Direct Costing and Public Utility Rates

Special mention must be made about the critical role that direct costing practices must
play in the redesign of public utility rates. Direct costing or direct cost is totally traceable to the
production of a specific item, such as a product or service. For example, the cost of the
materials used to create a product is a direct cost. And public utility rate is the rate or prices
that will charge the consumers for services provided by the government or state, such as the
supply of electricity and gas, and etc. Accountants can very well be accused of backsliding (an
action of relapsing into bad ways or error) if they refuse to overcome their deep sentimental
attachment to fully distributed or allocated costs. Only more refined information about
incremental, marginal or direct costs can help technocrats in both the public and private sectors
of redesign the rate or price structures in many of our strategic industries.

One of the top utility economists in the United States who sought to reproduce an
innovation in his field of specialization says that, “Efficiency of resource use in the public utility
sector cannot be achieved simply by holding each company’s profit to a “fair return” on its
invested capital. This regulatory standard can be satisfied with any number of different rate
structures each having its own special measure of resource use. It is, therefore incumbent on the
companies and regulatory commissions to select the best rate structure to induce the right amount
of resources to maximize the benefits to society. To test the efficiency of a rate design, it is
necessary to analyze the relationship of cost and benefits for each type of service. When
consumers pay a price that covers the cost of the service, this indicates that the value of the
service is at least as much as the value of the resources required to produce it. When price is
below cost, this indicates that some consumption is being subsidized, which is wasteful of
resources except when there are “social” benefits that are not recoverable through the
marketplace. When the price is above the cost, too few resources are being employed and there is
an efficient restriction of consumption. The relevant concept of cost to use for this efficiency test
is long run marginal cost or incremental cost that is the anticipated cost of varying the output of
services that customers demand. Historical or book costs indicate the value of already committed
resources, they do not indicate the costs that will be saved by reducing output or the costs that
will be experience by increasing output”.

It must emphasize, however, that Filipino accountants must be ready to innovate faster
than the Americans. The term “public utility” may be limited to a few industries in the United
States. But whether we like it or not, the stage of economic development in which we find
ourselves dictates that many more industries to be considered sufficiently strategic as to be
treated like a public utility or at least a quasi- public (essentially public as in services rendered
although under private ownership or control) utility. Accountants in this country must be quick
to respond to the demands for marginal cost analysis as a basis for pricing policies or rate
designs.

Productivity Research

Philippine society would surely go somewhere, if its constituents consistently practice the
virtue of hard work. Hard work can be translated into increased production. But equally
important is the need for Filipinos to work smarter. Hard work by itself may not lead to
economic progress. Hardwork inefficiently organized and performed can even be counter-
productive if it develops among the workers the wrong habits. Hence, there is also a need to be
productive in one’s work. Economic development accountants shall be expected to help in
devising more innovative ways of measuring output. Since productivity is generally defined as a
ratio between output and inputs, measurement must be faced squarely.

Societal Accounting

Socio-economic accounting is, therefore, the reorientation and extension of accounting

practices designed to enable business executives to better attune their efforts towards socially
desirable goals. The question is, what about the attempts of accountants to put price tag on
socially responsible behavior? And what about the so-called corporate social audit? In this
people shall use the term societal accounting to refer to the measurement of the degree of
performance by a corporation of its social responsibility.

In the measurement of corporate social performance, S. Prakash Sethi noted that there are
two broad lines of investigation being pursued. The first approach is merely a “reaction to
perceived reality”. According to this approach, it is not the “real” social needs which are
important, but the needs perceived by the public, whose perception is gauged by public-opinion
surveys, ranging from ad hoc to scientifically selected groups pooled under carefully developed
research designs. Once these needs are pinpointed, industrial firms decide for themselves how to
develop their individual responses to these issues.

The second approach may be called “maximum capability utilization and best effort”.
Corporate planners may call it the “inside-out approach”. The executive first makes an inventory
of the strengths and resources of the firm. Then management chooses those projects which will
make the best use of the firm’s capabilities in undertaking socially desirable programs and
practices at the least cost. This approach to societal accounting may take two forms. First form is
the public reporting device, in which a corporations list its various activities that it considers
socially beneficial and that may be of interest to such groups as investors, consumers, employees
and the general public. Another form of social audit is intended for management decision-
making only. Sethi described this form that it is starts by inventory what is being done in the
corporation’s various departments and divisions. The next step relates this finding to certain
performance criteria and identifies area of strengths and weaknesses and the people responsible
for them. This is followed by developing new goals and setting up programs to achieve these
goals. Describing this process is deceptively simple; the difficulty of making such an audit can
hardly exaggerate.

The Futility of measuring virtue

The first principle would like to propose is that the virtue of justice--which the
businessman exercises when he assumes his responsibility towards the various stakeholders n his
firms--- cannot and should not be subjected to pecuniary measurement. The social responsibility
of business is no different from the obligation of every man living in society to contribute to the
common good. The common good is not an arithmetical concept which can be straight-jacketed
into such meaningless criterion as "the greatest good for the greatest number". The common
good is a juridical order which enables every man to fully develop himself--- spiritually,
culturally, economically and intellectually and so on.

The only promising field for societal accounting may that of management and internal decision
making. However, societal accounting is next to useless, because the traditional matching
principle between cost and revenue is certainly not applicable when benefits are primarily
external to the firm. Moreover, socially responsible behavior cannot be subjected to financial
measurement. Any attempt to parade virtuous act would be counterproductive. The public would
be the first to be repelled by attempts of business to show off its social action results in pesos and
centavos.

Accounting in non-monetary terms

The constructive approach to societal accounting is found neither in jumping blindly into
the task with the hope that a definition of concepts would crop along the way nor in forcing the
tools and procedures of traditional financial accounting into the field of social action. By first
postulating certain philosophical and theological premises, it can avoid much useless
experimentations and eliminate automatically certain routes to societal accounting that are doom
to failure from the very start.

But they find societal accounting to be extremely useful in accomplishing the first two
objectives cited by S. Prakash in his excellent survey:

1. Enable the firm to continuously monitor its activities to make sure that programs are
developing most efficiently and are yielding the desired results;

2. Generate data to assist management in improving performance and selecting future activities
in anticipation of future activities in anticipation of future activities in anticipation of future
changes in objectives.

There are many existing indicators being employed to assess at least the extent of how
the following social concerns are being attended to:

 health and nutrition

 learning
 income and consumption
 employment
 non-human productive resources
 housing, utilities and the environment
 public safety and justice
 political values
 social mobility

All of these seek to measure a certain aspect of national welfare, distinct from that being
emphasize by traditional national income accounts. Every area has its own variables of interest.
 In health and nutrition, the variables of interest are infant mortality rate; expectation of
life; days disabled due to illness per capita per year in disability day equivalent, by membership
in the labor force, and by family status; available supply of calories per capita per day; and
available support proteins per capita per day, by origin (animal or vegetable)

In Housing, utilities and the environment, the following data are being looked into:
proportion of occupied dwelling units adequately served with water; proportion of households
with three persons or less per room; proportion of population served by electricity at home;
pollution concentration levels, by type of pollutant, by station.

These indicators are meant to serve as guidelines for the government to determine how
successfully it is tackling certain social problems. They are meant to feed information for the
government technocrats. They can used to establish what we have called "satisficing levels".
Societal accounting should provided businessmen with indicators on how successfully they are
promoting the interests of various "stakeholders". Societal accounting cannot be used to tell the
public how more or less socially virtuous or responsible a firm has become through the years or,
even worse, how more or less socially virtuous the executives of a particular firms are than those
of other firms.

Another set of indicators can also be devised to monitor closely what could be happening
to the interests of those who provide the funds. Such indicators would necessary involve the use
of current value accounting. Such indicators of performance are evidently not necessarily
reducible to pesos and centavos. Accountants must abandon the idea that accounting must always
be in financial terms.

https://www.accountingtools.com/articles/what-are-direct-costs.html

https://www.collinsdictionary.com/dictionary/english/public-utility

https://en.wikipedia.org/wiki/Utility_ratemaking