longer the central fact of economic activities and economic thought. It is only the procedure that matters-production, transport, priceformation. In a word, Fiat productio et pereat homo. How are we to account for this tendency, if not by tracing it to the changes which technical progress has brought about? Technology has liberated the work of production from the control of man. Before, we needed the living organism to regulate production; we now direct it by mechanical means.

The natural world, with its fullness of life, has been shattered to atoms; on its ruins an artificial world of dead matter has been erected by human ingenuity. And this is true for the economic sphere as for that of technical science. Technical improvements have had the effect of changing the face of the globe, and our whole view of the universe has changed in consequence. The more technical science tended to make man of less and less importance in the process of production, the more he was thrown into the background, not only so far as economic activities were concerned, but also in the whole sphere of human thought and action.

D. Indirect Costs and Social Control

171. ELEMENTS OF COSTS1

Production costs are classified into three principal divisions, known as the elements of costs: (1) material; (2) labor; (3) expense. These may be subdivided into:

Direct charges.-"Direct charges" is that element of cost that enters into, and can be charged directly to, the product.

The cost of the substance out of which the product is made is the direct material charge; the cost of the labor applied directly to the productive process is the direct labor charge; and any other expense that can be charged directly to an order, job, or process may be

Adapted by permission from J. L. Nicholson, Cost Accounting, pp. 24–32. (The Ronald Press Co., 1913.)

included as a direct charge under the caption "direct expense. expense of workmen in traveling to and from a job, as well as their hotel expenses while engaged out of town on a particular job, are examples of direct expenses.

Indirect charges.-Indirect material consists of such material as factory supplies, which, while used in processes, either does not enter into the product itself, or else enters in such a way as not to be chargeable conveniently to any particular article.

Indirect or non-productive labor is that used in repairing, handling, supervision, etc.-in short, any labor not expended directly on the article or process itself.

Indirect expense as used here refers only to those expenses incurred in the manufacturing end of the business which are properly a part of the cost of production; e.g., supervision, repairs, light, power, depreciation, etc.

Items composing the indirect charges.-The following list shows some of the more constant items which compose the indirect charges. The classification will vary in almost every factory, but the items listed almost invariably appear.

Production costs and selling costs.—A clear distinction must be made between production costs and selling costs. The latter include the selling expenses, such as advertising, commissions, salaries, etc., which are necessary elements in determining the price for which an article may sell, but have no direct bearing on the cost of producing the article itself. The cost of production ends when the finished stock is ready for sale.

The expenses that arise from advertising, commissions, salaries of officers, etc., are known as commercial or selling and administrative expenses.

The segregation of administrative expenses, as a distinct class, is sometimes a matter of convenience. In the majority of cases the time of the administrative force is spent in supervising the selling organization, in solving problems of production, and in looking after the finances of the business. Therefore, administrative expense is partly a production cost, and partly a selling cost. The purposes of costfinding are best served by separating expenses of such a nature from those expenses which arise from production proper and its direct supervision.

Relation of cost elements to selling price.-The sum of the direct material and labor cost is known as the "prime cost." This, combined with the indirect costs, gives the final "factory cost." The total of the selling and administrative expenses, plus the factory cost, shows the cost of making and marketing the article; and this totalplus the profit-gives the actual selling price.

This relation of the different elements may be illustrated by the diagram shown above, which, in the light of what has been said, is self-explanatory.

172. COSTS IN MACHINE INDUSTRY'

The principle of apportioning the indirect costs according to ability to pay is not peculiar to the transportation business. It can be traced through numerous other industries. A very good analogy is that of the packing business. The original purpose of slaughteringhouses was to supply meat. The margin between the price of cattle and the price of meat had to be sufficiently large to pay for the cost of killing and packing. These costs included two items, the cost of handling each particular animal plus a portion of the "overhead." In the development of the industry it was found that refuse matter could be manufactured into fertilizer, which in the market would bring a price somewhat higher than the added cost resulting from its production. Even though each unit of fertilizer did not pay as much toward overhead charges as each unit of meat did, no injustice was done to the purchasers of meat. On the contrary, they might profit by the production of the fertilizer, because the total overhead expense to be distributed upon the several units of meat was reduced by the amount contributed by the fertilizer department, thereby enabling the packer to reduce the price of meat. Likewise, other by-products came to be manufactured and each of them bore a part of the indirect costs, thereby decreasing the amount that the original product had to bear, and thereby aiding in its production.

What has been said about the packing business holds also in the case of the petroleum industry and many others. Whenever a byproduct can be manufactured, it is an aid to the industry engaged in its production if it contributes even a little to the meeting of the indirect costs.

W. M. Acworth brings out an analogy between rail transportation and the production of electricity so convincing that it is well worth quoting in full. "The business of electric supply is usually a monopoly, and in this country [i.e., England] it is more often than not in public hands, yet electric undertakings usually make charges more widely differential than an ordinary railway. A typical charge is 5d. per unit for electricity used for lighting purposes; id. per unit for electricity used for power purposes. From the commercial standpoint the 5d. for lighting is fixed as the maximum which competition and other illuminants will permit; and id. is a charge made to induce users of steam power, gas-engines, and the like to adopt Taken by permission from J. F. Strombeck, Freight Classification, pp. 21–24. (Houghton Mifflin Co., 1912.)

electricity as a substitute. As a matter of equity the case is this. The electric undertaking was established primarily to supply light. It involves large capital cost for short-lived machinery and mains. Plant and staff must be capable of dealing with maximum demand, and this demand 'the peak of the load,' as it is commonly calledonly comes for about two hours of the day, and that during the winter months of the year. For about twenty hours of the twentyfour, the bulk of the plant is idle; but interest, depreciation, and standing charges are running on all the time. Such service cannot but be expensive to give. There is, however, a way to make it less expensive. If consumers can be induced by the low price of id. per unit to take electricity for power, they will use it in the daytime, to some extent even in the dead of night, when the machinery would otherwise be idle. The 1d.-ex hypothesi the highest rate the traffic will bear will more than cover the extra cost of fuel, and will help to dilute the general expenses of the undertaking. So far from the low differential rate being an injury to, or made at the expense of, the consumers of light, the contrary is the case. The standing charges-the great bulk of the whole-instead of being charged on, say, 1,000,000 units, are now spread over 6,000,000, and the cost of supply per unit is proportionally decreased. The increase of the low-charged power customers is the only means by which the lighting customers can hope to see the charges made to them reduced."

And still another analogy might be offered. A manufacturer is selling his output in the domestic market at a fixed price, which nets him a fair return on his investment. The demands of the home market are not sufficient to enable him to run his factory at more than threefourths its capacity. He finds that provided he reduces the price somewhat he can secure a foreign order which will enable him to operate his plant at its full capacity. This reduced price covers all the direct expenses connected with filling the order, and leaves a small margin to be applied to the indirect costs of the business. It is good policy for him to accept that order. This is exactly the same principle on which carriers give low rates to cheap commodities to encourage their movement. A low-value commodity which cannot bear the regular rate is to the carrier in the same relation as the foreign order is to the manufacturer. And further, no one can say that the domestic purchaser pays a higher price on his goods so that the foreign order may be filled at a reduced price. The domestic purchaser does not only not bear part of the burden of the foreigner, but on the