Hate Qlolbge of :?lgriculturc J^t (Cornell IniBeraitH atljata, ST. % HF5686.M3B4"""'""'""-"'™^ Cost of production; practical principies 3 1924 013 825 405 The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/cletails/cu31924013825405 THE COST OF PRODUCTION PRINCIPLES OF FACTORY COST KEEPING LABOR, MATERIAL AND BURDEN HOW TO ESTIMATE MARGINS AND PROFITS COST KEEPING SYSTEMS ed. b V fiuvl- Cl^^-'ror^ Bean A. W. SHAW COMPANY CHICAGO NEW YOKE LONDON 1916 Copyright, 1908, by The System Company Entered at Stationers' Hall in Great Britain, 1909, by The System Company Entered according to the Act of the Parliament of Canada, in the year 1900, by The System Company at the Department of Aerriculture Entered according to the Act of Parliament of the United Commonwealth of Australia In the year 1909, by The System Company Copyright in Germany, 1009, by the System Company Copyright in France, 1900, by The System Company Copyright in Mexico, 1900, by The System Company Under the Title "The Business Man's Library" — Vol. HI (Trade-mark Registered) PREFACE The development of manufacturing and the inter- ests closely related to it has seen a corresponding growth in the science of costs. Nowhere has the appli- cation of scientific methods to the productive end of a business yielded larger returns than here. The pro- ductive sciences are so closely and intimately related to cost reduction that increased production calls for and demands with increase in volume of a product a corre- sponding decrease in its cost. The reasons for this demand are manifold. They are at the same time empirical and scientific. Empiri- cism arbitrarily demands reduced costs. Scientific methods show how cost reduction can be affected. Much of the literature on this important subject seems to have been included in either of two classes; either an exposition of a working system or systems, or an unrelated set of statements concerning the science. In this work an attempt has been made to give an exposition of the science from a broad standpoint ap- plicable to any business; to arrange the elements in PREFACE logical order, giving due weight to proper authorities; to unify and blend the whole so as to furnish true infor- mation to the student of the science and at the same time not be too elementary for the experienced cost ex- pert. Finally a number of cost systems with forms have been added as operated by various experts in this par- ticular line, with the idea of making a work of real worth to those wishing exact information on this subject. Careful search has been made of all the available literature on the subject, a large number of manufac- turing plants have been investigated and numerous per- sonal interviews have been had with those conversant with the subject of costs in order to secure the infor- mation necessary for a work of this character. THE PUBLISHERS. CONTENTS Parti— THE SCIENCE OF COSTS CaAFTXR Page I. Uttutt of a Cost System 1 Alexander H. Revell, President, A. H. Revell & Co. II. Development of the Science of Costs 7 Early natural advantages — The "established" firm versus the competitor — ^The trust as related to low productive cost — Growth of the science of costs — Scarcity of the really competent employ^ — Installation of a cost system. in. Elbmbnts op the Science of Costs 14 Costs not an exact science — Burden the element which complicates Costs — The elements Prime Cost and Direct Labor — Relation of Costs to Fac- tory Organization — Costs and the engineer — Business shrewdness and the knowledge of Costs — Relation of Costs to the accountant— Inaccura- cies in the use of term "Cost Accouning" — ^Ha- lation of Costs to the salesman — Relation of Costs to the buyer. IV. Selling Price — ^The Factors Composing It 25 The brace system of graphic representation — Cost to make and sell — Inexact use of terms. V. Material 30 Definition — ^Value of material — Cost of material — Supervision of stores — Fluctuation in price of material — Requisition for stores — The stores in- voice book — Orders for stores. VI. Labor *1 Price considered as Cumulative Labor Cost — Em- ploy6 record — ^The tally system described — Wage plans — ^The day's-work plan — Institution and workings of the piece-work plan — Drawbacks of the piece-work plan — Methods of figuring probable time — The premium plan — The bonus system — The profit-sharing plan. VII. Burden 58 Constituent elements of burden — ^Apportionment of burden — ^The percentage burden plan — The hourly burden plan — ^The machine-rate plan — The scientific machine-rate plan — What system? CONTENTS Chapter Page VIII. Indirect Labor 67 The term "non-productive" — Exclusion of selling expense from burden — Indirect labor calculation — Salaries. IX. Minor Burden Elements 72 Power — Heat — ^Light — Rent — Taxes — Insurance. X. Depreciation, Upkeep, and Other Factors 75 Related factors — Depreciation studied by insurers — Depreciation and the factory buildings — A common method of depreciation — Upkeep neg- lected to swell dividends — Provision for growth of plant — Permanency of emplo}Tnent — Manu- facture and disposal of product— Figuring depre- ciation to meet fluctuating demand — New meth- ods and inventions — New machines called for to improve the product — Contingencies not to be insured against — ^Appreciation of site — Depre- ciation based upon valuation — Method of calcu- lating depreciation — Lack of uniformity in svst- tems — Simplicity of blanket depreciation. XI. Selling Expense 98 Office expense — Making and Selling — Salesmen — Estimating — Advertising — Traveling — Indirect expense. XII. The Factors op Selling Expense 105 Office expense — Estimates, to what chargeable — Advertising and good will — ^Traveling expenses — Indirect expense — No rule for direct expense. XIII. Profit Ill Profit comprehends other factors — Interest, where chargeable — What profit really is^^jnclusion. Part II.— ILLUSTRATIVE COST SYSTEMS XrV. A Factory Cost System 119 Edric C. Warren, General Manager and Secretary, Century Stove and Manufacturing Co. XV. Regarding Factory Costs 125 L. A. Ely XVI. The Cost op Wood Working 131 Sheridan H. Graham XVII. Ascertaining the Cost op Production 140 E. J. Hathaway XVIII. How Factory Costs Are Found 150 Charles W. Norton XIX. A Factory Cost System 161 Charles J. Watts PART I THE SCIENCE OF COSTS CHAPTER I CTILITY OF A COST SYSTEM By Alexandee H. Revell President, A. H. Beyell & Company Good machinery is not more essential to the success of a manufacturing enterprise than is a thoroughly modem office and factory system. Every machine in your plant may be of the latest and most expensive model, but if the system upon which your business is conducted is anti- quated and inefficient you will be behind in the race and wiU probably meet with disaster. Scarcely too much emphasis can be put on this point. Repeatedly I have been impressed with the extent to which the manufacturer is inclined to depend upon prog- ress in ma,chinery and to neglect progress in office and factory methods. If his business is in any way yielding unsatisfactory results the first thing the manufacturer seems to think of is " Get a new machine or hire a new man." This is his common panacea, and hundreds of manufacturing enterprises have failed simply because improved machinery was expected to accomplish what could only be done by means of good sound business system — ^that established routine of order acting along the lines of common sense and sound principle. Perhaps it would be easier for the manufacturer to see the situation in its true perspective, if, for the moment, 3 4 COST OF PRODUCTION he would look at the business organization of his house as a machine, to be improved and brought up to a higher degree of efficiency through his intelUgent of a Company efforts along the line of progress. Cer- Like a Macnine |.^jjjiy^ ^j^g moment he began to view his house organization as a machine — and the most impor* tant one in his plant, too ! — ^he could no longer remain indifferent to this phase of his business. A cardinal weakness in most factory systems is a failure to get at the cost of production with sufficient accuracy. Every article, book or document that will in any manner throw light upon this difficult problem should be eagerly sought by the progressive manufacturer. He can afford to neglect nothing which will aid in the accuracy and ease with which his cost of production is to be deter- mined. Here is a matter in which guesswork will not do, and where a fraction of a cent, in the ultimate findings, is of serious moment. Considering the importance of figuring the cost of production to the finest fraction, the laxity of the ordinary methods of computation is surprising. When it is remem- bered that the price he is to receive for his product, and consequently the extent of his profit, depends upon the exactness with which he is able to arrive at the cost of production, no argument will be needed to make plain to the uninitiated the importance of this factor in the manufacturers' office system. However, I cannot refrain from repeating that here is the common stumbling block, so far as the accounting methods of the manufactuser are concerned. If a man knows what every article he manufactures UTILITY OF A COST SYSTEM 5 costs him to produce, and is absolutely certain that not the most insignificent element of that cost has by any chance been omitted, he is in position to meet competition and to meet it closely. And unless he has a cost system that demonstrates this result to a certainty his profits will, on those cases of "close figures, "mysteriously change into losses. Let me illustrate this phase of the matter by the sup- position that the buyer for a big department store comes to me and asks for figures on a certain large number of tables. When I give him my price he replies: "You are just $1,000 too high on the lot. I can get it from the other factory at $1,000 under your price. As a matter of fact I would rather get the goods from ,vou, and if you'll meet the other factory's price you may ha re the order." Right there is where the test comes upon the cost system of the house. We will say that I could meet the figures of my competitor and still have $500 profit, pro- vided every possible element of cost has been included in the estimate. But if there has been a single omission of any consideration whatever, I will lose by taking the job. It is human nature to make close prices and meet competition — ^but I believe that in most instances where this is done the small margin of profit counted upon resolves itself into a small margin of actual loss through the failure of the original figures to include every element of direct and indirect cost. It is a remarkable cost system which is so perfectly constructed that nothing can be left out. But it is possible to have a system so carefully devised that 99 per cent of cost possibilities are provided for. 6 COST OF PRODUCTION Another important result achieved by a tkorougk system in a manufacturing business is to save waste oi time on the part of expensive heads of departments, thus allowing them to give their whole effort and attention to executive matters of genuine importance. In other words, the complete situation in every department should be presented, by regular routine. This is always the first thing to do in bringing one's mental forces to bear on a new business proposition. «.-* o™*.™ Here is where the basis for mistakes and fail- oost System Saves ures is often laid at the very outset. To take Waste of Time , . .1 up an important business matter without completely removing from the mind all thought of every- thing save the one subject at hand, is as absurd as it would be for an admiral to take his fleet into action without first giving the order, " Clear decks ! " Possibly this may seem too trivial a point to warrant the emphasis placed upon it. Experience, however, teaches that it is almost impossible to put too much stress upon this attitude of the mind in attacking a fresh business topic. Thousands of men fall just short of a large success in the world of affairs through this weakness ; they are unable, at will, absolutely to drive from their minds the thoughts, cares and anxieties that attach to the subject which they have been considering and from which they desire to turn. When they take up a new subject they are haunted and annoyed by lurking anxiety relating to matters other than the one under immediate consideration. And these lurking ghosts of other things may be depended upon to make mischief and prevent that acuteness of concentration imperative in the process of going at once to the core of any subject CHAPTER II DEVELOPMENT OF THE SCIENCE OF COSTS The history of the cost of the made or manufac- tured product lies well within the developments of the last few decades, particularly in the United States. The reason for this is three-fold : First, the wonderful natural resources of the United States; second, the tendency to lower prices caused by competition ; third, the influence of trusts and combinations. The early settlers in this country found a virgin field for every species of undertaking. The sol' was rich, producing limitless crops ; the forests Early Natural of wide extent, with timber to be had for Advantages the taking; and the various minerals on>y needed bringing to the surface and the rudest metal- lurgical process to yield in paying quantities. This was the time of small operations and crude processes. The producer was to little expense for his raw material and labor, and had no thought of nor use for the thou- sand and one essentials and accessories to trade which now are nearly universal in use and application. Until comparatively recent times old and long established firms have often held their place in the field of commercial supremacy, because of the fact that they were established and had honorable and successful 7 8 COST OF PRODUCTION records to back them up. So fortified, they were enabled The " Estab- to meet all comers in their particular field, Versua'th"™ asking and obtaining better prices than Competitor their less experienced rivals. This can hardly be said to be true at the present time. No sooner does a field show a large profit than the pro- moter, aided by capital wanting investment, steps in and, guided by the cumulative experience of others, directed by the best managerial talent to be had, and taking care of its business by a system practically per- fect, the new venturer in the commercial arena often bests its older rival. This competition, of course, re- sults in a substantial reduction of prices, particularly if the old selling price was high because of monopoly, rathev- than because of technical knowledge and skill required in its manufacture and sale. Secent times, too, have seen the development of the t-.ust. The liberty allowed under the corporation laws of various states has been taken full advantage of by many industrial organizations, and these combinations are often so arranged that the real profit of twenty-five per cent or larger is so distributed by means of stock The Trust as judiciously "watered," that the share- ^oductile^'"' holder not on the inside, comes in for only *'<"t8 a modest five or six per cent. This re- quires, then, in order that the overcapitalized organiza- tion may bear the imposed burden of dividends on watered stock, that the production cost be reduced to the lowest possible figure. DEVELOPMENT 9 These three causes — appreciation in value of natural resources, growth of competition, and rise of the trusts — have been the important factors in develop- ing the science of costs in America. The older countries, however, restricted in their natural resources, having competition highly developed for decades and accustomed to perfected organizations somewhat similar to the modern trust, have given the science of costs more study than the younger and more wasteful nations. As early as 1832, Charles Babbage, A. M., professor of mathematics in the University of Cambridge, England, issued a comprehensive volume of 282 duodecimo pages under the title, "On the Economy of Machinery and Manufactures." Several of the thirty-two chapters of the book relate directly to the science of costs. Chapter XX, "On the Separate Cost of Each Process in a Manufacture," reading in part as follows : "The great competition introduced by machinery, and the application of the principle of the subdivision of labor, render it continually necessary for each pro- ducer to be on the watch, to discover improved methods by which the cost of the article he manufactures may be reduced; and, with this in view, it is of great im- portance to know the precise expense of every process, as well as of the wear and tear of the machinery which is due to it. The same information is desirable for others, through whose hands the manufactured goods are distributed; because it enables them to give reason- 10 COST OF PEODUCTION able answers or explanations to the objections of in- quirers, and also aflfords them a better chance of sug- gesting to the manufacturer changes in the fashion of his goods, which may be more suitable either to the tastes or to the finances of his customers. To the statesman such knowledge is still more important; as without it he must trust entirely to others, and can form no judgment worthy of confidence, of the effect any tax may produce, or of the injury the manufacturer or ,the"country may suffer by its imposition. "One of the first advantages which suggests itself as likely to arise from a correct analysis of the expense of the several processes of any manufacture, is the in- dication which it furnishes of the course in which im- provement should be directed. If any method should be contrived of diminishing by one-fourth the time required for fixing on the heads of the pins, the expense of making them would be reduced about thirteen per cent, whilst a reduction of one-half the time employed in spinning the coil of wire out of which the heads are cut, would scarcely make any sensible difference in the cost of manufacture of the whole article. It is, there- fore, obvious that the attention would be much more advantageously directed to shortening the former than the latter process." This writer was far in advance of the time in which he lived, as the foregoing paragraphs will bear witness, and when it is considered that he entered minutely into many questions now important ones. GROWTH OF COSTS 11 antioipating problems of the present day, the import- ance of his work may be better judged. It may be safely said, however, that not until the SO's was the science of costs considered of sufficient . . weight in the administration and record Growth aftka ° Soieaoe af of manufacturing, to be taken up by Costs either America or the older countries. That decade saw several books on the subject issue and a relatively small per cent of older manufactories in- stall simple systems. From 1890 to the present time, costs and cost systems have been studied, tried and im- proved upon and the present year sees an interest taken in the science proportionate to its importance. It is safe to predict that an exact appreciation of the true importance of costs will not be long in pervading all branches of business to which it may be profitably ap- plied. Manufacturers are not only awake to the im- portance of cost-knowing, but are generally instituting systems of cost determining and recording. The present status of costs in industry is an anomalous one. The manufacturer is anxious to know his costs, but he has not yet the faith in the accuracy of cost accounting methods. He hates to run by schedule while his competitor runs "wild." This is due partly to the idea that cost finding is a mysterious process, not readily comprehended by the ordinary business man and partly to the fact that competent cost keei)ers — men understanding the various ramifi- cations of business into which cost finding runs — are 12 COST OF PRODUCTION hard to find. Only the employer who has to pnt up with indifferent help, thoroughly realizes what this means. With the scarcity of really com- Scarcity of the Really Compe- petent employes in older branches of in- tent Employ^ „,-,.,.,■,,. dustry, a new field is liable to invasion by those manifestly incompetent, who rely on a compli- cated lot of data and a strong bluflE to pull them through. It is a fair assumption that the subject of costs is as diflScult as stenographic work, and the busi- ness man of even limited experience knows the difiB- culty of securing from among the thousands claiming a knowledge of the art, one who is really competent; this, too, in view of the fact that the employer is com- petent to judge immediately of the qualifications of the employ^ and to secure a successor at once. Only a long and thorough trial may reveal the incompetency of a cost system or the employ^ in charge of it. The status of costs today sometimes is compar- able to the condition of various lines of machine trade a decade ago. Ten years ago a man selling electrical coal mining machinery, stood to lose anywhere along the line. First, he must overcome the prejudices of the company buyer, the mine foreman, and to InstaUation f j j y of a Cost some extent the men, before getting his system in. Second, he must teach those who were to handle the machinery, the methods of work. Third, he must judge accurately the working conditions and map out the way ahead for the installed system to continue to show actual results as well as ACCURACY IN COST FINDING 13 latent potentialities. Now, let the same man go into a mine fitted out by him some years ago and he finds that in some cases his system has marched by him, it has been so adapted to the surrounding conditions that many of the under employes can give him pointers as to its eflScacy. Because of the better grasp of the man of administration to-day, the cost expert installing a sys- tem would find introduction much easier, but the re- maining conditions enumerated above often are much the same. Costs to be of use must be nearer accuracy than most any other result demanded in business adminis- tration. If costs — the cornerstone of the business fabric — is out of true the whole superstructure is liable to totter and fall under the strain of systematic com- petition. Speaking of this phase of business organiza- tion, Alexander H. Revell says: "A cardinal weakness in most factory systems is a failure to get at the cost of production with sufficient accuracy. Every article, book or document that will in any manner throw light upon this difficult problem should be eagerly sought by the progressive manufac- turer. He can afford to neglect nothing which will aid in the accuracy and ease with which his cost of prO' duction is to be determined. Here is a matter in which guesswork will not do, and where a fraction of a cent, in the ultimate findings, is of serious moment." CHAPTER III ELEMENTS OF THE SCIENCE OP COSTS The science of costs is not an exact one, for the reason that the items in many cases are and can be merely estimates, and as such are subject to error. True, a system of costs may be devised and worked so as to be satisfactory to all concerned, but there is not, nor can there be, any standard system, nor one that can secure a certain set of figures of which may be said: "This is the exact cost of a unit of Costs not an Exact manufactured product." Take the item Seienoe depreciation — treated in detail in a suc- ceeding chapter — few authorities agree as to what is the annual depreciation on machine tools under pre- cisely similar circumstances. Assuming that deprecia- tion charges were absolute, who can foresee the inven- tion of a machine which renders a certain machine tool worthless — which immediately depreciates its value to that of scrap? Yet depreciation must enter into every cost, and as an unknown factor of the whole result makes the entire science of costs an inexact one. The underlying principles of the science of costs, however, are not only exact but surprisingly simple. It is only when it comes to the application of these prin- ciples that confusion results. There may be few or many elements entering into 14 Cost ( J. fl- Material (a) Prime Cost J V 2. Direct Labor ' 1. Indirect Labor 2. Power 3. Heating, Light- (b) Burden 2. Selling Expense ing, and Bent of Buildings 4. Taxes 5. Insurance 6. DepreciatioB ^1. Upkeep 1. Office 2. Salesm^i 3. Estimates 4. Advertising 5. Traveling 6. Indirect Expense UL Profit Selling Price is made up of the simple factor Profit and the complex factor Cost to Make and Sell. The selling price of an article or product is the cost to the consumer (disregarding freight or like charges). It is the objective point of a system of costs to make the COST TO MAKE AND SELL 27 selling price as low or lower than that of competitors, and still keep the factor Profit as large as possible. Profit is the return from the employment of capital after all charges for labor, material, interest, deprecia- tion, selling expense, and other expenses of the business have been deducted. It is the difference between Selling Price and CJost to Make and Sell. A misapprehension of the meaning of "profit" is responsible for a large percentage of the failures in business. This is nowhere better shown than in certain country stores. One who has sold the country trade or met the individuals comprising the storekeepers of the smaller country towns knows how common it is to take the difference between the buying price of an article and its selling price, and call that difference "profit." Cost to Make and Sell — often called Final Cost or Cost — is made up of two complex factors, Factory Cost and Selling Expense. Selling Expense comprehends every expense related to or connected with the disposal of a product. In a machine, the following items are comprehended under the head Selling Expense: Office Salesmen Estimating: (a) Ordinary; (b) Drawing Boom Advertising Traveling Indirect These elements will be taken up in detail later. Selling Expense 28 COST OF PRODUCTION Factory Cost is made up of Prime Cost and Bur- den. Burden has already been defined, and may be subdivided as follows: Indirect Labor Heating, Lighting, and Bent of Buildings Burden^ Taxes Insurance Depreciation ^ Upkeep Prime Cost, as has been taken up before, is made up of two simple elements, Direct Labor and Material. While Direct Labor is a prime factor, yet it is some- times in machinery manufacture divided into classes as follows : (Machine Shop Labor Foundry Labor Drawing Room Labor This division is the last element derived in the sepa- ration of Selling Price into its component parts. It will be noticed that a regular gradation exists in this scale. In the descending scale from Selling Price to Direct Labor the first element of division is always a complex one, subdividing until unity is reached, while the second element is either simple or simply complex. This, of course, is of passing interest only, but helps to fix the outline of the science in the mind of the reader. The preceding outlines show the diagrammatic rela- tions existing between the various elements and factors INEXACT USE OF TEEMS 29 of costs, as commonly accepted by the best authorities to-day. The inexact use of terms by different writers is more common than material differences in graphic representation, though occasionally both tend to com- plicate the subject. The various elements of the science of costs having been defined and graphically represented, each element, beginning with Direct Labor, will be exhaustively treated in the order of its introduction as an element into the final cost to the buyer. CHAPTER T MATERIAL Material is the first great factor in the cost of a thing to the producer — the other items being Labor and Burden. That which is used in the manufacture of an in- dustrial product, entering into and becoming a part of it, is termed Material. The first prime cost of any manufactured product is the outlay for material. The science of costs, there- fore, furnishes a monetary history of the progress of the raw material from the time of its purchase, through its transformation, to its completion as a finished product. In the ordinary business this history commences with the purchase of the raw material and ends only with the selling price. Theoretically Cost to Make and Sell is the real objective point, but it is the best system which stops only with the final price, showing every gradation between. Material may be classified as follows : {Raw Material Finished Commodity Accessory Material Raw Material is entirely a relative term, and may be defined as any material for use in a process before it has been subjected to that process. The definition of 30 RAW MATERIAL 31 raw material given by H. 0. Carey is as true to-day as it was fifty years ago. Mr. Carey says in his Manual of Social Science: "What, however, is raw material? In answer to this question, we may say, B«fliiiti«B that all the products of the earth are in turn, finished commodity and raw ma- terial. Coal and ore are the finished commodity of the miner, but the raw material of pig-iron. The latter is the finished commodity of the smelter, yet only the raw material of the puddler, and of him who rolls the bar. The bar, again, is the raw material of sheet-iron, that, in turn, becoming the raw material of the nail and the spike. These in time, become the raw material of the house, in the diminished cost of which are concen- trated all the changes in the various stages of passage from the crude ore lying useless in the earth, to the nail and spike, the hammer and saw, used in the con- struction of a dwelling." In the science of costs the term Finished Com- modity designates any industrial product which is in- troduced, without substantial change, into the compo- sition of another product, usually as an accessory part. As an example, a firm manufacturing cement mixers finds the demands of the trade require that motive power be furnished with nearly every mixer. They manufacture the mixer and place it in the ware- house, it then being, as far as they are concerned, a finished commodity. If, when the mixer is sold, an electric motor is mounted and shipped with the ma- 32 COST OF PEODUCTION chine, such motor is a finished commodity entering into the make-up of the machine, it not having been proc- essed into shape as has the iron and steel which go to make up the remainder of the cement-mixing machine. Accessory Material is material necessary to a process, yet not actually entering into the completed product, as a scaffold built around a machine when assembling it, and is commonly considered a part of general manufacturing expense, particularly if the material is used again and again, and not directly chargeable against a particular job. The matter of the finding and apportionment of the cost of material is a simple one and may be arrived at with comparative exactness. Material is Ibtafi^ affected by the daily fluctuations of the market, it is true, but even then a mean price is easily determinable. Many factories contract for a year's supply of a product at a fixed price, so that market fluctuations do not have any effect on the keep- ing of costs. For instance, a company using several thousands of tons of castings per year, contract for them at a uniform rate per pound, delivered. The total weight of castings entering into a machine times the price paid per pound, obviously gives the cost of the cast iron for that machine. The steps in the treatment of material are as fol- lows: (1) Purchase; (2) storage; (3) use; (4) record (of all preceding acts affecting it) . In the present system of factory organization the Cost of Material COST OF MATERIAL 33 manager is the one from whom all purchases issue ; he is the nominal purchaser. As has been mentioned on a preceding page, this power may be vested in a specialist or in a number of specialists, who have more skill in buying and time in which to exercise that function than the manager. Purchased material either goes direct to the store ?oom or is kept track of by the storekeeper, who should be able to show by his records the receipt of material, issue of material, and balance on hand. Cost of Material may be subdivided as follows: Material Freight Express L Drayage The elements of Freight, Express or Drayage are constituents of Cost of Material. In figuring on ma- terial the cost at the factory is first taken, to it is added the cost of laying down the material at the factory door. There may be either freight or express charges and also drayage charges at one or both ends of the line. Transportation charges of whatever kind on raw material, should be so distributed a: to be borne pro- portionately by the material incurring the expense. If they are not and Freight, Express and Drayage are made general charges, a machine may be put out bear- ing a disproportionate burden of such charges wrongly placed. By stores is meant those supplies including raw 3 34 COST OF PRODUCTION material kept on hand for use in a bnsiness. While the stores account primarily concerns itself with the raw material used in a business, it often comprehends merchandise chargeable, not as Baw Material but as Burden. The matter of supervision of stores depends upon their amount and value. Where the material used con- sists mainly of pig iron or heavy castings, ^stores there would be no supervision necessary to prevent loss by theft. Where a miscel- laneous lot of finished and valuable product is kept among the stores, an exact system showing the disposal of every piece should be kept, not only for use in cost calculations but as a check on petty thieving. Brass castings and copper material are particularly liable to this form of "leakage." Stores in bulk are liable to a fixed percentage of loss. This loss is ascertainable by experience and should be considered — if the percentage is appreciable — ^in store room and cost calculations. Material once received by the store room can not issue without authority. This authority may be vested in the manager "" foremen of various departments or any intermediate employ^. The duties of the storekeeper are to receive incom- ing goods, verifying same by invoice, fill such requisi- tions for stock as are duly authorized and keep such account of stores as is deemed necessary to proper busi- ness administration. For this a stores ledger may be PRICE OF MATERIAL 35 used, being simply a ledger in which required accounts are opened, keeping a record of incoming and outgoing stores. The old stores ledger is fast being superseded by some form of card system. The efficacy of card systems as a means of saving time and expense is well recog- nized so the numerous advantages will not be enumer- ated here. One of the functions of cost ledger accounts is the charge of each job with the material used, exhibiting both quantity and value. In case a product is made in uniform lots, an estimate may be made of the material used in a standard product or machine and the job charged with a proportionate amount according to the number manufactured. An attempt to follow material through a job with regard to ordinary fluctuation in market price is not practical. There are several methods in Flactnation in Price of use to determine a fixed price of raw ma- terial to be used in a machine. One is to take the buying price and consider it final, the reason for this being given that the buying price is the price that concerns the manufacturer. Another method is to take the average or mean price for a term of years and call such price the market value. The argument advanced for this method is that a machine in process of construction may market at a time when the raw material of which it is composed is either higher or lowei* than the buying price, and in order to estimate 36 COST OF PRODUCTION correctly the price of the component parts of the ma- chine, a mean average price must be taken. Inflation of assets in business must be guarded against, even in the case of material. Such inflation can occur by writing up the value of material in the storeroom or in process of manufacture, before the finished product is actually sold, or by assuming the market value of raw material to be its original cost with the addition of transportation charges. Transportaion charges may or may not enhance the market value of raw material. The factory location may be such that the market value of the material would not equal the cost of removal. An apparent profit to a factory may be shown by the general factory buying from a branch at a certain per cent above cost instead of debiting to Manufactured Stock at cost. This may be advisable in a few indi- vidual cases, but as a practice, is liable to be a mislead- ing one. In a works having several branches each main- taining a separate stores department, the following outline of procedure is one followed by advantage by many. The head of each department makes a requisition to the head office for all stores needed in his division. This requisition issues on a stated date, as on the 25th of the month, on the 1st and 15th, weekly, or oftener. Stores are not allowed to get beyond a certain point, but if an unexpected demand does reduce them an REQUISITION FOB STORES 37 emergency requisition is issued. All requisitions are turned in far enough ahead to allow time for purchase by the head stores offlce, in case they are low. Requisition forms may be as simple or explicit as the needs of the record require, but usually exhibit: (1) Description of the material or article; Kor*ei"° (2) quantity; (3) for use in ; (4) when needed ; last supply obtained ; (5) by whom supplied; (6) remarks. Such requisition may be made out in duplicate or triplicate, and the carbon copy may be checked up with the goods when received. These goods are usually invoiced separately to each department of the works, as delay and con- fusion may result from the sending of one invoice from department to department for the checking off and verification of stores received. Should :he checking be done at the head oflSce, one invoice is enough as the storekeeper, on receipt of the goods, checks same ofiE with his duplicate, and if found correct, sends the requisition number with his O. K. to the head oflSce. Should goods not be as ordered or otherwise unsatis- factory, the requisition number is forwarded with no- tation of rejection. In case the storekeeper has made out his requisition in triplicate, the first sheet will be the "Original," the second, the "Advice," the third the "Voucher." In this case the Advice would be forwarded to the head oflBce bearing checks and notation, such an- notations having been duplicated on the Voucher by carbon paper. This gives the head oflBce a receipt from 38 COST OF PRODUCTION the storekeeper, the Advice being attached to the Orig- inal as a receipt, and the storekeeper has ia his hands the Voucher, which embraces the history of the requi- sition from the time it is made out until the goods were received by him. If a stores invoice book is kept, the invoice of goods when received and verified will be entered tfcerein, show- ing the amount of invoice as received, and the amount of invoice as verified, which amount is posted as a credit to the individual firms, and as a debit to the commercial ledger under General Stores. If these amounts are to be analyzed and used as a check on the departmental stores account, the ledger is so ruled as to permit each department or works to have a separate column. This also aids in the tracing of errors made in keeping of the different works books. Should a stores received book be kept it will con- tain the information of the requisition "Advice," and the stores ledger folio. From this is posted in the stores ledger a debit to the specified material acconnt. The stores departmental ledger closely resembles the commercial ledger. Instead of the accounts being with individuals they are with specified materials. Space is provided for such information as necessary, as description, rate and amount of goods. In addition, the debit side should have a space for the firm name of the house supplying the stores. Orders for stores are made out in duplicate by the one authorized — usually the foreman or departmental DIVERTED STORES 38 manager, the original going to the storekeeper, the duplicate being retained by the one ordering. When issued, the stores are receipted for on the original order, which becomes a voucher for their issue. The stores order may be as explicit as desired, usually exhibiting in detail the contemplated disposal of the stores, whether called for in the regular process of manufac- ture, for works order No. — , for maintenance of plant, or for other purposes. In case stores ordered and supplied are diverted from their original purpose, the one ordering such stores gives a detailed notification to the stor*e^*^ storekeeper that he may credit the debited account, and place the debit where it properly belongs. This may occur on a special or rush order, when the machines use the material already at hand for another order, and if not properly reported will show a low material record for the rush or special job and a correspondingly high material record for the job from which the material was taken. This, too, is liable to happen where stores are ordered in excess of need for jobs, or where an estimate has allowed for more material than is needed. The rule should be that surplus of any kind should be returned to the store- room, as well as diverted material reported for proper charge. Scrap reported from a job may be treated in var- ious ways. A satisfactory way is as follows : When a large amount of scrap is handled it may be considered 40 COST OP PRODUCTION in bulk and pro rated to the material from which it came. Such credit would be the amount which the scrap brought on sale. If not sold but held for sale, a fair price would be taken, being the mean market price. If returned to the works for remelting or other use it would be considered worth the scrap price, plus the charges necessary to lay it down for use at the factory. In concluding the chapter on Material, it may be said that the question of interest to the manufacturer is, whether or not his business is large enough to de- mand an accurate record of stores. It would seem that it is no more advisable to leave stores about without a check, than it would be to leave money lying about loose, and subject to no record. Stores are not only liable to misappropriation, but to misuse and deprecia- tion, and should be subjected to as careful supervision in their purchase, issue, and use as every department of factory expenditure. CHAPTER VI LABOR The greatest cost of production is labor, and the more complex the product the greater is this cost. _ . „ _ The first cost of anything is its labor cost, ered as Cumuli- and the cost of a thing at the present time tive Labor Cost . IS, from one point of view, the cumulative cost of the labor spent to produce that thing from the raw material. Every manufactured product existing to-day was at one time raw material and only by the exercise of labor has it become what it now is. On a preceding page has been given an illustration of the savage picking up native gold from the bank of a river at the sole cost of labor. When he desires anything, it is to be had at the direct or indirect expense of labor. Labor cost first enters into the price he has to pay for everything, and as all values spring from labor, burden charges can not arise until labor has purchased that which bears the burden. While methods of hiring labor and keeping a record of the individual employ^ may be said to fall within the subject of factory organization and management and without the science of costs, yet a correct record of labor necessary in costs, can not be kept without a minute record of the employ^. There are employers who require a detailed application blank, with informa- 41 42 COST OF PRODUCTION tion sworn to, with vouchers signed by one or more per- sons knowing the employ^, this application constituting a part of the employer's records. On the other hand, many factories entrust the hiring, supervision, and dis- charge of all shop employes to the foreman, who usually keeps no record — or a very imperfect one — of the em* ploy6s under him. Inasmuch as direct labor constitutes from forty to fifty per cent of the cost to produce, and is subject to waste the same as any factor of costs, it requires no argument to show that the most complete records should exhibit what disposal is made of every cent paid out for labor. A manager may know that waste is taking place, and only an accurate record will show, for instance, that the cost of assembling is too large, which overcharge may be remedied by a rearrangement of the plan of the factory, if conditions are such that it would be a paying step. The detailed employ^ record affects the cost record only indirectly, but at times in a very essential manner. There should be always on file, in an alphabetic card index a complete list of employes, this list to show the following data : (1) Name; (2) department; (3) num- ber; (4) formerly employed by ; (5) address; (6) engaged by ; (7) date; (8) occupation; (9) rating. The foregoing data is self-explanatory, with the exception of division 9, rating, which means more than apparent on the surface. The obvious or nominal BATING OP EMPLOYES 43 rating ahoald be a colorless one ; as, "Recommended by Perry & Schafer;" "Ransom Bros. & Co. say good man," etc., but each indorsement should be merely harmless in- formation and such that when made public or taken in court would not prejudice anyone to whose knowledge such information came. But the employe's number or some other symbol should refer to a private information record kept under the supervision of the manager and seen only by him and a trusted assistant. The em- ployer, to a certain extent, invests his money in his employ^, and is entitled to their working history, as a guide, not only to their being engaged, but to their re- tention, promotion, and subsequent history with the firm. On the other hand, the competent employ^, who has taken care to make his working history always a good one, and labored faithfully to maintain a high efficiency record, is entitled to the benefits accruing from such a record. The incompetent, dissipated, or shirking workman is often employed — particularly on a recommend — but his efficiency record will soon show him up and give him only that treatment which is due. There is no argument needed to show that all real records of this character should be secret, as much damage may be done by even the smallest "leak" in private information of this kind. The first point to be considered in a system of costs is the accurate recording of the employe's time. The systems used for this purpose are described in de- tail in Part II of this book. The check or tally system 44 COST OP PKODUCTION — now being fast superseded — is one to which many manufacturing plants otherwise modern in equipment, still retain. This system is as follows : The workman enters works through the time ofBce. Each employ^ has a number by which he is designated, which number he calls out on entering, the timekeeper giving him a check bearing the number TheTaUy & & t> System called. The works gate is guarded by a Described turnstile, and once in the workman can not leave without passing through this or some other exit where his leaving would be noticed. This is used as a means to prevent "doubling," as otherwise a work- man might call out a confederate's number and secure an extra check, and so lead to an improper credit for an employ^ not working. If the employes or any of their number leave at noon, the checks are given in at the time ofQce, and again handed them at 12:30 or whenever they return, if the workmen take their noon inside the works, their check would not he turned in until leaving time. The checks or tallies given out in this system, are racked on hooks numbered to correspond to the tallies. Absence of a check from a hook therefore shows that the employ^ bearing the corresponding number is at work, and an entry on the time-book or record is made accordingly. Workmen coming late have a "late check" hung on their hook bearing a notation as to time lost, or this notation may be entered at once on the time- record. SYSTEMS OF WAGE PAYMENTS 45 The time-record is posted at once and may be veri- fied by the timekeeper, who visits the factory, checking each department for number of workmen, or the fore- men may turn in such record, or a combination of both methods may be used. The check or tally system possesses many disad- vantages, but is often retained because of mere inertia, having been installed and worked satisfactorily for a long time it is kept in operation. This system is open to many objections, the principal ones being on the score of economy and accuracy. An automatic recorder of whatever kind dispenses with one or more employes, and is not subject to error, as are personal entries. The various kinds of time recorders are in common use and extensively advertised by the technical press The various methods of paying the workman have a direct and important bearing on production costs. It is admitted unqualifiedly that all tendencies of the average workman are toward restriction of output. There are two main reasons for this : (1) The wish to receive as much as possible for the least possible work ; (2) the theory that work must not be done as quickly as possible as it might throw the worker out of a job, or throw other workers in the same line out of employ, and so tend to a lowering of wages in that particular trade. The systems of wage payment now in use are the daily wage system or day's- work plan; the piece-work plan; the premium plan, the bonus system, and the profit-sharing system, and various modifications of the 46 COST OF PRODUCTION foregoing. A detailed discussion of the relative merits of these plans would be so long as to be without the scope of this work, but the principles of J?^' each system will be taken up following — their application depending, of course, upon circumstances. Whatever system reduces the price of labor — increases the output of the employ^ — is the one to be used and each have their advocates. In many cases it is not the system but the man. That is to say, an engineer of years' practical experience studies the various conditions surrounding l?bor as he knows it from personal contact. Being a bvoad and essentially practical man, he is able to install and operate a sys- tem, which, peculiarly fitted to the existing conditions, cuts down expense by a substantial percentage. Another man under different circumstances would make an en- tire failure of the same system. However, there are underlying principles broad enough on which to build, which, if taken as a basis, form the essentials of a sys- tem no matter what the circumstances. It is not necessary to trace the causes which have led up to the indifference shown by day workers. There is a minimum inducement only for a day worker to do his best. To do only enough to escape being discharged is more often the aim than to do a just day's work. No matter how often any attempt may be made to equalize men and put them on an equal footing, the fact still re- mains that a very great difference exists — and always will exist in both the quality and quantity of work done THE DAY'S- WORK PLAN 47 by diflferent men. Daily wages and equal pay assumes them to be on an equal footing, and sudh not being the case, is manifestly unfair to some. Either some are underpaid or overpaid, and in either case the remainder are discriminated against. In the day's-work plan, the employ^ is paid for the time which he spends upon his work. As a result of this system, an easy-going rate of speed is Day'a-Work generally taken, marked by occasional Plan spurts; workmen have little interest in the work, for which the employer overpays. The fore- going facts are admittedly true, and yet the percentage of manufacturing plants employing this plan is large — very large — ^when compared with what it should be. It is no small undertaking to reorganize a large factory and secure the cooperation of the workers to a success- ful finish, yet the returns are so great and the experi- ence gained so valuable, that no manufacturer should hesitate to make the change, gradually if necessary, but at any rate, get away from as wasteful a form of production as the day's-work plan of employing labor. The theory of piece-work is a simple one. With the piece-work plan in operation the workman is paid for his work, proportionate to the amount done. A definite price for each job being set, the workman who contrives either by working harder or by the use of better methods to shorten the time of manufacture, conse- quently earns a proportionately greater amount. This system, on its face, seems to be based upon 48 COST OF PRODUCTION scientific principles and to be fair to both employer and employ^. That it does not work well in practice and fails to yield the desired results is evident from an in- vestigation of a large number of shops in which it is or has been employed. Following is an outline of a change from the day's work plan to piece work as it often results in practice. The employer investigates or can not help observ- ing that his output is not what it should be while pay- ing his help by the day, and a system of payment by the piece is installed. Suppose the labor price of a standard piece of work to be ten dollars. The employer satisfies himself that this piece could be produced for eight dol- Institution and ^^.rs labor cost. To give the workman an KeotwMk""* incentive for faster work, a piece-work ^1*" price of nine dollars is made, this making in fact, a division of the profitable saving, with the workman. The first objection usually comes from the workman, who fears that he is being taken advantage of, and is certain he can not make wages at the price per piece offered him. Conditions being favorable and perhaps being fortified temporarily by a minimum guarantee, he starts in and increases his output much more than the per cent figured on the job with the re- sult that his earnings increase with such rapidity that the profit to the employer is swallowed up. The logical result is a cut in wages. The employ^ thereupon figures that too much work done and too large a consequent wage results in a cut. He therefore assures himself DRAWBACKS OF THE PIECE- WOEK PLAN 49 what is the maximum wage he can receive without a cut, and never increases his output beyond that point. The situation at this point between the employer and the employ6 is this: The former uses every possible means to increase the output that he may profit by more work without increased burden expense — the men so time their work that they are in no danger of a cut be- cause of large wages. The interests of the employer and the men are diametrically opposed, with the result that the object in view — reduction of cost — is not at- tained. Another and important drawback connected with the piece-work plan grows out of the fact that an accur- ate standard — especially on varied or complicated work is diflBcult to set. This was shown by Fred W. Taylor, of the American Society of Mechanical Engineers, in a paper presented before that body at Detroit in 1895. Mr. Taylor said: "Every intelligent workman realizes the import- ance, to his own interest, in starting on each new job as slowly as possible. There are few foremen or super- intendents who have anything but a general idea as to how long it should take to do a piece of work that is new to them. Therefore, before fixing a piece-work price they prefer to have the job done for the first time by the day. They watch the progress of the work as closely as their other duties will permit, and make up their minds how quickly it can be done. It becomes the workman's interest then to go just as slowly as pos- 4 5U COST OF PRODUCTION sible, and still convince his foreman that he is working well. "The extent to which, even in our largest and best managed establishments, this plan of holding back on the work — 'marking time,' or 'soldiering,' as it is called — is carried on by the men, can scarcely be understood by one who has not worked among them. It is by no means uncommon for men to work at the rate of one- third, or even one-quarter, their maximum speed, and still preserve the appearance of working hard. And when a rate has once been fixed on such a false basis, it is easy for the men to nurse successfully *a soft snap' of this sort through a term of years, earning in the meanwhile just as much wages as they think they can without having the rate cut." It is plainly evident that the success of piece work depends upon the fairness of the schedule of prices, the subsequent change in those prices and managerial ability of the foreman or supervision of the shop. If the time a job ought to take is accurately figured and the workman is given an equitable price — large enough to be made a real incentive — and a competent manage- ment is in charge, the defects of a piece-work system are forestalled or minified and a corresponding saving is effected over day labor. There are two methods of figuring the probable time on a job. The first is by averaging the time of a number of similar jobs performed under the same con- PROBABLE TIME 51 ditions. This method presents the advantage, that it actually shows what has been accomplished in the past, and as such is a guide to future production. The dis- advantage — and it is held by many to be Figuring a great one — is that it is impossible to Probable Time . , , „,,.,, judge what per cent of the time charged against the job was spent by the employ^ in "soldier- ing." It is usual, too, that little or no efEort is made to classify the operations necessary to perform the work, and that the result is more or less the nature of a guess — according as past records show a number of jobs similar to the one under consideration or not, A method in successful use is one in which a job is re- solved into its component elements, and the quickest time ascertained in which these elementary operations can be performed. These operations can be classified, tabulated and arranged and used as desired in the fixing of rates, and modified as experience shows is necessary. The second method is that of paying no at- tention to what has been done or what is actually being accomplished and disregarding former practices en- tirely. The probable time, therefore, must be figured by one who is thoroughly competent to judge of all the conditions, for on him depends the success of the plan. Such knowledge can come only from practical experi- ence and a highly developed sense of the possibilities of labor. In proving that wastes now going on are absurd, 52 COST OF PKODUCTION and in direct line with the second method outlined in the paragraph above, Harrington Emerson says in the Eailroad Gazette: "As an example of old practice against new, I hold in my hands the original figures of the skilled and com- petent engineer of a large shop, who estimated the cost of a certain job at |4,575, of which |3,300 was for ma- terials and $1,275 for labor. The work came under my direction after it was one-third completed, and was pulled off with four men in three months for a total cost of $3,375.09, of which $622.79 for labor, netting a profit of $1,824.91, instead of $629, as estimated— nearly three for one, yet some of the men on that job were paid a bonus [increase] of nearly 100 per cent above their regular wages. I also hold a routing card of one of my assistants, Mr. Parkhurst, in which a car- shop job, marking and moving 200 pieces of oak, was estimated by the foreman to require two days, but was actually completed in two hours twenty-five minutes on a fifty per cent bonus basis." The system above referred to is a modified piece- work system, known as the differential system, differing from ordinary piece work in that the premium paid is higher — often 100 per cent — and the reward is with- held unless the maximum of production is reached. A more exact definition of the differential rate system of piece work, is that system which pays the employ^ "a higher price per piece, or per unit, or per job, if the work is done in the shortest possible time, and without THE PREMIUM PLAN 58 imperfections, than is paid if the work takes a longer time or is imperfectly done." The premium plan of wage payment is as follows : The workman is paid over and above his usual daily wages, a premium for every hour he suc- Premium ceeds in reducing a previously determined Plan time, such premium being divided between the workman and the employer in a definite ratio. The time used as a standard is determined from previous costs. The effect of this system is to pay the workman for saving time, and has as its basic principle the making of the hourly premium less than the hourly wages. The premium rate is obviously the important part of this system. No hard and fast rule can be laid down as to what premium should be paid, as it would vary greatly with different lines of production, and in the same lines under different circumstances. If a small premium is offered the employ^ may not put forth the effort necessary to earn it, or if he does, not steadily or systematically. This will defeat the object of the system by not increasing production. If too large a premium be offered, the cost of production will be dis- proportionally increased. A cut of premium is to be much avoided as in the piecework plan, as it will lead to the same results. In a perfect working system the earnings of the employ^ will be limited only by his power of production, and the results to the employer will be an increase of output and decrease of labor cost. 54 COST OF PRODUCTION The bonus system of wage paying was first pro- mulgated in 1901. In this system a detailed card is made out showing the various elementary operations making up a piece of work. There is also Bonos shown the tools needed and the time necessary for each operation. These times have been previously determined and tabulated as de- scribed on a preceding page, there being no operation in the shop not a combination of these elements. The total time allotted on a job of work is obviously the sum of its elementary operations. If a workman is unable to perform his job of work in the allotted time, he is paid at the day rate only ; if he performs the work as laid out, according to the specification and within the time limit, he receives in addition to the day rate a definite bonus. The instruction cards are and must be made out by one thoroughly familiar with the operations and the records, and as so made they are a guide to the best method by which the work can be done. The ordinary worker, in all probability, would not plan out his work nor would he execute it even approximately as well as he will from his detailed guide card. Continuous work- ing by the right methods tends to make him a better workman and the entire trend of the employe's methods under this system is towards better execution as well as greater output. The principal advantage of the bonus system over THE PROFIT-SHARING PLAN 55 the ordinary piece-work system lies in the fact that it has a minimum wage and avoids the diflaculty found in piece work — that of securing an equitable rate. If proper piece rates could be made, thus avoiding the necessity of a cut, the piece-rate system would be pre- ferable, but such rates are very difficult to determine and often can only be found by "cutting and fitting" until suitable rates are thus obtained. The diflSculties in the way of providing suitable instruction cards are considerable, requiring a vast amount of practical information rarely possessed by one man. As the instruction cards take up processes in detail, if one of the operations is wrongly timed it can be modified as needed, but if any material error is often made it will cause the workmen to doubt the en- tire system, which result can not fail to be harmful in its result. As a result, the entire success of the plan hinges on the accuracy with which the cards are made out. The profit-sharing plan of wage payment is one in which the employ^ receives a certain percentage of the. final business profits in addition to his The Profit- Sharing regular wages. This system is open to many and serious objections, some which are as follows : Anything given the employ^ under the profit-sharing plan is not in the nature of earning but in the nature of a gift, being in fact, a sum that is in no way earned by him. Profit earned by a company 56 COST OF PRODUCTION may be due to the superior management of one man or come from the superior eflaciency of the sales force, or from one of a hundred other causes. Another prime objection is the one urged against the day wage system, viz., that it rewards the lazy em- ploy^ with the energetic, the poor with the good, as all receive an equal or proportionate share of the profits. Then, too, the rewards are not immediate but remote, and the effect of a future dividend upon any but the most sanguine is questionable. The workmen must accept on trust, the statement that the dividend is correct. They have no direct means of verifying it, as the means by which the result was obtained is so complicated that few could form any idea as to whether or not the announced profit was just or reduced by judicious "watering" of stock. The term "profit-sharing" implies a profit. In case a plant were run at a loss, there is no provision for an assessment, and it would be impracticable were there such a provision, as the indirect loss made by assessing the workmen would offset the money collected in. In a term of ten years, it is fair to assume that one or more "lean" years may be met, and under this system there is no provision therefor. Among the successful methods of getting the em- ploy6 to take an interest in the business is by making him a stockholder. He then not only "plugs" for the business, but, having a proprietary Interest in the com- pany, tries at all times to further their interest both INTERESTING THE EMPLOYE 57' in the shop or out. The ratio of success by this method may be said to decrease directly with the size of the company, as the smaller the company the greater one man's influence on its future. In the foregoing discussion of the various wage systems one element has not been touched upon — the relation of burden generally, or depreciation specifi- cally, to output. This will be taken up in the chapter on Depreciation. CHAPTER Vn BURDEN The second factor composing Factory Cost is Burden, often called Fixed Charges. This brings in the first inexact factor in the science of costs, and the science is mainly concerned with, (1) Determination of Burden; (2) apportionment of Burden. As previously shown, the constituent elements of Burden are as follows: ' 1. Indirect Labor 2. Heating, Lighting and Rent of Building Burden-^ 3. Taxes 4. Insurance 5. Depreciation ^ 6. Upkeep The determination of these various elements is not a diflScult process and may be arrived at with a fair degree of accuracy— the amounts determined being accurate enough for all practical purposes, the sum of the elements giving the total Burden. In the apportionment of Burden, the difiSculty arises as to how this factor shall be distributed and charged against the made or manufactured product. If we assume Burden = I, and product = p, then I — 3= amount Burden borne by unit product. P 58 BURDEN AND ITS APPORTIONMENT 59 But p is made up of different and complexly vary- ing factors, and there is not nor can there be any as- surance that when p is resolved into those factors that 6 can be correctly apportioned. If we take as a concrete example a factory pro- ducing 1,000 machines in one month, and assume that each machine goes through exactly the same process, and that the burden for that time was $2,000, then it is an easy matter to determine that the burden that each machine should carry should be |2,000 -=- 1,000, the number of machines = $2, the amount of burden that each should carry. But if the conditions remain the same with the exception that the machines turned out are different, each going through an individual process, it is with- out the scope of practical business possibility to ap- portion the burden so that it will be borne equitably by each machine. What can be done is this : Burden may be so ap- portioned that it is all charged off — each machine bear- ing some of the expense, as determined by some method of apportionment. There are three principal methods of apportion- ment, the percentage burden plan, the hourly burden plan and the machine-rate plan. There are many other methods, for the most part modifications of these, but the two first are in most common use. Both the percentage burden plan and the hourly burden plan have the warmest advocates, and much 60 COST OF PRODUOTION has been written in defense of each system — ^writers often seeing no other merit in any other plan than the one they set out to defend. The percentage burden plan is the one usually em ployed when it is attempted to distribute the indirect burden expense over the work. There is Ihe Fercent- age-Bnrden necessary to compute this distribution: (1) Burden; (2) amount expended for direct labor in a given period of time or on a given job. The ratio existing between (1) and (2) gives the percentage by which the direct wages is multiplied, the product giving the burden which that particular work should bear. This is a very simple method, and one that can hardly be called exact. By this method, a shop putting out work uniform or nearly so in product, and having a wage scale not greatly diversified, finds it accurate enough for practical purposes. Where this method falls short, however, is in the shop radically differing in conditions from the one noted above. If the working machines vary, greatly in identity, the wage scale is not uniform because of varying prices paid labor, and the component parts of the manufactured product are varied in material and price — when these conditions are present, the percent* age-burden plan is not accurate enough to meet the re- quirements of a cost system. Three of the elements of Burden are Taxes, K. surance and Depreciation. These are chargeable — not against the workman — ^but against the factory in HOURLY-BUEDEN PLA2T 61 which he works and the machine which he runs. But by the percentage burden plan, as part of Burden they are charged against direct labor. That is, a one-dollar man running a thousand-dollar machine is charged only one-flfth as much as a five-dollar man working at a job where the value of the tools may be regarded as ten dollars. (This, of course, is an extreme case and one introduced only by way of illustration.) But the taxes, insurance, and depreciation on the machine used by the one-dollar boy is one hundred times as great as the tools used by the five-dollar man, and the burden is calculated in on the direct labor of each in the ratio of 1:5; when the value of the machine is to the value of the tools as 1000 : 10 or 100 : 1. This and other discrepancies are not taken care of under the percentage plan. When the direct labor is indicated on the time card it stands as the base on which is figured the proportion of the burden it is to bear, regardless of any inconsistencies such as the one above last noted. This makes the calculation an ar- bitrary one and not one giving a correct solution of the problem of costs. The hourly burden plan, instead of distributing the indirect burden expense over the work or the indi- vidual iob, with direct wages as a meas- Burden ure, distributes this expense over the work according to the number of hours chargeable against such work. In other words, the ratio of the gross burden to the total number direct 62 COST OF PRODUCTION labor hours, gives the percentage by which the direct wages is multiplied, the product giving the burden which that particular work should bear. By use of the hourly-burden plan, Cost to Produce may be entirely dififerent than when figured by the per- centage plan. The advocates of the hourly-burden method claim that it is far more logical to take as the basis of calculation the hour instead of the dollar. One of the notable faults of the percentage system, that Factory Cost is always proportional to Prime Cost, is overcome. What in the percentage-burden plan is over- looked — the time spent on a job — is brought to the fore, and the factor Time is considered in its true importance in production cost. Empiricism is as manifest in the distribution method of the hourly-burden plan p,s in the percentage- burden plan. The one arbitrarily takes as a base, wages; the other, time. In order to have a system which is simple in operation, accuracy of apportion- ment is surrendered. What is the result? The system being simple, the conditions to which it is applied must be free from intricacy or complication or inaccuracy results. Whether this inaccuracy is important enough to be essential depends upon the complexity of the facts to which the system is applied. The two are propor- tional. If we return to the example of the one-dollar man and the five-dollar man, it will be seen that depreciation and allied charges are no better provided for by taking MACHINE-RATE PLAN 63 time as a base than by taking wages. Either plan is unsatisfactory — and particularly so — when low-priced labor is at work with high-priced machines and high- priced labor with low-priced machines or tools at the bench. It is not to be hastily assumed, however, that be- cause of inaccuracy in the division of Burden, that the gross cost of a product for a month or year will not be correct. Supposing this gross cost to be figured once a year; obtained by either method, it will be practically correct. The machine-rate plan is a method ante-dating both the percentage-burden plan and the hourly-burden plan, having its origin before modern Maciiine-Eate methods of accounting and not conform- Flan able to them. This plan as most com- monly in use, bases on the probable life of the machine under full work, an hourly interest and depreciation charge, this charge to be distributed over the work. By extension, and to provide for the disposal of the remainder of Burden, a part or, rarely, all of the re- maining charges are arbitrarily included in this allo- cation. When restricted to the factors Interest and Depre- ciation, and when a machine is running constantly, the machine-rate plan is an accurate one. Inaccuracy re- sults when the machine lies idle. The advantage of the machine-rate plan and the one which has kept it in use so long a time, is that the 64 COST OF PRODUCTION system provides for the inequality of the oost of work turned out on the various classes of machines. The in- formation it furnishes is valuable, but not as complete as might be. The scientific machine-rate plan of Mr. A. Hamil- ton Church is one designed to overcome the various drawbacks of other plans. The shop is The Soientiflo Ma- divided into various '^production centers, ohine-Bate Flan such center being a machine or a bench at which a workman is stationed, each station being theoretically a minor shop, bearing its burden of rent, interest, depreciation, etc., independent of other pro- duction centers in the same works. Mr. Church outlines the plan as follows : "First, we consider each machine as an independ- ent production center, allocating to such centers all the expenses and charges which can, on reasonable anal- ysis, be considerable as chargeable as a composite rent or machine rate for all the factors of production therein concerned. Second, we charge to a monthly shop charges account all charges whatever incurred by that shop, including all the items specifically represented in fractional detail by the machine rates, and also includ- ing, of course, such general items as can not be repre- sented in the machine rates, of which the most obvious item is the supervision of a head or foreman. "Then, as each machine is occupied on jobs, the latter are debited with so much per hour as machine rate, and at the end of the month the total amount so PLAN TO BE FOLLOWED 65 earned by the machines is deducted from the total shop expenses, leaving a balance which is distributed over the same jobs as a supplementary rate. The rates of the supplementary rate to the amount distributed by the machine rates forms a varying barometer, whose fluctuation is an index to the current efficiency of the shop." Additional distribution is effected in the scientific machine-rate plan by the ordinary hourly-burden method or by a proportionate increase of the machine rate. Such, in brief, are practically all of the methods in use to-day, for apportioning the burden to the manu- factured product. That this apportionment be exact is particularly essential, for the burden seldom repre- sents a smaller sum than direct labor and is often much larger. Burden in itself may represent a sum that bears an important ratio to the capital of the firm, and correct apportionment alone may be responsible for success of the plant, as inaccuracy may be for the failure of the business. To summarize, it may be said that it is impossible for any hard and fast rule to be laid down as to what plan should be followed in instituting a ^^^j system of cost accounts. No system should be installed without a thorough oompreheneion of the organization, management and purpose of the factory. This, of course, lies within the field and scope of the specialist. It is peculiarly in 5 66 COST OF PEODUOTION keeping with modem ideas tiiat a cost expert can ex- amine the conditions present in a given factory, install a suitable system and so instruct the necessary em- ployes that they can keep the system in active and use- ful operation. It is easy to generalize and say that the percentage- burden plan is the safest, particularly where wages form a large part of the cost of production and are comparatively regular in amount; or that the hourly- Durden plan with a partial charge for machines in use, is best where output is irregular and cost of labor varied, but it all simmers down to this: As no re- putable physician will prescribe for a patient without seeing him and noting all modifying conditions so as to diagnose the case, so no man — no "^atter how expert he be — can advise the adoption of a certain plan. A factory may lack in its accounting department and have a superior selling force — ^then it can not use a complicated system. Another and almost similar fac- tory boasts a superior accounting force and the man- agement is a stickler for vouchers and red tape — an exact and complicated system will not fall into bad hands when installed there. And so it goes, the old story, "Modifying Conditions," yet conditions abso- lutely essential to be reckoned with if a system is to yield satisfactory returns. CHAPTER VIII INDIRECT LABOR Indirect Labor is given as the first element of Burden, and has been defined in Chapter III, in com- parison with Direct Labor, to which it is related. There has always been more or less haggling over the designations, "productive" and "non-productive," as applied to labor, as implying that the Tad Tenn"Non- epithet "nonproductive" designates the Productive" . ..,.,,,, worKer is an expense — insinuating that he represents an outlay for which there is no adequate return. As an example of this asperity, may be quoted the stock remark of the manager of a western fire in- surance company, noted for its habitually strained re- lations with its agents, because of^managerial incompe- tency. On a special agent turning in a list of appoint- ments, the aforesaid manager would observe, "Too many lawyers in the list — we don't want lawyers — ^they are non-producers." Himself a flagrant example of a "non-producer," he had no time for them in the agency list. This allegation that the word carries with it the idea of expense and not production, may or may not be so, as a term may mean one thing to one man and a very different thing to another, because of the diflfer- 67 68 COST OF PRODUCTION ence in their education, bringlng-up, and experience. No snch charge can be brought against the use of the term "direct," however, and it possesses the distinct advantage of being more descriptive than "productive," so probably will be used by a majority of writers in the future as it has in the past. In the use of the term Indirect Labor in the sci- ence of costs, it is always to be remembered that it ap- plies only in its limited sense to the labor which is a part of Burden. Indeed a concise and strictly accurate designation would be "Burden-Labor," or that labor only which is a constituent of Burden. To be more explicit : The line of demarcation be- tween Burden aiid Selling Expense can not be too strictly drawn. The reason — outlined Ezcmsion of SeUing Expense here, and more fully developed later on — From Burden is this : Factory Cost is the value of the product as laid down after manufacture in the ware- house. No part or parcel of Selling Expense must be included in Burden or our warehouse value is inflated just that much, and when inventory is taken, that ex- pense shows up in the balance sheet as an asset. For instance, a factory has a Manager and an Assistant Manager. The first man devotes his time exclusively to sales, superintending the selling force and devoting his energies to disposal of the product. Meanwhile the Assistant Manager is in the factory increasing pro- ductive capacity. The one takes care of sales, the other looks after output. The first man's expense has nothing INDIRECT LABOR 68 to do with Factory Cost. The factory would run and its output be put in the warehouse — let us suppose — even if there were no sales force. With the second man it is different. His is Indirect Labor, and as such is a part of Factory Cost. The question naturally arises here, "Is not the labor of the first man as well as the second man. Indi- rect Labor?" It is, in a generic sense; it is not in a limited sense. Nor need any confusion result there- from. We have seen that the term "labor" has two meanings, the generic meaning being "work done for the accomplishment of an end," and, restrictedly, "di- rect labor." Similarly, Indirect Labor has two defini- tions: (1) Broadly, any labor not direct labor; and (2) restrictedly, any labor a constituent of Burden. So, applying the generic definition to the question above, we have the application that both are in the class of Indirect Labor in sense 1 ; and only the latter in sense 2. "Viewed from the standpoint of the lexicographer, the terms are not unusually complex, for our most common words have a large number of meanings — the noun "strike" having no less than eighteen separate and distinct definitions. The calculation of the amount of indirect labor is perhaps the most complicated of any of the items which go to make up the indirect expenses Indirect b i- Labor or Burden. The test of Direct or Indirect Labor is not so much on the point of pro- duction and non-production as on the point of charge- 70 COST OF PRODUCTION ability to some piece of work. For instance, if we sup- pose that an employ^ is at work one hour at the manu- facture of a dynamo for stock, and is taken oflf this work to assist in the repair of a motor, working thereat four hours, and later in the day takes a foreman's place for the afternoon, then his time card coming in and showing the foregoing facts, will call for an apportion- ment as follows : Direct labor on stock order number — , 1 hour; Upkeep of plant, 4 hours; Indirect labor, 5 hours. As a usual thing, the determination of Indi- rect Labor will not be extremely diflScult, but in the case of a large number of "split" time cards coming in it will be detailed work rather than particularly hard. In case the gross burden is calculated yearly or for some similar period, a daily running account may be kept with Indirect Labor, which will be the amount not otherwise charged to some work or job, the account being treated as though it were a continuous piece of work being totaled when the burden is calculated at the end of the fiscal year or on the taking of inventory. This is liable to reveal the fact that Indirect Labor, when totaled, is a much more considerable amount than might be supposed ofiE-hand. Here comes up the question of the relation of In- direct Labor to those indirect administration expenses — salaries of ofScers and directors. When the ways of high finance are considered, it will be seen that no irony is intended when the statement is made that many such salaries should be considered as profit ; that SALARIES 71 the drawee of a fat salary for which he has given no return, perhaps not even visited the plant of which he is an officer, is merely participating in an irregular division of the profits of the business. At the other extreme we have the manager who has worked his way up from the bottom, and who is not averse to taking a turn in the drawing room or even at the bench, becom- ing for the time being, an exponent of Direct Labor. Then, too, we may have officers whose work is merely administrative as regards either Selling Expense or Factory Cost, and countless other variations and modi- fications. Therefore it would seem just that the sal- aries be charged to such items as are proportionate to the class of work — ^to Indirect Expenses and Indirect Labor. This procedure can not but be unsatisfactory un- less done with a thorough understanding of the object of the business, and the relation of those participating in its management. As a discussion of the relation of Direct Labor to Indirect Expense falls within the scope of the latter, the reader is referred to the chapter dealing with that factor. CHAPTER IX MINOR BURDEN ELEMENTS The minor elements of Burden are: (1) Power; (2) Heat; (3) Light; (4) Rent; (5) Taxes; (6) In- suianee. These elements give little or no trouble in ealcula- tion of costs. Power, Heat, and Light are similar as elemental parts of Burden, for each may be purchased outright from a power-, heat-, or lighting-plant, or may be derived from a machine operated as a part of the equip- ment. In many cases the fuel account is a large and im- portant one, and one that by reason of its importance can not be handled as a part of the stores. In such cases it is advisable to have a system using a complete fuel register, similar in operation to that described in the chapter on "Material." Fuel is chargeable to Power, Heat, Light, or, rarely, to Accessory Material. Taxes and Insurance offer no difSculty of disposal, either in calculation or allocation. Practically all business insurance is calculated yearly, and rates vary little from year to year. Short term insurance, if on material in the process of manufacture is a part of the factory price, but if manufactured goods are insured in 72 THE FACTOR RENT 73 the warehouse, such insurance becomes a part of the expense of selling. In the second element, Rent ia one about which there is a great deal of disagreement. One extreme view is that the price paid for rented quarters is in the nature of profit : that is, the landlord has invested or supplied a portion of the capital. Rent is the in- come or profit from this investment. All sums paid for rent eventually come from business earnings. As such, they form no part of factory cost, and add no value whatever to inventory price. At the other extreme is the view that rent is as much an expenditure as though paid out for any com- modity and should be charged in as a part of Burden, whether the company owns the rented building or pays a regular price for their occupancy of it. The medium ground seems to be the conservative one in the disposal of the factor Rent. If the building is one not owned by the company, then charge rent in Burden. If the building is one owned by the company and because of such ownership represents an invest- ment of their capital, then, there being no rent actually paid, consider same along with interest on investment, as a part of Profit. The reason for such disposal of Rent seems to be a fair one. If the company has actually invested the capital necessary to buy the buildings, then Rent comes in the same category as Interest, and is disposed of as is Interest, as a part of Profit, because we do mi want 74 COST OF PKODUCTION to inflate our warehouse cost and so make our goods of more apparent value than they really are. But if the company has no actual investment in the buildings, then, day by day they are paying out for working room a certain sum which is and must be an expense, just as insurance is an expense or heating an expense, and as such, is a part of Burden. CHAPTER X DEPRECIATION, UPKEEP, AND BELATED FACTORS Depreciation is a lessening in value from age and contributory causes. This is a term that is closely related to Upkeep, which is collectively, those altera- tions, substitutions, or repairs necessary to offset de- preciation and keep a plant or any part of a plant in the state required for advantageous work. Intermeshing loosely with the factor Depreciation is Amortization. Amortization is the extinction or re- duction of a debt through a sinking fund. Factors '^^^^ concerns Depreciation only as In- terest concerns it. Interest on the capital of a firm and the deterioration of the buildings, ma- chines, stock, etc., in which this capital is invested are related, but not so clearly but that Depreciation and Upkeep may be considered separate from it, particu- larly if interest be calculated as a part of and taken care of by Profit. The determination of Depreciation as a factor in factory management or more restrictedly in the sci- ence of costs, is a matter of great importance, and errors in the calculation of this factor render both Factory Cost and Profit inexact. While it sound? like 75 76 COST OF PRODUCTION the repetition of a truism to set down, "no fixed rules can be given for the computation of Depreciation," yet suqh is the case and practice must conform — as in many other divisions of the science of costs — to the con- ditions surrounding the business. It is safe to say that the underlying principles of Depreciation are more exact, and may be more thor- oughly understood than those of many Depreciation Studied other factors going to make up Cost. For by Insurers this we have to thank the business of fire insurance directly, though marine insurance takes cog- nizance of Depreciation, in its restricted field, the valu- ation of marine risks. Fire insurance, which puts at risk every species of insurable property, concerns itself directly with the state of the risk as regards original and depreciated value at the time of the fire. Conse- quently this subject has been made a study by under- writers since the time the first risk was written and the first loss occurred, with the result, as before stated, that the principles underlying Depreciation are well marked out and agreed upon. The present tendency of all well-regulated plants to keep everything repaired up to the highest point of eflSciency, often makes Upkeep lower De- Depredation r r and the Factory preciation very appreciably. This is par- Buildings ticularly applicable to factory buildings of late construction. A building having its foundation laid in concrete, its skeleton of steel and cased in brick or concrete blocks, is not only subject to slow deprecia- A METHOD OF DEPRECIATION 77 tion, but every part in its make-up may be said to be standard and renewable as desired. In this class of buildings an average or aggregate value is maintained. But all factories can not be called well-regulated and it is not with buildings of this class that the cost de- determiner or cost accountant commonly has to deal. Sometimes the factory, by reason of its rapid growth is composed of a series of additions to the original plant and is kept in such a state as is warranted by the fact that "the management intends to build next year." Sometimes the factory is a rented building: other times it is part owned and part rented. In some cases the building itself is neglected because the business is so profitable and requires so much time that there is little time left to make any but those repairs that ac- tually can not be gone without. The value of a plant and buildings at the outset of business is, of course, 100 per cent and decreases with the passage of time until its value Is nil. A Common Method, of Perhaps the most common method of Bepreclation i . , • j.- i . ^ reckoning depreciation values is by writ- ing off a certain per cent, as 5 per cent — or such other figure as may be deemed desirable — as the sum to be deducted annually from the depreciated value. The value of the depreciated property then stands at the outset of its second year as 95 per cent of its original value plus the sum expended for its main- tenance and upkeep. The principle underlying this method has the merit of being sound, but in practice it 78 COST OF PRODUCTION leads to inaccurate results. These inaccuracies come in more from the upkeep of machinery than from the maintenance of buildings. It is no uncommon thing for a machine to be rebuilt after purchase, such rebuild- ing taking place either immediately after purchase or as the demands of the work call for it. Suppose that, immediately after purchase the gray iron of a machine is replaced by steel and the machine is worked over to suit the ideas of an employ^. On inventory the value of this machine will be, original cost less specified per cent of depreciation plus repairs, making it a watered asset. During the first years of a business the disposition of too large a percentage of the surplus of income over expenditure as Profit instead of a good part appor- tioned as Depreciation is the cause of the failure of many apparently successful ventures. In the case of a business having a large amount invested in depreci- able* property, the tendency to declare Upkeep Neg- r r ^ ? lected to Swell some or a large dividend is frequently too Dividends strong to be resisted, so a fictitious profit is forced, often for the purpose of inflating the com- pany's stock. Profitable repairs and the required up- keep are both postponed as well, with the result that if new capital is not interested, that stock values sink accordingly, and assessments must be made later to cover necessary charges for Depreciation. Earnings may remain a constant factor meanwhile, and stock *Deprecia1)le, a. Capable of or liable to depreciation;— a new use of the word- GROWTH OF PLANT 79 values go up or down as expenditures are made on the plant or not. In the case of large manufacturing plants, or those having owners very particular about repairs, the out- lay for renewals and upkeep may balance the average depreciation of the entire plant. To quote a trite and time-honored saying, it must be borne in mind that a chain is no stronger than its weakest link, and if upkeep is localized, there will come a time when the gradual and hitherto unnoticed lessening of value in parts of the plant not renewed, will manifest itself and call for un- expected expenditures — unexpected because the allow- ance for the renewal of the plant has always been a liberal one. Any business able to continue in the field at all, generally is obliged to extend or modify its plant. The reason for this is two-fold; (1) The Provision for Growth of natural increasing demands of business. Plant the plant being too small to handle the trade; (2) the fact that few firms starting again in business would duplicate their original plans. The American manufacturer and business man is always willing to extend his factory or business if there is a fighting chance of its being made to pay. He is also ready to tear out a building or machine and remodel or replace it with one that will better "do the business." Just when such expenditure is chargeable to Capital and when to Depreciation is not easy to determine. It may be that the management can determine the classi- 80 COST OP PRODUCTION flcation of such expenditure, but for those not familiar with the object, tendencies, and future of the business, it is practically impossible. When a needed addition is made to a building, it stands, of course, as an expendi- ture of capital, but such addition may lead to the sub- sequent abandonment or deterioration of the older part. Many a business is tided over unexpected expenditures or a period of financial depression because extensions and heavy repairs have been taken care of by Revenue instead of Depreciation. The object of the various methods of calculating Depreciation is to represent the real value of the ma- terial part of the plant, by means of depreciative* ac- counting instead of by revaluation. Greater accuracy might result by periodic revaluation, writing off such loss as these valuations showed, regardless of any reg- ular rate. This would give a more accurate idea of deterioration, particularly if such deterioration were irregular, as from a long period of hard running, alter- nating with a similar period of comparative idleness. This method of depreciation reckoning is practical only where the plant and process of manufacture are so simple as to permit its use without considerable trouble. Frequently manufactories are so constituted as to require the application of this method to some of the more important items, the remainder of the plant having the regular depreciation calculated and appor- tioned without a particularly close examination. Thus a general electrical manufactory may revalue its ma- 'Oepreclatlve, a. Of, relating to, or designating depreciation. VALUATION AND ADJUSTMENTS 81 cbine tools costing |500 or above, every year or six months, and write off a certain per cent for the rest oi the plant. The plan of periodic valuation instead of that of the regular depreciation rate, while theoretically more nearly perfect, is subject to some draw- ViOnatioii backs. Under the first plan the basis of appraisal is generally the two following facts: (1) Condition of the property at the time of its examination; (2) earning capacity. Taking these facts aa a premise may lead to a wrong conclusion, as de- terioration may not show from either; the property may look to be, and as far as earning capacity goes may be, as good as new. Nevertheless, every year of use or work is a year taken from its working life, and provision must be made for its final replacement or this replacement will inflict a heavy loss in the future. With this idea of replacement in mind, therefore, a percentage may be written off the present value, though any apparent depreciation is not present. If such is the case, then it is really an adoption of the depreci- ative rate. It is well to write off sufficient depreciation during the flpst years of the working of a plant, even if there are evident no signs of a lessening in value, vS^m"***** *^ ^y ^^^^ means the valuation will stand in case of any fire loss covered by insur- ance. In a fire insurance adjustment a yearly depreci- ation is figured off from the original cost or value of 6 82 COST OF PEODUOTION the property, regardless of replacement value, and it is often disappointing to find that values, as standing in the books of the company seem inflated in case of loss by fire. As a consequence of the reasons given, and par- ticularly on account of the diflSculties of time and ex- pense standing in the way of the carrying out of a sys- tem of periodic valuation, this system is little used. The plan which is in general use, and the one next in accuracy to the plan of periodic valuation, concerns itself with the establishment of average rates, which are written off yearly or semi-yearly. As a check to the accuracy of these calculations, valuation — either complete or partial — may be taken as often as deemed practical. Depreciation has been defined as a lessening in value from age and contributory causes. These con- tributory causes may come from or be Contributory Causes modified by other causes than what is com- monly termed "wear and tear." Physical condition and the elements affecting it are first thought of in connection with depreciation, but the value of any material property may be affected to a great ex- tent by influences not in common with such physical condition. These contributory causes may be enumer- ated as: (1) Tenure of holding; (2) probability of uni- form, regular, or increasing employment; (3) ex- haustion of (a) base of manufacture, or (b) field for disposal of manufactured product; (4) probability of TENURE 83 improved methods, processes, equipment, or the like^ making of no further practical use the specified prop- erty; (5) those unforseen events which no prudence, however great, can guard against or provide for. These and similar conditions, are more to be considered as under the head of amortization, than within the prov- ince of depreciation, and excepting only in rare cases, it is best to so provide for them in allocation or ac- counting. (1) As regards the item of tenure or holding, there may be various cases. A common case is that in which the building is merely rented. Tenure or Usually the lease will contain a covenant Holding to repair, which has been adjudged to mean "to keep the premises in as good repair as when the agreement was made," but ordinary depreciation can hardly be said to call for any extensive repairs. In case the agreement or conditions should be such that the trade fixtures and appurtenances become the property of the landlord, the need of a sinking fund becomes apparent at once, as capital so invested be- comes a loss at the expiration of the lease. The law — ever svibject to liberal interpretation when trade is to be enoouraged — does not compel as high a class of maiatenance as the owner would naturally keep up. The lessee may even permit his machinery to be worked to death before the lease expires, and take toward his sinking fund sums he would otherwise devote to up- keep and maintenance. 84 COST OF PRODUCTION (2) In determining depreciation rates the proba- bility of uniform, regular, or increasing employment or the reverse, for the plant, is an important factor. The entire business may depend upon the Fennanency of validity of certain patents, an act of congress, of the legislature, or a contract for a term of years. But the most disturbing factor liable to upset ordinary business probabilities is the far-reaching effect of the trust. Those classes of manu- facture or trade which are subject to trust competition are liable to dangerous interference, or even total ex- tinction within a fair term of years. Because of con- tingencies of this class, the argument for a high rate of depreciation is a sane one and one that is given more consideration than formerly, when profits were not only larger but more sure. That this depreciation rate should be used in conjunction with a sinking fund for the replacement of sunk capital, is also manifest. (3) Closely related to cause (2) above and in many cases a subdivision of it, is exhaustion of (a) basis of manufacture; or (b) field for dis- Kannfactnre and Disposal posal of manufactured product. In re- of Product gard to (a) may be noted as the best ex- amples, mining or lumber industries liable to exhaus- tion after a certain period of work. As regards (b) exhaustion of field for disposal of manufactured pro- duct, the most evident examples of this class of indust- ries are those depending upon style or fashion for their maintenance. NEW CONDITIONS 8S The calculation of the cost of production in all works of the classes last set forth above demands that the allowance for depreciation be a most liberal one. If the demand be reasonably sure but subject to those Figuring De- fluctuations which mark certain lines Meel^KiTctn. having slack periods alternating with ating Demand periods of great activity, a uniform yearly rate may be figured, or more preferably, a high rate figured during the rush and a lower rate during the lull. That depreciation does not stop during disuse or storing is commonly known, but the charge should surely be made large enough. (4) In many lines of manufacture and trade, the probability of improved methods, processes, equipment, or the like, making of no further practical New Methods ' ^ ^ and use part or all of a plant, is always a pos- Inventions sibility. In certain lines this contingency is so small as to hardly need provision for, as the inertia of the buying public once started, will continue in the face of any but absolute replacement at a lower cost. The trend of invention is always toward automatic production with as little labor as possible — and that iow-priced — leaving skilled labor for supervision. This replacement, or liability toward replacement, will not be provided for unless the rate be a generous one. Improvement of product is also one of the tenden- cies of invention, and competition may call for new machines which must be provided for out of the capital 86 COST OP PRODUCTION of the plant. Instances of this kind have been very noticeable in the older industries, which have lately Hew Machines been subject to great improvement. In Improve the steam laundering the introduction of the Product smoother for the raw edges of standing collars is an example of a machine designed to improve the product. Such a machine adds a new process to the number ordinarily performed but is demanded by the call for superior work. The protection afforded by the introduction of such machinery as will guarantee a superior product is often more eflfective than were the same amount retained as a sinking fund; indeed, the progressive American business man deems high efflcency of the working plant to be better than high dividends, for he has the utmost confidence that the former will surely bring the latter. It is — as it is almost needless to say — ^just this spirit which has placed America far to the fore in the race for the commercial supremacy of the world. (5) There are lines of business and manufacture peculiarly subject to certain contingencies which may not be insured against, because no com- Contmgencies Not to be pany can be found to take the risk. These Insured Against contingencies are not strictly depreciation nor may they come within the scope of the subject, but are worth a word in passing. A mine may be subject to flooding ; a dynamite factory to explosion ; certain lines of trade lay open to strikes of employes or danger of incendiarism — all of which can not be foreseen nor in- sured against. DEPRECIATION AND RESERVES 87 In case a company is large enough and conditions warrant, a reserve fund — separate from that of depreci- ation — should be maintained, proportionate in size to the amount at risk and the probability of the contin. gency so insured against coming to pass. This fund, when so obtained, is often entered upon the books under the guise of "Depreciation," when it is nothing more nor less than a reserve fund or a fund for insurance. The reason for this is not hard to be seen. What the stockholder wants is dividends. The future of the com- pany he considers is not his direct business; that de- volves upon the ofiQcers or the manager. Consequently, to provide a reserve really necessary — particularly from the viewpoint of the manager — what would otherwise be dissipated as dividends is kept under company con- trol disguised as a depreciation fund for renewal of the plant. Another plan that is sometimes followed is this: The original value of the plant is retained on the com- pany books. Under "Depreciation and Reserve," stands a fund derived from a portion of the profits of the busi- ness. Providing no actual misunderstanding results from such designation, it does no particular harm, but it must be remembered that instead of a tangible sum subject to the requirements of the business, the entry shows only loss coming from the age, wear, and con- tributory causes. The site of a plant — or more rarely the buildings themselves — may increase in value so as to offset % COST OF PEODUOTION the natural wear and tear of the occupied structures. This may be brought about by the natural increase of real estate or may be forced by the ereo- Appreciation •f tion of high-class buildings in the imme- diate vicinity, or from other and more re- mote causes. This offset, however, should be considered theoretical, and to be otherwise provided for than by being set over against positive physical impairment, but such depreciation should be treated as though there were HO appreciation of site. A revaluation of the property affected by appreciation will not only be more exact, but will be more satisfactory than when set over against the fund caring for depreciation. In providing a basis upon which to calculate depreciation, the value at the time such calculations are begun, is taken. This valu- ation will be the price paid, providing the plant was purchased outright. In many cases, how- Beiareciation = .. Based Upon ever, it is desired to equip a going plant Valoation with a cost system. The history of most industrial undertakings is one of growth, the plant starting in a small way and being added to irregularly, the increment being the result of the increasing de- mands of the trade. When such a business wishes the necessary basis for the calculation of depreciation a valuation will be necessary. Here must be combatted the fallacy that actual worth is the cumulative cost of an article or machine, because "it would take that much to replace it," and the valuation should avoid the ever- present danger of inflation. CALCULATING DEPEECIATION 89 Continental and English articles of association fre- quently specify the rate of depreciation to be written off. This might do for conservative ventures in a con- servative country where the prospect of success in any line may almost be_ said to be determinable by proba- bility tables compiled from past records, but for use in a younger country where records of production are con- sulted only that they may be broken, any method setting a rate of depreciation in the company articles is bound to be inaccurate. This method generally applies a cer- tain part of the profits for wear and tear, but deteriora- tion may be greatest during a season when the profits of the business are smallest. Besides the percentage-on-profits plan there are two others, one calculating depreciation as proportionate to the plant output, the rate being deter- Caloulating mined by the experience of the business during past years ; the other plan taking the capital value remaining from the year last past as a basis. This latter plan is for nearly all conditions the one most suitable. Depreciation is commonly calculated at the close of the fiscal year, at which time Upkeep is also summed up and made a charge against the revenue account. General activity, either of the plant as a whole or of certain departments may influence the de- preciation rate and raise or lower it proportionate to the amount of production. The fact that wear is not always immediately visible often leads to a misapprehension that a rate is 90 COST OF PRODUCTION too high. Depreciation is partly a provision against certain contingencies. These contingencies may or may not arise. The breakdown of tomorrow may be pre- ceded by no signs that indicate its occurrence. Besides obvious wear and tear, there are always risks — hidden it may be — ^but none the less a contingency that may be either near or remote. A prudent and conservative course may demand a much higher rate than would seem necessary from the closest calculation of wear and tear. No uniform system is in operation in various plants, to provide for depreciation. Even in precisely , ^ , the same lines of business, working under Lack of Dniformity in substantially the same conditions, methods SyBtexns Will be at wide variance and still con- sidered satisfactory by their users. In one shop repairs are given almost the entire attention, a tool room is maintained with several skilled operatives who devote their entire time to repairing, renewing, and remodeling machine tools, yet the rest of the plant may be left with little or no upkeep, and no provision whatever is made for depreciation. In other cases repairs are neglected and profit is rapidly written into a depreciation and sinking fund. These two cases cited are extremes and every gradation exists between them. Often when the same general plan is used the percentages are radically different. Blanket decreciation of the entire plant, covering buildings, fixtures, tools and rolling or delivery stock, BLAJSTKET DEPRECIATION 91 is not as common as formerly. This method is wrong in theory even if it does sometimes work in practice. „. ,. . , As said in a previous chapter of the direct- Simphoity of x- r Bianket burden plan of allocation of factory cost, Depreciation its chief merit is simplicity, with the corresponding drawbacks. When the application be- comes complex, the simple system is liable to be lacking. Buildings and machinery not only call for different rates but they are almost invariably subject to entirely different management in regard to repairs and upkeep. Who does not call to mind a money-making plant the buildings of which seem on the verge of tumbling down, windows cracked and obscured with cobwebs and dirt, while within the shop is every modern tool, kept in the highest possible state of efficiency ? Where blanket depreciation again fails, may be seen when certain departments of a plant are obliged to work up to their full limit while other departments are experiencing slack times. Deterioration in one part may be double or treble that in another. Division of sunk capital into classes for the reckon- ing of depreciation must depend much upon the scope of the business. A general manufacturing Classification plant renting its building would probably need but few divisions for this purpose: Fixtures; fixed tools valued above $50; lesser tools; engines or motors; etc. If the plant were larger and owned the land and buildings, land and buildings would be added. In organizing a new business, preliminary 92 COST OF PRODUCTION expenses of establishment may be considered as subject to an annual writing off. No difficulty will be experi- enced in classification for depreciation purposes. The underlying principles of classification are so broad, that even the most elemental knowledge of a business will be guide enough for their application. Over against this, however, is set the difficultly accompanying the proper determination of rate, which calls for long experience combined with rare and exact business judgment. The depreciation or appreciation of land occupied as a site has already been touched upon as coming within the province of revaluation rather ifnd or than depreciation. There may be said to be one exception, however. Fairness to future stockholders may require that some contingency be provided for by writing off a certain sum annually. Events may require the removal of the factory within a certain period of years. It would be no more than just that depreciation be charged against the land and not leave the entire loss to fall on the stockholders at the time of such removal. Generally speaking, however, depreciation is not meant to be charged against land. The subject of depreciation ratings is one that can not be covered by general formulas. However, a number of examples are given as used by fire insurance adjust- ers. It must be remembered these percentages are based on the actual life of the building without any repairs ; also that they tend to liberality of reduction if any BUILDINGS AND MACHINEEY 98 bias exists. The following percentages are as given by Tiffany : "Brick buildings, slate or tin roofs, used as manu- facturing establishments, where there is heavy running machinery, especially when used as planing mills and for the manufacture of sash, doors and blinds, wagons, hubs, spokes, furniture, chairs, and other wood workers, depreciate yearly to a greater extent than those used for less hazardous purposes, and a fair estimate on these classes would be annually 4 per cent. Frame buildings under similar condition depreciate 5 per cent. With shingle or gravel roofs, occupied for same purpose as described, depreciate annually 4% per cent ; if frame, 6 per cent." When we come to the matter of machine deprecia- tion, we have a subject not only complicated in theory but one on which both theoretical and Depreciation of practical authorities are at variance. And Xacliinery - , , there is the best of reason why such vari- ance should exist. Opinions are commonly the result of experience — and the nearer home the experience came to one, the more positive such a one will be in their con- victions. Certain farmers would declare positively that the life of a self-binder was five years or less, because such had been their experience, while others would show a five-year-old machine scarcely damaged and good for many years to come. Similarly differing reports would be given by managers having a shop fitted with high- 94 COST OF PRODUCTION priced, complicated machine tools. One would declare that as a result of his experience that 15 per cent yearly was none too much to write off, while an other would consider 5 per cent yearly, a liberal allow- ance. Ewirg Matheson, one of the leading authorities on the subject of depreciation says : "In regard to the proper rate of depreciation for machinery, there is, even in well-managed factories of similar class, a wide divergence of practice. Thus in a new factory doing a profitable business, private part- ners will, in their desire to be on the safe side, some- times commence by writing off annually 10 per cent from machinery of all kinds. Unless there be some ap- prehension of the plant becoming obsolete, this is gen- erally too liberal a rate for fixed machines, unless it is neutralized in some other way. In other cases, the records of many years' working may show that 21^ per cent is suificient, because the machinery was good in kind and quality to begin with, partly also because the expenses of installation and of liberal repairs have been defrayed out of revenue, and partly because the ma- chines have been moderately worked. "In engineering factories the rate which will prob- ably meet the deterioration will generally be found be- tween 5 and 10 per cent. Where the work is of a moder- ate kind which does not strain the machines severely, and where the hours of working do not average more than sixty per week, 5 per cent would generally suflSoe DEPRECIATION PEECENTAGES 95 for machinery, cranes, and fixed plant of all kinds, if steam engines and boilers be excluded. Where there is a diversity of machinery and plant, and the past ac- counts of twenty years to refer to. it is not diflScult to arrive at an appropriate rate and to make periodical revisions." The percentages given by Tiffany are as follows : "On all machinery, as a whole, including shafting, gearing, pulleys, bearings, and all connections, used in manufacturing establishments, such as planing mills, furniture and chair factories, and other wood works, there is a considerable deterioration in values, and the very best authorities regard as correct a depreciation the first year of 12y2 per cent, and every year there- after 10 per cent. On all machinery used in iron works there is an annual depreciation of 6 per cent. "Machinery, as a whole, in a flour mill, will not depreciate in value to as great an extent, annually, as that which is in a wood-working establishment, and should therefore have a specific per cent of deprecia- tion. The following may be relied upon as equitable, as it is based upon the experience of some of the most prac- tical millwrights in the country : Machinery in a flour mill will depreciate the first year, 12% per cent; the second year, 8 per cent; the third year, 5 per cent; the fourth year, 21^ per cent; the fifth year, 2 per cent, and every year thereafter, 2 per cent. An engine, prop- erly set and under the exclusive charge of a competent and careful engineer, will depreciate annually 5 per 96 COST OF PRODUCTION cent. The average life of a boiler is ten years, luad the annual depreciation should be 10 per cent. "In giving the percentages of depreeiatioB on en- gines and boilers it is assumed that a careful and com- petent engineer is employed, and that they are well cared for. Where this is not the case the per cent is largely increased, and many cases have been known where, in less than five years, they have been, through carelessness, rendered entirely useless and consequently worthless." The matter of depreciation of drawings and pat- terns is one intimately connected with estimates and is referred to the topic "Patterns," in the chapter "Esti- mates." Patents and copyrights theoretically are subject to the regular depreciation of lapse in a term of years, the protected life of a patent being 17 years and of a re- newed copyright 42 years. Practically, however, the depreciation is greatly in excess of the theoretical rate, because of the danger of superseding inventions or copy- rights. There are two methods in wide use for the calcula- tion of depreciation, the first reckoning on the original cost ; the second, on the value after the preceding years' depreciation has been deducted. Depreciation has been spoken of earlier in this work as an uncertain factor. It is, and can. not be made otherwise. But it can be made a safe factor by conservative writing off. To make the percentage writ- CONCLUSION 97 ten oflf large enough to meet the aims and protect the welfare of the business and yet not introduce too large a factor into Factory Cost, so restricting the sales de- partment in their battle for trade, calls for a thorough knowledge and business technique granted but few. This, however, is a matter of education and application no more difficult than the innumerable problems that are daily taken up and satisfactorily solved by practical business men. 7 CHAPTER XI SELLING EXPENSE The factor coordinate with Factory Cost is Sell- ing Expense, the two going up to make Cost to Make and Sell. Selling Expense comprehends six factors, which will be treated in detail hereafter: (1) OfSce; (2) Salesmen; (3) Estimating; (4) Advertising; (5) Traveling, and (6) Indirect Expense. Each of these fac- tors lie well within the limits of Selling Expense, with the exception of (6) Indirect Expense, which compre- hends, or may be made to comprehend, certain expenses which result from or grow out of administration in- stead of selling. In the strictest sense, Selling Expense forms no part of the cost of production. An article is produced when Factory Cost lays it down at the works door. But the business man says: "I have no use for this product unless I can sell it. Production is all right, but it must have added to it the complement Selling Ex- pense, in order that I may have a working basis." To furnish this working basis, to the cost to produce, or Factory Cost, is added Selling Expense and the manu- facturer knows as Cost to Make and Sell what his product stands him in and he is able to govern his busi- ness affairs accordingly. The functions of making and selling call for the 98 PRODUCTION AND SELLING 99 exercise of vastly different organization, methods, and most of all, widely differing faculties of mind. The line between the two is clearly and sharply drawn. The con- structive mind is satisfied when the machine is com- plete, every part working smoothly and ready to per- form its individual functions. Having completed the manufacture, the engineer or mechanic regards that problem as solved and calls his job completed and turns his attention to other things. Not so does the com- mercial mind act. The salesman takes the thing to be sold and concerns himself alone with its disposal. Worth to him is an essential in so far as it helps sales. It is not difficult to see from what different view- points Production and Selling look at the same prob- lems. Nor is it to be wondered at that years of life side by side have led the one to look upon the other with mere tolerance if not with misunderstanding, the two differing business divisions being linked together by interest alone. Therefore, in practice as well as in theory, there is little or no diflSculty in separating the expense of selling from the expense of making. If there be any diflSculty, it will usually concern some small item which, dis- tributed over the entire cost of production, does not affect the results to any material degree. The allocation of Burden has been thoroughly taken up in these pages, and it has been shown that there is an existing relation between Burden and Prime Cost and the elements of Prime Cost, Material and 100 COST OF PRODUCTION Direct Labor. No such relation exists between Selling Expense and any of factors or elements of Factory Cost. The cost of the commercial disposal of an article has nothing to do with the cost to make it. The demand may be such that the product is eagerly purchased at the factory door, in which case the only expenses are few and indirect, giving rise to the equation, Factory Cost : Selling Expense : : 1000 : 1. On the other hand, a plant may be engaged in the production of a nostrum which requires that immense sums be spent to further the disposal of the product when made, in which case the equation may stand: Factory Cost: Selling Ex- pense : : 1 : 1000. The fact that there is no existing relation between Selling Expense and Factory Cost does not mean that no means for the distribution of the expense of selling must be provided. If Direct Labor or Prime Cost is made to bear the burden of Selling Expense, it is a very simple disposal of the subject, but one having only its simplicity to commend it. The ideal — and impossible — way would be to have each unit of product bear its pro- portionate burden of Selling Expense by being debited for the exact cost of selling it, but this would call for a cost system so complicated that it is hardly worth mentioning except by way of illustration. This being in the realm of the impossible, the compromise nearest cor- rect must be taken as a basis of a method for allocating the expenses of selling. This gives a choice of three methods for the distribution of the expenses of selling : DISTRIBUTION OF SELLING EXPENSE 101 (1) On Direct Labor; (2) on Factory Cost; (3) on number of hours required in production. No general statement can be made as to which of these three methods is preferable. In general manu- facturing the last method is in successful use and con- sidered favorably. That the taking of the number of hours required in the production of a certain product as a basis for the distribution of the cost of selling is an arbitrary one must be at all times remembered and cor- responding allowances made. The following excerpt from an article by A. Hamilton Church in the Engineer- ing Magazine, gives an excellent method of dealing with this troublesome subject : "The most practical method of correcting the errors introduced by the artificiality of the basis of distribu- tion, is by means of classification whereby the incidence which would otherwise fall equally on each kind of work is made to fall unequally. A number of classes are created, the incidence in the first of which is, say, 100, the incidence in the second being 120, that in the third and fourth perhaps 150 and 170 respectively, and so on for as many classes as may be found necessary. Leaving aside for the moment the considerations which determine in what particular class any given article shall stand, it is evident that if we have a thousand dollars to distribute, the first class will get o£E lighter and the last class will be more heavily debited than on an ordinary averaging plan. Therefore, if any reason- able means of classifying articles can be devised which 102 COST OF PRODUCTION ehall correspond as closely as possible to the diflferences in their commercial treatment, the arbitrary character of the original basis will be to a large extent minimized. There still, however, remains the objection which must never be lost sight of when consulting the figures, that an undue rise in production cost will lead to a dispro- portionate absorption of general charges, in whatever class the article may happen to be. "The process of determining the classification is, unfortunately, somewhat diflScult, or at least demands a good deal of thought and care at the outset. Space will not permit of its full treatment here, only the principle followed can be detailed. Every item of general charges must be tabulated. The average annual cost of adver- tising, traveling, drawings, patterns, catalogues, corre- spondence department, cashiers and bookkeeping, man- agement, and all similar expenditures must be got out and arranged in columns. These are the items of which the incidence has to be settled. Now, against these has to be placed each of the different classes of articles manufactured, and each one of these has to be carefully reviewed with relation to each of the items of expense. "Thus, for instance, advertising. Analysis of the ad- vertising expenditure may show that one article has practically no concern with advertising. Of this class an obvious example is repairs to the firm's own prod- ucts. Other articles, on the contrary, may involve special advertising, and should, of course, be debited with the whole of such special expense. Catalogues are DETERMINATION OF INCIDENCE 103 open to similar analysis. Such items, again, as are standard articles supplied either from stock or from standard parts, involve much less of the expenditure due to correspondence than do special jobs. Repairs, on the other hand, although escaping the advertising debit, should be visited heavily on the correspondence and bookkeeping sections, since these small jobs cause as much work to these departments as do standard orders of fifty or a hundred times their value. From this brief description it will be seen that the general establish- ment charges are capable of a very detailed analysis. It is true that the element of judgment is very strongly involved in this analysis, but there is a difference be- tween judgment and mere guesswork. There is no rea- son why a very close approximation to facts should not be made at this stage if the work is carried out by a competent person, who has access to all the data neces- sary for decision." It will be seen that the success or failure of this system lies in the ability to fix and maintain a satis- factory percentage of incidence. This once found and understandingly applied, the system does what no other method does, distributes the selling burden where it logically and of right belongs. Those classes which call for heavy selling expenses have such expense duly al- lotted to them; classes which require little selling ex- pease are treated accordingly. To sum up : The cost of production is obviously not satisfactorily indicated unless first. Prime Cost, 104 COST OF PRODUCTION Factory Cost, and Selling Expense are sharply differ- entiated from each other; second, Burden and Selling Expense are correctly distributed. The second con- tingency is even more important — if the proportion be large — than the first, and is to be provided for— as are similar problems in costs — by the adaptation of the best method to the problem in hand. CHAPTER XII THE FACTOES OF SELLING EXPENSE The elements making up Selling Expense have been given as (1) OflBce; (2) Salesmen; (3) Estimates; (4) Advertising; (5) Traveling; (6) Indirect Expense. By oflSce expense is meant the outlay necessary for the maintenance of a selling oflSce. Theoretically such an institution should concern itself solely ^Mii»e ^^^^ disposal of the manufactured prod- uct, but often times a part of office ex- pense, particularly that relating to correspondence, would strictly be chargeable to other elements. No difficulty, however, will be experienced with the calcula- tion and apportionment of this element. Salesmen or sales expense contributes largely to the expense of selling. It is usual to open an account with each man and keep a careful record of the sales in his territory. The record shows the ratio of sales expense to each dollar of product disposed of and the relative worth of the salesman and the territory as well. The determination of all amounts and percent- ages relating to salesmen's expense is an easy matter for the accountant and one very essential to the finding of costs. An estimate is the probable cost of a product as calculated from the best information obtainable, also, 105 106 COST OF PRODUCTION the figures, tables, and accessory drawings made up to show cost or other specifications. The ordinary esti- mate is a selling expense and chargeable to What as such. A certain job is required and the Chargeable specifications therefor — ^usually more or less imperfect — are drawn up by the prospective buyer. The manufacturer verifies and often works out the specifications in greater detail and submits his price. Often the same specifications are submitted by the buyer to several firms, to one of which he awards the contract. This is a plain example of a case where such estimates are Selling Expense, as they are made to further the sale of a product. Estimates may call for drawings, and when filled for patterns or rarely for special machinery. The rule covering special expense incurred in manufactur- ing a certain machine or product is a general one and may be embodied in the following words: When esti- mates, drawings, or the like are made to further a sale not made, debit Selling Expense; when the sale is eflfected such charge may be made against the indi- vidual job, providing the outlay is of no more use after the job is completed; if the estimates, drawings, etc., are to be continued in use for future jobs they should be considered a part of Plant Equipment and charge- able as such. This rule is of particular use in drawing- room estimating. It is a rare occurrence that patterns are made up for a contract not yet awarded, but esti- mates and drawings are often made up as in competition ADVERTISING 107 for a contract. If the business is such that all estimates and drawings are similar, the loss will not be great, as duplicates may be used in bidding for another job. But in many manufacturing plants, the output has a wide range and two machines exactly alike may never be made. It is upon plants of this last class that expenses for estimates and drawings fall the heaviest. There are, as in other divisions of the subject of costs, widely dif- fering methods of treating these charges, but the above rule will be general enough to cover all cases which may arise. The element Advertising is a selling expense in one sense and in another sense an investment. A firm manufacturing furniture, let us say, finds and they have on hand several typewriting machines for which they have no use. They expend the sum of ten dollars for advertising to dispose of the machines. Such advertising is an ex- pense; they bought so much space in an advertising medium, the typewriting machines are disposed of, and there is an end to the transaction. Now, this same fur- niture firm may spend ten thousand dollars in one sea- son for publicity — to get their name prominently be- fore the public. The seed thus sown may accelerate trade for a decade — for several decades, it may be. A great part of such advertising is in the nature of an investment. It creates — or aids in creating — a valu- able asset. Good-will, which is possibly worth more than the remainder of the plant. This is generally the case 108 COST OF PRODUCTION where the good-will carries with it the right to use some widely known trade-mark or trade name. In charging oflE advertising expense a medium ground is advisable. A certain percentage of general advertis- ing is an expense and chargeable as such ; the remainder goes toward the purchase of Good-will, an asset of the plant. No general rule can be given for the ratio exist- ing between these two parts. Indeed two persons hav- ing the same knowledge of and experience in the same business would have widely varying views, depending upon the sanguineness with which each looked upon the future. One might hold that a certain sum had been expended and the actual results from such ex- penditure were so many dollars; the other might as truly say that results would come in, directly and in- directly for a long term of years. A compromise view places faith in the actual experience of the past as a guide to the future and is neither too sanguine nor severe and proportions the expense and investment ac- cordingly. Traveling expense may be variously classified. Transportation used by salesmen is usually charged to an account so as to furnish a basis for EMense^ determining the ratio of expense to sales. Traveling done in the interest of the com- pany may be either a legitimate selling expense, an ad- ministrative expense or a perquisite of an official, but generally is chargeable to Selling Expense. Indirect Expense includes the salaries of offioers INDIRECT EXPENSE 10« and directors not chargeable as Direct Labor or Profit, various other minor expenses not chargeable elsewhere. Besides these, there are constantly com- ^j^J^ ing up extra concessions, as free repairs, special discounts for cash on installment or overdue debts, etc., which might be termed Doubtful Debt Eeserve. For instance, a buyer who has always had an Al reputation purchases a bill of goods on ninety days' time. The collector for that territory learns he is in financial diflSculty and accepts 75 per cent of the face of his account not yet due, for a cash payment. No general rule can be given as to what items are to be included in Indirect Expense. These expenses dif- fer greatly in different businesses and vary widely in amount in the same business at different times. The tendency to dispose of doubtful items by placing under Indirect Expense, should be carefully guarded against. While nothing is so fatal to the worth of Ho Bule ° for a cost system as an endless hair splitting DiTGot Ezponso over the technicalities of the higher mathe- matics of bookkeeping, yet the other extreme, the making of General Expense or Indirect Expense a catch-all for the accumulative odds and ends of ex- pense, is to be just as strongly guarded against. The lines between Prime Cost, Burden and Selling Expense kept sharply in mind, there should be no great difBculty in deciding to which of the three main groups of great expenses an item — however obscure — belongs. 110 COST OF PRODUCTION With the element Indirect Expense, we come to the last constituent of the factor, Cost to Make and Sell. This factor is the real objective point of the science of costs. This once determined, the calculation of the re- maining factors is a matter of simple arithmetic. CHAPTER XIII PEOFIT Profit, in the science of costs, is the excess of the selling price over the cost of making and selling. This meaning of profit is not to be confounded with the meaning in political economy, which is, "what is left of the product of industry after deducting the wages, the price of raw materials, and the rent paid in the produc- tion, and is considered as being composed of three parts — interest, risk or insurance, and wages of superintend- ence." In the preceding chapter it was said that the ob- jective point in the science of costs, is the Cost to Make and Sell. The objective point in a business, however, is Profit. There can be no exact definition of Profit, for the only terms in which it is definable are relative. What would be a profit in one business would be a loss in another; what shows as a profit in the bookkeeping of a corporation may be a loss disguised at the expense of some other constituent element of cost. Upon the accuracy of the determination of the intermeshing fac- tors depends the worth of what the books declare a profit. It has been previously stated in these pages that Profit comprehends and must take care of Interest, 111 112 COST OF PRODUCTION Discount, Rent, if the plant owns the buildings, and like charges. There are two prime reasons for this. First, these items are a part of the price Profit Compre- kends Other which the buyer pays, but can not be said Factors to be a part either of warehouse cost or inventory valuation. Second, in these days of high finance, the amount of capital of a company may bear one of many ratios to the amount actually paid in, so by placing interest payments on stocks and bonds as a part of profit, no matter what the apparent ratio of capital is to cash paid in, it is disposed of equitably. A third objection is given by F. A. Halsey, in a lecture given before the mechanical engineering stu- dents of Cornell University : "There is one item which is usually included in the burden, which it does not cover, and which occupies very debatable ground. I refer to the item of interest on the value of the tools and plant, which is usually added to an allowance for the depreciation due to wear and tear, the sum being treated as a single item called Interest and Depreciation. Of the correctness of the depreciation charge there is no doubt, but as much can not be said for the interest charge. I am not prepared to condemn this practice outright, but it is necessary that its questionable nature be shown as well as the fact that those who advocate it have at least a case on their hands to defend, and that, even if their principle is right, their practice is usually wrong. This charge as usually made is in flat defiance of the fundamental INTEEEST— WHERE OHAEGEABLE 113 principle of modern bookkeeping — that is, double entry bookkeeping. I refer to the principle that every trans- action and every charge of whatever nature must ap- pear on the books as a transaction between two indi- viduals — ^fictitious or real, as the case may be ; that is, there must be no charge without a corresponding credit. Now, against this interest charge there Is nowhere, on any book, in gross or detail, directly or impliedly, any credit whatever. It Is simply lugged in bodily from nowhere. If the principle Is right, there is certainly a screw loose somewhere in its application." Speaking further on the same subject, Mr. Halsej says : "There is one argument in favor of charging the interest on the cost of the tools which has weight, even if in principle the practice be wrong. The placing of the interest charge in the allowance for profit means that it is necessarily added as a flat percentage, which ignores the different values of the tools on which the work is done. The importance of making the more ex- pensive tools carry their fair proportion of the burden is so great, and so many influences exert themselves against it that it may be fairly argued that to accom- plish this, the interest charge should be placed on the tools, but if this is done, cross entries between the ledger acc©unts should be made in such a manner as to relieve the interest and discount account of the amounts charged against the tools. I am not aware that this has ever been done [this in 1901], but, nevertheless, the common practice can not be defended. By no possible 8 114 COST OF PRODUCTION argument can a double charge for the same item be justified." For the various reasons given above and for numer- ous other minor reasons, it seems logical and in keeping with the science of costs as now practiced, to include the interest group of elements in Profit. Profit then takes care of the investment in its entirety and if the stock be heavily watered does not throw as an expense upon Burden a load which it should not be made carry. Profit is related so intimately with the three ele- ments Depreciation, Upkeep, and Sinking Funds, that there may be said to be a qualifiedly fixed ratio existing between them. As an extreme case, let us take a get- rich-quick plant. Suppose this plant to be outfitted, running, and doing what would be conservatively called a good business. Their normal profits would probably be 8 per cent on the capital invested. But the pro- moters have other plans. Only such repairs as are ab- solutely necessary are made, depreciation charges are marked down to a minimum or disregarded altogether, no sinking fund is maintained and a dividend of per- haps 20 per cent is declared. It is evident that 12 per cent has been misappropriated and if the same course is continued that this percentage will have to be re- turned by means of assessments or the business will eventually have to close. At the other extreme the ultra-conservative man- ager stickles for a large sinking fund, keeps in repair the entire plant, extending it wherever efficiency de- CONCLUSION 115 mands and then trims down to the lowest possible per- centage the annual dividend to stockholders, on the theory that dividends paid out are out of the control of the management. These two types present the two extremes of man- agement, and it is safe to say there is every grade be- tween them. The amount of profit depends, therefore, taken aside from the question of business management, upon the sums allotted to related elements. With Profit is reached the final element entering into the cost of production. Selling Price, comprehend- ing all the elements previously treated is of relatively small concern as compared with those constituent ele- ments. Indeed it may be said that one having a grasp on Material, Labor, Depreciation, and Selling Expense is a long way on the road to a thorough understanding of the science of costs. PART II ILLUSTRATIVE COST SYSTEMS CHAPTEE XIV A FACTORY COST SYSTEM BY BDRIC C. WARREN, General Manager and Secretary of the Century Stove and Manufacturing Company The first points in importance in factory cost sys- tem are the factory records. These should be simple, and should, with as little detail as possible, accomplish the results striven for. With the system here shown, every hour of labor is accounted and paid for on some order or in non-productive labor. This system uses two time sheets, the first being the simplest form that it is possible to use. On this the workman indicates his time, the card being known as the workman's check. Figure I shows the form filled out by the foreman from the workman's check. This check is not illus- trated, as any form which has blanks for the workman's time will be suflScient. It may, of course, be made as comprehensive as desired. Figure II is a requisition blank, which is used by the foreman for material wanted. Another form is used by the stockkeeper, and follows material from the stockroom. Figure III and the carbon copies made from it are the order sheets, the original of whioh is kept 119 120 COST OF PRODUCTION in the office. As many carbon copies of Figure III are made as there are departments throng which this order must run. These forms cover all the business that is done in the cost system. To get a practical demonstration of its operation, TIMC SHEET CENTURY STOVE AND MANUFACTURING CO. »I(CX« »:!kf;'o. M«ICC TOTW, ^ , :«««.. Fig. I we will follow an order through the factory. The requi- sition for the order is furnished by either the superin- tendent or the manager, and the number of copies which are required for the factory are specified on the order requisition. The clerk makes out this order, sends the dnplioate order sheets to the superintendent, files the EDRIO O. WARREN 121 white oflSce copy in book marked "uncompleted costs," makes a card index for the order number, and indicates of what it consists. The duplicates of this order are then distributed to the different department foremen through whose hands the order must pass. RCQUISITION Ton ORDCR NO. OATC -•.•«.■ »tMPLOirc .FOREMAN FIG. n All raw material is stored in a warehouse; no ma- terial is carried in the factory except such as has been requisitioned for some order number. Sheet metal work and machine work are made up on special orders, and the cost is obtained on this part of the work. The fore- man, who starts the order, orders the material on Fig- 122 COST OF PRODUCTION ■ S i « i < K ■= srs o « • S S SLS -■ * Si ' Ml* ' E £ E K £ E <• . 9 a 2 1 w 1 u « i 5 E s a z 51 ^ ^ < g d z u H s ^ < ■ w £ i y ■v J \a o s a H 1 o B ft ^ ^ ^ u E < u D i d z B U < ^ £ o 2 i »-' g 1 3 £ o X § u 9 EDRIC C. WARREN 123 ure II from the stockkeeper, and furnishes each man who goes to work on the order with his required card, with the check number of the order in its proper place. This slip is turned in to the foreman when the job is completed or at the end of the day. The foreman fills out the office time sheet, Figure I, from the several time sheets which have been turned in by the work- men during the day. Figure I is then turned in to the office. Labor is figured by the clerk, and entered under the proper order number in the columns marked "Labor from Time Sheets." When the stockkeeper has filled out Figure II, on which he places the weight or count, it is returned to the office and entered under the head "Material" against the proper order number. Com- pleted parts, bolts, and other small fittings, which are used in common and are not ordered for any particular order number, but are kept in stock in the factory, are placed on the foreman's order in the column marked "Material Used," which is not shown on requisition blanks. As soon as foreman is through with his work on any order he returns his blank to the office, marked "Completed." When all blanks have been returned to the office the costs may be estimated very quickly and accurately. The hardest problem with which the com- pany has to contend is the matter of non-productive cost. It has finally adopted the plan of keeping track of this item of cost from the time sheets for the two weeks, and the percentage which this amount is of the whole 124 COST OF PRODUCTION payroll is the percentage which is used as the basis of the non-productive costs on all cost sheets which are estimated during the succeeding two weeks. When the cost sheets are completed, they are placed in a binder, marked "Completed Costs." CHAPTER XV REGAEDING FACTORY COSTS BY L. A. ELY Almost any progressive manufacturer will admit that few items concerning the expense of the business are of such vital importance as the knowledge of the cost of articles. Yet many of these same manufacturers merely estimate the cost of production -on many articles when they determine the selling price. To what records do firms and corporations which are considered progressive, and which have an almost perfect system in all other departments, resort when this most important of all departments is being con- sidered? Their lack of information is astonishing, as the only way in which to settle on the selling price of a manufactured article is to first arrive at the actual — the estimated— cost of production. The writer of this chapter has endeavored not only to devise a plan for factory costs but to illustrate it as well, and to arrange its adaptability to any manufac- turing firm. Attention is called first to the illustrations. It will be noted that the forms shown may be arranged for either the typewriter or the autographic manif older, on a regular padded form, inasmuch as that the entered order bears the date of entry. By this system such firms 125 126 COST OF PRODUCTION as care to embody their stock order in the same list with their shop orders may do so. Others may with but little additional time and expense operate independent sets. Th. M!A^n4 Ry,»m ftv t SHOP ORDER ;■■ KaiV.'J8.V"B KM Ouii OrocR No. 9602 SiVSrS'„?.iA.-*2... oATro.JiSSH 'je WFT1> TO SHIfPIHO BOOM.; Z~Jft^y^jr*'^'''''~'~~~.Z'.^-^^^ zzs tZS J. 7 .Si j.).r« 3c I n. MJtTtHUt. LB9. SUriD «"">«•— ""'""'OUIlnLEUIITILCOMPltTtLYnUtO. THIHO.II.* *"^'^ M«D TO SHIPPINO ROOM. FlQ. I When made out in triplicate, the shop order (Fig- ure I) goes directly to the shop foreman. On it, as L. A. ELY 127 soon as the work is finished, he cheoks the items and enters a memorandum of the material used, with sueh other notations as may be required. Then it is sent to The Michoind System Co. •J JSSg'HBivaaaBii'.ftft.^. roRM ^ J Om OiiotR No. 9602 l8SBV.~„§:^.^.£'..i>«Tio.::f:firi7./..no.f.., -J^ Jo m jiii yi MATERIALJ UBS. BHIPMNC NOTICE CHECKAU.ITEMSP0ASHOPINCOL.A~*'b" s. n the shipping room, where it takes in return a receipt for the articles which accompany the order. The second of the triplicate orders (Figure II) 128 COST OF PRODUCTION goes directly to the shipping room, where it is filed in a suitable drawer until the form from the shop, which bears the consecutive number, is presented, when the material is listed and priced. Then it is properly checked as packed for shipment, and if shipped the bill of lading is attached and it is returned to the oflSce, where it is filed alphabetically or attached to the orig- inal correspondence in the vertical file. When the order is received, the third, or duplicate, is at once placed in the unfilled order file, where it remains until the return to the ofiSce of the other forms which, as has been explained, go to the workshop and to the shipping room. Then the data from the other forms are added and the invoice is made according to the price and terms as sold, and the sheet is entered by consecutive numbers on a post binder and a card made out and indexed to the name of the person to whom the article is shipped. On each of these sheets appears the number of the ledger page to which the transaction haa been posted, or a small card, filed alphabetically, records the proper file of the sheets and the history of the case. Should it be desired the reverse of the card or slip is used as a history record, and the printed farm is printed to suit the conditions. Spaces may be arranged for a number of workmen. Proper dates could be printed at the top of the card or form, under which en- tries could be made from the time checks of the work- men engaged on any particular job. L. A. ELY 129 The running expenses of the factory shoBld be en- tered on this card according to some agreed basis of An Accurate *^^^*' ^^^^^ ^^^^ question has received care- Method of De- fui consideration, or data furnished by the ternumngf Expense several foremen, but in no case should esti- mate be made a basis. The items of running expense in every instance should be printed on the card or form. The usual material used on jobs could also be printed, provided small spaces are left for the writing in of special items, which might only be called for at odd in- tervals. The number of men and days, as well as the list of items, will all have to be considered in making up the size of this card. If used in the manufacturing of machinery or farming implements, much more space will be required for the entries than if the system is to be used in the millinery or carpet department of a store. These items are entered, extended and totaled. Then the other incidental expenses, such as crating, boxes, drayage, freight allowance, and other items of expense, with commissions if sold on that basis, are added. This made into one total gives a very close cost price for that job, which may be said to be the net cost. Then, if the selling or contract price be added, there is a compilation of facts that leaves no question for the manager or owner to ask when he figures on a similar piece of work. Then, if to this compilation be added remarks giv- ing any special matter relating to the working out of 130 COST OF PRODUCTION that job any peculiarity in management, it is of incal- culable value to a firm in future estimates. Again, a firm may have the idea that a certain set of men are wasting time or material. This system pre- sents a means of accurately getting at the truth of the matter by setting two gangs of men at the same job. That will force a comparison of time and material re- quired to produce any given result. The elasticity of this system admits of its adapta- tion to any line of manufacturing with beneficial re- sults. CHAPTER XVI THE COST OF WOOD WORKING BY SHERIDAJS H. GRAHAM In this chapter the desire is to present for the con- sideration of manufacturers a system which will simplify the keeping for ready reference the cost of the manufacture of any article or set of articles. While a wood-working plant is under specific discussion, it is merely by way of illustration and it can readily be seen that the principles involved may be carried into any line where system is desired and with the same satis- factory results. It matters little what the nature of the article may be, all goods manufactured should be constructed from blank orders which should be furnished Orders ^0 the foreman of each department through which an order passes. The form suggested for this purpose (Figure I) may be adapted to varied requirements. At the completion of a part of the order in any department it receives the O. K. of the foreman, and is sent along to the next department, and so on until the work is finally ready for delivery. This enables the office to learn at any time the exact position of the order without searching through the factory for the desired information. The endorsement of the last foreman having charge of the work should also include the date of the completion of the order. 131 1»2 COST OF PRODUCTION If the order is one necessitating its transfer from one department to another on trucks, then each truck should bear a job ticket or tag on which should be en- tered the order number and the name of the article to be manufactured. The tickets should in all cases ac- company the order, the number of which could at all times be told by the workman detailed, and foremen should be instructed to refuse to receive any job from another department without the ticket attached. One cjf the essential points in the cost of the manu- facture of an article is the time a workman consumes in its construction; often it is of far ^^g greater importance than the actual cost of material. In order to properly arrive at that point the adoption of a time card is suggested. This card may be printed in the form of the dial of a clock (Figure II). This plan is suggested for the rea- son that the most illiterate workman is able to tell time, and his only task need be to place a cross in the hour when he begins work on an order, and another when it passes from his hands. Thus the exact time required for the work in each department through which it passes may be at once determined. Different forms should be provided for each department, as they differ in the operation, but each should retain these chief points: (1) The order number; (2) job number; (3) date commenced; (4) date finished; (5) name or check number of workman; (6) number of pieces and the name of the article. Cards for the various departments SHERIDAN H. GRAHAM 133 would have the possible operations printed along the side of the card. The idea which it is wished to con- vey will be found illustrated. These time cards should be deposited in pockets attached to each machine and should be numbered ac- cording to the machine number in order to prevent con- fusion. Then when a workman starts a job he has but ORDER MO. SHOP ORDER SHOP ORDER NO. C/h^Ay^. CLycct^iUrvU roBEiviAW X^o.S-i'yx.tJj MAKE' jp. . Sew WHEN COMPLETED DELIVER TO e,«TE orOROER DATEBEGAN DATE FINISHED Fig. I to enter the job number on a card and cross the time when he commences his work. The illustration (Figure III) shows one of these pockets in use. He enters his name, or, if he cannot write, his check number, runs a line through the operation to be performed and when through with it makes another cross on the dial. The plan described, as will be seen, also serves as a check 134 COST OF PRODUCTION on the workman for the machine number and the name of the operation or department must corrcBpond. For instance, if a shaper was numbered 26, and the work- man crossed out the operation of sawing on the card bearing the shaper number, the time clerk would im- mediately know that there had been an error made and eould trace it. Of course, workmen would be paid for OIWCRNO. id's SHOP OftDKH no. y MACtujr CAflVINaS U— I ON WHAT *^Vt?/-*^ BARS xvX /^y j^ ' i • \''^, ^ COMPLCTINO ^'^T/T'V^ NO. HOURS Q ^/ HATD ^ 4 TOTAL COST ^^ oosrE.cH ^^^.yr Fio. n the time indicated on the card. The diflferent cards they turn in each day show the exact amount of time worked, and the exact cost of the labor can thus be obtained. It is a very simple matter to determine the cost of non-productive labor by computing the cost of the pro- ductive labor for a given period in a given department. SHERIDAN H. GRAHAM 135 and dividing the amount tlius obtained into the cost of non-productive labor for the same length of time in the same department. To illustrate: Assuming that the productive labor amounted to |1,000.00 for a given period of time, and the non-productive labor for the same department amounted to |100.00. By dividing as stated above, the result would be 10 per cent. There- fore to the cost of the productive labor add 10 per cent to cover the cost of the non-productive labor. There should be turned in each day by the foreman of the machine room the exact amount of rough lumber cut. This should include all scrap and vi^aste for each order number. In keeping a stock record a card should be made out for each kind of lumber, the cards to be filed be- tween suitable guide cards (Figure IV). Becor? When lumber is received it is entered on the card in the proper column, noting the date, from whom received and the amount. The daily reports turned in by the foreman of the cutting room should show the amount of stock cut for each order, and from his reports the amount of stock could be en- tered. When an order is made out in the offiee the actual net amount of lumber needed for its construc- tion is determined and entered in the proper column. Thus the amount of scrap and waste can easily be de- termined by a comparison of the foreman's report and the office estimate. In determining the percentage of waste, add the various amounts of stock estimated for the different 136 COST OF PRODUCTION orders and also the amount of stock cut, and the differ- ence will give the amount of scrap and waste together. The superintendent should estimate the amount of stock in the scrap bin. The difference between the stock there and the total amount of scrap and waste, Fig. hi divided by the amount of stock cut, will give the pro- portion of waste. Several entries on the card (Figure IV) serve to properly illustrate this. It will be seen that the entries show that on the orders No. 250, No. 251 and No. 252, the office estimate amounted in the aggregate to 3,223 feet. The actual amount of material cut was 4,353 feet. The superintendent finds the amount of scrap to be 354 feet. SHERIDAN H. GRAHAM 137 The difference between the amount actually cut and the offiee estimate is 1,028 feet; deducting the 345 feet of scrap. This result determines the cost of material, and the 15 per cent thus obtained is added to the estimate to cover the cost of waste, and this will give approxi- mately an accurate cost of material. WMooruiMBm RCCeiVCD ^VO DATC miOMIHHOM AMOUNT ncccnfCD DAT! KO. •BTIIfVTK «;»? •«, WASTe BAUtr^eK 7 I" a.s.-^a. irooo 9 }f ,1i-S /3^ 7 tr s-lm (If /S'oo 1 If Ct4/yi^yr>\^,yi^J3^ 17 00 ^^T^ / ■ 1 FIG. IV It is next necessary to ascertain the cost of the complete article. To do this an assembly card (Figure V) is suggested. The cost of the different ?°™P^*** operations by departments, as will be seen, is entered in the proper column, the operator's name or number and the department, the number of hours employed and the total. Material 138 COST OF PRODUCTION can also be figured with the value and the coat per piece for material, cost per piece for labor, the shop burden or loss, or according to the name of the article. The cards may be filed in one of three ways, either alphabetically, according to the name of the party for whom the order was constructed, numerically, accord- ing to the order number, or according to the name of ML Mela huKoraliiau tNOP OBDM HO. /^Olf MnSHSU DATE FIM^HEO 0^,s scnmMMT WCnTIOMS HOURS MTE urauKT MATERIAL "Mm., liLlu..^ /-j-rf-a' '/.i^l^Jl! ■r '? SHflR BURDEN ■} ^7 COST PER PIECE MATERIAL 'si _ _ LABOR 'fl iom /f •fi TOTAL COST PER PIECE ?iH« 1 1 Fig. V the article. The forms can easily be enlarged or con- tracted to meet the particular requirements of factories of any capacity, and it will apply to any line in the manufacturing world. This system was originally devised for a large wood-working factory in Eastern Pennsylvania, where it was given a thorough trial of five months, beginning from the very day it was installed. SHERIDAN H. GRAHAM 139 The real merit in the system lies in the fact that while it was devised for a wood-working factory, it has been adapted to many large factories in other lines and there is not a single instance where its simplicity and accurateness has not been commented on favorably. CHAPTER XVII ASCERTAINING THE COST OF PRODUCTION BY E. J. HATHAWAT Every manufacturing establishment should have a system for ascertaining the actual costs of production. There are many systems in use, but perhaps none that is applicable in its entirety to all lines of business. There are, however, certain general features that govern all such systems and which may be adapted to any line of manufacture with but little variation. The chief desideratum in a factory cost system is simplicity. It should be easily understood, economical in operation, and its importance to the business should be recognized by every employ^. The difficulty with most factory systems is that they are too complicated. They attempt to give too much — much that is unneces- sary — and they are too expensive in the handling. The following system of ascertaining the cost of work is used in one of the largest printing and book- binding houses in Canada. It is the natural develop- ment of many years of experience with cost systems, and is a simple, economical and accurate record of all work pafBsing through the factory. A work docket, giving the general partieulars, de- scription of work, record of paper to be supplied, time promised and other such information, is written in 140 E. J, HATHAWAY 141 duplicate, the original (Figure I) going into the factory with the work, and the duplicate (Figure II) remaining on a loose-leaf file in the oflace. Every producing employ^ in the factory is required to hand in a work ticket (Figures III, IV, and V) each 1 floJKiwxal-PujAilu^ Qo. „„ Qua. 1 ,„3 DuoALtJr Ibotkr (fittewo.. Dcscniprron: L.T. t\^. Q;"!**^ waJ!*^- cH«o«-q>¥qr-?J..-. ,M 3.. *«ouf.r»i£(?;*!? •TOCK •UfWCO WITH OttCMT. t c TOT'LS 1 ..1.0..,.^.. .S!o:?.W!^!^.L..... law , . .« .,« .1.2. 9 7V ,,. COKEftn., „ .._. PER • FUtHTINtt COST COMPOSITION rnoM woitN TiCKrra .„._„ ...3-. .0..7. If 12. r« COST or IMR. _,„.__.._.._..__.„_._. fes BINDINa COST 1 7i?: 2 «7 STOCK BUPPLIIO ss: cuTsiac WOUK ...~.,«..s.iisBp..f'.': eb ■inOINQ — " ZS^ 2* «4-.!L-.lEo«l^- ..usxqk.. .,,,'iM ..aO....„it„*jEB!l«Hiit!p!f{.....MW ■■""'■■ __ ,...KII ..-.■.... COHT or UtBOW FHQM WOHK T1CKCT» COMPOSITION pnEVBWonN Fig. n the workman's number appearing above and the value of the time charged below. (Thus in Figure III the first entry under composition, 42/60, indicates that E. J. HATHAWAY 143 compositor No. 42 has worked on docket J 1255, to the value of sixty cents.) As this file of duplicate dockets contains only those veifposino room lauunwoRK iv^^f^. T 1 BT -iJ-.^iC&rvftiTKy ^ FonEMAM FIO. V finally been delivered to the shipping room, the doeket passes into the oflSce, where the amount of labor is 10 146 COST OF PRODUCTION made up on the duplicate, transferred to the original, and the actual cost of the job ascertained. (Figure VI.) To the prime cost, covering materials and direct labor, must now be added the percentage covering man- Bgement, maintenance, and other working expenses, in order to find the net cost of the work. The docket as now completed is sent to the invoicing clerk, to be marked with the date of charge and amount, for pur- poses of reference, and then filed in an alphabetical index. The duplicate (Figure VII) is filed in a corre- sponding numerical index, and thus ready reference may be made to any particular job by name, number or date at any time. This docket system has now been in use for a con- siderable time, and has in every way proven highly a. System That Satisfactory. Its advantages over the ^uebyAct^i crude and immature systems in general Trial ygg gj-g manifold. Its operation is re- moved from the hands of the departmental foremen, who are liable to error in the handling of accounts, and costs of labor are made up by an independent clerk. It is a ready check on all estimates, as it contains the cost of paper, labor by departments and materials, the elements entering into all properly prepared esti- mates. The dockets giving actual results are always accessible, in cases of request, for new estimates or repeat orders. Errors on the part of employ^ in making out their work tickets can easily be traced, and E. J. HATHAWAY 147 excessive costs of labor in any department can readily be located and accounted for. The file, with its "live" dockets, is a daily record of the work in hand and its present condition. It pro- JOB WORK DOCKET. (originaO >|>.J 1265 W..T.. i^tmAu.»-!i.ottc. ^g«ia. DncNipnoN: cw«BQca^^"^r,2J--,. .ao.a.. OMOUHT ■ .H'dz*^-. •TOCK CUPntEO WrTH DOCKET. PRINTtNO COST BINOINa eoMPOfiiTJon rnoM woaKTiCKcra ,.„_,_ ..fi-... ..c ...a -EMsggJ LceaT gy Z-V ^2 7V 21 6i> _W^!L.lESe®L;: t. ^ancuAN □motnv £LC>fKdrrMTonT Fig. VI vides an easy means of finding joos that have oeen un- duly delayed and of answering the varied inquiries for work which is in progress 148 COST OF PEODUOTION The above system of recording factory costs of pro- duction has proved of inestimable value to the printing and binding house in which it is being used. It is in- clusive in its scope, yet it is so simple in its operation |<\l3-«^| JOB WOnK DOCKET, „.j ,255 ,.S!i9l^f*<^iCSj!i&^!it!!L(!ff. Rtututt>r ju)*. S^sufa^. 4*^^ ■ I OEScpiif^ion: t.T- ttj^- MfuA? 'imJr- Q»Ma VJQl. two tJUyu>. unA( /atiXetni^. ICO » I JiMOUMT »i„ STOCK SUPPtlED WITH POCNCT, J...'...j(... ..fiB..»f?^t't."..l¥wJ^.gt.??/l7lCi^*i--iW31^?(j[(.W. Pn ESS WORK -T5'.?£.*y/7fc..'-yzi-..:?!tt.. ..y/*B.»^^J..!^MC.*a«i>. I"? 7^ Fig. vn that it is readily understood, and it requires little time on the part of employes for filling in the required data. To the line of work to which it is applied it seems to E. J. HATHAWAY 149 kave overcome many of the difficulties which seem to affect the various methods of securing accurate records of costs of production. It is inexpensive both in its in- stallment and in its operation, and has proven its effectiveness in actual trial — a trial that has been as severe as it has been satisfactory in its results. CHAPTEE XVIII HOW FACTORY COSTS ARE FOUND BY CHAELES W. NORTON The competitive spirit of the business world of to- day has permeated through the outer strata of com- mercial organization and is now at the very root of (UU) <0»fiA»M- w-s- woniUKO onDcn nc I AHIQNED TOU AWg HKmtBI »tn'HOHHCP TO OO THC FOmiWIHO WOWIl, VO, S <1Q- "Kajtta^fro^ , rg.*"^ ncauismoN n TMg roLLOWiHO STOCK, va. 14. M».~^Wt-g-- t^otunx. •alt Vced^XitSts-. twJtS'^- utaaIiSaa; "lljoa Fig. I; the foreman's order from the superintendent enterprise and industry — namely, the factory and the workshop. No matter how large or how small the out- put, how great or how little the investment of capital, how sagacious or how limited the executive ability of the concern, there is demanded alike of all the final re- sult of definite competitive quotation on standard prod- 150 CHARLES W. NORTON 151 uetB. The minor manufacturer, limited by capital, lack of organization or concentration of interests, or even by inexperience and neglect of system — in fact, not even so established that he may work together into an har- monious whole the different ends of his business, is con- fronted constantly by the problem of placing his goods upon the market at the same figure and under the same trade inducements as his stronger and thoroughly 16 CLAM enmATon . j TOoaUaa — 1 unrr nCNT 1 %^ h B« IN-reBMT « OCPHICIItTION s. 10 I» aa MUTAUSMl H for TAXES 76- MiBCKLuruoum or , a »a 10 Fig. VI; the shop expense record equipped competitor. Time is too precious in which to experiment, the balance of power is all on the one side, and it becomes apparent at once that to apply the pro- ducing prices of the larger enterprise to the smaller forms a peculiar misfit. Therefore, a mechanical process by which the details of manufacture may be statisti- cally arranged and compared becomes of inestimable value, and the only true and safe course for determin- ing the cost of production. 152 COST OF PRODUCTION Nothing appears to yield a better result than the versatile card systems. Added to this must be sys- How a Factory tematic arrangement of factory equip- Applf^i^^of" ^^^^> *^^ intelligence of an able cost-figur- coBt syBtem ing department, and, above all, persever- ance in accomplishing the results sought. To illustrate the first point, let us diagram the factory arrangement and we find the following necessary departments and duties therein : I. Shop Order Department — (a) Analyzes orders, (b) MfUies foreman's orders. II. Factory Clerks — (a) Time charging, (b) Stock charging. III. Stock Department — (a) Orders stock, (b) Raw stockrooms, (c) Store stockrooms. IV. Shop Expense Department — Figures and al- lots shop expense. V. Piecework Rate Department — Figures piece- work rates. VI. Shop Schedule Department — (a) Schedules orders, (b) Sees that above are carried out by follow- up system. VII. Counting or Transfer Room — In other words, the factory "clearing house." VIII. Shop Ticket Department — (a) Assembles tickets, (b) Inspects tickets. IX. Cost Figuring Department — Final Summary of Costs. Of these nine divisions, it will be seen that com- CHARLES W. NORTON 153 164 COST OF PEODUCTION binatiens may be made to reduce the organization into more general heads, but not to destroy their individual functions. But considering the above to exist as stated, let us take up an order in progress through the factory and see how the system may be applied. When the order comes into the factory, after receiving a house C.«BAM*^ ' c.» If*! OB*D« 1 rtNIINBO PRODUCT CLASSiriKS O^CHATION Rcn ■TATC or eOMPLCTION RATE MACHINI HO. 4* T)Mwt«f(l 1 is s- MOULOINft OIIILUNO ■■ 16 wi-mtn 11 — MOUtfTflW 6s. _ e. IS- 16 WVETrilS VININa 10 16 12. TO* OnNaMCMI-M 8 V« f wu».Na 1 W 7 «fUT1N0 1 »o — as- Ka Figs. Vn and V; tlie follow-up card and piece-work record number, it is delivered to the shop order department, the order is then analyzed by the superintendent and each foreman's work is outlined in Figure I (in this case for the completion of copper-lined reservoirs in a stove factory), together with a requisition upon the stockroom for the stock necessary in construction. Ad- CHARLES W. NORTON 155 ditioD to 8ooh, if required, may be made only by the superintendent. Each foreman files these cards in order of completion, or may file ahead in case of rush orders. Every employ^ is provided with a time card (Figure II). These are filed in an open tray, under alphabetical guides (if collected), or upon board, with hooks convenient to section where used. Upon com- mencing the job, the workman indicates by cross at the proper hour and minute, as shown in the cut, and upon ..- "/l«-(<,3 C,«*»-r ■MUm MCf me AMD aHCCREB wt stn rOMM INSKCTCD °w NCMAHNB POU« ■ns. 1 Wtl. \^ .. ^ •• %^ »:^ 'c . f T^atajw»«4 Ov\ V«U — * C .• v^ *• • ■ «%. T> M 1^ F e M K^ ^. F - 1 Fig. IX; where the shop tickets are checked completion makes similar indication in the opposite square. Such time is then estimated and entered above by the timekeeper and indicated in his book as a check (together with all postponements on the job) ; the ticket accompanies the article as completed. From such a system, piece-work rates may readily be computed, and the encouragement of industry among workmen is evideot. 156 COST OP PRODUCTION When the truckman Is sent to the storeroom for his necessary stock, he takes his requisition card as evidence. Upon Figure III the different articles, their "/'*/o? ■nm IP qtW g' jLa_ -4" C.TTT=>xA_ NECCIVING CLCRft ■VTVMIKD AMOUNT OT DilTg I '[ift>/oo Tm« lO 1^. tjf\ jo: jg^ AMOUHff' CTrF>m. nccciviNO CLn ■aniimw «c«a^ NICHELINQ « 10 \0 ftV CXTRA WORK & WASTE PR CT a M- I eOLTS, SCREWS & RODS 1 ^s KNOBS A HINGE PINS 2- lO RIVETS & WASHERS 1 <^- ASH PAN 1. «fo POKER & TOWEL ROD 7.r 1 o n UFTER & SHAKER 10 STOVE SRICKB A MICA 1 16 RESERVOIR a 02. DOOR LINING a^ ^^ \f ^^ ^-^ V A POft-MO. HIIO »tn • ■iCt c=„ Ma.He. AIHP ir»«T -""" "■" u « vSr ■ aJi sf t.-J ot-io l ,a ,f„ t /O 7/r ^^ H iy il i -./. 4.* .ja^l_ _'J. c= »c V ■f-.,n :^^^t.^ 70 Oi,tk> ■T ,^^ r=^ if J-J ro r^U aX ' f rc f /r /... 'hf ri ■^I. \4' ro ^ hr ](^.^C~ (^ V 1 ■fo/3 4^ fe 3 f'n 1 ^' — r ij !£. ?^ ti F Fig. II This the foreman of the wood shop can estimate so that an accurate percentage can be added to the cost of the lumber. In this line of goods, the waste will average 20 per cent, while with castings, steel parts, bolts, nuts, washers, etc., 3 to 5 per cent will cover any ordinary waste. As every progressive manufacturer contracts for material on the basis of a season's supply, it is not OHAELES J. WATTS 167 difficult to determine the cost of the different raw ma- terials. It is recommended that the detail cards (Figure I) be made up on the detail side in the office and that the labor items be recorded on the cards by the clerks in the several departments through which the pieces pass in course of manufacture. They are then to be delivered to the cost department, where the cards (Figures II and III) are compiled, after which all cards are kept in a cabinet in the cost department. If any changes occur affecting the kind, cost or quantity of material, the clerk having charge of such details may either make the changes from time to time as they occur, or preferably by means of a notification slip advise the cost clerk of these changes. The latter can then record the changes at his leisure. This sys- 168 COST OF PRODUCTION tem permits of a perpetual cost account being kept, since there is provision in both cards (Figures I and II) for recording such changes. As many manufacturing plants make their own cast iron, thej no doubt have a foundry statement show- ing the cost of melted iron from the cupola. But to make this simple system complete, we submit an easy method (Figure IV) for obtaining the cost of melted Pig. IV iron. The labor of the molders is recorded on the back of the detail card (Figure I) so that the material is figured separately from it. To obtain the cost of one pound of melted iron from the cupola, the total cost of pig iron, scrap, sprues, gates and coke, together with cupola labor, is divided by the total weight of the good castings obtained from the heat. The result will be the cost per pound of CHARLES J. WATTS 169 melted iron. Castings are flgnred at the cost of melted iron, and the foundry labor is added afterwards. This gives the actual cost per casting. For malleable iron the same general rule applies. On this card (Figure IV) is kept the heat record of the foundry. These cards are filed in a cabinet and form an excellent comparative statement. Although different kinds of pig iron would not be bought at the same price per ton, a fixed amount is here used to simplify the example. It should be charged at cost. Twenty-two per cent is added to the cupola labor for the non-productive labor, as it represents the per cent which covers the cost of foreman, rough labor, etc. in the foundry. This is fully explained further on. The remaining entries on these cards not specifi- cally referred to are self-explanatory, and will suggest for entry other items of information which will prove to be of interest and value not only to the superintend- ent but to the manager as well. Of equal importance with the cost of the materials used in the process of manufacturing in determining the total cost of production, is labor, labor Labor, in manufacturing, is divided into three classes. Productive labor is that which produces something tangible and of asset value. In other words, it is the labor that from raw ma- terial makes a finished piece or part. Next is departmental non-productive labor. This Is that class of labor in each department which is neces- 170 COST OP PEODUOTION sary to make the productive labor most effective but does not of itself produce anything. To be more ex- plicit, a manufacturing department ie generally made up of a number of men over whom is a foreman, and if the number of men be large there is a clerk also. There are also truckers, oilers, and a general class of roust- abouts who must be maintained in the department in order that the producers may work to advantage. In the plant must also be shipping and stock clerks, timekeepers, engineers and others who belong to no one department but who are a positive necessity in order that the producing departments may operate effectively. The labor of these is called general non-productive labor. If $1.00 be the value of productive labor and to it be added 30 per cent as the value of the departmental non-productive labor, $1.30 results. To this is to be added the general non-productive labor which may be assumed to be 40 per cent of the total productive which will give 11.70 as the real cost of each fl.OO of produc- tive labor in the department. If the percentages above referred to are properly calculated, and to the cost of all the productive labor in the factory is added departmental and general non- productive percentages, the result is the exact amount of the pay roll for the term or period considered. In order to properly handle the cost of labor it is recommended that piece prices be established in all de- partments which will not only simplify the matter of CHAELES J. WATTS 171 records, but will also result in a saving in the cost of manufacture, as it is a well known fact that piece workers are prone to produce more work in a given time than day workers, the greater effort of each one being attended by a consequent gain to him in earnings. All well conducted factories are divided into de- partments. Six departments will generally be sufiflcient C4 C6 Jet CS> /8i,^ c//^ Z^ ^,ju,/. j^t<.>^ -<^«.«^««' /p.^. 1 .... , -,. D«TC 5«»I -*■■ ^^„„ ^^jf / ?.,< "f ^■^/^ i^a^^j^ rr rn ^(L^'A^Jtn uf I.J! /dlTT^Af^ -' t.n r,r /S •2- '■S '" 1 7-0 FIG.V to cover all of the productive labor. These are usually classed as follows : Wood shop, foundry, steel or black- smithing department, machine shop, paint shop and assembly room. Since piece prices can always be closely approx- imated in each of these manufacturing departments, a small card cabinet is provided in which is kept a record of the piece prices paid for work in each department. 172 COST OF PRODUCTION The illustration (Figure V) represents a convenient price card for the wood shop. On this card are the prices paid for the labor in the wood shop in making the piece named on the card which in this case is re- ferred to as CI. As six columns are provided on this card for changes in cost prices it will last a long time. Since in many manufactured articles certain parts are identical, not so many cards will be required as «N4Nac aNB MCW 've* ••MK* ?./. ,.^..s):/^,.£,3:/m antonflw /^^ '€Utrvi»ta &l ^a~o -^^fi J^O mxm wwct w»ioa ,/^ :^z \/yia& ^^iny .rrvi^L^ TIlit ■tCBlD CWWBfp ■COOT weawp CHJW^«iK ^it^P*t.t£^'9f/ . /ii3 - /nOQ^ % ao 40 BO 9 *0 Vi 00 40' BO 9 10 SO 30 *0 SO 3 to ■ CO 30 40 BO 3 to 20 30 40 90 10 HI zo « «0 BO 10 to ■o 00 40 W 4. 10 20 30 40 BO 4 1© 20 30 40 60 11 M ao 30 «> 60 11 • ao X 40 80 5 to 20 30 40 BO 5 to SO M ■«o 60 - _— ^_ _ ___ ^^ _^ ' FiaVU Of course, all departments numbered above six are for general non-productive labor except where the la- bor performed pertains to tools, patterns, permanent equipment, machinery, assets or permanent values. These time cards should be marked as productive or non-productive by the foreman of the department in which the work is performed. This gives the time- CHARLES J. WATTS 1T5 keeper the information necessary to separate the pro- ductive from the non-productive labor and will be de- scribed and illustrated later. At 6:30 A. M. a workman, Wilson, receives his time card from the clerk or foreman and is assigned to his work. At noon he has finished this work and pro- ceeds to fill out the card. He first inserts his check number, in order that the timekeeper may identify him on the pay roll, having previously checked in at 6:80 A. M. with this number. He dates his card, signs his name, indicates what he has done, crosses 6:30 and 11 :30 in the hourly divisions and hands the card to the clerk or foreman at once. After the noon hour he receives a new card and proceeds as before. As these time cards will be coming to the timekeeper's clerk at all hours of the day from men in the department, the clerk at once inserts the price as shown by the price card (Figure V), and com- putes the earnings, in this case, f 1.25. It is, of course, evident that the labor performed is productive and the card is marked "Prod," meaning productive labor. Should, however, the labor be suoh that the clerk cannot determine whether it is productive or non-productive he confers with the foreman. This same plan is pursued during the day and at the close of the day the clerk has all tickets computed except the last round turned in. These he computes as his first duty the next morning. 176 COST OF PRODUCTION The clerk hands the day's time cards to the fore- man for his approval or correction after which they are delivered to the timekeeper for the pay roll. As all these cards are marked so as to separate the productive from the non-productive labor of the six manufacturing departments, the timekeeper is now in a position to ascertain each day or week, as may be desired, the departmental as well as the general non- productive percentage, the latter being a fixed quantity. In computing the time as given by the time cards of a workman in any producing department, where the goods are run through in small lots, it is recommended that such workraan receive credit on his ticket for the number of pieces made at piece-rate prices, and the bal- ance necessary to make up his day's wages be allowed him at his day rate and be charged as non-productive labor. For calculating the departmental percentages of non-productive labor "labor statement" cards are pro- vided (Figure VIII). The timekeeper having full information from the daily time cards received from all departments is able to divide the pay roll as shown. The total of the pro- ductive labor for the week divided into the total of non- productive labor gives the per cent of non-productive la- bor for the week. The "last week" item on the statement comes from a previous statement. The "to date" item includes the totals from the beginning of the fiscal year. These "to date" totals represent the amount paid in the CHAELES J. WATTS 177 wood shop up to and including September twenty-sec- ond, resulting in an average departmental non-produc- tive per cent, of thirty-two. All productive or manufacturing departments are treated in the same manner, as well as the cost of that part of the labor in the non-productive departments which is productive labor when expended on tools, pat- terns, permanent equipment, etc. LABOA STATEMCNT 'Mseo (HOP WEEKENDiNe 9/jJ /a-t> j>ISTBiaOTI9M PRO PIECE PRO DAV 1 hON PRO tOTAL 1 (pAA(P/,,„lAMi. /yfr f.0 ' USltt^ (f 1,0 77^.^^/C^i . 1 1^ • J.%,,, • JS 1.0 (/ TOTALS ron wtrit /7S- so /■? (n" ITi n' f^l 76- TOTALS mST WEEK iTJi ko /s S.0 ..f 'fo SfS 7(1 TOTALS TO DATE /^« f 272 S.S. 6&S Va sm ■6-3 DCP'T NON -PROD. FOR WC£K . 3 mi BEP'T NON-PROD. FOR LAST V »W.K . liiH OXP'T NON.pnOD. TO DATE - -M^ . J Fig, Via The method of obtaining the amount of general non-productive labor is as follows : If any productive labor has been performed in non-productive depart- ments, that amount is added to the total of all produc- tive departments. The sum of these is divided into the total of the non-productive departments after the amount of productive labor has been deducted. From the "labor statements" of the various de- 12 178 COST OF PRODUCTION partments (Figure VIII) a "labor summary" of all tiie departments is made up (Figure IX). The per cent of general non-productive labor for the current week is readily determined by dividing the amount of productive labor into that of the non- productive labor. The item "last week" came from a similar summary. The 40 per cent non-productive "to date," we apply to the total amount of labor as shown on the card (Figure III). V i> BOW suwMknv :^.w^ J.LSa^ga$. L^ ^^ ,^^y? ;< l^ unA^ _* ^^. X. ^f.-^fi^ lk>rfv^ ma t^i j ma. om | wow >iw. /•;rf' SLa\ /3, io I -73 9:r /xa ^JJ & 'f j '!?;t ^o ■ . T-LoWj. 2y !o 93 Co i fT-.T-.f, (J /^i — '^'■ •^""^ ('ZL. ^^.—n^^ . a-oD /3/i \3o \*f£. 7-^ Lijic^^ isk xa\ ^/ i 3^^/ -pf 5^ ^ J? g-->fg -££^L2 'l,Jo 1-o\ cTg o -2£ hjL y""/ :£ai, /ItCB .3 /-jfcf rrf jJo-/'/ ■A /;w;»- .^ OJ y*. Is. Pis. IX The metiiod of aseertaining and recording the pro> portionate cost of both the departmental and the gen- eral non-ppoduetive labor to the productive, usually oonsidered a difBieult undertaking, is by this system shown to be an easy and simple computation. The pur- pose of these percentages is to give the absolute cost of producing each part, which is obtained by adding them to the flat cost of each part which is already established since the work is done on a piece-price basis. CHARLES J. WATTS 1T9 For convenience, these percentages are not applied direct to eacli part, but on assembly cards (Figure X) on which are collected the flat cost of each part as given on the reverse of the detail cards (Figure I re- verse). For illustration, the cost of labor in the work- shop in producing of the part designated as CI is as- sumed to be $2.35. /• N / M.c.ncaMOP \ / WOOOSND^ "'"'"" \^ ^^ Munaiii ... ";"* HO ■-... |'.=,. ""i 1 (? / p- ^iJ- 5^ 1 ,0. «r ^, !^^£Xli^ /i ^ M f.p. f. ^J- 0.1 •s.^^ Xlu /J- /i fn 1 f.3 \, ?.A i fi'-f if lUJ- TO i (e/. 1 rr 1 l*-7 f,^ 1 p\ 7r 1 <1 Sl.o fd 1 e, /o / 1 f>, // 10 1 f>./i. ,/. i P,/3 i fi.,J ?' f I^U f^ 2i Fia. X This amount is recorded on the assembly card (Fig- ure X) against CI and by the same method is charged up the flat cost of all other parts as 02, C3, etc., until all the flat labor in the wood shop is assembled, amounting in the illustration to |16.95. It is presumed that on September twenty-third there is a change in cost (Figures V and VI) and it is so recorded on the assembly card (Figure X). There 180 COST OF PRODUCTION being no further changes, this total, ($16.80) as the cost of the flat labor in the wood shop is transferred to the material and labor summary card (Figure III). After this total is also added the departmental per cent of non-productive labor for the wood shop, previously obtained (Figure VII). The same method is followed with the cost of all the flat or productive labor in each department until the total cost of all the productive labor in all depart- ments is obtained together with the non-productive percentage. This total (Figure III) is $93.65. To this total is added the percentage of the general non-pro- ductive labor which in this case being 40 per cent (Figure II) is $37.46, making the total cost of labor — productive and non-productive — 1131.11 (Figure III). To this is to be added the costs of material taken from the material summary cards, of which the lumber card (Figure II) is shown. This gives a total factory cost in this case, $228.60 for 100 8x20 rakes. As total factory costs are needed but once a year, when prices are made for traveling salesmen, the total summaries (Figure III) are made up only at or near the close of the factory year. As by this system an accurate general average of the cost of both departmental as well as the general non-productive labor is determined, and as most manu- facturers make yearly contracts for materials, it is pos- sible to compute the cost of all material at the new prices and obtain exact costs for the ensuing season. CHAELES J. WATTS 181 It is also possible at any time during a season to make a close estimate in the same way of the cost of any new article or product by taking the cost of the material, adding the known cost of the flat labor with the "to date" labor percentages in all departments which are shown by the labor statements at that time. The term "manufacturing expense" as used in this chapter includes the cost of the supplies used by the factory during the year, consisting of Exprase*""'^ replaced belting, emery cloth, sand paper, planer knives, buckets, brooms, mops, sta- tionery, fuel, oil and numerous other articles of a like nature. There are, of course, many ways of accounting for these items, but their inclusion in this division ac- cords with the working of the other departments and will be found most satisfactory. At the time the general inventory is taken let all stock of this class be carefully listed at its asset value, deducting a certain per cent for depreciation from the value of such articles as are worn or partly used. Hav- ing done this there is now in the factory only the raw material, permanent equipment, the product in course of manufacture, and the finished goods. At the time of commencing operations, whether at the beginning of a new business or annually after each inventory, let each foreman draw from the stock room such supplies as he needs, a proper blank being pro- vided for the purpose. It is necessary to advise the stockkeeper as to the cost of each article in this ao- 182 COST OF PEODUOTION count. This may be accomplished by a system in the purchasing department whereby invoices for all goods received pass through the stock clerk's or storekeeper's hands. Having received and filled the order from the fore- man, the material drawn is charged to the proper de- partment on a stock card (Figure XI). Let this card represent one article which in the illustration shows leather belting drawn for department Number One. Have a card for each article, also a card for each department. As the usual list of supplies is not large it will not take very many cards for all of the depart- ments. The stockkeeper should do all his posting from the foreman's orders to these cards once a day, and thus economize time. This stock card shows the cost price and it is there- fore not a difficult matter to enter the record in actual value of the supplies and not simply the quantities used. There are many ways in which the ledger can be divided, but it is recommended that there be used a card having a guide projection in the center and extend- ing one-third of its length, for the division of the dif- ferent kinds of stock, and a card with a tab (Figure XI) for each department. As these tabs indicate the numbers of the depart- ment it is easy for the stockkeeper to locate any cards wanted when posting. The system, once started, requires but little labor to keep up, and as a replacement is infrequent, the ex- CHARLES J. WATTS 183 pense is small. If desired, the capacity of the cabinet may be enlarged and used also to keep a record of all material in the stock room, although for cost purposes it is not necessary. The superintendent and the manager as well, will also find that a weekly report or manufacturing ex- pense summary (Figure XII), made up from the stock cards (Figure XI), is very helpful in eliminating un- i-'j.^:L.^^l^(B^ .„,;....Sc^T ..,. ««D •UAHTrrv pnicc COVT '°~ „.. OOB. -,„. \:o.T COST ?//4 / /i IT / Tfl nuui. IM X I- ft r?-/" „ \ ^--=— , ■ ■ f . , . ' necessary expense in any department. This report, either on a card or on a sheet, may accompany the re- ports of labor in the various departments (Figure VIII). These two reports show the actual cost of the labor performed and of the supplies consumed for the week, which may be discussed and analyzed with the foremen. This weekly report of manufacturing expense also 184 COST OF PRODUCTION serves as a basis for applying this expense to labor cost, either at the end of the season, or at any time during the season, when the factory costs of making any new articles of manufacture are under considera- tion. In pro-rating this expense over the cost of the given article, it is recommended that the entire output of the factory be computed at prices derived from the cost estimates, and that this amount be divided into the MANUFACTURING EXPENSE SUMMARY WEERCNDINa Ac-^^ J. S. 'QC OEPAHTMENTS MATERIAL 1 » 3 1 • - • II T 9 I .0 Itj Odijic<'■,^^^ J 7i> <• ^d l.iP,^, ,! ■ n %.,.u-fi^U ' / 20 X.- Ur. U^ %1 UijL,Zal ri iO £^t--uUk /i- 70 XijS^ui, 'i" 90 ™ H _ _ _ _J 1_ .. _ 1 FlO. Xlt total cost of the supplies used. This gives the per cent which is added to the labor and material cost of the individual article to secure the net factory cost. Of course, this per cent during the season could not be readily arrived at owing to the unfilled orders in the factory, but the total cost of supplies for years previous is known, and a per cent based upon this would answer for the special costs necessary to be esti- mated during the season. CHARLES J. WATTS 185 If, in calculating costs at the end of a season for the succeeding season, it should be found that the pro- portion of supplies used is 10 per cent of the entire cost of the product, and the article in question costs $10.00, the manufacturing expense would, of course, be $1.00 for each article, which would be added to the factory cost. General Expense, in connection with a cost system, is to many managers a source of annoyance, and how to ascertain the proper percentage to be Ezm^e applied to the factory cost is a problem which is ever before them. Again, how to apply the anticipated profits has been a much discussed question with all. While it is not claimed that this method of treating general expense will satisfy every manufacturer, yet he will be convinced that if he will apply the items that go to make up general expense as here indicated, the estimated cost will vary but little, if any, from the actual costs. The term, general expense, as here used includes such items as salaries, traveling expenses, taxes, in- surance, uncollectable debts and notes, depreciation of product as well as of manufacturing plant, freights, telephone rent and telegrams, express charges, adver- tising and similar items of a miscellaneous nature. There are two ways in which general expense can be arrived at for cost purposes. Either is suflBciently accurate to obtain satisfactory results, one having the 186 COST OF PRODUCTION advantage of being short in application while the other is somewhat more difficult and tedious. The simplest method is to keep a dose account of all items entering into the general expense account as direct charges, and ascertain the total of this account for the year, adding a suitable allowance for uncol- lectable accounts, depreciation of product, plant, etc. Divide this total by the total cost of the entire out- put less the value of material on hand as shown by the inventory. This result will be the per cent which is to be added to the cost estimate. It is suggested that the salaries of traveling men and their expenses be kept separate and by districts or territories. This will make it possible to ascertain the cost per cent of selling in each district. This separation is recommended, as many manu- facturers well know that their selling expense in one territory is much greater than it is in others. This con- dition alone often prevents a concern from doing a profitable business in certain localities, which disad- vantage would be removed by making each locality stand its own share of the selling expense, instead of pro-rating the entire selling expense over the entire product. In the handling of a certain product one territory is known in which it costs 40 per cent of the selling price to market the goods, whereas in others it requires only from 3 to 5 per cent. If a district selling expense account is kept an expensive territory can be quickly CHARLES J. .WATTS 187 located and abandoned, if the resulting profit is not worth the time and expense required to secure the busi- ness. If the selling expense account is not divided in this manner, these facts are lost sight of. It can be done either by the ledger accounts or by a simple ruled distribution book or card file which the bookkeeper can keep without difQculty. If the latter is used, there is a card for traveling expense, for salary, and for any other incidental expense of the salesman in each dis- trict. On the reverse side may be kept a daily, weekly or monthly record of the sales. At the end of the year a few simple computations only are necessary to arrive at the desired results. The other plan of ascertaining the per cent of gen- eral expense to be added to the cost estimates, of which mention was made, would be carried out in the main in the manner just described, except that instead of wait- ing until the end of the season to apportion the monthly fixed expense, reserve and suspense accounts are opened in the ledger to cover such items of expense as are not directly incurred during the month in review. In reserve accounts are included such expenses as cannot yet be exactly determined and whose payment therefore, must be deferred ; for illustration, taxes. To this tax reserve account would be credited the esti- mated amount of the yearly tax, the same amount being charged to an Accruing Tax account. This amount would be pro-rated monthly into the general expense 188 COST OP PRODUCTION account and the pro-rated sums credited to Aocrning Taxes. At the end of the year, if the estimate was cor- rect, the cash payment should close the Tax Reserve account and the pro-rated sums which have been cred- ited monthly would close the Accruing Tax account. Other reserve accounts are handled in the same way. Suspense accounts, which comprehend expense paid in advance for terms longer than a single month, are handled in the same manner except that the suspense account would be charged with the money paid and the amount pro-rated to general expense according to the number of months covered by the payments. For in- stance, if insurance premiums are paid six months in advance, one-sixth would be charged out each month so that at the end of six months general expense would have consumed all of this amount and the Advance Insurance Premium account to which is charged the cash payment, would be closed. Salesmen's expenses and other similar items are handled in the same manner. The difference in the two methods is the difference between general expense known only at the end of the year and a definite statement of all general expense items for each month. The first is simple, and for yearly cost purposes is generally satisfactory, while the second method is equally good for yearly costs but also gives a monthly general expense statement, which for many reasons is preferable. CHARLES J. WATTS 189 Either method can be used with a card system, thus reducing the cost of maintenance, or can be kept in the ordinary ledger. Special Costs is a term used to include the extra items of cost arising from defective manufacture, the substitution of expensive material, such as Costs* brass in place of malleable iron, and such items as may result from oversight on the part of some foreman or other employ^, or from a fail- ure of prompt delivery of material. If these expenses cannot be traced directly to some source against which they may be charged, they should be borne by the specific part of the product affected and not charged over the entire product or to the general expense account. It is suggested that a Special Cost account be opened in the ledger, covering such items and that this account carry this expense throughout the season, re- garding it is an uncollectible account which is to be pro-rated over the cost of the product aflfected. The natural inquiry is, "Why should this expense, incurred during the previous year, be added to the cost of the goods to be made the following season?" The reason is, if a certain amount is charged up during one season for oversight and errors, there is a strong proba- bility that similar conditions will continue to exist, and an allowance should be made, as it would be for bad debts, interest on the investment^ etc. This sepa- 190 COST OP PRODUCTION rate account gives facts to work on, while if the items were merged in the general material acconnts they would be lost sight of entirely. To the cost estimates with all percentages included mast now be added a certain per cent for profit. For example, assume twenty per cent as the '«»''*■ desired profit, and $10.00 as the cost of producing an article in the factory, ten per cent as the per cent of manufacturing expense, fifteen per cent as the per cent of general expense, and five per cent as the per cent of selling cost, then flS.OO is the total cost of the article. If twenty per cent be added to this the selling price is $15.60 in the territory costing five per cent to sell in. This will assure you a profit of about twenty per cent on the money invested for the machine. Now, let us consider the different cards and blanks and see how each may be elaborated to make a broader, but perhaps more complicated system. The detail card (Figure I reverse) may be changed so as to provide a column for recording the price as well as the quantity of the stock with one or two ad- ditional columns for changes in price. This card then becomes a working price sheet, and when the non-pro- ductive labor percentages are added to these prices a cost record of pieces or parts is attained which fur- nishes a cost basis for prices of repair parts as well as for the inventory. As these cards are kept up they furnish a permanent corrected record of cost prices for CHARLES J. WATTS 191 theae purposes at any time they may be desired. In making these computations for inventory pur- poses it is not recommended that the percentages for manufacturing and general expense be added. Annual inventory prices should not be inflated, and for thin reason factory cost prices only should be used. There is always a certain amount of stock taken into the inventory which is valued at the original cost while it has really depreciated. Taking the inventory at corrected cost prices will therefore in a measure, correct these errors. The material summary card (Figure II) shows in this instance the total cost of lumber used in the 8 x 20 rake. From these material summary cards a compu- tation may be made, showing the approximate number of feet of lumber required for each size and kind of machine made, thereby giving the required unit neces- sary for a given number of machines of each class. Fur- ther computations may be added, giving the total costs as shown by the cards. These furnish valuable data in estimating the requirements for the next season. Further, if the cost of the labor on each kind of article as shown on the total summary cards (Figure III) is summarized, a very close estimate will be at- tained of the amount of money required for next sea- son's labor. These cards (Figure III) may be so modified that manufacturing and general expense are included with the factory costs. If this is done nothing need be 192 COST OF PEODUCTION added to make the record complete but the selling price and the profit wanted. A column may be added in which to show the total feet of lumber, or the weight of the material. By completing the records in this way, it is easy to make comparative yearly statements of the cost of material and labor and the percentages of expense and profit. When the information on the cupola record (Fig- ure IV) is complete there is still ample space for other information for the superintendent. For example, if it is desired to know the average cost of molding, add to the total productive labor in the foundry, the total non- productive per cent which in this case is (40) ; divide this amount by the total number of pounds of good castings and the result is the average cost per pound to mold for two weeks, the period of time covered by the card. This added to the cost of the melted iron gives the average cost per pound for castings. The piece-price card (Figure V) may be ruled on the back in such a manner as to provide space for a record of orders received and parts made, taking the place of a department order book. This is particularly advantageous for the foundry and steel shops. If the cards (Figure V) are of good material the items may be recorded in pencil, and at the end of the season this record may be erased and the cards used again. While the time card (Figure VII) is intended for CHARLES J. WATTS 193 the guidance of the timekeeper in making up the pay roll, it may be passed to the cost department and the labor recorded thereon entered on a piece-work record card (Figure XIII). This card shows the number of each piece made, at what time, by whom, the number of hours necessary in making, the total amount paid and the average rate per hour earned by each work- man. nccc WORK Rceono SojjfC^r^- 0.i^. IH ■^ aa M.ei Mtt TO»L Dai ■■tt "'"""' ^^ /3J- •^ ao ^^:^.J^^. H y»- 'i^o ^ i-b .J/^ i ol ffl r^ r^ j^ i^ |M p^ j^ iw w m pf FIG..XIII. This is useful information and is well worth the time and effort necessary to keep it in proper order, as it indicates whether the scale of piece prices paid is profitable or whether it should be revised. Then, too, the same cards may be used as a basis for opening a ledger account with each lot of goods going through the factory. To each account is charged all the labor and the matmal consumed in the process of manufacture 13 194 COST OP PRODUCTION and the cost of the yearly production of any particular lot is shown, no matter when it was made. By using order numbers in the factory for each lot of goods going through at one time, practically the same form of cards could be used by simply adding a place for the order number and charging the cost of labor to that number as well as the cost of all material drawn on requisitions correspondingly numbered. By this method the exact cost of the lot is obtained. This, however, is bringing the system nearer and nearer to a balance ledger cost system and therefore becomes more expensive and complicated. The labor statement cards (VIII) may be pro- vided with columns other than those shown in the illus- tration, in which the manufacturing expense may be recorded, as on the manufacturing expense summary cards (Figure XII). This places before the foreman of the department the exact expense incurred by his department during the week, from which report he may intelligently dis- cuss with the superintendent the conditions in the fac- tory, particularly in his own department. Through these statements unnecessary items of ex. pense are often discovered which can be eliminated, thus adding to the net profit. Again, a column may be added in which the time- keeper may compute the per cent of piece work to day work, another column to show the number of men em- ployed in the department and the average wage rate CHARLES J. WATTS 195 paid per hour. A total summary of all this information may be made on the labor summary cards ( Figure IX) covering all departments. To this system for ascertaining factory costs may be added a system of inventories on cards which will show the number of pieces made and in stock, and their location in the stock or store room. The procedure in general is as follows: When a lot or run of parts or pieces is started through the factory, it should be accompanied through all the various departments by a tag-board slip indi- cating the department which it is to reach finally, the number of pieces sent, the piece name or number, and any other information that may be necessary. This card should accompany the lot until it is put in stock or storage. The assembly room should draw on this stock by requisition only. Then a record of finished parts in stock is easily maintained and the requisitions them- selves show the quantities in the assembly room being placed in finished product. The finished goods sent to the warehouse from the assembly room should be accompanied by transfer slips showing the exact number sent. The clerk in charge of the inventory cards, having received properly signed requisitions for the finished parts, makes the necessary changes on the records. Such a system provides a simple record of all parts made and on hand, and if shipments are checked 196 COST OF PRODUCTION against the goods in the warehouse a complete inventory results. Further, by using the record of costs as shown by the detail cards (Figure I) an accurate inventory with values can be compiled at any time.