Dixon Fagerberg, Jr.
SEDONA, ARIZONA

A WORLD WAR II COST ACCOUNTING ASSIGNMENT

Abstract: This article describes the development of a process cost accounting system for a war production plant in 1942. A variety of cost drivers were used for purposes of allocation of overhead. In addition, the role of the cost accountant in the war effort is emphasized.

Although Pearl Harbor and America’s declaration of war against the Axis powers was creating tension in the country, my professional life as a CPA in Arizona was relatively normal in the winter of 1941-42. At that time, I heard of a tremendous complex of plants being built nearby for the production of magnesium. The site of the plants was later named Henderson.

Magnesium is the lightest of the metals and has many structural uses when alloyed with zinc, manganese or alumi-num. This plant’s output, though, was wanted for its pyrotech-nical qualities in order to manufacture incendiary bombs to be dropped on Germany. The name of the Organization was Basic Magnesium, Incorporated (BMI) and the Defense Plant Corporation was destined to invest some $140 million in the project. Over 7,000 employees were already working feverishly to complete the facilities by mid-1942, the date targeted for initial magnesium production.

Everything about the BMI situation intrigued me: its size, its importance, its proximity, and the metal-extractive nature of the underlying production processes. So, with some audacity perhaps, I applied to BMI on January 2, 1942, for the specific task of designing and installing BMI’s accounting system. Fol-lowing a drawn-out series of letters and interviews, I was hired and reported for work on May 13, 1942.

BMI ACCOUNTING

Upon reporting for work, I was flabbergasted with the size of it all — not one plant, mind you, but rather 12 or 14 huge, separately structured, facilities in process of construction and machinery installation. As I recall, there were some 300 people

82 The Accounting Historians Journal, June 1990
in the offices, including the Defense Plant Corporation crew, the legal, insurance and office-services departments and, of course, the accounting department of 150 or more.

The accounting function was split into two divisions: Con-struction and Acquisition (C & A) and Management and Opera-tion (M & O). I thought I had been hired to go right to work in M & O, designing the magnesium process-cost system. To my surprise, the production phase was at least three or four months away, hence relatively low on the priority list for the time being. There were a host of more pressing C & A problems on the front burner. Clyde Warne, the BMI controller, immediately delegated me to try to unlock the numerous accounting “logjams” that had developed.

Time kept passing. One of Basic’s ten magnesium-reduction plants was now scheduled to go on stream sometime in October. The process cost system could not be put off any longer. To design it properly, two conditions were absolutely essential: (a) non-interruption and (b) collaboration with someone who understood all the step-by-step processes resulting in the end product: magnesium.

The first requirement was easily arranged. A secret room, without telephones, was set aside for the exclusive use of me and my collaborator. No one knew where we were. We were out of reach.

The second requisite was met by assigning a young man named Malcolm (Mac) Maben to work with me. Until this time, the only two places where magnesium had been produced from magnesite in any significant quantities were Germany and England. Therefore, to acquire the knowhow to build and operate Basic’s plant (by far the biggest of its kind in the world), it had been necessary to send a group of key technical people to Britain for instruction and training. They were referred to as “trainees”. Maben had been one of these, having spent several months in Britain studying the processes and their costing with metallurgists and cost accountants.

Both the setting and the collaborator proved to be ideal. He and I were closeted in that room, with no interference, for about five weeks. During that period, I broke away once to visit Basic’s mine at Gabbs, Nevada, over 330 miles from our plant. It was a hot, desolate, tiresome trip, yet rewarding because, as always, I was interested in the pecularities of that mine, and how the geologists and engineers who had explored and developed the magnesite property at Gabbs were putting “rock in the box”.

MAGNESIUM COST ACCOUNTING

Rather than describe the work Mac and I did together, I am simply appending the master process cost sheets and the sup-porting sub-sheets that were developed to pin down the costs of each link in the production chain. When these sheets were laid alongside each other, they took up a whole wall of a good-sized room, much to the astonishment of all concerned. This was the biggest cost accounting job of my career. In light of the current popularity with discovering “cost drivers,” students of cost accounting may be surprised to observe the many cost drivers used to allocate service department costs (Appendix B).
In the course of our work, we found that there were no less than 45 service functions or departments needed to enable the actual magnesium reduction processes to take place. In a small plant, many of these would have been merged; but here at “The Desert Giant” each one was distinct and individually staffed. (In present-day dollars, this plant would have cost well over a billion dollars.)

As shown in one of the attached charts, the reduction of the numerous raw materials to the end product required 33 separate stages or processes. First, chlorine had to be produced, hence it was necessary to build the largest chlorine plant in the United States. Second, the raw magnesite had to be mixed with peat and other ingredients to form bullet-like pellets which were chlorinated. Finally, the chlorinated pellets were electrolyzed to produce magnesium metal.

These were the essential steps.

Along the way, we had to enter into a number of bypaths. One of the most interesting of these was the way peat is harvested by cutting deep trenches and cutting it into big blocks like bales of hay for removal. This decomposed forest material is on its way to eventually become coal, a nonmetallic mineral. Thus the extraction of peat from the earth is a cross between agriculture and mining.

It would be pleasant to report at this point that the use of magnesium had burgeoned over the subsequent years and that our cost analysis work had gained wide adoption. Alas, such is not the way it turned out. In comparison with aluminum, the other leading “light metal”, magnesium’s worldwide production ratio is about 1 to 275. Moreover, most of the 260,000± metric tons of magnesium annually produced is now extracted from brines rather than from hard-rock magnesite ores. Despite its never having been extensively utilized, I still look back upon our work with a certain fondness because we were so totally absorbed in what we were doing. In other words, the work itself was the reward. (The collaboration with Maben was most satisfying. Our thinking seemed to synchronize. After leaving BMI, he and I may have exchanged a few short notes; then, as usually happens, we lost track of each other. At that time, he was only 25 or 26 and was subject to being drafted, having received deferrment only for his “trainee” period in Britain. Ever since, I’ve wondered and worried if, indeed, he did serve in Europe and, like so many others, failed to return.)

THE WAR PLANT, THEN AND LATER

In December 1942, the first magnesium ingot was poured. It was displayed in the lobby of the Administration Building for everyone to stare. Although production was behind schedule, it increased rapidly to a peak in March 1944. But in November 1944, the plant produced its last ingot on orders of the WPB (War Production Board).

Having been both an observer of and participant in the project, I have put together the following condensed information concerning it. First as to the plant, its cost was in the neighborhood of $140-million. It was then the largest magnesium plant in the world and the only one using the electrolytic process except for its prototype plant in England. One had to see it to realize how big it was. Its plans and blueprints, if spread out, would cover 46 acres. It was the second largest steel construction job up to that time; the lumber it required was enough to build a city of 40,000 inhabitants; the facilities included 350 miles of pipe. From the standpoint of engineering skill and the marshaling of a vast new labor force in the desert, the construction of the plant was unquestionably a great accomplishment.

As to the plant’s doing what it was designed to do, the answer has to be mixed. On the plus side, BMI supplied one-fourth of the magnesium that was used in the incendiary bombs dropped by the Allies in World War II. (Magnesium is inflammatory in finely powdered form or when formed into thin wire or foil.) Further, it achieved its production capacity of 112-million pounds a year and got its cost down to 180 or 190 a pound. At peak production, 5,500 workers were employed. Upon closing, 26-million pounds of magnesium were on hand out of a total of 100-million in the National Stockpile.

On the minus side, the plant did not produce magnesium after the shutdown. Although the metal weighs about one-third less than aluminum and has attained a niche in airplane manfacturing and other uses, magnesium production has not boomed worldwide to the extent once anticipated, especially in comparison with aluminum.* However, the BMI plant is still utilized on a limited scale by lessees. Shortly after the mag-nesium production ceased, Stauffer Chemical Co. began making chlorine and soda ash; Western Electrochemical made potassium perchlorate; and Hardesty Chemical produced a variety of chemicals including synthetic detergents. No attempt has been made to trace the plant’s operating history from 1944 to date.

In retrospect, the cost accounting system developed for BMII was state of the art, and probably would still be so today. Its development in such a short period of time shows what could be accomplished under the motivation of war-time conditions. Those involved with BMI felt they had a patriotic calling, and part of that calling was the establishment of a cost accounting system. Indeed, cost accountants throughout the land made their contributions to the war effort just as surely as if they had carried guns or piloted bombers.

*90% of America’s magnesium now comes from ocean water, the extraction ratio being about 1,000 to 1. That is, 1,000 pounds (125 gallons) of sea water must be processed to get one pound of magnesium.

86 The Accounting Historians Journal, June 1990

APPENDIX A
THE PROCESS-COSTING STRUCTURE FOR PRODUCING
MAGNESIUM AT THE HENDERSON, NEVADA PLANT
OF BASIC MAGNESIUM, INCORPORATED, 1942-44

In basic structure, the costs at BMI were similar to those of most processing industries. This is shown below in simple diagrammatic form where E signifies Direct Expense Elements, F the various Functions or processes, and C the Conversions of the materials from one stage to another until the final product (in this case, magnesium) emerges.

Etc.
Cost of Final Products $$$

Fl F2 F3 F4 F5 Etc.
El S S S S s s
E2
E3
Etc.
E Totals S S s s s
Cl ($$) SS
C2 ($$) SS
C3 ($$) SS

APPENDIX B FUNCTIONAL COSTS

These were of two kinds: those functions preparatory to or serving the magnesium-reduction processes AND those directly involved in producing magnesium and intermediate products.

SERVICE FUNCTIONS OR DEPARTMENTS

Function or Department Basis of distributing charges to beneficiaries
1. Plantsite lands and streets Square footage of area occupied
2. Fire protection Insured value of properties
3. Plant protection No. of employees
4. Safety department No. of employees
5. Industrial relations No. of employees
6. Canteens No. of users
7. Change houses No. of users
8. Payroll and timekeeping No. of employees
9. Purchasing and expediting Dollar values of materials consumed
10. Plant offices Dollar value of direct costs Water system
11. A. Pumping and transmission
12. B. Storage
13. C. Distribution
14. D. Total Gallons of water consumed

Function or Department Basis of distributing charges to beneficiaries

Power system

15. A. Transmission
16. B. Conversion (substations)
17. C. Distribution
18. D. Total KWH of energy consumed Transportation to plantsite
19. A. Vehicular Car miles
20. B. Railway Tons transported
21. C. Cranes, hoists, conveyors, etc. Estimates of use
22. D. Total

MAGNESIUM REDUCTION PROCESSES

Unless otherwise noted, the product emerging from each process flows or passes to the next process listed. For example, the Brine Solution goes to Electrolysis, and so on.
Process Resulting Product

CHLORINE PLANT

1. Brine preparation Brine solution
2. Electrolysis Chlorine gas; cell liquor to caustic evaporation #6
3. Cooling and Drying Chlorine gas — to Process #17
4. Liquefaction Liquid chlorine
5. Vaporization Chlorine gas — to Process #17
6. Caustic evaporation Caustic solution and caustic soda.

PREPARATION PLANT

7. Dust collection Dust mixture )
8. Coal milling Pulverized coal )
9. Peat shredding Shredded peat ) To
10. Calcined magnesite Process
grinding Ground calcined magnesite ) #13
11. Raw magnesite
drying & grinding Ground raw magnesite )
12. Magnesia milling Pulverized magnesia )
13. Dry mixing above
6 products Pellet mixture
14. Pellet production Finished pelletsProcess Resulting Product
10 METAL PLANTS
15. H C l recovery & Magnesium chlorate solution neutralization
16. Effluent disposal No product; cost charged to #17 below
17. Chlorination Anhydrous magnesium chloride to #20
18. Motor generators D.C. energy charged to #20
19. Rectifiers D.C. energy charged to #20
20. Electrolysis Raw magnesium metal (lbs.); cell mud to
#30 and #32

REFINERY & FOUNDRY

21. Manganous chloride Manganous chloride (lbs.) dehydration
22. Primary ingot casting Primary alloy ingots
23. Secondary ingot casting Alloy ignots
24. Crude billet casting Crude billets to #28
25. Crude slab casting Crude slabs to #29
26. Powder billet casting Powder billets
27. Powder slab casting Powder slabs
28. Billet machining Finished billets
29. Slab machining Finished slabs

FLUXES PLANT

30. “A” Flux grinding Ground materials
31. “A” Flux mixing “A” Flux
32. “B” Flux grinding Ground material
33. “B” Flux mixing “B” Flux