INTEREST, RENT, AND NORMAL RETURN ON CAPITAL INVESTMENT IN THEIR RELATION TO MANUFACTURING COSTS.

This article attempts to show what the proposal to charge the normal investment return as a manufacturing cost means in the case of an enterprise in which there is borrowing neither of money nor of goods. The case of a manufacturing company (A) is studied. All the fixed assets employed in the business, valued at $20,000, are owned, not rented, and the company's accountant follows the practice of charging depreciation thereon at the rate of $1,000 per annum. Let it be further assumed that company A manufactures only one product, which is here designated as and that in the year in question 1,000 units of X were produced and sold. Also assume that Company B was organized with a capital stock of $80,000 sold at par. Bonds were issued having a par value of $10,000, paying interest at the rate of 5 per cent per annum. By virtue of the conditions laid down, the manufacturing costs of company B are identical with those of company A; and the books and statements should show that fact. The mere payment of bond charges has in no way affected the costs of manufacture. Also consider another Company C, in which there are no bondholders. If in these three establishments technical and commercial (not financial) conditions should become altered, the alterations affecting the three companies in different directions and degrees, the cost accounts, kept as indicated, would make possible an accurate comparison of the commonly accepted costs. scribed has been so recorded. Yet it is possible to find eminent authority for the inclusion among the "indirect expenses" of manufacture of both contractual interest and contractual rent.