Management Accounting Information for Managing and Creating Value 7th Edition Smith Solutions Manual

Visit https://testbankdeal.com to download the full version and
explore more testbank or solutions manual
Management Accounting Information for Managing and
Creating Value 7th Edition Smith Solutions Manual
_____ Click the link below to download _____
https://testbankdeal.com/product/management-accounting-
information-for-managing-and-creating-value-7th-edition-
smith-solutions-manual/
Explore and download more testbank or solutions manual at testbankdeal.com

Here are some recommended products that we believe you will be
interested in. You can click the link to download.
Management Accounting Information for Managing and
Creating Value 7th Edition Smith Test Bank
https://testbankdeal.com/product/management-accounting-information-
for-managing-and-creating-value-7th-edition-smith-test-bank/
Operations Management Creating Value Along 7th Edition
Russel Solutions Manual
https://testbankdeal.com/product/operations-management-creating-value-
along-7th-edition-russel-solutions-manual/
Operations Management Creating Value Along 7th Edition
Russel Test Bank
https://testbankdeal.com/product/operations-management-creating-value-
along-7th-edition-russel-test-bank/
University Calculus Early Transcendentals 3rd Edition Hass
Solutions Manual
https://testbankdeal.com/product/university-calculus-early-
transcendentals-3rd-edition-hass-solutions-manual/

South-Western Federal Taxation 2015 Comprehensive 38th
Edition Hoffman Test Bank
https://testbankdeal.com/product/south-western-federal-
taxation-2015-comprehensive-38th-edition-hoffman-test-bank/
Marketing Research Essentials Canadian 2nd Edition
McDaniel Test Bank
https://testbankdeal.com/product/marketing-research-essentials-
canadian-2nd-edition-mcdaniel-test-bank/
Introduction to Electronic Circuit Design 1st Edition
Spencer Solutions Manual
https://testbankdeal.com/product/introduction-to-electronic-circuit-
design-1st-edition-spencer-solutions-manual/
Ethical Dilemmas and Decisions in Criminal Justice 8th
Edition Pollock Solutions Manual
https://testbankdeal.com/product/ethical-dilemmas-and-decisions-in-
criminal-justice-8th-edition-pollock-solutions-manual/
Tourism Principles Practices Philosophies 12th Edition
Goeldner Test Bank
https://testbankdeal.com/product/tourism-principles-practices-
philosophies-12th-edition-goeldner-test-bank/

Economics of Social Issues 21st Edition Register Solutions
Manual
https://testbankdeal.com/product/economics-of-social-issues-21st-
edition-register-solutions-manual/

Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd
IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
1
CHAPTER 7
A CLOSER LOOK AT OVERHEAD COSTS
ANSWERS TO REVIEW QUESTIONS
7.1 When we refer to manufacturing overhead costs we are describing the indirect manufacturing costs of products.
These are the factory costs that are incurred in producing products but cannot be traced directly to them. They
include all manufacturing costs other than direct material and direct labour, such as the costs of supervision,
power, factory security and so on. From a product costing perspective, we can expand our definition of
overheads to include all product-related costs other than direct costs as managers may require comprehensive
estimates of product costs for making product-related decisions (see Chapter 4). However, as Australian
accounting standard AASB 102 Inventories requires that inventory valuations in external reports of
manufacturing businesses only include manufacturing costs, a distinction is drawn between indirect costs within
the manufacturing area, called manufacturing overhead, and other indirect costs incurred along the value chain,
upstream and downstream, of the manufacturing or production area.
Upstream costs and downstream costs, regardless of whether the entity is a manufacturer or a service provider
include costs incurred before and after the production process, such as research and development, design and
supply costs, marketing, distribution and customer service costs.
The indirect costs of responsibility centres are costs assigned to a unit in an organisation such as a department or
division where a manager is held accountable for performance. Indirect costs cannot be traced directly to the
centre so they need to be assigned instead.
7.2 Cost object: is something that is assigned a separate measure of cost because management need such cost
information; for example, responsibility centres, products, projects and so on. (The various production
departments in a manufacturing firm also provide examples of cost objects. For example, the material handling
cost pool may be allocated across the various production departments that use material handling services. In a
hospital costs may be assigned to reception, a ward, a doctor, operating theatres or intensive care unit (ICU) and
so on.)
Cost pool: a collection of costs that are to be assigned to cost objects. Costs are often pooled because they have
the same cost driver. (An example of a cost pool is all costs related to material handling in a manufacturing
firm.)
Cost allocation base: is some factor or variable that is used to allocate costs in a cost pool to cost objects. (An
example of a cost allocation base may be the weight of materials handled for each production department that
uses material handling services. This base would be used to assign the costs in the material handling cost pool to
the production departments.)
Cost driver: is a factor or activity that causes a cost to be incurred. (From the example above, the allocation base
of weight of materials handled for each production department may be a cost driver depending on its causal
relationship to the costs in the cost pool.)
The difference between cost allocation bases and cost drivers is that cost drivers are allocation bases but not all
allocation bases are cost drivers. Ideally allocation bases should be cost drivers; that is, there should be a cause
and effect relationship between the costs in the cost pool and the allocation base. In practice, some allocation
bases do not have this relationship, or the relationship is imperfect. Under these circumstances the accuracy of
the cost allocations can be questioned.
7.3 As shown in Exhibit 7.2 (Estimating the cost of a cost object), in estimating the cost of a cost object, direct costs
are traced directly to the cost object and indirect costs (those with no direct linkage to the cost object) are
collected into cost pools and assigned to the cost object by means of allocation bases, preferably cost drivers.
Some possible examples of cost objects and their direct and indirect costs for the NGOs involved in the tsunami
relief efforts (described in the ‘Real life - Measuring tsunami recovery costs: an overhead or not?’ on page 276)
follow:

2
Cost objects Direct costs Indirect costs
Programs to deliver
immediate disaster relief
• Campaign and administrative costs
that can be directly traced to
specific program
• Salaries of program designer and
planners
• Salaries of appeal workers
• Salaries of relief workers in
disaster area
• Transport of staff and relief goods
to disaster area
• Accommodation for relief workers
• Technical and logistical consulting
costs
• Food and clean water
• Medicines
• Temporary shelter
• General office and administrative
costs of NGO (depreciation of
office equipment, general
stationery and postage, rent,
cleaning, general accounting and
office staff salaries, bank fees etc)
• Salaries of CEO and top
management
• Legal, insurance and risk
management costs not directly
traceable
• Marketing, advertising, publishing
and other costs for general
awareness and fund raising
campaigns
• Consulting and advocacy activity
costs of seeking change in
government and institutional
policies
• External audit and reporting costs
Projects to:
• rebuild after a disaster
event
• construct additional
infrastructure
• deliver long-term
community development
• Administrative costs that can be
directly traced to specific projects
• Salaries of project designers and
planners
• Salaries of staff involved in project
field work
• Transport of staff and materials to
field
• Accommodation for field staff
• Technical and engineering
consulting costs
• Building and infrastructure
materials
• General office and administrative
costs of NGO (depreciation of
office equipment, general
stationery and postage, rent,
cleaning, general accounting and
office staff salaries, bank fees etc)
• Salaries of CEO and top
management
• Legal, insurance and risk
management costs not directly
traceable
• Marketing, advertising, publishing
and other costs for general
awareness and fund raising
campaigns
• Consulting and advocacy activity
costs of seeking change in
government and institutional
policies
• External audit and reporting costs

3
7.4 A cost allocation base is some factor or variable that allows us to allocate costs in a cost pool to a cost object.
One possible allocation base for assigning advertising costs to the various attractions of a large theme park
would be the number of people patronising the park’s attractions. This would assume that the number of people
attending a certain part of the theme park would be an indication of the advertising resources consumed by each
attraction. Notice that in most cases the sales revenue generated by the various components of the theme park
would not be a viable allocation base since most theme parks have a single admission fee for the entire park.
Note that some people would consider ‘corporate’ advertising of this nature should not be allocated to the
various subunits of the business, as it is very hard to determine a causal cost driver. In activity-based costing
terminology the advertising could be regarded as a facility cost.
7.5 The development of departmental overhead rates involves a two-stage process.
In stage one, overhead costs are assigned to the firm’s production departments. First, overhead costs are
distributed to all departments, including both support and production departments. Second, support department
cost allocation takes place which involves costs being allocated from the support departments to the production
departments. At the end of stage one, all overhead costs have been assigned to the production departments.
In stage two, overhead application occurs as the costs that have been accumulated in the production departments
are applied to the products that pass through the departments using the overhead rate set for each production
department.
7.6 A support department is a unit in an organisation that is not involved directly in producing the organisation’s
goods or services. However, a support department does provide services that enable the organisation’s
production process to take place. Production departments, on the other hand, are units that are directly involved
in producing the organisation’s goods and services.
Examples of ‘production’ departments in a bank may include cheque processing, tellers, loan departments and so
on. Examples of support departments in a restaurant chain may include washing dishes (either manual or
stacking and unstacking dishwashers), cleaning, ordering/buying (some franchises rely on ordering from a
central unit and some require purchasing at the local market), bookings desk, head office, laundry and
accounting.
7.7 Activity-based costing can be used to assign manufacturing overhead costs to products in two stages. In the first
stage overhead costs are assigned to activity cost pools (that is, activities). In the second stage, activity costs are
assigned from the activities to products in proportion to the products' consumption of each activity, measured by
the amount of activity driver consumed. In traditional costing systems, when a two-stage allocation process is
used, the first stage is to assign overhead costs to production departments and the second stage is to assign the
overhead costs from the production departments to products in proportion to the products' consumption of the
departmental overhead cost drivers.
7.8 Using departmental overhead rates instead of a single plantwide overhead rate can improve the accuracy of
product cost information. The allocation bases used for each department are likely to be more realistic in
representing the relationship between overhead costs and the product, compared to using just one plantwide rate.
However, using departmental overhead rates requires the distribution of overhead costs to departments, the
allocation of support department costs to production departments and the collection of cost driver data by
production departments. While this approach usually provides more useful information than the single cost pool
approach, it is more expensive to operate and still can provide misleading information. A problem with this
approach is that costs with different behaviour patterns are added together before allocation to the product. It is
difficult to identify a realistic cost driver for a cost pool that includes setup costs, space costs and indirect
material costs, for example.
Using activity-based costing should improve the accuracy of cost information. Allocating costs to activities
rather than departments enables the identification of even more appropriate allocation bases. For example ABC
uses both volume and non-volume based cost drivers as allocation bases and attempts to aggregate costs that
have similar behaviour patterns. Again, however, there is an additional cost in analysing costs and cost drivers at
an activity level rather than at a department level.

4
7.9 A cost driver is an activity or factor that causes costs to be incurred. A volume-based cost driver is a cost driver
that is a measure of or proxy for the volume of production. An assumption underlying the use of a volume-based
cost driver is that costs are caused, or driven, by the volume of production. Examples include direct labour
hours, machine hours and direct material volume.
Non-volume based cost drivers are cost drivers that are not directly related to the number of units produced. For
example in manufacturing the set up costs are not driven directly by the units of output since each batch can vary
in volume. In a bank, non-volume based costs can include human resource management (driven by staff
numbers), cleaning (driven by floor space or room numbers), and IT servicing (possibly driven by the number of
computers).
7.10 Labour cost is a commonly used base for allocating overhead costs to cost objects including projects such as
those undertaken by FFA. Although such projects may be self funded by the member countries they result in
additional overhead costs being incurred by the FFA. As these overhead costs cannot be specifically traced cost-
effectively to the individual projects, an appropriate allocation base is needed to allocate them to the individual
projects to avoid cross-subsidisation of projects from member contributions and donations.
It is likely that there is some relationship between the level of salary costs for the projects and the increase in
overhead costs incurred by the FFA (as larger, higher cost projects are likely to require more support from FFA),
though the correlation is unlikely to be perfect. In the absence of a stronger logical connection and a more
practical, cost effective allocation base the use of salary costs as the allocation base may be reasonable.
However, it is not surprising that the member countries questioned and sought independent advice on the
accountability of the seemingly high overhead recovery rate of 66% of salary costs, because to them the
overhead recovery is an uncontrollable cost.
7.11 The primary benefit of using a predetermined overhead rate instead of an actual overhead rate is to provide
timely information for decision making, planning and control. Also the predetermined rate removes fluctuations
inherent in monthly actual overhead rates. While the use of actual overhead rates removes the need to account
for over- or under-allocated overhead, this is because it relies on data that are not known until after the event, so
it cannot be used in a timely fashion. Notice that in both approaches, it is necessary to calculate an overhead rate,
as overhead costs cannot be traced directly to products.
7.12 The denominator volume is the measure of cost driver volume used to calculate the manufacturing overhead
rate. The most common measure is the budgeted volume of cost driver for the coming year. Theoretical capacity
is the maximum level of production that the plant can run at, without ever stopping. Practical capacity assumes
the business operates at the maximum level that its resources allow under normal, efficient operating conditions.
Product costs will be higher using practical capacity, as the denominator measure of cost driver volume will be
lower, resulting in higher overhead rates. Using theoretical capacity as the denominator will result in lower
overhead rates and product costs, but there will be higher levels of underapplied overhead.
7.13 Management accountants allocate indirect costs to responsibility centres to help managers understand the effects
of their decisions, to encourage particular patterns of resource usage and to support the product costing system.
For example production departments may source services from support departments and where these services are
supplied for ‘free’ there may be a tendency to over-consume them. Where they are charged to departments, the
departmental managers are held responsible for these costs and need to be careful about the amount of these
services they consume. Also, where departmental overhead rates are used for product costing, it is necessary to
allocate the costs of support departments to production departments, to calculate departmental overhead rates for
the production departments.
The problems encountered in allocating a proportion of costs of the Prime Infrastructure Group (which changed
its name to Babcock and Brown Infrastructure on 1 July 2005) to its responsibility centre of Dalrymple Bay Coal
Terminal (DBCT) related to the disentanglement of overheads associated with DBCT’s operations from the costs
of other activities within the Prime group. The amount of overhead allocated by Prime to DBCT affected the
overhead cost per loaded tonne sought to be recovered by DBCT in the total price per loaded tonne of coal
charged to terminal users. The terminal users have little option but to use the terminal facility because of its
monopolistic nature. The competition authority, to ensure fair and reasonable access for terminal users, needed
to approve the terms and conditions of terminal access. It sought an independent review of Prime’s method of
allocating overhead to DBCT, which found that Prime had not reliably estimated the amount of overhead
relating to DBCT. This ‘Real life’ example illustrates the impact that overhead cost allocation choices can have,
not only on product costs and product prices, but also industry competitiveness.

5
7.14 Budgeted support department costs should be allocated rather than actual support department costs. If actual
costs were allocated, the activities of the department that provides the services could compromise the results of
the department that uses these services as well as their ability to plan activities. The incentive for cost control in
the department that provides the services may be reduced if they just transfer those excesses to the next
department. The allocation on the basis of budgeted figures highlights the good or poor results in the sourcing
department.
7.15 Under the direct method of support department cost allocation, all support department costs are allocated
directly to the production departments, and none of these costs are allocated to other support departments. Under
the step-down method, a sequence is first established for allocation of support department costs. Then the costs
incurred in the first support department in the sequence are allocated among all other departments that follow in
the sequence, including other support departments. The method proceeds in a similar fashion through the
sequence of support departments, never allocating back to a support department that has had its costs allocated.
Under the reciprocal services method, a system of simultaneous equations is established to reflect the reciprocal
provision of services among support departments. Then, all of the support departments’ costs are allocated
among all of the departments that use the various support departments’ output of services. The reciprocal
services method of support department cost allocation is the only method that fully accounts for the reciprocal
provision of services among departments.
7.16 As stated in the previous answer, under the reciprocal services method all of the support departments’ costs are
allocated among all of the departments that use the various support departments’ output of services. It is the only
method that fully accounts for the reciprocal provision of services among departments. However, this degree of
accuracy may not be necessary for the purpose and sometimes makes very little difference to the resulting
costings. The degree of inaccuracy of the reciprocal and step down methods depends on the amount of overhead
in each cost pool and the level of support provided between departments. As the method of allocating support
department costs becomes more detailed and sophisticated the cost of maintaining the system increases.
7.17 The term reciprocal services refers to two or more support departments providing support services to each other.
In a university, for example, the IT department provides support services to the human resource (HR)
department but the human resource department also provides HR support to the IT department. In fact IT gives
support to all other departments (e.g maintenance, grounds, student administration, faculty administration,
library, security) and receives support from many of them (maintenance of facilities, HR, security).
7.18 The contribution margin statement is used to highlight the separation of variable and fixed costs. The total
contribution margin is equal to sales revenue less the variable cost of goods sold (sometimes called the variable
manufacturing expenses) and the variable selling and administrative expenses. The fixed expenses deducted
below the contribution margin include both fixed manufacturing overhead and fixed selling and administrative
expenses.
In the absorption costing income statement the cost of goods sold expensed, for each month, includes variable
manufacturing costs and the predetermined fixed manufacturing overhead cost applied to products sold. The
expenses deducted after that are the selling and administrative expenses, which include both fixed and variable
components.
7.19 Both absorption and variable costing systems assign direct material, direct labour and variable manufacturing
overhead costs to products in exactly the same way, but they differ over their treatment of fixed manufacturing
overhead. Absorption costing includes fixed manufacturing overhead as a part of product cost. Variable costing
excludes fixed manufacturing overhead from product cost and expenses it in the period in which it is incurred.
The key distinction between variable and absorption costing is the timing of fixed manufacturing overhead
becoming an expense. Eventually, fixed overhead is expensed under both product costing systems. Under
variable costing, fixed overhead is expensed immediately, when it is incurred. Under absorption costing, fixed
overhead is inventoried and not expensed until the accounting period during which the manufactured goods are
sold.

6
7.20 Variable product costs are particularly useful for short-term decisions, such as whether to make or buy a
component, and pricing—especially when variable selling and administrative costs are included. The fixed costs
will be incurred anyway and in the short term they should be disregarded. In making these decisions, the variable
costs provide a good measure of the differential costs that need to be assessed. The information needed for short-
term decision making is discussed in Chapter 19.
Under variable costing, profit is a function of sales. The classification of costs as fixed or variable makes it
simple to project the effects that changes in sales have on profit. Managers find this useful for decision making.
Also, cost volume profit analysis (which we discuss in Chapter 18) requires a variable costing format.
Planned costs must take account of cost behaviour if they are to provide a reliable basis for control. In addition,
the link between sales and profit performance, under variable costing, ensures a performance measure that
managers understand easily.
Fixed costs are an important part of the costs of a business, especially in the modern manufacturing environment.
Variable costing provides a useful perspective of the impact that fixed costs have on profits by bringing them
together and highlighting them, instead of having them scattered throughout the statement.
Absorption product costs include unitised fixed overhead, which can result in suboptimal decisions, especially as
fixed costs are not differential costs in the short term. However, in the modern business environment, with a high
level of fixed overhead, a relatively small percentage of manufacturing costs may be assigned to products under
variable costing. Also, in the longer term a business must cover its fixed costs too, and many managers prefer to
use absorption cost when they make cost-based pricing decisions. They argue that fixed manufacturing overhead
is a necessary cost incurred in the production process. When fixed costs are omitted, the cost of the product is
understated.

7
SOLUTIONS TO EXERCISES
Exercise 7.21 (20 minutes) Predetermined overhead rates for various cost drivers:
manufacturer
NOTE: Budgeted sales revenue, although given in the exercise, is irrelevant to the solution.
1 Predetermined overhead rate =
driver
cost
of
level
budgeted
overhead
ing
manufactur
budgeted
(a) $546 000
15 000 machine hours
= $36.40 per machine hour
(b) $546 000
30 000 direct labour hours
= $18.20 per direct labour hour
(c) $546 000
$630 000*
= $0.867 per direct labour dollar or 86.7%
of direct labour cost
*Budgeted direct labour cost = 30 000 hours x $21
Actual overhead rate = actual manufacturing overhead
actual level of cost driver
(a) $510 000
16 500 machine hours
(b) $510 000
= $18.89 per direct-labour hour
(c) $510 000
$607 500*
= $0.84 per direct labour dollar or 84%
of direct labour cost
*Actual direct-labour cost = 27 000 hours x $22.50
2 Denyer Ltd will not know the data for actual costs and cost drivers until the end of the year. For timely decision
making it is necessary to have estimates and use predetermined rates.
Exercise 7.22 (20 minutes) Predetermined plantwide overhead rate: printing firm
budgeted manufacturing overhead
budgeted level of cost driver
$546 000
15000 machine hours
2 Business cards 600  $36.40 = $21 840
Wedding invitations 300  $36.40 = $10 920
Promotion flyers 200  $36.40 = $7280
3 Actual
manufacturing
overhead
−
Applied
manufacturing
overhead
=
Overapplied or underapplied
overhead
$51 000 − (1100)($36.40) = $10 960 underapplied

8
Exercise 7.23 (30 minutes) Predetermined plantwide overhead rate; alternative cost drivers
budgeted manufacturing overhead
budgeted level of cost driver
(a)
$546 000
= $18.20 per direct labour hour
(b) $546 000 = $1.30 per direct labour dollar or
$420 000 130 of direct labour cost
2 (a) Business cards 800 direct labour hours  $18.20 = $14 560
Wedding invitations 600 direct labour hours  $18.20 = $10 920
Promotion flyers 400 direct labour hours  $18.20 = $7280
(b) Business cards (800 direct labour hours)($22.50)  1.30 = $23 400
Wedding invitations (600 direct labour hours)($22.50)  1.30 = $17 550
Promotion flyers (400 direct labour hours)($22.50)  1.30 = $11 700
3 Actual
manufacturing
overhead
−
Applied
manufacturing
overhead
=
Overapplied or underapplied
overhead
(a) $51 000 − (1800)($18 20) = $18 240 underapplied overhead
(b) $51 000 – (1800)($22.50)(1.30)† = $1650 overapplied overhead
† Actual direct labour cost = 1800  $22.50
In hindsight, direct labour dollars seems the most appropriate cost driver, as it results in the lowest level of
underapplied/overapplied overhead. It therefore appears to better represent the behaviour of overhead costs.
However, it is difficult to make this judgment based on just one month’s data.
Exercise 7.24 (10 minutes) Departmental overhead rates: manufacturer
Applied manufacturing overhead per deluxe saddle and accessory set:
Tanning Department 110 m2
 $8 $ 880
Assembly Department 4 machine hours  $22 88
Saddle Department 45 direct labour hours  $10 450
$1418
Exercise 7.25 (15 minutes) Volume-based cost driver versus ABC: manufacturer
1 Material handling cost per mirror:
$180000
60
( ) 500
( )+ 60
( ) 500
( )
é
ë ù
û*
´ 500 = $1500
* The total number of direct labour hours.
An alternative calculation, since both types of product use the same amount of the cost driver, is the
following:
$180 000
120*
= $1500
* The total number of units (of both types) produced.

9
2 Material handling cost per lens = $1500. The analysis is identical to that given for requirement 1.
3 Material handling cost per mirror:
$180 000
8 + 32
( )
*
´8
60
= $600
* The total number of material moves.
4 Material handling cost per lens:
$180 000
8 + 32
( )
*
´ 32
60
= $2400
* The number of material moves for the lens product line.
Exercise 7.26 (20 minutes) Normal costing; alternative denominator volumes: engineering
firm
1 Practical capacity will be greater than the actual volume of production. Overhead will be underapplied at the end
of the coming year. Job costs and tender quotes will be lower than their actual costs because the overhead cost
will be understated.
2 A change from practical capacity to the budgeted volume will increase the overhead rate and, therefore, increase
job costs and tender quotes. This will make it more difficult to win tenders.
3 If normal volume were used, by the end of this year actual production will be lower than the normal volume, as
the company is expected to be in the ‘trough’ of its normal business cycle. Overhead would be underapplied, but
not by as much as it would have been if practical capacity had been used as the denominator volume. Next year
the company will be in the peak of its two-year cycle and, if normal volume is used as the denominator volume,
overhead will be overapplied. Over the two-year cycle, the underapplied and overapplied overhead should even
out, assuming that actual production behaves as expected over its normal cycle.
Job costs and tender quotes under normal volume will be understated this year and overstated next year,
compared to their actual cost. The average cost over the two years should approximate the actual production
cost.
Exercise 7.27 (10 minutes) Direct method of support department cost allocation: bank
Direct customer service departments using services
Deposit Loan
Provider of service
Cost to be
allocated Proportion Amount Proportion Amount
Human Resources $ 720 000 (50/80) $ 450 000 (30/80) $270 000
Computing 1 200 000 (60/80) 900 000 (20/80) 300 000
Total $ 1 920 000 $1 350 000 $570 000
Grand total $1 920 000

10
Exercise 7.28 (15 minutes) Step-down method of support department cost allocation: bank
Human
resources Computing
Direct customer service departments
using services
Deposit Loan
Costs prior to allocation $720 000 $1 200 000
Allocation of Human Resources
Department costs $720 000 144 000 (2/10) $360 000 (5/10) $216 000 (3/10)
Allocation of Computing
Department costs $1 344 000 1 008 000 (60/80) 336 000 (20/80)
Total costs allocated to each
department $1 368 000 $552 000
Total cost allocated to direct
customer service departments
$ 1 920 000

11
Exercise 7.29 (25 minutes) Reciprocal services method of support department cost
allocation: bank
First, specify equations to express the relationships between the support departments.
Notation: H denotes the total cost of Human Resources
C denotes the total cost of Computing
Equations: H = 720 000 + 0.20C (1)
C = 1 200 000 + 0.20H (2)
Solution of equations: Substitute from equation (2) into equation (1).
H = 720 000 + 0.20(1 200 000 + 0.20H)
= 720 000 + 240 000 +0 .04H
0 .96H = 960 000
H = 1 000 000
Substitute the value of H into equation (2).
C = 1 200 000 + 0.20(1 000 000)
C = 1 400 000
Next, use the calculated total allocation figures in the cost allocation using the reciprocal services method:
Support departments Direct customer service departments
Human Resources Computing Deposit Loan
Traceable costs $720 000 $1 200 000
Allocation of Human
Resources Department costs (1 000 000) 200 000(0.2) $500 000(0.5) $300 000(0.3)
Allocation of Computing
Department costs 280 000(0.2) (1 400 000) 840 000(0.6) 280 000(0.2)
Total cost allocated to each
direct customer service
department $1 340 000 $580 000
Total costs allocated
$1 920 000
Exercise 7.30 (20 minutes) (appendix) Variable and absorption costing
1 Porter Ltd.
Income statement under absorption costing
Year ended 31 December
Sales revenue (36 000 units at $45/unit) $1 620 000
Less: Cost of goods sold (36 000  $35/unit)* 1 260 000
Gross margin 360 000
Less: Selling and administrative expenses:
Variable $108 000
Fixed 30 000
138 000
Net profit $222 000

12
2
PorterLtd
Contribution margin statement under variable costing
Year ended 31 December
Sales revenue (36 000 units at $45/unit) $1 620 000
Less: Variable expenses:
Variable manufacturing costs
(36 000  $27/unit) $972 000
Variable selling & administrative costs 108 000
1 080 000
Contribution margin 540 000
Less: Fixed expenses
Fixed manufacturing overhead $300 000
Fixed selling and administrative expenses 30 000
330 000
Net profit $ 210 000
* Assuming that the production of 25 000 units equalled the normal capacity, the fixed manufacturing overhead per unit is
$8 ($300 000/37 500 units).
3 (a) The absorption costing profit is higher because 1500 units produced are carried forward as finished goods
inventory. Each unit carries forward a cost of $8 for manufacturing overhead that is expensed under
variable costing. Therefore using the absorption costing method the costs in the income statement are
$12 000 lower than when using the contribution margin approach, where total fixed costs are expensed as
period costs.
(b) The short cut method is based on the change in closing inventory, which represents costs incurred in the
current period which will be released against future revenue. Where production is greater than sales (as in
this case) the higher value of closing inventory deducted from the cost of goods available for sale shows a
lower cost of goods sold— and, therefore, a higher gross profit. The calculation for this is shown below.
Increase (decrease)
in units in inventory

fixed manufacturing cost
per unit
= difference in profit
1500 units  $8 = $12 000 more under
absorption costing

13
SOLUTIONS TO PROBLEMS
Problem 7.31 (30 minutes) Plantwide and departmental overhead rates: manufacturer
Instructors please note before setting this problem: The actual overhead of $300 000 is for the whole plant (that is,
Fabrication plus Assembly Departments).
1 Total budgeted overhead = $270 000 + $135 000 = $405 000
Budgeted direct labour hours = 22 500 + 90 000 = 112 500
Predetermined overhead rate = $405 000/112 500 = $3.60 per direct labour hour
2 Laser:
31 500 hours  $3.60 = $113 400 (overhead)
[$113 400 + $90 000 (prime costs)]/11 250 units = $18.08 per unit
Inkjet:
93 000 hours  $3.60 = $334 800 (overhead)
[334 800 + $675 000 (prime costs)]/112 500 units = $8.98 per unit (rounded)
3 Departmental overhead rates:
Fabrication = $270 000/45 000 = $6 per machine hour
Assembly = $135 000/90 000 = $1.50 per direct labour hour
4 Laser:
Applied overhead = (15 000  $6) + (30 000  $1.50) = $135 000
Cost per unit = (135 000 + 90 000)/11 250 = $20 per unit
Inkjet:
Applied overhead = (30 000  $6) + (72 000  1.50) = $288 000
Cost per unit = $(288 000 + 675 000)/112 500 = $8.56 per unit
5 (a) Plantwide overhead rate:
Applied overhead (124 500 labour hours  $3.60) $448 200
Actual overhead 450 000
Underapplied overhead $1 800
(b) Departmental overhead rates:
Applied overhead (45 000 machine hours  $6) $270 000 in Fabrication
Applied overhead (102 000 labour hours  $1.50) $153 000 in Assembly
Total applied overhead $423 000
Actual overhead 450 000
Underapplied overhead $ 27 000
6 One would expect the departmental overhead rates to be the best approach. However, in this case the plantwide
rate results in less underapplied/overapplied overhead. Perhaps direct labour hours is a better cost driver for
‘Fabrication’ than machine hours. As the question does not identify the actual overhead costs for each
department separately, it is not possible to identify which department contributes most to the underapplied
overhead and, therefore, assess the appropriateness of each department’s cost driver.

14
Problem 7.32 (25 minutes) Predetermined plantwide overhead rate; different time periods;
pricing: manufacturer
1 (a)
Estimated
manufacturing
overhead
Estimated direct
labour hours
(DLHs)
Quarterly
predetermined
overhead rate
(per DLH)
First quarter $200 000 25 000 $8.00
Second quarter 160 000 16 000 $10.00
Third quarter 100 000 12 500 $8.00
Fourth quarter 140 000 14 000 $10.00
$600 000 67 500
(b) (i) & (ii) Part A200 produced January April
Direct labour rate per hour $30.00 $30.00
Number of DLHs per unit 20 20
Overhead rate per DLH $8 $10
Direct material 200 $200
Direct labour 600 $600
Overhead 160 $200
$960 $1 000
2 (a) January ($960 x 1.10) $1056
(b) April ($1000 x 1.10) $1100
3
Estimated
manufacturing
overhead
Estimated direct
labour hours
(DLHs)
Quarterly
predetermined
overhead rate
(per DLH)
First quarter $200 000 25 000
Second quarter 160 000 16 000
Third quarter 100 000 12 500
Fourth quarter 140 000 14 000
Totals $600 000 67 500 $8.89 (rounded)
4 (a) & (b) Part A200 produced January April
Direct material $200.00 $200.00
Direct labour 600.00 600.00
Overhead ( 20 DLH x overhead
rate of $8.89 per DLH) 177.80 177.80
$977.80 $977.80

15
5
Price is cost plus 10% markup
i.e. $977.80 x 1.10 $1075.58
6
The annual rate is preferred, as it averages out (that is, normalises) the effects of fluctuations in overhead costs and
cost driver volumes over the year. Notice that with quarterly overhead rates, the firm may underprice its product in
January and overprice it in April. Note also that an increase in prices in two quarters of the year could further decrease
demand for the product, which would then further increase its cost and price per unit.

16
Problem 7.33 (45 minutes) Departmental overhead rates and activity-based costing:
manufacturer
1 (a) Former product costing system: traditional system based on a single volume-related cost driver.
(b) Current product costing system: departmental overhead rates based on different cost drivers.
Support Department
Costs Allocation

17
(c) Contemplated product costing system: activity-based costing.
2 Suggested activity cost pools and activity drivers are shown in 1 (c) above.
Overhead costs are assigned to activity cost pools
associated with significant activities
Overhead
costs
assigned to
activities.

18
Problem 7.34 (50 minutes) Plantwide versus departmental overhead rates; product pricing:
manufacturer
1 Schedule of budgeted overhead costs:
Department A Department B
Variable overhead
A 20 000 direct labour hours  $32........................................ $640 000
B 20 000 direct labour hours  $8......................................... $160 000
Fixed overhead ............................................................................... 400 000 400 000
Total overhead................................................................................ $1 040 000 $560 000
Grand total of budgeted overhead (A + B): $1 600 000
Predetermined overhead rate =
total budgeted overhead
total budgeted direct labour hours
=
$1 600 000
40 000
= $40 per hour
2 Product prices:
Basic
system
Advanced
system
Total cost...................................................................................... $2 200 $3 000
Mark-up, 10% of cost................................................................... 220 300
Price.............................................................................................. $2 420 $3 300
3 Departmental overhead rates:
Department A Department B
Budgeted overhead (from requirement 1)..................................... $1 040 000 $560 000
Budgeted direct-labour hours ....................................................... 20 000 20 000
Predetermined overhead rates....................................................... $1 040 000
20 000 DLHrs
$560 000
20 000 DLHrs
$52 per $28 per
direct labour hour direct labour hour

19
4 Revised product costs:
Basic system Advanced system
Direct material.............................................................................. $800 $1600
Direct labour................................................................................. 600 600
Manufacturing overhead:
Department A:
Basic system 5 x $52 ...................................................... 260
Advanced system 15 x $52 ............................................. 780
Department B:
Basic system 15 x $28 .................................................... 420
Advanced system 5 x $28 ................................................ _ ____ 140
Total $2 080 $3 120
5 Revised product prices:
Total cost...................................................................................... $2 080 $3 120
Mark-up, 10% of cost................................................................... 208 312
Price .......................................................................................... $2 288 $3 432
6 CONSTELLATION TELECOMMMUNICATIONS LTD
Memorandum
Date: Today
To: President, Constellation Telecommunications Ltd
From: I M Student
Subject: Departmental overhead rates
Until now the company has used a single, plantwide overhead rate in calculating product costs. This approach resulted
in a product cost of $2200 for the basic system and a cost of $3000 for the advanced system. Under the company’s
pricing policy of adding a 10 per cent mark-up, this yielded prices of $2420 for the basic system and $3300 for the
advanced system.
When departmental overhead rates are calculated, it is apparent that the two production departments have very different
cost structures. Department A is a relatively expensive department to operate, while Department B is less costly. It is
important to recognise the different rates of cost incurrence in the two departments, because our two products require
different amounts of time in the two departments. The basic system spends most of its time in Department B, the
inexpensive department. The advanced system spends most of its time in Department A, the more expensive
department. Thus, using departmental overhead rates shows that the basic system costs less than we had previously
realised; the advanced system costs more. The revised product costs are $2080 and $3120 for the basic and advanced
systems, respectively. With a 10 per cent mark-up, these revised product costs yield prices of $2288 for the basic
system and $3432 for the advanced system. We have been overpricing the basic system and underpricing the advanced
system.
I recommend that the company switch to a product costing system that incorporates departmental overhead rates.

20
Problem 7.35 (30 minutes) Activity-based costing calculations
1 Cost rates per unit of each cost driver:
(a)
Activity
(b)
Activity
cost pool
(c)
Quantity of
cost driver
(b)  (c)
Cost rate per unit
of cost driver
Machine setup................. $200 000 200 setups $1 000 per setup
Material receiving........... 120 000 80 000 kg $1.50 per kg
Inspection........................ 160 000 1 600 inspections $100 per inspection
Machinery-related........... 840 000 60 000 machine hours $14 per machine hour
Engineering..................... 280 000 7 000 engineering hours $40 per engineering hour
Total overhead ................ $1 600 000
2 Overhead assigned to each product line:
Activity
Overhead assigned to
Basic system line
Overhead assigned to
Advanced system line
Machine setup..........................
$ 50 000 (50 setups  $1000) $150 000 (150 setups  $1000)
Material receiving....................
45 000 (30 000 kg  $1.50) 75 000 (50 000 kg  $1.50)
Inspection.................................
70 000 (700 inspections  $100) 90 000 (900 inspections  $100)
Machinery-related....................
280 000 (20 000 machine hrs  $14) 560 000 (40 000 machine hrs  $14)
Engineering..............................
120 000 (3 000 eng. hrs  $40) 160 000 (4 000 eng. hrs  $40)
Total overhead .........................
$565 000 1 035 000
3 Overhead assigned per unit of each type of printer:
Basic system................................................................................ $565 ($565 000  1000 units)
Advanced system......................................................................... $1035 ($1 035 000  1000 units)
4 Comparison of total product cost assigned to each product under three alternative product costing systems:
Plantwide overhead rate*....................................................... $2 200 $3 000
Departmental overhead rate** ............................................... 2 080 3 120
Activity-based costing†
.......................................................... 1 965 3 235
* From the data given in the preceding problem.
** From the solution to the preceding problem.
†
The assigned overhead as calculated in requirement 3 above, plus the direct material and direct labour costs given in
the data for the preceding problem:
Basic system ........................................................................ $1965 = $1400 + $565
Advanced system................................................................. $3235 = $2200 + $1035

Another Random Scribd Document
with Unrelated Content

7th. It has been said we have exclusive jurisdiction in places
belonging to Congress, and within the ten miles square. We could
erect a bank in any of those places; its influence would extend over
the continent; the principle upon which we founded this power could
not be confined to a particular time or a spot of land. Gentlemen
ridicule the idea that the exercise of a pervading influence and a
general principle should be limited by any particular number of
years, or be confined within a fort. He said, the power of exclusive
legislation in those places was expressly granted, and, under its
influence, the Congress might exercise complete and exclusive
legislation within those limits; that the power was confined to the
places. But if the general powers of this constitution are to be
governed by the same rules of construction, and we are to have no
regard to place, it follows that Congress can exercise exclusive
legislation over this continent. He was astonished at this doctrine. It
would be equally reasonable to say, that France, because within the
limits of her own dominions, and over her own property, she
exercised exclusive legislation, that hence she had a right to legislate
for the world.
8th. The power of removal of officers by the President alone. He
said, it was known he had opposed that doctrine. He left it to be
defended by those who had voted for it. But he hoped Mr. Smith, of
South Carolina, and some other gentlemen, who had opposed it,
would review the arguments they had used upon that occasion.
He observed, after taking a view of these precedents on the danger
of laying down improper principles in legislation, how eagerly men
grasped at the slightest pretexts for exercise of power. He shuddered
to think what a broad and commanding position this Bank will form
for further encroachments.
A gentleman from Massachusetts (Mr. Sedgwick) has said, that
whenever a power is granted, all the known and usual means of
execution are always implied. The idea had been properly examined
by Mr. Giles, but he would ask, if incorporating the subscribers to a
bank was the known and usual means of borrowing money,

especially when the subscribers were not obliged to loan; or of
collecting taxes, when no taxes were levied on the bank.
But gentlemen tell us, that if we tie up the constitution too tightly, it
will break; if we hamper it, we cannot stir; if we do not admit the
doctrine, we cannot legislate at all. And with a kind of triumph, they
say that implication is recognized by the constitution itself in the
clause wherein we have power to make all laws, to carry, &c. He
said, he was ready to meet the gentlemen upon this ground. This
clause was intended to defeat those loose and proud principles of
legislation which had been contended for. It was meant to reduce
legislation to some rule. In fine, it confined the Legislature to those
means that were necessary and proper.
He said, it would not be pretended that it was necessary and proper
for the collection of taxes. Indeed, one gentleman (Mr. Ames) had
attempted to show that the payments in specie could not be made,
if by chance a great quantity of debt suddenly accumulated in a
particular place. But it might be remembered, that this necessity, if it
arrived, was created by the Legislature, and that would be strange
reasoning which broke a good constitution to mend a bad law. No
taxes are to be collected by this bill.
It would not be necessary and proper as a means of borrowing
money, because, first, we do not want to borrow money, and, if we
did, this law, though it may be the probable, is not the necessary
mean; for if it was the interest of the stockholders, they might, and
he believed would, refuse to loan. He said, that the institution might
be defended upon more plausible grounds, if the Bank had been
taxed; or if a condition to loan money to the public had been part of
the plan. Upon what ground, then, do gentlemen stand? They can
only say, that they have implied a great and substantive power in
Congress, which gives to Government, or to individuals, the
influence of fifteen millions of dollars, irrevocably, for twenty years,
with a power of making by-laws, &c., because there is a probability
that this institution may be convenient and agreeable in the
operations of Government. He asked, upon parallel principles, what

might Congress not do? He said, that the gentleman from Virginia,
(Mr. Madison,) pursuing the doctrine into all the forms in which it
might appear, had struck upon several cases which were very
pointed—an incorporation of manufacturers with exclusive privileges;
merchants with the same; a national religion. This a gentleman (Mr.
Ames) has said was unfair and extravagant reasoning; and yet, in five
minutes, the gentleman's own reasoning led him to ask, with
warmth, if Congress could not join stocks with a company to trade to
Nootka? And he condescended to doubt, if the privileges given to
such a company might not be exclusive. He saw clearly, himself, that
his theory led to the latter conclusion; for if expediency, if
convenience, if facility, if fears of war, if preparations for events
which might never happen, can justify an incorporation upon the
present plan, the same suggestions, the same logic, will legalize
incorporations with exclusive privileges. The deductions of the
gentleman from Virginia are sound and right, and cannot be fairly
controverted. Congress may then do any thing. Nay, if the principles
now advocated are right, it is the duty of the Legislature of the
Union to make all laws; not only those that are necessary and proper
to carry the powers of the Government into effect, but all laws which
are convenient, expedient, and beneficial to the United States. Then
where is your constitution! Are we not now sitting, in our sober
discretion, a General Government, without the semblance of
restraint? Yes, said he, we have still a constitution, but where is it to
be found? Is it written? No. Is it among the archives? No. Where is
it? It is found in the sober discretion of the Legislature—it is
registered in the brains of the majority!
He proceeded. I say there is no necessity, there is no occasion, for
this Bank. The States will institute banks which will answer every
purpose. But a distrust of the States is shown in every movement of
Congress—will not this implant distrust also in the States? Will you
gain by this contest? This scheme may give, and I am convinced will
give, partial advantages to the States. In the fair administration of
our Government, no partial advantages can be given; but, by this
bill, a few stockholders may institute banks in particular States, to

their aggrandizement and the oppression of others. This Bank will
swallow up the State banks; it will raise in this country a moneyed
interest at the devotion of Government; it may bribe both States and
individuals. He said, gentlemen asked who would be offended or
hurt by this plan? Have we heard any complaints against it? Have
the newspapers reprobated it? These questions had no influence on
his mind. He said it was one of those sly and subtle movements
which marched silently to its object; the vices of it were at first not
palpable or obvious; but when the people saw a distinction of banks
created—when they viewed with astonishment the train of wealth
which followed individuals, whose sudden exaltation surprised even
the possessors—they would inquire how all this came about? They
will then examine into the powers by which these phenomena have
arisen, and they will find—they will reprobate the falsehood of the
theories of the present day.
He said, that gentlemen had told us of the sudden irruptions of
enemies. When those necessities arrive, it is time enough to make
use of them to break your constitution. But, gentlemen say, upon
emergencies the Bank will loan money. We differ in opinion. I think
when we want it most, the Bank will be most unable and unwilling to
lend. If we are in prosperity, we can borrow money almost any
where; but in adversity, stockholders will avoid us with as much
caution as any other capitalists.
But a gentleman (Mr. Ames) tells us not to be alarmed, the Bank will
not eat up liberty—he said he was not afraid. He was not under any
apprehensions that all the little influence that Congress possessed
would destroy the great spirit of American liberty. The body of the
people would laugh at and ridicule any attempt to enslave them; but
a conduct which had that tendency might arouse alarming passions.
He said, there existed at this moment ill-blood in the United States,
which to quiet he would readily agree to enter into a foreign war.
America with us, we might defy the world. There was but one people
he was afraid of offending. This was America. He was not afraid of
foreign enemies, but the resentment of our own country is always a
subject of serious apprehension. He observed, that there were other

parts of this important and diffusive subject which he might have
touched, but he had fatigued himself and the House.
Mr. Smith (of South Carolina) said, as he had been greatly
misunderstood by the gentleman last up, he wished to explain the
position he had laid down. He had never been so absurd as to
contend, as the gentleman had stated, that whatever the Legislature
thought expedient, was therefore constitutional. He had only argued
that in cases where the question was, whether a law was necessary
and proper to carry a given power into effect, the members of the
Legislature had no other guide but their own judgment, from which
alone they were to determine whether the measure proposed was
necessary and proper to carry the powers vested in Congress into
full effect. If, in such cases, it appeared to them, on solemn
deliberation, that the measure was not prohibited by any part of the
constitution, was not a violation of the rights of any State or
individual, and was peculiarly necessary and proper to carry into
operation certain essential powers of the Government, it was then
not only justifiable on the part of Congress, but it was even their
duty to adopt such measure. That, nevertheless, it was still within
the province of the Judiciary to annul the law, if it should be by them
deemed not to result by fair construction from the powers vested by
the constitution.
Monday, February 7.
Bank of the United States.
The House resumed the consideration of the bill for incorporating
the Bank of the United States.
The question being on the passage of the bill,
Mr. Giles.—In the course of discussing the present important
question, it has been several times insinuated that local motives, and
not a candid and patriotic investigation of the subject upon its

merits, have given rise to that difference of opinion which has been
heretofore manifested in this House. I shall not examine the truth of
this observation, but merely remark, that the causes which may
have produced the arguments against the proposed measure,
whatever they may be, can neither add to, nor take from, their merit
or influence, and, of course, the insinuations might have been
spared without injury to the subject; but so far as the observation
may have been intended to apply to myself, I can truly say, that if a
bias were to influence my conduct, it would rather direct it to favor,
than to oppose the proposed measure. This bias would arise from
two causes: the one from the respect which I entertain for the
judgments of the majority who advocate the measure; the other of a
more serious nature. I have observed with regret a radical difference
of opinion between gentlemen from the Eastern and Southern
States, upon the great Governmental questions, and have been led
to conclude, that the operation of that cause alone might cast
ominous conjecture on the promised success of this much valued
Government. Mutual concessions appear to be necessary to obviate
this effect, and I have always been pleased in manifesting my
disposition to make advances; but from the most careful view of the
arguments in favor of the proposed measure considered under this
impression, they do not seem to me sufficient to establish the
propriety of its adoption, and I am therefore impelled, by the joint
influence of duty and opinion, to be one in the opposition.
A gentleman from Massachusetts (Mr. Ames) prefaced his
observations with this remark, that it is easier to point out defects
and raise objections to any proposed system, than to defend it from
objections, and prove its affirmative propriety, and warned the
House against the effects of arguments of this nature, urged in
opposition to the measures now under consideration. I agree with
the gentleman in this idea in general, but we should reflect that in
the present case the address of the arguments in favor of the
measure is made to one of the strongest affections of the human
mind, the love of dominion; and hence we may justly conclude, that
they will be received and relished with their full and unabated

influence. This reflection appears to me to be at least a counterpoise
to that remark.
The advocates of this bill have been called on, and I conceive with
propriety, to show its constitutionality and expediency, both of which
have been doubted by those of the opposition. In support of the first
position, a multitude of arguments have been adduced, all of which
may be reducible to the following heads; such as are drawn from the
constitution itself; from the incidentality of this authority to the mere
creation and existence of government; from the expediency of the
measure itself; and from precedents of Congress; to which may be
added a similar exercise of authority by Congress, under the former
Confederation.
Observations arising from the constitution itself, were of two kinds.
The right of exercising this authority is either expressed in the
constitution, or deducible from it by necessary implication. One
gentleman only, from Massachusetts, (Mr. Sedgwick,) has ventured to
assert, that, discarding the doctrine of implication, he could show
that the right to exercise the authority contended for was expressly
contained in the constitution. This, I presume, must have been a
mistake in language, because the difference between an express and
an implied authority appears to me to consist in this—in the one
case, the natural import of the words used in granting the authority
would of themselves convey a complete idea to the mind of the
authority granted, without the aid of argument or deduction; in the
other, to convey a complete idea to the mind, the aid of argument
and deduction is found necessary to the usual import of words used;
and that gentleman proceeded with a labored argument to prove,
that the authority was expressly granted, which would have been
totally useless, if his assertion had been just.
[Mr. Sedgwick rose to explain; he never conceived the authority
granted by the express words of the constitution, but absolutely by
necessary implication from different parts of it.]
I shall not contend as to the assertion, but shall proceed to consider
the arguments in favor of the measure upon the doctrine of

implication; which, indeed, are those only which deserve
consideration.
In doing this, I shall consider the authority contended for to apply to
that of granting charters to corporations in general, for I do not
recollect any circumstance, and I believe none has been pretended,
which could vary this case from the general exercise of that
authority. To establish the affirmative of this proposition, arguments
have been drawn from the several parts of the constitution; the
context has been resorted to. "We, the people of the United States,
in order to form a more perfect union, establish justice, ensure
domestic tranquillity, provide for the common defence, promote the
general welfare, and secure the blessings of liberty to ourselves and
our posterity," &c. It has been remarked, that here the ends for
which this Government was established are clearly pointed out; the
means to produce the ends are left to the choice of the Legislature,
and that the incorporation of a bank is one necessary mean to
produce these general ends. It may be observed, in reply, that the
context contemplates every general object of Government whatever;
and if this reasoning were to be conclusive, every object of
Government would be within the authority of Congress, and the
detail of the constitution would have been wholly unnecessary,
further than to designate the several branches of the Government
which were to be intrusted with this unlimited, discretionary choice
of means, to produce these specified ends. The same reasoning
would apply as forcibly to every clause of the constitution,
restraining the authority of Congress to the present case, or to any
one in which the constitution is silent. The only candid construction
arising from the context appears to me to be this; it is designed, and
it is the known office of every member to point out the great objects
proposed to be answered by the subsequent regulations of which
the constitution is composed. These regulations contain the means
by which these objects are presumed to be best answered. These
means consist in a proper distribution of all Governmental rights
between the Government of the United States and the several State
governments, and in fixing limits to the exercise of all authorities

granted to the Government of the United States. The context,
therefore, gives no authority whatever, but only contemplates the
ends for which certain authorities are subsequently given.
Arguments drawn from this source appear to be ineffectual in
themselves, and the reliance of gentlemen upon them indicates a
suspicion and distrust of such as may be drawn from other parts of
the constitution. The advocates of the bill have turned away from
this context, and have applied to the body of the constitution in
search of arguments. They have fixed upon the following clauses, to
all or some one of which they assert the authority contended for is
clearly incidental; the right to lay and collect taxes, &c., &c.; to
provide for the common defence and general welfare, &c.; to borrow
money, &c.; to regulate commerce with foreign nations, &c. The bill
contemplates neither the laying nor collecting taxes, and, of course,
it cannot be included in that clause; indeed, it is not pretended, by
the bill itself, to be at all necessary to produce either of those ends;
the furthest the idea is carried in the bill, is, that it will tend to give a
facility to the collection.
The terms "common defence and general welfare" contain no grant
of any specific authority, and can relate to such only as are
particularly enumerated and specified. "To borrow money."
Gentlemen have relied much upon this clause; their reasoning is,
that a right to incorporate a bank is incidental to that of borrowing
money, because it creates the ability to lend, which is necessary to
effectuate the right to borrow. I am at a loss to discover one single
relation between the right to borrow, and the right to create the
ability to lend, which is necessary to exist between principal and
incident. It appears to me that the incidental authority is paramount
to the principal, for the right of creating the ability to lend is greater
than that of borrowing from a previously existing ability. I should,
therefore, rather conclude that the right to borrow, if there be a
connection at all, would be incidental to the right to grant charters of
incorporation, than the reverse of that proposition, which is the
doctrine contended for by the advocates of the measure. The same
reasoning which would establish a right to create the ability to lend,

would apply more strongly to enforce the will after the ability is
created; because the creator would have a claim of gratitude at least
upon the created ability, which if withheld, perhaps, with justice
might be insisted on. "To regulate commerce with foreign nations."
This is by no means a satisfactory ground for the assumption of this
authority; for if it be deemed a commercial regulation, there is a
clause in the constitution which would absolutely inhibit its exercise.
I allude to that clause which provides that no preference shall be
given by any regulation of commerce or revenue to the ports of one
State over those of another; and it seems to be admitted, that one
principal effect to be produced by the operation of this measure will
be to give a decided commercial preference to this port over every
other in the United States.
Gentlemen finding it difficult to show that necessary relation and
intimate connection between the authority contended for, and any
one of the specified authorities before mentioned, which would be
essential to the establishment of their doctrine, have referred to
what has been generally called the sweeping clause, and have made
deductions from the terms "necessary" and "proper;" they have
observed that certain specified authorities being granted, all others
necessary to their execution follow without any particular
specification. This observation may in general be true, but its fallacy
here consists in its application to this particular case. It cannot be
applied until the exercise of this authority be proved to be
necessarily connected with some one of the previously enumerated
authorities, and here the argument, as well as the fact, fails.
The authority contended for seems to me to be a distinct substantive
branch of legislation, and, perhaps, paramount to any one of the
previously enumerated authorities, and should therefore not be
usurped as an incidental subaltern authority.
I am confirmed in this opinion from the indistinct, confused
conceptions of gentlemen who advocate the measure. They rely
upon the incidentality of this authority to some one of those
particularly specified, and yet have applied it as an incident to

several distinct, unconnected subjects of legislation; and then,
distrusting their own conclusions, or as if the inquiry would be too
troublesome or minute, they leave this ground, and assert that it is
incidental to the result of the whole combined specified authorities.
Gentlemen must, therefore, view this right through different optics,
at different times; or, what I rather believe to be the fact, they have
no distinct view of it at all, the right having no existence.
A gentleman from Massachusetts, (Mr. Sedgwick,) finding the usual
import of the terms used in the constitution to be rather unfavorable
to the doctrines advanced by him, has favored us with a new
exposition of the word "necessary." He says that "necessary," as
applicable to a mean to produce an end, should be construed so as
to produce the greatest quantum of public utility. I have been taught
to conceive that the true exposition of a necessary mean to produce
a given end was that mean without which the end could not be
produced.
The gentleman's reasoning, however, if pursued, will be found to
teem with dangerous effects, and would justify the assumption of
any given authority whatever. Terms are to be so construed as to
produce the greatest degree of public utility. Congress are to be the
judges of this degree of utility. This utility, when decided on, will be
the ground of constitutionality. Hence any measure may be proved
constitutional which Congress may judge to be useful. These
deductions would suborn the constitution itself, and blot out the
great distinguishing characteristic of the free constitutions of
America, as compared with the despotic Governments of Europe,
which consist in having the boundaries of governmental authority
clearly marked out and ascertained.
The exclusive jurisdiction over ten miles square has been adverted to
by one gentleman (Mr. Ames) as a specified authority, to which the
one contended for is suggested to be incidental. He has reasoned in
this manner: Congress possess jurisdiction over ten miles square,
&c.; Congress may therefore establish a bank within the ten miles
square, and, as principle is not applicable to place, Congress may

exercise the same authority any where else. This seems to me to be
an ingenious improvement upon sophistical deduction; the
gentleman, however, should have reflected that the ground upon
which he built the right to exercise this authority was that of
exclusive jurisdiction, and to extend the principle it is necessary to
extend the right of exclusive jurisdiction; without this, the basis of
his argument fails, and the superstructure, however beautiful, must
follow; for the principle, if at all deducible from that source, is
expressly confined to place, and cannot operate beyond it.
I shall now consider the second resource, whence the constitutional
right of exercising the proposed authority is derived; its incidentality
to the mere creation and existence of government. It has been
observed, that in all governments there are certain rights tacitly
granted, and certain other rights retained; that it is impossible, in
framing a constitution, to enumerate every minute governmental
right, and that such an attempt would be chimerical and vain. And
hence the incidentality of this authority to the mere existence of
government is inferred. These observations seem to me to apply to a
government growing out of a state of society, and not to a
government composed of chartered rights from previously existing
governments, or the people of those governments. I have been
taught to consider this as a Federal, not as a consolidated
Government, and am not prepared or disposed at present to
relinquish that idea. A gentleman from New York (Mr. Lawrence) has
remarked, that the Government is consolidated quo ad the powers
granted, and of course quo ad their incidents; but he should first
have shown that the authority contended for is one of those
granted, or incidental to some one of them, before the application
can be made. The observation can have no tendency to establish
either of those positions. What effect would this doctrine, if
admitted, have upon the State governments? And how would it be
relished by them? Their dignity and consequence will not only be
prostrated by it, but their very existence radically subverted. A third
resource of deducing this constitutional authority is resorted to—the
expediency of the proposed measure itself. I presume the great

object of the constitution was to distribute all governmental rights
between the several State Governments and the Government of the
United States; the expediency, therefore, of the exercise of all
constitutional rights, as they relate to State or General Governments,
is properly contemplated and decided by the constitution, and not by
the Governments among which the distribution is made. A
gentleman from South Carolina (Mr. Smith) has said, that the
expediency and constitutionality of the proposed measure cannot be
considered separately, because the constitutionality grows out of the
expediency. This is but candidly unveiling the subject of that
sophistical mask which has been ingeniously thrown over it by some
gentlemen; for all the arguments adduced in favor of the measure,
from whatever source they arise, if pursued, will be found to rush
into the great one of expediency, to bear down all constitutional
provisions, and to end themselves in the unlimited ocean of
despotism.
Several gentlemen have said, that this authority may be safely
exercised, since it does not interfere with the rights of States or
individuals. I think this assertion not very correct; if the States be
constitutionally entitled to the exercise of this authority, it is an
intrusion on their rights to do an act which would eventually destroy
or impede the freest exercise of that authority; for it is totally
immaterial whether the effect be produced by the operation of this,
or by an inhibition in express terms. The States may not only
incorporate banks, but may of right prohibit the circulation of bank
paper within their respective limits; the act, therefore, if it be
intended to have an effectual operation, will certainly infringe this
right, or exist at the mercy of the State governments. This
reasoning, however, places the subject in another point of view a
little singular. It contemplates the authority contended for as vacant
ground, and justifies the tenure by the mere title of occupancy. In
almost all the remarks in favor of the measure, gentlemen seem to
have forgotten the peculiar nature of this Government. It being
composed of mere chartered authorities, all authority not contained
within that charter would, from the nature of the grant, have been

retained to the granting party; and I will venture to assert, that this
opinion was the sine qua non of the adoption and existence of this
Government; but if this opinion had been doubtful, Congress
themselves have made an express declaration in favor of this
construction to the proposed amendments to the constitution.
Gentlemen have inferred a constitutional right to exercise the
authority contended for from a fourth resource—the former usages
and habits of Congress. In affirmance of this argument, several acts
of Congress have been referred to—the power of removal from
office, the government of the Western Territory, the cession from
North Carolina, the purchase of West Point, &c. I shall not examine
into the propriety of these several acts, though I conceive it would
not be difficult to show, that they differ materially, upon
constitutional grounds, from the one now proposed. I shall only
remark, that, if Congress have heretofore been in the usage and
habit of disregarding and violating the constitution, it is high time
that that habit and usage be corrected. I hope and trust that the
people of the United States will not tamely see the only security of
their rights and liberties invaded and violated, but also see one
violation of it with impunity boldly urged as an argument to justify
another.
An instance of a similar exercise of authority by the Congress which
existed under the former Confederation, has been mentioned in
favor of its exercise by the present Congress. The argument has
been, that as the powers of the present Congress are greater than
those of the former Congress, and the former were competent to the
exercise of this right, the present must be more so. It is to be
remarked, that that act was the child of necessity, and that Congress
doubted its legitimacy, and the act itself was never confirmed by a
judicial decision; and it should be also remarked, that the same
Congress did not pretend to possess the right to punish those who
should counterfeit the paper of the Bank, and recommended it to the
States to confirm the act which they had done, and to pass laws for
the purpose of punishing those who should counterfeit the paper,
and it is a little remarkable that this circumstance, which is one of

the most essential to the existence and operation of this act, is
withheld from our view. But as I think arguments drawn from this
source wholly foreign to the subject, I shall make no further remark
upon them.
I shall now suggest a few observations respecting the expediency of
the proposed measure. In doing this, I shall not say any thing as to
the utility of banks in general, nor as to the effects of the banks of
England, Scotland, Holland, &c. I possess not sufficient practical or
theoretical knowledge to justify the inquiry; I shall only point out a
few circumstances, which are peculiarly attached to the government
we are now administering, which might vary the application of
general rules, drawn from governments of a different nature, and
which possess the unquestioned right of granting charters of
incorporation.
In the first place, the right of exercising that authority by the
Government is at least problematical, it is nowhere granted in
express terms; the Legislature, therefore, can have no competent
security against a judicial decision but a dependent or a corrupt
court. I presume that a law to punish with death those who
counterfeit the paper emitted by the Bank will be consequent upon
the existence of this act. Hence a judicial decision will probably be
had of the most serious and awful nature; the life of an individual at
stake on the one hand, an improvident act of the Government on the
other. A distrust arising from this cause will for ever keep the Bank in
jeopardy, and the very first trial of this nature will probably subject
the Bank to a run which it will be unable to withstand; for all
stockholders will require the greatest possible security for their
money, and a distrust of such an institution will be its destruction.
This observation seems to me to have peculiar force, from the great
proportion of paper to that of gold and silver, upon which the Bank is
proposed to be founded. The peculiar relation between the General
and State Governments, will naturally produce a contest for
governmental rights, until long experience shall settle the precise
boundaries between them. The present measure appears to me to
be an unprovoked advance in this scramble for authority, and a mere

experiment how far we may proceed without involving the
opposition of the State Governments. It should be remarked that this
Government is in its childhood; it is therefore unfitted for such bold
and manly enterprises, and policy would dictate that it should wait at
least until it may have become more matured or invigorated. Two
modes of administering this Government present themselves; the
one with mildness and moderation, by keeping within the known
boundaries of the constitution, the other, by the creation and
operation of fiscal mechanism; the first will ensure us the affections
of the people, the only natural and substantial basis of Republican
Governments; the other will arise and exist in oppression and
injustice, will increase the previously existing jealousies of the
people, and must be ultimately discarded, or bring about a radical
change in the nature of our Government. Having suggested these
observations upon the measure in general, I shall now proceed to
point out a few objections to the details of the bill. I think the
authority given to the Bank to purchase and hold lands
objectionable; in the first place I doubt the constitutional right of
Congress to invest such an authority; the lands within the United
States are holden of the individual States, and not of the United
States; and that tenure appears to me to be the true ground upon
which the right to exercise that authority grows. I believe it is
admitted, that although Congress may naturalize a foreigner, they
cannot authorize him to purchase lands; and I think the case at least
as strong, when they first create an artificial person, and then invest
the authority; besides, if we have any reference to the experience of
other countries, we shall find it dangerous to allow incorporated
bodies to hold lands at all. The exercise of that right produced great
oppression in England, and nothing but the masterly activity of an
absolute prince could apply a competent remedy. A gentleman from
Massachusetts (Mr. Sedgwick) has denied that the Bank is invested
with this right. It is true it is confined to the mode of purchasing by
mortgage, but that is the most effectual mode of purchasing, and
the most ruinous to the landholder.

I will merely mention one other objection without a comment—the
authority given to make laws not contrary to law or its own
constitution; but the most objectionable clause is that which limits its
duration, and pledges the faith of the United States that no other
bank shall be established in the mean time, however dangerous and
offensive the present measure might prove in its operation, and
whatever may be the utility and advantage in any other scheme of
banking which experience may suggest. Such a stipulation cannot be
justified but from the most pointed necessity, and from the maturest
deliberation. When I search for the necessity of this measure, it
escapes me; it is not pretended in the bill itself; the chief stimulus
which I can discover to the existence of this measure, is to give
artificial impulse to the value of stock. This is not a sufficient
justification; the subject has not been sufficiently considered, and I
therefore hope it may be postponed to some future session of
Congress; many evils may be avoided by such a conduct, none can
result from it.
Mr. Gerry said, he should principally confine himself to the objections
of the gentleman first up from Virginia, (Mr. Madison,) not from a
disrespect to the observations of other gentlemen in the opposition,
but because he considered their arguments as grafts on the original
stock of those urged by the gentleman alluded to, and if the trunk
fell, its appendages must fall also.
The objects of the bill were to render the fiscal administration
successful, and to give facility to loans on sudden emergencies, and
to benefit trade and industry in general; and that these were objects
of high importance had not been denied, neither had it been
asserted that they ought not, if possible, to be attained.
It is objected, however, that the mode proposed by the bill is
unconstitutional, and the bill itself defective.
The mode proposed is a National Bank; to establish which he
thought Congress were as competent as either House were to
adjourn from day to day.

It is said that Congress have no power relating to this subject,
except what is contained in the clauses for laying and collecting
taxes, imposts, excises, &c.; for borrowing money, and for making all
laws necessary and proper for carrying these powers into effect; and
that these do not authorize the establishment of a National Bank.
To ascertain this, the gentleman from Virginia proposes a candid
interpretation of the constitution, which we shall agree to, and he
offers to assist us with his rules of interpretation, for his good
intentions in doing which we give him full credit; but as he
acknowledges that he has been long decided against the authority of
Congress to establish a bank, and is therefore prejudiced against the
measure; as his rules, being made for the occasion, are the result of
his interpretation, and not his interpretation of the rules; as they are
not sanctioned by law exposition, or approved by experienced
judges of the law, they cannot be considered as a criterion for
regulating the judgment of the House, but may, if admitted, prove
an ignis fatuus that may lead to destruction.
We wish not, however, by establishing our own rules of
interpretation, to enjoy the privilege which is denied to the
gentleman, but will meet him on fair ground, by applying rules which
have the sanction mentioned; and as the learned Judge Blackstone
has laid down such, it is presumed the gentleman from Virginia will
not contend for a preference, or refuse to be tried by this standard.
The Judge observes: "That the fairest and most rational method to
interpret the will of the legislator is by exploring his intentions at the
time when the law was made by signs the most natural and
probable; and these signs are either the words, the context, the
subject-matter, the effect and consequence, or the spirit and reason
of the law." With respect to words, the Judge observes, that "they
are generally understood in their usual and most ordinary
signification, not so much regarding the grammar as their general
and popular use."
The gentlemen on different sides of the question do not disagree
with respect to the meaning of the terms taxes, duties, imposts,

excises, &c., or of borrowing money, but of the word necessary: and
the question is, what is the general and popular meaning of this
term? Perhaps the answer to the question will be truly this, that in a
general and popular one the word does not admit of a definite
meaning, but that this varies according to the subject and
circumstances. With respect to the subject for instance, if the
people, speaking of a garrison besieged by a superior force, and
without provisions, or a prospect of relief, should say it was under
the necessity of surrendering, they would mean a physical necessity,
for troops cannot subsist long without provisions; but if speaking of
a debtor, the people should say he was frightened by his creditor
and then reduced to the necessity of paying his debts, they would
mean a legal, which is very different from a physical necessity; for
although the debtor, by refusing payment, might be confined, he
would be allowed subsistence, and the necessity he was under to
pay his debts would not extend beyond his confinement. Again, if it
should be said that a client is under the necessity of giving to his
lawyer more than legal fees, the general popular meaning of
necessity would, in this instance, be very different from that in the
other; the necessity would neither be physical nor legal, but artificial,
or, if I may be allowed the expression, a long-robe necessity.
The meaning of the word "necessary," varies also according to
circumstances; for although Congress have power to levy and collect
taxes, duties, &c., to borrow money, and to determine the time,
quantum, mode, and every regulation necessary and proper for
supplying the Treasury, yet the people would apply a different
meaning to the word "necessary" under different circumstances. For
instance, without a sufficiency of precious metals for a medium, laws
creating an artificial medium would be generally thought necessary
for carrying into effect the power to levy and collect taxes; but if
there was a sufficiency of such metals, those laws would not
generally be thought necessary. Again, if specie was scarce, and the
credit of the Government low, collateral measures would be by the
people thought necessary for obtaining public loans: but not so, if
the case was reversed. Or, if part of the States should be invaded

and overrun by an enemy, it would be thought necessary to levy on
the rest heavy taxes, and collect them in a short period, and to take
stock, grain, and other articles from the citizens without their
consent, for the common defence; but in a time of peace and safety,
such measures would be supposed unnecessary. Instances may be
multiplied in other respects; but it is conceived that these are
sufficient to show that the popular and general meaning of the word
"necessary," varies according to the subject and circumstances.
The second rule of interpretation relates to the context, and the
Judge conceives that "if words are still dubious, we may establish
their meaning by the context; thus the preamble is often called in to
help the construction of an act of Parliament." The constitution, in
the present case, is the great law of the people, who are themselves
the sovereign Legislature, and the preamble is in these words: "We,
the people of the United States, in order to form a more perfect
union, establish justice, insure domestic tranquillity, provide for the
common defence, promote the general welfare, and secure the
blessings of liberty to ourselves and our posterity, do ordain and
establish this constitution for the United States of America."
These are the objects for which the constitution was established,
and in administering it we should always keep them in view. And
here it is remarkable, that although the common defence and
general welfare are held up in the preamble among the primary
objects of attention, they are again mentioned in the eighth section
of the first article, whereby we are enjoined in levying taxes, duties,
&c., particularly to regard the common defence and general welfare;
indeed common sense dictates the measure; for the security of our
property, families, and liberty—of every thing dear to us, depends on
our ability to defend them. The means, therefore, for attaining this
object, we ought not to omit a year, month, or even a day, if we
could avoid it; and we are never provided for defence unless
prepared for sudden emergencies. Should Government be surprised
in this case, it would be as dishonorable as for a general to be
surprised in a state of warfare, and the event to the community may
be much more fatal. If provision then for sudden emergencies is

indispensable, it must be evident that it will depend in a great
measure on the ability of the Government to command, at all times,
for this purpose, a sufficient sum of money, which is justly
denominated the sinews of war; and how is this to be effected? By
emissions of bills of credit? During the Revolution, bills of credit, it
must be acknowledged, have done wonders; they have, in conflict
with the banks, Treasury, and public credit of Great Britain, risen
superior to them all, and have since died a natural death. We have
honored them with a funeral pile; we now bid peace to their manes,
and devoutly hope that bills of credit will for ever be extinct in the
United States. Are we to depend, then, on taxes for commanding
money in cases of urgent necessity? These, as has been shown by
other gentlemen, will be too slow in their operations, unless, indeed,
we should levy a tax for drawing into and locking up in the Treasury
three or four millions of dollars; a law which would be universally
considered as unnecessary and improper.
By loans, and loans only, can provision be made for sudden
emergencies; but if loans should be made previously to an
emergency, the people would be unnecessarily burdened by the
interest thereof, and most of the other evils would ensue that would
arise from previous taxes; and if they were to be made at an
emergency, without previous arrangements, of whom are we to
borrow? Of individuals? These cannot be depended on, as has been
fully proved by our own experience at the commencement of the
Revolution. Are we to apply to the banks already established in the
States for loans? These can no more be depended upon than
individuals; for stockholders having not more attachment to
Government than other citizens, would, in cases of public danger,
attend to the preservation of their property by other means than
loaning it to Government. And moreover, the united capitals of all
the banks existing in the Union would be insufficient for
Government, for they do not amount to a million and a half of
dollars, and only a part in this could, in any case, be reasonably
expected on loan.

Are we to apply to foreign banks or individuals? These, as has been
shown, are too remote; and if not, we have not been able, without
the assistance of an ally, to obtain foreign loans during the war, and
perhaps the power on whose assistance we may rely would be
hostile to us. Such dependence, then, as has been stated, would
necessarily leave us in a deplorable state; and it must be evident
that a previous arrangement to aid loans in cases of sudden
emergency is necessary and proper in the general and popular use
of the term, inasmuch as any other measure that Congress can
adopt would be inadequate to the purpose of common defence; and
what previous arrangement can we make so proper as that of a
National Bank? If gentlemen in the opposition know of any, let them
produce it, and let the merits of it be investigated; for it is
unreasonable to propose a rejection of this plan without producing a
better. The plan proposed by the Secretary of the Treasury, which is
now the subject of discussion, does honor, like all his other
measures, to his head and heart; it will be mutually beneficial to the
stockholders and to Government, and consequently so to the people.
The stockholders by this plan will be deeply interested in supporting
Government; because three-quarters of their capital, consisting of
funded certificates, depend on the existence of Government, which
therefore is the prop of their capital, the main pillar that supports
the bank. Again, the credit of Government, which is immaterial to
the other banks, is essential to the National Bank, for the annual
interest of three-quarters of its capital, which must form a great
share of its profits, will depend altogether on the credit of
Government, and produce, on the part of the stockholders, the
strongest attachment to it. On the other hand, it will be the interest
of Government to support the Bank, as well on account of the
benefits which the public will generally derive from the institution,
and the profits arising from the shares of Government in the stock
which will be hereafter noticed, as of the supplies of money which it
will be for the interest of the Bank to furnish in cases of urgent
necessity. Whenever these exist, Congress may lay a tax for
supplying the Treasury, and anticipate it with certainty by means of
the National Bank. It being then our duty to provide for the common

defence in cases of emergency, the provision must evidently be
made by taxes, loans, or by arrangements for obtaining the latter on
the earliest notice; and previous taxes and loans being oppressive,
improper, and unnecessary, the arrangements for aiding loans
become indispensable, and a bank consequently necessary and
constitutional.
The third rule of the Judge, relative to the "subject-matter" of a law,
it is unnecessary to apply, because the members agree in their ideas
relative to the meaning of the terms taxes, duties, loans, &c.
The fourth rule, which relates to "effects and consequences," is
important; and here the learned Judge observes that "as to effects
and consequences, the rule is, where the words bear none, or a very
absurd signification, if literally understood, we must a little deviate
from the received sense of them." In the present case, the
gentlemen in the opposition generally, as well as the gentleman first
up from Virginia, give the whole clause by which Congress are
authorized "to make all laws necessary and proper," &c., no meaning
whatever; for they say, the former Congress had the same power
under the Confederation without this clause as the present Congress
have with it. The Federalist is quoted on this occasion, but although
the author of it discovered great ingenuity, this part of his
performance I consider as a political heresy. His doctrine, indeed,
was calculated to lull the consciences of those who differed in
opinion with him at that time; and having accomplished his object,
he is probably desirous that it may die with the opposition itself. The
rule in this case says, that where the words bear no signification, we
must deviate a little; and as this deviation cannot be made by giving
the words less than no meaning, it must be made by a more liberal
construction than is given by gentlemen in the opposition. Thus their
artillery is turned on themselves, for their own interpretation is an
argument against itself.
The last mentioned rule relates to the spirit and reason of the law,
and the Judge is of opinion "that the most universal and effectual
way of discovering the true meaning of a law, when the words are

dubious, is by considering the reason and spirit of it, or the cause
which moved the Legislature to enact it". The causes which
produced the constitution were an imperfect union, want of public
and private justice, internal commotions, a defenceless community,
neglect of the public welfare, and danger to our liberties. These are
known to be the causes not only by the preamble of the constitution,
but also from our own knowledge of the history of the times that
preceded the establishment of it. If these weighty causes produced
the constitution, and it not only gives power for removing them, but
also authorizes Congress to make all laws necessary and proper for
carrying these powers into effect, shall we listen to assertions that
these words have no meaning, and that this constitution has not
more energy than the old? Shall we thus unnerve the Government,
leave the Union, as it was under the Confederation, defenceless
against a banditti of Creek Indians, and thus relinquish the
protection of its citizens? Or shall we, by a candid and liberal
construction of the powers expressed in the constitution, promote
the great and important objects thereof? Each member must
determine for himself; I shall without hesitation choose the latter,
and leave the people and States to determine whether or not I am
pursuing their true interest. If it is inquired where we are to draw
the line of a liberal construction, I will also inquire where the line of
restriction is to be drawn? The interpretation of the constitution, like
the prerogative of a sovereign, may be abused; but from hence the
disuse of either cannot be inferred. In the exercise of prerogative
the minister is responsible for his advice to his sovereign, and the
members of either House are responsible to their constituents for
their conduct in construing the constitution. We act at our peril; if
our conduct is directed to the attainment of the great objects of
Government, it will be approved, and not otherwise; but this cannot
operate as a reason to prevent our discharging the trusts reposed in
us.
Let us now compare the different modes of reasoning on this
subject, and determine which is right, for both cannot be.

The gentleman from Virginia (Mr. Madison) has urged the dangerous
tendency of a liberal construction; but which is most dangerous, a
liberal or a destructive interpretation? The liberty we have taken in
interpreting the constitution, we conceive to be necessary, and it
cannot be denied to be useful in attaining the objects of it; but
whilst he denies us this liberty, he grants to himself a right to annul
a part, and a very important part of the constitution. The same
principle that will authorize a destruction of part, will authorize the
destruction of the whole of the constitution; and if gentlemen have a
right to make such rules, they have an equal right to make others
for enlarging the powers of the constitution, and indeed of forming a
despotism. Thus, if we take the gentleman for our pilot, we shall be
wrecked on the reef which he cautions us to avoid.
The gentleman has referred us to the last article of the amendments
proposed to the constitution by Congress, which provides that the
powers not delegated to Congress, or prohibited to the States, shall
rest in them or the people; and the question is, what powers are
delegated? Does the gentleman conceive that such only are
delegated as are expressed? If so, he must admit that our whole
code of laws is unconstitutional. This he disavows, and yields to the
necessity of interpretation, which, by a fair and candid application of
established rules of construction to the constitution, authorizes, as
has been shown, the measure under consideration.
The usage of Congress has also been referred to; and if we look at
their acts under the existing constitution, we shall find they are
generally the result of a liberal construction. I will mention but two.
The first relates to the establishment of the Executive Departments,
and gives to the President the power of removing officers. As the
constitution is silent on this subject, the power mentioned, by the
gentleman's own reasoning, is vested in the States or the people;
he, however, contended for an assumption of the power, and when
assumed, urged that it should be vested in the President, although,
like the power of appointment, it was by a respectable minority in
both Houses conceived that it should have been vested in the
President and Senate. His rule of interpretation then was therefore

more liberal than it is now. In the other case, Congress determined
by law, with the sanction of the President, when and where they
should hold their next session, although the constitution provides
that this power should rest solely in the two Houses. The gentleman
also advocated this measure, and yet appears to be apprehensive of
the consequences that may result from a construction of the
constitution which admits of a National Bank. But from which of
these measures is danger to be apprehended? The only danger from
our interpretation would be the exercise by Congress of a general
power to form corporations; but the dangers resulting from the
gentleman's interpretations, in the cases alluded to, are very
different; for what may we not apprehend from the precedent of
having assumed a power on which the constitution was silent, and
from having annexed it to the Supreme Executive? If we have this
right in one instance, we may extend it to others, and make him a
despot. And here I think it necessary to declare, that such is my
confidence in the wisdom, integrity, and justice of the Chief
Magistrate, as that I should be at ease, if my life, liberty, and
property were at his disposal; but this is a trust which I am not
authorized to make for my constituents; and as his successors in
office will possess equal powers, but may not possess equal virtues,
caution with respect to them is necessary. Again, what may be the
result of the precedent relating to the session of Congress? If we
had a right by law to determine where the next Congress should
hold their session, one Congress may oblige another to sit in
Kentucky, or in the intended State Yazoo, under the protection of a
Choctaw chief, or his Excellency, Governor Tallan. It must therefore
be evident that the usage of Congress in both instances is against
the gentleman, and that the dangers from the precedent of
establishing a bank are comparatively small to those resulting from
the other measures referred to.
The gentleman from Virginia has endeavored to support his
interpretation of the constitution by the sense of the Federal
Convention; but how is this to be obtained? By applying proper rules
of interpretation? If so, the sense of the Convention is in favor of the

bill; or are we to depend on the memory of the gentleman for a
history of their debates, and from thence to collect their sense? This
would be improper, because the memories of different gentlemen
would probably vary, as they had already done, with respect to those
facts; and if not, the opinions of the individual members who
debated are not to be considered as the opinions of the Convention.
Indeed, if they were, no motion was made in that Convention, and
therefore none could be rejected for establishing a National Bank;
and the measure which the gentleman has referred to was a
proposition merely to enable Congress to erect commercial
corporations, which was, and always ought to be, negatived.
The gentleman's arguments respecting the sense of the State
Conventions have as little force as those relating to the Federal
Convention. The debates of the State Conventions, as published by
the short-hand writers, were generally partial and mutilated; in this,
if the publications are to be relied on, the arguments were all on one
side of the question; for there is not in the record, which is said to
contain the Pennsylvania debates, a word against the ratification of
the constitution; although we all know that arguments were warmly
urged on both sides.
The gentleman has quoted the opinions, as recorded in the debates
of this State and North Carolina, of two of our learned judges; but
the speech of one member is not to be considered as expressing the
sense of a convention; and if it was, we have no record which can
be depended on of such speeches. Indeed, had even this been the
case, the Union was at that time divided into two great parties, one
of which feared the loss of the Union if the constitution was not
ratified unconditionally, and the other the loss of our liberties if it
was. The object on either side was so important as perhaps to
induce the parties to depart from candor, and to call in the aid of art,
flattery, professions of friendship, promises of office, and even good
cheer; and when these failed, the Federal Bull was published,
denouncing political death and destruction to anti-federal infidels.
Under such circumstances, the opinions of great men ought not to

be considered as authorities, and in many instances could not be
recognized by themselves.
Mr. G. then observing that the sense of the States respecting a bank
would be best ascertained by their legislative acts, showed, from the
journals of Congress, that when restrained by the Confederation
from exercising any powers but what were expressly delegated,
Congress had, without any authority, established a bank whose
capital might extend to ten millions of dollars; and had not only
pledged the faith of the Union not to erect any other, but had
recommended it to the States to prohibit any State establishment of
the kind, and had also determined that the bank bills should be
receivable in the taxes and duties of every State. That the States did
not remonstrate against, or tacitly acquiesce in, but actually
supported the measures of Congress relative to the bank, whilst the
war continued, and after the peace. That this was the strongest
evidence the States could give that they thought the measure
salutary, and had no objection to it on the ground of its being
unconstitutional. He then urged, that if the States and the people at
large had no objection to a bank in that case, they could not in this;
and inquired whether there was any evidence of their disapprobation
of such an institution in the debates of their Conventions or
propositions for amendments? To this he answered in the negative,
and urged, that whilst the Conventions were silent on the subject,
and had no objections to such a measure, several of them had
proposed amendments to the constitution for restraining Congress
from establishing commercial corporations; which evinced their
disapprobation of such institutions, and admitted at the same time,
in some degree, the power of Congress, under the existing
constitution, to form them.
Mr. G. then showed, that as a monopoly had been urged as an
objection to the bill, no such consequence could result from it; for
the bill does not restrain State or private banks, or even individuals,
from negotiations of a similar nature with those permitted to the
stockholders; nor does it restrain the States from forming similar
corporations. This plan has not a feature of monopoly, and the

gentlemen who oppose it contend for a bank which, according to its
original institution, was founded in monopoly.
He then answered the arguments urged against the authority of
Congress to enable corporations to hold lands, when they had no
power themselves of purchasing and holding land; and showed, that
although Congress are restrained from purchasing lands, (except in
certain cases,) and from exercising over the same exclusive
legislation, yet that they may hold lands obtained by execution,
conquest, and by other means as well as by those clauses of the
constitution which relate to lands now belonging to the Union; and
that Congress had often invested others with powers which they
themselves could not exercise.
He then noticed the argument, that, by a law of Virginia, notes
payable to the bearer, or order, would not circulate in that State, and
observed that this law could not be supposed to extend to bank
notes; and if it did, it would be null and void, because the
constitution of the Union, and laws, made in pursuance thereof,
were paramount to the laws and constitutions of the several States.
Having considered the arguments against the constitutionality of the
bill, he entered into the policy and utility of the measure.
Tuesday, February 8.
Bank of the United States.
The House resumed the consideration of the bill for incorporating
the Bank of the United States.
The question still being on the passage of the bill,
Mr. Vining apologized for rising to offer his sentiments on this
subject, which had been already so ably discussed; but considering
the nature of the objections as arising from constitutional principles,
it had acquired an importance which would justify his troubling the
House with some remarks.

He began by noticing the leading argument of Mr. Madison respecting
the sense of the Continental Convention on the power proposed to
be exercised by Congress in this bill. He showed that the opinion of
the gentleman, in this instance, was, if not singular, different from
that of his contemporaries; at least a similar objection had not been
started by those gentlemen of the Senate, who had been members
of the Convention; but granting that the opinion of the gentleman
from Virginia had been the full sense of the members of the
Convention, their opinion at that day, he observed, is not a sufficient
authority by which for Congress at the present time to construe the
constitution.
Mr. V., in explaining the powers proposed by the bill to be given to
the corporation of the Bank, adverted to the particular power of
"making rules and regulations not contrary to law." He showed that
this term law means the common law; and alluded to the inquiry of
Mr. Madison, as to what law was intended by this clause, who, in
answering his own question, said, "that if the laws of the United
States were intended, the power contemplated was dangerous and
unconstitutional, as those laws were very few in number."
Mr. V. observed, that the restriction contended for by the gentleman
as the result of his objection, would annihilate the most essential
rights and privileges of the citizens of the United States. He then
observed, a corporation is nothing more than constituting a body
with powers to effect certain objects in a combined capacity, which
an individual may do in his individual capacity, agreeable to the
usage and customs of common law.
Adverting to the act by which the United States became a free and
independent nation, he said, from that declaration, solemnly
recognized at home and abroad, they derive all the powers
appertaining to a nation thus circumstanced, and consequently the
power under consideration. He traced the origin of corporations to
the time of Numa, the first of which was for agricultural purposes;
they were afterwards extended to other objects; and from that day
to this, all civilized and independent nations have been in the

practice of creating them; and what do they amount to but this—
enabling a number of persons, in a combined capacity, to do that to
a more certain effect than an individual may do; but subject to the
control of common law, in all its regulations and transactions.
On the doctrine of construction, as applied to the constitution, he
observed, that on some occasions the constitution is like the
sensitive plant, which shrinks from the smallest touch; on others it is
like the sturdy oak, which braves the force of thunder. He referred to
the act containing the power of removability; in which the utmost
latitude of construing the constitution was contended for and
adopted; and, said he, the funding system cannot be defended on
any other principle than of implication.
He then inquired, of what right does this incorporation deprive a
single citizen? And can an act possibly meet the disapprobation of a
single person which does not infringe his rights, and which puts
money into his pocket? I think not. He insisted that the power of
Congress alone was equal to establishing a bank competent to
creating a currency which shall pervade all parts of the Union; the
paper of the State banks cannot circulate beyond the bounds of the
particular States.
From the restrictions to the Government contended for by the
opposers of the bill, he compared the constitution to a horse finely
proportioned in every respect to the eye, and elegantly caparisoned,
but deficient in one, and the most essential requisite, that of ability
to carry the owner to his journey's end; he had rather, he said,
mount the old Confederation, and drag on in the old way, than be
amused with the appearance of a Government so essentially
defective.
Mr. Madison observed, that the present is a question which ought to
be conducted with moderation and candor; and, therefore, there is
no occasion to have recourse to those tragic representations which
have been adduced. Warmth and passion should be excluded from
the discussion of a subject which ought to depend on the cool
dictates of reason for its decision.

Welcome to our website – the ideal destination for book lovers and
knowledge seekers. With a mission to inspire endlessly, we offer a
vast collection of books, ranging from classic literary works to
specialized publications, self-development books, and children's
literature. Each book is a new journey of discovery, expanding
knowledge and enriching the soul of the reade
Our website is not just a platform for buying books, but a bridge
connecting readers to the timeless values of culture and wisdom. With
an elegant, user-friendly interface and an intelligent search system,
we are committed to providing a quick and convenient shopping
experience. Additionally, our special promotions and home delivery
services ensure that you save time and fully enjoy the joy of reading.
Let us accompany you on the journey of exploring knowledge and
personal growth!
testbankdeal.com

Management Accounting Information for Managing and Creating Value 7th Edition Smith Solutions Manual

More Related Content

Similar to Management Accounting Information for Managing and Creating Value 7th Edition Smith Solutions Manual (20)

Recently uploaded (20)

Management Accounting Information for Managing and Creating Value 7th Edition Smith Solutions Manual