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THE
MUSIC TRADE
REVIEW
JUNE 16, 1923
Cost Accounting in Retail Selling
The Necessity of Finding the Actual Cost of the Merchandise Which Is Sold in Order to Obtain the Neces-
sary Net Profit—The Diversion of Cost of Handling to Overhead Expense and the Develop-
ments Which It Brings in Its Train—Figuring Piano Costs Properly
One of the outstanding features of the ses-
sions of the National Association of Music Mer-
chants Convention was the attention devoted to
the allied questions of financing and accounting.
The retail music trade, and especially that
branch of it devoted to merchandising pianos
and talking machines on instalment payments,
presents a number of difficult questions in this
direction, especially since ordinary merchan-
dising here is complicated with problems that
partake largely of a banking nature.
There is, however, one side of this problem
which seemed to be given but little attention
and that is the question of proper cost sys-
tems. It is not too much to say that the
average retail music dealer uses his manufactur-
ers' invoice value plus freight for the basis of
his mark-up to cover his overhead and his net
profit. Now, as a matter of fact, the cost of
a piano as it stands on his wareroom floors
represents several other elements which are not
accounted for in this system, but which in no
way belong to the overhead expense and which,
if neglected, tend to cut down the net profit
and deceive the dealer as to the true margin
which he is making on the net sale.
Neglected Element in Costs
These elements are as follows: First the cost
of bringing the instrument from the freight
depot to the warerooms; second, the cost of
keeping the instrument in tune up to the time
it is sold, and third, the cost of polishing and
so on, a certain amount of which is usually
spent on every instrument before it finds its
eventual owner.
All these items in no way represent a selling
expense. Considered properly, they are con-
tinuations of manufacturing costs and as such
should be allowed for in the accounting system
used by the dealer. The retail furniture trade
here presents a striking example for the retail
piano merchant. In many retail furniture stores
cost upon which selling price is figured is the
invoice value, plus freight, plus the cost of cart-
ing, plus the cost of handling. This last ele-
ment usually is figured on a percentage value,
arrived at by averaging the expense involved in
carrying the stock in perfect condition until
it is sold. The percentage varies with the type
of store, ranging all the way down from 11
per cent.
Let us see what happens when the dealer
fails to work upon this system. He takes his
invoice cost plus his freight and marks it up
SO per cent of the selling price. From that
margin he must get, first, his overhead and,
second, his net profit. At the end of the month,
figuring on this basis, he strikes his balance
sheet and considers he has made so much
money. But on this sheet there is shown a
comparatively heavy loss on his tuning* and
repair department and an excessive delivery
cost well beyond the percentages figured in the
overhead.
In other words, his net profit
shrinks and he finds he is working on a much
lower margin than he thought.
What Analysis Shows
A little analysis would soon show the reason.
To the tuning and repair department is credited
all the money which is paid for outside tunings.
But in a majority of cases a good, deal of the
tuners' and polishers' time is spent on the floor
on instruments in stock. The tuning depart-
ment gets no credit for this, generally speaking.
In fact, in many retail warerooms the individual
tuner need show no work ticket for such jobs.
Yet this time is paid for in their weekly salaries.
What happens when this tuning and polishing
is considered part of the cost? A work ticket
is made out for each job done by the tuner
or the polisher on the floor, the tuning depart-
ment is credited with the time involved and the
merchandise account debited with it. The mer-
chandise account is protected because it has
already been credited with a percentage to allow
for this, in the basis on which the mark-up is
made. The expense is rightfully distributed and
at the end of the month, or whenever the profit
and loss balance is struck, the net profit margin
tells the truth.
The same holds true for the delivery account.
Under this system house cartage is credited
where it belongs and not charged to the over-
head.
Many dealers regard their tuning and repair
departments as necessary evils, since they so
often show a net loss. That is a mistaken idea
and the reason for it is that this department
rarely is credited as it should be with the w 7 ork
it does. In some faulty accounting systems it
carries the burden not only of the house tuning
and repair work, but of the free tunings as well,
the latter purely a selling expense. How, under
such conditions, can it show a profit?" The
tiling is an absurdity on the face of it.
An Essential to Every Business
A proper cost system is an essential in every
business, whether it is manufacturing or selling.
The dealer who does not know the true cost
of the merchandise he is selling cannot set ade-
quate selling price? for the goods he handles
nor can he ever know the net profit he is
making. Without this knowledge he is con-
tinually gambling on his business and unneces-
sarily gambling. Why gamble when it is per-
fectly possible to work with certainty? It is
better to know costs and allow yourself a
smaller net margin through this knowledge,
than to fool yourself on costs and think you
are making a larger net margin than you ever
can make.
Proper cost systems are simple, that is, in
merchandising. They are within the grasp of
practically any person who has any knowledge
at all of how to keep books. They are an essen-
tial in the smallest business, just as they are in
the largest. In fact, the small business prob-
ably needs them more than the large one, for
the margin between profit and loss in the latter
is much smaller than is the case with the
former.
The comparatively small use made of them
in retail piano selling is largely due to the
attitude of the dealer placing all the emphasis
in his business on moving stock. He has been
brought up in business with the idea that selling
pianos at retail presents a comparatively large
margin between the cost and the selling price
and the result is that he is careless. A dollar
here or a dollar there seems a comparatively
small thing to him, something hardly worth
bothering about.
As a matter of fact, however, the margin in
the sale of a piano is not nearly as large as it
appears at first glance. When the cost is taken
into consideration, that is, properly taken, the
heavy overhead and selling expense, the ex-
pense involved in carrying the outstanding
paper, the net margin is small, smaller per-
haps than is involved in selling any other mer-
chandise of a similar type and class. This
small margin is what makes the proper knowl-
edge of costs so important and so essential.
Selling at a Profit
The attention of retail dealers should be con-
centrated on selling at an adequate profit, not
merely on selling. The most conspicuous fail-
ures the trade has ever had in its retail end
can be traced directly to this mistake. One
which has been dragging for years, and which is
not entirely over yet, owed its beginning and
development entirely to this. The instruments
were sold under any conditions and almost at
any price, no proper system of cost accounting
was ever used, old rule-of-thumb methods were
good enough, manufacturers sustained these
operations because of the apparent largeness
of the outlet, with the result that the piano
trade in a large and profitable territory was set
back for a long period, a public was misedu-
cated and the entire industry lost large sums
of money, not only those involved directly in
the failure.
A proper accounting and cost system would
not, of course, have prevented such a thing
entirely, but at least it would have been a check
on such operations, for it would have shown
the truth at frequent intervals and at least have
made this particular dealer know that, though
he was selling pianos in large numbers, his net
profits were tar from what they should be.
SCHUMANN TW0=T0NE CAMPAIGN
Many Cities Throughout the Country Featuring
Sheraton Two-tone Walnut Piano in Window
Displays This Week
CHICAGO, I I I . , June 9.—Evidence that the two-
tone finish is growing in popularity exists in
the account given by Roy S. Dunn, secretary
of the Schumann Piano Co., regarding thirty-
seven window displays being run this week in
different cities.
"The windows will feature the new Sheraton
model Schumann upright in two-tone walnut,"
said Mr. Dunn, "along with artistic living room
furniture of similar types. The public which
sees these displays will get an impression of
the unusual beauty of a room where the furni-
ture is of the two-tone variety. Thirty-six win-
dows in almost as many cities will convey the
attractiveness of the two-tone piano finish idea
to countless people and should have a most
stimulating effect upon this latest development
in our industry."
The Schumann factory in Rockford is pro-
ducing the new type finishes and case designs
at capacity. Owing to the fact that Rockford
boasts forty-seven furniture factories, the Schu-
mann Co. is most advantageously located to
secure the trained craftsmanship necessary in
this work. Both W. N. VanMatre, president,
and C. B. Mclntosh, vice-president, express the
liveliest satisfaction with the manner in which
the Sheraton model is being received in the
trade. They believe that there are both profit
and prestige to the retailer who goes at the
two-tone proposition in the right way.
During the entire time of the exhibit at the
Drake and also on Friday and Saturday after-
wards in Room 408, where the Schumann two-
tone was exhibited, dealers were taking advan-
tage of the opportunity to inspect the new
styles and finishes. It looks as though the two-
tone idea was passing out of the stage of nov-
elty into a stronger and more permanent hold
upon trade and public interest.
TO OPEN A_NEW STORE
TAMESTOWN, N. Y., June 13.—Danielson's Music
House, 17 East Third street, has just completed
-arrangements for opening a new store in two
months or so. The location of the new business
will be at 19 Main street and a line of musical
instruments will be handled.