Created: 1/1/1961

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CENTRAL INTELLIGENCE AGENCY Office of Research nnd Reports


To the Soviet leadership tlie cost of production is one of the must Important factors in their planned economy, principally because it is regardedeasure of the efficiency vith vhlch national resourcesill red. There io,eneral lack of knowledge in the West about the nature of Soviet cost dataow they are derived and how they are used. This report examines the Soviet concept of coot, the methods by which*coot la calculated under varying conditions of production ln the machine buildingnd the use to which auch cost data are put.

The methods of calculating coat in Soviet machine building are illustratedumber of hypothetical examples taken from Soviet literature. Particular attention also Is devoted to theof costing new articles ln Soviet machine building. The use of costaasis for planning prices is examined only in passingit is regardedubject requiring more treatment than it can receive in this report.

iai -


Summary and


A. General Features of Cost and Cost Accounting in the

S. Khozraschet, or the Principle of Economic

and Reporting

Organizations Concerned with Accounting


II. Techniques of Computing Cost in Machine Building

of Outlays for


a. Normative Method

h. Order


3- Types of Calculated Cost and Their Composition

0. Full

III. Level of


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Comparable Output

Honcooparablc Output

Soviet Data on the Change in Cost


Methodological Problems

Institutional and Technological Factors . -

IV. Structure of Cost

of Machine Building with Other Indus-


2. Individual Machine Building Plants and Shops .ppendixes


in Machine

1. Machine Buildinghole

A. Khozraschet

Aypcndix B. Norms

Appendix C. The Normative Method of Calculating theOf Output

Appendix D. Cost Data fromtate Plan for theof the National Economy of

Appendix E. Source References


USSR; Example of Report Submitted by ar.on Reducing the Cost of Comparableor, the Cost Of Total Comrodity Output, MarchFirst7

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USSR: Example of Report Submitted by anon the Cost of Comparable Output andof Total Commodity Output, Distributed byCalculation, First7

USSR: Annual Percentage Change ln the Cost ofOutput in Machine Building and in Industry8

USSR: Structure of the Cost of Output in Industry as a

Whole and in Selected Heavy9

Sample Record of the Movement of Materials in

Production ofachines at MachineX, July

Sample Worksheet for Computing Basic Production

ofachines at Machine Building Plant X,

Sample Cost Calculation Report for


Data on the Planned Cost of Comracdity Output of



Data on the Planned Cost of Commodity OutputBuildingI


USSR: The Dispersion of Primary Sconomic Elements Among Items Of Calculation following page

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Summary and Conclusions

The Soviet state attempts to regulate the consumption of national resources at state enterprises through its costing system and its program of cost responsibility- Costs also are used in planning the prices of goods and services in the USSR, although the degree of direct correlation between costs and prices is not known. Thisfocuses primarily on the use of cost accounting in Sovietbuilding to plan and to reduce progressively expenditures in the manufacture of machinery and equipment. The use ofethod for measuring and effectuating changes in efficiency of production is not, of course, unique touch less original withthe USSR, having been employed by industrial firms in market-oriented economies for many years. What is significant, in contrast to market-oriented economies, is the scale onore or less uniform national costing system has been established in the USSR. The establishmentigh degree of uniformity in cost accounting at Soviet state enterprises is intended not only to simplify state regulation of the level of expenditures at many such enterprises but also to insure homogeneity of data for statistical purposes.

The cost" of goods in the USSR generallyessconcept of cost than iw the case in market-oriented economies. Stemming from the organization of tne Soviet economy itself, with preponderant state ownership of the means of production and with the absence of competition in the domestic market, such items of cost aa land rents, insurance, interest or. capital, and soles promotion, for example, arc not reflected in the cost of Soviet goods. Expenditures for specialized training of personnel as well as for research and development, which are commonly borne as items of cost by private enterprisesarket-oriented economy, may in some cases be partly or entirely financed out of the state budget ln the USSR andmay not bc fully reflected in -he ruble cost of the output, of an enterprise. Because they are less inclusive, it may generally ye said that the given unit costs of Soviet machinery and equipment are understated relative to the costs of similar articles manufacturedarket-oriented economy.

" Tne term cost as used in this report refers to the production cost (sebestolmost')-


Tbe coetB of production In Soviot Industry do not tend to be as responsive to short-run scarcities of supply asarket-oriented economy, because the Soviet government establishes the prices of the factors of productionationwide basis in advance of eachperiod. The costing of the direct factors of produclion ln Soviet industry isrocess of converting physical Inputs of production Into ruble values on the basis of preplanned conversion ratios (fixed prices of materials, fixed wage rates, output norms, and the like).

In spite of the absence of market competition and privatein tha USSRand the absence of the attendant effocto that market competition may have on coating und pricing practices at the enterprise levelit may be said that those aspects of costwhich arc properly concerned with the exercise of managerialover the costs of production are generally similar ln the US and the USSR. Tha similarity between the systems of cost accounting ln the two countries ls most marked In the accounting concepts employed, especially In the use of standards for measuring variations in costs. Cost accounting In both countrlea probably is more oriented toward the primary objective of reducing costs than is true In Westerncountrlea where the primary objective of cost accounting 1sthe aacertainmcnt of product unit costs for the purpose of eatabliahlng prices. This situation probably is explained by the anomalous fact that in the more competitive US industries and under Soviet conditions of state monopoly alike the price structure is such that enterprises tend to increase profits through the reduction of costs rather than the raising of prices.

In spite of the similarity ln the primary objectives of costin the U3 and the USSR, Ihere probably is greater emphasis on determination of the unit coat of manufactured articlee ln the USSR than ln the US, in partesult of the Soviet uaa of such data In tlie construction of Industrywide Indexes showing periodic reductions ir. the coot of output. Periodic reductions In pha cost of output aro regarded as an indication of increased efficiency of production and are, therefore, an Important objective of Sovietplanning. The difference between fixed enterprise wholesale prices and declining unit costa of output at state enterprises"profit" and is the major source of capital accumulation by the state.

In the absence of private profitaskingtimulus to holding down coats in production, the USSH has recently introduced financial incentivoa In the form of bonuaea for managerial personnel who meet or exceed plans for the cost of output, provided that they cimulta-ncoualy fulfill the other major production goals. The principal


method for systematically controlling costs in the USSR, as in the US, however, is the establishment of production standards orfficial state norms governing operations are an integral port of the production program of Soviet machine building plants.

Whether in the US or the USSR, the establishment of production norms and the allocation of cost is often an involved procedure in machine building, where large numbers of heterogeneous articles, including many new articles, may be producedingle plantiven period. Insofar as possible, the costs of materials and the wages of production workers in the USSR are directly allocated to the specific end articles manufactured, whereas overhead costs are indirectly allocated among the articles.

The most common method of cost accounting in Soviet machine building is the so-called normative method. Under this method, norms are set in advance for the outlays required to meet theprogramlant, the norms usually being based onsubstantiated opportunities to realize savings inwith the previous production period. Deviations from the norms for the outlays that occur in actual production are recorded in the accounts of the plant. Such deviations, expressed in ruble values, are then added to or subtracted from planned costs to derive actual costs at fixed intervals during the production process. On the basis of periodic reports, deviations may bo traced to their source and corrective action token before the accounting period iu completed. In this way, norms serve not only to establish the planned cost of production but also to check on ond regulate the actual cost of production at frequent intervals. The normative method is most suited to large-scale production.

A number of important types of ir-achinery and equipment arein small series or as individual units, especially inand heavy machine building. Because the nature of small series and custom production decs not readily lend Itself to the normative method of accounting, the so-called order method is used. The cost of an order placedustom-built heavy press, for example, is estimated in advance, but, in the absence ofnorms governing the building of the press, it is difficult to ascertain how far the actual cost may reasonably deviate from the estimated cost during the various stages and operations of theprocess. In some cases the soundness of the estimate itself may bc in question. In any event, total actual cost is notuntil the order has been filled, sometimes onlyeriod

iscussion of the Soviet system ol norms, see Appendix 8.

Nev articles going into series production for the first time, like articles manufacturedueton basis, are not Initially covered by substantiated norms. Consequently, costs can only be eatimated. The coet of nev artlcloe in Soviet machine building is generally quite high because of the practice of writing off in theeare of their manufacture all plant costs connected with the designing, manufacturing, and testing of prototypes as well as the tooling for production. Because there are no previouslycosts with which to compare the actual cost of new articles, the output of Soviet machine building is divided Into two categoriescomparable output and noncoarparable outputfor purposes ofan Index of change in cost. The index of change ln cost Isonly for comparable output and includea only articles that are in at least their eecond conBeeutlve year of production.

Comparable output accountsmaller percentage of commodity output* in Soviet machine building than in practically any other Soviet induatry. In contrast to the mining, oil extraction, andindustries, whore allegedlyercent of the commodity output is comparable from one year to the next because of thenature of the product, onlyoercent of the commodity output in Soviot machine building vne credited7 with being comparable. The sizable share of noncomparable output In machine building reflects the large number of new articles manufacturedlargelyesult of the Soviet policy of encouraging the adoption of naw and improved types of machinery and equipmentthe economy.

Soviet economists have been critical of the index of change in cost for some time largely because it does not include thesegment of cootmodity output and because,ink index, lt tends to overstate annual reductions In cost in those Industries, such as machine building, wherennual reductions are realized froa declines in the Initial high unit costs of new articles after their first year of production. ew Index showingin outlays per ruble of commodity output (comparable and non-comparable) was adopted to replace the index of change ln coat as the official Index under the Soviet Seven Year. The new index, which Is based on the ratio of the outlays of production to the total value of commodity output expressed in wholesale enterprise prices, la itself tbe target of many criticisms. Soviet economists charge, among other things, that this Index does not strictly reflect the dynamlca of cost but rather tha change lo profitability (in which

* rief explanation of coemodlty output and the differencecommodity output and gross output in Soviet Induatry, see the first footnote onelow. Alao see III, B,, below.

coBt is only one factor). The nev index appears to be faratisfactory substitute for the older cost reduction Index based on comparable output, which is still in limited use.

Among Soviet industries, machine building is generally credited with registering one of the highest, if not the highest, annualreductions in cost. Although no firm data on annualin cost in Soviet machine buildinghole are available for the years, it is claimed that, under the Fifth Five Year, average annual reductions in the cost ofoutput ranged betweenndercent in the machine building industries. Meanwhile, the reduction of cost in machine building is significantly reflected in reductions of cost in the commodity output of industryhole because of the largemade by machine building to industrial output. Although reduction of cost in Soviet industry under the Fifth Five Year Plan was planned atercent and was actuallyercent, the planned reduction under the abortive Sixth Five Yearasercent and under the current Seven Year Plan is to be "no less5 percent."*

Soviet reliance on domestic sources of production to meet its rapidly expanding requirements in goods has, through the years, fostered production of essential articles at some machine building plants that produced at relatively higher costs than other plants. Consequently, prices on such articles had to be set high enough torofit on average costs, the extra profits from the moreplantsinistry being used to cover the losses of the less efficient plants. One method by which the USSR is now seeking to reduce cost in Soviet machine building is by eliminating high-cost production through greater specialization of output atplants.

In spite of the allegedly increasing influence of coston the structurallor. and the production program of Soviet machine building, it may reasonably be assumed that the desire of the Soviet leadership to attain or surpass the technological level of the industrialised Vest Im key industries will, from time to time, justify the priority Of selected physical production targets over considerations of cost. The recently initiated program for radically and rapidly increasing the domestic production of petrochemicalby dispersing such production among various types of machine building plants as well as by expanding the petrochemical equipment industry Itself, for example, emphasises that under the Soviet system

* This target figure presumably is based on the new index showing the decline in outlays per ruble of commodity output.

of selective forced-draft development of critical Industries, physical production targets of machinery and equipment are of paramountwhen Imports cannot be relied on to fill domestic

In addition to their use lo planning and controlling consumption of resources, in establishing prices, and In measuring changes in productions! efficiency, costs also aro used In the USSR to determine the balance between materials (including fuel, energy, aad) and wages within industries. Inecline in outlays for wages relative to outlays for materlale Is considered in the USSR to be an indication of technological progress and, consequently, an economically desirable development. Although the aharc of wagesdeductions for social insurance) ln Soviet machine building declined1 percent of total cost27 percentachine building remains one of the aore labor-intensivein the USSR. This fact is explained by the relatively higher wages and/or relatively larger amounts of manual labor required ln various machine building Industries compared with Industryhole. An Interesting trend in the structure of cost in machine building was tbe perceptible Increase ln the share of wages in total outlays during thes. This reversal of the secular trendower share for wages probably can be ascribed to reductions in theprices of material inputs aa well as to wage Increases thot took place during tho period.


A. General Features of Cost and Cost Accounting in the USSR"

Production costs (sebestoimost') in the USSR are used torecord, analyze, and plan outlays of production with the aim of controlling the consumption of resources at state enterprises. The cost of goods in the USSR generallyess inclusive concept of cost than Is the case in market-oriented economies. Stemming from the organization of the Soviet economy itself, with preponderant state ownership of the means of production and the absence of competition in the domestic market, such items of cost as land rent, insurance,onnd sales promotion, for example, are notin the cost of Soviet goods. Other Items of cost that are often borne by the private enterprisearket-oriented economy, such as specialized training of personnel as well as research and development, may in some cases be partly financed out of the state budget in the USSR and so may not be fully reflected in the ruble cost of anoutput. In general, the cost of output In Soviet machine building ls calculated on the basis of the current operating expenses of the producing plant. In comparison with similar US goods, the cost of Soviet machinery and equipment probably is understatedesult of differences in the comprehensiveness of cost In the two countries.

The costs of production ln Soviet industry do not tend to be as responsive to short-run scarcities of supply as in market-oriented economies, because the Soviet government establishes the prices of the factors of productionationwide basis when planning the over-all physical requirements of the national production program. The costing of the direct factors of production in Soviet industry Isrocess of converting the inputs ol" production into ruble values on the basis of preplanned conversion ratios (fixed prices of materials, fixed wage rates, output norms, and the like).

In spite of the absence of market competition and privateln the USSRand the absence or the attendant effects that market competition may have on costing and pricing practices at the enterprise levelit may be said that those aspects of costwhich are properly concerned with tlie exercise of managerialover costs of production are similar in the US and the USSR. Of course, the various existing methods of cost accounting are designed

For serially numbered source references, see* The initial cost of building and equipping most state enterprises is covered from the state budget in the form of an intersst-freefund. uller explanation of the charter fund, see Appendix A.


to meet the specific requirements of those who employ them. Because the methods of cost accounting used in the USSR are prescribed by the state and are mandatory for all state enterprises in the country, there is certainly greater uniformity in cost accounting and reporting practices than in the US, where enterprises are generally free to follow any accepted practice they please. In the USSR, as in the US, however, techniques of cost accounting are under constant analysis, and there are always areas of controversy with respect to theof one or another technique, often based on the objectives that those who use cost accounting are pursuing.

The similarity between cost accounting in the US and the USSR is most marked in the accounting concepts employed, especially ln the use of standards for measuring variations in costs." Cost accounting in both countries probably is more oriented toward the objective of reducing costs than in Western European countries, where the primary objective of cost accounting Is reportedly the ascertainment ofunit costs for the purpose of establishing prices. Thisprobably Is explained by the anomalous fact that in the moreUS industries and under Soviet conditions of state monopoly alike the price structure is such that enterprises tend to increase profits through the reduction of costs rather than through the raising of prices.

In the absence of private profitmakingtimulus to holding down costs ln production, the USSR has recently introduced financial incentives in the form of bonuses for managerial personnel who meet or exceed plans for the cost of output, provided thut they simultaneously fulfill the other major production goals. In the machine buildingthis new bonus system went into effectxcept for several currently critical types of equipment, such as electrical and electronic equipment, chemical equipment, petroleum equipment, und equipment for the metallurgical industry, the new bonus system based primarily on cutting down costs supplants the old bonus system based primarily on meeting or exceeding physical production Bonuses are more modest under the new system than under the old and in the machine building industries cannot exceedpercent of an

" Because the description of cost accounting in Soviet machinethat Is found in this report is based on primary Soviet sources and is intended to be an aid to those who may be working with Soviet data, the cost accounting terminology used is that found in Soviet. Although readers familiar with US cost accounting terminology may have little difficulty in equating such basic terms as planned cost, actual cost, deviations, and norms in the USSR Lo standard cost, historical cost, variances, and standards, respectively, in the US, it is believed to be advisable not to push the identity of these concepts and terms too far by employing US terminology to describe Soviet cost accounting.

individual's salary. Although the nev bonus system may, in part, be designed to eliminate some of the abuses connected with the old system of bonuses and may reduce the size of bonuses paid to supervisory and technical personnel. It probably reflects aa well the ever-increasing use of cost accounting by the Soviet regime to effectuate moreutilization of resources.

In spite of the similarity in the primary objective of cost accounting in the US and tbe USSR, there probably is greater emphasis on determination of the unit cost of manufactured articles In the USSR than in the US. eparate form for reporting unit costs ls provided among the documentsoviet machine building enterprise submits to the central statistical and financial agencies at periodic Such data ore used to construct Industrywide Indexes onln the coat of output.

To what extent the Initial enterprise wholesale prices* of articles In machine buildingniform percentage relationship to their initial planned unit coatsoot question In spite of inferences in Soviet literature that some degree of uniformity exists between costs and prices at this accounting stage. Because of the absence of competition in the domestic Soviet economy, It would seem that. In general, prices ln the USSR mightore directto unit costs than In the US, where the complex factors of competition must often be reckoned with in the pricing policy of un enterprise. The Soviet practice of leaving prices ln effect forlong periods of time while unit costs decline, however,thateriod of time any Initial relationship is destroyed. Not until such time us enterprise wholesale prices are administratively reviewed and readjusted to prevailing unit costs Lb the initialrelationship restored between tho unit cost and the price ol* an article.

Reductions In unit coats are an Important objective of Soviet economic planning because they are used to calculate economies realized ln production. The difference between the fixed enterprise wholeuale prices of output and the declining unit costs of output at Soviet state enterprises represents "profit." Such profit is the major source of capital accumulation by the Soviet state, and systematic reduction of unit costs Is regarded as an important method of helping to finance capital investment programs.

* Producer goods manufactured at Soviet machine building plants are generally sold by the manufacturer directly to other state enterprises st enterprise wholesale prices; consumer durables (such asstoves, radios, and television acts) manufactured at machine building plants also have enterprise wholesale prices but are sold to the public at state retail prices.

B- r the Principle of Economic Acc

Soviet machine building plants operate within the statewide system of khozraschet (khozyaystvennyy The khozraschet system of the USSR is Intended to encourage operational efficiency and financial self-sufficiency in state enterprises which might otherwiserain on the state budget. Soviet spokesmen describe khozraschet asocialist method of economic management which seeks to establish commensurobility between the monetary value of the outlays ofand the financial status of an enterprise as reflected in theof its economic activities-" hozraschet enterprise isexpected to recover from the sale of its output (goods ond services) the cost of the outlays of production as well as toargin of profit.

Khozraschet is the principal method ofa regime of economy at enterprises in order to achieve the best results with the least outlays. It makes the financial and economic Btatus of each enterprise directly dependent on fulfillment of the indexes contained in the state plan. 3/

Although the volume of output, the product mix, the cost of the outlaye of production, and the prices of the output of anore, in the final analysis, centrally determined, the management of each khozraschet enterprise ie responsible for seeing that alleconomic measures are taken at the enterprise to meet or exceed the planned targets. Because the bulk, of the cost of productionachine building plant is incurred in the semiflnishing, machining, ond assembly shops, many machine building plants extend the principles of khozraschet to the individual shops and their subunits.

Thie practice is known as intraplant khozraschet andetailed record of the outlays of production by shop, section, or

** The term khozraschet has been variously translated asnonfinaneing by thecostcosteconomiceconoaicnd "nonbudgetary." Although each of these terms describes some facet of khozraschet, none is wholly adequate in itself. Consequently, the Russian term is used throughout this report. rief discussion of the evolution of the khozraschet system aa well as thefeatures and juridical status of khozraschet enterprises, see Appendix A.


other subunit to be kept so that actual performance can beand qualitatively compared with the planned indexes. hozraschethozraschet shop is provided with the fixed capital required forarticular production process, and the Bhop is thenlan that specifies the quantity, quality, and mix of its output along with appropriate norms governing theof materials and labor. The planning and bookkeeping departmentshozraschet enterprise must keep various regional and central organizations of the state informed of the enterprise's progress In fulfilling the plan and, if the enterprise ls deviating from planned Indexes beyond the permissible limit, must pinpoint the reasons for the deviation and take corrective measures.

and Reporting Procedures*

the Immense state-operated Soviet economyarge degree of centralized control to insure that organizations and individuals operate within the framework of the state planremendous network of offices for the accounting (bukhgalterskly uchet) and reporting (otctiet) of economic data has been created. The data submitted by Soviet enterprises are used not only for direct control purposes but also for compiling national,and industrial branch indexes. Consequently, Soviet accounting and reporting procedures are oriented toward these ends. The dataduring one plan period are used as the basis for planning the indexes of the following period.

The principal source of data at the plant level is the primary document (pcrvichnyy dokumcnt). The data for these simple controlcome both from the production shopslant, where tlie costs of materials and labor that enter directly into production areto the appropriate articles of output, and from the variousshops, and laboratories, where overhead costs also are allocated among the articles of output. These documents are drawn up on theof each operation or series of similar operations for tlieof recording busic production data that can be directly forwarded or further processed. Theeports that are forwarded by the plant to administrative, statistical, and financial organizationsto it may contain primary data in their initial form, maydataarge number and variety of primary documents, or may contain statistical indexes derived from data contained in primary doc-

Ur.tll Soviet industry was largely reorganized from aministerial system of administrationegional system ofinachuilding plant reported cost


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data to its controlling administrative organization, usually aor administration of its ministry in Moscow. After the data from all the plants of the ministry had been summarized, they wereto the Central Statistical Administrationhich hadreceived copies of the plant reports through its regionalpresumably as an Independent check on the ministries as well as to enable preliminary statistical computations to be made. Since the reorganization of industry, all but one of the machine buildinghave been abolished, and administrative control over the machine building plants has been largely vested ln regional econcaic councilshich in turn are subordinate to the councils ofof the various republics in which they are located. Machine building plants, like other industrial enterprises, now report their cost data to regional organizations for administrative purposes. As before, however, direct reporting of individual plants to the regional offices of the CSA is continued. Data-processing centers set up by the CSA within the regions transmit the data to the CSA in Moscow.

D. Centralized Organizations Concerned with Accounting and Reportlng*

The CSA bears the major responsibility for running thesystem of statistical accounting and reporting. Because of the need for close contact between the planning authorities and theof statistics, the CSAeriod wus part of Gosplan, USSR.owever, the CSA was detached from Gosplan and placed directly under the Council of Ministers, USSR, allegedly to perform its ever-increasing workloadreater degree of independence.

At present the CSA exercises centralized control over the Soviet accounting systemamified network of statistical offices. In each of thenion-republics thereepublic statisticalwith branch offices in the various adrainistrative-territorlul divisions of the republic. Administrative control of the reported cost data for machine building was formerly exercised by the variousmachine building ministries but is now the immediate concern of machine building administrations under the regional economic councils. The methodology of compiling, analyzing, and reporting cost data,is supervised by the CSA. The CSA hands down instructionsaccounting and statistical reporting to departmental headsurn, pass them down through channels. local CSA bodies receive copies Of these Instructions in order to assist and check onreporting.

Other centralized organizations concerned with accounting and reporting in the Soviet economy arc Oosplan, USSR, and the Ministry of


finance, USSR. The CSA coordinates with Gosplan itB annual plan of statistical projects. Including the forms for recording statistical data. Instructions, and methodological provisions- In turn, Gosplan coordinates all the methodological Instructions It sends tonion-republics (formerly to the ministries) in connection with the drafting of the state plans, Including cost estimates, with the CSA. This coordination ls intended tonifiedin planning and reporting so that statistical indexes will be.

Within Oosplan, USSR, the departments responsible for planning the development of the various machine building industries are believed to work with the Department of Prices and Cost in coordinating the planning of costs and prices for machinery and equipment nf national importance. Special state caaalttees established directly under the Council of Ministers, USSR, to guide the development of the important machine building Industries engaged In defense production are believed to work closely with Gosplan, USSR, In mutters of planning.

The Ministry of Finance, USSR, aupervisea the methodology of accounting in cooperation with the CSA. Together with the CSA, itstandard forms for Invoices and accounts as well as Instructions pertaining to filling out these forms. The forms for the annual plan fulfillment reports of industrial enterprises are approved Jointly by the CSA and the Ministry of Finance, USSR.

II. Techniques of Computing Cost in Machine Building

A. 'estimate of Outlays for Production*

For purposes of computing the cost of the different types of outlays required to meet the over-all production program of an entire machine building industry or an Individual machine building plant, the drawing up of an estimate of outlays for production (ameta zatrat nas required. This method of itemizing the outlays needed to fulfill the planned production program also provldea the data used by Soviet economists ln analyzing the structure ofn Soviet machine building the estimate of outlays for productionof the following eight primary econoaic elements (pervichnyye ekonomlehesklye^ elcmenty): basic materials, auxiliary materials, fuel, energy, wages, deductions for social iaourance, amortization, and other expenditures.

The sum of these elements reflects the total cost tolant of the goods and services for which lt must epend its financial resources. As such, the estimate of outlays forserves as the basis for establishing the financial plan of each machine building plant. The Itemization of cost by prlaary economic elements at the plant level conforms to the method of itemizing cost in the state plan. In this way the sum of the coat of the resources allocated to the Individual plants of an Industry in kept in balance with the cost of the resources allocated to the industryhole.

B. Calculation

1 . General Features1

However useful they may be for over-all planning purposes, the primary elements of cost contained in the estimate of outlays for production do not readily lend themselvea to computing the unit cost of apeclfic articles or to analyzing and controlling the day-to-day operations of the various shops and departments within the plant. Tne complex technology and organization of production In machine building as well as the variety of articles produced give rise to zhc movement of many different articles through successive stages of manufacture la the semlfinlshlng, machining, and assembly shopslant, where the major share of the production costs originate. These main production

* 57

requently referred to in abbreviated form as "estimate of fsmeta prolzvodstva).

"** For the structure of cost, see TV, p. Itf, below.

f V

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shops of the plnnt are, in turn, serviced by auxiliary Dhopa. In order to use the dotu contained in the estimate of outlayo forto compute the cost of individual articles being produced throughout the plant, the data are regrouped into "items of(kal'kulyatslonnyyehich conform more closely vlth the Internal accounting system of the plant. Insofar as possible, tbe coats of materials and the wages of production workers are directly allocated to the specific end articles manufactured, whereas overhead costs are allocated among the output by Indirect methods.

The Items of calculation In Soviet machine building, like tbe primary economic elements, are specifically prescribed by the state. The eight major items ofone of which exactly corresponds substantively with the primary elements even when bearing the same name, are as follows: materials, fuel used directly in the production process, electric energy used directly in the production process, wages paid to production workers, deductions for the eociel insurance of production workera, shop expenditures, general plantnnd nonproductlonal expenditures. The accompanyinghows how the homogeneous primary economic elementa are dispersed among the items of calculation when outlays are reitemlzed for purposes of calculation.

A comparison between the outlays of production expressed as primary elements and as items of calculation chows that tho Items of calculation pinpoint the source of costs within tha plant, whereas the primary elementa reflect the composition of the over-allof the plant. These two techniques of computing coot arein the cost section of the technical, industrial, and financial plan (tekhpromfinplar.). The regrouping of prlnory elements into items of calculation la achieved through the technical-economic Indexesin various sections of tbe tekhprocflnplan. These Indexes, which arc based on established material consumption norma and labor consumption noma,are expressed in ruble values aa well as in physical terms. In this way, cost is tbe common denominator of the tekhpromfInplnn wherein all the produclion activities of the plant are reconciled with one another und with the over-all produclion program of the plant. Whether broken down into primary elementa or into items of calculation the total, outlays for production are, of course, identical.

' Depending on the size and importance Of expenditures included under any of these eight major iloins, the number of Items may be increased or decreased. See jj,elow; Table 2, "to, below; 6, p. . ov. ** Following iscussion of consumption norms, see Appendix B.



The Dispersion of Primary Economic Elements Among Items of Calculation

Economic Elemenls

Among Items of Calculation



Shop expenditures

General plant expenditures

used directly in the production process Shop expenditures General plant expenditure*

energy used directly in the- production proton Shop expenditure* General plant expenditure!

paid to production workers Shop expenditures General planl expenditures

for Social Insurance

for the social insurance of production worlen Shop expenditures General plant expenditures

expenditures General plant expenditures


expenditures General plant expenditures

Ihis figure lefkeli yrodutl.oo MM* c'tG0

Because of the important purpose it serves in thesystem, the technique of computing cost knovn as'kulyatsiya)etailed, examination. Calculation Isused to allocate productionspecific goodsproducedlanthole or by its Individualdeportments.. The unit cost of Individual articles Isonlyrerequisite to establishing their prices andto constructing indexes of gross output (vulovayacooKBodity output (tovarcaya produktsiya) but also toof change in the cost of commodity output for purposeschanges in the efficiency of production."

Because of differences ln the degree of specialization, the type of output, and the organization of production from plant to plant, several methods are used ln Soviet machine building forthe account of outlays expended in the manufacture of the outputlsnt. The exact number and title of Item headingsiven plant depends largely on the particular method of keeping accounts.

In Soviet machine building the three principal methods of accounting the outlays of production and, hence, of calculating costs are the following: the normative (normativnyy) method, the order {zaknznyy or pozakaznyy)nd the mass conversion (peredel1-nyy or poperedel'nyy) method. Inourth method should perhaps be mentioned, the so-called "boiler" (kotlovoy) method, which is apparently all but The normative method ls by far the moat prevalent. In practice, because of diversified production

* Commodity output Includes only production of explicit goods and services that are designed to enter into the national turnoveriven period, whereaa gross output In machine building also includes the difference ln unfinished production on hand at tha beginning and at the end of the period as veil as some intraplant turnover. Indexes of gross and commodity output valued ic ruble prices serve in the USSR as the principal measure cf grovthlant or an industry. Because of the more specific nature of commodity output in comparison to gross output, most Soviet cost Indexes arc computed on the basis of commodity output. ** Also referred to as the batch (portlonnyy or popartiomyy) method. Under this method, expenditures ln excess of norm expenditures are merely distributed among the Individual types of output into the planned cost of each type. Because the "boiler" method does notasis for determining the nature or cause ofexpenditurea, it has been in disfavor with Soviet officials.

programs at some machine building plants, more than one method may be employed.

2. Methods

a. Normative Method'

The normative method of calculating cost is the method most highly favored by Soviet officials because it affords the state the most complete control over month-to-month consumption of resources. The normative method is especially suited to theo'f comprehensive statistical datu on costs at machineplants engaged in the mass and large-series production of aof articles. Costs calculated by the normative method areby Soviet spokesmen as being more scientificallythan those calculated by the other methods.

Within most Soviet machine building plants, theof norms in the production processes is mandatory in planning the production program. Technical-economic norms are an integral part of the system of cost accounting at such plants. In addition to setting norms for the principal outlays (materials andstimates of expenditures for services and for administration of the plant (overhead) also are broadly treated as norms.** The alleged superiority of the normative method as compared with the other methods of accounting and calculating is generally attributed to four specific features, as follows; the prompt reflection of deviations from norms in the accounts and reports of the piunt, the use of norms as indexes of change in production efficiency, the method of allocatingcosts between finished and unfinished output, and the use of aggregative statistical techniques that simplify accounting procedures.

(l) Under the normativelose check may be kept on whether or not actual cost in deviating from planned cost. If actual cost is, in fact, deviating from planned coat, themethod of accounting and calculating also reveals the source of the deviation and enables prompt remedial measures to bc initiated. If the responsibility for the deviations can be traced to Individual persons or departments in the plant, such persons or departments may be penalized accordingly.

* For graphic examplesextual description Of tlie steps followed in making normative calculations, see Appendix C. ** iscussion of norms in the USSR, see Appendix B-


The most commonly cited causes for deviations from material consumption norms* at Soviet machine building plants axe as follows;

The nonconformance in type and size of raw materials delivered to the plant with those established by state standards. Delivery of such materials results either in waste of materials or in an increase in the weight of the finished article. The suppliers of such materials are usually held responsible when deviations from norms result from this cause.

The substitution by the plant of one kind of raw material for another.

Unnecessarily large allowances ofresulting from incorrect layouts, templates, and the like.

Deviations from the established norms for the wages of production workers usually can be traced to thepayroll. Because wages are charged against specific articles of output. It is possible to relate deviations from the wage norms directly to the appropriate type of output. Such deviations occur most oftenesult oft disruptions in the normal working pattern occasioned by the necessity of reprocessing raw materials or by the use of cutting tools of inferior quality.

Although deviations from norms for directsuch as materials and the wages of production workers can be shown in primary documents, the practice of recording them there has not become as firmly established as Soviet officials would like. esult, the size and cause of deviations from consumption norms is frequently detected only when drawing up the accounts. Deviations occurring in indirect expenditures, such as shop and general plant overhead, are usually discerned by comparing actual outlayB withoutluys.

nnual consumption norms express the plannedper unit of output in the consumption of materials and labor an compared with the previous year. In the same manner that annual consumption norms are expected torogressive decline in consumption per unit of output from year to year, so currentnorms, which arc derived by subdividing the unnual norm into four quarterly periods, are expected toimilar decline

* For an illustration of the rrethod of recordingeriel consumption norms, see Appendix 0.


from quarter to quarter. Actual consumptioniven month may vary within specified limits from the quarterly norm so long as tho average quarterly level of consumption as shown in the plan is met during the quarterhole. Thus the consumption of materials or the norm-hours of labor per unit of output may be somewhat higher than the planned quarterly level in January and lower than the planned quurtarly level ln March. Deviations from quarterly norms occurringiven month are shown in the monthly accounts because of their Importance in analyzing the current operations of the producing plant.

The recording of periodic changes ln norms tochanges ln actual consumption is considered to be an important feature of the normative method because lt points up changes inefficiency at each producing plant and serves as the baoiu for setting the norms for the following plan period. Norms expressed in ruble values must be recalculated to reflect any adjustments In the prices of material Inputs, wage rates, and utilities and transport rates, if the norms are to be regarded as indicators of changes in productions! efficiency.

eviations froa current norms are usually charged In full to the cost of the output finished In the reporting period. Unfinished output Is valued only at the norm cost. Soviet economists claim tbat this practice does not distort the cost of most finished articles inasmuch as the balances of unfinished output ln mass and lurge-series production are more or lesB uniformear.

In tightening up norms from one month to the nexteans of reducing the consumption of resources, unfinishedis revalued at the beginning of each new monthly reporting period so that it will conform to normative calculations based on the new current norms.

nder Lhe normative method, consumption norms are established for types or groups cf similar products. Types or groups of similar products arc defined as "products vith approximately the same technology of production, the same labor Inputs, and the same materials compouition-" By establishing general categories of similar products based on the normative outlays required to produce them, the work of recording the outlays and calculating the cost of the many Individual articles that may be producedachine building plant is simplified. In the plant's accounts, there is no attempt tobetween the outlays for articles that have been grouped together on the basis of their similarity.


The unit cost or the Individual artlolou includediven type or group la calculated and reported by theplant to superior organizations periodically during the your on the basia of this aggregative statistical technique.* Any deviations from current noms that have occurred as veil as any changes in tha norms themselves are calculated for types or groups of articleshole. The normative cost is determinedimple addition orof deviations from and changes in the norms relating to the given type or group of articles. Thus the deviations from noma and changes ln norms recordedype or group of similar articles is used for all of the individual articles within the group when their unit cost is being calculated. Soviet economists claim that,ule, the deviations from the consumption norms recordedroup of similar articles are almost uniformly applicable to each article within the group.** Normative calculations may be mode for both finished and semifinished articles.

b. Order Method***

Under the order method of calculating cost,is based on the individual order that la placedroducing plant, ordinarilyredetermined quantity of output. The actual cost of filling oach order is determined only after the order has been completely filled. esult, the period required for filling large orders and manufacturing articles that entail prolongeddoes not usually coincide with the normal Soviet monthly reporting period. Proa the point of view of cost accounting, the most serious defect In the order method of accounting and calculating is the delay involved ln submitting adequate data on the cost of output until the month In which an order Is closed. This latter defect ia considered especially objectionablelant or shop lahole series of orders requiring several months or several quarters tofor deviations froa planned cost cannot easily be caught and remedied during the production process.

In the order method, actual outlays are recorded only for the orderhole. epurate account bearing the numerical

articleampleorms have been aggregntively coleiven group of similar arnowledge of the de twoen the individual articles cias group of so-called "similar articj on the accuracy of this 9j

worksheet on which deviations from alated for all articles falling tieles is presented in Appendix C. gree of difference permitted be-sed together in one or anothert is not possible to comment

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designation of tho order is openod for each order, and all outlays expended in fining the order are entered in this account. Direct expenditures arc entered from primary documents, and indirectare distributed among all the orders being filled. The outlays entered in the account for the entire order, expressed both in physical units and ruble values, are merely summed to derive the total cost of the output. From these data the actual unit cost of an article is calculated.

Determination of the actual cost of partialof an orderiven month is difficult, if not impossible, under the order system. If the cost of partial fulfillment of an order is called for, finished output is valued, not at actual cost, but at planned cost. When thereery lengthy technologicalinvolved in producing large and complex pieces of machinery, orders are sometimes further broken down according to completeif they pass through distinct stages of processing, toa more detailed calculation and distribution of cost onof the order.

The order method is an old method of accounting that,as the principal method used in Soviet machine building. It IS now used predominantly in individual and small-series production and is limited largely to shipbuilding and heavy machine building. In addition to being used for machinery and equipment producedor ln small series, the order method is used in most Sovietbuilding plants to calculate the cost of repair and installation work and the manufacture of special tools and devieee.

The order method is especially applicable ir. theof prototypes and experimental, batches of new articles that are destined for subsequent mass or large-series production because of the many changes which may occur in the design, technology ofand technical norms established for such articles. Only after formal documents attesting to successful production of parts and components on production lines and in shops have been drawn up and after substantiated technological norms have been established may the normative method of accounting supplant the order method in the manufacture of new articlesass or large-series scale.

c. Conversion Method*

The conversion method of accounting and calculating cost is used in so-called mass conversion processes, where an initial homogeneous raw nuteriul (or semifinished material) undergoes bulk processing at distinct, consecutive stages. This method finds only limited application In machine building, principally in the processing


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of such materials as iron, steel, and rolled ferrous and nonferrous metals, where the technological process is brief, uniform, and

Because of the brevity of the process involved in each conversion, all outlays connectedonversion are recorded in full In the courseeporting month. alculation ia made on the basis of the types and grades of articles or semifinished gooda that emerge lo the conversion of tho muterial from one form to another. When several types of articles (nuts, bolts, screws, rivets, and the like) are manufactured olmultaneously from one and the same material, the outlays of production are commonly distributed among the different types of articlea through the use of coefficients that must be approved by planning organ1tationo. Control over consumption norma under tbe conversion methodxercised through accounts that reflect the movement of the raw materials through the various phases of conversion.

In machine building the conversion method ls used most extensively in foundries. Here, cost la calculated for the two principal phases of production. The first phase (or conversion) la the preparation of the molten metal, which includes the preparing, placing In the furnace, and smelting of the charge. The second phase is the manufacture of the casting, which Includes the preparation and filling of the mold and the knocking out and cleaning of the coating. The conversion method alao ia used uometlmes in forgea, whero the nature of the production process doea not alwaya lend itself to the normative method.

0 the converBion method followed essentially the order method in form. Since the Introduction of the normative method in mass and series production, however, tbe accounting andof cost at each phase of production under the conversion method has been patterned more closely on the principles of themethod.

3. Types of Calculated Cost and Their Composition* u. General

Under Soviet procedure, two costs are calculated for the outputachine building plant: the plant cost (fabrichno-sftvodekaya sebestolrxst') and the full cost (polnaya sebcstolmoctjhird cost, the branch cost (otraalcvayas derived


by averaging the full costiven article at all the plants that bear major responsibility for producing the article. Io general, lt is the planned branch cost or machinery and equipment that serves as the basis for setting prices. With increasing emphasis being placed on plant specialization in Soviet machine building, some models or types of machinery and equipment are currently produced at only one

plant. In such cases, of course, the full cost at the producing

plant also is the branch cost.

b. Plant Cost

In calculating the cost of an article or of the entire outputlant, the following seven items' make up what is called plant cost' in Soviet machine building.

(l> Expenditures for the purchase of materials

principally metal in machineepend primarily, of course, on the price and quantity of materials required to meet theprogram of the plant. Transportation and handling costs

ttranaportno-zwotovitel'nyye raskhodyl connected with thestorage, preliminary processing, and intraplant distribution of basic materials, however, also are included under this item. Inthe consumption of materials, the value of reusable scrap

(determined by its ultimate disposition) is subtracted from thecoat of work pieces bought in the rough. The cost of finished and semifinished goods purchased from other plants also may bein this item.

, irectly ia the production process, in-

cluding fuel used for scelting iron and steel in the plant foundry and for heating metal in the forges and in the heat-treating shops.

lectric energy used directly in che production process, including electric energy consumed by electric furnaces in foundries and in the welding, galvanizing, and heat-treating shops.

* The decree "Basic Principles of Planning, Recording, andthe Cost of Industrialpprovedy Gosplan, USSR; the Ministry of Finance, USSR; and the CSA, USSR, providedimplified itemizationalculating the cost of standard Some machine building plants itemize expenditures in greater detail than is done in this report. For exemple, when expenditures connected with settingew production line are sufficiently large,_they may be Separately itemized rather than being lumped ur.aer shop expenditures" as in this oxenple,

Wages pale to production workers. In reporting cost, only wages paid for work already completed are included. wages paid to production workers, even though not envisaged In the plan, ore Included when calculating actual cost. The sireorker's wage is determined by the norm governing his work, the category of his work, and the wage rate Tor that category of work.

Deductions for the social insurance of produclion workers are paid by enterprisesirect percentage basis into wages. The size of these payments Is established by the government on the basis of working conditions. Within the various branches of machine building, the size of payments for socialrangesercent of the wages.

Shop expenditures which Include the following:

(o) The overhead costs of operating the shop,the wages of the shop management, engineers and technicians, office workers, Junior service personnel, and auxiliary workers as well as shop maintenance, intrashop transportation coots, safety measures, and the like.*

Expenditures for tbe maintenance and operation of equipment. Including lubricants and abrasives; energy used to drive motors for purposes not directly connected vith the productionthe wage3 of setup men, oilers, und repair men; andof shop equipment.

Depreciation of special cutting tools and accesaories. Including the coat of repair and preventive maintenance

of such tools and accessories. Special related expenditures,outlays for the testing of finished urtlcles when ouch testing leads to full depreciation of special tunic and accencories.

Expenditures arising from the servicesof design bureaus, testing stations, or plant laboratories in production of Individual articles.

Coots incurred in setting up mass and series production of new typea ofIncluding any or all of the

* When calculating the actual (as opposed to the planned) cost of output, the following expenditures are allocated to shop expenditures: Idle time chargeable to the shop (including fuel and energy useda period ofhortages of and damages to assetB; and losuea arising from the underutllizatioii of parts, components,tools, and attachments that have been modernized.his item refers, of course, only to that portion of the cost of new articles incurred directly by the shop. Specialized designand institutes attached to state ^footnote continued or,


following expenditurea: the designing of new articles and theof the technological proceaa for producing then; theof materials, semifinished goods, cutting tools, and attachments required for production of new articles; the manufacture of proto-typea; the redesigning and rearrangement of equipment (exclusive of centrally allocated capital outlays) required for production of new articles; and the difference between the actual and planned cost of the first batch of articles manufactured in the process of setting up production.

(f) losses froa rejects, which reflect outlays for production of components, parts, or articles that are rejected because of defects as well as outlays for work connected withtho source of defective articles. Losses from rejectstho following: the cost of the materials expended for rejected porta less the value of the reusable part of the materials, the baae and supplemental wages as well as deductions for social insurance of those workers who were engaged in the processing of defective parts up to tho time of discovery of the defect as well as the wages andof those workers who are engaged in trouble shooting, shop expenditures allocable to the rejected articles, and expenditures for the repair or replacement of parts of an article that is solduarantae, if the article breaks down before the expiration date of the guarantee. Excluded in calculating losses fron rejects is the value of the price at which rejected articles can be sold for limited use aa wall as the pay withheld froa the wages of those responsible for rejocted articles.

eneral plant expenditures, which Includeexpenditures not specifically ullocuted to shops or otherof the plant, such as outlays for the management of the plant; amortization of buildings and equipment not subject to

scientific and research organizations also engage ln resoarch and development, some of which la financed from the state budget. The plant also mayesign bureau. To determine all the outlayshop (plant) expends in setting uppecialis drawn up for each new article. All the expenditures connected with setting up production are allocated to the cost of producing the new articleear period, dating froa the manufacture of the first batch. The length of this period say be extended only by securing special permission from higher authority. In this way, part of the expenditures connected with setting up production of new articles is written off during the first year of production, and the remainder is written off in the following year.

amortization at the shop level; maintenance of therounds; personnel on detached duty; and office, postal-telegraph, andexpenditures. When determining the actual cost (as opposed tc thet) of output, the loving penaltj DBT* Included under general plant expenditures: fines paid by anfor demurrage, for failure to meet scheduled deliveries, for losses ln production resultinghortage of assets and unfinished production, and for overdue payments on loans.

It may be seen from the Items which are Included In the calculation of plant cost that all of these coots arc incurred ln the production process at the plant. shop expenditures)general plant expenditures) include all tho overhead costs Incurred at tho plant.

c. Full Cost

The full cost of an article orlant's output ia computed by adding to the plant coat certain expenditures that are not directly connected with the production process. Among these so-called nonproductlonal expenditures* are the following:

Expenditures incurred lc packaging, crating, and transporting articles to the station of shipment.**

Payment for the services of sales

Contributions by the plantro rata basis) for the maintenance of organizations above lt ln thehierarchy, such aa combines, tr-ista, administrations, and departmenta.

CO Funds paid by the producing plants to help defray the coat of centralized programs affecting the machineindustryhole, such as sclentific-reaearch work, personnel training programs, and the standardization of articles.

* raskhodyiterally, "extraproductlonal expenTTlturea?1

** The domestic prices of machinery and equipment in the USSR are ordinarily. (free on board) station of Ordinarily machinery and equipment are sold by the producing plant directly to the using plant in the USSR. Before7 administrative reorganization cf industry and construction, however, antifriction bearings, for example, were sold through the All-Union State Trust for the Sale of Bearings.


honproductional expenditures account forery small chare of full cost, the major share comprising the plant cost. The calculation of the unit cost of an article and of the cost of the entire output of an individual machine building plant, hovever, Is baaed on full cost.

d. Branch Cost

The calculation of the full cost of an article has been discussed as it relates to Individual producing plants. It should be noted, however, that where several machine building plants are producing the same article, the full cost at the individual plants will vary ln accordance with the specific conditions of production obtaining at the respective plants. In such cases, rather thana different price at which each plant will sell theingle nationwide price la set on the basis of the branch cost of the article. The branch cost Is on average of the full cost ofthe article ot all plants within the branch of machinethat bears the major responsibility for producing It. The branch cost of an article, however, isimple arithmetic averageeighted average, for the Bum of the outlays of all the individual producing plants is used to derive the full cost of producing tbe given quantity. On the assumption that the planned physical volume of output is produced at the planned coat aad sold at the fixed price, the branch of machine building in question is assured ofthe full coat of the article plus its planned profit, even though one or more of Its individual plants may produce the articlelanned loss.

Although the planned cost of producing an articleiven machine building plant Is usedheck on the efficiency of that plant In meeting its cost targets, the planned branch coat of on article is usedeasure for comparing the relative efficiency of production at all plants that produce the same article. Excessively high costs at an individual plant, such as existlant flrot begins to produce on article already ln full production at other plants, nay temporarily be excluded in the calculation of branch cost. In such cases the Initial high coats connected with setting upat the plant are charged off when full production laand the cost la aore nearly in line with that of otherof the article. It is probable that in the current Soviet campaign to concentrate production of givec typea of macliinery and equipment in the minimum number of plants conducive to realizing the maximum benefits of specialization, branch cOBt data are considered In allocating production responsibilities to the moat efficient producers. Where productionpecific type or model of machinery or equipment Is concentratedingle plant in the USSR, however.


the state planners and admin1strators have no comparative basis for Judging whether or not the article is Indeed being produced at the plant which can produce it aost efficiently.

Because of the Soviet practice of establishingnational prices on Important industrial goods, the unit cost of most of the materials used ln machine building is the same throughout tbe USSR. The price of metal ln the USSR, for example, la. station of destination, which means that transportation coata havo been token Into account inniform national price on metal. This practice, ln Itself, tends to obscure advantages In production of aachinery and equipment arising from the locationroducing plant near the source of raw materials. Although the establishment of branch coats for articles in Soviet machine building lfl designed to limit production of articles to officially designated plantsof ouch articles at unauthorized plants presumably results in unprofitable production for theany plants when facedhortage in the supply of parte or components from theproducers are forced to choose between manufacturing their own ports and componentsinancial loss or falling to meet their production goals.


Ill, Level of Cost

A. Planning

1. Centralized*

The level of cost within the Soviet economy la plannedational scale at the time that the national economic plan Isand approved. Planning by centralized state agencies haaseveral significant changes since7 reorganization of the administration of industry and conatructlon and the subaequent adoption of the Seven fear.

With the replacement of practlcolLy all of the military machine building ministries by state committees under the Council of Ministers, USSR, and of the civilian machine building ministries by departments In the all-union and union-republic gosplons (with correo-pondlng administrations, aa appropriate, In the regional economiche role of Gosplan, USSR,stablishing the coat targets of the nutionul economic plans haa been strengthened. Whereas the former mlnlntrlestrong Influence on the final coat targets adopted by Gosplan, USSR, the present regional economic councils, because of their multiplicity and dispersion, ore not ln such aposition.

Among other criticisms leveled against the former ministries was the charge that, in planning cost for the plants administratively subordinate to them, the ministries approached the matterurely mechanical way without investigation of the real opportunities forcost at individual plants. onsequence, tbe level of planned cost allegedly waa sometimes Inflated at the producing plants, and the plants were permitted to make unwarranted profits by selling at prices established on the buslo of audi inflated planned coeta. The present machine building admlnlatriitionB of the regional economic coun-clla, it lo maintained, are sufficiently close to the producing plants to ascertain that tbe coat plans assigned to the plants conform more closely to theoretically substantiated opportunities for reducing costs.

Following the adoption of tbe Seven Tear Plan, Increased mnmbmsjas allegedly been placed or. annual targets as integral parte of long-term plans rather than as separately conceived goala based on actual performance In the preceding year. In drawing up long-term,r moreargeto arc established not only for tbe tcrmlnul year of the plan but for each Individual year included In the plan as well. The target figures established for each given year are


referred to a3 "unnual targets of the long-term plan." It is claimed that this method of planning eliminates the necessity of drawing up annual plans at the approach of each newractice whichusing incomplete datu from the current yearasis for drawing up the new plan and which sometimes left theirm plan during the interim between the drafting and approval of the new annual plan. It Is maintained that, byin advance targets for all years of the long-term plan, the economy operates continuouslylan, annual plan targets being merely adjusted where necessary to take care of doviations from the plan in the preceding year:

The planning of the national economy Is now baaed on long-term plans broken down Into annual targets by branch of industry, unlon-republir, udminlstrative economic region, enterprise, and construction project. The plans drawn up by enterprises, construction projects, regional economic councils,or other governmental departments are based on the control figures of the long-term plans worked out by Gosplan USSR with the assistance of Gosplans In the union-republics and ministries and departments of the USSR and approved by the Central Committee of the CPSU and the Council of Ministers,

When the government corrects annual targets In the long-term plan, corresponding changes arc made ln tho plana of the union-rcpubllcB, the ministries and departments of the USSR, the regional econoaic counclla, and finally the producing plants.

Starting with aggregative data on production, construction, labor, materials, technical equipment, and finances, tbe central planners establish control figures for the development of the national economy. In planning costa and pricesational scale, the state planners rely primarily on norms to relate resources to the planned volume of output. The four major types of technical-economic norms used ln establishing this correlation are us follows:

governing the utilization ofand productive capacity.

governing the consumption ofprocessed materials, fuel, andenergy).


c. Norms governing labor inputs in theof the major types of products.

d. Normsatio between the amount of technical equipment installed and the number of production workers (tekhnlchcskaya vooru-zhennoat').

Once the available resources have been apportioned among industries and adalnlstratlve areas, the appropriate targets are disseminated to the various union-republics and administrativeregions, where tbey are further elaborated ln terms of the particular Industries located in each jurisdiction. Finally theplant receives Ita targets, the implementation of wblch Is worked out ln the plant's tekhproinf Inplan. Throughout this entire process, all physical targets must be reconciled with tbe central control figurea pertaining to the level of coat and reductions in cost contained ln the state plan.*

2. Plant*"

Tbe planning that goes on above the plant level Involves only major aggregative control figures. To the extent that the plants themselves coordinate the various major goals disseminated to them fron above. It may be said that there is an element of decentralized planning in the USSR. Using the standard forao and methodologiesby the state planning and statistical agencies, the Individual producing plant works out ita over-ell plan of operation, the tekhprcnflnplan, ln which every activity la detaiLed. The tekbpruc-fInplan contains data on the volume of output; on the growth ofon the utilization of equipment, floorspace and manpower; on labor productivity and wages; On deliveries of mnterialo and technical equipment; on cost; on financing; and on capital construction. The resultrogram of coordinated indexes. Indexes governing the plant's production program are detailed in physical terns andruble costs.

Under tbe present organization of planning, the cost planlant is on integral part of the texhprocfinplan. The tekhproa-fInplan elaborates ln specific detail bow the cost plan is to be met

' Although the exact procedure followed in the centralized planning of cost in the USSH has not been comprehensively described in Soviet sources, acquiaition In the West of1 State Plan for theof the National Economy ofi< provides Insight into this subject (see Appendix DX ## ik/


In each phase of the plant's operation. The over-all performance of the plant is therefore reflected In the cost plan, vhlch reconciles all the component parts of the production program of the plant. During any givenomparison of the reported level of costlant with the planned level of cost revealslance the over-all performance of the plant in meeting its indexes. Because the cost plan Is aplan of the plant's activities, it reveals in vhat respect the plant may be deviating from the plan.

It ls through the cost plan that the primary elements in the estimate of production are reconciled with the items of calculation, as these costs are computed In different ways and must be kept Inthroughout the planning process. It Is also through the tekhprom-flnplan that the estimate of the outlays of production is linked with the volumes of gross and comrDOdity output, with the plan of material-technical supplies, tbe labor plan, and the organizational andplan (orgtekhplan). ecree of the Central Committee of theParty (CPSU) and tbe government made it mandatory, beginningor enterprises to complete by no later thanovember of each year the annual program for the following year, based on adjustments made in the annual control figures of the national long-term plan and showing all indexes broken down by quarterly and monthly periods.

B. CcMTOOdlty Output*

1. Generul

ln establishing the level of the cost of output, Soviet planners use commodity output rather than gross output for several First, cocmodity output includes only production of explicit goods and services that are designed to enter into theiven period, whereas gross output in certain casesaome intraplant turnover undumber of branches of industry with long lead times (such as the machine building industry) includes the difference in unfinished production on hand at the beginning and at the end of the period as well as some intraplant turnover. Second, in planning the level ofajor consideration is the plannedin the unit coat of articles that have been in production during the previous period. The level of cost of all such goods is planned by establishing the nev level of cost as the difference between thelevel of cost and the planned reduction in cost. Commodity output is preeminently suitable for this purpose because the norms relating to established goods and services included :r. commodity outputonvenient method of computing reductions in the unit cost of all such goods and services compared vith the previous year. The level of the cost Of new articles included in commodity output cannot, of course, be


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calculated from changes in norms and planned reductions In unit cost compared with the previous period simply because these articles vere not produced In tbe previous period. Consequently, ln calculating the level of cost of ccamnodlty output, the output Is divided into twothe costs of which ore calculated separately and then added togethercomparable output (sravnimaya produktsiya) and noncompora-ble output (nosravnimaya produktsklya).

2. Coaparable Cutput

Separable OUtmjnt Inelodas aU ir; the commodity outputlant tbat are in at least their seeond consecutive year of production. In machine building, cocparable output may Include finished articles, ports, and semifinished goods as well as services and work recurrently performed for other plants and organizations. Partial changes ln the technology of manufacturing or In the design, operation, equipping, material composition, or exterior finish of an article already in production do not Invalidate the comparability of the article unless such changes are accompanied by the issuance of new technical specifications or state standards.

The planning of the level of cost of comparable output in Soviet machine building dependsarge degree on theand analysis of statistical data pertaining to production in the period previous to the plan period. In goneral, the Sovietassumes that the unit cost of comparable output will be reduced Successively from one year to the next.

In planning the cost of comparable output, the level of cost is expressed as an absolute ruble value and also as achange ln comparison with the actual level of cost in the previous year. To derive the level of cost of comparable output In the plan period, the nuaber of units of each article to be produced isby the planned unit cost. The level of cost of comparablein the previous year is derived by multiplying the nuaber of units of each article to be produced in the plan period by thenit costa actually reported for these articles ln the previous period. The relationship between the levels of coatuccessive

ay beby the ratiof- and the percentage change In


the level of cost, by the formula

the second year,

in the second year, and

in the first year.


olume Of output innit cost of outputnit cost of output

Reductions in the level of cost of comparable output Id machine building may reflect economies of production achieved inbuilding itself or reductions ln the prices of the materials and services supplied by other Industries. In the first case,of production may be realized ln machine building throughin the unit consumption of materials and labor, through aln overhead costs per unit of output,ore rational use of production facilities, through mechanization and automation of production processes (including materialsnd the like. Reductions in the prices of materials and services required forln machine building may result from economies achlevod in the metallurgical, fuel, electric energy, and transportation Industries. Reductions ln such costs may be partly offset, of course, by Increases in wages and amortization rates ln machine building.

Soviet announcements concerning percentage changes in the cost of output in machine building may be misleading to the layman insofar as they sometimes appear to apply to the entire ccmmodlty output. In some industries, such as the mining, oil extraction, and lumbering industries, where allegedlyercent of the output is comparable from one year to the next because of its homogeneous nature, percentage changes announced ln the cost of commodity output may, ln fact, apply to virtually the entire output. In machinehowevur, where each year witneusan the introduction of alargo number of new articles, data concerning the planned change in cost apply only to slightly more than half of commodity output.

j. aoncemtjarable Output

Koccomparable output includes articles which have never before been producedlant (even though they may have beenat other plants) as well as articles which have been previously produced onlyample basis. If there is some question as to whether an article belongs ln comparable or nonccerporable output, the matter ln referred to the appropriate planning agencyigher level.

In planning the level of cost of noncomparable output, costs ore necessarily estimative in nature and are established only for the plan period. When an article has not previously beenand when norms have not been established for its production, there is no substantiated basis for setting the level of cost.

Under Soviet conditions, the principal factors thatthe estimated unit cost of an article arc the prices andof inputs, on the one hand, and the number of units produced, on the other. Although prices of Inputs are generally no problem In


estimating the cost of new articles inasmuch as they are generally established for rather prolonged periods, sometimes an unforeseen change in these prices requires that the estimated cost be Moreroblem, ln the absence of established norms. Is the accurate estimation of the physical inputs required. Estimation of the number of new articles that will be manufactured in the first year of production also Is subject to error, especially if all the difficulties connected with the setting up of production have not been resolved at the time that the plan is drawn up. Because unit cost in mass or series production varies with the number of unitselay in the starting up of production or aninterruption in production mayewer number of units to be produced than was planned. Failure to produce the planned number of units may leadigher unit cost than estimated in the plan. With new articles the incidence of rejects also is apt to be high, and the unit cost of production may rise accordingly.

Because of the Soviet policy of charging off thecosts and the costs of setting up production Incurredlant to the cost of new articles In the initial period of their mass or serieshe level of cost of new engineering products is relatively high in the USSR, and, consequently, noncom-parable output accountsizable share of the total cost of commodity output. In fact, it may safely be said that noncomparablo output accountsigher percentage of the total cost ofoutput in Soviet machine building than In any other Soviet industry.**

Soviet economists claim that in estimating the cost of new articles it is common practice to work from analogy with the cost of articles already in full production. Even so, problemsin planning the level of cost of noncomparable output apparently leave room for wide margins of error. To judge from case6 cited in the Soviet press, enterprises are guilty of "padding" the estimated costs of new articles, not only to cushion themselves against unfor-seen contingencies but also with the conscious Intent of making high profits for the enterprise "at the expense of the economyecause of their very nature, estimates of cost for new articles to some degree have been exempt from the rigorous standardized controls of costing norms. An increasing effort is being made, however, to

" See the second footnote oubove. ** Sods of the problems of interpreting published data on theof cost in Soviet machine building are discussed in D,elow, where the influence of the relative sizes of comparable and noncomparable output on the cost of commodity output is analyzed.


bring such estimates under the closer scrutiny and control of central agencies os well as toore standardized methodology for drawing up estimates.

C. Reporting*

Data on the level of cost are included in the monthly and quarterly report submitted by Soviet plants on: Report of an Industrie! Enterprise on Fulfillment of the Plan Pertaining to the Cost of Commodity Output. The titles of the various sections of this report are as follows:

of the Plan for Reducing the Coat

of Comparable Output and for the Cost of Total Commodity Output

Cost of Comparable Output and Total Com-

modity Output by Items of Calculation

3- The Influence on Cost of Changes in Prices of Materials and Fuel

L. Losses from Defective Goods

The Unit Cost of Major Types of Output

Outlays for Production Exclusive of Intraplant


The data appearing inflso arcfor the year in the annual report submitted on Formhe Cost of Commodity Output. Becausefrovide the most salient data for purposes of centralizedond control, examples of these two sections are shown in*

In Tableeveral costs have been computed for comparable output and total commodity output in7 and in the entire first quarter7 by multiplying the physical units of output in the respective periods first by the average annual unit cost***


ollow or. pp.ndrespectively. Data Text continued on p. Ll.


Table 1

USSR: Example of Report Submitted by an Industrial Enterprise on Reducing the Cost of Comparable Output a/

and on the Cost of Total Commodity Output7st7



For zttt first euartar7

eriod since tbe beginning of the year




' aiOutput c/ (CoaparaBlc mt HoneoflinrM>lg Output*

Actual Coat



r : -;

Id Coot


Conparable output consists of tnoae goods aad servlCM producediver, yew that vere also produced In tlu-iin* ycftr. ifcn-conparable output comprises tho residual of conoodlty output.

onr: Report Of sn InJus-rlel Enterprise on Fulminant of the Plan Pertaininge Cost ofusing hypolhetlcel dsta.

robitltted at Ihe and ofquarter. this report also gives ths vslue of commdlty output In enterprise wholesale prices. example, eooaiodJty output was0 rubles, includingOO rubles of caapejable outputubles of

::l( OUtpUt.

: minus) divided by.

- 39

Table 2


Arerago Annual Coals

oT Calc-lailM

Prcrlm Tear

. -

atd processed material*

Ud energy


- vagrs

vith setting up

from re. ecta

expenditures. Including expenditures

maintaining and operating equipment


cost of output




coat of coaaoUty output


f Oiore gsce*vices producediven year that -ere else prodded In tic jre:eilsgutput conprlae* the residual of coreicdlty output.

t. Baaed or.r: Boportndustrial Enterprise on TulfiUr.gnt of the Plar Pertaining v> the real ofny Qjtput, -jsisg bypoUieUcal data! Zhtt itiforoatlen li. calculated lor the Quarter in reports

- ito -

that obtained in the previous yearhen by the unit cost called for in the quarterly plunnd finally by the actual unit cost as determined by cost calculation in the plan period

The level, of cost computed from unit costs in theyear (Columns subtracted from the actual level of cost

The difference between these tvo levels of cost is divided by the level of cost in the previous year (Columno derive the percent by which the cost of comparable output was reduced during the period reported on The actual percentage reduction in the cost of comparable output may be compared with the percentageplanned for the period

The actual cost of total commodity outputhich is the sum of the actual cost of comparable and noncomparable output, is compared inith the planned cost of total commodity output In the same period (Columno determine the site of savings or excessive expenditures In relation to the plan. Although there is no space provided for reporting and comparing the planned and actual, cost of noncomparable output, the difference can easily be computed by subtracting, respectively, the planned and actual cost of comparable outputnd h) from the planned and actual cost of totul commodity output. In this hypothetical example, takenoviet source, the planned cost of noncomparable output for7 wannd the actual costubles. It should bc observed thai Uie site of savings or excessive expenditures in the actual cost of ail commodity output (Columnompared vith the planned cost (Columnay. In Soviet machine building, often be attributable faulty estimates of the cost of new articles (noncomparable output).

fTablehows the distribution of the placned and actual cost of commodity outputnd h) among the Items of calculation, thereby pinpointing Sources of deviation from the plan. imilar manner the cost of comparable output is distributed among the Items of calculation, und the actual costfor each item (Columnsuxtaposition with the cost expressed in Overage annual costs of the previous yearrom these data the reduction in cost cf each item used to calculate comparable Output may be computed. In effect.ertain of the aggregutive data contained in

* Most ruble values shown in this report are hypothetical, and, there Is no necessityonversion foctor for converting rubles to US dollars. The only exception is to be found inndp. espectively, below, where ruble valuestl rubles. The ratio1 rubles1 US dollarso 1.

- hi -

D. Published Soviet Data on the Change In Coat' 1. Genera!

The tvo published Soviet Indexes on the change In cost of industrial output (Izmencniye sebestolmosll proinyshlcnnoyncluding machine building output, have for some years been based on the change in the annua! unit costs of comparable output.** Bothare link indexes, so that data for each year in the series are related only with the data for the preceding year. In one index,the influence of changes In the prices of the materia! Inputs of production are reflected in the change of cost from one year to the next, and In the other Index this influence is excluded by usingprices for materia! Inputs in each of the two years for which costs are being related. Accordingly, tbe first cost index, entitled "In the current prices of each year" cystvuyuahchikh tscnakh sootvetsvuyufihciiegoeflects total changes In cost In money terms, whatever the source. The second index, entitled "In price3 comparable with the previous year"senakh,redydushrhlmy reflecting changes in inputs, therebychanges in res! cost. Beginninghere wasa new coot index, one that covers the entire commodity output and not Just comparable output. This index ls based on "outlays per ruble of commodity output (zatraty naovarnoyome explanation of the various factors that influence these indexeseceBflary prerequisite to evaluating their significance and

Where Soviet indexes showing annual changca ln thecost of cceamodity output pertain only to comparable output, thesuch output ln relation to total commodity output In any givenand ln Soviet Industryhole ia of some consequence. of commodity output in Soviet machine building Isrelatively rapid change from one year to the next as someout and others enter into production. According to theplan, the share of comparable output in tbe commodity outputmachine building industries In that year waa toOercentage conspicuously belowfor other shore of comparable

output in commodity output hoe declined even further ln the machine building industries. With comparable output accounting for aa little

** lhe method of computing annual percentage changes ln the cost of comparable output uoiug unit cost dataescribed in B,bove.

*** Sec Appendix D.

- L2 -

asoercent of <uxoraodlty output in those areas of machine building where small series and Individual unit productionthe share of comparable output in ccstmodity output for machine buildinghole was said,o average betweenndercent.

Among Soviet industrlea, machine building is generally credited with registering one of the highest, if not the highest, percentage annual reductions in the cost of comparable output. This phenomenon is generally attributed by Soviet economists to theannual reduction In unit costs of comparable output that may accompany expanded scales of production, rises in productivity, and the marked declines in the unit cost of new articles after the cost of designing, testing, and tooling for production has been written off as an Item in their production cost. There is no published Index available since the end of World War II on annual reductions in the cost of comparable output for Soviet machine buildinghole,lt is Claimed that under the Fifth Five Yearverage annual reductions ranged betweenn the machine building industries. lata on annual changes in the cost of comparable output in machine building and Industryhole for the8 are given in Wore recent data on percentage changes ln the cost of comparable output in two branches of machine building are tabulated below (presumably based on prices comparable with the previous year).




Vehicle Industry



" ollows on p. hh.


Table 3

USSB: Annual Percentage Change In the Coat of Comparable Output a/ ln Machine Building and in Industry&





Comparable output consists of those goods und services producediven year that were also produced In the preceding year, rtoncooparableomprises the residual of commodity output, t. Based on prices comparable with tre previous year.

The comparable output of machine building,maller percentage of commodity output than is the case in other Soviet industries, is relatively high ln valueignificant percentage of the total comparable output of industryhole.* For this reason, changes in thelevel of cost of comparable output inbuildingarked influence on the annual percentage change in the cost ofoutput for industryhole. 'Ihe Soviet index on the change in cost of the comparable output of industryhole may be compared inith available data on machine building. It may be noted that in all but one) for which data are available for both Indexes, annual reductions in machine building have been much larger than reductions ln industryhole. Of course, the Influence of the machine building index on the index for Industryhole is directly dependent on the share of machine building in the total comparable output of Industry. If, as appears likely, this share is gradually declining. Just as within the total commodityof machine building the share of comparable output is declining, then machine building may exert less influence on the indexhole than it previously did. It may be pertinent to point out in this context that, although cost in Soviet industry was to have been reducedercent under the Fifth Five Year Plan and was reported to have been actually reduced onlyercent, the planned reduction under the abortive Sixth Five Yearropped toercent, and under the curront Seven Yearh* reduction is to be "no less5

2. Methodological Problems

Although the index of change in the cost Of comparable output has long been the accepted official index governing theperformance of plants and industries in the USSR, this index has been criticized by Soviet economistsumber of grounds. One major criticism has been the failure of this Index to take account of the cost of nonconparuble output, especially in industries such as

* It should be noted, however, that the share of machine building in the comparable output of industry is considerably less than its Share ln the total commodity output of industry. In1 Plan, for example, the machine building industries accounted forercent of the total commodity output of industry but only aboutercent of the comparable output of industry (see Appendix D, Tableelow).

** This target figure presumably is bused on the new index showing the decline In outlays per ruble of coTjnodity output.

machine building, where such outputelatively large share of commodity output. It is pointed out that there is little basis for comparing machine building indexes, which may embrace onlyoercent of commodity output, with indexes for theindustries, the food industry, and the timber industry, where the high degree of homogeneity of output from year to year leads to inclusion ofercent of cceamodity output.

Another major criticism has been that in an industry such as machine building,arge number of new articlesoutput) pass over into comparable output each year, the index overstates actual reductions in cost relative to industries where output is largely uniform from year to year. 3ecause of the formula that is used to compute the index of change inrasticin the unit cost of newer articles, which occur when all plant costs connected with their development huve been written off and when production is normal,trong downward bias in the cost of comparable outputhole. Because the cost of comparable output in any given year is directly influenced by the number of newer articles programedarticular plant or industry in the several yearsthis Index has been criticized as not being an objective measure for evaluating the relative performance of individual plants orwith respect to econonizing on state resources.

Another objection has been that the criterion forcomparable output in machine building has militated against Improvements in the quality and composition of comparable outputof the adverse effect which such improvements may have on the cost of comparable output. In an effort to Include asumber of articles as possible in the comparable output of machine building from one year to the next, articles that are roughly the same from the consumer's point of view (hut fcr which the design, tlie technology of production, the finish, the materials coaposition, and the like may be modified without any change In specifications or stateon the production side) are treated as comparable output. When such changes lead to an increase ir. the unit cost of an article, plants are hesitant to make changeseven in the interest Ofthe quality end composition of outputbecuuse Such changes tend to raise the cost of comparable outputhole. The use of "he group method in the normative calculation of unit costs in machir.o

(that ir., tl..-. _'.

group of slmllur articles) means that any substantial increases in outlays connected with changes made in one or more articles in the group are recorded as deviations for tho grouphole and may be

" -'or the formula used for computing the index of change in cost, seebove.

reflected in the respective unit costs of the articles, thusto an increase in the cost of all articles in the group compared with the previous year. Soviet economists argue thut the practice of including articles in comparable output in spite of modifications which may lead to increased unit costs of production discourages that improvement in the quality and assortment of articles for which the regime is constantly prossing on behalf of the economyhole.

Other criticisms include the following points. The mu-chine building index of change in cost, being limited to comparable output, is not organically related to indexes of growth in physical volume of output, labor productivity, and profitability, all of which are based on total output. Because of the annually changingof output in machine building, it is virtually impossible toa meaningful base-year index for this industry in planning or recording reductions in costeriodears or longer {the existing link index admittedly does not reflect the absolute measure of savings realized from reductions in cost).

In view of the shortcomings of the index of change in cost, instructions were issued as early5 by Gosplan, USSR; the Ministry of Finance, USSR; and the CSA, USSR, requiring that the following three measures be used to establish fulfillment of the cost plan: (a) the index of change in cost, (b) the plan for the cost of total commodity output, and (c) the plan for the unit cost of articles of major importance. The desire toingleindex for measuring changes io the cost of totaloutput, however, finally led to the adoption under the Seven Yeur Plan of an index showing reductions In outlays per ruble of commodity output (expressed in enterprise wholesales the only official index of cost in the national economic plan."*

* Talc ratio may bc expressed by the following formula:

ql Cl

Outlays per ruble of commodity output =where

ommodity output in units,nit cost of output, and

holesale enterprise price per unit of output.

** The index of change in the cost of comparable output is now used only at the discretion of local pl.anr.Ing and administrative.

According to ita proponents, tlie principal merit of the index of change in outlays per ruble of commodity output compared with tho indox of change in coat is that it covers the entire range of commodity output. This feature is advantageous in evaluating tlie qualitative performance of plants nnd industries In that Itniform mcacure of comparison in all cases. The effect of druBtic reduetlone ln unit cost when new articles enter normal production is less pronounced in this index, for such articles accountmaller share In total commodity output than ln comparable output alone. Also, in machine building the low unit coat of mass-produced articles le to some degree balanced by the high unit cost of nev articles not yet in normal production. The index of change in outlays per ruble ofoutput is related with the other Indexes pertaining to the operationlant. It alao ia claimed that this Index permits of more accurate planning and accounting for periodsears and longer.

Although the index of change in outlays per ruble ofoutput Is free from seme of the defects of the Index of change in cost, such serious objections have been lodged by Soviet economists since ita adoption that it is surprising to find this Index being used as the only official Index pertaining to cost. horough analysis of thia Index, especially in view of its recentand the lock of published atatlatical data. Is beyond the scope of this report. Some of the major criticisms registered against the index in recent Soviet publicatioao, however,rief

As the main point of attack, It is alleged that the index of change ln outlays per ruble of commodity output is not basically an index of the dynamlCB of cost at all but an index of change iu profitability, reflecting, as lt does, chances in annual ratloa of the coat of production (outlays) to the value of commodity output, expressed ln wholesale enterprise prices. Thus the index may reflect not only changeo that occur ln the coat of product ion but also changes that nay be made in the wholesale enterprise prices at which output is sold. Additionally, the Index may be affected by changes in the product mix as between products with different profit margins. The number of variable factors capable of affecting the ratios andthe Index has caused anguished cries from the econoalats whose Job lt la to analyze and interpret the data. These distortions would perhaps be merely of academic Inter/eat if they did not lie at the center of the Soviet problem ofeliable criterion for evaluating and rewarding the perfornuuice of state enterprises lnthe Interrelated economic und technical Indexes that ore uued to stimulate and direct their activities.

- k& -

One Soviet economist, writing in Finansy SSSR (Finances of the USSR) foroncludes that the index of outlays per ruble of commodity output docs not sufficiently stimulate the reduction of cost, ibr the performance of an enterprise ls evaluated on the basis of an index that the enterprise itself can manipulate. In citing an instance of such manipulation, he remarks, "It is clear that it isame of figures. Can weame of figures to be the basis for evaluating the struggle to reduce cost?" to the absence in the state plan of uny index concerned purely with cost as such, he advocates adoptionodified form of the index of change in cost.

The many methodological problems inherent in Sovieton the dynamics of cost raise serious doubts as to the validity and usefulness of such data, and yet the matter of systematicallyunit costs by fixed percentages and ruble values is treated with the utmost seriousness in the state plans. Under the Seven Year Plan, for example, the outlays of production ia industry,transportation, and the sovkhozes are to be reducedillionum equal to almost one-half of the state capital investments planned forear period.

3. Institutional and Technological Factors

In addition to distortions arising from methodological problems inherent in Soviet indexes on the dynamics of cost, there are several institutional and technological factors that currently bear on the problem. 'Ihe Soviet regime is bringing pressure to bear on machine building to intensify the degree of plant specialization with respect to basic manufacturing processes and product mix at the same time that it is attempting to foster the production ofmore advanced and diversified output.

In the past the overwhelming drive of the Soviet leaders for quantity output at almost any cost led to the practice ofproduction of some articles among high-cost producing plants. The practice of allowing acme plants to manufacture an article at aigher costs than others set the stage for substantial reductions In cost at the plants that were initially high-cost producers. Suchhave been achieved by an unceasing campaign directed at high-cost producers to make them emulate the methods of the low-cost Because of the absence of industry "trade secrets" within the economy, the USSR has beenosition to introduce, at anyplant whatsoever, innovations and rational schemes developed at other plants. Although it is not possible to assess quantitatively the degree to which this factor has contributed to the annualir. the cost of comparable outputoviet machine building, iteasonable tc assume that reductions from this source will be harder

- h9 -

to come by as the current program of "specialization and cooperation" tends to eliminate duplication of production programs among machine building plants.

Combined with the drive to increase plant specialization in machine buildingerceptible change in Soviet requirements, as expressed by the regime, in the mix and design of machinery and equipment for the economy. In spite of reductions in costfrom greater specialization in production of semifinished articles as well as standardized parts, components, and finished articles manufacturedass or large-series scale, Sovietfor technologically more advanced articles may lead to an increase in the over-all level of cost. The extent to which new articles (nonccoparable output) may increase their share in the total commodity output of machine building or influence the ratio ofto the value of commodity output will, of course, dependumber of factors. One factor is the relative emphasis placed by the regime on the domestic manufacture of new articles at any cost. Another la the extent to which the required types of machinery and equipment can be standardized and produced onass or large-series scale. Still another factor is whether or notf the costajor effort to introduce the most advanced types of machinery and equipment into the economy is very highthe present method of financing the cost of developmental work and tooling will beorew method may be adopted.

In spite of the increasing importance of costin the organization of the production programs of Sovietbuilding, it may reasonably be assumed that tlie desire of the Soviet leadership to achieve equality with, and eventually tothe major industrial powers of the West in respect to the level of technology throughout the economy will justify the priority of physical production targets over considerations of cost in the case of particular types of machinery and equipment deemed essential to meeting immediate policy objectives. 'Ihe recently initiated program for radically increasing the production of petrochemical equipment by dispersing production among various types of machine building plants as well as by expanding the petrochemical equipment industry Itself, for example, emphasizes that under the Soviet system of selective forced-draft development of critical industries, physical production targets of machinery and equipment are of paramount importance when imports cannot be relied on to fill the gap in domestic requirements.

As the pressures to keep abreast of Western technologyndustry have increased, the Soviet machine building industries have had to produce not only new standard equipment but also custom


equipment. Such production is burdensome to the Soviet method of planning and controlling the cost of production, and it is declared Soviet policy to standardize articles for large-scale production wherever possible. Because of the almost unlimited requirement in basic types of machinery and equipment that has characterized the Soviet economy since the inauguration ofear planst has generally been economically feasible to standardize articlesigh degree and to manufacture themeries or massbasis with comparatively low unit costs of production. At the present time, however, as the technology of production grows more sophisticated, greater emphasis is being placed on complex automated types of equipment, especially in the chemical and ferrousindustries. Hot all components of such equipment readily lend themselves to standardization, and it may be assumed that the unit costs of manufacturing them are consequently high.

Soviet economists have alleged that the present system of costing tends to retard the introduction of new articles both because of the high initial cost to the consumer and because of the lack of any marked profitability to the producer. Although It is professed Soviet policy to encourage the introduction of technically advanced equipment, the present method of charging off the cost of developmental work and tooling at the plant to the initialcost allegedly tends to discourage immediate widespreadof such equipmentf its high prico. Hot does the high initial cost generally associated with new articles in Soviet machine building necessarily make them more profitable thanarticles for the producing plant to manufacture.

Although, ln practice, producing plants maythe estimated cost of new articles in order to assurea margin of profit, the enterprise wholesale price ofin machine building is ordinarily setevelercent above the estimated cost. This margin of profittc that set on established articles in machine buildingprices are adjusted tc costs. The fact that prices ofarticles may be revieweddjusted to costs only atIntervals In the I'SSR, however, means that, as pricesconstant and costs steadily decline, the margin of profitarticles increases. Thusroducingmeet its production target with respect ic the planned volumeof new articles, output in excess of the plan is apt toof those articles which are rv>Sl profitablenamely,.

The- expenditure of precious resources on established articles that nay be technologically Inferior to new articles isesirable situation from the Soviet point of view.


Although It is obvious that some reform could beto change the situation, any change of the existing procedure of costing nev articles vould presumablyegree of direct subsidization from theractice which runs counter to the principles of khozraschetractice frcei which the Sovietattempted to escape at the time of9 wholesale price Furthermore, the high initial costs (and prices) of new articles tend to Inflate the index of gross output and contributeubstantially higher growth rate in machine building than would otherwise be theeature that is of important propaganda value. Indexea of reduction in coat also are enhanced by theSoviet cost syetom, once the unit cost of new articles commences to decline.

A factor that weighs against these paper considerations is the official concern with the present rate of introducingof improved design and efficiency. Methods ofore rapid rate of expanalon and replacement of existing inventories of machinery and equipment with better machinery and equipment,presumably must not be incompatible with the centralized method of controlling the financial activities of state enterprises. Should tbe Soviet authorities feel that the present method of costing and pricing new articlestumbling block to their broader policy objectives, it is entirely possiblehange might be made if it did not run contrary to the principles of khotraachet.


IV. Structure of Cost

of Machine Building with Other Industries*

Soviet economists, in analyzing the structure of cost In an industry, attach considerable Importance to the relationship between the outlays for materials (including fuel, energy, and amortization of fixed capital) and the outlays for wagea (including deductions for social insurance). Information on this relationship is neededlanned economy for the regulating of wage rates, on the one hand, and of prices of materials and amortizationn the other. Inecline in outlays for wages relative to outlays forin the structure of cost la considered in the USSB to be andesirable development and an indication of technological progress.

The high degree of standardization in the accounting anddocumcnta of nearly all Soviet Industries facilitatesof the structure of cost not only between individual plants within an industry but also between industries. In auch ccmparisons theof cost ls analyzed on the basis of the homogeneous primaryelements found in the estimate of outlays for production. In* the structure of the cost of output in Soviet machineis compared with the atructure of the cost of output in other ae-lected heavy industries and in Soviet industryholehe individual industries being arranged from left to right in theorder of their labor intensivencss in terms of cost.

The most labor-intensive industries in the USSH are theand machine building industries, where higher wages are paid and/or relatively larger amounts of manual labor are required than in industryhole. In the materials-intensive industries, such as the chemical and energies industries, the share of wages and deductions from wages in the total cost of output is belov the average for induatryhole.

in Machine*

As shown in the tabulation below the balance between materials and wages in the cost of output tn Soviet machine building changed markedly in the ay years2

** oviet amortization charges on machinery andwere based on physical depreciation and cupital repair only. Since that time, there has heen un attempt to allow for technological obsolescence asollows or.. 1

Table 4

USSR: Structure of the Cost of Output ln Industryhole and In Selected Heavy Industries

Percent */

Outlays Categorized oyconomic Elements


Building and NV-tolvorkir.R



trie and Steant Er.ertry




and deductions for



Based on outlays of production ln current rubles.



Materials (including fuels and energy)

and (includingfor social


The relative decline in wages may be attributed mainly to the growth of mechanization and to new technologies or production. According to Soviet economists, the change in the structure of cost has beenmarked in machine building because of the introduction of mass and large-series production techniques. Soviet economists further claim that the increase in the share of materials and amortization and the decrease in the share of wages has been accompaniedteady reduction in total outlays per unit of output. Whether or not declines in Soviet accounting costs per unit of output can be considered aindication of declines in real costs, however, is far from certain. It is noteworthy that the share of wages and deductions from wages tended to increase3 This change probably was due to reductions in the wholesale prices of materials as well as to increases in wages which occurred during this period.

C. Analysis*

1. Machine Buildinghole

The structure of cost in Soviet machine building isby the following characteristics: izable share of outlays for basic daterials in comparison with most other branches of heavy industry, (b) the purchase by some machine building plants of large quantities of semifinished goods from other machine buildingndarge wage bill compared with the average for industry.

ihe relatively high shore of outlays both for materials and wages In machine building in explained by several qualitative Not only arc relatively expensive materials (high-quality ferrous and nonferrous metals) used in machine building, but these


materials also arc subjected to complex and repeated processing at the machine building plants. Tbe degree to which raw materials areinto semifinished goods within the plant that manufactures the finished article (that is, the degree of vertical integration) and the degree to which semifinished goods are purchased from other plantsransaction known as "cooperation" in the USSR) varies greatly from plant to plant within the machine building industry.

In the technology of Soviet machine building, thereredominance of mechanical processing that is more labor consuming, for example, than the chemical and electrical processes employed in some other branches of industry. Differences in the share of wages ln the total outlays of individual machine building plants largely reflect the relative complexity of the technology In use at the plant and the amount of precision workigh degree of manual skill.

The relatively small outlays for fuel and electrical energy in machine building as compared with some other branches of industry is explained mainly by the very limited use In machine building of chemical and electrical processes thatarge amount of fuel and energy. The size of the outlays for fuel and energy in machine building plants depends largely on the level of technology and the scale of production in foundries and forges.

The percentage of outlays for amortization in machineis relatively small, considering the ccoplexity and cost of Soviet economists explain this fact In large part, however, by citing the relatively high productivity of the equipment found inbuilding plants.

2- Individual Machine Building Plants and Shops

The cost pattern varies between individual types Of machine building plants, dependingumber of factors. Differences in the Structure of cost within the machine building industry are illustrated in the tabulation below, where vurious costseavyre compared with thoselant producing cutting tools:






'TOlMWiW .


The total structure of the cost of output also varies greatly among the Individual shopsachine building plant- Cost categorized by items of calculation instead of by primary elements Ie usually used in comparing the structure of cost in the various shopsachine building plant, especially if intraplant khozraschet is established at the plant. The tabulation below shows the structure of the actual cost of output in selected shops of the Urals heavyBuilding Plantecent year.

Repair Tool

Assembly Shop Foundry Forge Shop Shop

6 2 usedthe production

0 directlyproduction

0 0 0

Wages paid to 3 1 2

Deductions for the social Insurance of production


cutting tools and

IJ 5 * 0

losses from 0 0


Differences in the structure of cost at the various shops are explained primarily byhe technology andof production. Thus in the assembly shop the outlays forgoods (parts and componctts) manufactured in other shops at the plant or at cooperating enterprisea accountarge share in the cost of output. Outlays for materials other than semifinished goods are small ln assembly shops.

The large chare of outlays for energy used directly lnln the foundry ls due to the use of electric furnaces formetal. The sizable outlays for cutting tools and dleB in the forge compared with the other shops result from the extensive uee of stamping and, increasingly, costly dies.



The system of khozraschet was Introduced in the USSR1 at the inception of the Hew Economic Policy (NS?). Lenin la quoted as having written that "the transfer of state enterprises to so-called khozyaystvennyy raitcliot is inevitably and indisaolubly connected with the new economic policy and in the near future this type ofwill inevitably become predominant, if not excluaive." The trend toward khozruschot was accelerated under the policy ofthe country. ecree of the Central Committee of the All-Unlon Ccamtunlat Party,n reorganization of the admin lot rat Ion of industry declared that khor.raachet had fully Juatified ltaelf and that it ^os to be Introduced in all enterprises of state induatry. During World War II, hovever, aubatantlalwere made ln this policy as the result of wartime economic pressures. Since theumber of measures have been Inaugurated to restrengthen the khozraschet system ln state enterprises.

Khozraschet enterprises are distinguished from budgetaryby the following features:

charter establishing the departmental subordi-

nation of the enterprise, its structure, the competence of the administrative and technical chiefs, the rights and obligations ofuridical entity, and itsto controlling economic organizations.

charter fund allocated by the government in

the form of fixed and working capital needed by the enterprise for obtaining the phyilcal resources required for continuous operation ln fulfillment of state plana.

plan of operation organized on the basis of

an annual technical-iadustriol-finunc ialnplan) detailing the plannedwith respect to volume of production, lubor, coat of output, materials and technical equipment to be supplied, the sale of output, financing, and capital accumulations.

* . See the second footnote onbove.


h. Operational independence in the disposition of funds within tbe limits of the existing state plan- This independence i3 exercised by the directors of the enterprise in devising and applying the most effective methods ofproduction, of providing the enterprise with the necessary labor force, of procuring materials at the proper prices, and of selling the output of the enterprise at established state prices.

5- The utilization of credit in appropriate banking institutions when the working capital allotted to the enterprise proves to be insufficient.

useayment account (raschetnyy schet)

in the State Bank (Gosbank) for accumulating reserve funds.

complete system of recording (uchet) and re-

porting (otchet) in order to show the results of economic activities connected with

Q. eriodic balancing of the books to establish the financial status of the enterprise.

9' Provision of material incentives for theof enterprises byart of the enterprise's capital accumulations for awarding premiums and for Improving living conditions.

10. Responsibilityational program ofincluding proper and efficientof labor, materials, and finances.

ir.' s

in the following activities at the enterprise level: the planning of production, the planning and supervision of capital construction, the exercise of technical control, the organization of the supply and sales system, the conduct of commercial and financial transactions, theof labor problems, the training und assignment of the labor force, and the appointment and dismissal of supervisory personnel.

Of all the features tbathozraschet enterprise apartudgetary enterprise, perhaps the most Significant is thethat the kho?raschet enterprise bears to the state in return


for the use of state-owned capital. The fixed capital that the state allocates to each khozraschet enterprise is used to erect and equip the physical plant, and the working capital is used to purchase stocks of materials in given quantities and prices and to maintain funds in the bank for paying the wage bill and settling the accounts of the enterprise with other enterprises and organizations. hozraschet enterprise may increase its fixed capital through capitalthat is, byortion of its profits in expanding or modernizing the plant. In the event that the working capital allocatedhozraschet enterprise by the state in the charter fund is insufficient, the enterprise can obtain bank credit that is repayableate andixed percentage fee dependent on the size of the loan and the length of the period for which it is granted.

The state, as the owner of the capital allocated to khozraschet enterprises, has the right to redistribute working capital bysurplus working capital from one enterprise and transferring it to another enterprise that is short of working capital. Under the former ministerial system of managing the economy, the state granted ministries the right to build up reserves in the amountercentinistry's total working capital in order to render temporary financial aid to its enterprises. inistry could use the reserve working capital of one of its enterprises for another of itson the condition that the capital be returnederiodonths, with paymentee corresponding to the percentage rate prevailing in Gosbonk. Under the present system, whenis being expanded and an enterprise cannot meet the requiredln working capital from its own capital accumulations,working capital may be allocated from the state budget.

Another marked feature of most khozraschet enterprises is that they arc expected to operatelanned profit. The profit of an enterprise represents the margin between the full ruble cost and the wholesale price of the output of the enterprise. It is thisto make not only the planned profitrofit even greater than planned that the Soviet state regards as the principal incentive in its drive for continuously improving efficiency and productivity in state induetry. The more that the actual cost of production can bc trimmed in comparison with the planned cost, the greater is the profit of the enterprise.*

* Sometimes the methods of making greater-thon-piaimed profits have been of dubious benefit to the economyhole, and other methods that have been clearly at the expense of the planned product mix have been roundly condemned by the state.


The profit realizedhozraschet enterprise Is usuallyamong the following items:

Payments to the state budget

Payments to the Industrial Bonk (Proabank) for use in

capital construction

3- Replenishment of the enterprise's working capital

k. Financing of special measures, such as the training of personnel, the introduction of new technical equipment, the repayment of losses Incurred in operating the enterprise's housing, and municipal services

5> Capital construction (over and above planned capital investments)

6- Cultural services and bouuses to workers andof housing

Some of the features of khozraschet that are applicable at the general plant level do not apply at the shop level or in thebetween shopslant which operate under so-called in-traplant khozraschet. For example, the contract basis of delivery from one khozraschet enterprise to another, the independentbalance sheet, the payment account in Gosbank, and the granting of bank credits, all of which are characteristic features ofat the plant level, do not apply to shops and otherunitslant operating under lntraplant khozraschet.

The principal financial control over khozraschet enterprises is exercised by the Ministry of State Control and the Control and the Control-Revision Administration of the Ministry of Finance, USSR,



Basic to the Soviet system of planning and controlling the volume, cost, and price of Industrial output is the widespread and, in machine building, mandatory use of norms to calculate tbe inputs of production and to derive indexes of productlonal efficiency- Soviet economists describe these norms as "computed values used for planning theprogram and the technical and economic efficiency of anas well as for evaluating its performance."

Although each normpecific value, all norms are subject to periodic review and adjustment as changes occur in tbe technology and organization of production. In establishing norms, Soviet officials Insist that they beoviet euphemism meaning that norms must be continually tightened up.

Soviet planner8 declare that the setting of norma of production is Indispensable tolanned economy. Norms are considered essential in establishing the national economic balance sheet In which available supplies of materials are correlated with the consumption requirements of production. In machine building, where so much of the output is producedass or large-series scale In widely divergent economic areas, norms are an Important element In bringing productional efficiency in the manufacture of similar productsore uniform relationship over the country.

of Norms

a. Consumption Norms

Because it is used to determine more thanercent Of the cost of outputoviet machine building, the consumption nona (raskhednaya norma or norma raskhoda) merits primary consideration. In keeping with Soviet accounting categories, the two principal types of consumption norm used to compute the outlays of production are the labor consumption norm (norma zatrat truda) and the materialnorm (norma raskhoda mate rial'nykh reeursov)-


(l) Labor Consumption !formu

Labor consumption norma stipulate tbe amount oforker tonit of work (an operation) or the amount of outputorker can produceiven time. The first isime norm (noma vreacni) and the second an output norm (nonaa vyrabotki). The output norm iserivative or the tine norm.


Time norms un- usually used to measure labor inputs at machine building plants where the output la produced in small series or In single units. These norms ure established by determining the amount of working time (houra and minutes) requiredkilled worker toarticular Job or operation under the prevailing technology and organization of production.

When wages are paidiece-rate basis, as ialn machine building, the time norm la used to establish wagea ln relation to the orders being filled. Thus the time norm stipulates the amount of working time (basic and subsidiary) to be allocated directly to the productions! operation, the amount to be spent In servicing the work area, and the amount of preparatory and down time allowed in the manufacture of an entire batch of articles.


The output norm ap-eirirr. the nuaber of units ofexpressed in tons, kilograms,s, piecea, or the like,orker must produceiven length of time. Output norma are used primarily where aaaa and large-series production prevail. Such norms may be established equally well for the planthole or for groups of workers. The best productional results achieved by one plant or by one group of workflrslant are used to spur the more backward plants and workers throughout the USSR to improve their labor productivity. Output norms arc used extensively in intraplantand accounting.

for Setting Labor Boras

In many cases, one and the same operation can bein machine building using different methods and different equipment. Consequently, different amounts of time may be required to coaplcte an operation, depending on the method and equipment used. To achieve the higheat productivity of labor io the performancepecific operation, Soviet officials call for adoption of the method


that embodies the most effective utilization of equipment, the most productive technology, and the best organization of labor.

Soviet economists distinguish between two methodslabor norms. One method is referred to as the(analiticheskiy meted) and the other as themethod topytno^tatlstichesklv meted). Theis In

method of establishing labor norms is

based on trict verification of potential increases ln theof labor and of the optimum utilization of equipment and organization of labor." The analytical approach to setting labor norms ls coafiidered the only truly scientific approach. All labor consumption norms determined by the analytical method ore referred to as technically based norms (tekhnicheski-obosnovannvye normy). The analytical methodreakdown of each operation Intoomputation of the duration of each element of the operation, andomputation of the normhole. Calculations are based on indexes that describe the absolute productlonal capabilities of the equipment used (capacity, load limit, and the like), the material factors which influence the productivity cf labor (the quality of the materials processed and the cutting toolsnd the optimum utilisation of working time, not oaly with respect to equipment, tools, and materials but also with respect to the skills of the worker- This approach to setting labor norms requires independent research in order to determine which method insures the maximum utilization of the factors of production. The approach also involves the chronometerins of working tine and dissemination of the best results and most ad-vanced methods- Technically based ;iorms are considered "progressive" norms, as they allow for continuous increases in labor productivity independent of actual performance at any time.

In practice, however, some industrial enterprisesStill use the so-called empirical-statistical norms in place of or along with technically based norms. Such norms are established on the basis of reported statistical data in the previous period or merely on the basis of the observations of norm setters. Both the Communist Party and the Soviet government have condemned the use of empirical-statistical norms, for they do not insure the naxlmum growth of labor productivity. There is an active campaign to eliminateempirical-statistical norms from Soviet machine building.

(d) Uses of labor Consumption Horns

In tho USSR, labor consumption nones are used not only to determine the share of the wages of individual production workers


(or groups of production workers) ln the total wage billlant or industry but also to measure changes in labor productivity. Tnthe production programs, labor consumption norms provide the data necessary for computing the production potential of Individual sections, shops, and plantshole; for determining the amount of equipment, the number of workers, and the wage fund required toroduction target; and for scheduling completion dates in the manufacture ofparts, and finished articles.

Labor consumption norms also are used to determine the labor intenslveness (trudoyemkost') of production and to plan the cost of labor per unit of output. The share of the cost of labor in the total cost per uait of output is calculated from the sua of thetime norms for all operations required tonit of output under the given conditions of production. Because labornorms are used to plan the production programs of plants, the quality of planning depends in large part on the validity of the norms. Soviet planners declare that the correct formulation of labornorms is prerequisite to the correct planning Of wages.

aterial Consumption Norms

Material consumption norms stipulate the amounts of various materials considered necessary for productionnit of output or the completionnit of work under specified conditions of Soviet officials take the positionlanned economy is impossible without technical norms which can be used to plan the material inputs of production.

Although, in the broadest sense, machinery and equipment are classified as materials in the USSK, the setting of norms for the depreciation of machinery and equipmentattern different rrom that followed in setting norma for the consumption of rawprocessed materials, fuel, and electric energy. The difference arises from the fact that materials, fuel, and electric energy arc classified as working capital, whereas machinery and equipment are classified as fixed capital. In setting norms for raw materials, processed materials, fuel, and electric energy, consumption is computed per unit of output, whereas in setting norms for machinery and it is the degree of utilization and the length of service that are computed. For tlie sake of convenience, norms pertaining to raw materials, processed materials, fuel, and electric energy are treated under material consumption norms in This appendix, whereas normsto machinery and equipment are treated under the separate subheading of amortization norms.*

iscussion of amortization norms, see b,elow.


(a) Classification ol' Material Consumption Norms

There are several criteria for classifying material consumption norms in the USSR. ubstantive basis, all material consumption norms are classified as specific or general. Specific norms are formulated to cover the materials coasumed inpecific operation or for the manufacture of specific articles. General norms are designed to cover the materials consumed in diverse types of operations where the only common unit is rubles or hours.

A similar distinction is made vith respect to the applicability of material consumption norms. Here, norms areas individual or group norms. Individual norma are those which are limited in application to the manufactureingle article or to production performedingle piece of equipment. Group norms apply to articlesimilar type or nomenclatureon moreingle given machine. Group norms are really aggregative norms that reflect the average consumption of materials per unit of output for specific administrative or geographicin the USSR.

With respect to their effective duration, material consumption norms are classified as annual norms and current norms.ule, material consumption norms are effectiveear- In addition to annual norms, however, current norms may be established for specific periods within the year when there are regular seasonal fluctuations ln the percentage of materials consumed per unit or output or when changes In the consumption pattern arise fromand technical measures token to realize economies of Current norms may be higher or lower than the annual norms. The weighted average of all the current norms in the courseear, however, must be equal to or better than the approved annual norm.

c-r o;-. ir. cor.sumpt lei: norms is made between technical norms and technical-economic norms. Technical norms merely indicate the amount or materials required tonit of one or another type of output. In making the calculations for these norms, use is made of technical data contained In the designing documents and cf results obtained from testruns. Technical norms ore calculated with the use of specific equipment and on the assumption of optimum output under the given conditions of production. Because actual conditions of production do, in fact, vary, technical norma also may vary. Technical, norms are formulated without considering the factor of cost.

Technical-economic nones arc based on technical norma but, in addition, take into account all the economic factors of These norms are designed to Improve the utilization of materials in production and to reduce the cost of output. Intechnical-economic norms, the norm setters take Intorecommendations that have been made by Innovators andto streamline production ond conserve materials as veil as the latest achievements of science and engineering.

(b) Formulation of Technical-Economic Norms

In principle, technical-economic norms are identical ln structure for practically all types of materials. The formula used in setting consumption norms for materials is :i. DF,s the net amount of materials required per unit of finishedepresents additional consumption per unit of output arising froa losses attributable to the technology of production,epresents additional consumption of materials per unit of output other than those directly attributable to the technology of productionainly losses occurring ln the delivery and handling of materials.

Then production of one or another type of output either ia calculated by formulas or ia determinedirect measurement or weighing of the finished article. In setting noma for the consumption of metal or wood in production of articles that are made excluaively of metal or wood, for example, theawith tho net weight of the metal article or the net volume of the wooden article. The difference between the actual consumption of materials per unit of output and thea used ua anof the efficiency of the technological process ln use. For any given technological process of production or given design of an article, theitted amount. Whenever the technology of production or the design is changed, thelao Is changed, lhe "progreiiaivencas"ewly formulated technical-oconomic norm is gauged by comparing not only then the reapcctlve norms but also thend P.

It le recognized, of course, tbat losses of material Inputs (D) arising from the technology of production are Inevitable in any given production proeesa. The official Soviet position, however, is that the elxe of the losses la not fixed and con always be further reduced.

An for loaaes connected vith the handling of materials and finished outputhe official position la that auch leases are not inevitable and con be partly or entirely eliminated.


Technical-economic norms may be reduced by either of two methods: by reducing losses of materials in productionnd P) or by decreasing the net consumption of materials per unit of output As an example of the latter method, the consumption norm for metal in machines can be reduced by introducing rational changes in the design of parts and components.

(c) Principles for Setting Material Consumption Horms

One of the major considerations in setting material consuaption norms is the dovetailing of norms vith state plans for conserving materials. Reduction of unit consumption of materials in Soviet industry is effected in the main by the tightening up of norms. The Soviet regime hasumber of methods, ln the absence of market competition, to spur reductions in material consumption per unit of output. These methods include socialist competition,and Innovation, and recognition of better-than-normall of vhlch are accompanied by honorific and/or monetary rewards. These various methods of reducing consumption arein subsequent norms that thus serve as the principal vehicle for continuous reduction in the outlays of materials per unit of output.

In planning the future output of articles that also have been produced in the past (so-called comparableoviet officials stipulate the total amount by which the unit consumption of materials is to be reduced. Por example, the state supply plansallededuction ofillion metric tons ofmetals, Uo million metric tons of standardillion kilowatt-hours of electric energy, and lU million cubic meters of lumber- Such goals are implemented by successive reductions in the material consumption norms each year and are formulated on the basislan of organizational and technical, measures (orgtekhplan) drawn up by each plant in an effort to improve the utilization of resources- Soviet officials claim that the setting of norms for the consumption of materials facilitates better organization of production, reduction of the cost of comparable output, administration Of khoz-raschet, and reduction of excess stocks of materials while generally increasing the profitability of enterprises. k, with aof 'i-ercent planned in the cost ol" industrialercent was to be achieved by reducing outlays of raw materiale, processed materials, fuel, and electric energy per unit of output.


(d) Procedure forfi Material Consumption Norms*

Drafts of new consumption norms, incorporatingreductions compared with prevailing norms, were worked out hy plants and submitted for approval to the appropriate mainond ministry. The ministry submitted drafts of the mostmaterial consumption norms, particularly those involving critical or deficit materials, to Gosplan, USSR, for approval. Individual norms that were deemed especially important required the approval of the Council of Ministers, USSR.

The Council of Ministers annually established for the individual ministries and departments the quotas for the averageof material consumption norms, presumably based on theof over-all economic planning. The ministries and deportments, ln conformity with these quotas, approved or adjusted the consumption norms submitted to them by their producing plants. These official norms were then disseminated to the production level. Individual norms that had been coordinated with Gosplan, USSR, were formally confirmed by the ministries. inistry could subdivide group norms that had been coordinated with Gosplan, USSR, into differentiated normsto its various main administrations and producing plants. These differentiated norms could deviate from the group norm but, when averaged together, had to conform to the group norm.

b- Amortization Norms

The amortization norm is used to establish the amount by which the initial value of machinery and equipment is to be written off annually. In the majority of cases the annual amortization norm in

(Sf +

percent is determined by the use of the formula" wbere

Sf is the full initial value of the fixed capital,

Rhe value of capital repair and expenditures connected with liquidation,

L is the residual value of the machine or piece Of equipment being amortized, and

D Js the length of service.

* This description is based on the procedure followed under theform or organization. Ttcontinued on p. ?l/


8 the Soviet government has confirmed for the Depurate branches of the national economy (and for Industry in particular) average norms of amortization deductions, expressed as percentages of the initial value of existing machinery and equipment. In view of the heterogeneous composition of fixed capital in industry as well asin the degree of utilization and conaequently diffcrencea in the depreciation period, differentiated amortization norms exist within the individual industries and plants. The differentiated amortization norma established for producing plants fall within the limits of the deductions and appropriations approved for their Industryhole. The plant, in turn, may use differentiated norms for each type ofand equipment within the limits of the amortization normsfor the plant- Plants calculate amortization monthly (at the beginning of the month) by computing the percentage of the annual amortization norm or the percentage of work completed.

believed that the same procedural principles are followed today, with the difference that the regional economic councils and the councils of ministers of the various republics have replaced the mainand ministries, respectively- It is believed that the regional offices of the CSA and Gosplan nowore decisive role than heretofore byloser check on data and analysis.



of Deviations froa Material Consumption Norms

Plants that use normative accounting usually determine deviations from current norms for the materials consumed ln the manufacture of given groups or types of similar articles by the method that follows. The bookkeeping office of Plant X, for example, drawsonthly Record of the Movement of Materials in Productioniven type of machine.** This report establishes the balances of materials on hand at the beginning of the month, the flow of materials to the shops of the plant during the month, and (on the basis of anthe balances on band at the end of the month. With the use of these data, the actual consumption of materials is computed for the month) in- the result is compared with the consumption norm for the monthColumns (ll)nd deviations from the current norms are) and (lit). The deviations from material consumption norms shown in) and (Ik) are then transferredorksheet on which the consumption norm and the deviations from the consumption norm are recorded for each of the Items of calculation appropriate to production of the given type of

Worksheet for Computing Basic Production

Where the normative method of accounting is used ln machinean index of deviations from current norms is computed as ato calculating the actual unit cost of individual articles. Such an index is computed separately on monthly work sheets* for each group of similar articles before monthly cost calculation reports are submitted. In)) Of the worksheet shown in Tabiche ruble values of deviations from current norms forachines are entered opposite the respective items of calculation. ) shows the ruble value of outlays for the month that can be charged to commodity output. The ruble values of the deviations from the)re then divided by the value of the outlays


ample ofonthly record, see Tablehich follows on

""* See, (y))) of the sample worksheet in Tablehich follows on

t ample worksheet. See Tablehich follows ont Text continued on








ra ,


) g

iiS P| MS I'l







i 1!


to commodityo derive on index of deviationsfor calculating the unit cost of variousachines (for example,* Because the outlay norms established for the Individual machinesroup or type may vary somewhat andthe Incidence of rejects among them is not uniform, the Index ofalculated for the full unit cost ofachineohole in) of tho worksheet is not usedoefficient for calculating the actual unit cost of the individual machines within the group. Before examining how the actual unit costpecific machine is calculated, however, the explanation that follows may help to clarify the worksheet.

The data in) opposite the stub heading "Materials" have been entered from Columns (U) throughf the Record of the Movement of Materials in*

The data on wages in) have been taken from documents on production and from the supplemental payroll.for social insurance are calculatedercentage of wages.

The entries for shop and general plant expenditures in) reflect the relationship of actual outlays to the approved estimate of outlays. Actual shop outlays in7 would have0inus)ccording to the data in Table 6. Rejects and any shortages in unfinished production are written off at norm cost.

Unfinished production at tho end of the montholumngiven0 rubles, was obtained rrom separate calculations based on inventories and/or primary documents. The value of outlays charged to the commodity output of the plant in production ofachineso derived by subtracting the value of final rejectsColumn (i'l)ent)nd unfinished production at the end of the month ll valued according to current noroc, from the total outlays expended during the month plus the balance of unfinished production at the beginning of the month

tn this particular worksheet, only deviations from norms ore shown. Deviations between the actual nnd planned prices of materials ore enteredeparate calculation sheet. The separation offrom norms and deviations from prices is of considerable importance in analyzing tlie coot Of output-

ample report allowing the unit cost calculation ofachine, see Tablehich follows on





The entire column of deviations from monthly outlaya carried over to) ln computing the Index of deviations for commodity outputt)so thatmay be fully allocated to tha cost of output ln the reporting period.

3. Calculation of the Unit Cost of an Article

Reports on the unit cost of each major article" producedlant are submitted monthly, using tte Index of deviations shovn in) of the worksheet* to calculate the cost. The coat calculation report Is intended toomparison of

the actual unit costpecificn

Table 7with both the planned quarterly average

and the current (monthly) norm coatolumn

To calculate the actual unit coat ofachlne lnhe current norm coats in Columnof the cost calculation report were multiplied by the respective deviations computed for Typeroup ln0 of the worksheet. Theere divided, and the quotients wore entered inf the coat calculation report opposite the appropriate item of calculation.hows the ruble value by which the actual costs ofachine deviated from the normed costs. Actual costs are then entered infter the deviations have been added to or subtracted from the norm costs. According to the data in Tablehe full norm cost ofachine Inublen. The deviation from the norm costavingercent above the norm rest and resulting in an actual unit coatubles. In the example ofachine, the actual unit coat was not only lover than the monthly norm cost but also was lover than the planned quarterly average costubles. Since July Is the first monthuarter, it is doubtful whether or not the actual unit coat ln July would often be lower than the planned quarterly average cost.

ample report showing the unit cost ofachine in the month ofee Tablebove. ** The worksheet (Tables onbove.




Although the State Flan for the Development of the National Economy of the USSR1 is now primarily of historic Interest, it is believed that the method of planning cost at the national level has not changed substantially since that time. opy ofI state plan is the only such document that ls known to have reached the West. Accordingly, data pertaining to cost in the machine buildinghave been extracted from this plan toraphic example of the manner in which cost data are derived for national Industries.

For purposes of comparison,hows summary data on the planned level of the cost of commodity output and the plannedreduction in the cost of comparable output established forIndustries, Including the machine building industries, as well as for Industryhole. It should be noted that, ln the lOAl plan, the percentage by which the cost of comparable output was to be reduced in the principal machine building industries was uniformly high, rangingercent1 percent, compared with other industries. It also should be noted that,ange ofoercenteighted average2 percent in the machine building industries, the percentage of comparable output in the total commodity output was much lower ln machine building than in other industries.

the detail with which the central planners

provided individual Industries with cost data in thelan. In addition to giving the full cost of commodity output, the plan listed for each ir.ajor Industry (except the defense industry) the outlays for production broken down by conventional primary elements. The over-all cost of each primary element, establishedational scalein the plan and allocated among the Individual Industries, was based primarily on the level of cost reported by these Industries in the previous plan period but was adjusted to reflect plannedin-the cost of comparable output and the estimated cost of non-comparable output (new articles) programed for lQlil.

ollows on ollows on


Table 8

USSR: Data, an the Planned Cost of Commodity Output of Industry1


Pvtrolauni-Cvctrlc aawtr statloca

Roafsrreuaucal LaOuaur Coaatraauor.

f< Gliding

m:'lr.a Canaral tMmilia UastrKaJ Induairy Ictsrit !

: ir,

Uffet J'r, Taitiu uduatry mod laduarrj


nu laduairy

ndustry 5/

Planned Cent of Total Cmndliy Oulput b/ (Willierit lea)








COT[omlil- On put





Plannedin Laval of Cccporobir Ouipul. il




Planned Annuel Saving*'-wht. HjMh)








The Soviet documents used in this report included official plans statistical handbooks, an encyclopedia, textbooks, periodicals, and newspapers.

Bol'shaya sovetshayft eiitr-lklopediya (The Large Soviet

ol 3b,. (hercaftcr referred to as USSR. Bol'shaya)

Brown, Samuel R. Costs and Prices, Sydney,

Devine, Carl T. Cost Accounting and Analysis, hew

(Cantor, L. K. otsialistlcheskoy1 (Cost ln Socialist.

lasser,dr. Handbook of Cost Accounting Methods, Nev

Mitchell, Kenneth B. Cost Accounting and the Engineer,.

Organisation for European Economic Cooperation. Cost Ai-count-ing and ProductivityThe Use and Practice of CostIn the USA,

SoUlallatichcshly trud,-

Soviet Weekly, London,- 7-

Troitskiy,nd Stuchevskly, M. P. Planlrovanlyeashinostroitel'non gavoce (The Planning of Costchine Building.. Statistika promyslilennostl (The Statistics of.

Bol'shaya (l,. Sebestoimoat'ashinoBtroymtll

(The Coat of Output in Machine

(hereafter referred to as Canshtak, Sebectolmost') USSR, Moscov State Economics Institute. Ekonomixa sotalallu-

tlchcskoy procnyshlennosti (The Economics Of Socialist Industry),

. (hereafter referred to as USSR, Moscow

State Economics Institute. Ekononlka) USSR, Moscow State Economics Institute. Problcmy kho/.yayst-

vennogo rageheta (Problems of Cost

Bol'shaya. (l,.


h. . Uchetanhlno-gtroycnli (Production Accounting and Calculation in Machine



Mar gulls, A. Bukhgaltersklytraslyakh narodnogo khozyaystva SSSR fAccounting ln the Branches of the National Economy of the

. Soviet Statistics,..

. Statistika promyshlennosti (The Statistics of-

Bol'shaya (l,. Perefitroykn upravlcnlya proffiyshloanoat.'yu 1

stroltel'stvoirt'v SSSR (The Reorganization of the Admlnlstra-tlon of Industry and Construction in the

. Organlzatalya goaudarsivenaoySSH (The Organization of State Statistics in the.

. Soviet Statistics,.

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