Generating profits through an objective review of the cost system;

              Generating Profits Through an Objective Review of the Cost System
by JOHN E. KOLESAR Principal, Pittsburgh Office
Presented before the Youngstown Chapter of the National Association of Accountants—November 1961
THE classical definition of profits describes them as the excess of
revenues, proceeds, or selling prices over related costs. Stated in another way, they are the monetary benefits arising from commercial operations or transactions. Although technically correct, these defini­tions
imply that profits are residues or excesses left over from business transactions; that profits are passive rather than active; and that they are more in the nature of by-products than the principal product of the business organization. This is a mistaken impression held by many business managers and accountants. Subconsciously these attitudes influence their business judgment and decisions, which in turn are often reflected as losses in the financial statements or as inadequate returns on investment. More properly, however, profits are the prin­cipal
product of management. They are dynamic and can be influenced through the skillful use of management tools.
For purposes of illustration and in support of the latter definition, let us compare the activities required of management to generate a profit with those required to manufacture a product. From our aca­demic
knowledge we recall that there are five basic management functions or activities required in any successful business organization. They are planning, organization, motivation, coordination, and control. Each of these five activities must be applied in some form, at proper stages of completion, to manufacture a product that will be accepted by the ultimate consumer. In the planning stages the product is designed; detailed drawings, blueprints, and bills of material are prepared; and specifications and tolerance are precisely engineered. Organization is furnished when route sheets are prepared, materials are ordered, and the manpower and machines are scheduled. Through the functions of production control, timing and coordination are in­troduced
into the manufacturing processes. Wages, incentives, and fringe benefits provide the motivation for skilled labor to produce a quality product, in a reasonable period of time. And finally, through a program of inspection, measurement, and comparison with product
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