The rule to follow in determining this actual percentage will therefore be :

To divide one hundred times the actual rate (2000) by one hundred plus the actual rate (120)

The quotient (16 2/3) will be the actual rate of commission to be used in the solution.

It may, therefore, be concluded that the methods used in any of the preceding problems will not be affected in the least by the provision that the commission itself is to be considered as a deductible expense. It will only be necessary to express the commission actually payable in a percentage of the earnings from which only the taxes have been deducted.

Limitations of System*

BY F. R. CARNEGIE STEELE

System, a word that has been very much over-worked in recent times, is defined in the dictionaries as "a whole compounded of several parts—a number of things or parts so compounded as to make one complex whole." Antiquarians admit that system in relation to accounting is of most respectable antiquity because it was held in high esteem by the industrial and commercial leaders of ancient times in Babylon, Nineveh and Phoenicia, and some have whimsically alleged that system may have originated with our first ancestors in the garden of Eden, who, in clothing themselves with fig leaves, personally inaugurated what is now termed the "loose-leaf system" that we have quite erroneously regarded as a modern device!

TREND TOWARDS MECHANICAL ROUTINE

In relation to industrial accounting of the present day, however, as system obtains a greater development, has an increasing emphasis laid upon it and is proclaimed as having wider and wider usefulness, there has arisen in many minds a natural doubt whether the claims made for it are consistent with known conditions of business operation or there is not some confusion between system and industry itself. In certain instances also there has been a mistaken aim to develop system into a semi-automatic machine, and to substitute routine, admirable in many respects, for what is of far greater importance: viz., the individual alertness, diligence and judgment that have always been essential to successful management. It is a curious commentary on the direction which modern management seems to be taking towards the methods of military "manual" training and "staff and line" practice, to observe that modern armies themselves are breaking away from these hard and fast methods and are in fact doing all in their power to foster initiative and resource, not only in the officers but also in the rank and file. Even in the days when the "manual" methods were in full force, it was always recognized that far more than perfectly acquired drill was required to make an effective fighting

* An address delivered at the annual meeting of the Associated Industries of Massachusetts, Boston, 1920.

force. Esprit-de-corps, the enthusiasm and confidence which come from a sense of corporate efficiency and reliance of each on all the others, has always been recognized as one of the most important factors in military success. It is fairly certain that it is also one of the most potent factors in industrial success. The tendency of modern industry has been to place men in such positions that they become as nearly as possible mere machines with an ever-decreasing scope of intelligence and imagination. While up to a point and for a certain period it is perfectly feasible to find practical efficiency in this direction, it has been strongly questioned whether it does not, in the long run, defeat its own object. There are reasons to believe that quite contrary principles are more practical, based on the fostering of such relations with and among the workers that their human faculty is encouraged to the full and enlisted in the service of the common end: namely, economical production.

In the fashionable pursuit of efficiency by "cutting" labor cost there lurk other dangers overlooked or unsuspected by many persons who rejoice in what seems a "practical" avenue to increased profits. One of these is the fact that speeding up labor implies raising the efficiency of every one of the many factors of production simultaneously, unless the benefit is very largely to be wasted. Old-fashioned methods of storekeeping or of shop transport, for example, will not serve under an increased strain of intensive production, and more than one plant has placed itself in the paradoxical situation of finding its deliveries more uncertain and more subject to annoying delay than when the former easier-going production methods prevailed. A still more serious danger, because far more insidious and less likely to be detected at an early stage, is a progressive deterioration in the character and quality of product. Reputations of many years standing may easily be lost or damaged by too headlong a plunge into the seductive waters. of "cutting down labor cost" in the development of system. This, too, has its remedy, but in the earlier stages of enthusiasm for new methods, little attention is likely to be paid to warding off a danger that seems almost inappreciable. The confirmation comes later from the salesmen in the field.

SYSTEM SUBORDINATE TO MANAGEMENT

Those who fully recognize the value of system as an aid to executive control also recognize the danger of over-rating its

worth and misapprehending its functions; and they unhesitatingly affirm that system must ever be subordinated to management and can never serve as an excuse for bad management. Business success lies in policies, energy, enthusiasm, resourcefulness and sagacity. System itself is merely a tool with which the mind enhances its effectiveness by using it as a basis of knowledge and as a framework for the executive fabric; and it assumes importance only as intelligence, persistency, experience and energy wield it. It is no magic touchstone with which to change losses into profits or create markets for product, nor will it serve as collateral for an importunate bank creditor or as a panacea for labor troubles. System alone neither manufactures nor sells; and in the highest departments of management, where decisions are made, when reasons for and against seem evenly balanced, where men's qualifications are judged, where plans are made in advance and policies are devised, all that system can do is to make for a full knowledge of the facts which bear on the questions to be determined, so as to free the mind from many anxious questions and leave it clearer for the consideration of the final problems of management, the solution of which is apart from system. On the other hand, it must not be assumed that the planning of accounting and production systems is in itself management or a part of management. Management requires wholly different qualifications from those belonging to the expert, and successful management rests on personality-but obviously a personality distinct from an individual's capacity to lay out a system of accounting control. Accounting and production experts have a viewpoint different from that of the executive; and they have a wider basis of comparison for the facts in their field; and they possess daily familiarity with problems and difficulties that may seem unique and peculiar to a manager endeavoring to do his own systematizing in the intervals of his regular work.

SYSTEMS THAT BECOME OBSOLETE

In almost every plant the system is constantly tending to get out of touch with existing conditions. Men come and go, methods of doing business are modified little by little, new wants become apparent, while former wants cease to be felt. There is no help for this, for no system can grow as a living plant grows, and the "self-perpetuating" system is an obvious absurdity. A system is the expression of a given set of relations today, and if they

change ever so little (and in any live business they are always changing), it will be a less perfect expression of the relations existing tomorrow. It is not infrequently found, on expert examination of large businesses, that a whole history of waste and loss can be read from the mere existence of forms, blanks and books out of use, which represent praiseworthy attempts of different individuals at different times to meet the shortcomings of a system that was getting out of touch with actual conditions. The loss of cash in printers' bills is the least part of such a result. What strikes the imagination most is the futile groping in the dark, the energy diverted from the proper conduct of the business and the loose grip on the vital facts of the daily work that this long series of experimental systematizing represented. Nevertheless, many concerns are operating today with patch-work systems in which all the parts have long since lost the well-defined and balanced relations that they possessed when first installed. This may arise from several causes. Special returns perhaps may be called for temporarily, but once started, they are compiled "until forbidden," and no one ever thinks of countermanding them. Or returns may come into existence and continue to live their useless lives because a new man, or a man with a new point of view, wants to know something not disclosed by the existing way of serving up statistics, so he institutes certain new reports. Afterwards he leaves or is promoted, and while his successor has no use for those figures, because either he has not the same view-point or does not know the purpose of such reports, yet, from a want of moral courage or from sheer inertia, he refrains from interfering with what appears to be a well-grounded custom, and so the useless expense of compilation continues. The remedy for this very common disease of organizations is after all a simple one and a positive economy, not only in indirect results but in actual operating expense. It is, frankly to recognize that systems are constantly growing out of date and that they require regular auditing and adjustment at frequent intervals.

MISPLACED CLERICAL WORK

Operations and profits may be analyzed, gains and losses traced to their causes, new facilities of operation may be created and new means of control established, yet there commonly arises from the very beginning the question of the cost of increased clerical