tailored regulations still in the uncertain future. This cannot help but leave some permanent mark on our program. Repeal of these provisions will not provide us with a perfect price-control law, but it will give us an act under which we can move forward with a sound and workable stabilization program. Mr. PAUL M. GREEN, PRICE WATERHOUSE & Co., New York, August 29, 1951. Director of Accounting, Office of Price Stabilization, Washington, D. C. DEAR SIR: In your letter of August 27th you have requested our views on the following question: "Without reference to the desirability of price control and without expression of your opinion as to whether prices are now high or low, or whether they should be higher or lower than they now are, do you believe that from a technical accounting point of view it is advisable to administer price control on the basis of total costs, including selling and administrative expenses, broken down by individual units of material or products?" In our view it is highly impracticable to administer price control on the basis of costs, including selling and administrative expenses, broken down by individual units of materials or products for the following reasons: (1) Most business enterprises are not in a position to furnish information showing allocations of the total costs of production, distribution, and administration by individual units of materials and products. (2) The revision required in cost systems to furnish this information would involve an inordinate expense. It would also involve a very considerable time interval for the preparation of the information-of such an extent as to invalidate its usefulness as a basis for price control. (3) Even if all industrial companies were able to furnish the detailed information required, the Office of Price Stabilization would have to organize a work force of thousands of accountants to study and review the reports in order to administer price control. Such a development is neither practical nor desirable. We do not believe that a sufficient number of competent accountants could be found to do such a tremendous administrative task. As requested in your letter, we have confined our views to a technical accounting viewpoint without consideration of the general desirability of price control or of possible alternate methods of implementation. Furthermore, we have not considered whether the question submitted to us is a proper interpretation of the requirements of the price-control statutes now in effect. Yours very truly, PRICE WATERHOUSE & Co. Mr. PAUL M. GREEN, UNITED STATES STEEL CORP., Director of Accounting, Office of Price Stabilization, Economic Stabilization Agency, Washington, D. C. DEAR MR. GREEN: We have your letter of August 27 with respect to the administration of the so-called Capehart amendment to the Defense Production Act of 1950. It is our opinion that the discussions leading to the enactment of the Capehart amendment, as well as the spirit and intent of the present law, are on the basis of total cost. The law defines cost as "including material, indirect and direct labor, factory, selling, advertising, office and all other production, distribution, transportation and administrative costs." That being the case, we feel that the Capehart amendment permits administration of price control on a total cost basis without change in the law. In some cases it may be desirable to present cost changes on a specific productfor-sale basis, and in such cases it appears to us that the law will allow such productby-product presentations. In other words, it is our judgment that the law is on a broad basis and can be interpreted in a practical way to deal with the myriad conditions encountered in industry and commerce. In cases where there are a great many products for sale, further varied by size, finish, etc., it would be extremely burdensome to calculate individual product costs to be submitted to substantiate allowable price changes. The detail of checking these numerous items would be very costly to the Office of Price Stabilization in such cases, but, as indicated, the individual product approach may be practical in some instances. We recommend that the general approach to the measurement of the increases and decreases of cost of production and selling and administrative expenses be by calculation of cost item changes on an over-all basis, and that the total of allowable price change be so determined. Following is a listing of typical cost items and an approach to the measurement of increases and decreases in item costs: Interest and other costs of long-term Change in rates, charges, or debt. debt. State, local, and miscellaneous taxes Rate and assessed value changes. (excluding Federal taxes on income). It will be noted that the indicated items measure increases and decreases in costs of production and include as well all the components of selling, advertising, office and other distribution, transportation, and administrative costs. Sincerely, E. M. VOORHEES. NORTON CO., Mr. PAUL M. GREEN, Worcester 6, Mass., August 29, 1951. Director of Accounting, Office of Price Stabilization, Temporary S Building, Washington 25, D. C. DEAR SIR: You have requested an opinion with reference to the following question: "Do you believe that from a technical accounting point of view it is advisable to administer price control on the basis of total costs, including selling and administrative expenses broken down by individual units of materials or products?" It is my opinion from a technical accounting point of view it is advisable to administer price control on the basis of total costs. A dollar spent, whether it be for materials, supplies, factory wages, clerical wages, sales salaries, or real-estate taxes, is a cost under present accounting principles. One cannot say that expenditures for materials and factory wages are the only items of cost. Certainly the wages of billing clerks are cost items just as much as the wages of the production worker. The variations in the treatment of costs in industry make it advisable to administer price control on the basis of total costs. I regret that more time was not available to consider this matter. NORTON Co. Controller. GENERAL MOTORS CORP., Washington 6, D. C., August 29, 1951. Mr. PAUL M. GREEN, Washington 25, D. C. DEAR MR. GREEN: We have your letter of August 27 asking for our opinion as to whether it is advisable to administer price control under the Capehart amendment on the basis of total costs, including selling and administrative expenses, broken down by individual units of material or products. The question raised in your letter is not new. We had a similar situation under OPA as to the manner in which cost data should be shown and presented for review. Again, within the past year, automotive industry representatives met in a series of meetings sponsored by OPS under Mr. John Hancock to draft a practical approach to a pricing formula for the passenger car industry. Both of these instances involved the preparation of cost data for a purpose similar to that which you are now considering and a basis of reporting was worked out which did not require the calculation of total unit costs. In these cases, the basic approach was the same. This contemplated an understandable, workable, and verifiable presentation of the increase in cost segregated as tó (1) material (direct and indirect), which was based on the change in the cost of materials entering into production of a product, and (2) payroll, based upon the change in wage rates (including fringe benefits), during a given period. Minor variations of this principle were available which provided flexibility for the single product and the multiproduct company. I believe that the intent of the Capehart amendment provides for a continuation of this same principle which can be administered. It would be most unfortunate for all concerned if we were now to depart from a principle and practice which has been proven. While the quotation contained in your letter is directed solely at the practicality of determining "total unit costs, including **" the body of the letter indicates that you are primarily concerned with the administration of the Capehart amendment. As we explained to you yesterday morning, we feel that the intent of the Capehart amendment can be met satisfactorily by dealing with cost increases (or decreases) since the base period. The Capehart amendment itself does not contain any reference to total "unit" costs and our experience indicates that cost increases can be determined without dealing with total "unit" costs. * As you know, we have determined a "cost increase factor" for our individual car lines which we believe adequately demonstrates the total material and wage and salary payroll increases since the base period. This is subject to verification by review of our records. These increases can be calculated as a percent of unit sales price in determining the increase per unit required to reflect these cost. increases. We recognize the difficulty of determining total unit costs, under usual cost accounting practices which in our case do not cover the allocation of all expenses, beyond standard factory costs, on a unit basis. To require a company to demonstrate the validity of so-called total unit costs by a series of detailed accounting breakdowns is not practicable in the case of a multiproduct company. We should like to emphasize, however, that it is quite practicable to show a cost increase factor on a unit basis that is a realistic measure of the type of cost increases required to be reflected by the Capehart amendment, and we would urge that the OPS direct its attention at this aspect of the problem. In order to comply with the over-all intent of the Capehart amendment it is only necessary to give consideration to the other elements of cost such as depreciation, insurance, taxes, advertising, etc. These cost elements do not normally lend themselves to measurement in terms of cost per unit of production. While accounting practices and systems vary greatly from industry to industry and, indeed, from company to company in an industry, and while many companies may not be in a position to furnish unit costs broken down by individual units of production for these elements, nevertheless increases or decreases can readily be calculated. As an example of what we have in mind, the following formula sets forth the basis on which a calculation could be filed under the Capehart amendment: Net price, base period.... Material increase (based on bill of material for best-selling item in each category). Labor cost ratio to sales (percent). Increase in payroll (percent).. Other cost increases.. Base period: Total company net sales. Other costs (amount). Sales ratio (percent). Current period: Total company net sales. Total cost increase.. Ceiling price.... We believe, as we have stated above, that a workable system of price control can be applied under the terms of the Capehart amendment based on readily available accounting data showing (1) the increases in labor costs and material costs from a "base date" to some current date on a unit basis for the best-selling commodity of a production line or category, and (2) the increases in all other costs shown in the aggregate. Yours very truly, Mr. PAUL M. GREEN, R. C. MARK, Comptroller. LYBRAND, ROSS BROS. & MONTGOMERY, Director of Accounting, Office of Price Stabilization, Washington, D. C. DEAR MR. GREEN: This is in response to your letter of August 27 in which you solicit our opinion on a question arising out of the Capehart amendment to the Defense Production Act. With the exception of companies dealing in a single product having no variations in size or quality, the accounting systems of industry generally are not designed to develop unit costs including "selling, advertising, office, and all other distribution, transportation, and administrative costs." While costing procedures in different industries and as among different companies vary, it is a rare case where they are designed to distribute, among the products manufactured, costs other than those relating to material, direct and indirect labor, and factory (or production) overhead. We are familiar with situations under which it has been necessary to make some distribution of selling, distribution, and similar expenses among lines of production (as, for example, in justifying cost differentials under the Robinson-Patman Act). In our experience, such determinations have always required special costing analyses and have been exceedingly time consuming. Difficult questions of allocation arise, many of which must be decided along arbitrary lines without the guidance of standards developed by general practice. Accordingly, it is our opinion that generally it would be impracticable for industry, without amplifying, supplementing, and extending accounting systems currently in use, to develop dependable and defensible "total costs, including selling and administrative expenses, broken down by individual units of material or products." Very truly yours, LYBRAND, Ross BROS. & MONTGOMERY. Mr. PAUL M. GREEN, Director of Accounting, HASKINS & SELLS, CERTIFIED PUBLIC ACCOUNTANTS, New York 4, August 29, 1951. Office of Price Stabilization, Washington 25, D. C. Dear Mr. GREEN: I have your letter of August 27 in which you refer to the provisions of the Defense Production Act, as amended, and request that I answer the following question: "Without reference to the desirability of price control and without expression of your opinion as to whether prices are now high or low, or whether they should be higher or lower than they now are, do you believe that from a technical accounting point of view it is advisable to administer price control on the basis of total costs, including selling and administrative expenses, broken down by individual units of material or products?" In answering your question I shall not attempt to interpret the accounting requirements of the Defense Production Act, as amended; my comments will be limited to the practicability from a technical accounting point of view of administering price control on the specific basis stated in your question. As you well know, cost accounting for a manufacturing company is a complicated process which involves many matters of judgment and many alternative procedures which are acceptable but which do not tend to produce comparable results between industries or even among companies in the same industry. The administration of a price-control act that is related to cost is complicated and difficult at best. It seems to me that to the extent that it is based on extensive costing procedures, it rapidly becomes more difficult to administer even to the point of becoming impracticable not only from the standpoint of enforcement by a Government agency, but also from the standpoint of compliance on the part of manufacturers. Based upon many years of public accounting experience, it is my impression that while many manufacturing companies have reliable records of total costs and of increases in total cost, the vast majority of manufacturing companies do not have cost records which would be reliable as to cost of individual units of material or products. Even when one considers the simpler elements of cost accounting such as direct materials and productive labor, there are many difficulties involved because of inconsistencies between companies as to what materials are considered direct materials and as to what labor is considered productive labor. In computing unit costs these difficulties increase as other items, such as factory overhead, are added to the computation, and it seems to me that it becomes impracticable to achieve comparable results when an attempt is made to allocate selling, advertising, distribution, and administrative costs on a unit basis. It is probable that there are not many companies in the country whose accounting systems provide for the allocation of selling, advertising, distribution, and administrative costs in their costing procedures. Nothing that I have said heretofore is intended to refer to the question of whether total cost, including selling and administrative expenses, should be considered in administering price control, which I consider to be a policy question; it is intended to apply only to the breaking down of such costs to individual units of material or products. If selected as the basis for price control, total costs or increases in such costs probably could be demonstrated without the necessity of computing total unit costs. However, in answer to your specific question, it seems to me, for the reasons outlined in the foregoing paragraphs, that from a technical accounting point of view it is not practicable to attempt "to administer price control on the basis of total cost, including selling and administrative expenses, broken down by individual units of material or products.' Yours very truly, JOHN W. QUEENAN. SCOVELL, WELLINGTON & Co., PAUL M. GREEN, Director of Accounting, Office of Price Stabilization, Washington 25, D. C. DEAR MR. GREEN: This statement is sent to you, in answer to your request of August 27, for presentation at a meeting of the Senate Committee on Banking and Currency. It is based on the experience of the writer and of his firm cover |