In order to illustrate some of the more elementary features of cost accounting, the following brief analysis will be useful. The account shows an average weekly credit balance of $7,000 for the year, average amount of items in transit $5,300, average amount of checks cashed at par at other branches $600, number of checks issued seven thousand.
Interest on the average balance at 4 1/2 %, $7,000........................ . . .
Exchange received on items deposited or collected.............................
LESS VALUE OF WORK DONE
Interest value of items in transit average $5,300 at 5%......................
Interest on checks crossed at par and paid by branches, average outstanding, $600 at 5% .............................
Collection charged paid to other banks.....
Office charges on 7,000 debits to the account at 2 cents each.......................
This leaves a net profit to the bank of $127.
Even with the large balance of $7,000 it will be noticed that there is constantly outstanding $5,900, consisting of $5,300 of items in transit, and $600 of checks paid at par by other branches. This leaves the real balance practically $1,100 instead of $7,000. It is well to remember that the bank must base its holdings of cash reserves on the larger or book balance, which will reduce still more the net balance of $1,100.
The rate of interest, four and a half per cent, is based on a net earning power of five per cent less ten per cent for cash reserve.
The "exchange received" is self-explanatory, but attention is drawn to the fact that the schedule of exchange charges is evidently insufficient. In making the rate, full allowance was not made for the length of time the items would be outstanding. The total cost for collection, interest and commissions was $343, or $18 more than the exchange collected, and were it not for the free balance of $7,000 the account would be operated at a serious loss.
The most satisfactory way of obtaining the average amount of items in transit is to multiply each item by the number of days it was outstanding, and divide the total amount by the number of days under considera-tion. This will give the average daily amount outstanding.
In the accounts of customers who have the privilege of crossing checks payable at par at another branch, particular attention should be paid to the date such checks are cashed at the other branch, and the interest during the time taken in transit, made an expense against the account. The correct treatment is shown in the above statement. This is necessary because the amount of such checks in transit not only affects the amount of the credit balance but, in addition, some customers do not arrange to provide funds for their checks until they are about due at the bank. In many cases they do not even provide the funds then, until their attention is called to the matter. Par privileges should not be accorded to accounts of this nature. They should be granted only to accounts which keep a credit balance commensurate with the work done, in addition to having ample funds to cover outstanding checks.
Altho the account shows a profit, it is not a normal one, as there is a serious weakness shown in the rates of exchange charged. A slight drop in the deposit balance would turn the profit into a loss. An examination of the cash items deposited will show on what points the rate of exchange is inadequate, and an adjustment should be made accordingly. Conditions in a customer's business are constantly changing. The nature of the items deposited varies accordingly. An exchange rate that is satisfactory one year might not be so the next.