Chapter 36 Chapter 7 deals with the relationship between direct costs, total costs and associated products.cost of sales.risk insurance.reproduction cost

Section 1. Difficulties in getting the various departments of a mixed enterprise to properly share production costs, especially sales costs. Now let us consider direct and supplementary costs, with particular attention to the proper allocation of supplementary costs to the associated products of the firm. A product produced by one department of an enterprise is often used as a raw material in another department, so that the relative profits of the two departments can only be determined by a sophisticated double-entry bookkeeping system; but in fact, it is more common to make estimates by subjective guesswork.Agriculture, especially when perpetual pastures are combined with long-term rotations of cultivated land on the same farm, is a good illustration of this difficulty.

Another instance of this difficulty is that of the owner who has to divide the cost of his ship between a very heavy cargo and a bulky but not very heavy cargo.He tried to carry as much of a mixture of the two types of cargo as possible; an important factor in the struggle for survival of competing ports was the disadvantage at which those ports could only supply bulky cargoes, or only heavy cargoes; The port, whose chief export is heavy but not large, attracts to itself those industries from which it can be shipped cheaply.The success of the Staffordshire pottery factories, for example, was partly due to the cheap shipping of their goods by ships from the Mersey carrying iron and other heavy cargoes.

But in the shipping industry there is free competition, and it has a great deal of discretion as to the size and shape of the ships, as to the routes and general methods of business; therefore the following general principle applies in many respects, viz. The relative proportions of the associated products must be adjusted so that the marginal cost of production of each product is equal to its marginal demand price.In other words, the quantity carried by each type of cargo has a constant tendency towards the equilibrium point, at which point the demand price for that quantity is just enough to compensate its freight under normal commercial conditions. Direct costs (monetary), but also include all supplementary costs directly or indirectly incurred by the business in the long run due to transportation.In certain branches of the processing industries, a preliminary calculation of the total cost of production of any class of goods is usually made by assuming that they bear the share of the supplementary costs of the enterprise and their direct costs or the amount of special wages employed in producing them. method carried out.Then there is an allowance for those products which require more or less than the average amount of space, lighting, or the use of expensive machinery; and so on.

Before the second quarter. .The distribution of the two elements of firm supplementary costs among the different sectors requires special attention.They are marketing costs and risk insurance premiums. There are several commodities which are easily marketable; they have a steady demand, and it is often safe to produce for reserves.But it is for this very reason that competition drives down their price so sharply that it cannot furnish a substantial surplus beyond the immediate cost of producing them.Sometimes the production and sale of these commodities can be made almost automatic, so that they bear little administrative and marketing expense.In practice, however, these commodities are often burdened with even a small share less than they should be, and employed as a means of establishing and maintaining commerce Regularized other commodities; for there is no such intense competition as regards them.It is often advisable for manufacturers, especially those in the furniture and clothing industries, and for retailers in nearly all trades, to use one of their wares as a means of advertising the others, and to make the first class The supplementary costs are borne less than their proportional share, so that the goods of the second class bear more than their proportional share.They place in the first class those commodities so uniform in character, and so common in consumption, that their value is well known to almost all buyers; more and less thought in buying at the lowest possible price.

All difficulties of this nature are exacerbated by the instability of supply prices which arise whenever the tendency to increasing returns is strongly in operation.We have seen that, in looking for normal supply prices in these cases, we must choose a representative firm, operating at normal capacity, so as to obtain the average internal and external economies produced by the industrial They vary with the success or failure of particular enterprises, but they generally increase when the total volume of production increases.Obviously, if a firm produces a commodity whose increased production would give him more internal economy, it would be worthwhile to make a great sacrifice in trying to sell the commodity in a new market.If he has a solid capital, and the commodity is in great demand, this expense of promotion may be great, and may even exceed its immediate cost of production.It is probable, in fact, that if he were selling several other commodities at the same time, how much of this distribution of costs would be due to the current year's sales of each of them, and how much would be due to the future business he was trying to establish for them. We can only make a rough estimate of what we should bear in exchange.

In fact, if the production of a certain commodity obeys the law of increasing returns, thereby giving great advantages to large producers, then this production can easily be manipulated by a few large factories; and the normal marginal supply price cannot Use the above method to find out, because that method assumes that there are many competitors of enterprises of various sizes, some of which are new, some are old, some are in the rising stage, and some are in the declining stage.However, the production of this kind of commodity by a few large factories is actually monopolistic to a large extent; its price is mostly determined by the struggle among competitors who strive to expand their sphere of influence, and it is difficult to have a real normal level.

Economic progress has continually provided new facilities for the marketing of goods at great distances, not only by lowering the cost of shipping, but often more importantly by bringing distant producers and consumers into contact with each other.Nonetheless, producers who live locally have great advantages in many industries.These advantages enable him to compete with distant competitors whose methods of production are more economical.He can sell as cheaply as they in his neighbourhood, for though the cost of producing his commodities is higher than theirs, he saves a great part of the cost of their distribution.Time, however, is on the side of more economical production methods; if he or some new firm does not adopt their advanced production methods, his distant competitors will gradually enter there.

What has yet to be studied is the relationship between the premium for a firm's risk insurance and the supply price of any particular commodity produced by that firm. Section 3 Risk Insurance. Manufacturers and merchants generally carry insurance against fire and damage at sea; the premiums paid by them are supplementary costs, a part of which must be added to the direct costs, in order to determine the total cost of their goods.But no one insurance policy can protect against most business risks. Even in the case of fire damage and loss at sea, insurance companies must account for possible indiscretion and deceit; therefore, apart from calculating their own expenses and normal profits, they are not obliged to charge a premium, which is higher than those The real equivalent of the risk in a well-managed building or a well-managed vessel is much greater.But the loss by fire or accident at sea, if it should occur, is likely to be so great that paying this extra expense will mostly be worthwhile; partly from special business reasons, but chiefly from the aggregate utility of increasing wealth. It cannot increase in proportion to its quantity.But most of the business risks are so inseparably connected with the general management of the business that the insurance company which bears them is actually responsible for the business.Each factory, therefore, must act as its own insurance agency with respect to these risks.What is expended under this heading is a part of its supplementary costs, a part of which must be added to the direct costs of its various products.

But there are two difficulties here. In some cases, the risk insurance premium is easily ignored, and in other cases, it is easily calculated twice.A great shipowner, for example, is sometimes reluctant to insure his ships with marine insurers; and puts aside at least a part of the premiums he pays on them, in order to establish his own insurance fund.But he still has to add the premium to its direct costs when calculating the total cost of operating a boat.As regards those risks which he cannot afford to buy insurance policies at a reasonable price (even if he wanted to, he would have to deal with the same in one form or another. Sometimes, for instance, some of his ships would lie in port up, or will earn only a nominal freight, and in order to make his enterprise profitable in the long run, he must in one form or another charge an insurance premium on his smooth voyages to compensate for those that are not. loss caused by voyage.

But in doing so, he generally does not place a formal premium on his account, but by a simple method, viz., taking the average of the good sailings and the bad sailings; After averaging, the insurance premium for these risks cannot be included in the production cost as a separate item, otherwise the insurance premium calculation will be repeated.Having decided to take the risk himself, he seems to spend a little more on the precaution against it than the average cost of his competitors; and this extra expense is charged to his balance sheet in the usual way.In fact it is another form of premium; therefore, he should never calculate the premium for this part of the risk separately, because then he would calculate it twice.

When a manufacturer calculates his average sales of clothing materials in the long run, and uses past experience as a guide for his future actions, he has already calculated the reduction in the price of the machines that are caused by new inventions that make the machines nearly obsolete. risk, and the risk of depreciating his commodity by changing the style.If he calculates the insurance premium for these risks separately, he will repeat it. The fourth quarter continues. It can be seen that when we calculate the average income of a risky enterprise, although we need to calculate the cost due to instability, we must never calculate the risk insurance premium separately.It is true that an adventurous occupation, such as gold mining, has a special appeal for certain persons: in which the risk of loss is less attractive than the opportunity for riches, even though the latter is far less valuable on the principles of insurance estimators. ; As Adam Smith pointed out, a risky industry with a legendary factor is often so crowded that its average return is lower than when there is no risk.But in most cases the effect of the risk is in the opposite direction; a railroad stock that is likely to pay four per cent sells for more than a stock that is equally likely to pay one cent, seven per cent, or anything in between. Each trade has its own peculiarities, and in the vast majority of cases the scourge of instability, though of little importance, is of some concern; The average of unstable outcomes) is slightly higher than the risk-taker's self-confident gain if he differs very little from the average.Therefore, we must add the instability (if it is very large) reward to the average price; even if we add the risk insurance premium, we should calculate the larger part of it twice. The fifth section reproduces the cost.Some of the remaining chapters of this article can be ignored for the time being. The discussion of business risk once again shows us the fact that the value of a thing, while tending to be equal to its cost of production (money), does not coincide with it at any particular time, except by chance . When Carlyle saw this, he suggested that we should talk about the relationship between value and reproduction cost (money) instead of the relationship between value and production cost. But so far as normal values ​​are concerned, this suggestion is meaningless.Because the normal cost of production and the normal cost of reproduction are synonymous; there is no real change in saying that the value of a thing has a tendency to be equal to its normal cost of reproduction (money) rather than its normal cost of production.The term reproduction cost is not as simple as the term production cost, but it refers to the same thing. This argument for change is flimsy even on the readily accepted fact that, in certain rare cases, the market value of a thing is less distant from its cost of reproduction than from the particular cost of production. The distance between the actual cost of things is large.For example, the present price of a ship built before the recent great improvement in iron-making may differ more from its reproduction cost (i.e., the cost of producing another like ship by modern methods) than it did in the past. The difference in cost between ships is smaller.But the price of an old ship may be less than the cost of its reproduction, because the art of ship design has advanced as rapidly as the method of ironmaking; Furthermore, steel has replaced iron as a shipbuilding material.It may still be asserted that the price of the ship is equal to the cost of an equally suitable ship of modern design and modern method of manufacture.But that is not the same thing as saying that the value of a ship is equal to its cost of reproduction; in fact, as so often happens, when an unexpected want of ships raises the cost of freight sharply, those who are eager to secure a large profit in profitable business, The price to be paid for a seaworthy vessel is substantially greater than the price charged by the shipyard for another equally suitable vessel to be delivered at a later date.Apart from the fact that buyers can conveniently wait for the production of new supplies, the direct effect of reproduction costs on value is insignificant. Moreover, reproduction costs and prices are irrelevant in the following cases; for example, grain in a besieged city, quinine in short supply on a malaria-endemic island, Raphael's paintings, unloved books, obsolete There are only half a dozen armored boats in the market, fish oversupplied, hardly any fish in the market, dumb bells, clothing out of season, or a house in a disused mine. It is recommended that readers inexperienced in economic analysis delete the following seven chapters and read directly Chapter 15, which contains a brief conclusion to this article.Indeed, the four chapters dealing with the relation of marginal cost to value, and especially Chapters VIII and IX, are concerned with some of the difficulties involved in the term "net product of labour"; which term is used in Book VI. of.But the general explanation given there suffices for the time being in most cases; and some of the complications associated with it are left for discussion at an advanced stage of economic research.