The Expanded and Annotated My Life and Work

A COST ACCOUNTING SYSTEM IS NOT A SUICIDE PACT
Concretely, what I most realized about business in that year—and I have 
been learning more each year without finding it necessary to change my 
first conclusions—is this:
 
1. That finance is given a place ahead of work and, therefore, tends to 
kill the work and destroy the fundamental of service.
 
2.  That thinking first of money instead of work brings on fear of failure 
and this fear blocks every avenue of business—it makes a man afraid 

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What I Learned about Business  •  27
of competition, of changing his methods, or of doing anything which 
might change his condition.
 
3.  That the way is clear for any one who thinks first of service—of doing 
the work in the best possible way.
Ford’s conclusion to this chapter, which again stresses the dysfunctional 
effects of financial control of the work, deserves elaboration. The sole 
legitimate purpose of a cost accounting system is to satisfy the financial 
reporting requirements of the Securities and Exchange Commission and 
the Internal Revenue Services. GAAP (Generally Accepted Accounting 
Principles) standardizes financial reports for these purposes, but investors 
should not rely on them to compare the performances of two organiza-
tions. They are absolutely not suitable for management decision purposes; 
a cost accounting system is emphatically not a suicide pact.
Assets that depreciate and absorb overhead costs do so only on paper, 
and for very specific tax and financial reporting purposes. Ford and 
Crowther (1930, p. 25) said of this, “As for the buildings and machinery, 
they must be valued in dollars according to the meaningless methods of 
accounting that are required by law. Actually they are worth only what 
we can do with them.” The same reference adds (p. 24) that book value is 
a generally useless and potentially misleading estimate of an asset’s or a 
business’s value.
Consider for example a million-dollar piece of equipment that depre-
ciates over five years; 10, 20, 20, 20, 20, and 10% is a typical formula for 
straight-line depreciation. This means only that, for example, the com-
pany can write off $100,000 against its income for tax purposes after the 
first (partial) year of ownership, and $200,000 after the following year, 
which is the first complete year of ownership.
The machine is then worth $700,000 on paper as a capital asset, but this 
does not answer the question as to what it is actually worth. If it can no 
longer do the job for which it was purchased, or any other job, it is worth 
only what the company can get for it by selling it to somebody who can 
use it. If it can still do its job, and if its replacement would cost a million 
dollars, it is still worth a million dollars. It is, as Ford said, worth exactly 
what the company can do with it.
Overhead is another dysfunctional financial metric that has no place 
whatsoever outside of tax preparation and financial reports. Chapter 6 
elaborates, “The foremen and superintendents would only be wasting 
time were they to keep a check on the costs in their departments. There 

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28  •  The Expanded and Annotated My Life and Work
are certain costs—such as the rate of wages, the overhead, the price of 
materials, and the like, which they could not in any way control, so 
they do not bother about them.” The truth is that the business incurs 
the underlying cost no matter what, and it is merely an accounting con-
vention that assigns it to individual units of production. It is easy to 
see that application of overhead to actual decision making can have 
disastrous effects.
Consider for example a product whose bill of materials (BOM) incorpo-
rates $10 in materials, and which requires an hour of labor at $25 an hour. 
The cost accounting system assigns 40% of labor plus $10 in capital equip-
ment cost to this product, for a standard cost of $55.
Suppose the company has excess labor and equipment capacity, and it 
receives an offer of $20 per unit. If the business allows itself to be managed 
by the cost accounting system, it will reject the order with the claim that 
it would be selling at a loss ($35 per unit) and making it up on the volume. 
The truth is, however, that the $20 price offers a marginal profit of $10 per 
unit, and this leads to the concept of managerial economics.