VISION FOR BEAN COUNTERS
Robert Theobald wrote,
>We prefer bean-counters to people of vision.
I'm sure Robert will forgive me for taking issue with one sentence, out of
context. The problem is not just that we prefer bean-counters to people of
vision, it is also that we prefer our bean-counters to be without vision.
I would describe myself as an artist. I'll justify that by pointing out that
I make pop-up books and my credentials extend to having my work selected in
juried exhibitions. As an artist, I take an artist's approach to social
policy analysis. Some on this list may even recall my mentioning "narrative
policy analysis" in the past. But I tend to keep my working methods to
myself these days.
To make a long, long story short, my narrative policy analysis of the hours
of work issue has led me on a winding path to bean-counting: tax accounting,
contract costing for collective bargaining, cost accounting, accounting
history. And what has appeared to my artist's eyes is something that seems
not to have been seen by the bean counters themselves. It is a small
technical oversight with consequences that far exceed the turmoil caused by
the year 2000 computer problem. It is a similar type of problem to the year
2000 problem: back when they implemented the systems, they didn't anticipate
the long term consequences and changed circumstances.
What it boils down to is the treatment of direct labour costs in cost
accounting. From the perspective of the 19th century industrial producer,
direct labour costs varied with the volume of production and therefore
seemed to be the ideal candidate for controlling costs. In the late 20th
century, there is very little labour that still remains "direct labour" but
accounting practice simply doesn't acknowledge this. By putting on 19th
century blinders, corporate entrepreneurs of the past twenty years have
pretended to "cut costs". They haven't cut a single cost, they've simply
shifted the cost of doing big corporate business on to society. It makes
*their* balance sheet look good; therefore it is good.
Let's travel back in time to the latter part of the eighteenth century, when
"relative simplicity existed in regard to the accounting for engineering,
coal mining, and textile firms." The passage cited below lists some of the
accounting problems raised by the industrial revolution. The passage
concludes by noting, "It is common knowledge that some of the problems
listed have not been solved even at present." It is uncommon knowledge that
the central problem left unsolved is not listed:
>With the rapid growth of these industries, however, a number of problems
arose which accountants and bookkeepers had not previously needed to
consider, except in a minor sort of way. These problems arose mainly in
connection with the large amounts of capital sunk in plant equipment and
transportation facilities. Many economic historians have pointed out the
contrast between the old and the new methods of production. For example,
Ashton states:
>
>The typical concern of the new era was integrated in its structure; it
mined the ore and coal, smelted, refined, rolled and slit the iron into its
finished form of plates and rods. From this time onward therefore, very
large capitals began to be sunk in the iron industry, and in 1812, to give
an example, in one locality, there were in the neighborhood of Birmingham no
fewer than ten iron works, each of which had cost over £50,000 to˙
establish.
It was by no means uncommon to find 300 or 500 men employed in a single
works, apart from the colliers and others connected with supply of raw
materials.
>
>The same authority states that in 1833 about one fourth of the cost of bar
iron was said to consist of interest on the capital sunk in the foundry and
equipment. The relatively large investment required in those early mills
brought on many of the same problems which producers have to face today, and
which require such complex cost records. For the sake of emphasis a few may
be enumerated (some of these were also significant in connection with the
firms described in the preceding chapter):
>
> 1.An adequate supply of raw material and the records pertaining thereto
would be wanted by the managers of the foundry, as is was recognized that
too much inventory might be kept on hand.
>
>2.The large payments made to employees required a system which would tend
to diminish payroll frauds or errors.
>
>3.The problem of depreciation became much more important in view of the
more expensive equipment used and the obsolescence factor.
>
>4. In view of the keen competition which began to prevail, it was essential
that the managers know to what extent prices could be cut in dull seasons,
and yet cover "prime costs"; in other words, a knowledge of variable and
fixed costs was required. This latter brought up the whole problem of˙
overhead.
>
>5.The transfer of product from process to process needed to be watched
carefully and costs compared from period to period.
>
>Many other problems of like nature arose, not only in the iron and steel
industry but in other industries as well. For example, the accounting for
the engineering and machinery trades offered many interesting perplexities.
Steam engines began to be used in England in the latter part of the
eighteenth century, and the production of textile machinery grew by leaps
and bounds after the Napoleonic Wars. Railway equipment was needed after
1880, in both England and the United States. In all of these trades it was
the custom to estimate costs and tender bids to prospective buyers. What was
more logical than to take the next step; that is, after accepting a contract
for a certain project, to keep some sort of collective details "as to the
costs of executing the contract in order to ascertain the profit or loss
thereon, and to provide information for future estimates"? Obviously, this
is what is known today as job order costing, and some of the modern cost
accountants' most difficult problems grew out of those humble beginnings.
All of the controversy concerning the allocation of overhead to jobs or
contracts, whether or not to include interest as a cost, profit on
unfinished contracts, and the coordination of the cost and the general
financial records, can be traced back to the same source. By-product and
joint product costs became increasingly important as industrial chemistry
gained a foothold in the early 1800's. The extension of railway systems
combined practically all costing problems, such as depreciation,
obsolescence, heavy overhead expenses, shop costs, joint costs, and control
of a far-flung integrated organization.
>
>It is common knowledge that some of the problems listed have not been
solved even at present. The economist J. M. Clark has aptly stated the
situation thus: "The Industrial Revolution was so strangely slow in making
men aware of what it was doing to them!"
>
I referred in a previous post to J. M. Clark:
>About 75 years ago, John Maurice Clark wrote a book called _Studies in the
>Economics of Overhead Costs_. One chapter is an analysis of labour as an
>overhead cost. Clark's point was that labour is treated as a variable cost
>in the employer's accounting but that a portion of that cost has to be met
>*by someone* whether or not the worker is employed. Layoffs, low pay and
>overwork shift the cost of labour from the firm to society. They don't
>"eliminate" the costs.
>
>If the social overhead costs of labour were properly accounted for, there
>would be no "economic miracle", only an unambiguous confiscation of value
>from labour to subsidize finance. If it was simply a matter of transfering
>value, it would be possible to restore that value to its "proper owners"
>through a more honest accounting. But the swindle has required not only a
>transfer of values but a wholesale waste of potential value. This pilfering
>and waste is done under the name of "trade-offs between efficiency and˙
equity".
>
>There is no "trade off" between efficiency and equity, only a legacy of bad
>bookkeeping, bad policy and bad faith. Taking a cue from André Gouin's
>comments on Alan Greenspan, I might add, "bad English". Watch the financial
>crisis in Asia to get an idea of what kind of bird hatches from this little
>nest egg of misallocation. And watch the IMF prescribe more sickness as the
>cure.
Regards,
Tom Walker
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Know Ware Communications
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