EDP Personnel Specialists.

tions manager of Gold Bond Stamps,Ltd., Canada. . . . DARYL W. JOHNSONhas been named treasurer of L & A Prod-ucts, Inc. . . . DONALD E. KEOGH wasappointed to U.S. Division Controllerof Cornelius Co. of Anoka.. .. JOHN E.SCHWARZ was named a partner of John-son, West & Co.

Five Muskegon members were recentlynamed at Continental Motors. HEN -DRIK GRASHUIS is now industrial analysissupervisor, JOHN J. JORDAN was pIOmot-ed to general accounting manager, G.G. LAUTENSHLAGER is now payroll de-partment chief, PHILIP B. MELEMEDwas named engineering analysis super-visor, and NEIL E. VANREGENMORTERwas promoted to inventory analysis su-pervisor.

JOHN G. SANSE-VERE, New York,has joined Ace Pub-lishing Corp. astreasurer and vicepresident of financeIRand administration. SANSEVERE

New York

DAVID W. BRENNER, North Penn., hasbeen admitted to partnership at ArthurYoung & Co.

JAY PARKER, Norwich, has been appoint-ed controller of Mystic OceanographicCo.... V. A. PARSONS is now controllerat Plastic Wire & Cable Corp.

LAWRENCE BOYLE, Oakland -East Bay,was recently appointed plant controllerat Container Corp.

CHARLES GOAD, Phoenix, has joinedSouthwest Magnesium & AluminumCorp. as controller.

ALVERN E. JOHNSON, Pittsburgh, hasbeen promoted to district comptroller bySealtest Foods. . . . RONALD F. KLANI-NIER has been appointed manager -fac-tory accounting for Harbison WalkerRefractories Co., Div. of Dressler Indus-tries. . . . STANLEY R. MASON is nowcontroller, Keystone Steel & Wire Co.,Div. of Keystone Consolidated Indus-tries.... EDWARD MICHENKO has beenappointed manager of profit planningand budget control , Copperweld Steel.

FRANCIS SHINAL, Princeton, was namedmanager of accounting operations of thePhotronix Div., McGraw -Hill, Inc.

CHARLES G. HORSTMAN, Providence,was recently promoted to vice presidentand controller of Carol Wire & Cable

Corp. . . . JOSEPH H. O'NEILL IS nowadministrator of the Osteopathic Gen-eral Hospital.

J. W . HORTON, Racine - Kenosha, hasbeen promoted to manager of generalaccounting at Jacobsen Mfg. Co.

HENRY W . HORNIK, Raleigh- Durham,has been named treasurer, Roberts Co.

HORSTMAN HORNIKProvidence Raleigh- Durham

CALVIN D. GARDNER, Rochester, hasbeen named supervisor of the cost de-partment at Itek Business Products. . . .

BARTLEY C. GOULD is now cost account-ing manager at Sybron, Inc. plant inElyria, Ohio. . . . ROBERT A. LANIGANhas been named treasurer of Chamber-lin Rubber Co. . . . WALTER M. LORN-SEN has been appointed principal ofHaskins & Sells.... DAVID R. WIEGANDwas appointed to the new post of plan-ning manager of Castle Div., Sybron.

Two San Fernando Valley memberswere recently promoted at Lockheed -California Co., a division of LockheedAircraft Corp. R o l A. ANDERSON waselected assistant treasurer, and KEITHANDERSON, assistant controller. . . .

SANFORD G. HIRSCH has been electedtreasurer of Networks Electronics Corp.

. ROBERT HOCKENBERG was promotedto senior staff accountant at Ernst &Ernst.

DUANE DERRIG, Southern Minnesota,is now a partner in the firm of Broeker-Hendrickson & Co.

LOUIS R. MONTICELLO, Syracuse, hasbeen promoted to accounting officemanager of Agway, Inc. Chemical Div.

JOSEPH PAOLETTI, Trenton, has beenappointed manager, financial operations,RCA Astro - Electronics Div. . . . J. J.SOUTHWICK, JR., was appointed man-ager in charge of the Trenton office ofErnst & Ernst.

R. R. DETWILER, Tri- Cities, has beenappointed administrative manager atNitrin, Inc.

JOSEPH N. BARBERA, Union County,was recently named controller of SeaLand Service, Inc. . . . J. WAYNEKNOWLES is now section head — businessanalysis for Humble Oil & Refining Co.


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COURSESMathematics For Business Management

Basic Mathematics.................. ...............................Basic Data Processing Concepts & Techniques.Developing & Using Standard Costs....................Flexible Budgeting & Performance Reporting...Direct Costing & Contribution Accounting.........Costs for Decision Making....... ...............................

SEMINARS

....... Mon. thru Fri.

....... Mon. thru Wed.

....... Mon. /Tues.

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Pricing Policies & Decisions.................. .........................Thurs. /Fri.Cash Management & Funds Analysis... .....................Mon. /Tues.

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Documents

management - accou-al-ting - Strategic Finance