Advantages of Uniform Accounting*

BY ANTHONY B. MANNING

In all fields of activity today we find that persons, firms and corporations in similar trades or industries are banded together in associations for the purpose of a closer trade relationship. Discussions on co-operation, prices, credits, etc., are of particular interest; matters of legislation that are beneficial or detrimental to their particular industry are debated; committees are formed for the purpose of investigating particular phases of various questions that are vital to the health of their trade or industry, but rarely do we find the different members of an association exhibiting statements of their cost of doing business for the benefit of the other members.

In the operation of any business, large or small, the intelligent management and financial success depend not only on shrewd buying of raw commodities but on economical operation as well. If the proceeds of the sales are higher this month than they were last month, and the cost of operating has increased in a larger proportion, even though the cost of raw materials and supplies may be normal, it will naturally be found that the profits have decreased. Then, again, even though the profit and loss statement of a particular business may compare favorably from month to month, it would be of interest to know just how it compares, item for item, with similar reports of other members of the same trade association in that particular locality. But, unfortunately, this data is more or less sacred to the average business man and as a result no comparison is possible.

How is the broad-minded business man to know how his operating costs compare with his competitors'? By a comparison of his statement with a consolidated statement of all the members of his association.

The basis of all comparisons is uniformity of system, without which the comparison of the various elements of operating costs, overheads, etc., would be misleading. In each industry a standard system of accounts should be devised-call it standard practice, standard procedure, classification of accounts or any

A thesis presented at the May, 1919, examination of the American Institute of Accountants.

other name if you will-but nevertheless it must be in principle fundamentally adapted to the particular industry and recognized as standard. It must be made plain just what should be contained in each account and should reveal the necessary procedure to follow in clearing the "wash" accounts and setting up the reserves at the end of each accounting period.

As an example, take the telegraph companies and the telephone companies. The government has published in pamphlet form the procedure necessary for these two classes of industry and, elaborate as they are, they embody all the conditions that are apt to come up for treatment. They set out in no uncertain terms what each account should contain, with a system of symbols to designate each account classification, the "wash" accounts and reserve accounts necessary and how to clear them. These two pamphlets are good illustrations of what a standard procedure, briefly stated, should be. The uniform system should be properly installed in all the plants of the same industry by competent accountants, so that the peculiarities of each plant can be taken care of, as they develop, without interfering with the main scheme.

With a uniform system of accounts properly installed, it is advisable for the accountant engaged to make a monthly audit in detail and to prepare statements of operating costs, selling costs, administrative costs, etc., showing the relationship to the whole. A statement like that on page 115 would bring out data for comparison which would be beneficial to the management of any manufacturing business.

While of course the above statement is not complete as to all the elements of expense under each heading, it will illustrate the segregation attempted for comparison. It may be said that this form with a few changes has been used in plants of the same company where a continuous process cost system is in operation.

If each manufacturer would adopt a uniform system specially designed for his industry and a uniform statement of manufacturing, selling and administrative costs compiled and certified every month or every quarter by a competent accountant, and if the association would appoint an auditing committee or engage a certified public accountant as a confidential disinterested party to consolidate the individual statements of each member and have this consolidated statement published in a special pamphlet or in the association's journal, each member could compare the

percentages of each element of expense in his particular business for the period with the percentages of the consolidated statement, which would be the average of all statements.

In this way he could determine what elements of cost were above the average, investigate the cause, eliminate costly methods and still attain the desired improvement. A comparison of this kind will enable each manufacturer to trace the leaks in his business without knowing the individual competitor's costs. When the comparison is made, he knows that the individual statements used to make up the consolidated statement were taken from systems of accounting similar to his. He knows that what was considered unproductive labor in one plant was considered unproductive labor in his plant and all the other plants of the particular industry. He also knows that if the percentage of any one element of cost as shown in the consolidated statement is lower than the percentage representing a similar element of cost in his statement there must be some other company whose cost must be lower than the average, as the consolidated percentage is an average of all statements combined.

The system in use in most large corporations operating a number of plants and having accounting records kept in each individual plant, controlled by a uniform system from which monthly reports are rendered to the main office for purposes of consolidation, is similar in principle to the method advocated for each industry. Consolidation is simplified, as all statements are built up on the same basis. If the procedure has been followed the basis of comparison is uniform.

To carry the idea as applied to the industries a step further, everything else being equal, each local organization of the particular industry could forward the local consolidated statement to the state body and each state after consolidating the several local statements could, in turn, forward the consolidated state report to the national association. In chart form this appears on page 117.

So that a statement could be published showing the results of the country by sections, viz:

Statement of Operating Costs and Profits