EXPERIENCES WITH COST ACCOUNTS IN NORTHERN IRELAND

Proceedings of Conference. 137

EXPERIENCES WITH COST ACCOUNTS I N NORTHERN IRELAND.

By R. W. HALE.

Cost Accounts have been kept at the Agricultural Research Institute of Northern Ireland for nearly ten years. I propose to describe the system which has been followed and to use it as an example in discussing how the orthodox systems of cost accounting may be simplified and how far the simplified system is of use in the management of the farm.

The late Dr. J. S. King had published his views in his “ Cost Accounting applied to Agriculture ” shortly before costing was commenced at the Institute and when Professor Rae and myself were discussing the methods to be adopted we were much influenced by this book of King’s. I should also acknowledge the assistance of Mr. Glynne Williams and Mr. D. A. E. Harkness in the preliminary discussions. - The system adopted as a result of these discussions may be said to have withstood the pragmatic test, since it has suMved for ten successive years costing. A few minor improvements which it is intended to introduce at the end of the tenth year will not affect the general system.

Before going to Northern Ireland I had nearly three years’ experience of cost accounting in Somerset. As a result of this experience I felt strongly that the assumptions entailed in systems of costing which were then orthodox, as set out for example in the “ Instructions to Accountants,” compiled for the guidance of agricultural economists by the Ministry of Agriculture’s committee, had such a large effect on the production costs of many of the products of the farm (particularly of crops) that the figures were almost valueless. So many rules had to be kept in mind in interpreting the figures that it was difficult to get any definite results from them. It was chiefly for these reasons that it was decided from the first not to attempt unit costs of production (as usually defined) on the Institute farm, and to avoid as many arbitrary allocations of costs as possible. Although this meant that we were automatically limited to obtaining only prime costs of the farm products, it was felt that the advantages gained in simplicity of interpretation and in saving of time at the actual book-keeping would be well worth the sacrifice.

We were thus led straight away to adopt King’s idea of calculating a “ surplus ” or “ deficit ” on each department, instead of a “ profit ” or “ loss,l’ and to construct a “ surplus and deficit account ” instead of a “ profit and loss account.” Since the net surplus (as it practically always would be) on the

i 38 Agricultural Economics Society.

productive departments has to meet the overhead costs and ieave a margin over them if the farm is to make a profit, the overheads are also carried to the " surplus and deficit account," the margin remaining being the true profit or loss on the farm and being of course the same in amount as the profit or loss calculated by any other system of costing, given the same valuations, income and expenditure. In so far, however, as, under a more orthodox system, some items of stock-in-hand would be valued at cost and the valuation of residues from crops and manures would be increased, our system would give a different final profit or loss on the farm.

The method of carrying overheads direct to the surplus and deficit account seems particularly appropriate for an Institute farm, since items under this heading are the ones particularly liable to be affected by the fact that the farm is not an ordinary commercial one. Our prime costs are thus not affected by the facts, for instance, that no charges are made against the farm for stationery, postages or telephone or for management and attending markets, and so on. Also in our case it is very convenient because we actually pay no rent for the main part of the farm and should have no figures for similar farms in the district for guidance in estimating a rent. We can, however, still judge the results of our farming without the necessity of estimating and charging out a rent.

By this method of dealing with rent and establishment charges, we have already eliminated two arbitrary allocations of cost, or three if the establishment charges were to be allocated partly according to manual labour costs and partly according to rent, as recommended by the "Instructions to Accountants." We do not seem to have lost any useful information in the process. The fact that the farm in the early years of our occupancy required an exceptionally heavy expenditure on hedging, fencing, and ditching is duly recorded in the large costs under these headings in the establishment account and it would not seem to help in the management of the farm if the crop costs in the early years were inflated by having this expenditure allocated to them on the acreage basis. The crops were expensive enough before the land was got into good order, but this is best shown directly by the heavy prime costs and the poor yields, and not confused with the different question of the poor state of the hcdges, fences and ditches. Similariy any extra time we put into keeping up the appearance of the buildings and the tidiness of the yard, over the time which would be spent on a commercial farm, is best kept separate from the costs of the productive departments.

Equipment depreciation and repairs is another class of expenditure which it is difficult to deal with in an entirely satisfactory manner. We have adopted the practice which is usually recommended, namely, to depreciate each imple- ment from its cost price to its estimated scrap value, at a flat rate over its estimated life. Where the depreciation so calculated can be charged directly to a particular account, this is what we do, foIlowing the suggestions of Dr. King. For example, depreciation. on, and, of course, repairs to, harness can be charged to the house labour account; on dairy equipment to the milk production account; and on pig equipment to the pig account, if only one account for pigs is kept. There is always, however, the field machinery and a great deal of the barn machinery on which the depreciation cannot practicably be charged to any one account, and the best alternative in this case seems to be to carry the charge to the Surplus and Deficit account as an overhead.

Proceedings of Conjerence. 139

There are many other charges in orthodox costing systems which it is almost impossible to estimate with any accuracy, and in our system it was decided to omit them, almost entirely. Manurial residues of feeding stuffs, for instance, are not valued, so that we make no charge for them to the farmyard manure account and no credit is allowed to the livestock accounts. Although, of course, farmyard manure plays an important part in the farming system (and is valued so much for our rather impoverished farm that we have spent several hundreds of pounds on slaughterhouse manure) there is no part of the system in which the production of manure is the principal object, and in actual practice the value of manure produced is not considered in deciding on feeding practice. The inclusion of manurial values in the accounts would thus be of no assistance in the business control of the farm. In fact it was felt that the inclusion of manurial values would be positively misleading, since the values taken from the usual tables (Voelcker & Hall’s) so often give an altogether exaggerated value to a load of manure by the time it reaches the field. In my experience in Somerset, the farmyard manure cost in general was between 71- and 81- per load, but on certain farms it went up to 161- and 171- per load. There seemed to be no alternative, however, to Voelcker and Hall’s tables, if manurial values were to be estimated at all.

I t was also felt that in the use of the ordinary artificial fertilizers it was the crop to which they were applied which was considered and their effect on subsequent crops was not of sufficient importance to make it worth while to carry forward the manurial residues given in valuers’ tables. Thus there was eliminated another tedious operation from our system and another series of estimates which are so difficult to make that they arc usually done purely by rule of thumb from tables.. It had, however, to bc admitted that lime and slow-acting phosphatic manures (basic slag and North African phosphate) could not reasonably be charged entirely to the first crop grown after they were applied. The farm was-in particular need of these manures when it was taken over, the soil being very acid in most fields and like most soils in Northern Ireland being definitely deficient in phosphates. I t was decided to charge these manures evenly over seven years, which was the normal length of the rotation, but when it appeared that phosphates had to be applied again before the seven years from the first application, this period was reduced to five years.

I t was realised from the first that lime and phosphates would be applied at different times in the rotation, and to fields that would not be brought into the rotation, so that we were not able to adopt the assumption that about the same expenditure would be incurred on these manures each year, and hence were not able to assume that each year’s expenditure might be charged entirely against the year in which it was incurred. We have, however, adopted this assumption in the case of farmyard manure and of cleaning costs, in order to avoid carrying forward part of these costs. The general rotation on the farm takes seven years. Most of the fields come under the plough in turn. The first crop after ploughing out from grass is oats, which is followed by a root break of turnips, potatoes, cabbage, etc., to which the farmyard manure is applied. This is followed by oats or barley, in which seeds are sown for two years’ hay crops, and then the grass is grazed for two years at least, sometimes more. Since all the work on farmyard manure and on cleaning is charged against it, the root break appears very expensive, but, of course, under such a costing system it is not correct to isolate one crop for independent consideration. The rotation must be taken as a whole if the cropping results are to be reviewed. In the final analysis this has to be done in any case

140 Agricultural Economics Society.

whatever the system of costing. I should also mention here that the charge for farmyard manure, unless it is bought, is merely the labour cost of heaping, carting out and spreading. No charge is made for the manure produced on the farm, since, as mentioned already, no manurial values of feeding stuffs are charged and since no charge is made to stock for straw used for bedding. Also, as regards cleaning costs, the Irish farmer is not so dependent, under the type of rotation mentioned above, on the root break for keeping his fields clean. Although weeds I am sure grow as well in Ireland as anywhere, they are controlled mainly by the long leys. This makes our system of costing particularly suitable to local conditions, but the principle could be applied quite well in districts where the cleaning operations are more important. I t would not give such good results if there was not a definite cropping rotation in which the area under each crop is much the same from year to year. In our own case the introduction of silage crops at different places in the rotation is going to upset our assumptions in future years. When our assumptions are applicable, however, they have the advantage that extra costs in wet or difficult years are charged directly against the year in which they are incurred. If spread over a number of years the effects of particular seasons on the year’s results are lost sight of.

I t is obvious that our system could not be used to obtain unit costs of crops, for purposes of charging crops consumed on the farm to the livestock concerned. Since the main bulk of the crops are fed on the farm, a theoretically ideal way of dealing with such crops would be to charge them to stock at average prime costs, so that over a series of years the prime costs of the crop would be on the average met by the charges to the livestock. The great difficulty in this method, however, would be to know how to estimate the average prime costs before the accounts had been running for a number of years. We were hence :educed to using conservative market prices in the case of oats and barley, and very rough conservative market prices for roots and hay (such as 101- per ton for turnips and 316 per cwt. for good hay). There is one distinct advantage in using such prices, in that the accounts are more real when presented to the ordinary farmer. In practice it has worked out that our cropping costs have probably been as nearly exactly covered when we used these figures, as they would have been had we used estimated average prime costs, which would have been something like 17/6 per ton for turnips and 113 per cwt. for hay.

There is one other point on which our system permits a simplification of the ordinary systems. It is not necessary to estimate a cost for straw. This always presented a difficulty, which it was thought better to avoid altogether. No charge is made to stock for straw used as bedding and no credit is allowed to the stock for manure, Hence there is no charge to the farmyard manure account. We do, however, have to make a charge to cattle for straw used as fodder, since we could obviously not leave the cattle with no charge when hay was replaced by straw. We have to put a rough value on the straw, comparing its feeding value with that of hay, and usually charge it at 21- per cwt. The credit is carried direct to the Surplus and Deficit account, since we do not wish to alter the surplus or deficit on the oats accounts because some of the straw happens to be fed. The feeding of the straw is a matter which concerns the management of the cattle, but not the management of the oats.

The allocation of grazing costs is a difficult matter under any system of Under the usual systems, in which rent costing, and ours is no exception.

Proceedings of Cmfmence. 141

and rates and certain establishment charges are allocated on an acreage basis, grazing costs are apt to take up a very considerable proportion of the total farm costs, and it is a serious weakness in the system to have to allocate such a large sum on the basis of rather abstract notions about grazing units. Our system at least has the advantage that grazing costs are merely prime costs, inclurling only cultivations, weeding and manuring, and come to only Ll00 or so on the 500-acre farm. We allocate this sum according to grazing units in the usual way. The grazing of different classes of stock is competitive on the farm, so that the alternative of charging certain fields to certain classes of stock is not open to us, as it would be if we could consider the grazing of the different classes of stock as complementary.

Most systems of costing which have attempted to cut down the amount of work entailed have concentrated on the labour records and analyses. There is no doubt that these and the records of disposal of stores entail the greater part of the clerical work of costing, but on a large farm with several different rates of pay for different classes of work, the short-cut methods of labour analysis would result in too great an inaccuracy in the final costs. We do not attempt any shortened methods in recording the use and disposal of any of the elements of prime cost .at the Institute. In fact, our labour analyses are probably bulkier and kept in greater detail than in most cases, since it was the aim from 'the beginning to use the accounts for management and teaching and for these purposes operation costs are most useful.

I t wil l clarify the whole system, I hope, if I give a few examples of the type of statements we can prepare from our accounts. The two years' barley growing costs in Table I were used in an article in the Journal of the Ministry of Agriculture for Northern Ireland, of which the chief aim was to point out to local farmers that the growing of barley as a feeding stuff was a good proposition under local conditions.

By analysing the labour and power costs in the way shown in the table, changes in costs under particular headings can be attributed to charges in conditions more directly than is the case when all man labour on different operations is added together, and d horse labour taken together, and so on. Costs under the different headings may be compared with other competing crops though for this purpose it would be more useful if the statement included physical units or numbers of hours worked under the different headings. A t any rate, the statement gives the direct outlays which might be different if another crop were grown in the place of barley and is not confused by the inclusion of overheads and rents, which would be the same, for any crop. Each item represents a definite expenditure of t h e or materlals, and is not affected by arbitrary allocations (except in the case of slow-acting manures and in so far as it is neecessary to charge horse labour and tractor costs at flat rates over all classes of work).


TABU I.

BARLEY: PRIME Cosrs PER ACRE.

CdtiVatiOM t0 SOhg :- Men . . . . . . . . . Horses . . . . . . . . . T ~ t o r s . . . . . .

Weeding :- Men . . . . . . . . . Men . . . . . . . . . Horses . . . . . . . . . Tractors . . . . . . Twine . . . . . . . . .

Cutting a d StOOhg :--

Carting and Stacking :- Men . . . . . . . . . Horses . . . . . . . . .

Thatching :- Men . . . . . . . . . Ho'rses . . . . . . . . . Stack Rope . . . . . .

Artificial Manures and Lime Residues of slow-acting Phosphates Seed . . . . . . . . . . . . . . .

... ... ...

...

... ... ... ...

... ...

... ... ...

...

PrimeCostinStack ... Threshing :-

Men . . . . . . . . . Horses . . . . . . . . . Hire of Thresher ... Paraffin . . . . . . Twine . . . . . . . . .

... ... ... ... ...

Prime Cost in Loft ... Prime Cost of C- per cwt. i i Yield of Grain per acre ...

Loft) . . . . . . . . . . . .

1934. d s. d.

13 9 14 7 0 1

13 8 11

7 10 1 1

10 11 2 0

6 1 1 9

L s.d.

1 1 4 6

1 0

1 3 6

12 11

5 11 16 0 2 3

1 6 0

12 1 2 9 6 8 1 6 -

0 0 0

I 3 0

1936. d 8. d.

I9 0 17 2 14 7

9 4

2 4 2 0

-

10 10 2 8

7. 4 6 9

10 4 1 4 8 9 1 8 1 0

L s. d.

210 9

13 8

13 6

8 1 12 8 3 2 14 8

5 17 0

l a 1

€7 3 0 €7 0 1

22.7 cwt.

6s. a. 31.3 cwt.

4s. (Id.

As an example of what we get out in the case of live stock, I have set out in Table I1 part of a table which was published in the Journal of the Ministry of Agriculture and Fisheries. Figures for the last accounting year have been added to the published table and one or two other figures have been amended.

Proceedings of Conference.

TABLE 11.

AVERAGE PRIME COSTS OF MILK PRODUCTION.

143

prim^ C O S k COW 1931-32 1032-33 1933-34 1934-35 1935-36 1930-37 per year. L s . d . L s . d . i s . d . L s . d . L s . d . L s . d .

DepreciationofCows ... 5 12 9 3 14 7 4 1 0 5 18 7 3 16 1 2 9 6 Depreciation and Keep of Bulls ... 1 0 7 19 7 1 2 8 1 1 4 0 1 5 1 0 19 0

WagesandHorsekour 6 12 4 4 1 9 10 5 3 10 5 15 9 5 10 2 5 10 2 Concentrates ... ... 11 12 7 5 0 9 6 0 0 6 9 0 6 9 4 6 13 9 CoarseFodder ... ... 7 9 11 5 7 6 7 14 10 6 11 2 6 15 8 6 6 10 Grazing ... ... 12 9 14 3 15 6 10 5 14 0 18 8

Sundries ... ... ... 2 4 8 2 0 6 1 1 6 3 2 1 2 2 2 9 2 0 0

36 3 3 23 13 4 26 18 1 30 6 7 25 16 0 25 0 4

Dairy Costs ... ... 6 1 8 1 5 6 7 6 2 7 5 3 0 4 1 4 6 4 1 8 6

42 1 4 28 19 11 32 0 8 35 9 7 30 10 6 29 18 10

TuberculinTests ... ... 17 8 16 4 16 1 17 6 2 2 2 5

Prime Costs per gallon produced, pence ... ... 12.71 11.14 11-14 12.12 10.05 9.82

Average number of Cows in the Herd during the year 57-0 66.6 . 63.9 03.1 68.3 74.6

Average number of Gallons of Milk produced per Cow 794 624 666 703 729 762

Pounds of Concentrates fed per Gallon of Milk produced . . . . . . . 4.66 2.74 3.02 3-17 . 3.22 2.85

Average Price of Concen- s. d. s. d. s. d. s. d., s. d. s. d. trate Mixture per cwt. ... 7 0 6 7 6 1 6 6 6 2 7 0

Here again I do not wish to go into a discussion of the figures themselves, but merely put them forward as an example of a straightforward statement which ought to appeal to the “ practical man.” The only items needing any explanation before they can be interpreted are depreciation and grazing. The table brings out the effects of some of the more important factors which are involved in mi$ production. For instance, the effect of contagious abortion in reducing milk yields in 1933 and 1934 is shown and the effect on depreciation of cows appears in 193435. The economy in adopting a definite rationing system for concentrates appears from 1932-33 onwards and the saving in labour through using a milking machine appears in the same year. (The increase in equipment costs through using the machine could easily have been shown separately if required for special purposes.) The items listed are all under the farmer’s control, at least as regards quantities if not as regards prices, and are all definitely connected with the milk production department as such. The addition of overhead and rent charges to the table, or the inclusion of figures for manurial residues and bedding, would only introduce complicated considerations not connected directly with milk production and would hence not help in determining the efficiency of the milk production department. These items, in as far as they are controlled by the farmer, are not controlled through the milk production department. Any waste in them would not be easily observable in the milk production statements, but could better be discovered elsewhere in the accounts. As a concrete example, suppose that heavy expenditure on hedging and fencing has been incurred. This will be seen in the establishment account, but if it is allocated over the fields on an


acreage basis, and a proportion of the amount going to the grazing account is then allocated to milk production, it will be difficult to assess the effect that this has in raising milk costs, and the alteration in the milk costs will have no value in helping to manage the dairy herd more efficiently.

As an example of the final summary of the year's working, the surplus and deficit account, I am presenting the Institute account for the year 1936-37 in Table 111.

TAB= 111.

SURPLUS AND DEFICIT ACCOUNT. C a t t l e

Milk Production (Dairy Herd and Bulls) Store Cattle (Heifers) . . . . . . . . . Calves . . . . . . . . . . . . . . .

Fat Cattle (purchased). No. 3 Account ,. 8 , I , No. 4 ,,

S h e e p No. 14 Account (1936 Feeding Lambs) No. 15 Account (Flock for 1936 Lambs) No. 16 Account (1936 Feeding Lambs) No. 17 Account (Flock for 1937 Lambs)

Pigs . . . . . . . . . . . . Crops-

Oats, 1935 and 1936 Barley, 1935 and 1936 Potatoes, 1935 ... .. 1936 ... Turnips, 1935 ... .. 1936 ... Mangels. 1936 ...

1936 ... CabdAge, 1936 ... Vetches, 1936 ... Hay, 1935 ... ,, 1936 ...

...

... ... ... ... ... ... 1.. ... ... ...

Straw sold and fed . . . . . . Breeding Horses Account ... Sundry Sales . . . . . . . . .

Establishment . . . . . . . . . Equipment (General) . . . . . .

Net Surplus on Farm

...

... ... ... ... ... ... ... ... ...

... ... ...

... ... ...

... ...

...

...

...

... ... ... ...

... ... ...

...

... ... ...

... ... ...

... ...

...

... ... ...

... ...

... I . . ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...

... ...

...

t ... -14 -86 - ... ...

... ... ... ...

...

... ... ... ... ... ... ... ... ... ... ... ...

...

.I. ...

... ...

...

L ... +1,300

-99

... +44 ... 4 8

-

... +62 ... +75 ... -67 ... -20 -

._.

... +42 ... -19 ... - 1 ... +28 ... - 8 ..- -76 ... -28 ... - 1

... -34

..I -37 ... - 8 ... +I67

... +51 ... +- 7 ... + 3

... -764 ... -179 -

...

t

+ 1,201 - 4

+ 60 + 386

+ 26

+ 61 + 1,729

-943

+786

-

- This method of analysing the account is quite simple and calls for no

detailed explanation. The separate items are grouped so that net surpluses on the different departments of the farm are obtained, the deficits on calves and heifers, for example, being set against the surplus on the dairy herd, since the calves and heifers accounts are almost entirely concerned with animals being reared for the dairy herd. Accounts for fattening cattle, which are mostly purchased, are grouped separately. The sheep accounts in any accounting year unavoidably include the tail end of one feeding and rearing

Proceedings of Cmjerence. 145

Season and the beginning of another, so that the results of the sheep accounts are best seen when the two parts of each account are extracted from the books and added together. The valuations made at the end of the financial year do not then affect the surpluses or deficits. The year 1936-37 was one in which an especially close balance was obtained between the crop costs and crop returns. (During the past 6 years the balance on crops has varied from a deficit of l409 to a surplus of L237, but the net deficit on the 6 years is only l87-1

As usually happens in costing, one year’s crops have not all been disposed of at the end of the accounting year, and so each year’s accounts have to include two accounts for each of the main crops. In our case it is not possible to differentiate the returns from the two years in the case of grain crops because grain from the new crop is mixed with grain from the old. If it were not for administrative considerations we should be able to move our stocktaking from 1st April to 1st May, and should then have practically no crop products except oats to carry forward from one year to the next and should also in most years be able to wind up the feeding lambs account in the one financial year.

As I have inferred several times already, the Institute accounts a re designed mainly for use in the management of the farm, although a lot of useful information is obtained from them for use in teaching, and they have occasion- ally been used for publication and in connection with experimental results. Since there is probably only one other set of complete cost accounts being kept in Northern Ireland, there is no point in our trying to make our costs comparable with other farms. The comparisons to be made are between one year and another on the same farm, and our system is quite adequate for this. It would also be suitable for comparing similar farms in farm management investigations. I realise that it would not be suitable for comparing costs in different districts, owing to probable differences between the districts in the levels of overheads and rents and in the rotations practised. Nor, for similar reasons, would it be suitable for the type of investigation aiming at obtaining national or district average costs, for which purposes it would also be as unsuited as full cost accounts owing to the labour involved.

As in all cases of costs kept on the farm, it is not always the end-products, in the form of such statements as those I have given, which are the most useful results of our costing. The keeping of detailed records of work done and stores used is frequently found to be of value in unexpected ways, and has a salutary effect on the care taken by the staff in carrying out orders. From this point of view the means justify the end.

In using our accounts for publication we, of course, come up against the difficulty that most farmers will expect us to produce a cost figure which can be compared with the selling price, to see if the product in question is being sold at a profit. The economist, of course, realises how misleading such a

In the publication of our milk production costs in the article referred to already, particular care was taken to point out that the costs shown were only prime costs and could not be used directly in estimating the profit from milk production. It was rather to prevent a worse misuse of the figures that a selling price was mentioned at which milk production could be considered to yield a reasonable surplus to go towards meeting overheads. For this purpose, as explained briefly in the text, the farm overheads and estimated rent were apportioned

. use of cost figures can be, but he is not often able to avoidit.


to milk production in the ratio of the milk production prime costs to the total farm prime costs. This method of dealing with overheads seems as reasonable as any other, and may be conveniently and easily applied in this way, with sufficient accuracy for practical purposes, after the accounts themselves have been closed.

It Will be realised from the description of our costing system that it has been pragmatic considerations, almost entirely, which have decided our methods. We have, in fact, deliberately avoided going into the finer points of costings technique, preferring to keep the accounts, and their interpretation, relatively simple, and hoping thereby to obtain more obvious relations between causes and effects. I am sure everyone who has kept farm cost accounts has found difficulty in interpreting the many wide variations in costs which always occur, whether from farm to farm or from year to year. Unless the variations can be accounted for, there is little purpose in recording them and no use can be made of them in the management of the farm. Of course, the actual headings under which the variations in costs of, say, a particular crop have occurred can always be traced if the crop account is analysed far enough. But it does not necessarily follow when the variations have been thus traced to their source, that their actual causes have been explained. This applies particularly in the case of labour costs, and particularly if the various operations comprised in these costs have not been recorded separately.

Even in cases where it seems reasonable to attribute variations to such causes as the weather, we cannot usually be certain how much of the effect was realy caused by the factor to which we attribute it. I n the case of the weather, of course, its effect on, say, the cost of cultivation can never be exactly measured, nor can the heaviness of the soil nor the steepness of the field. In fact, most farm operations are controlled by such factors that are not capable of exact measurement and whose effects hence cannot be determined with any accuracy. If it were possible to obtain numerical measurements of the causative factors it would be possible to see how far they had produced the results expected from them, and how far they were capable of accounting for observed variations.

I had hoped to be able to find a few operations for which our Institute records provided measures of the factors affecting them, so that I could show some examples of the degree to which the seemingly obvious explanations could account for variations. For this purpose, it would be necessary t o find operations which have been carried out in the same way for a number of years, to provide a sufficient number of records, and the chief factors affecting them must be capable of measurement, at least roughly.

It soon appeared, however, that it would not be possible to find sufficient of such operations to form a basis for a general argument. Field cultivations, such as ploughing, harrowing, etc., are too much affected by the weather and by the character of the soil ; the time taken in harvesting operations is affected chiefly by the degree to which the crop is laid, apart from the weight of crop to be harvested ; hoeing of root and potato crops might have provided suitable operations, except that we have no measure of the weediness of the crops and there were not records from a sufficient number of separate crops. Cutting and making of hay do not provide suitable operations. Nor do the tending of livestock, and in any case the different operations in tending livestock are not separately recorded.

Proceedings of Conjerence. 147

I have, however, been able to find one operation which was suitable for my purposes, namely, the carting in from the field of ricks of hay by means of hay bogeys. I should perhaps explain this operation, as it is practised only in certain districts. The hay, when ready, is put up in ricks of 4 to 8 cwt., in which it is left to dry out further. ?'he ricks are carted in individually as opportunity affords, each rick being pulled bodily on to the bogey by ropes and a winch, and is slid off at the stack or left where the hay is required. ?he carting in is not seriously affected by weather conditions, since it is done only when the ricks are dry, and is not affected by the way in which the hay is stacked or put in lofts, the hay not being actually pitched off the bogey. Since 1931 the weights of hay crops carted in this way have been recorded by putting each bogey over the weighbridge each time it comes in with a rick. .It was convenient in extracting from the labour records to work with the number of horse hours, and this has been taken as the measure of the labour involved in carting in each field. As measures of factors affecting the operation, we have the acreage of the field ; distance from the farmyard (this being obtained from %-inch Ordnance maps) ; the weight of the crop ; and the number of ricks i n each.

A first examination of the figures suggested that the amount of carting which had to be done acr0.s other fields had a large effect on the number of hours taken for each field. Accordingly measurements were made for each field of the distance hauled over hard roads and of the distance hauled across fields, the latter including an estimate made by eye on the maps of the average distance hauled within the field.

In order to determine the degree to which the measured factors actually accounted for the variations in hours worked, a multiple linear correlation analysis was undertaken. Since the effect of distance on the time worked must depend on the size of the field, the number of hours worked per acre was taken as the dependent variable and the independent variables were expressed as (a) number of ricks per acre ; (b) average weight per rick in cwt. ; (c) distance carted over hard roads, in chains ; and (d) distance carted over fields, in chains. Using the standard methods of correlation, the following equation was obtained :-

Hours per acre=41 (ricks per acre)+.34 (cwt. per rick)+-03 (chains over

The coefficient of multiple correlation between hours per acre and the independent factors was 43900, corresponding to a coefficient of determination of -79. In other words, 79% of the variations in hours worked per acre are accounted for by variations in the independent factors.

Perhaps a few more figures will give an even better idea of the magnitude of the variations not accounted for. The actual hours worked per acre varied from 1.1 to 9.5 with an average of 5.0. When an estimate was made for each field, by means of the above equation, of the hours that would be expected to have been worked, the difference between the estimate and the actual hours worked was in two cases over 2 hours ; in five cases it was between 1 and 2 hours ; in thirteen cases there was a difference of less than I hour ; and in two cases the estimate was esact.

On general grounds, it wodd be espected that the above linear regression equation was not the best expression of the relation between honrs worked

roads)+-14 [chains over field)4.18

148 AgricultJtral Econornz'cs Society.

and the other factors. The effect on hours worked of the average weight of the ricks would be expected to be greater when there were more ricks to the acre, and the effect of distance similarly might be expected to be jointly connected with the number of ricks and the weight of the ricks. Without going further into these complications, however, it may be concluded that the major part of the time taken on this operation can be accounted for by the factors which have been measured.

Even in this especially simple case, however, nowhere near all the variations can be accounted for. In other operations where the causative factors cannot be expressed in definite terms, there is much greater likelihood of dis- crepancies between the actual and the estimated effects. Our explanations of the variations may be very wide of the mark, and we have no means of, verifying their accuracy.

I still conclude, therefore, that it is desirable to keep farm cost accounts relatively simple, so that each figure may have a concrete meaning, and each attempt to trace cause and effect shall be as free as possible from confusion with irrelevant factors. To attain these ends in the labour records, however, it is essential to analyse separately the different operations in each crop or other account.

DISCUSSION ON MR. HALE'S PAPER. &6SidcrJ :

I am quite sure you wi l l like me to express your hearty appreciation of Mr. Hale's work. Looking back on about 26 years of my own work, I cannot help feeling how much easier it is for the men who are tackling things at present than i t was for us who had to work with nothing behind on which we could fall back. I am exceedingly glad to hear the reference that has been made to Dr. King.

appreciate the difficulties wafound in the early days in trying to carry on with the old costing systems. Today these have to a large extent gone into disfavour for a number of reasons-to a large extent from the point of view of simplicity. It is interesting to see what a krge amount of information can be derived from a much simpler system of cost accounting than I personally adopted in the early days at Oxford.

The farm is about 600 acres, and I should like to have some information as to the relative proportions of grass and arable and also =me fuller information as to the type of crop on the arable land. If one looks a t the results givenon page 144, there is a surplus of 51,729 (without reckoning the establishment charges), of which 51,200 comes from milk and only 626 from the whole of the crops. I take it then that the bulk of the crops is grown for consumption on the holding. How many acres of potatoes are grown ? Apparently few pigs and poultry, (if any of the latter) are kept. The main output from the farm is in the form of milk. After allowing for establishment charges, there is a net surplus of L788, which I take it is left to meet the rent charge, to which no reference has been made, and also any interest on capital. This net surplus amounts to about 30/- an acre. I was particularly interested also to see, and I am perfectly certain that Miss Cohen may have the same feeling, the type of information which you are able to extract on that last page. I have often told farmers that if the records are there it is possible to make some use of them, but if no records are kept, even if the Archangel Gabriel came down he would still be up a tree I This little tit-bit which you bring in is really most interesting, at least i t has been to me, and possibly there will be a large number of other points which you might be able to bring out.

R. iWcG. Carslaw : I should like to congratulate Mr. Hale on his paper, because I think he has justified

his claim that the system of accounts that he has devised and is applying in Northern Ireland is, as he says in page 137, more useful than the form of " full " costing with which many of us had experience some years ago. Indeed, I believe there is wm& doubt amongst authorities as to the correct spelling of the adjective before the word costing," there being many who favour '' fool " in place of '' full." It seems to me, however, that although

He and I had a good number of pre strong arguments with reference to that work and Mr. Bridges, I am quite certain, 3

I should like to ask one or two questions.

I have often felt this.

I now invite discussion, which I should like to close about 11.30.

Proceedings of Conjtvence. 149

,Mr. Hale has gone a great way towards simplifying these cost accounts and towards making them of more r e d value to the practical farmer, he has not yet surmounted the major difficulty associated with the arbitrary division of a farm organisation. Where diversified farming is practised, questions of technical efficiency in production are more often than not only secondary factors, while the prime factors influencing profits are questions of administration, in particular the choice and combination of the vanous departments which comprise the farm unit. Now, if that is so, I think it follows that it is more important for the farmer in the first instance to choose and combine his departments in such a way as to maximise output from overhead costs, and I do not think that Mr. Hale’s method of accounts really gives the farmer much information on this matter.

As I look at it, cost accounting, whether it be by Mr. Hale’s method,,?^ the old ’‘ full cost ” method, or b enterprise costing,” is of value p r i m J y as a guide to the technical efficiency with which the particular department is being managed. It won’t tell the farmer whether he should or should not continue to produce a particular commodity, whether he should or should not increase his commitments in that particular commodity, or whether he should or should not substitute some entirely new enterprise for the one to which the costs refer. I do not even see that cost accounting is necessary for this purpose, because the question whether any one department should be expanded or contracted can be answered, I think, in a much less complicated way. Surely i t boils down to the simple issue of whether the nearest alternative to the existing department will add more to the gross income of the farm than i t will add to the gross costs of the farm, quite irrespective of how these totals are distributed ? When it comes to the prime issue of choice and combination. I would suggest that cost accounting is largely superfluous, and that the questions at issue can be settled by setting up simple estimates of the financial effects on the farm as a whole of the substitution contemplated.

C. Y. Daws: I had a feeling when reading this paper that there has been some confusion of thought

as to why cost accounts are kept. We have had a lot said in past meetings of this Society about cost account-full cost accounts-being kept to appeal to the practical farmer, and that we must interpret these, or that they must be capable of being interpreted by the farmer himself. Well, frankly, I do not see why cost accounts, especially in an Institute like this, should be capable of being simply interpreted by the practical farmer. Surely in a case such as this we can liken full cost accounts to the laboratory experiments which are carried out by agricultural chemists and similar people. They are concerned with what we might call the scientific aspect, or i f you like, the academic aspect, and they are not concerned just at that moment as to how the farmer will interpret their figures or findings. We have a case, for example, in our present milk cost investigation. where in spite of the simplicity of the enterprise study, we have to be very careful what the farmers think, or how they are going to interpret the cost figure which we publish. I think it is the duty of anyone who embarks upon a system of full cost accounts to make them as detailed or “ scientific ” as possible.

The question of the allocation of overhead costs and other similar difficulties should not be shirked. For example, on age 143 we have a table of prime costs of milk production. I may be wrong-I must confess ! have not followed some of these figures very closely- but surely we cannot interpret the figure there for grazing in the same way as we can interpret the figure for concentrates ?

The cost figure for concentrates is the total cost of producing concentrates and i t necessarily includes the allocation of certain overhead costs on the basis of (perhaps) rather abstract notions.” But in the case. of grazing we find only the prime cost, which in this case means practically just the labour cost. So we have in this Table I1 of Prime (hl% some constituents which are total costs and some which are prime costs.

This statement is drawn up to some given date and contains a lot of minus and plus quantities which to my mind are most confusing. I realise, of course, as is stated in the paper, that the accounts for sheep and 80 on have to carry over to other years, but when we have a total surplus of Q.729 and we have not allocated L943 of it, there seems to be a weakness in the whole system. After all, factories and 50 on are up against these problems. Any factory which attempts costing docs. attempt costing, and pays a great deal of attention to the allocation of overhead and secondary charges. The printing industry, for example, has recognised methods of allocating overheads, which may be modified in the light of further experience.

the method which has now come t o be called

Now let US turn to the surplus and deficit account given on page 144.

It is our duty, I think, t o allocate all items.

150 Agricuhral Economics Society.

C. W. Roberts: It gave me great pleasure to know that Mr. Hale was going to give us this paper,

with its references to the late Dr. King’s methods. It was when Dr. King started working out those methods some 16 years ago that he asked me to help him in the work. Having become dissatisfied with a conventional statement of cost he set out to clarify his ideas as to what cost accounts were to do. With these ideas clearly before him he worked at his plan. It is unfortunately true that many cost accounts have been prepared without any reason beyond the demand for statements of cost-statements that have been written, welcomd and quoted, but have been truly used not a t all.

Of course. as Dr. Carslaw has said, any valuable system of cost accounting will be concerned to a great extent with raising technical efficiency-a int which Miss &hen criticised me for omitting in a discussion 18 months ago. And rthink. with Mr. Hale, that accounts kept along these lines are quite as likely to lead to increase of technical efficiency as those kept along orthodox lines. And, we think, accounts kept on these lines are also not inferior as to choice of alternatives in organization. whatever the objective in mind-greater profit or greater labour employment, or whatever i t is. However, at the Midland, cost accounts along orthodox lines have now displaced those which have been kept along Dr. King’s lines since 1922.

Mr. Dawe has criticised the method in that the cost statement Mr. Hale has produced includes neither overhead expenses nor an indication of the amount of such expenses involved. My practice has been to indicate the acreage involved by the stock or crop concerned and the amount of overhead expenses that would have to be borne by the stock or crop if area was the best basis for apportionment. For instance, since the dairy herd uses about 140 acres of the ZOO-odd acres on the Midland College Fann, the herd would be chargeable with approximately seven-tenths of the overhead expenses.

A minor point I should like to make-Mr. Hale says that he does not charge deprcciafion on, say, implements, to t h e crops. If however he does charge repairs there ma be some confusion ; for a comparison between a farm where equipment is repaired reguLly with one where no repairs are performed will have the misleading effect of showing lower costs on the latter than on the former.

E. A. B d l : The subject is one of

very great interest to me personally. The old system of full costing that has been referred to b Dr. Carsbw fAl into disfavour with me perhaps rather earlier than most, for quite a d d r e n t reason, because on the disbandment of the old Castings Committee in 1921 I Started to build up a private practice in farm accounts and soon found that I was faced with the alternative of charging my farmers so much that they immediately left me, or else charging them so little that I lost money on it. I think you will understand that this full system was thus deservedly unpopular, not least so with myself. But I have been very much interested to see from this paper and from the discussion that has followed it, how much information can be got from a modified system, which possibly might not cost quite so much.

Personally, I rather agree with Dr. Carslaw. that the nlaximum benefit can be got from the farm account by comparing the results ol those individual enterprises which are there with the results of those with which it is proposed to replace them. But a t the same time, I do think that statements such as appear at the top of page 143 are extremely useful from the point of view of measuring the relative efficiency of individual enterprises. I note that in the list of the expenses per cow there appear only things which are direct expenses and which would not be there if the dairy department were replaced by something else. I think, after all, that that system is one which gives you in the end the reatest amount of information. If your departments only bear the prime costs-which f would prefer to call the direct expenses-then when you come to prepare a profit and loss account you have the gross profits from the departments coming in against the oncost expenses which would be there whatever be the departments with which you are working your farm, and that, I think, is extremely important.

One point 1 should like to mention with regard to the nomenc?ature.,< It Seems to me that a large amount of the difficulty here arises from calling this paper Experiences with Cost Accounts in Northern Ireland.” I am not sure that it would not have been better to say “ Experiences with Management Accounts in Northern Ireland,” because when you come to a statement of “ prime costs ” per gallon and see that it shows 12.71d.. then someone who finds that figure and does not understand it completely. is g?ing to take the word “costs,” and think that i t is the whole cost. direct expenses.” I think you would then get away from the difficulty and confusion which has been referred to.

I should like to say how much I have appreciated this paper.

I should call I t

Proceedings 01 Conjerence. 161

Some things I should like to ask Mr. Hale to explain. He has here the heading " grazing," and I have assumed from what he said that this refers to grazing which has been taken outside the farm and which would not have been taken for the cattle or the cows in the dairy herd unless it had been necessary. And then, in the item of" Depreciation of Cows," I should be interested to know what Mr. Hale does in Northern Ireland in order to determine this depreciation. Those of you who listened recently to a wireless talk by Mr. Mansfield from Cambridge may perhaps remember that he referred to thh point and stated that in order to get proper charges for depreciation and upkeep of the COW herd, it was the practice to keep both the cows and the young stock at a more or less stationary value from year to year. He referred incidentally to the difficulty of reconciling this with the Income Tax practice. I should be interested to know how the Northern Ireland people deal with that, because i t seems to me that if you have any change in the numbers- if you have been lucky and have kept, say, 10 more cows or queys than you require to fill up your dairy stock and do not happen to sell them before the end of the year-then to value these a t the low stationary value is not giving that year's accounts the proper credit for having the extra 10. Personally. I think one ought to value all stocks at market value. If you do that the accounts are valuable from the Income Tax as well as from the management point of view. But one ought to take out an equivalent number of cows, heifers, queys, calves or other breeding stock-an equivalent number a t each end of the year-to a special " Stock " Account and then there will be a definite transfer of surplus or deficit from this Stock Account to the general account under a heading of '' Appreciation or Depreciation." If you do this only for the same number a t the beginning and end of the year, then you have that figure segregated and it does not interfere with the value of the general account for management purposes.

W. H. Long: I think Dr. Carslaw introdpced a very interesting point into this discussion when he

drew attention to the difference in importance of the variations in costs of the individual operations on different farms, on the one hand, and of possible reorganisation of a system, on the other. Dr. Carslaw emphasised that in his opinion it is the system rather than the efficiency with which the different departments of the system are worked which is the more important, and I only rise to suggest that I think there is room for a good deal of discussion on the subject before finally accepting Dr. Carslaw's statement. PerSonally, I would not like to say definitely which is the more important, but I do think that one cannot overestimate the importance of the efficient management of a farm within a system. The point that I am trying to make is that within a system there are such big differences in profits on individual farms that I would be inclined to say that the factors making for efficient production within a system have a greater effect on the total profit of the farm than has the choice of the best of two or more possible systems, and to that extent I would disagree with Dr. Carslaw. I would not dare to disagree very strongly, for I acknowledge the importance that lies in the happy choice of a system, but I rather fancy that in actual practice it is the improvements in the actual working out of a definite system which offer greater possibilities of increasing profits rather than the reorganhation of complete systems.

R. McG. Carslaw: May I speak again just to avoid any misunderstanding to which I may have given

rise. I had no intention of underestimating the im rtance'of technical efficiency. Technical efficiency is undoubtedly of great importance, gt in my opinion it is even more important to get the optimum choice and combination of enterprises. We have only to consider the sort of changes that have been effected by British farmers during the last ten years to realise the immense importance of adjusting choice and combination to meet alterations in price and cost levels. Look a t the official statistics for crop acreages and numbers of live stock. Consider the alterations that have taken place in the proportions of total crop production marketed and withheld for live stock fodder. Such administrative adjustments I consider of rime importance, but that is not belittling in any way technical efficiency as a factor inluencink profits.

A : Bvidgas : I did not intend to enter into thir discussion a t all because it is a very long time since

I have had anything to do with the subject of cost accounting. In so far as my connection with the very early work in this subject is concerned, I should just like to say-that t h e instructions which were issued to accountants in connection with cost accountmg work had a very long and difficult confinement. and there was by no means unanimity amongst economists on the principles and methods contained in the instructions. With regard to the views expressed by Dr. Carslaw and Mr. Long, which touched the crux of this question of Cost accounting, I think that i f you were to take certain systems of farming. especially dairy fanning in the west country where the opportunities of alternative enterprises are

Agricultural 'Economics Society.

few &d.the system.of farmidg js fajrly .rigid, then p@+bly .&st accounting r&&;;hhuld be designed m i d y from an efficiency standpoint. In the eastern counties,~&-()'&pemally in our arable.distr.icts where there are a great many posaible alte&tiv& which a fa3ker can adopt, it is quite true that the aspect which Dr. Carslaw has mentioned is as i m & a n t as efficiency in production, and cost accounting must provide the necessary dab. -But the svrprising thing is that despite all the statements about the need for cost +cmunting. a great niany changes in o-tion in recent years haire taken,p&e wi@out any accgunts at all, and it rather suggesb that fanners have'some qliicker and readier. method ,than cost accounts for the pu scof assessing the value of a.change in their methods or type .of production.. I do n o t x o w .what it is, I have never yet discovqed-from f e e , p ' h o w they approach these queMons-but their methods we a challenge to theneed for &borate cost 'aceounteg record$. The chief, Mint is that changes do take ' p l w without, 'g far as we know, any very definite record being kept, and I am a r c that if oainqmists'we are to makeany advance in *is direction we must strive for something w & e approaches more 'to the farmer's ,method of handling questions of 'he sort, This .+*r -r&ed a rather-particular point on Mr. Hale's aper, and it came in@ my .mind when Mr. bberte ,was speaking, that neither he'nor Mr. gale wid very much about the use'of'thbse accounts from the point of view oftheir use in the subditntion of new for existing ent&rp&. I do not know, of course, whether it is the case-that the.* that they have-keh iunning are .%-profitable that ,they do not require to change. I should like.@ G k e +at-poht'.% 'Ke whether, in fact, the accounts have been used in connection, with substitution of- one 'enterprise'foranother. I should like-to add my thanks to Mr. Hale for a most edx&ent paper.

J. R. C U h 6 :

I did not intend to take any.@ in this discrrssion.&,it is'only on minor .poihts that I disagree with Mr. !Hale's attitude toward ,farm costings, but Mr. :Bridges' .heretical

'sbtemedt urges me to say something in favour of the economist ind the'valusofhis work 'to the farmer. I agree that many farmers have made a success of their business withbut 'having ever cons'dted an economist,or having kept cost accounts or fecords.; this doesnot, however, rule out the possibility that they might have been even more rucaxsful.if.they had done'so. I feel strongly that farmers.'in general could!improve considerably .the rirnning of their,fannsiif they kept more and greater debils'of their:business. .Farmers are generally reckoned, to have good memories. I know;but memory is a tricky.jade, and it is unwise to trust to'.this, when the keepihg of a fewmore simple records'would give, as ' i t doa;accurate.information. 'Such records provide data that make itpossible *compare 's&isfactorily one year's experience with previous years';and.one.method or a p t & with .otherswhich mfiy have been previously practised. Accurate diagnosis is omof the-most important steps in the process of combatmg siclmessr and this is no less , h e in-the pursuit of efficiency'and better farming. .I therefore think that'the economist and his rnethodsof analysis.can be dfc6nsiderable value to the farmer in themmning-of'his business. .'As Dr. Carslaw has already said, the main roblem which confronts the farmer in the running of his busineru is that of determining tge kind, number and balance of.enta rises which ,wq the returns from his efforts and from the capital expended. 'P do not see how a farmer c+n very well establish',&eae'conditiogs unlesa'he, has'prwiously "alysed 'very .c+re@ly ,the position of each enterprise by .vine metpod that will determme the approximate itemhed costs of and the returns from the various products.

Proceedings of Conference. 1 63

Unless considerable prominence is given to this kind of practice through the process of analpkg and attempting to value the effect of farmyard manwe in thi 'system, co-mpletely erroneous conclusions may result. The working out of the detailed costs, no &tt& how imperfectly, is more likely to show up the strength or weakness of the practice, Gther'tfmn the method suggested of ignoring it in the business analysis. Lastly the question of rent, which I admit is a difficult one. should be tackled : rent should be spread over the enterprises and not simply lumped a ainst profits. I t may be found where the farm is tenanted that the rent is too high for t k e type of farming that is being carricd on. By spreading the rent over the various enterprises this will be more clearly shown than by the other method. I am certain, at least, that it wil l tend to clear up the relative impdrtance of the rent as a cost factor and therefore leave the farmer in a better position 9 determine what to do. When he enters the farm he has to make an estimate of the rent it should be able to bear and a check on this can best be made by splitting up the rent over the various productive enterprises. His only remedy may be a reduced rent or an0th.y farm.

R. HndnJqn : s can definitely be a proached from two

point& First there is the academic a p p r o x . If absolute and &tailed costing8 are required, then the more academic approach must be adopted, but if we are thinking of costing from the f a r m e r ' x i n t of view, then frequently a more simplified system of costing is just as useful, en we are thinking in terms of efficiency we have to remember that frequently what we are after is not the absolute efficiency throughout the whole enterpriee, but certaia standards of efficiency that can be evolved within a farm department; For instance, by adopting simple methods one can obtain definite standards of efficiency for different sections of pig production.

I agree that in castings it is necessary to allocate overhead8 aa far aa possible, but in my opinion with some of them it is almost impossible. It is impossible to ollocote rent oc~urately in the costing of pigs, and in general with pig costingo overheads cannot allocated in any way which is going to be at all accurate. All we can say is that by making some attempt to allocate overheads we may arrive more nearly to the actual cost. On the question of farmyard manure. a poipt I would make is that it is not the cost of producing the manure that decidu i ts value, but the use to which it is to be put. That is an important point often oyerlookcd. very high value, and yet there are other types of farms that produce very large quantities of manure, which is practically of no value at all to t h e farmer. In many instances if you work up manure values from total food residues, you get a value that i's perfectly ridiculous. . In such cases the cost of the m u r e is actually the cost of production of the animal, and the manure is something merely incidental.

I think that the question of farm cost'

00 arable farms the farmyard manure baq

T. J. Youw:


Mr. Galbraiih (Visakw) : I am an uninvited foreigner and I feel an overwhelming desire to make a few comments.

My justification is perha s that this discussion is, after all, an international one, except that you do not debate dis matter in the ordinary way-there is a tendency to resort to violence I I might just as well in listening to this discussion of farm management say something about the methods in my own country, America. The comments I have to make are two. The first with regard to a comment by Mr. Bridges that the farmer, by resorting to simpler methods, is frequently wiser than the economist. I think a word might be said to the economist. It seems to me that those methods to which the f-er resorb are two. First, the question-will the expansion of expenditure on this ente

substitution of this enterprise for another enterprise increase my net returns? In approaching this problem of farm management there is perhaps a feeling that we have not approached i t with as full a recognition of the question of mechanisation BS we might ; that more serious consideration of marginal analysis might rovide us with a very Useful lesson in our approach to farm management problems. h y second comment is w ~ t h reference to the interesting question of calculating overhead charges. It was quite natural, perhaps inevitable, that in setting up systems of cost accounts for agriculture we should rather slavishly have followed the systems of accounting previously set up for industry. Now, industry may have a different problem in connection with cost accounts. Reference was made to the case of a printer, who must allocate his overheads, for the very important reason that he uses his costs in formulating his prices. In other words, under conditions of what we sometimes refer to as imperfect and monopolistic competition he has to put a rice label on his product. His cost accounts must be subservient to that end. In agricuhre the farmer, after all, must sell to the market. He is not in thatFa py position where he can put a price tag on his product and say " Take it or leave it. t h e market price is something that is made up. His cost accounts are not subservient in the same way as his price problem. It may suggest that the allocation of overheads is a good deal less important in agriculture than it is in industry. I think we should ask ourselves, first-is there, in allocating overheads, a clear logical basis for that allocation ? If there is not, then I simply question whether i t can be of any use. The second question H o e s that allocation maximise the infoxmation that the cost accounting system gives to the farmer ? Remember that the farmer has not the objective of price policy in mind in the same sense that the industrial cost accountants must have. May I add a word of apology for having taken your time in making these two comments.

Presided :

have had an opportunity of hearing him. and call upon Mr. Hale to reply.

R. W. Hab: In presenting my paper I was conscious that I was dealing with what seemed to be

an out-moded method of investigation. If i t had not been for the Secretary's histqnce I would not have done it a t all. For this reason, and also because most of the points rrused in the discussion have been replied to by later speakers, I am glad that the paper has lead to so much discussion.

The matter of the relative importance of determining technical efficiency within departmbnts of the farm and of determining the correct combination of departments has been thoroughly discussed, and the two points of view emphasised sufficiently. I should like just' to remark that I believe when Dr. King originated his costing system he had this question ve He wanted to get a system that would he1 the farmers in determinin z e relative advantages of different enterprises, and I thinkgis syStSm is well adapt4 for that purpose.

After all, if one enterprise is to be substituted for another on the same land and with the same buildings (and hence the same rent) it will be necessary to d a t e the effect of the proposed substitution only on the farm sales and on the prime costs, and it will be no help to have the rent included with the costs, alread determined, of the e-g enterprise. But other overheads, aa was pointed out by I&. Currie, are not to the same extent independent of the system of production followed, and in special cases it may be necessary to estimate the effect of a substitution of enterprises on the overhead costs. But for practical purposes when the system of farming is not being changed much from year to year, it may be assumed, perhaps with mental reservation, that the overheads are not affected by any of the small clhnges made. The surplus and deficit account does then show in the most useful way which of the farm departments have yielded good returns.

increase my net returns I It may be subjective, but i t comes down to that. Or w 3- the

We are all pleased to welcome Mr. Galbraith's presence with us this morning and to I must now bring this discussion to an end

much in view.


Of course, in an individual isolated case like ours, no system could give much help in determining the relative surpluses which might have been obtained from other combina- tions of enterprises, but where you have several farms costed on the same system, all in a certain locality with the same possible outlets for production, the system should be very useful.

, The President asked for more information about the Institute farm. As he suggested, our crops are grown practically entirely for feeding purposes. Our only cash crop is potatoes-about 6 acres, (Perhaps Mr. Currie would hence agree that we were justified in not valuing farmyard manure in our own case). About 200 acres of the farm are under crops in any one year but nearly the whole of the land is cropped a t some time or other. The rotation is roughly oats, roots, oats, hay two years, grazing two or three years. " Pigs " looks a small enterprise in the Surplus and Deficit Account I gave, but it is really one of our big enterprises. It happened to yield rather a poor surplus in the year given. There are no commercial poultry on the farm.

In the discussion on the advantages of allocating rent and overheads, the figure of L943, given in my specimen Surplus and Deficit Account, was brought in. Though some might say it is a weakness in the costing system not to allocate such a large sum, i t seems to me on the other hand that it is a very serious weakness if you have to allocate such a .mge sum on a basis that is not logical. I would add that in estimating the importance of the sum of i943, it would be better to compare it with the total farm expenses, which without rent come to nearly d7.000, rather than with the figure of L1,729. which is the net sum of the surpluses and deficits on the departmental accounts into which th8 farm . account is divided. Mr. Gdbraith made good points in asking whether the allocation of overheads was on a logical basis and whether it maximises the information to the farmer. I think that a logical basis of allocation is so difficult to arrive at, and that the information to the farmer is so Iittle if a t all increased, that it is not worth while making the allocation.

I have made a point of the simplification of the system, mostly with a view to s i m p h g the interpretation of the results, but the saving of time in the actual bookkeeping on a single farm would not be very great. Working out the accounts myself, I suppose I could do all the extra recording, allocations, and posting, that would have been necessary i f our system were more orthodox, in well under a week.

Information was asked for on some of the items in the table of our average prime costs of milk production. The depreciation of cows is worked out by the standard valuation method, mws in the herd at the beginnin and at the end of each accounting year being valued a t the same flat rate per head. f realise that there are snags in this method, as pointed out by Mr. Bell, but I do not see how his p r o p d for a special " Stock '* account would overcome the difficulty of paper profits and losses due to valuing breeding stock at current market prices. Grazing costs are merely the prime costs of cultivations, manuring, and so on, on t h e fields actually grazed on the farm, and are allocated to the stock on a grazing-unit basis. If it could be assumed that the fields would have to be cultivated and manured whether they were grazed or not, these grazing costs might be considered similar to overheads, but as they do not include any allocation of rent or other overheads, I think they can be considered as being prime costs and hence in the same class of costs as the concentrates. Under the heading of concentrates I have classified the costs of purchased cakes and meals and of home-grown oats at conservative market values, so that there is no element of overhead costs included under this heading.

As I pointed out, we make great efforts to ensure that peo le do not think that the y!sts we publish are the total costs in any way. We always A them prime costs, though direct costs " d g h t be ?! good a name. (And a purist might justifiably argue that our accounts are not really

In reply to Mr. Roberts' point about repairs to implements. I should explain that these are dealt with in the same way as depreciation. When they cannot be charged dbc t . to one account. both are canied-tPtheSurplusYld-Defici+Accourrt aa*verheada.* -

I think i t has been applied by Mr. Thomas in this way.

Mr. Bell discussed the saving of time in the actual bookkee ing.

I h o w that in this subject the question of nomenclature is difficult.

Cost " accounts a t all).

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bfr. Hale adds the following note :-'I In reading through the discussion I see that the remarks I made at the finish were rather inadequate, partly because I did not feel justified in taking more time over them, and I have taken the liberty of making a few additions to them."


The President then called on Mr. Senior to read his paper, adding " I should like to say how much we are personally indebted to him for preparing this paper at such exceedingly short notice."

MR. SENIOR spoke as follows :-Mr. President, Ladies and Gentlemen, thank you very much for those kind words. It was rather a tall order to prepare a paper at the last moment but I hope it wil l be interesting. I do not propose to read my paper through, I am told this is rather presumptuous but it does not lend itself very well to formal reading, and in the second place I think I might usefully try and talk round it for some minutes. The Department of Agriculture for Scotland, working in close collaboration with the Agricultural Colleges at Aberdeen, Edinburgh and Glasgow, have for eight years now been analysing and publishing accounting statistics. The accounts are in the first instance completed and used by the Advisory Economist at each College in his research and advisory work. Where the farmers also agree to co-operate with the Department, as is generally the case, the accounts are then forwarded to the Department anonymously under code number. In the beginning the records were few, but they have gradually increased in number until at the present time the total handled is over 300 per annum.

The aim underlying this work is to provide some continuous measure of the changing fortunes of the industry as revealed by the analysis of financial accounts. This is a type of information which has been conspicuously absent in the past and even now is very meagre. It has always been clear that only a comparatively small number of farm accounts could be obtained and analysed each year. The possibility of ensuring authority for the statistics by sheer weight of numbers of accounts was obviously impracticable. If, therefore, a small number of accounts were to be used to indicate the affairs of a large body of farmers or even perhaps of the industry as a whole, then some scientific basis had to be found for ensuring representativeness to the sample. With this end in view, therefore, a parallel piece of work has been proceeding to obtain a statistical classification of farms in Scotland by type. We are, I realise, particularly fortunate to be in a position to do this. I t has meant dealing with the 4th June returns for every individual I' holding in Scotland. It has been and remains a big piece of work. Fortunately, we can now see our way to bringing the first stage to a conclusion in the not too distant future. The statistical layout of agriculture by types of farming that we shall obtain is not of course a static thing and it may be necessary to consider redoing this work after some period of time has elapsed. On the other hand, it may be possible to alter the present technique of the annual analysis of the Agricultural Statistics so as to incorporate the essential features of the type classification of holdings to which I have just referred. One section of this statistical research has already been published, in rather more detail than the remainder is likely to be, in the Report on the Profitableness of Farming for 1028-29. For details as to technique I would refer you to that Report.

In default of this basis for the selection of samples of farms from which to draw accounting data, resort has so far been had to selection according to the judgment of those who had a wide knowledge of the agriculture of various districts. In addition, selection was at first only carried out among the more important farming types. This has answered quite well, though naturally as there is no very precise knowledge yet as to the degree of representativeness in the samples, care has to be exercised in interpreting the financial results. When the statistical distribution of farming types is fairly clear, then will come the stage of adjusting the sample to the " population." All this I admit is a very slow and gradual process and necessitates a long view. Nevertheless, I


think we can claim to be progressing. An article in the Scottish Journal of Agriculture for July, 1936, dealt with the adjustment of sample to population in the Border Counties and attempted to illustrate how a well chosen sample of accounts might be made to speak for a very large body of farms. The sample of farms from this area chosen in the light of general knowledge as typical was found to be different in many respects from what it would have been if it had been chosen in the light of accurate statistical knowledge of the distribution of farming types in the area. This served to confirm us in our view that, until such time as we could utilise a more scientific basis of selection, the accounting results should only be considered as giving a broad indication of the state of affairs in general. It would seem hopeless to attempt to ensure by any other than statistical means the representativeness of a sample which may never amount to more than one or two per cent. of the population.

The accounts received at the Department are as I mentioned earlier obtained in the normal course of research and advisory work carried out at the three Agricultural Colleges. The results of the analysis of the agricultural statistics should eventually provide a very useful backpound for work at the College as well as at the Department. I have described in broad outline the plan of work at present being followed at the Department because it may make some of the points in the paper clearer and give a background to it. The paper marshals certain facts relating to the agricultural depression in Scotland, most of which have already been published a t some time or another. As a starting point the Economist index of business activity is introduced to give an idea of the general course of depression in the economic life of the country as a whole. The average profits earned among four broad type groups of farms are next examined. In considering these as a whole it would obviously be very valuable to be able to adopt some method of weighting, assuming of course that the samples are really representative-which is doubtful as yet. This is where the research among the statistics will prove useful. Without weighting, however, the facts portrayed suggest that the experiences of agriculture as a whole agreed fairly closely with those of the whole community, though I should qualify this by pointing out that the incidence in the case of agriculture seems to have been relatively more severe. The experiences of the four type groups provide quite marked differences, however, and I have no doubt that further refinement in grouping would have provided more variants. Certain other aspects of the history of the period are touched upon where there is any useful information as for example output, wages and rents. There are some, however, about which we know little or nothing-credit in various forms, changes in the size of holdings and in the number of holdings per farmer and so on. I t is our hope that in the future we shall be able to obtain and use economic statistics of this kind in addition to the accounting statistics.

The whole paper while proyiding only a brief review of the facts of the period so far as they are available does convey some of the essential happenings of the period and puts them in something like their true perspective. There is a great deal more to be obtained from the accounting statistics in the eight published Reports on the Profitableness of Farming than has been produced here, and as I have just indicated it is our hope that thpy will be even more comprehensive and useful in the future, particularly as we are now at last up to date and have time to review the position. I trust that these remarks coupled with the paper will, apart from the immediate interest of the facts themselves, give you an inkling of what we are trying to do at the Department and also an idea of how we are doing it.

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EXPERIENCES WITH COST ACCOUNTS IN NORTHERN IRELAND