272 THE ECONOMIC RECORD NOV.

percentage addition to these two groups to allow for all other hospitals and other charities.

5B (vi) .-Residual, obtained by deducting 5 8 and 5B (i) - (v) from 5.

7a.-Estimated from data supplied, on request, by 17 out of the 24 Australian trustee companies listed in the Australasian Insurance and Banking Record.

7b.-From Auditor-General Is Reports and Public Trustee O5ces.

FULL COST PRICING IN FVESTERX AUSTRALIA

In 1952 and 1953 we interviewed many manufacturing b s in Western Australia to check whether the conclusions of empirical enquiries made by Oxford economists in the.United Kingdom are also applicable in Western Australia. We interviewed intensively the executives of twenty-one manufacturing firms and many others less thoroughly. One of the important findings of the well-known Oxford empirical enquiries was that firms in the United Kingdom generally adopted a pricing policy of k i n g their prices at “full average cost”. This must not be taken to mean that they always quoted the price for their product which equaLled the full average cost includ- ing profit. The full average cost was sometimes exceeded in boom times, or on particular favourable lines, or not charged in depression times, or on lines where competition mas exceptionally keen. Price leadership was also found to be fairly common. The price leader fixed his price at full average cost, or a conventional price, and other firms producing that type of product fixed a similar price, adjusting their costs or ‘the quality of their product to that price, or shading the net profit margin if they could not do so. The full cost principle is thus a rule of thumb pricing policy which provides a frame of reference or guide .for the entrepreneur, and is not a hard and fast formula.

The actual formula used for the estimation of full average cost also differed considerably, but generalizations could be made. “The formula used by the different firms in computing ‘full Cost’ differs in detail, but the procedure can be not unfairly generalized as follows: prime (or direct) cost per unit is taken as the base, a per- centage addition is made to cover overheads (or oncost, or indirect cost), and a further conventional addition (frequently 10 per cent.) is made for profit. Selling costs commonly and interest on capital rarely are included in overheads; when not so included they are alIowed for in the addition for profits.”’

Mr. P. W. S. Andrews, as a result of his empirical enquiries, appears to have arrived at a slightly difTerent generalization of the

1. R. L. Hall and C. J. Hitch. “Price Theory and Busineu Beh~vioot”. in 05fd Ecaomic Papww, No. 2. 1938.

1954 FULL COST PRICINQ 273 full cost or normal cost principle. “The business man’s conviction that, in the possibly-not-so-long run, his demand will be very elastic if he charges too.high a price, mill lead to his charging what he believes to be the right price, and then meeting the demand of his market a t that price up to the limit of his production capacity. He fixes that price by adding a definite margin to his estimates of the average direct costs of producing a particular article.

“We shall call this margin the costing margin, to distinguish it from the realized gross profit margin shown in thettrading account, but these two margins will have some sort of equivalence. The costing margin may well differ from product to product in the case of a multi-product business, but the weighted average of the costing margin will be equal to the realized gross profit margin so long as the realized circumstances do not differ from those that were implicitly assumed in the costing margins.’=

Our interviews with the executives of the twenty-one firms in our sample, and with other business men, led us to the conclusion that manufacturing firms in Western Australia do fix the prices for their products with the guidance of a full cost principle. We found evidence of price leadership, and shading of prices below the full cost figure in order to meet a competitor’s price. But despite many examples of individual prices varying from full cost, the principle was emphasized as the guide to price fixing and the cost levels which should exist in the firm.

Our investigations led us to suppose that there is a valid generali- zation of the full cost price formula normally used in manufacturing enterprises in Western Australia. However, this formula differs from that of R. L. Hall and C. J. Hitch and P. M. S. Andrews. The formula we found to be in general use was that of cost of materials plus direct labour cost per unit of output plus a percentage margin. on direct labour costs to cover factory overhead costs, plus a further percentage margin on this “factory cost” to cover the ‘‘gros9 margin” (selling costs, administration costs and net profit). The term “gross margin” used here differs from that used by P. W. S. Andrews.

There were, of course, some exceptions to the formula generaliza- tion. For instance, firms producing building materials added a money figure per 1,000 bricks or tiles, etc., to the prime cost to obtain the factory cost, before adding the percentage “gross margin”. Printing firms usually employed the formula of the Master Printers’ Asso- ciation, which consists of raw material cost plus an hourly rate for each machine used for the particular job to cover labour and machine charges, plus the ‘‘gross margin ” to cover selling, administration and net profit. One food processing firm added a “poundage” to the

2. P. W. 5. Andrem. Manufacturing Btuinem, P. 167.

274 TEE ECONOMIC RECORD NOV.

estimated factory cost to cover packing cost before adding the “gross margin”. We only discovered one firm in the light engineering group which simply added a gross margin to direct labour cost to cover factory overheads and selling, administration and net profit. This firm was a newly established one, under inexperienced entrepreneur- ship. Apart from this latter exception, all the firms found their “factory cost” and added the so-called “gross margin” to it.

One of the questions which arises from the general use of this formula is “Why add the percentage margin for factory overheads to direct labour cost, rather than to prime cast?” The answer appeared to be mainly in the realm of accounting convention in Australia. Most executives believed that factory overheads do vary proportionately with direct labour costs. One executive of a light engineering firm produced figures for a series of years purporting to prove this close relationship.

University of Western Australia.

Perth Technical College, Western Australia.

ALLYOLD COOK

EDWIN JONES

INDEXES OF VOLUME AND QUANTUM For upwards of fifty years successive official Statisticians in

Australia have worked on the problem of quantum measurement and, in particular, on problems of measuring the volume of production and trade. Latterly much attention has been given to the broader subject of measuring national income, gross national product and consumer espenditure a t constant prices. But in Australia, as else- where, this important work is still in its infancy.

Progress has been given great impefus here by the fact that, since 1952, Australia has been one of the fifteen members of the Statistical Commission of United Nations through which body inter- national statistical effort in this, as in many other fields, has been co-ordinated and advanced.

Official Statisticians in Australia have, as yet, published rela- tively few statistics of quantum or volume, and these few relate mainly to primary production. Most primary production is recorded as quantity aggregates of relatively homogeneous types of goods. The more intractable problem of converting statistical aggregates (that can initially be expressed in whole or in part only in terms of money) into “real” terms, or into values at constant prices, still awaits solution. The very rapid rise and wide dispersal of prices of late years have delayed progress, and problems of concept and method remain exceedingly difficult. Apart from these considerations, even