Chapter C: E. Knoeppel (4)

There are two special advantages in having the shop orders numbered. Each foreman knows, when he receives his order, how many operations are ahead of his own and how many follow, and can lay out his work accordingly. It does not always follow, however, that because one foreman receives order No. 3, two other operations must be completed before his own can be started. Each shop order may call for the manufacture of a different part, to be sent to the assembly shop, but if one of these parts is in stock, no order is issued. The foreman receiving order No. 2, when his number naturally would be 3, knows that one of the parts is in stock and that his operation must be hurried accordingly.

The employes in the cost department find the numbering system invaluable, for it enables them to tell how many operations there are on a job; also operations which have been completed. This information is of considerable assistance in tracing orders through the shop.

The shop order shown in Fig. 43 answers the same purpose as the form shown in Fig. 42. Instead of the system of numbering the order copies, the plan of inserting the names of all shops is followed. Following the name of each shop is the name of the operation to be performed. This also enables the shop foreman to so lay out his work that the order can be handled promptly when it reaches his shop.

=25. Work Orders.= The work order is the written instruction of the foreman to the workman to do certain work. As a rule, this order is made on the production time card, as shown in preceding pages. Sometimes, however, it is unnecessary to give more explicit directions than can be written on a small card, which makes it advisable to issue a special order.

In certain classes of work, also, it is advisable to use one work order for a job which is to pass through the hands of several men. Such a work order is shown in Fig. 44. This order shows the numbers of the men and machines to which the work is to go. Another class of work for which special orders should be issued is outside repair work──as plumbing, steam fitting, electrical repairs, etc.

=26. Standing Orders.= Manufacturing is fast developing into a system of producing standard parts to be assembled into complete machines and appliances. Every part that goes into a machine is made from a standard pattern and is interchangeable with the same part in every other machine of the same style made in the same shop. It is no longer necessary to design each machine, and each part required to fill an order──the parts are manufactured in large quantities and carried in stock till needed. An order from a customer may require the manufacture of one special part, the balance consisting of parts to be assembled.

The manufacture of parts as standard units is not an accounting problem, but the accounting department and the manufacturing departments must coöperate in maintaining proper records of the manufacture of those parts. The manufacture of one lot of standard units involves the same operations whenever the same unit is made. Adopting this principle to accounting, it is advisable to establish standards in respect to orders. Whenever the same standard part is needed, the order should be for the same quantity; this, of course, after a standard quantity has been established. When units and quantities have been standardized, order numbers should be made standard──whenever the same work is to be done the _same order number_ should be used. If this plan is followed, orders are soon recognized by number──and the order number informs the foreman as to the work required.

Series of order numbers should be assigned for different classes of work. Numbers 1 to 100 might represent regular plant maintenance and repair orders; numbers 101 to 200, plant construction and special repair orders; numbers 201 to 400, the manufacture of special tools; numbers 401 to 1000, the manufacture of parts; numbers 1001 to 1500, assembling or production orders for complete machines. Shop orders can be distinguished by a second series of numbers starting at, say 5000.

Illustrating the above, the superintendent of a typewriter factory might receive order number 1007, meaning that he is to assemble 1000 No. 7 typewriters. His assembling order to the foreman would bear the same number. After the parts have been drawn from the parts storeroom, it may be found that the stock of certain parts is running low. Production orders are issued for parts, No. 417 being the number for frames for No. 7 machine. The shop orders may bear the numbers 5060─_a_, 5060─_b_, and 5060─_c_, _a_ being the order for the foundry, _b_, the order for the machine shop, and _c_, the order for the finishing department.

As to expense orders and construction orders, it is very necessary that the work to be charged against each order number be clearly specified. When the expenditure involved exceeds a certain amount, or where the work is of a special nature, a special order should be required. Explicit instructions for charging all expense items should be given to each foreman, preferably in printed form──or in typewritten form when the number of foremen is small. Many concerns issue printed instruction books containing the order numbers and specifications, with any rules that may be in force governing the conduct of employes, for general distribution among employes.

RECORDS OF MANUFACTURING ORDERS

=27.= An essential record in any system of cost or factory accounting, is a record of manufacturing orders. A system of records shouldbe maintained, which will show the exact number and nature of the orders issued to the shop or factory, and from which it will be possible to locate every order──to determine in what stage each order is, and to estimate closely the date of completion.

Such records are equal in importance to records of material, both raw and partly finished, in store at all times. Without them, it is impossible to obtain authentic information about work in process. Orders are certain to be side─tracked, and it is extremely difficult to estimate, with any degree of accuracy, delivery dates for either new or old orders.

The records should be so complete that it will be literally possible to run the business from the office──without calling foremen from the shops, who must return and investigate the condition of an order before an intelligent answer can be given. The manager who can conduct his business from the office is following modern ideas; he is far─seeing──not lucky──for this condition is the result of carefully made plans to insure records that will show him exactly what he wants to know.

Along the line of running the business from the office, Mr. F. E. Webner, in an article in the _Engineering Magazine_, cites an apt illustration. Two very large corporations with a common line of product were concerned. Each of these in turn was asked verbally by an executive officer of a concern which is a large user of the product, as to what delivery could be made on a stated quantity of goods. One concern used the long─distance telephone to a number of its plants; the other concern consulted records within its office and was able to give a decisive reply within half an hour, and to know just which of its works was best able to turn out the goods. The first concern had a number of superintendents on edge looking up data and could not give a positive answer short of two days.

As in every other department of a business, the expense of maintaining an adequate system of order records in the manufacturing departments is infinitesimal, when compared with the results obtained. A single contract lost for the lack of needed information may mean the loss of a valuable customer, the profit on whose business would pay the cost of an adequate system many times over.

=28. Manufacturing Order Register.= The form of the manufacturing order register necessarily depends on the nature of the business, the product, and the number of operations or departments through which an order must pass. It need not be complicated──simple forms always are to be preferred──the main thing is that all orders be so recorded as to be readily located.

A simple and convenient form for a register of manufacturing orders is shown in Fig. 45. This should be in loose leaf, a sheet being used for each style or size of machine, part or piece manufactured. If, for instance, a typewriter is made in five styles, five sheets would be used──one for each style. Separate sheets would also be used for each part──as many sheets for each as there are sizes.

The sheets should be indexed under the names of the parts and those in each division arranged in the order of sizes. Supposing type bars to be made in ten sizes──numbers 191 to 200──the sheets would be filed in the order of these numbers. Should the industry be one in which orders are issued to assemble parts into complete machines, the sheets on which assembling orders are recorded should be filed with a separate index, but may be kept in the same binder. It is also advisable to use sheets of a different color for these orders.

The heading of this form, Fig. 45, shows the name of the part, the machine on which it is used, the drawing number, pattern number, and style or part number. Orders to manufacture are entered in the columns at the left of the body of the form, giving the date, order number, quantity ordered, and total ordered to date──that is, if 500 parts are ordered on the 10th and 300 on the 25th, the sum of the two, 800, would be entered in the total column. Following the order record columns are columns for the departments, the form illustrated being designed for a furniture business. Under the heading for each department, a daily record is made of the quantity received, quantity delivered to the next department or to stock, and balance in the department, the latter being in an uncompleted state. This form can be adapted to almost any class of manufacture by a proper arrangement of departmental columns.

In most all industries, it is practical to keep a continuous record of all manufacturing orders; sometimes it is best to keep a record for each order. A form of this class, designed for the use of a machine shop, is shown in Fig. 46. This form shows the progress of a single order through all of the departments. A card is used in this case, both sides being required to accommodate the number of operations, and they are indexed by order numbers.

=29. Tracing the Order.= The system of tracing orders through the shop or factory is very important and should be as nearly automatic in operation as possible. There may be many orders which need not necessarily be traced, but a system that will automatically keep the office informed on the progress of _all_ orders, will pay for itself in the time saved in tracing a single order without proper records. To attempt to find the exact condition of work in progress without a tracing and recording system, is not alone expensive, but unsatisfactory in results; the degree of accuracy is measured by the ability of foreman to make accurate estimates. Practically, foremen should be best able to estimate the time required to complete a job, but their estimates will be found to vary greatly on similar jobs; time standards are more accurately determined by a comparison of the records of past performances.

When practical──and it has been found practical in many industries──a transfer office should be maintained in the works. This office should be in charge of a transfer clerk, who will record all transfers of work in progress from one department to another. Theoretically, all work should pass the transfer office. In the manufacture of small parts, this can be done without loss of time, provided the transfer office is centrally located. When heavy work is the rule, it is not practical to carry out this plan in detail, but such transfers should be conducted under the supervision of the transfer clerk.

The transfer clerk should maintain records of orders in progress, which will be duplicates of the office records, reporting all transfers to the office on the form shown in Fig. 47. This is a simple report form, giving order numbers, part numbers, quantities, and names of the departments between which transfers are made.

When no transfer clerk is employed, it is necessary to obtain reports, in the same form, from the different foremen. This report should provide for an acknowledgment of the receipt of work, as well as a record of deliveries. The form shown in Fig. 48 gives a double check, since the quantities received must agree with the report of deliveries from the department from which the work was received.

From these reports, the order records are made in the office. In addition to their value in maintaining a record of orders, the tracers and reports are used to advantage in compiling an inventory of work in progress.

GENERAL EXPENSE AND COST SUMMARIES

EXPENSE DISTRIBUTION

=1.= In order to obtain a thorough understanding of a subject, and to gain a clear insight into the various questions involved, so that one may understand not only its underlying principle, but also its operation in detail, it is quite essential to know first, _why_ a thing is done, and second, _how_ to do it. While a general knowledge of a subject is always desirable, and to be commended, it is often found insufficient when put to the test. Special subjects require special consideration and study, especially when the how─to─do─it is involved.

On the subject under consideration this is particularly true, for it seems to be a common confession among those handling factory accounts, that while they know in a general way how their expense accounts should be treated, they seem to be in a maze when it comes to actually doing it. The "knowing how" is the best asset of a good accountant; and in these days when the subject of costs is of vital interest to the manufacturer, the up─to─date accountant has the opportunity to show his value. To make the necessary repairs to a touring car broken down on the country road may take but one dollar's worth of the repairer's actual time, but the "knowing how" may be worth ten dollars to him when rendering his bill, and usually is.

While it is realized that there are differences of opinion among accountants on some of the questions considered in the presentation of this subject, it is the intent of this article to present what is generally conceded by our leading accounting authorities as the best practice in a well─organized, up─to─date, industrial plant, and to so present the subject to the prospective student that he may fully understand and master the "why" and the "how" of this important question in factory accounting.

That the subject may be carefully considered in all its various phases, it will for convenience be developed under the following general divisions in the order in which they are naturally suggested:

(1) Basis of Expense Distribution.
(2) Methods of Expense Distribution.
(3) Percentage Method Exemplified.

BASIS OF EXPENSE DISTRIBUTION

=2. True Cost──What Is It?= Without trespassing on the general subject of cost accounts, it is quite essential to clearly establish at the very outset what constitutes _true cost_. It would be difficult to conceive of a manufacturer to─day who would simply take the value of wages paid and material used for a cost price, and to this amount add the usual percentage of profit he desires to make on his output, and sell at that price. It would be folly to attempt business on any such basis. No business can be conducted without expense, and yet, in the case just cited, the manufacturer has simply ignored it. Suppose the expense of conducting his business exceeds the percentage he added for profit, what then? He soon finds he has made a serious error in figuring his cost, and the item omitted is the cause of his business losses. His selling price was based on less than the true cost of his product and it is noted he has made no provision, in making up his cost price, for covering the expense of operating his factory, his offices, and general expense, including insurance and taxes. It is apparent then that this matter of _expense_ has a very important bearing on the cost, in fact is a part of it, and must be carefully considered in making up the cost records. The factor of expense is frequently found to be greater than the direct labor cost itself, and a successful manufacturer must know how much expense his costs should absorb and how to figure it. The sales from his product must more than pay for the direct cost to manufacture and all the expenses of his factory besides, and if his sales are not sufficient to pay for both there is no profit. This expense, then, is an indirect charge to the cost of production, and must be included in it before the selling price can be established. Many a manufacturer has been ruined by not properly handling his manufacturing expense, and the necessity for its careful consideration cannot be emphasized too strongly.

Mr. Clinton E. Woods, one of our leading authorities in factory organization and accounting, very clearly states that expense and "overhead" charges must be absorbed into the cost of production as much as labor and material, by which operation expense is really converted into an asset.

True cost includes first, _direct labor_; second, _material_; and third, _expense_. The last item will admit of further subdivision and originates from two different sources: First, the expense of operating the work─shop or factory itself; and second, the general expense of offices and administration.

The cost of production, therefore, resolves itself into the following elements:

Direct labor $
Material
Factory expense
────────
Factory cost
General expense
────────
Manufacturing cost

=3. Selling Expense.= _Selling expense_, oftentimes spoken of as _commercial expense_, has no bearing on cost price. The correctness of this position is easily shown. Two manufacturers, competitors in the same line of production, both operating up─to─date plants with the finest equipment, may produce at the same cost. The expense necessary to market the product from one factory may be so excessive as to cause one concern to lose business to their competitors who can sell their output at less expense, while the actual cost to manufacture may be identical in both shops. Again, while one manufacturer, who can produce at a low cost but carries a heavy selling expense, may conduct his business at a loss, his next door rival in trade may not be able to manufacture as economically but can sell his product with less expense, and thereby carry on a profitable business. In the two instances cited, the key to the losses of one manufacturer and to the profits of the other is in the expense of selling, and not in the cost of production.

In a large plant with an elaborate, well─organized, and expensive sales division, where the dividing line between the commercial and production expense is clear cut, these two expense accounts should be kept entirely separate; the commercial being charged off to _Loss_ and _Gain_ direct, while the latter only should be merged into manufacturing cost.

In a small plant, where the selling division is conducted through the general office at an expense so small as not to affect the cost of administration over what would be necessary for manufacturing purposes only, or where there is difficulty in separating the selling from the manufacturing expense, the two are often combined as general expense and pro─rated as one account into production costs.

Theoretically, selling expense is not a charge to production, but the dividing line between this view and the practical one in most cases is a very fine one, and in the interest of simplification instead of elaboration, the commercial will be treated in this presentation of the subject as a part of the general expense, and will be considered in detail later.

=4. Expense Based on Cost Price or Selling Price.= Having shown that expense is of necessity an item which must enter into true cost, the question at once arises as to what it is related. Is the amount of expense to be borne by any article of production based on its cost or its selling price? While it is noted that some accountants claim the latter should be the basis for calculation, the consensus of opinion seems decidedly in favor of the cost price as the correct one, and there seems to be good argument for the stand thus taken:

(a) Inasmuch as the selling price cannot be established until the cost price has been ascertained, which is to include the expense, it is apparent that the expense must be calculated from data already in hand; either the direct labor or material cost. The selling price is established after, and contingent on, the cost price, not the reverse.

(b) Again, the selling price may vary according to the demands of trade; different prices to different classes of customers, as well as the wholesale and retail prices for the same article. In either case, the cost price is the same and is not influenced one way or the other by the selling price. The selling price may fluctuate while the cost price remains positive and stationary.

(c) While the selling price is theoretically based on cost, it is often fixed by the trade, or regulated to meet competition regardless of cost, and the expense accounts are found to continue about the same each month whether the selling price is high or low.

(d) In times of depression, or when business is slack, it is common practice to "mark down" the selling price and increase the amount of sales at a smaller percentage of profit.

(e) It is difficult to see wherein there would be any difference in the expense of manufacturing an article which sells at $110.00 over what it would be were the price but $100.00, yet there would be if the selling price were used as a basis.

Other reasons will suggest themselves, but these just referred to are quite sufficient to show that the selling price is too erratic and that expense will be found more reliable when figured at cost price, which method has, therefore, been adopted as the best practice.

=5. Expense Based on Cost of Labor or Material.= Having decided that expense should be reduced in some manner from the direct cost price rather than the selling price, it is remembered that we still have two items of cost to choose from: The labor cost and that of the material. There are those who maintain that the material cost is the correct starting point for calculations, but there are few manufacturers, if any, who do this.

An attempt has been made to use the combined total of labor cost and material, but this method is hardly worthy of serious consideration. The best practice points almost without argument to the labor cost as the true basis of expense; this is not only the logical conclusion but common sense:

(a) It is easy to see that the elements which go to make up the expense of operating a factory──foremen, sub─foremen, supervision, shop clerks, toolkeepers and grinders, helpers, the up─keep of tools and machines, lighting, etc.──are all closely related and largely dependent upon the number of men employed. Reduce the number employed and it will be seen at once that some of the above mentioned items of expense can be cut; less supervision is required and the wear and tear on tools and machinery is also reduced. It is difficult to see wherein any difference in cost of the material used would of itself cause any increase or decrease in the factory expense or even be influenced by it. It is quite contingent on the labor.

(b) That the cost of the material is not a reliable basis for calculating expense can be quite satisfactorily demonstrated. If the cost of an article is, say, labor $25.00, material $50.00, with expense to be figured at 50% on material, or $25.00, it is seen at once that the manufacturing cost would be:

Labor $25.00
Material 50.00
Expense 25.00
────────
Cost $100.00

Suppose this article were duplicated under the same identical conditions and cost, using only this time material that cost $60.00. It is a fair proposition that the total cost would be but $10.00 more than in the first instance, or $110.00. But if the percentage is added on the material as before, it is found that the expense this time is $30.00, which would make the cost appear thus:

Labor $25.00
Material 60.00
Expense 30.00
────────
Cost $115.00

It is now noted that the cost figures $15.00 more than in the first instance, while we are quite ready to admit it should be but $10.00, the only difference being in the cost of the material.

=6. Conclusions.= Having established the fact that the expense is a legitimate charge to the cost of production, we are now quite safe in laying down for our foundation the proposition that expense is contingent on, and should be figured from, the direct labor value of the cost price.

METHODS OF DISTRIBUTION

=7.= Time is continually bringing improvements; old methods once thought practical and satisfactory are replaced by more efficient ones to meet the exacting conditions of to─day. Examine a _Practical Bookkeeping─Manufacturer's Edition_ of thirty or forty years ago and you will probably find nothing on this subject of _expense distribution_, while to─day it is one of the most important and most discussed of any in factory accounting in general, and cost accounting in particular. Since that time different methods of handling expense have been devised, some with more or less merit. It will be the intent of this section to consider at some length three of the most frequently used of these methods, endeavoring to find one which will, in the most equitable manner, distribute into production the operating expense of a factory with the least amount of detail and unnecessary figuring on the part of the accountant; and at the same time prove satisfactory from the manufacturer's standpoint.

=8. The Man─Hour Rate Method.= This method, once quite popular, is now but little used, and it is doubtful if it can be found in operation in many up─to─date plants at the present time. The name of the method suggests its intent, which was to distribute factory expense over the various production job orders according to the amount of time spent by the workmen at an hourly rate. This rate is easily calculated, and was established by dividing the total expense for any period by the total number of hours spent on productive work for the same period, reducing the rate of distribution to so much per hour. If 100 hours of labor were spent on a productive job, the cost of the wages paid the workman for this time was not considered, the expense to be borne by the job being figured at the hourly rate for the 100 hours. It will be seen that this is hardly an equitable arrangement, and to rectify a serious defect in the method, some adjustment must be made:

(a) The inability to fix a standard for the efficiency of the labor lays the man─hour rate open to criticism. Could this be done, this method would in many cases prove a very equitable way of distributing expense. It will, however, be seen at once that as it is, a skilled workman carries no more expense than an apprentice boy, and if both work on a productive job a full week, the expense in either case is the same regardless of the wages paid. This is hardly a fair proposition. Either the apprentice's time must be accepted as standard and the skilled workman considered twice as efficient in work─hours, or _vice versâ_. To do this would lead to endless complications, yet the quantity and quality of the output between these two classes of labor should be considered and adjusted in some way so that the injustice done the manufacturing cost may be corrected. But this is not an easy matter to regulate, and means extra work on the part of the cost clerks in recording the time spent on job work and adjusting these inequalities in the labor.

(b) The man─hour rate requires that the hours worked be carefully recorded and totaled, as well as the cost. Many concerns with heavy pay─rolls to be apportioned over a large number of job orders, ignore the footing of the long columns of hours and fractions, and use only the totals of labor cost, which are of course necessary for entry in the commercial books. It is obvious that in doing this an immense amount of clerical labor is saved. The man─hour method requires that both hours and labor cost should be recorded and totaled──a double operation and duplication of work, which, unless it can be simplified, should be avoided, as it means time and unnecessary expense.

=9. Machine─Hour Rate Method.= This machine─rate plan of distributing expense was designed to meet the needs of a shop where the product is largely the result of a machine or tool operation, rather than the labor of the mechanic himself. It somewhat resembles the man─hour plan in that the rate of distributing expense is reduced to an hourly rate for the time the machine is working on the job instead of the time of the operator. Each machine is intended to have its own rate.

The method of arriving at the machine rate is easily understood, and reduces itself to the item of depreciation on the original cost price of the machine with its shafting, belting, tools, and installation cost figured at, say, 5%, the power to operate machine at an estimated cost per horse─power, ordinary repairs, divided by the number of hours the machine is estimated to be in operation for the same period; this will give the hourly rate of cost to operate. Some mechanical engineers advocate including in the above cost, interest on the investment at 6%, also insurance and taxes; and by others, the value of the floor space occupied by the machine is also included; but in all these latter points referred to, engineers greatly differ in opinion, and it is generally decided by each manufacturer for himself according to his own ideas.

On the question of the value of machine rates there is probably more argument by mechanical engineers and accountants than on any question in factory accounting; in fact, engineers themselves are very far apart in their opinions and do not seem to agree among themselves. Accountants generally are inclined to take a somewhat different view of the situation from our mechanical friends. While it is admitted there is good argument for both positions, it is to be remembered that we are considering the question of machine rates as a means of distributing the expense account, and it seems to be the prevailing opinion among accountants that as such it is found wanting. While, theoretically, it is undoubtedly the correct solution of the problem, it is more often found in practice to be a case of a "distribution that does not distribute," and for this reason is not used by the very class of factories and machine works for which it was designed and intended to benefit.

Let us consider in detail a few of the objections that may be raised to the machine─rate method:

(a) It will be noticed there are other expenses in the shop than that of operating the machines and not covered at all by the machine expense. Machine rates are absolutely worthless for bench labor and the assembling room, for these two must also share in carrying the shop burden. Not to do so would be manifestly unfair. It is therefore necessary that a second distribution must be made entirely different in its calculation, to handle this undistributed expense not covered by the machine rates, which means two different operations for the same shop.

This necessitates two different time records to be kept, one card for each machine showing jobs worked on and hours idle, and another time card for the workman. Is is easy to appreciate that this double operation greatly increases the clerical work in the shop, besides two sets of entries by the cost clerks, and more detail for all concerned. If a method can be found which requires but one time record to be kept, this double process can be done away with and the duplication of work avoided.

(b) The principal factor in the calculation of the machine rate, in fact, the real key to a successful calculation, is in establishing a standard of work─hours for each machine. It is noted that the higher the standard, the lower will be the rate, and the lower the hours operated, the higher will be the rate; in other words, when the machine is idle in excess of the standard, the rate changes. In some shops where the output is a stable product, always in demand, and the machine in continuous operation, a good estimate may be made, but in most shops a machine is frequently idle on account of "no work" or "laid up" for repairs the same as is its operator. The practice in most shops is such that it is extremely difficult to estimate ahead what the work─hours of a machine will be, and it resolves itself generally into an intelligent guess with two estimators far apart in their estimates, yet a satisfactory distribution requires a standard which will work out in figures close to the actual facts.

Who can successfully estimate ahead for any time the activity of each machine in a large factory? Our factory engineers are at wide variance on this point. One authority says "full time," 300 days a year, is the proper basis for calculation. It would seem as if this were rather an unusual position to take; it apparently being his belief that the time idle would be offset by the time the machine was operated overtime, or else he expected the machinery once put in motion to neither shut down, nor break down. Either appears to be rather a dangerous assumption on which to base a careful calculation for rate of distribution.

Another engineer says 80% of a full day will be found to be the maximum, and further adds: "It will doubtless fall much below that figure." One naturally asks "How much lower?" There is quite a large field of figures to choose from between an 80% activity and a dead standstill for the machine.

It is quite unnecessary to attempt to demonstrate at length that the work─hour standard may be a very elastic figure, and it is often found that after distribution has been made, the results are very unsatisfactory and the machine rates used have proved "way off."

(c) Again, having settled on the work─hour standard, other adjustments appear necessary to equitably handle the machine rate question. For instance, two machines may be of the same book valuation and in cost of operation practically alike, yet one may be far more efficient than the other and possibly turn out two or three times as much work. This condition is constantly found in different shops, and whether or not the two machines should carry the same rate, and, if not, how this inequality shall be adjusted, forms a very interesting question for discussion.

(d) It is noted that the essentials in the calculation of machine rates are all based on estimates which may or may not prove correct; that positive book figures are lacking; and that the calculations are made on assumptions. One of the best professional opinions noted is that expressed by one of our leading accountants, who, commenting on the question of machine rates, observes that "it begins with estimating and is estimating all the way through." This appears to be rather severe criticism, yet one has but to give the subject careful consideration to note that it quite correctly sums up the situation in a few words.

As previously stated, the machine─rate method is without doubt theoretically correct, but, until the subject has been more thoroughly elucidated and worked out in all its details to fit shop conditions and furnish a satisfactory means of distributing expense, it is doubtful if it will be used to any great extent. This method certainly requires an elaboration of system and detail, with questionable results, and with many serious objections apparent; it seems pertinent, therefore, to ask the question "Is it worth while; cannot something better be devised?"

=10. The Percent Method.= A third plan of distribution, commonly referred to as the _percentage method_, differs from the two already outlined, in which the time employed was the basis of operation, in that the rate of distribution is a percentage on the direct labor cost of the product, which is, of course, commensurate with the amount of time expended. In the first division of our subject, it was shown that expense figured on direct labor would prove the most reliable.

This method is based on the principle that the production of each department of a plant should shoulder its own expense, and also a share of the general expense. In other words, the cost of the output from the _Blacksmith Department_, for instance, would be the total productive labor of the department, plus the material used, plus the operating expense of the department, plus its share of the general expense of the whole plant. It is only necessary, then, to establish the relation between the productive labor and the expense, and express the same in a percentage. It is immaterial how many departments or processes there may be in the factory; this relation should be found in each case, based on its own productive labor and expense, each department having its own percentage ascertained from its own actual conditions; no estimating about it. The expense, then, is figured on the labor cost. If, in the _Blacksmith Department_ already referred to, it is found that the expense at which the department is operated is one─fourth of its total productive pay─roll for the same period, it is at once apparent that if to the labor cost of every productive job, 25% is added for shop expense, the total of these expense items added will equal the total expense of the department. In other words, the shop expense is split up and added to each job in proportion to the labor expended on it.

The general expense is handled the same way. If the total general expense is found to be one─third of the total productive labor in the plant, it is likewise apparent that, if to the labor of every productive job, 33⅓% is added to cover general expense, the sum total of these percentage items added will equal the total general expense of the plant.

Following, then, the formula outlined at the opening of our discussion under the heading of _True Cost_, the cost of a job done in the _Blacksmith Department_, on which the direct labor cost was $100.00, would appear on our records as follows:

Direct labor $100.00
Material 50.00
Factory expense at 25% 25.00
────────
Factory cost 175.00
General expense 33⅓% 33.33
────────
Manufacturing cost $208.33

This is the _percentage method_. While it is quite natural in anything of value and merit to look for its imperfections, this method is criticised by some accountants who point to flaws in its logic and method of computation; nevertheless, it stands to─day as the best solution of the vexed question of expense distribution that has yet been devised, for it not only has the approval of our best technical authorities, but that of the practical accountant as well. It commends itself to the intelligent judgment of the manufacturer, who is quick to realize its superiority, and it can be recommended for many reasons:

(a) It is based on actual figures, easily extracted from the regular books of account, and which are a true statement of fact; no guess─work or estimating about it. There is no better way to figure what is to be, than to use results of what can be conclusively demonstrated already has been.

(b) It can be used in any manufacturing plant, or in all the departments of the same plant, thereby insuring uniformity of method, which is always desired. No argument is necessary to convince that two methods in the same factory are undesirable when one can be found that is satisfactory.

(c) It accomplishes its purpose──it distributes. If it is found that factory conditions are changing, the percentages used may also be changed so as to increase the amount of expense distributed, or diminish it, as necessary.

(d) It requires less work for the cost accountant. The man─hour plan requires the hours worked to be recorded and footed in addition to the labor cost. The machine─rate plan requires not only two different calculations, as already shown, but also necessitates the adding of all the hours worked. The percentage plan requires only the labor cost in money value, and renders the recording and adding of long columns of hours entirely unnecessary, which, as can readily be seen, is an immense saving of labor. In a large plant with an elaborate system of job orders to be handled, the value of the percentage method, in doing away with this double calculation, will be appreciated immediately.

(e) Figuring by percentages can be done rapidly, and in many instances it is but a mental calculation and almost instantaneous. Were hours recorded, the frequent use of fractions would render the process of figuring expense less rapid.

(f) It is an equitable means of distribution, for it is based on the direct labor cost, which is not only the most reliable element of cost to use as a basis, but which is one of the principal factors by which the amount of expense is influenced.

(g) It has the endorsement of our best factory accountants and auditors, and it is noted that where "systems" are being installed by factory organizers to─day, the percentage method is continually being adopted as the most satisfactory, for it brings the best results with the least machinery to operate.

PERCENTAGE METHOD EXEMPLIFIED

=11.= Before proceeding to show in detail the method to be pursued in arriving at the various percentages to be used in distributing expense by the _percentage method_, it may be well at the outset to clearly understand what constitutes _productive labor_ and _expense_, or _non─productive labor_, for it is on the former that all calculations are based.

=12. Productive Labor.= The wages paid to the workmen for labor spent on productive work which is offered by the manufacturer for sale, and from which the business derives its regular revenue, is properly classed as _productive labor_. In other words, the amount of productive labor is commensurate with the productive output.

It is frequently asked whether labor spent on plant extensions or new equipment, when made for one's own use, may be considered productive labor and should carry its share of the expense in its distribution. Most assuredly, yes. If this same work were performed to be sold again in trade it would be considered productive labor and the expense would be added. The reverse is also true; if it were purchased from another manufacturer he would treat it as productive labor, and include expense in his cost and selling price, and the purchaser would have to pay for it, and would carry same in his ledger, in his plant or equipment accounts, and on his balance sheet as an asset. The only difference, if any, is in making new equipment himself, in which case it goes on his books at the cost price to him, thereby saving the manufacturer's profit he would have to pay if he purchased it. Is it, then, any less productive labor because a manufacturer prefers to make his plant extensions or new machinery, himself, instead of buying? It does not appear so; it certainly is productive labor.

=13. Non─Productive Labor.= All other labor, not distinctly productive as just outlined, must be classed as non─productive. This includes _clerks_ and _offices_, _foremen_, _assistants_, _watchmen_, _repairs_ and _renewals_, _small tools_, etc., and all the many expense men not working on product but necessary to keep the plant in repair and operation. Non─productive labor is a question of keeping the factory organization and management up to concert pitch, and is not regulated by the quantity of production.

Inter─department work in a plant often raises an interesting question. Shall labor expended by one department on repairs for another department receive credit for same as productive labor? The foreman of the department often claims that the repairs his men are doing for another department are just as much production, so far as he is concerned, as though his men were building a machine for sale, and should shoulder part of his expense. In a certain sense, all labor is productive, and from a selfish point of view, the foreman's argument is a fair one. But from the broader view of the manufacturer, all such inter─department repairs, or similar work, are a part of the operating expense of the plant, and are necessary for the up─keep of the equipment; they are not made for sale, as is a production order, and must be carried as expense──non─productive labor.

=14. Expense and Production Cost Ledgers.= Without digressing from our general subject, it may not be out of place at this point to call attention to a most convenient method of keeping cost records. Inasmuch as the cost of production must absorb the expense costs of manufacturing, it will be found advantageous to keep these two classes of accounts in separate binders, putting all the non─productive labor cost records in one binder, calling it _Expense Ledger No. 1_, and all the productive labor in _Production Ledger No. 2_. When the expense distribution is to be figured, it will be noted that all the entries will be made in _Ledger No. 2_, while _Ledger No. 1_ furnishes the amount and details of expense to be distributed.

=15. Period for Comparisons.= Having shown that our percentages of distribution are based on the relationship of total expenses to total of productive labor, the first step in our calculation is to draw off from our ledgers a statement of each for the same period as a basis for comparison.

Inasmuch as there is generally found to be some item of extraordinary expense that appears each month, comparisons made on conditions shown by one month's operations are apt to be found abnormal, while a comparison made on results of operations extending over six months or more will give an average nearer the true condition of the plant's activities than one made on results shown by a shorter period.

=16. Pay─Rolls Dissected.= For our first statement, let us examine the pay─rolls and find out what portion may be classed as non─productive labor and what as productive labor, both by departments and in totals, our examination of same to cover a period of six months as just suggested.

For the sake of illustration, let us take a plant with a weekly pay─roll of about $10,000. Ordinarily there will be four pay─rolls each month, but in order to provide for thirteen rolls quarterly, it will be necessary every third month to have the labor account cover five weeks instead of four. Turning to our _Private Ledger_, we find our _labor account_ appears as shown in Fig. 1.

It is now seen at a glance that the total pay─roll for six months is $266,155.00. It is now necessary to know the split─up of the above figures into productive and non─productive labor by departments, and this is easily obtained. By reverting to the pay─sheets, can be found the total pay─rolls for each department during the above period, and from _Ledger No. 1_ can be found the portion of these same rolls that were classed as non─productive labor, and the balance will be found entered in _Production Ledger No. 2_, the sum total of which will in each case balance with the totals in the _Private Ledger_. Every dollar of labor is accounted for in either one or the other of the two cost ledgers. Having done this, the labor statement resolves itself into something like the following:

PAY─ROLL DISTRIBUTION
Jan. 1 to June 30, 1908
══════════════════╦════════════════╦══════════════╦════════════
║ Non─Productive ║ Productive ║ Total
║ Labor ║ Labor ║ Pay─Roll
──────────────────╫─────────┬──────╫─────────┬────╫────────┬───
Dept. A─Offices ║ $9,828│00 ║ │ ║ $ 9,828│00
B─Store ║ 2,180│00 ║ │ ║ 2,180│00
C─Power ║ 4,524│00 ║ │ ║ 4,524│00
D─Yard ║ 9,316│00 ║ │ ║ 9,316│00
E ║ 9,971│00 ║ 104,409│00 ║ 114,380│00
F ║ 7,082│00 ║ 31,429│00 ║ 38,511│00
G ║ 1,749│00 ║ 5,528│00 ║ 7,277│00
H ║ 2,488│00 ║ 10,659│00 ║ 13,147│00
I ║ │ ║ │ ║ │
J ║ │ ║ │ ║ │
K ║ │ ║ │ ║ │
Etc. ║ │ ║ │ ║ │
Totals ║ 58,021│79 ║ 208,133│21 ║ 266,155│00
║ 21│8% ║ 78│2% ║ │
──────────────────╨─────────┴──────╨─────────┴────╨────────┴───

The above figures are all that are needed so far as the labor end of the comparison is concerned. In fact, the non─productive labor is not necessary and is shown here merely as a matter of interest, as are also the proportionate percentages of each division to the total pay─roll, for it will be remembered that the productive labor is the figure used in all costs on which the expense is calculated.

=17. Departmental Expenses.= Against the amount of productive labor for each department shown in the statement just made, place the total expenses for the same departments. This is readily found by again referring to the _Private Ledger_, where the amount of _Operating Expense, Department E_, for the same months the pay─rolls were tabulated, appears as in Fig. 2. The expenses of all the other departments should be similarly treated.

=18. General Expense.= The general expense of a plant, for the sake of convenience as well as information, is kept usually in considerable detail, different ledger accounts being opened to carry the various subdivisions of expense. The use of a _General Expense Account_ in the ledger is not recommended, for its very name has the earmarks of a general dumping ground for all miscellaneous items, and is often found a convenient place to hide expense, trusting it will there be lost sight of and thereby escape observation.

The combined total of these various expense accounts is the total general expense, a part of which each productive job is to carry. As they now appear in the ledger as separate accounts, _Executive_, _Office_, _Store_, _Power_, _Yard_, _Taxes_, _Insurance_, _Printing_ and _Stationery_, _Telephone_ and _Telegraph_, _Postage_, etc., it will be seen that each account is in itself but a part of the amount to be distributed, and, to better show this combined total, these individual accounts should be closed out monthly and brought together in another account, called _General Expense Distribution_. This is done by journal entry.

═══════════════════════════════════════════════════════════
Dr. Cr.
────────┬───╥────────────────────────────────╥─────────┬───
$10,293│28 ║ General Expense Distribution ║ │
│ ║ Executive Salaries ║ │
│ ║ Insurance ║ │
│ ║ Taxes ║ │
│ ║ Depreciation ║ │
│ ║ Freight ║ │
│ ║ Express ║ │
│ ║ Cartage ║ │
│ ║ Printing and Stationery ║ │
│ ║ Telephone and Telegraph ║ │
│ ║ Traveling Expense ║ │
│ ║ Postage ║ │
│ ║ Legal ║ │
│ ║ Water ║ │
│ ║ Advertising ║ │
│ ║ Etc. ║ │
│ ║ Operating Expense Dept. A ║ │
│ ║ " B ║ │
│ ║ " C ║ │
│ ║ " D ║ │
│ ║ ║ ───────┼──
│ ║ ║ $10,293│28
────────┴───╨────────────────────────────────╨─────────┴───

These accounts are now balanced out and combined in total in the _Distribution Account_. The _Distribution Account_ is now examined to ascertain the total general expense for the same six months previously used, and the _Private Ledger_ shows it to be $67,840.00, Fig. 3.

=19. Power.= While the cost of operating the power─house is unquestionably a legitimate charge to the operating expense of each department according to quantity used, it is noted that, by the journal entry just made, the cost of same is closed into _General Expense Distribution_.

In a plant operating a central power station with electrically driven machinery, the power used in each shop can be metered and accurately known, in which case, each shop can be charged with the amount actually used. To do this requires considerable extra expense, and although it is done in many works, most plants do not consider the expense worth the results, and are inclined to treat all power as general expense rather than departmental.

In a plant driven by shafting and belting, the power consumed cannot be registered or recorded, and the power required only estimated from tests made as often as desired. Although there may be a heavy draft on the power─house at certain times, when all the machinery is in operation, there are frequently times when but few machines are running and the power required is down, although there is no way of recording it.