Scholefield, J. B.

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eGrove (Univ. of Mississippi)

Journal of Accountancy Volume 64 Issue 1 Article 3 7-1937 Robinson-Patman Act and the Accountant J. B. Scholefield Follow this and additional works at: https://egrove.olemiss.edu/jofa  Part of the Accounting Commons Recommended Citation Scholefield, J. B. (1937) "Robinson-Patman Act and the Accountant," Journal of Accountancy: Vol. 64: Iss. 1, Article 3. Available at: https://egrove.olemiss.edu/jofa/vol64/iss1/3 This Article is brought to you for free and open access by the Archival Digital Accounting Collection at eGrove. It has been accepted for inclusion in Journal of Accountancy by an authorized editor of eGrove. For more information, please contact egrove@olemiss.edu. The Robinson-Patman Act and the AccountantBY J. B. SCHOLEFIELDIF I were a lawyer or an economist, dealing with the Robinson- Patman act, I would probably speak of the absurdity of such legislation and the unwisdom of interference with natural laws. I might speculate upon the improbability that politicians and gov­ernment employees have suddenly developed sufficient wisdom and ability to qualify them for detailed interference in and con­trol of all the activities of business. But such speculation would be idle, for we confront facts and not theories. No doubt we must reconcile ourselves to a very different mode of existence and must discard, although unwillingly, many of our old ideas. If the great economists of the past are turning over in their graves at the things which are done, they are better off than we who are turning on a griddle.Through the centuries business has been obliged to adjust itself to many changes, but most of the changes have come slowly and gradually. Now they come thick and fast, and we can only hope that the efforts of business to conform thereto will not end in the fate of the chameleon. This little creature lived up to his reputation by changing color every time he was placed on a dif­ferent colored leaf but, when somebody placed him on a Scotch plaid, the gallant little fellow died trying to make good.In the following very general discussion I will confine myself to the subject matter—the effect of this act upon accounting. This greatly restricts the scope of the remarks, but even so it is obviously impossible to indulge in detailed statements or to do more than make suggestions within the scope of a short paper.Provisions of the ActThe Robinson-Patman act amends section 2 of the Clayton act and is described as an “anti-price-discrimination act.’’ Not being a lawyer, I may perhaps be pardoned for the following con­densed and somewhat inexact summary of its main provisions and objectives:Note.—Paper read at a recent conference of the College of Commerce and Business Administration, University of Southern California.16The Robinson-Patman Act and the AccountantIt professes to be aimed at practices which “substantially lessen competition, create monopolies, injure, destroy or prevent competition.” It is aimed at “persons engaged in commerce” and forbids actions or practices which “directly or indirectly” bring about the above conditions. It specifically forbids:1. Price discrimination between different purchasers of like goods or quality of commodities.2. The payment or receipt of commissions, brokerage, dis­count or other compensation for services not rendered to or for the payor.3. Service allowances not available to all customers.4. Service not available to all customers.The recipient of a forbidden discrimination (knowingly) is penalized with the giver, as is any other person who is knowingly a party to the discrimination.A person accused under the act may show that varying prices for the same class of goods sold to different purchasers are due to differences in cost of manufacture, sale or delivery, resulting from differing methods or quantities. It would seem that this is the clause of major interest to the accountant. Price changes are also permitted to meet market conditions, deterioration, ob­solescence, forced sales, or liquidation of business in the goods concerned.With this non-technical and probably inadequate summary let us consider the position of the accountant and his usefulness to the manufacturer who is subject to the act. Inasmuch as this is part of a vast quantity of legislation designed to protect the little man against the octopus, big business, we may assume that employment will come from those who are attacked under the act, although this is not altogether a safe assertion, as the in­dependent retailers have powerful associations interested in preventing any favored treatment of chain stores or other non­members. Incidentally, cooperatives, being fair-haired boys, are exempt from prosecution when they rebate to members, pro­ducers, or consumers in proportion to sales.Bureaucratic AuthorityIt is becoming common practice to assume that much of recent legislation is favorable to the business of accountants. This has been said of the securities act and the social-security legislation17The Journal of Accountancyand is being said of the Robinson-Patman act. The short view would seem to confirm this opinion, but I am not at all sure that the ultimate result will be favorable. Accountants are of most value when they display initiative and can supply the answer to obscure and complicated problems by the application of sound accounting principles. It is true that, beginning with the income tax, there has been an increasing call for their services to assist or guide business in operating under mounting legislative burdens and restrictions; but there may well be an end to much of this opportunity. We are more or less in a “twilight zone” as regards many of the newer requirements of governmental control, a stage where neither the government nor the citizen has digested the legislation and where requirements have not been fully formu­lated. In these circumstances there is room for the applica­tion of individual theories and practices which are temporarily acceptable.All restrictive legislation delegates authority to bureaus, and bureaucracy is naturally inflexible. Sooner or later it prepares a strait-jacket of regulations, which, by length of application, acquire the force and effect of law. Holes are plugged up by new legislation and the field of opportunity for personal initiative is greatly narrowed if not entirely removed. As an example, I feel sure that any accountant who has handled income-tax matters under the revenue acts up to and including the 1921 act and also handles them under the present revenue act will agree that the scope of the tax advisor’s activities has been greatly circum­scribed by the hurdles of long-established regulations and the closing of one gap after another. There is considerable difference between the master mariner on the high seas and the harbor pilot in a buoyed channel.Opportunities for AccountantsThe proceedings for alleged violation of the Robinson-Patman act come first before the Federal Trade Commission, and the complainant need only make out a prima facie case. It then devolves upon the accused to rebut this case and, of course, there will be opportunities for the accountant in this rebuttal if the costs of manufacture, sale or delivery are involved. The sponsors of the law state that it applies to interstate commerce only, so, if this proves true, the employment will come mainly from the18The Robinson-Patman Act and the Accountantlarger businesses. On the other hand, it is hard to reconcile this statement with section 3 of the act, which purports to control transactions in “any part” of the United States.To revert to a discussion of the law itself, it seems fair to say that any seller who sells f.o.b. the factory at the same prices and discounts to all purchasers, large and small, and grants the same service and discounts to all should be safe from infractions of the act. He may go further than this and offer quantity discounts varying in amount with the volume of sales, but here he may eventually run afoul of the Federal Trade Commission, which has the power to fix maximum quantities as to various commodities, beyond which quantity price differentials shall not be permitted even though supported by differences in cost.Apart from special cases, in which the law permits price changes because of stress of circumstances, and which are mat­ters of executive policy, the only excuse for varying prices to purchasers is found in different costs. There is no prohibition against selling below cost, provided all customers get the benefit of this, nor is there any upward limitation of prices provided they are uniform. It is, therefore, apparent that, for sellers who would navigate among the shoals, a life-boat must be provided in the form of adequate cost accounts not only for production but also for selling and delivery cost.We might, on hearing of this, become enthusiastic at the prospect of demonstrating that the cost of, say, a 75 per cent. operation of the factory was so much, but that the addition of 25 per cent. operation, due to a large order from a large cus­tomer, so reduced the cost that he could be granted a special price. The sponsors of the legislation tell us that this is not so, but that the saving, if handed on at all, must be handed to all customers because the purchasers of 75 per cent. of the output made possible the saving on the last 25 per cent. Evidently this is a variation of the old argument as to whether the last cast­away who reached the raft caused it to overturn or whether the ten who were there before him caused it to founder by retaining their places.If the sponsors of the law are correct it would appear that re­ductions in manufacturing cost, unless attributable to a product which differs in quality or otherwise from the product sold to the bulk of the trade, cannot be handed on to one customer to the19The Journal of Accountancyexclusion of others. This would seem to limit the possibility of differentiation to selling costs and delivery costs. A writer in the April, 1937, Journal of Accountancy ably discusses this and makes the point that practically all cost systems in existence relate only to production costs.During the committee hearings the following instances of variable selling and delivery costs were cited:Single warehouse delivery as against multiple store-door de­livery.Single order calling for periodic deliveries as against numerous small orders with consequent high selling costs.Rush deliveries versus substantial deliveries to warehouse.Rush season orders, causing overtime labor, as against ad­vance orders permitting the use of cheap off-season labor or the purchase of raw material at cheaper off-season prices. (This is a manufacturing saving and is hard to reconcile, as a reason for price differential, with the prohibition against handing a large customer all the saving attributable to increased volume sup­plied by him.)Differences in distance involving different freight charges.Differences in credit risks.It would appear, therefore, that the accountant’s problem will be to devise and maintain cost accounts for the guidance and information of management not only to insure profitable selling prices but to enable executives to fix prices which will not be discriminatory under the law. This will involve sufficient diffi­culty but, if the accountant is also called upon to interpret these costs in their application to sales to various customers, his respon­sibility will be practically unlimited. Until there are judicial decisions on this point he will have little to guide him, and only the larger businesses can afford the cost of taking cases to the court of last resort.There appears to be a possibility that the restrictions as to price differentials may be avoided by establishing branch plants in states in which large purchasers carry on business. This would apparently make the business done with such purchasers intra­state unless the recent decisions of the Supreme Court have with­drawn this protection. There is already a movement to initiate legislation for each state along the lines of the Robinson-Patman act so the branch-plant idea may soon be worthless.20The Robinson-Patman Act and the AccountantIt may be that the legislation against bigness may result in decentralization of manufacturing, and in that case the ac­countant’s work will be greatly increased. On the other hand the tendency may be for chain stores and other large retailers to extend their own factory capacity, resulting in a shut-down of independent producers from whom these retailers now buy.Problems for AccountantsI will conclude by stating a number of the problems which will confront the cost accountant.How can a saving in production cost be allocated among large and small customers otherwise than ratably, if it may not be attributed entirely to the added volume which made it possible?How can overhead be allocated to production, selling and de­livery costs so as to enable separate costs to be obtained for these departments?How can transportation (outward) be allocated to various customers? For instance—if customers ordering in small quan­tities are supplied from carload shipments, must they be given the advantage of carload rates?How can cost of billing and collection be allocated between large and small customers?What is a proper charge for credit risk on small customers as compared with large purchasers? Is there a mortality table for large and small customers, or can one be compiled from experience?How can the expense of commercial travelers and branch offices be allocated to various types of sales? What part thereof is sales promotion? If numerous calls are made on one customer before a small sale is made, as compared to one call on a large customer, how can the expense be recorded and allocation defended?Must advertising expense be charged ratably to all sales, or can there be a differential in favor of large customers? If the advertising is on the producer’s brands must any portion be charged against goods manufactured and sold under the pur­chaser’s brand?Can savings in costs be applied equally to all units produced, or is there a halt in the rate of saving as the production reaches some point?21The Journal of AccountancyWhat are “proportionally equal terms” on which service or facilities must be offered to all customers?What are the economies in manufacture which will warrant a differential in price? If a new large order requires working addi­tional shifts for an extended time, thus changing the power-load factor and warranting a lower cost for power, can all of this saving be used in reduction of the prices charged on this new order?If a manufacturer depreciates on a straight-line basis but his plant is operating at 50 per cent, of capacity, can he take new business and ignore depreciation in the charge therefor? If not, must he refuse the business because he can only get it on prices which are so much lower than his regular prices that a similar adjustment of all prices would be uneconomical? Must he there­fore let the business go to a lower-cost competitor, or is this a case where a price variation is permitted to meet competition?If a large customer controls a supply of cheap raw material and arranges for its sale to a manufacturer at a low figure, can the manufacturer give effect to this purchase in a special price to that customer? If not, must he refuse the business, or else act merely as a processor and arrange for the customer to buy the raw material?If a manufacturer has two plants, one a low-cost and the other a high-cost plant, can he use the former for large low-price orders or must he average his costs in fixing prices? Can he avoid this difficulty by incorporating each plant separately?We cannot well enter a discussion of the elements which make up cost. It is generally held that interest is not a part of cost. Suppose a manufacturer who borrows heavily to buy raw mate­rial and for running expenses accepts a large order where the purchaser pays in full in advance. Can the manufacturer reduce his price to this particular customer by the amount of interest involved, or is this merely a special discount for prepayment, which must be offered to all customers who will pay in this manner?It may be that the answer to these and similar questions will be, in some cases, that certain manufacturers will abandon all business with small retailers and will concentrate on large orders. The law permits a person subject to the act to select his cus­tomers. If this is the result, the small independent retailer will22The Robinson-Patman Act and the Accountantpay more for his merchandise because his sources of supply are reduced.This rambling and partial discussion of the subject may dis­courage some accountants, but will only cause others to gird on their armor for the fray. There should be a great extension of cost accounting and a detailed breakdown and allocation of pro­duction, selling and delivery costs such as the world has never seen—unless, of course, the government hands us our cost sys­tems ready made. Even then a succeeding administration, if such there be, may denounce the decisions and the allowances of its predecessor. It’s been done before!Gilbert, I think it was, said “A policeman’s lot is not a happy one!” But that was many years ago and he knew nothing of ac­countants or modern governmental regulation; otherwise he would not have wasted his sympathy on a policeman.23

Robinson-Patman Act and the Accountant

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Robinson-Patman Act and the Accountant

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