The Allocation of Administrative Expense by Lines for Casualty Insurance Companies

It is an astonishing fact in the light of present day knowledge, that the industrial development of this and other countries should have progressed so long, without producing until comparatively recently a science of cost accounting. Today an adequate cost system is a commonplace necessity for any progressive manufacturing concern. It exercises certain very important functions. First, it indicates and calls attention to fluctuations in cost from period to period in individual departments as well as in the product as a whole. It thus supplies a fair measurement, making due allowance for external conditions, of the efficiency and economy of the administration. Second, it furnishes a reliable means of allocating cost between different classes of products and so makes it possible to fix prices correctly on each. Third, it indicates when prices are fixed by competition or other outside influences, which line may be pushed to the greatest advantage, and which line must be handled more economically in order to show a profit. In other words, such a system points the way to wise economy in the weaker lines, and may prevent injurious retrenchment in the lines on which the company's prosperity depends.