!!l!|!i!!''liijii.i!Hl|!'»l''i'<(i'ti GopigMI^^.. COFayOHT DEFOSffi INDUSTRIAL MANAGEMENT LIBRARY SHOP EXPENSE ANALYSIS AND CONTROL BY NICHOLAS THIEL FICKER C058TJLTIN0 INDUSTRIAL ENGINEEB AND LECTUBEB ON FACTOBT ENOINEEBISG AND COST PBODUCTION AT NEW TOEK UNIVEBSITT, SCHOOL OI" COMMEBCE, ACCOUNTS AND FINANCE NEW YORK THE ENGINEERING MAGAZINE COMPANY 1917 Copyright, 1917, by THE ENGINEERING MAGAZINE COMPANY NEW YORK 3 *«»■-•■ MAY "3 1917 ©CIA460906 TO MY MOTHER INTRODUCTION The first eight chapters of this book appeared origi- nally in The Engineering Magazine as a series of articles extending over a period of eight months. They were immediately accorded recognition by manufac- turers and accountants alike as a standard reference work on this, the most difficult phase of cost finding. These eight chapters have been supplemented by others to show the definite application of the subject. The author *s method of treatment demonstrated thoroughly the fact that some of the various phases of Shop Expense, which previously have been given only brief consideration, vitally affect the whole prob- lem. Of interest to the management is the method shown by Mr. Ficker for exercising executive control over each phase of production by a systematic segre- gation of all of the charges relating to it. The findings of the author are that the orthodox methods of cost finding are wrong, since in their appli- cation the management is able to shift responsibility from its shoulders to those of the shop proper when- ever the occasion may arise. Both Mr. Ficker and Mr. H. L. Gantt, who needs no introduction, arrived independently at this conclusion, and simultaneously published their belief that the fallacious, older methods of cost determination must go. This basic principle of executive responsibility is expressed in Chapter VIII, and should rank as a notable contribution to the sci- ence of Industrial Management. Chables Eablb Fune. PREFACE Manufacturers are often too inclined to treat the problem of shop expense distribution in an empirical rather than in a practical manner. They establish arbitrarily certain rates of expense loading and then cannot understand why their costs of manufacture appear ridiculously high or low as the case may be. Like any other experiment made without forethought, it usually ends in failing to accomplish what was in- tended. The extensive development and utilization of auto- matic machinery for manufacturing purposes have been conducive to a diminishing labor cost and an in- creasing overhead expense. The fact that this is indi- cative of a healthy condition is frequently lost sight of, however, by manufacturers who look upon an increase in their shop expense as something incompatible with efficient management. It naturally follows, therefore, that as the disparity between labor and expense in- creases, the greater must be the vigilance exercised to prevent the expense factor from getting beyond definite limits. According to the latest available figures furnished by the Federal Trade Commission, only ten per cent of the 250,000 or more manufacturing plants in the United States have adequate cost finding methods in operation ; forty per cent estimate their costs and fifty per cent have no basis whatever of knowing what these costs are. With the large majority of these manufac- vii Vlll PBEFACE tnring establishments still doing business on a hap- hazard basis, therefore, the science of Industrial Man- agement cannot be considered as in anything but a transitory state of development. In presenting this book for study and analysis the author does not claim, to have exhausted the subject, but, on the contrary, earnestly believes that much greater development work must be done before any- thing approaching universal standardization of cost finding methods can be possible of attainment. It has been simply with the object of paving a smaU part of the way towards such eventual standardization that this book has been written. The author wishes to thank those of his friends who, by their suggestions or criticism, have helped in the preparation of this work. To Mr. Willard F. Hiue the author is especially indebted for his valuable criti- cisms and assistance in establishing the various view- points necessary to a successful treatment of this sub- ject. NicjoLAS Thiel Fickeb. March, 1917, CONTENTS CHAPTBB FAOQ I. Establishing the Unit of Time as a Basis of Dis- tribution I II. The Two Main Divisions: Machine Expense and Material Expense 14 III. Classification and Interpretation of General Ledger Accounts Pertaining to Production . 29 IV. Distributing Manufacturing Expense to Produc- tion Centers and Segregating Power Expense 45 V. The Standardization op Rent Expense Distribu- tion . . . .64 VI. Depreciation, Insurance;, Taxes, and Interest — Tool, Material, and Special Department Ex- pense 77 VII. The Machine Unit System ..... 94 VIII. Current Variation Ratios for Adjusting Current Costs . . . 117 IX. Organization 132 X, Waste in Manufacturing 154 XI. Graphic Determination of Costs .... 171 XII. Standard Reports 198 IS SHOP EXPENSE ANALYSIS AND CONTROL Chapter I ESTABLISHING THE UNIT OF TIME AS A BASIS OF DISTEIBUTION A SHOP cost is made up of three component parts : Labor, Material, and Manufacturing Expense. Labor and Material are quantities which are easily de- termined, but the correct distribution and apportion- ment of Manufacturing Expense so that each job pass- ing through the factory may bear its true share is a matter requiring the most careful analysis and study. When we stop to consider that in a large percentage of the two hundred and fifty thousand or more facto- ries in the United States, this manufacturing expense amounts to more than the combined total of the pro- ductive labor and material used, an idea of its im- portance will be readily comprehended. Probably the most common practice of distributing manufacturing expense is that of taking the total of this expense for the previous year and determining 1 Z SHOP EXPENSE ANALYSIS what percentage this total bears to the productive labor for that period, and then applying this percentage to each job on the basis of the prodnctive labor which has been charged directly to these jobs. Except in rare instances where the monthly output is practi- cally uniform and where the article made consists of only one item of merchandise, this method of apply- ing manufacturing expense is of no value whatever. Even in such a case as has just been cited it would not be correct to distribute the expense on the basis of productive labor where this productive labor is made up of a combination of day-work and piece-work labor. Let us take, for example, a factory employing one hundred people in five manufacturing departments, and assume that the class of merchandise manufac- tured is brass fittings, of which there are two dozen different articles. In looking over his books for the preceding year, the manufacturer finds that his produc- tive labor amounted to $100,000 and his manufacturing expense to $50,000. He reasons, therefore, that if he adds fifty cents to every dollar of productive labor applied on jobs passing through his factory during the ensuing year, he will have a fairly accurate idea of what it costs him to manufacture each job. He therefore issues an order to his cost department to compile costs for the ensuing year on that basis, and then feels that he has solved the whole problem of cost finding on any of his two dozen different articles of manufacture and has established a correct basis for estimating and billittg purposes. Let us now see how near he is to his real costs of production. The factory is divided into five different departments as follows : THE UNIT OP TIME Department Number of Employees Productive Labor Lathe 15 15 45 S 9,000.00 18,000.00 18,000.00 5,000.00 50,000.00 Milling Drilling Punch Press Assembly Total 100 $100,000.00 A detailed analysis of manufacturing expense, con- sisting of charges for administration, power, rent, light, tool expense, depreciation, insurance, taxes, sun- dry, and material expense, showed that the manufac- turing expense should have been divided as follows: Department Manufacturing Expense Percentage of Productive Labor Lathe S 6,000.00 15,000.00 9,000.00 10,000.00 10,000.00 67 83 50 200 20 Milling Drilling Punch Press Assembly Total $50,000.00 50 This analysis shows a wide variation between the relation of the manufacturing expense and the produc- tive labor of the various departments. The "drill- ing department** alone shows a percentage on which it would be safe to apply the 50 per cent charge for manufacturing expense; the variations in the other four departments showing a discrepancy of from 20 to 150 per cent. SHOP EXPENSE ANALYSIS A study of the comparative table which follows will show tMs variation very clearly. It will be seen, for Department Productive Labor Manu- facturing Expense Percent- age of Mfg. Ex- pense to Productive Labor Depart- mental Mfg. Ex- pense Based on 50 Per Cent Rate Error in Unit Costs by Using One Gen- eral Rate forAU Depart- ments Lathe Milling DrilliQg Punch Press . Assembly. . . Total $ 9,000 18,000 18,000 5,000 50,000 $ 6,000 15,000 9,000 10,000 10,000 67 83 50 200 20 $ 4,500 9,000; 9,000 2,500 25,000 -$1,500 - 6,000 - '7,506 +15,000 $100,000 $50,000 50 $50,000 example, that the actual manufacturing expense of the "Punch Press Department" is 200 per cent of the pro- ductive labor; therefore, if the manufacturer applies the general rate of 50 per cent, which he decided at the beginning of the year to add to productive labor on jobs in order to cover the indirect expense incurred, his costs of production in the Punch Press Department would be $7,500 too low. In like manner the costs of the * 'Assembly Department" would be $15,000 too high, due to the fact that the manufacturing expense in this department is actually only 20 per cent of the productive labor. Percentages cannot be averaged when they are based on different units. The error of assuming that they will average is committed constantly by even some of the largest and most efficient manufactories. The average manufacturer, after a presentation of errors THE UNIT OF TIME O similar to those which have just been cited, will say, ''Very true — hut what difference will it make even if my departmental expense charges are wrong, so long as they average out in the final completed cost I ' ' This would be difficult to answer, providing his assumption were correct. His whole basis of reasoning, however, is wrong, for the simple reason that he has failed to grasp one of the fundamental laws of mathematics and-has labored under the delusion that a minus per- centage in one department would be offset and equal- ized by a plus percentage in another department. The road to bankruptcy is strewn with the wrecks of just such men who failed to appreciate until too late this very simple but yet most important principle. A con- crete illustration of just how errors of this kind are made each day would probably be of interest at this point. Let us assume that a certain order has just been completed after passing through all of the departments of the shop, and is now ready to be figured. The time tickets show that forty-two hours were spent on this job. For simplicity, let us assume a uni- form wage rate of twenty cents an hour. An analysis of these time tickets by departments would then show the work to have been divided as follows: Department Time Rate Labor Cost Lathe Milling Drilling Punch Press . . . Assembly Total 2hrs. 4 « 6 « 10 " 20 " $0.20 u u a u $0.40 0.80 1.20 2.00 4.00 42 hrs. $0.20 $8.40 6 SHOP EXPENSE ANALYSIS Adding to the above labor the standard manufac- turing expense rate of 50 per cent, which the manu- facturer decided was to be applied to all jobs irrespec- tive of the department in which the work was done, and considering the material cost as $1, this job would then show a total cost of $13.60, made up as follows: Labor $ 8.40 Manufacturing Expense 4.20 Material 1.00 Total $13.60 We have found by analysis, however, that each of the departments through which this job passed in the process of manufacture had a different rate of manu- facturing expense. Taking the actual percentage of manufacturing expense for each department and com- piling the shop cost of each job by figuring this ex- pense separately, we find a considerable variation ex- isting between the cost as compiled on the 50 per cent basis for all departments and that compiled by con- sidering the work of each department independently. The cost figures would appear as follows: Department Labor Mfg. Expense Lathe $0.40 0.80 1.20 2.00 4.00 67% ^ $0.27 83% = 0.68 50% = 0.60 200% = 4.00 20% = 0.80 Milling Drilling Punch Press Assembly Total $8.40 $6.35 The manufacturing expense, therefore, which should have been applied against the labor on this job amounts THE UNIT OF TIME 7 to $6.35, instead of $4.20 when computed on the 50 per cent basis, making an error of $2.15. This shows that the manufacturing expense which had really been ap- plied was approximately only two-thirds of the actual figure. Using the corrected figures, the cost would then show a total cost of $15.75, which is $2.15 in excess of the cost as figured on the 50 per cent basis, this re- vised cost being made up as follows : Labor $ 8.40 Manufacturing Expense 6.35 Material 1.00 Total $15.75 Assuming that the manufactured product had a highly competitive selling field and that the percentage of profit which the manufacturer could add to his origi- nal cost of $13.60 was limited to 10 per cent, then the actual billing price of $14.96, at which the product was marketed, would, instead of netting him a profit of $1.36, net him an actual loss of $0.79. Or, looking at it from another angle, let us assume that this article had a market price of $15.50 and that, irrespective of the cost of manufacture, this price was the limit his customers would pay ; then the manufacturer would still imagine that he was making a profit of $1.90 or close to 14 per cent on his investment of $13.60, when in reality he was losing 25 cents on each of these arti- cles he sold. The question which the student of this subject will most naturally ask at this point is, "What if he does lose money on this article, as long as he is making enough profit on some of his other lines to more than make up for this loss?" He may also ask, *'What is the manufacturer to do, if he is forced to make an 8 SHOP EXPENSE ANALYSIS article or line on which lie is losing money, in order to keep all of his other lines intact T' A farmer who raises chickens and does not occa- sionally take count of his stock will not discover until probably too late that some thieving fox has been prey- ing on those chickens ; but once let him know that such a condition exists and he will lie in wait night after night with a shotgun until the cause of trouble has been removed. This is analogous to the manufacturer in the above case: As long as he is not aware of the losses which are occurring, he will be satisfied to a certain extent and will not investigate; but once let him know that it is actually costing him more to make his goods than he can sell them for, and the fur will usually start to fly very quickly. A competitive ar- ticle which is being sold at less than his manufacturing cost usually means that some other manufacturer is turning out this article at a much lower cost than he is. This means investigating methods, locating leaks, and exercising a close watch and supervision over this line until the cause of trouble has been remedied. Very often it may even be found advantageous to discon- tinue a certain line because of excessive costs, but the factor of paramount importance is in finding where the trouble exists. There is also another phase of this matter which is worthy of consideration at this point. The very fact that a manufacturer is losing money on some lines and is still able to show a substantial profit at the close of each year's business means that he is making an abnormal profit on one or more of his other lines. By substantially reducing his selling prices on one or more of these lines showing such an abnormal profit, it may be possible for him to monopolize all the busi- THE UNIT OP TIME if ness in that line, his increase in sales more than making up for the small profit per unit sold. Shop costs when compiled on the hit and miss prin- ciple of using one general rate for manufacturing ex- pense, applicable to all departments and classes of work, are therefore of very little value except in very- rare cases, such as that cited at the beginning of this chapter where the output is of the mass production styie on a single type of merchandise. Manufacturing expense might justly be termed a function of time. It increases in a ratio which is prac- tically directly proportional to time. Administration, rent, depreciation, taxes, power, and other charges which make up the manufacturing expense, with the possible exception of that part known as material ex- pense, are all proportionate thereto. In using the productive labor as a basis of expense distribution, it must be thoroughly understood that only when such labor is used as a function of time is it permissible to use it as a basis for distributing manufacturing expense. Manufacturers and cost accountants very often make the mistake of using the productive labor as a basis when a large amount of this labor is piece-work. Even where the expense has been segregated by departments, the introduction of piece-work labor will change the entire aspect of the case. Piece-work is not a func- tion of time, it is a function of quantity ; and as manu- facturing expense, when not split up into two divisions (machine expense and material expense) and applied as two separate items to shop costs, cannot be dis- tributed correctly on any basis but that of time or functions of time, piece-work labor cannot be used as a basis for distribution. 10 SHOP EXPENSE ANALYSIS It is not to be nnderstood from the foregoing that even where the material expense is added to shop costs as a separate item is it permissible to use piece-work labor for distributing manufacturing expense. The method of applying this material expense will be taken up in a later paragraph and explained in detail. To illustrate more fully the error of using piece- work labor as a basis of expense distribution, let us take, for example, a department in which a certain manufacturing expense rate has been figured on the basis of straight day-work labor. At a punch-press machine in this department a man is getting paid at the rate of 25 cents an hour. By analysis of the cost of certain punched parts it was found that the operator punched out these parts at a rate of 2,500 an hour, and a piece-work rate of one cent a hundred was set for all work on this piece of merchandise, this being equivalent to his hourly rate of 25 cents. Let us further assume that the depart- mental rate of, say, 60 per cent of the productive labor fairly accurately represents the expense of operating this punch press. This would mean that a charge of 15 cents an hour (60 per cent of 25 cents) would cover the cost of the manufacturing expense which this ma- chine must bear of the department's total charge. Piece-work is introduced at this point. The press- man, spurred on by the incentive of higher wages, speeds up his production to such an extent that in- stead of turning out 2,500 pieces an hour he actually increases this to 4,000 pieces. At the rate of one cent a hundred, his pay, therefore, amounts to 40 cents an hour instead of the 25 cents which he earned on an hourly basis. In due course of time the cost clerk who figures this job applies his 60 per cent to the THE UNIT OP TIME 11 40-ceiit labor charge, making the mamifacturing ex- pense chargeable against this job 24 cents. But if this pressman had turned out 4,000 pieces an hour while on a straight day-work rate of 25 cents an hour, the clerk would have added only 15 cents for manufacturing expense instead of 24 cents under the piece-work ar- rangement. This makes a difference of 9 cents in the manufacturing expense charge or, in percentage, a varfetion of 60 per cent over the original method of determining this expense. The only way to determine which of these two meth^ ods is correct is to find whether or not these expenses actually did increase 60 per cent on an increased pro- duction due to the piece-work method. Administra- tion, rent, light, depreciation, insurance, taxes, and tool charges remain the same regardless of the volume of output; all that remains of the items which enter into the manufacturing expense are power and ma- terial expense; and the very small increase in either or both of these items would be so small as to hardly make them worthy of consideration. Piece-work can- not, therefore, be used as a basis for manufacturing expense distribution. The labor must be reduced to functions of time or else be figured directly on the basis of time. In order to determine correctly the manufacturing expense on the job above referred to, the cost clerk must first know the time it has actually taken the pressman to stamp out the 4,000 pieces and, finding this to be one hour, he then applies his standard rate of manufacturing expense for that department (which is 60 per cent of the productive labor) to the 25-cent labor charge which would have been incurred on this job had the workman been paid on a straight hourly 12 SHOP EXPENSE ANALYSIS basis, and by so doing finds the charge for manufac- turing expense against this job to be 15 cents. Manufacturers commonly commit the error of dis- continuing time-keeping on jobs after piece-work rates have once been established. The importance of timing all jobs will be appreciated by simply keeping in mind the fact that the unit of time must be used as a basis for distributing manufacturing expense. In some of the larger manufacturing establishments where the piece-work labor amounts to 80 per cent or more of the total productive labor, the time spent on each operation is known to a small fraction of an hour. By this means only can a reasonably accurate basis be established for the distribution of manufacturing ex- pense. The purpose of this opening chapter has been to impress on the mind of the reader the necessity for segregating all of this expense by manufacturing de- partments ; to establish the unit of time as a basis for such distribution; and to point out some of the mis- takes that are made where a thorough knowledge of the subject is lacking. It will be seen, as a deeper insight into manufacturing expense distribution is gained, that a much finer segregation is possible than that by departments which has been used as a basis of discussion in this chapter. The method of apply- ing this expense directly to machines by what is known as the ''machine unit system" will be treated in Chap- ter VII, and the control over the machine unit system by the "current variation method" will be explained in detail in Chapter VIII. The most important point to be comprehended at this time, however, is that none of these finer distinctions are possible until after the primary stages are put into operation. THE UNIT OF TIME 13 Many accountants make the mistake of thinking they can hurdle these primary stages and start right in on a segregation of expense by machines or process points without first proving their distribution by de- partments as herein outlined. Nothing is to be gained by such methods of procedure, as they invariably re- sult in disaster to the entire scheme. The first require- ment is to establish to a satisfactory degree of cer- tainty a basis that is correct, then each successive step will become simply a matter of careful analysis and procedure. Chaptee II THE TWO MAIN DIVISIONS: MACHINE EX- PENSE AND MATERIAL EXPENSE BEFORE going into a detailed analysis of the vari- ous elements comprising manufacturing expense, it is of paramount importance that a thorough under- standing be had of just what is included by the term. A manufacturing establishment may be arbitrarily divided into three main divisions of organization: First, the manufacturing or shop organization; sec- ond, the sales organization; and, third, the general organization. The sales organisation, which is self-explanatory, and the general organization, which consists of the general executive officers of the company and their staffs, may be eliminated from this discussion. We are simply concerned with what is known as the manu- facturing or shop organization and the expense inci- dental thereto. Whenever the term ''manufacturing expense" is used in this treatise it should be under- stood to refer only to the shop proper and not to any other organization unit of the company. Manufacturing expense may be defined as consisting of all charges incurred in connection with manufac- turing which cannot be considered as productive labor or raw material. It is made up of two distinct kinds of expense — ^machine expense and material expense. 14 MACHINE EXPENSE AND MATERIAL EXPENSE 15 These two divisions of manufacturing expense require distribution to jobs according to different methods. Machine expense, for example, is distributable on the basis of time, while material expense is more or less proportional to the bulk of the raw material used. In classifying original expense items, however, it is extremely difficult, if not impossible, to charge ex- penses directly against either machine expense or ma- terial expense with any degree of accuracy. This can be illustrated by considering the expense charge for light, which forms part of what we shall later denote as rent expense. The expense of lighting the material stockrooms, for instance, would be classified ''material expense;" while the expense of lighting the manufac- turing departments would be classified "machine ex- pense. ' ' From this example it can be seen that it would be practically impossible for the clerk who does the classifying to pro-rate correctly an expense charge for light so that the two main divisions of manufac- turing expense would receive their just allotment. Therefore, in order to simplify the work of classifica- tion, all expense items are first charged to one or more of the classes listed below. Administration Expense Power " Rent " Tool « Fixed Charges: — Depreciation " Insurance " Taxes ** Idle Labor " Unclassified " Direct charges to Ma- terial Expense/ > IneludeB only expenae pertaining to material Closed out into Machine Ex- -pense or Material Expense or both 16 SHOP EXPENSE ANALYSIS After making the preceding classification the ex- pense items are then closed out, as indicated, at peri- odic intervals into either machine expense or material expense according to certain fixed rules which will be discussed later. Whenever charges are made against any of the above classes, a further sub-classification by departments and kinds of expense should be made. For example, a charge for "Kepairs to a Punch and Die" would be classified ''Tool Expense — Eepairs to Tools — Punch Press Department." Symbols denoting these classi- fications are used to save time. Thus, the foregoing example might be classified as follows: 25—032—525 in which 25 is the general ledger account number for manufacturing expense; 032, the sub-classification de- noting ''Repairs to Tools," and 525, the number of the department incurring the charge. In this manner a large part of the manufacturing expense can be read- ily segregated by departments. There are, however, some expenses which cannot be charged directly to specific manufacturing depart- ments. These require distribution according to cer- tain fixed rules ; for example, administration expense, against which the salary of the general superintendent is chargeable, could not be assessed directly against any one department. It is, therefore, simply charged in blanket form to administration expense and then later it is pro-rated amongst the various departments on the basis of the number of employees in each. A shop superintendent does not superintend floor space or machines, but he does superintend the personnel of each department ; therefore his salary and the salaries of his general sta:ff are chargeable to the various manu- MACHINE EXPENSE AND MATEEIAL EXPENSE 17 facturing departments on the basis of the normal num- ber of employees in each department. On the other hand, rent expense is distributed on the basis of floor space occupied by each department; power expense on the basis of kilowatt-hours consumed; and fixed charges on the basis of face values of equipment in each department. Non-productive labor,, such as wages of sweepers, material porters, freight elevator operators, watch- men, etc., requires classification depending on the source of incurrence to one or more of the several main divisions of expense which have been listed, and is finally absorbed in the departmental expense charges through the distribution of these main divi- sions of expense. For example, the wages of sweepers are chargeable to rent expense, and eventually are absorbed by the manufacturing departments through the rent charge which is assessed against all depart- ments, store-rooms, etc., on the basis of the number of square feet occupied by each. This charge per square foot is determined by simply applying the total of all charges included in rent expense against the total manufacturing area and then reducing it to a charge per square foot. In like manner, wages of fire- men are chargeable to power expense, and are dis- tributed, together with other power expense items, on the basis of a rate per kilowatt-hour according to the power consumption of the various departments and divisions of the factory. It is not the intention at this point to go very deeply into an analysis of all of the sub-classifications to the several main expense divisions, which will be dis- cussed more fully in a following chapter, but to lay particular stress upon the importance of classifying 18 SHOP EXPENSE ANALYSIS correctly all accounts which in any way affect the distribution of manufacturing expense. In the opinion of the writer the division of expense that deserves to rank as most important is that clas- sified as **idle labor expense." For some reason or other, however, those factors most deserving of con- sideration in a manufacturing establishment are the ones most apt to be neglected by the management. This statement is not made on hearsay, but is the con- clusion forced upon the writer by association with conditions as they actually exist in many plants throughout the country. All that the average factory manager seems to be interested in is in knowing that his employees are at their benches or machines when the whistle blows in the morning, that they stay there except during the lunch period until the whistle blows at night, and that some sort of distribution is made of the time spent by them on different jobs during this period. How much time has been wasted during the course of each day does not seem to be of particular interest to him. Ask the average manufacturer how much time his men waste in waiting for new jobs, how much time they waste waiting for tools, how much time they waste reporting to time clerks at the start and completion of each job. If he is honest he will tell you that he doesn't know. He may also tell you that all the time of his productive employees is distributed on jobs. Surely, there is nothing simpler than to charge every minute of the day to the five or ten jobs a man may have worked on during that time. However, the facts remain. Let us take, for example, a factory employing 100 workmen in the manufacturing departments at an aver- age wage of 25 cents an hour. We will assume that MACHINE EXPENSE AND MATERIAL EXPENSE 19 the factory day is nine hours long, and that the aver- age number of job changes is six a day. At the start and finish of each of these six jobs every employee reports to a timekeeper who, by the use of a time stamp, records the time of starting and finishing each job. There are two time clerks in the shop to handle the time of a hundred men. They are as centrally located as possible; but by timing the men, without their- knowledge, it is found that it takes a man an average of two minutes going to and two minutes com- ing back from the timekeeper's desk at the start and completion of each job he works on during the day. (This figure is very conservative and can be substan- tiated in almost any factory engaged in work requir- ing successive job changes.) "We find, therefore, a loss of four minutes for each job, or twenty-four minutes a day, for each employee. This means 2,400 minutes, or forty hours a day for the entire force; at 25 cents an hour it is equivalent to $10 per day; for a year of 300 working days it means a direct loss of $3,000. There are methods whereby this time can be recorded right from the workmen's benches or machines that work out very satisfactorily and do not require the men to leave their places at any time. This will an- swer the question of how job records are to be kept without necessitating the above loss of time. Then, in addition to this $3,000 waste, there is the time consumed in waiting for the next job which, through faulty planning, has not arrived on schedule. These "waits" average anywhere from five minutes to half an hour, depending on how much interest the management shows in this part of the routine. In any event a loss of half an hour a day for each man would be extremely low and could hardly be criticized 20 SHOP EXPENSE ANALYSIS as being harsh on the management in view of present- day conditions. This means another loss that amounts to 50 hours, or $12.50 a day, or $3,750 a year. A total loss of $6,750, therefore, exists in comparison with a payroll of $67,500 for the year. In other words, 10 per cent of the available productive labor is wasted. This means that, without taking any other than these two causes of loss into consideration, there is a charge right here of $6,750 to manufacturing expense, which must be distributed and absorbed by the output of the factory. It is worthy of note, nevertheless, that efficiency engineers, cost accountants, and managers of factories usually neglect to take this factor of idle time into consideration from a strictly expense point of view. Much has been written dealing with meth- ods of applying the undistributed portion of manu- facturing expense to costs of production where a bal- ance has accumulated due to a decrease in shop ac- tivity, but for some unaccountable reason the expense incurred in the form of labor not engaged in producing has been almost entirely disregarded. The importance of knowing, therefore, what the ma- chine activity is for the shop as a whole and for each department thereof becomes even more apparent when the fact is realized that the other manufacturing ex- pense items, such as administration, power, rent, de- preciation, insurance, taxes, etc., have also been undis- tributed on production orders during the period meas- ured by the "idle labor" just referred to. A machine standing idle is still occupying floor space (rent expense) ; is still incurring tax and insurance charges ; is still piling up power charges through the running of idlers, countershafting, etc.; is still de- preciating in value more than if it were in operation ; MACHINE EXPENSE AND MATEEIAL EXPENSE 21 and the administration expense is still being charged against the operator of that machine whether he is producing or not. Therefore, for every minute that is charged as ''idle productive labor" and which repre- sents a loss in cold cash to the manufacturer a certain additional amount for the manufacturing expense in- curred during that period is also chargeable. The amount in dollars and cents which the sum of these two -sources of loss represents is the measure of the loss which the manufacturer is really forced to stand. A careful consideration of the facts as presented cannot help but force the conclusion that ''idle labor" is a very important factor in connection with the distribution of manufacturing expense. However, once its importance is realized, it is a com- paratively simple matter to apply a remedy. Leaks of any nature in a manufacturing establishment derive their importance not so much from their occurrence as from a lack of knowledge as to their existence. To know is to remedy, but the simplicity of the remedy has no bearing on the case providing the need of its application remains undiscovered. Much has been written dealing with the routing and scheduling of shop orders, and with stock-keeping methods in general. The purpose here is not to discuss this phase of manufacturing in any way except to point out that a proper method for handling, routing, and scheduling production orders is essential if a con- trol over this important factor of expense called "idle productive labor" is to be exercised. Another important division of manufacturing ex- pense is that classified as "material expense." Ma- terial expense may be defined as that expense incurred in purchasing, receiving, and handling shop, raw, and 22 SHOP EXPENSE ANALYSIS worked materials. It includes such expenses as depre- ciation, insurance, and taxes on raw and worked ma- terials, salaries of raw and process material stock- keepers, counters, inspectors and porters, freight ele- vator operators (in part), etc. In shops where large cranes are used it also includes the salaries of crane- men. All manufacturing expense which is not chargeable as material expense is known as "machine expense." Where accurate costs are required, material expense should be applied to shop costs as a separate item; that is, it should not be included with the machine expense as one general loading, but should be con- sidered separately. In such cases it should be applied as an individual rate, called material expense, on the basis of the value of the raw material charged against an order, or on the basis of the bulk (represented by weight) of the material used. The construction of a shop cost made up in this manner is here shown : Productive Labor Machine Expense)""^- ,„_^^ Raw Material J}I>= (Manufacturing Expense) Material Expense)- Shop Cost The practice of sub-dividing manufacturing expense into machine expense and material expense respec- tively has for its object a more perfect control over the channels through which this expense accumulates than is possible where this segregation is not made. When classifying expense charges it necessitates very little extra effort to classify them properly by sub- divisions of expense instead of grouping them all under MACHINE EXPEI^rSE AND MATEKIAL EXPENSE 23 one general classification. By this method it is a comparatively simple matter to segregate the manu- facturing expense so that at the end of every month, quarter, or year, comparisons can be made to deter- mine whether the machine expense or the material ex- pense has increased in undue proportion to the shop output. When applying material expense as a separate item in making up costs of manufacture, care should be used in establishing a basis of distribution. The practice of applying material expense to jobs, by using the cost of the raw material used on each job as a basis, is a mistake frequently made by manufacturers and cost accountantSo Their method of establishing this basis is to take the total cost of the raw material used during a normal year and find what relation this cost bears to the material expense for the same period. With this relation established in the form of a percentage based on the raw material cost, they proceed to apply it to all shop jobs in order to determine the proper pro- portion of material expense chargeable thereto. There is only one correct way of distributing ma- terial expense, and that is on the basis of bulk. Prac- tically all material expense is incurred in a ratio pro- portional to bulk. By using the term ''bulk" it is to be understood that the term "weight" can be used as a substitute, but simply because it is a more stand- ard way of measuring material and because the bulk of an article is rather difficult to determine axicurately. That there is quite a distinction between using the cost of the material and the bulk (or weight) of the material as a basis for material expense distribution will be readily noted from the following comparisons : It is a comparatively simple matter to handle and 24 SHOP EXPENSE ANALYSIS store $1,000 worth of platinum; it requires, however, a considerable amount of time and effort to handle $25 worth of brass castings. More space is required in the store-room for wrought iron pipe than is required for copper wire of equal value. Diamonds or precious stones require practically no handling expense as com- pared to the cost of handling lumber. Freight ele- vators are necessary because of the bulk (or weight) of a bale of cotton, but an equal value in gold could be carried in a man's pocket without effort. The con- clusion to be drawn, therefore, is that material expense does not to any appreciable extent vary in proportion to the cost of the material, except as such increase or decrease in cost is due to a greater or less bulk of material used. There are instances where the con- sumption of materials of different kinds is so uniform year in and year out as to permit the use of the ma- terial cost figures as a basis for material expense dis- tribution. Such cases do not warrant the segregation of material expense as a separate and distinct item of manufacturing expense, but in the average factory such a segregation is conducive to more accurate cost figures. The possibility of error is so great where the cost of the raw material is used for material expense dis- tribution as to warrant an illustration of how such an error can occur. Let us take, for instance, a fac- tory whose manufacturing expense has been divided into machine expense and material expense : The ma- terial expense has been found by analysis to average 15 per cent of the cost of the raw material used as figured on the basis of a normal year. By analysis of past figures it has also been found that the machine expense of a certain department is 50 per cent of the MACHINE EXPENSE AND MATERIAL EXPENSE 25 labor. A job is assigned to this department, and on its completion the cost clerk's jfigures would appear as follows : Productive Labor $ 3.00 Machine Expense, at 50 per cent . . 1 . 50 Eaw Material. . 6.00 Material Expense, at 15 per cent . . . 90 Total Cost $11.40 An inspection of the order shows that the high ma- terial cost was due to the fact that platinum was used in the manufacture of what happened to be an elec- trical instrument requiring platinum contact points, etc. If the material used had been zinc or copper the material cost would have been considerably less than 90 cents ; yet by a study of the items which go to make up material expense we find that it costs a great deal less to handle platinum than it does to handle copper, weight by weight ; therefore, something must be wrong with this method of applying material expense to shop orders. A study of the weight of the raw material, as found in the books of the company for the period over which the normal material expense was figured, showed that if reduced to a cost per pound basis the material ex- pense would be five cents a pound; the charge of 90 cents should, therefore, have represented material weighing 18 pounds. The platinum used amounted to only a fraction of an ounce; hence, the charge of 90 cents for material expense is actually over 85 cents too high, making a corresponding error in the shop cost as compiled by the clerk. The foregoing example demonstrates very clearly 26 SHOP EXPENSE ANALYSIS that the cost of raw material cannot be used as a correct basis for distributing the material expense por- tion of manufacturing expense. It does not necessarily follow, however, that it is always advisable to figure this expense by a system requiring the weighing of the material on each order. Circumstances alter cases, and it naturally foUows that in such instances where the extra expense incurred in figuring this expense amounts to more than is justifiable in proportion to the benefits which can be derived from such a segrega- tion, a more general scheme of distributing material expense can be used. A factory turning out a line of injectors, lubrica- tors, valves, and grease cups, with an output varying but little from year to year, would be justified in es- tablishing a basis of material expense distribution by classes of merchandise manufactured. Let us assume the normal material expense to be $3,000 a year, with the output as follows: Class of Merchandise Pounds Output Per Cent of Total Output Injectors 6,000 24,000 18,000 12,000 10 40 30 20 Lubricators Valves Grease Cups Total 60,000 100 The material expense on an output of 60,000 pounds would amount to five cents a pound. Distributing this expense among the four classes of merchandise on the basis of the output in pounds for each class, the charges would appear as follows: MACHINE EXPENSE AND MATEEIAL EXPENSE 27 Class of Merchandise Pounds Output Material Expense at $0.05 Per Pound Injectors 6,000 24,000 18,000 12,000 % 300 1,200 900 600 Lubricators Valves Grease Cups Total 60,000 $3,000 Eeference to the cost ledgers at this point shows that the actual cost of the raw material used amounted to $9,000, divided among the four classes of merchan- dise as follows: Injectors $1,200 Lubricators 3,900 Valves 2,700 Grease Cups 1,200 Total $9,000 In order to establish a basis for the application of material expense as a percentage of the cost of the raw material used on each class of merchandise, it is only necessary now to reduce this material expense charge against each class to a percentage of the raw material cost. Working this out, the figures appear as follows : Class of Merchandise Cost of Raw Material Used Material Expense Percentage Applied on Basis of Raw MaterialUsed Injectors $1,200 3,900 2,700 1,200 $ 300 1,200 900 600 25 31 33 50 Lubricators Valves Grease Cups Total $9,000 $3,000 33 28 SHOP EXPENSE ANALYSIS A percentage has now been established for the ap- plication of material expense to each class of mer- chandise. By simply oompnting this expense directly from the cost of the raw material used on each order the proportionate charge for this expense can be reached with reasonable accuracy. It should be kept in mind, however, that this method of using the cost of the material as a basis of material expense distri- bution holds reasonably true only in cases similar to the one here cited. "Wherever it is possible to do so, the only real basis of distribution, which is by bulk, should be used. Chapter III CLASSIFICATION AND INTEEPEETATION OF GENEEAL LEDGEE ACCOUNTS PEE- TAINING TO PEODUCTION rjlHE proper interpretation and classification of all -*■ charges pertaining to manufacturing forms the basis for the correct distribution of manufacturing expense by classes of merchandise. It is therefore of vital importance that a thorough understanding be had of the functions and purposes of all general ledger accounts to which manufacturing charges are made, so that these charges may be classified correctly and data recorded in such manner as to make them readily available when needed. The primary object of the general ledger of a manu- facturing business is to show through its various ac- counts at any given time the operations of the com- pany, and by a comparison of the asset and liability items the status or worth of the concern at such a time. The purposes of its various accounts are for recording the investment of the company in property of all kinds, the purchases, sales and transfers of merchan- dise, the volume and cost of the production of the manufactured product, and the expenses incurred in running the business in its administrative, purchasing, selling, and stock-keeping functions; all with the ob- 29 30 SHOP EXPENSE AI^ALYSIS ject of determining the degree of profitableness of tlie business in its various brancbes. Therefore, by establishing a basis for the classifica- tion of accounts in detail in such manner as to make them readily available, records in comparative or other form may be compiled for controlling purchases, sales, expenses, and production costs, which can then be used in combination with each other so as to reflect the workings of the company in its different departments and its capacity as a whole. The organization of a manufacturing business may be arbitrarily divided into three distinct parts, as mentioned in the preceding chapter, namely, I, Manu- facturing ; II, Trading, and III, Financial and General. Only the main divisions of the general ledger accounts pertaining to, I, Manufacturing, will be considered here. These may be shown as follows: (A) Factory Plant (B) Merchandise (Manufactured) (C) Eaw Material and Work in Process (D) Depreciation of Factory Plant. The individual ledger accounts under each of these four main divisions are: (A) Factory Plant: 1 Grounds 2 Buildings 3 Permanent Fixtures 4 Machinery 5 Small Tools 6 Patterns 7 Shop Fixtures (B) Merchandise: 8 Merchandise (Manufactured) CLASSIFICATION OP ACCOUNTS 31 (C) Raw Material and Work in Process: 9 Shop Productive Labor 10 Shop Raw Materials 11 Shop Expense 12 Shop Deliveries 13 Shop Piece Parts 14 Shop Scrap (D) Depreciation: 15 Depreciation of Factory Plant. TJie scope of the respective accounts included under each of these four main divisions is naturally subject to revision, as are the accounts themselves, in order to make them conform more readily to existing condi- tions where they are to be used. The reader should bear in mind the general objective rather than the details herein set forth. The outline of accounts which the writer has used for illustration is, with, certain modifications, similar to that in use at the present time by one of the large electrical goods manufacturing companies, and has been selected because of its clean- cut distinctions and the successful manner in which it has worked out in practice. The four main divisions of the general ledger ac- counts pertaining to manufacturing are as follows: (A) Factoey Plant. To these accounts are charge- able the original cost of and additions to grounds, buildings, those permanent fixtures used principally for manufacturing, machinery, small tools, patterns, and shop fixtures. The cost of installation, as well as transportation charges, should be included with the cost of the various items. New values of renewals or improvements are chargeable as assets, the old net values being transferred to expense. When buildings which are to be torn down are included in the pur- chase price originally paid for the grounds, a part of 32 SHOP EXPENSE ANALYSIS the cost of demolishing said structures may be charged to * ' gToimds account. ' ' The * 'factory plant accounts" should be analyzed at periodic intervals and the records arranged by spe- cial classes so that an inventory is always readily available. These records can then be conveniently used in determining depreciation, insurance, taxes, and rent charges. The balances to the several plant ac- counts should always be indicative of the face values of the respective accounts. Adjustments for deprecia- tion should never be made directly through these ac- counts, but through the "depreciation account" pro- vided for that purpose. This account is credited and ''manufacturing expense account" debited with the amount to be set aside as a reserve for depreciation. The difference between the debit balances of the plant accounts and the credit balance of the depreciation ac- count should represent the net values of these accounts. The accounts under (A) Factory Plant will be detailed on page 36. (B) Merchandise (manufactured). To this account should be charged the cost of all parts manufactured each month, whether completely assembled or not. An inspection of the account will give an idea of the vol- ume of work done by the manufacturing departments, as represented by the cost figures. (C) Eaw Material and Work in Process. This is subdivided into the following accounts: Account No. 9. Shop productive labor. To be charged each month with the cost of the labor directly appHed to production orders. Account No. 10. Shop raw material. Should be charged each month with the cost of CIASSIFICATION OF ACCOUNTS 33 raw materials purchased for manufacturing use. Account No. 11. Shop expense. Should be charged each month with the current manufacturing expense charges for that period. It includes non-productive labor expense, mate- rials, supplies, etc., as will be explained in detail in a later chapter. Account No. 12. Shop deliveries. -Should be credited monthly with the sum of the shop productive labor, raw material, and shop expense applied on production orders for that period, and the merchandise (manufactured) ac- count debited to that extent. AccouMt No. 13. Shop piece parts. Should be debited each month with the cost of completed piece parts manufactured which have not as yet been assembled, the merchandise (man- ufactured) account being credited to this extent. By this method of accounting, the value of fin- ished merchandise can be arrived at quickly from an inspection of the merchandise (manufactured) account. Account No. 14. Shop scrap. This account is designed to assist in determin- ing the expense incurred throughout the year in handling and disposing of shop scrap material sent out for disposition and should be credited with the amount received from the sale of same. All expense incurred in the handling and dispos- ing of shop scrap is chargeable to this account monthly. This includes all labor expended in con- verting this material into some shape or form which will tend towards increasing its value. It also includes the labor expended in sorting, SHOP EXPENSE ANALYSIS weighing, pressing, and boxing this material for shipment; the cost of packing supplies (rope, boxes, barrels, etc.) ; the burning of non-redeem- able waste; and the current operating expenses of the scrap room, such as power, rent, light, in- surance, taxes, administration, and depreciation of equipment. The balance to this account at the close of the year is indicative of a profit or loss on shop scrap and is closed out into the ''shop raw material account" through the following en- try: Dr. Shop Raw Material Account Cr. Shop Scrap Account 100 Charging Shop Raw Material Account with loss sus- tained in disposing of Shop Scrap Material throughout the year. In case of a profit, reverse the above entry. (D) DEPRECiATioisr OF Factoey Plant. As explained in a previous paragraph this account is designed to show at any time the amount of depreciation which has been set aside as a reserve for the replacement of the plant. This account is credited and the shop expense account debited each month with the accrued depreciation for that period. By crediting deprecia- tion in this manner, the face values of all equipment as indicated by the factory plant accounts are shown without deductions for depreciation, the difference be- tween the plant accounts and the depreciation account representing the net value of the plant. The advan- tage of showing face values without deductions is found when compiling depreciation, insurance, and tax charges, and also in the event of liquidation of the plant assets. Methods of computing depreciation will be discussed more fully in a later chapter. CLASSIFICATION OF ACCOUNTS 35 The foregoing outline of the scope and functions of those accounts listed as *' pertaining to manufactur- ing" will serve to give an idea of the relation existing between them. A comprehensive understanding as to the purpose of each account is essential in order that charges may be properly classified and that final totals for manufacturing expense may be correct. When drawing up a standard reference list of sub- classifications, clean-cut lines of distinction between each and every other class should be made. This will not only be conducive to more accurate records, but will also be of great assistance in the actual work of classifying. "Where a clean-cut line of distinction has been made, the clerk doing the classifying does not have to draw on his imagination as to the proper dis- position of charges for factory plant, merchandise, or expense. He simply refers to his standard list of clas- sifications which determines the disposition of the charges for him. The depreciation of an article and the disposition of any expense which may be incurred in connection therewith are the factors which largely determine its classification. Since these factors vary, it is almost impossible to give any concise definition without a long line of exceptions. However, it will suffice to state at this point that too much detail in the form of sub- classification of accounts is decidedly better than too little, as is the case where all kinds of charges are classified under one heading. An illustration of the correct method of drawing up a standard reference list of classifications will be found in the following analysis of the "factory plant ac- counts." The sub-classification of these accounts ac- cording to fixed lines of distinction will be noted. 36 shop expense analysis Account No. 2. Buildings 001 Architects' fees, Engineering, and Inspection 002 Excavation 003 Foundations ^ 004 General Mason Work: a Walls (brick, concrete, stone or tile) h Exterior Stone (special and terra cotta) includes lintels, sills, water tables, coping, cut-stone, etc. c Roof (concrete, tile, etc.) d Floors (concrete, tile, etc.) e Interior Stone and Tile Work / Plastering 005 Metal Work: a Structural Iron and Steel (includes columns, girders, trusses, floor beams, anchors, etc.) h Ornamental Metal Work c Sheet Metal and Miscellaneous Metal Work (in- cludes metal roofs, steel siding, metal doors and windows, flashing, gutters, iron railings, metal ceilings, etc.) 006 Woodwork: a Structural Wood Work (includes girders, beams, columns, joists, purlins, studs, lath, bridging, etc.) h Roofing, Flooring and Siding c Millwork (doors, windows, railing, baseboards, mouldings, etc.) 007 Plumbing, Sewer, Water and Gas connections from the main headers in building to the street 008 Special Chimneys and Stacks 009 Miscellaneous (include under this heading all items not included under the above classifications, such as special roof coverings, etc., unless they are of a nature justifying a special classification). Note: — ^The above classifications are merely a suggestion. They can be amplified or cut down to meet particular require- ments in any plant. ^ Where special foundations, such as require piling, etc., have been necessary, the cost of such work should be deducted from values on which insurance is to be taken out. Depreciation is chargeable on these items owing to possible inadequacy and improvement in the art. CLASSIFICATION OF ACCOUNTS 37 When classifying a bill for plastering, tlie notation made on the bill would be 2-004 (/), in which 2 would be the account number ; 004, General Mason Work ; and (/), Plastering. This is an extremely simple method of classifying and makes possible a rapid sorting of charges according to specific accounts and sub-classi- fications. These sub-divisions, as shown under ''buildings" and- as will be further shown under "permanent fix- tures," "machinery," etc., should not be understood to be separate ledger accounts. They are used for the purpose of arriving at certain charges more readily, and for the further purpose of making a control over disbursements in any divisions more simple than would be possible where charges are grouped under one or two general classifications. These sub-classifications are usually analyzed through a subsidiary ledger where each classification is considered as a separate sub-ac- count. This subsidiary ledger is for the purpose of analyzing the charges on the main ledger account by classifications — "buildings account," for example — but does not aifect the general ledger or its accounts in any way. The total of all charges made to the sub- classifications of any general ledger account as carried in the subsidiary ledger must always equal the charge as carried on the controlling account in the general ledger. Account No. 3. Permanent Fixtures A permanent fixture is a structure, installation, or apparatus which is a part of the building equipment, usually having a fixed position or value regardless of occupant, and which is not used as a productive ma- 38 SHOP EXPENSE ANALYSIS cliine. The sub-divisions of the permanent fixtures account for a manufacturing plant may be classified as follows: 001 Pertaining to Buildings. 002 Pertaining to Power Plant. 003 Pertaining to Water. 004 Pertahiing to Material. 3-001 Permanent fixtures pertaining to buildings would include such charges as those for passenger ele- vators, fire protection system, factory internal tele- phone system, speaking tubes, heating system, gas illu- minating system, and pumps, piping, tanks, fittings, etc., for the factory water service. 3-002 Permanent fixtures pertaining to power plant will include all fixtures for the — a Steam Generating System h Steam Distributing System c Electric Current Generating System d Electric Current Distribution System e Transmission System / Compressed Air System g Electric Illuminating System. 3-002 (a) The steam generating system comprises all those fixtures used within the boiler room. It in- cludes such items as boilers and fittings, ash and coal conveyors, feed-water heaters and pumps, coal bunk- ers, etc. In plants where special railroad tracks are laid these should also be included, as should the cost of any special excavations, such as might be used for coal tanks or ash pits. 3-002 (h) The steam distributing system comprises those fixtures installed from the main feed piping to CLASSIFICATION OP ACCOUNTS 39 the place where the steam is used. In some of the larger plants the steam distributing system is split up into high-pressure and low-pressure systems, the low-pressure systems consisting mainly of that part of the main exhaust line installed particularly for the purpose of handling the exhaust steam for heating. All main lines, including underground conduit, piping, fittings, etc., used for the purpose of distributing steam are' chargeable to this account. 3-002 (c) The electric current generating system comprises the cost of engines, dynamos, switchboards, condensers, piping to engines and condensers, founda- tions for engines or dynamos, and all trenches, deliv- ery mains, etc., connected with the generation of elec- tric current. 3-002 (d) The electric current distributing system is chargeable with the cost of all wiring for circuits, special pipe conduits required by the National Board of Fire Underwriters, outlets, etc. It includes the cost of all cable and wiring from the feeder switch termi- nals in the engine room up to and including the con- trolling apparatus in each department or center of distribution. 3-002 (e) The electric current transmission system covers all fixtures relating to line and jack shafting and to motors driving them. It includes the cost of pulleys, hangers, stringers, footing pieces, motors, platforms, switchboards at the centers of distribution, and all transmission equipment. 3-002 (/) The compressed air distributing system includes the cost of all compressors, main pipe lines to hose or machine connections, headers, etc. 3-002 (g) The electric illuminating system includes 40 SHOP EXPENSE ANALYSIS all wiring from the distributing boards to arc and in- candescent lamps, extension cords, pulleys, etc. This description covers in a general way the scope of the several systems chargeable as "pertaining to power ' ' under the ' ' permanent fixtures account. ' ' The importance of classifying all additions properly will be seen very readily when the purpose of making these distinctions is fully comprehended. For example, power expense charges are made in the same manner as the divisions that have been made above. The cost of generating a thousand feet of steam, the cost of generating electric current per kilowatt hour, the cost per cubic foot of compressed air manufactured, all depend directly on the proper classification of these charges for equipment. The face values are used as a basis for charging depreciation, insurance, and taxes, and as these charges form a part of the cost of gen- erating steam, electricity, or compressed air, an error in classifying the cost of any additions will affect the current costs for generating power. This power ex- pense is then distributed amongst the various manu- facturing departments where it is eventually absorbed by the production orders as a part of the "manufac- turing expense" applied against them. 3-003 Permanent fixtures pertaining to water in- clude all fixtures used in connection with the factory water supply and distribution system. In some plants distinction is made between the water used for manu- facturing purposes only and that used for drinking and toilet purposes. However, a fine distinction of this nature is very seldom necessary for practical pur- poses. The items chargeable to permanent fixtures under this heading include all mains, pipe lines, ar- tesian wells, pumps, meters, tanks, fittings, etc., re- CLASSIFICATION OF ACCOUNTS 41 quired by the supply system, and all wash bowls, sinks, traps, catch basins, piping, fittings, etc., used in con- nection with the distributing system. 3-004 Permanent fixtures pertaining to material in- clude freight elevators, material scales, chutes, dry kilns (where installed), cranes, storage tanks for com- bustibles, and other similar equipment. The four main divisions of the ''permanent fixtures account," namely, those pertaining to building, power plant, water, and material, respectively, as analyzed in the foregoing paragraphs, when properly classified all become controlling factors over the expense which we are interested in distributing correctly. Too much care cannot be used in the classification of equipment charges, as they form the basis for the proper distri- bution of manufacturing expense. Account No. 4. Machineby The machinery account may be arbitrarily divided into two classes — regular or standard type machinery and miscellaneous machinery. Regular machinery em- braces all that is commonly called "machinery." Mis- cellaneous machinery includes those non-portable fix- tures which are used in direct production and which are assessable, therefore, against the work which is performed, either directly or on a pro rata basis. It includes such items as ovens and furnaces, tanks, ket- tles, pots, vats, motors driving regular machinery, foundations for regular machinery, etc. All machinery should be numbered and a card record kept for each machine. Miscellaneous machinery should be distinguished from regular machinery by some identification mark, as for example by prefixing 42 SHOP EXPENSE ANALYSIS the letter **M" (meaning "misoellaneous") before the number assigned to each piece of miscellaneous machinery, thus, M-595. The installation and trans- portation charges should be included with the cost of all machinery and other plant equipment. When a machine is installed with the intention of removing it at some definite time, as, for example, such plant equipment as might be temporarily installed during the construction of a permanent plant which has al- ready been decided upon, then in such instances the cost of installation and transportation is charged di- rectly to shop expense. When a machine is transferred from one department to another, the destroyed por- tion, if any, should be written off and charged to shop expense, and any new portion which might be added should be charged as an addition to the machine through the machinery account. Monthly totals ©f ma- chinery sold or junked should be made up and checked against the totals charged to shop expense for plant written off. In cases where the depreciation reserve amounts to less than 100 per cent of the difference between the original and the junk value of the machine, the difference should represent the sum charged to shop expense for plant written off. A summary of plant items so discarded can be made up along the lines of the following report form : Invoice No. Plant Discarded Face Value Depreciation Junk Value No. Description Reserve Accrued Sales Pr. Profit Loss classification of accounts 43 Account No. 5. Small Tools Small tools may be divided into two classes, perma- nent and perishable tools. Those tools whose esti- mated life is over one year are known as permanent tools ; those less than one year, perishable tools. Per- manent tools include such items as punches and dies, templets and jigs, milling fixtures, etc. Perishable tools include emery wheels, files, hammers, plating racks, drills, cutters, and the like. Perishable tools should be written off the first year, while the depre- ciation rate for permanent tools depends on the policy of the management. It is, however, good conservative practice to write all permanent tools off in two years. Account No. 6. Patteens Patterns may be divided into two main classes, metal patterns and wooden patterns. These in turn can be segregated into patterns of company manufacture and patterns borrowed. Care should be exercised ia the keeping of all pattern records, owing to the fact that these records often become disarranged where pat- terns are loaned to or borrowed from other com- panies. All patterns outstanding at the time of in- ventory should be considered as if they were in the possession of the factory. While on its face this ac- count appears very easy to take care of, experience has shown that considerable trouble is met when a suit- able routine for the keeping of these records is not provided. Account No. 7. Shop Fixtuees Shop fixtures are tangible unproductive installa- tions that are required by the shop departments to 44 SHOP EXPENSE ANALYSIS assist tliem in carrying on their particular class of work. The account includes safety devices of all kinds, benches, lockers, portable scales, stools, tables, tool chests, trucks, wheel barrows, ladders, racks and shelv- ing in store rooms, and desks, adding machines, etc., used in the shop ofiBces. This concludes the analysis of what are known as the Factory Plant Accounts. The purpose in mind has been to define in logical order each of these accounts and their sub-divisions, so that the charges made thereto, which will be used as a basis for making charges for depreciation, insurance, taxes and rent, to the manufacturing expense account, will be charged to the proper sub-classifications of expense to which they belong. Chapter IV DISTEIBUTINa MANUFACTURING EXPENSE TO PRODUCTION CENTERS AND SEGRE- GATING POWER EXPENSE npHE purpose of the preceding chapters has been -*• to show the sources from which mannfacturing expense charges originate and the methods of assem- bling them by classification. After these charges have been assembled through the shop expense account they are then distributed to the various centers of produc- tion in accordance with certain clearly defined rules for each kind of expense. We will now consider these classes of expense from a distribution standpoint in the order below. Let us assume that an analysis of the shop expense account of a manufactory for the year 1916 showed up as listed on the following page. These represent the direct charges as classified dur- ing the year to each division of the expense account. Transfers must then be made between these divisions of expense for services rendered by one division to an- other. These are known as service charges. For ex- ample, rent expense is distributable to the different departments of the factory on the basis of floor space occupied. Therefore, a transfer must be made charg- ing power expense with the proportionate amount that the engine and boiler rooms must bear of the total 45 SHOP EXPENSE ANALYSIS Summary of Manufactubing Expense (Table I.) Administration Expense S 49,419 . 90 Power " 22,632.30 Rent " 54,363.20 Tool " 156,402.05 Fixed Charges: Depreciation « 87,943.18 Insurance " 359.31 Taxes « 1,054.74 Material « 35,128.07 Unclassified « 1,209.71 Idle Labor « 16,487.54 Total Manufacturing Expense $425,000.00 rent expense, tMs charge being made on the basis of percentage of floor space occupied by them. In like manner a transfer must be made between rent expense and material expense on the basis of space used for storing material, and between power expense and tool expense on the basis of power furnished to the manu- facturing departments, etc. In this way all expense charges finally reach their proper destination. An analysis of these expense divisions will show how these transfers are made and how unit costs for power, rent, etc., are obtained. Administration Expense Administration expense is composed of expense charges incurred through the administration of the shop as a whole and through its various departments. It is made up of the salaries of superintendents and their assistants, salaries of the shop and office clerical force and the employment department, and any travel- ADMINISTRATION AND POWBB EXPENSES 47 ling, advertising, or office expense incurred by, for, or in connection with the proper administration of the shop organization. It includes service charges for rent and telephone, depreciation of and repairs to shop fixtures used by the shop administrative branch, wages of injured employees, insurance, pensions, tele- grams, etc. Administration expense consists of two parts, general and departmental. The departmental administration expense is charged directly to the de- partment incurring it, as, for example, the salary of the foreman of the punch press department, which would be assessed directly against that department. The general administration expense, which of course cannot be assessed directly against any one depart- ment, is distributed to all departments in proportion to the average number of employees in each department. The administrative branch of the shop is concerned directly with the personal or human element and ad- ministration expense is therefore distributed on that basis. An analysis of the administration expense, against which direct charges amounting to $49,419.90 have been made, shows that this amount is increased to $51,844.22 through transfers made from rent expense on the basis of floor space occupied by the administrative and cleri- cal departments of the shop organization. A detailed analysis of administration expense with the addition of this service charge is shown in Table II on the following page. An inspection of this analysis will show that all of the administration expense has been trans- ferred to other divisions of expense; namely, tool ex- pense, power expense, material expense, and a small charge for service to other than shop departments. 48 SHOP EXPENSE ANALYSIS This expense has been distributed on the basis of em- ployees, as previously outlined. Administration Expense (Table II.) Salaries: Shop Superintendent and Assistant $ 6,708.33 " Cost Department 3,864. 15 " Payroll " 2,009.00 " Stenographic Department 2,234 . 15 Foreman's Clerks 2,679.70 Special Studies 3,347.50 Telephone Switchboard Operator 392.00 Foremen 15,696 . 55 Assistant Foremen 11,100.90 Depreciation on Shop Fixtures (pertaining only to administration) 294 . 79 Insurance on Shop Fixtures .82 Taxes on Shop Fixtures 2.41 Telephones, Rental and Calls 240.00 Telegrams .97 Traveling Expense (pertaining only to the shop organization) 6 . 80 Stationery 841 .83 Total Direct Administration Expense $49,419.90 Service Charges— Rent 2,424.32 Grand Total Administration and Clerical Expense $51,844.22 Transfers to other Divisions of Expense: Tool Expense $50,967.39 Power Expense 78.47 Material Expense 673.07 Other than Shop Accounts 125.29 $51,844.22 Balance % 000.00 administbation and powee expenses 49 Power Expense The next division of manufacturing expense requir- ing analysis is power. Power expense is made up of all expense incurred in generating, distributing, and transmitting power. It can usually be divided into about six distinct di- visions similar to tbose made according to systems in the* classification of ''permanent fixtures pertaining to power" in the preceding chapter. These lines of division are as follows: Steam Generating Expense Steam Distributing Expense Electric Current Generating Expense Electric Current Distributing Ebcpense Transmission Expense Compressed Air Expense Steam expense is distributable on the basis of the number of thousand pounds of steam used; electric current on the basis of kilowatt hours ; and compressed air on the basis of cubic feet. In order to know the unit costs for each of these divisions of power, the expense incurred must be classified accordingly. The importance of classifying power equipment according to the same divisions as outlined in the preceding chap- ter will, therefore, be readily appreciated ; as it would be impossible to make charges for depreciation, insur- ance, and taxes in proper proportion to each system unless the face values as indicated on the "permanent fixtures" account were classified in like manner. The remarkable progress which has been made in piping steam from large central generating stations and selling it at so much per thousand pounds, in much the same manner as electric current, water, and 50 SHOP EXPENSE ANALYSIS Power Expense Sxtmmart (Table III.) Depreciation of: Steam Generating System _..._...._ $ 1,213 .75 General High-Pressure Steam Distributing System 120 . 00 General Low Pressure Steam Distributing System 204.30 Electric Current Generating System 906.30 Electric Current Distributing System 360.00 Compressed Air System 261 .30 Transmission System 1,997.53 Electric Illuminating System 444.20 Insurance on: Steam Generating System 3.29 General High-Pressure Steam Distributing System .27 General Low-Pressure Steam Distributing System .55 Electric Current Generating System 2.46 Electric Current Distributing System 1 . 10 Compressed Air System .82 Transmission System 5.48 Electric Illuminating System 1 . 10 Taxes on: _ Steam Generating System 9.17 General High-Pressure Steam Distributing System .76 General Low-Pressure Steam Distributing System 1 .53 Electric Current Generating System 6.88 Electric Current Distributing System 3.06 Compressed Air System 2 . 29 Transmission System 15 .29 Electric Illuminating System 3.06 Rent: | BoUer^^o^ } Service Charge Transferred from Rent Expense. . . | ^'IH • |^ Coal 5,492;37 Wharfage on Coal Boats 31 . 64 Cartage on Coal 890 . 55 SuppUes: Oils 262.80 Waste 151.76 Unclassified 33.92 Electric Illuminating System 267.47 Water Purchased 414.56 Repairs and Changes to: Steam Generating System 226.98 General High-Pressure Steam Distributing System 22 . 58 General Low-Pressure Steam Distributing System 16.26 Electric Current Generating System 169.65 Electric Current Distributing System 67.27 Compressed Air System 48.98 Transmission System 372 . 80 Electric Illuminating System 35 . 15 Power Purchased: For Power 255.61 For Illumination 115 . 92 Depreciation, Insurance and Taxes on Shop Fixtures 6.04 General Administration Expense (Service Charge transferred from Adminis- tration Expense) 78.47 Salaries: Chief Engineer (Part) 1,440.00 Assistant Engineer 1,248.00 Oilers and Wipers 1,754 . 15 Firemen 948 . 75 Grand Total Power Expense 822,632.30 ADMINISTRATION AND POWER EXPENSES 51 gas can be bought, has made the compilation of power cost data a matter of prime importance to the factory management. Comparisons between private costs and market prices for power will show very quickly from which direction economy can be derived. It is natu- rally understood that it is not always possible to buy power nor advisable to buy it from outside sources, even when an apparent saving will result therefrom. These are questions which must be decided by the man- agement in each case; however, control cannot be ex- ercised in either case unless the facts are presented in a way to make this control possible. A specimen power expense report is presented on page 50 to give a general idea as to the various items included in power expense. Salaries, as included in the sub-classifications on the specimen power expense report, are chargeable to the respective systems as follows: Salaries of the chief engineer and his assistants are chargeable to all power systems on the basis of number of employees in each. Salaries against the steam generating system include wages of firemen, expense of handling coal and ashes, and supervision expense. Salaries against the electric current generating system include wages of engineers, dynamo ten- ders, switchboard attendants, and supervision. Salaries against the electric current distribu- tion system include care of machines in the line of distribution, inspectors, and supervision. Salaries against the transmission system in- clude wages of oilers and wipers, motor cleaners, etc., on line shafting, and supervision expense. 52 SHOP EXPENSE ANALYSIS Salaries gtgainst the compressed air system in- clude wages in connection witli inspection, at- tendance, and supervision. The sub-classification "general administration ex- pense" includes that part of the general administra- tion expense of the shop chargeable to the power plant. It is divided amongst the several power systems pro- portionally to the number of employees used on each system. Where power plants of more than 500 horsepower are required, special attention should be paid to the handling of coal and ashes and the expense incidental thereto. The installation of mechanical stokers, con- veyors, and improved devices of many kinds designed to facilitate the handling of coal and ashes on a large scale have been conducive to a much lower cost for labor than was thought possible a few years ago in con- nection with steam generation. This phase of power plant expense has attained a much greater degree of importance, and data must now be available to make possible the proper control over it. While fixed charges, repairs, etc., on such mechanical equipment will increase, it should be remembered that this equip- ment is making lower cost of operation possible through the greater reduction of cost in other items, and, therefore, comparisons should be made at peri- odic intervals between the increased expense on the one hand for machinery and the reduction in labor on the other. The shrinkage of coal in bins is also an item worthy of consideration. In most of the larger plants tanks have been built especially for storing coal under wa- ter. This prevents the volatile matter in the coal from ADMINISTRATION AND POWER EXPENSES 53 working off as would be the case were the coal exposed to the air with constant decomposition taking place. Other items of power expense to be considered are wharfage on coal boats where the coal is delivered by water, and demurrage on coal cars where deliveries are made by rail. A recording wattmeter attached to the switchboard in the engine room should be used as a means of watch- ing power consumption each day. A study of the rec- ords will show, in all probability, quite marked drops in the power used due to slack periods on the part of machine operators; such periods can be remedied by a closer study of conditions during the time when the slacking up occurs. A wattmeter installed in every manufacturing department will show in which depart- ment the greatest losses are occurring; comparisons can then be made, and the attention of the department foremen called to this factor of waste. This waste may occur because a large part of the line shafting is in operation and consuming power while only a few ma- chines are working up to their full capacities. The ammeter on the main switchboard in the engine room will serve the purpose for making these obser- vations fairly well where a recording wattmeter is not available. Assuming the voltage to be more or less constant, a reading of the ammeter every half hour will indicate any drops in power consumption, and comparisons made from day to day by plotting these readings on cross section paper, using the time as abscissae and the amperage as ordinates, can be used as a means of locating this factor of waste. A study of this kind, made from ammeter readings in a factory employing a thousand workmen, showed sudden drops at 11 a. m. and 4 p. m. The morning drop was due to 54 ADMINISTRATION AND POWER EXPENSES 55 a general slowing up on the part of the machine opera- tors in the latter part of the forenoon; the afternoon drop to the reluctance of workmen to start work on new jobs if they happen to finish their old work after 4 p. m., and also to the "washing up" period which started considerably ahead of the closing hour, 5 p. m. Chart I shows clearly when these losses occur. When summarizing power expense by systems, trans- fers must necessarily be made from one system to an- other according to the power bought and sold by each system. For example, if the total cost of generating steam was $10,000, and if all this steam was used in generating electric current, then a transfer would have to be made charging the electric current generating expense with $10,000 for steam purchased from the steam generating system, and crediting steam generat- ing expense with this same amount. Assuming that the direct charges to "electric current generating ex- pense" were $5,000, then the total cost of electric cur- rent available at the bus bars would be $15,000. Then, for example, if the total kilowatt hours generated amounted to 750,000, the cost per kilowatt hour would be two cents. In a similar manner transfers would be made from "electric current generating expense" to "electric current distributing expense," and from "electric current distributing expense" to "transmission and illuminating expense ' ' respectively. In this way power expense charges are finally closed out into their proper channels and costs for generating and transmitting all kinds of power can be derived accurately. How these power expense items are finally closed out into either machine expense or material expense is showed on Chart II. POWER EXPENSE DISTRIBUTIOH IStcam GencKAr/Ne Expense \ I Steam DisTPiBUTine Expense.\ Electric Current Generating Expensi Electric Current dis tributinb expensi el's Electric /llumina,t'n6 Expense Q /?£■// r Expense i- 5 •^ Material Expense Ma chine Expense ^,Cc PonER Transmission Expense ft Material Expense Machine Expense Material Expense Compressed /ill Expense Machine Expense ■Total Power Expense CHAHeEABLE TO MATEPIAL EXPENSE Total Power Expenbc CHtRCEABLE TO [MATERIAL EXPENSE Machine Expense N.T FicKEit. CHART II. SHOWING HOW STEAM GENERATING EXPENSE IS FINALLY CLOSED OUT TO MATERIAL EXPENSE AND MACHINE EXPENSE 56 ADMINISTEATIOIT AND POWER EXPENSES 57 It should be understood that the scheme of power expense distribution as shown on Chart 11 is subject to modifications in order to make it apply to special conditions. For example, the low-pressure (exhaust) steam used for heating and which is chargeable to rent expense is not indicated among the expenses on the accompanying chart. Let us assume that after analyzing the total power expense by systems we find the total against each sys- tem to be as follows: Analysis op Power Expense (Table IV.) Steam Generating System $10,571 . 13 Steam Distributing (High-Pressure) System . . . 143 . 61 Steam Distributing (Low-Pressure) System 222 . 64 Electric Current Generating System 6,062 . 23 Electric Current Distributing System 431 .43 Compressed Air System 1,223.26 Transmission System 3,111 . 10 Electric Illuminating System 866 . 90 Total Power Expense $22,632.30 Then assuming that the total pounds of steam gen- erated during the period against which these figures apply amounted to 25,931,500 pounds, the cost per thou- sand pounds of steam generated would be $0,408. The details of the analysis by systems are shown in Table V. After the steam has been generated it must then be distributed, the exhaust steam being used for heating and the live steam for manufacturing purposes. A transfer should be made, therefore, closing out all of the steam generating expense into steam distribut- ing expense as a service charge. The direct charges to 58 SHOP EXPE]SrSE ANALYSIS Steam Generating Expense (Table V.) Power Expense, Steam Generating System, refers to all expense relat- ing to boilers, fittings, and pipings for steam used within the boiler room. Depreciation of Permanent Fixtures $1,213.75 Insurance on Permanent Fixtures 3 . 29 Taxes on Permanent Fixtures 9 . 17 Rent 940.84 Coal 5,492.37 Wharfage 31.64 Cartage of Coal 890.55 Water 414.56 Repairs and Changes to Permanent Fixtures. . . 226 . 98 Administration 39 . 23 Salary, Chief Engineer (Part) 360 . 00 Salary, Firemen 948.75 Total Direct Expense $10 571 . 13 Transfers to Other Accounts {Steam Distributing System) 10,571.13 Balance % 0.00 Total Pounds of Steam Generated in the Boiler Room 25,931,500 Cost per 1,000 pounds $0.408 steam distributing expense, together with the service charge for steam purchased from the steam generating system, would then appear as shown in Table VI. An inspection of these figures will show that the cost of steam distributed to the permanent connections where the steam was used amounted to $10,714.74. On the basis of estimates furnished by the chief engineer, this expense of generating and distributing steam is transferred to the electric current generating system, material expense, and tool expense, in a ratio directly proportioned to the steam each has used, the figures being derived as shown in Table VII. Geneeal High-Pressure Steam Distributing Expense (Table VI.) Power Expense, General High-Pressure Steam Distributing System, refers to all expense relating to piping, fittings, etc., from the connection with the main feed piping to the local permanent connection where the steam is used. Depreciation of Permanent Fixtures $ 120.00 Insurance on Permanent Fixtures .27 Taxes on Permanent Fixtures .76 Repairs and Changes to Permanent Fixtures. . . 22.58 • Total Direct Expense $ 143.61 Service Charges — Steam Generating Expense . . 10,571 . 13 Grand Total Steam Generating and Dis- tributing Expense $10,714. 74 Transfers to other Accounts: Electric Current Generating Sys- tem $7,928.91 Material Expense 594-67 Tool Expense 2,191.16 $10,714.74 Balance $ 0. 00 Cost per thousand pounds of steam distributed $0,414 Distribution of Steam Expense on Consumption Basis (Table VII.) Steam Used by Lb. of Steam Expense Chargeable to Elec. Cur. Gen. System . . . Steam Hammers 19,188,850 1,944,875 1,439,255 479,775 479,795 335,890 383,865 239,940 1,439,255 $ 7,928.91 803.60' 594.67 198.22 - 198.22 138.76 158.58 99.11 594.67 El. Cur. Gen. Exp. Tool Expense $2,191.16 Material Exp. Nickel Plating and Wash- ing Tanks Special Pump for Pressure Tests High-Pressure Pumps Oil Pump for Foundry .... Vacuum Pump Misc. Mfg. Purposes Freight Elevator Pumps. . . Total 25,931,500 $10,714.74 59 60 SHOP EXPENSE ANALYSIS The direct and service charges to electric current generating and distributing expenses respectively are obtained in much the same manner as that followed in the steam system. These expense figures are analyzed and summarized in Tables VIII and IX. Transfer of these expenses are made on the basis of consumption. Compressed air, transmission, and illu- minating expenses are shown in Tables X, XI, and XII. Electric Current Generating Expense (Table VIII.) Power Expense, Electric Current Generating System, refers to all expense relating to engines, dynamos, switchboards, condensers, and piping. Depreciation of Permanent Fixtures $ 906 . 30 Insurance on Permanent Fixtures 2 . 46 Taxes on Permanent Fixtures 6 . 88 Chief Engineer (Part) 360.00 Assistant Engineer (Part) 936 . 00 Oilers and Wipers 1,315 . 61 Supplies : Oil 197.10 Waste 113.82 Unclassified 33.92 Administration 29 .43 Depreciation, Insurance and Taxes on Shop Fix- tures (Oil Tanks, etc.) 6.04 Power Purchased (For Power) 255.61 Repairs and Changes 169 . 65 Rent 1,729.41 Total Direct Expense $ 6,062.23 Service Charges — Steam Generating Expense . . 7,928 . 91 Total Electric Current Generating Expense $13,991 . 14 Transfers to Other Accounts (Electric Current Distributing) 13,991.14 Balance $ 0.00 ADMINISTKATION AND POWER EXPENSES 61 Electric Current Distributing Expense (Table IX.) Power Expense, Electric Current Distributing System, refers to all expense relating to main distributing cables and wiring from feeder switch terminals in engine room up to and including the first centers of distribution in each building, and from there to the permanent terminals at the controUing apparatus or equivalents. Depreciation of Permanent Fixtures $ 360 . 00 Insurance on Permanent Fixtures 1 . 10 Taxes on Permanent Fixtures 3 . 06 Repairs and Changes to Permanent Fixtures. . . 67 . 27 Total Direct Expense $ 431 .43 Service Charges (Electric Current Generated).. 13,991.14 Total Electric Current Generating and Dis- tributing Expense $14,422.57 Transfers to Other Accounts: — Transmission System $10,841 .61 Compressed Air System 2,013 . 57 Electric Illuminating System .... 966 . 53 Freight Elevators, Material Ex- pense 600.86 14,4^2.57 Balance $ 0.00 Total Kilowatt Hours Generated and Distributed 693,522 Cost per Kilowatt Hour. . . $ 0.021 Having made all transfers we find the final distri- bution of power expense to be as follows : Tool Expense $19,380.70 Material Expense 1,195.53 Rent Expense 2,056.07 Total $22,632.30 This final total agrees with the total ''power ex- pense" as given on page 57, and concludes the dis- tribution of power expense by systems. Tool expense is closed out into machine expense. Compressed Air Expense (Table X.) Power Expense, Compressed Air System, refers to all expense relat- ing to air compressors, main pipe line to hose or machine connections, headings, etc. Depreciation of Permanent Fixtures $ 261 .30 Insurance on Permanent Fixtures .82 Taxes on Permanent Fixtures 2 . 29 Repairs and Changes to Permanent Fixtures. . . 48.98 Oils 65.70 Waste 37.94 Salaries : Assistant Engineer (Part) 312. 00 Oilers and Wipers 438.54 Administration 9 . 81 Rent 45.88 Total Direct Expense $ 1,223.26 Service Charges (Electric Current Distributing Expense) 2,013.57 Total Compressed Air Expense 3,236.83 Transfers to Other Accounts {Tool Expense) .... 3,236.83 Balance % 0.00 Transmission Expense (Table XI.) Power Expense, Transmission System, refers to all expense relating to line and jack shafting and the motors driving same, pulleys, hangers, stringers, etc. Depreciation of Permanent Fixtures $ 1,997. 53 Insurance on Permanent Fixtures 5 . 48 Taxes on Permanent Fixtures 15 . 29 Repairs and Changes to Permanent Fixtures. . . 372 . 80 Salary Chief Engineer (Part) 720 . 00 Total Direct Expense $ 3,111 . 10 Service Charges (Electric Current Distributing Expense) 10,841 .61 Total Power Transmission Expense $13,952 . 71 Transfers to Other Accounts {Tool Expense) .... 13,952.71 Balance $ 0.00 62 ADMINISTEATION AND POWEE EXPENSES 63 Electric Illuminating Expense (Table XII.) Lighting Expense, Electric Illuminating System, refers to aU expense relating to distributing mains (Ught), wiring, arc lamps, puUeys, and other fixtures, incandescent lamps, clusters, stands, rosettes, guards, extension cord, etc. Depreciation of Permanent Fixtures $ 444 . 20 Insurance on Permanent Fixtures 1 . 10 Taxes on Permanent Fixtures 3 . 06 Supplies 267.47 Repairs and Changes 35 . 15 Power Purchased (For Lighting) 115.92 Total Direct Expense $ 866.90 Service Charges 966.53 Total Electric Illuminating Expense $1,833.43 Transfers to Other Accounts (Rent) 1,833.43 Balance $ 0.00 Ghapter V THE STANDAEDIZATION OF EENT EXPENSE DISTEIBUTION TN the preceding chapter a detailed analysis was "*• made of administration and power expense charges as divisions of manufacturing expense. We found that administration expense, for example, is distributa- ble to production centers on the basis of the number of employees in each center; we likewise found that power expense is distributable on the basis of units of power. In other words, our analysis has shown thus far that each division of manufacturing expense is distributable according to some distinct method of pro- cedure. Rent expense, which we are about to analyze, is proportioned to manufacturing centers on the basis of floor space occupied; the unit of distribution is, therefore, the square foot, and the method to be fol- lowed in arriving at this charge per unit is herew^ith outlined. Eent expense may be arbitrarily divided into two parts : {a) Fixed charges pertaining to grounds, build- ings, and "rent permanent fixtures" {i.e., permanent fixtures pertaining to buildings), and {b) Annual main- tenance. Under {a) should be included : 1 Depreciation on all buildings 2 Depreciation on rent permanent fixtures (this includes such 64 BENT EXPENSE 65 permanent fixtures as are common to the whole building . and which were specified in the preceding chapter under "permanent fixtures pertaining to buildings") 3 Insurance on all buildings and on "rent permanent fixtures" 4 Taxes on grounds (except such grounds as are considered as surplus, i.e., purchased in advance of present requirements) Taxes on buildings Taxes on "rent permanent fixtures" 5 Interest on investment (consisting of interest computed at a reasonable rate on net value — the face values of grounds, exclusive of surplus — on buildings and on "rent permanent fixtures, " less all depreciation on plant written off to date. Mortgages or bonds outstanding against the property should not be deducted) Under (6), Aimiial Maintenance, such items of ex- pense as the following would be included: 1 Salaries of janitors, sweepers, cleaners, watchmen, passenger elevator operators, fire brigade, etc. 2 Lighting (depreciation of lighting plant, or proportion of power consumed in lighting) 3 Fuel for heating 4 Repairs to building 5 Repairs to "rent permanent fixtures" 6 Changes to buildings and "rent permanent fixtures" 7 Amounts written off buildings and "rent permanent fix- tures" 8 House service supplies, such as soap, towels, toilet, and jani- tor supplies. A summary of rent expense made according to these two divisions and applied separately against the total number of feet of effective floor space will give a rate per square foot for both fixed charges and main- tenance. Comparisons can then be made between the expenses of different periods and any abnormal varia- tions can be easily located. In order to arrive at the total effective floor space the following items should be taken into considera- 66 SHOP EXPENSE ANALYSIS tion : All space in buildings which might be used for factory, warehouse, or office purposes, including aisles, engine and boiler rooms, toilet rooms, stairways and elevator shafts (excluding light shafts), pillars, and walls; all open yards used in the carrying on of the manufactory's business, including such space as might be used for the storage of raw material, scrap, etc., also any roofs used for such purposes ; and all driveways, courts, railroad tracks, and other facihties owned by the company and used for shipping or receiving mer- chandise. In cases where buildings are rented the total annual rent charge to expense should include annual rent paid, and annual maintenance which is not included in rent paid. When figuring depreciation, insurance, and taxes, net values of plant should be used as a basis for making calculations. This means that from the face values of buildings and "rent permanent fixtures," deductions must be made for all depreciation which has previously been written off together with the accrued depreciation up to the end of the current year. No de- ductions, however, should be made for "mortgages" or "bonds payable." All rates used should first have the approval of the management as they directly affect the manufacturing expense charge which we are inter- ested in distributing to costs of production. In classi- fying direct charges to "rent expense" during the year, the same procedure should be followed as ex- plained in Chapters III and IV. In Chapter III, we designated the shop expense (manufacturing expense) account as Account No. 11. For sub-classification purposes let us assume that all numbers from 100 to 199 inclusive were assigned to BENT EXPENSE 67 administration expense; all from 200 to 299 were as- signed to power expense, and all from 300 to 399 to rent expense. A reference list of these classifications pertaining to "rent expense" for the year would be made up as follows: RENT EXPENSE CLASSIFICATION REFERENCE LIST m 301 Changes to buildings and rent permanent fixtures 302 Depreciation on buildings and rent permanent fixtures 303 Drawings and surveys 304 Inspection and supervision of maintenance of buildings and fixtures 305 Interest on investment in grounds, buildings, and rent permanent fixtures 306 Renting other buildings 307 Repairs to buildings and street paving 308 Repairs to rent permanent fixtures 309 Repairs and inspection of passenger elevators 310 Supplies for cleaning 311 Supplies for fire protection (not including apparatus) 312 Supplies for watchmen (oil, lanterns, etc.) 313 Stationery 314 Salaries, attendants to heating system, fire brigade, etc. 315 Salaries, passenger elevator operators 316 Salaries, pumping station (fire and house service) 317 Salaries, sweepers 318 Salaries, ushers and watchmen 319 Taxes on grounds, buildings, and rent permanent fixtures 320 Watch box service 321 Water (other than for manufacturing uses) 322 Unclassified rent expense 323 Service charges for light (Brought forward from power expense and from gas expense) 324 Service charges (Brought forward from administration ex- pense) 325 Transfers to other accounts (credits) The "shop expense account" has been referred to as Account No. 11, and as rent expense is simply one 68 SHOP EXPENSE ANALYSIS of the divisions of shop expense, then, by nsing the reference list of sub-classifications made up for each division of expense, we would classify charges pertain- ing to any kind of expense according to the classifica- tion numbers assigned thereto. For example, "renting of other buildings" would be classified 11-306, by which (11) would denote the account number and (306), being in the three hundreds, would designate the charge im- mediately as a rent expense item, the details as to kind of expense being obtainable by reference to the classi- fication list. To the direct charges to rent expense as made dur- ing the course of the year, transfers must now be made for ''service charges" from other divisions of expense. For example, a transfer must be made from that di- vision of manufacturing expense known as "fixed charges" for the proportion of depreciation, insur- ance, and taxes chargeable to "buildings" and to "rent permanent fixtures," and for taxes on "grounds," as these form part of the rent expense. Transfers must also be made in like manner from "power expense" to "rent expense" for electric illumination, etc. By adding these service charges to the direct charges the total expense chargeable against ' ' rent ' ' can be arrived at. The classifications for use in making the transfer entries in the subsidiary expense ledger are included with those listed above. (See sub-class 325 under Rent Expense.) As we are interested in determining a rent rate per square foot for both fixed charges and maintenance as included under rent expense, let us analyze the annual rent charge of $54,363.20, stipulated in Chapter IV, according to these lines of distinction. This analysis would then appear as follows : RENT EXPENSE 69 Statement of Annual Rental Expense and Cost of Effective Floor Space for the Year 1915 Fixed Charges: Depreciation on Buildings and Rent Permanent Fixtures . . $ 5,686.96 Insurance on Buildings and Rent Permanent Fixtures 27.10 'Taxes on Buildings and Rent Permanent Fixtures 104.86 Interest on Investment in Grounds, Buildings, and Rent Per- manent Fixtures (Figured at 5% of Net Values) 7,279.33 Rental of (2) Buildings from A. B. C. Realty Co 25,000.00 $38,098.25 Maintenance: Repairs and Changes to Buildings $ 4,419.74 Repairs and Changes to Rent Permanent Fixtures 110.83 Salaries Watchmen and Door- keepers 2,103.05 Salaries Sweepers and Cleaners . . 3,852.50 Salaries Yardmen 780.00 1,872.17 Water (House Service) Fire Protection Expense 493.50 Supplies for Cleaning 169.25 Gas Purchased 1,031.84 Electric lUu- [ Power purchased 115.92 minating \ Power generated 966.53 Expense [ Supplies 267.47 Drinking Water Expense 82.15 $16,264.95 Total Annual Rent Cost .... $54,363.20 A STiirmiary of floor space against which the above expense is applicable would then be made and shown in the following manner: 70 SHOP EXPENSE ANALYSIS Manufacturing space 29,742 sq. ft. Material « 26,666 " « Office « 4,723 " « Space used for other than Material or Manu- facturing 6,063 " " Total Occupied Space 67,194 sq. ft. Unoccupied Space 38,719 « « Grand Total Floor Space 105,913 sq. ft. RESUME Number of square feet effective floor space 105,913 Fixed charges per square foot $0 . 3597 Maintenance per square foot . 1536 Total rental cost per square foot $0.5133 Having established a rent expense rate of $0.5133 per square foot, transfers can now be made to power expense on the basis of floor space occupied by the engine and boiler rooms ; to material expense for space used by storerooms ; and to machine and tool expense for space used for manufacturing purposes, etc., the charge in each case being determined by multiplying the number of feet of floor space occupied by the rate of $0.5133. These transfers would be shown as fol- lows: Total Annual Rent Cost $54,363.20 Transfers to Other Accounts: Power Expense $2,716. 13 Material Expense 11,213 . 55 Tool Expense 15,119.46 Administration and Clerical Ex- pense 2,424.32 Shippmg Expense 2,474. 11 Engineering and Draughting 504 . 20 $34,451 . 77 Balance. $19,911 .43 KENT EXPENSE 71 The balance indicated is equivalent to tlie charge against 38,719 square feet of unoccupied floor space. By using a method similar to the one here outlined for determining a rate per square foot of floor space for both fixed charges and maintenance, a basis of com- parison can be established between the rent expense of different periods and as a basis for arriving at de- cisions as to the purchase, rental, or construc- tion of new buildings. It is also a means of showing very clearly the actual expense involved through carrying surplus space. An analysis of this kind has been known by the writer to have resulted in an entire rearrangement of production centers and storage space, so that the excess floor space could be rented and a fair income derived therefrom. The method herein outlined for analyzing the annual rent charge is of course subject to modifications to meet existing conditions at the plant where it is to be applied. In some instances a much more elaborate system of classification and a more detailed analysis may be necessary. For example, where "water for house service ' ' has simply been given one sub-classifi- cation, (321) in the reference list of classifications, in extensive manufacturing establishments, similar to the large steel mills, railroad repair shops, or brass mills, the charge for water expense chargeable to rent alone might necessarily have to be divided into five distinct classes, as : a, Fire protection, hydrants and sprinklers ; h, grounds service ; c, house service for toilets ; d, drink- ing water ; e, high-pressure service for power for ele- vators. For these charges classification numbei-s from 330 to 349 could be assigned and used. Where divisions of this nature are necessary the expense is distributed to the respective systems on the basis of cubic feet of 72 SHOP EXPENSE ANALYSIS water used as indicated by the meter readings, and where this is not possible the distribution is made on the basis of estimated consumption. As mentioned in the preceding chapter on power expense distribution, light or illuminating expense is chargeable to rent. This introduces another factor which has to be taken into consideration at certain plants, that of generating gas. Where this is done, the classification of expense pertaining thereto should be made in a manner similar to that shown below : GAS GENERATING EXPENSE 350 Accidents 351 Belting on machine 352 Changes to gas plant 353 Depreciation on generating, purification, and distributing equipment, and buildings 354 Generator fuel (coke, coal, etc.) 355 Enrichers (oil, etc.) 356 Purification materials (iron oxide, shavings, etc.) 357 Rags, oils, cleaning supplies, waste, etc. 358 Repairs to buildings and fixtures 359 " " machinery and tools 360 Insurance 361 Taxes 362 Wages of gas maker and assistants 363 " " clinker and ashmen 364 Inspection expense 365 Service charges (brought forward) 366 Transfers to rent (class. No. 323) and other accounts (credits) It will be noted that the classification numbers as- signed to the above reference list are in the 300 class. This has been done because of the fact that practi- cally all of this expense is finally closed out into rent expense, of which it really forms a part because the gas generated is used for illumination purposes. Any gas distributed for direct manufacturing uses, such as BENT EXPENSE 73 gas ovens, heaters, blow pipes, etc., would be charged to ** machine and tool expense," through the transfer classification number 366. Still another possible division of expense chargeable to rent is that of the care and upkeep of grounds. This has become a factor of considerable importance of late years, because manufacturers are appreciating the importance of desirable and attractive surround- ings to the works proper as an inducement to labor. It is a proven fact that where large, well-ventilated rooms with abundance of light are provided increased efficiency has resulted therefrom. In the same way, if the outlook from the interior of the factory is over spacious, well-kept, green lawns spotted here and there with shrubbery, the expense involved will be repaid many fold through different sources. Many of the larger plants, especially, have laid out tennis courts, baseball diamonds, and running tracks on the grounds adjacent to or surrounding the factory buildings, all for the use of their employees. The competition stirred up in this way between different departments and with other organizations has resulted in immeasurable bene- fits, and the scheme is now being applied wherever conditions and locations permit. However, all this involves extra expense, and this expense, like all other kinds of expense, must be con- trolled in order to derive the maximum return on the expenditure involved. The care and upkeep of grounds are chargeable to rent expense, and as these expenses must necessarily be classified, a reference list of classi- fications should be made up in the following manner : RENT EXPENSE " GROUNDS" 375 Changes to fences, driveways, walls, gates, houses, etc. 376 Depreciation on houses used as part of the grounds 74 SHOP EXPENSE ANALYSIS 377 Depreciation on fixtures, etc. 378 Insurance on houses, equipment, etc. 379 Repairs 380 Salaries, superintendent of grounds and watchmen 381 Salaries, care and upkeep of grounds 382 Taxes 383 Service charges — ^water (transferred from water expense) 384 Service charges — administration (transferred from admin- istration expense) 385 Transfers to rent (closed out into classification No. 321) A method of expense segregation along the lines here indicated makes possible a control over each sub-di- vision of rent expense not possible where the charges are all grouped under one general heading. For small factories such an elaborate system of classification is not warranted, but where manufacturing is done on an extensive scale even a more detailed analysis may be necessary. The object here has been to show the pos- sible ramifications of rent expense in its broader ap- plications. Referring back to the original summary of rent ex- pense at the beginning of this chapter, we found that this amounted to $54,363.20 for 105,913 square feet of floor space, with an equivalent rate of $0.5133 per square foot. This space must now be classified so that an amount proportionate to the floor space occupied can be charged to each division of manufacturing ex- pense, such as administration, power, machine expense, etc., and in this way be eventually closed out into either machine or material expense. A classification of floor space by expense classification follows : Items chargeable to machine and tool expense: Includes space in manufacturing departments occupied by machines and benches, and the surrounding space, in- cluding private aisles necessary for their proper operation and maintenance. This space should be accounted for as RENT EXPENSE 75 a balance after all other areas have been deducted from the total area of each department. It should be finally dis- tributed amongst the various benches and machines for use in determining a machine rate of expense loading, as will be explained in detail in Chapter VII. Includes, also, tool rooms. Items chargeable to administration expense: General shop administrative and clerical offices (all offices included under shop administration expense); manufacturing offices of general foreman, foreman and - shop clerks; space occupied by lockers. Items chargeable to material expense: Offices where the work done pertains to material; stock rooms, including private aisles; raw and process stock space outside of stock rooms; tracks and space occupied by scales (pertaining to material); freight elevator space; three-fourths of main aisles in the manufacturing and stock departments; receiving rooms; inspection laboratories. Items chargeable to power expense: Steam generating system, including space occupied by boiler room, coal bunkers, ash bins, ash conveyors, etc.; electric generating system, space occupied by generators, switchboards, etc.; electric distributing system, space occupied by mains, etc. ; transmission system, space occu- pied by motors, shafting, switchboard, etc., other than transmission stock; compressed air system, space occupied by compressors and piping. Items chargeable to light expense: All space taken up by lighting systems. Items chargeable to rent expense: Stairways and passenger elevators; one-fourth of main aisles in the manufacturing and stock departments and all of the office corridors; sinks and toilet rooms; vacant space in shop not in use. This classification of floor space forms the basis for prorating and distributing rent expense to the several other divisions of manufacturing expense heretofore mentioned. These areas should be checked up at peri- odic intervals, as extensive changes or removals will affect costs of production either through excessive or insufficient charges. Office space should be charged a 76 SHOP EXPENSE ANALYSIS somewhat higher rate per square foot than regular space. This can be determined by an analysis of ex- penses and will be found to average closely to a ratio of two to three; that is, if regular space costs fifty cents per square foot, office space would be found to average close to seventy-five cents; the higher cost is due to more effort being expended in the cleaning and maintenance of the office space. The purpose which the writer has had in mind in making the foregoing analysis of the annual rent charge has been to show the relative importance and the extensions of one of the most important divisions of manufacturing expense; one in fact which has not been treated seriously enough by both manufacturers and accountants alike, that is, from a cost standpoint. The illustrations used herein are not intended for use either in very small or exceptionally large plants ; they must be changed to fit existing conditions at the plant where they are to be used. In trying to strike a happy medium and at the same time show some of the pos- sible ramifications the purpose has been, therefore, to provide a basis of reasoning rather than to establish certain fixed rules or lines of procedure to be followed. In our analysis of manufacturing expense we have considered, thus far, administration expense, power expense, and rent expense. In the next chapter an analysis will be made of depreciation, insurance, taxes, and interest charges. As these constitute a very im- portant part of the total overhead which we are in- terested in assessing against costs of production an analysis of certain common errors made in computing these charges will be discussed and a standard method of determining what they are will be outlined. Chapter VI detpeeciation, insurance, taxes, and in- terest—tool, MATERIAL, AND SPECIAL DEPARTMENT EXPENSE TN our preceding analysis of administration, power, -■■ and rent expense we found that these divisions of expense were distributable to costs of production on the basis of employees, units of power consumed, and floor space occupied, respectively. Under the classification ''fixed charges" were in- cluded depreciation, insurance, and taxes. These charges are computed and distributed to production centers on the basis of face values, which, as will be noted by the reader, forms a basis distinct from any thus far considered. The importance of correctly classifying additions to the factory plant accounts, on which point the writer laid considerable stress in an earlier chapter, will now be fully appreciated; as it will be seen that the face values of the factory equip- ment, as indicated by the respective plant accounts on the general ledger of the company, control the extent of the expense charges for which they are used as a basis of computation. Of the three divisions under the head of fixed charges, depreciation is by far the most important from a cost standpoint. Until such time as a standard 77 78 SHOP EXPENSE ANALYSIS method of computing depreciation has been established and adopted, this important part of manufacturing ex- pense will continue to perplex and confound manufac- turers and accountants probably more than all the other phases of cost accounting combined. Some manufacturers set aside reserves for depre- ciation, according to fixed rules, while others set them aside according to the state of their digestion. (This latter statement is far from idle jest. A board of direc- tors, with which the writer had occasion to be thrown in contact several years ago, set aside each year a reserve for ''depreciation" which was later charged against the manufacturing branch of the company and assimilated in their cost of production. The amount varied in proportion to the profits of the company for the preceding year, and, to a great extent, on the state of mind of the officials at the time of these annual meetings. The idea that depreciation formed a most vital part of their cost of manufacture had not en- tered the minds of these men, and yet they expected to use their shop costs as a basis for determining sell- ing prices.) The determination of depreciation rates is mostly a matter of estimate. Any scheme of depreciation must therefore be necessarily founded on an estimate of the life of the plant under consideration. Deprecia- tion must represent to the manufacturer the difference between the cost of the property and its liquidation value when it becomes useless to him. This period of usefulness is governed by two factors, actual wear and tear, and possible obsolescence due to improve- ment in the art. No one would advocate writing off the same amount of depreciation on a flying machine motor as on a motor in ordinary commercial appli- FIXED CHARGES 79 cation, for the simple reason that the rapid improve- ment in the design and construction of motors for driving aircraft has made it necessary to discard for- mer types long before they have become worn out through actual usage. Certain types of automatic screw machines having a natural life of between fifteen and twenty years were replaced in a plant known to the writer at the end of three years by machines so much more efficient that the loss incurred in discarding the earlier machines was more than made up through the operation of the improved type. Types of build- ings for certain classes of manufacturing have also been known to change, although not so rapidly as in the case of machines and fixtures. Obsolescence is therefore a very important factor from a depreciation standpoint, and one which must be given careful con- sideration when establishing rates. Since depreciation is so dependent on variable fac- tors, is so much a matter of estimate and even conjec- ture, the question has naturally been raised, ''Why not set aside each year a sum which will be adequate to meet all needs and in this way eliminate all fussing with depreciation, amounts, and rates?" This scheme would be perfectly logical were it not for the fact that it does not take into consideration the effect on operat- ing costs. Depreciation is a very real expense just as much as power, rent, and taxes; and every administrative head should understand that it is something more than simply a bookkeeping transaction. When we stop to consider that in the average machine shop the charge to manufacturing expense for depreciation on build- ings, machinery, and tools, when computed at fair rates, averages about one-third of the manufacturing 80 SHOP EXPENSE ANALYSIS expense, an idea of its effect on shop costs will be more readily appreciated. A factory and its equipment represent a complex en- tity made np of units varying in degree of importance from a file to a building. The file is soon destroyed, while the building may last for generations, but in the final analysis they are both perishable tools. Between these extremes lies, therefore, a continuous line of equipment, each item of which contributes with its own life to the product of the factory. Three factors govern any depreciation scheme : First — The length of time the property is to be used ; Second — The liquidation value at the end of that period ; Third — The method of creating a reserve to take care of this depreciation, that is, whether uniform or varying amounts shall be set aside annually. It is obvious that the several estimates which have to be made and used as the basis of any depreciation scheme must naturally be based on a combination of experience and conjecture. It is a lamentable fact that more data on depreciation of properties are not avail- able for standardization purposes, as they would be of material assistance in establishing rates. However, the fact remains that any scheme relying on estimates for its success will rarely, if ever, turn out to be abso- lutely correct. We must, therefore, make use of what data are available and apply them in a reasonable way to the problems under consideration. Deprecia- tion is too often looked upon as a loss ; yet one of the first laws of economics teaches us that ** production without consumption cannot exist"; hence, ''deprecia- tion of the plant" means to a reasonable extent ''ap- preciation of the product." FIXED CHARGES 81 Considering the three factors of any depreciation scheme, in the order above stated, the first is that of ''time." 1. The ''life" of any property from an operating standpoint is, as has been stated, dependent on wear and tear, and on obsolescence. In some instances wear and tear may be entirely offset by repairs and replace- ment of parts, as found in the case of railroads. In mauufacturing establishments, however, the procedure is usually to make repairs as they are needed, but to make no regular and extensive replacement of parts. 2. The ' ' liquidation value " of a plant is affected to a large extent by its adaptability for other uses and by its possible increment, as in the case of city proper- ties. At best, however, the liquidation value of the average plant at the end of its useful life is little more than scrap value, and in its worst phase it sometimes involves considerable expense in order to get rid of worthless property. 3. The "method" of computing depreciation de- rives its importance from its possible effect on operat- ing costs. It is sound business practice to approach liquidation value as rapidly as possible ; it is also good policy to know the real value of property when mak- ing up tax reports or when placing insurance ; but it is vitally important that the effect on costs of produc- tion resulting from any depreciation reserve scheme requires that the method adopted be determined with due regard to its effect on these costs. The argument in favor of writing off depreciation on the basis of diminishing rather than original values is well taken, for the reason that during the early life of a property, when the reserve for depreciation would be high by this method, the repairs would be negligible ; 82 SHOP EXPENSE ANALYSIS while during the later period of its usefulness the smaller reserve would be offset by higher repair charges. Therefore, by applying rates of depreciation on net values of plant and thereby making the charge to expense lighter towards the end of the life of the property, the effect on operating costs would be more or less equalized for all periods. It is generally true that the efficiency of a plant decreases as the plant grows older, and it would seem reasonable to have the depreciation charge to manufacturing expense less when repairs are increasing. Some plants have adopted what is known as the ''de- preciation-repair reserve" method, which consists of estimating the probable life of property and the re- pairs for that period. By adding these repairs to the amount for depreciation and by dividing this total by the estimated number of years a flat charge is made to manufacturing expense each year to cover all re- pairs and depreciation. Any increase or decrease for that period is adjusted through a special adjustment account provided for that purpose. This method has some good points in its favor, but does not really sim- plify matters as much as it would seem to on first con- sideration, because of the constant adjustments which would have to be made for new equipment purchases and for equipment sold or junked. The English practice in arriving at depreciation rates on buildings is to consider the value of a build- ing to be always worth at least twenty-five per cent of its original cost. This procedure is not in accord with the usual practice of American manufacturers and en- gineers, who take an entirely different viewpoint. In England, where many of the buildings are over a hun- dred years old, a building is considered as something FIXED CHAKGES 83 permanent, even if it only consists of walls, roof, and floors, so long as the floors can carry a load. The rates of depreciation on buildings which they nse average only about one-half of one per cent. That buildings are sometimes too permanent does not seem to enter into their method of calculation. By charging too low a rate for depreciation, and by paying out profits ac- cording to the state of their accounts, English manu- facturers often find it necessary to take in new capital in order to bring their equipment up to modern re- quirements. That this usually results in hardship will be readily appreciated, and the English practice has beeng'ustly criticized for it. A very good illustration of the fact that construc- tion can at times be too permanent can be found in the case of an English railroad between London and Liverpool which was built many years ago and was laid out with the intention of using only small freight cars with a ten-ton capacity limit. Owing to the fact that all cuts, tunnels, bridges, etc., were made practically permanent by using masonry and stone construction throughout, the cost of rebuilding the road later on was so great as to make it prohibitive. Today freight rates on merchandise between these two cities, a dis- tance of approximately two hundred miles, are nearly twice those charged between New York and Chicago, a distance of almost one thousand miles. This condition is directly due to the fact that sufficient depreciation had not been provided for a possible condition such as now exists. In American practice the following rates of deprecia- tion on buildings and permanent fixtures devoted to manufacturing purposes have been used with a con- siderable degree of success : 84 SHOP EXPENSE ANALYSIS Depreciation Rates on Buildings and Permanent Fixtures Factories Warehouses Buildings: Modern fireproof steel and tile . Mill construction Steel construction (only partly fireproof) Wooden buildings (of poor construction) Permanent Fixtures: Pertaining to buildings Pertaining to power and light- ing plants Pertaining to material 3 per 7 « cent a 3 4 per cent u u 6 " u 3 a a 12 « u 8 u u 12 « 12 « 12 « u u u u The reason for using a lower rate of depreciation on warehouses is due to the conjecture that the wear and tear on factory buildings and permanent fixtures resulting from the constant jar of machinery will be greater than on buildings used only for storage pur- poses. ''Permanent fixtures pertaining to power and lighting plants" are depreciated at a slightly higher rate than other permanent fixtures, on the basis that they come more or less in the same class as machinery and are therefore subject to more rapid obsolescence than other permanent fixtures. In establishing rates of depreciation on machinery it is very seldom worth the extra trouble involved to use separate rates for each machine type. A uniform rate for all types will prove to be of much more prac- tical value both in the simplicity of its application and in attaining the ends desired. A rate of from 7 per cent to 10 per cent on machinery is usually within FIXED CHARGES 85 reason, and rates approximating these are what are commonly used. Small tools should be written off just as rapidly as possible. Many manufactories write all tools off as soon as purchased, but as this would prove to be a hardship to new companies, a minimum of at least 15 per cent a year should be written off to be conservative. In the case of patterns, changes are even more likely to be made than in the case of tools ; it i« good practice to write them off entirely within two or three years. When making ledger entries for depreciation re- serves an account called "depreciation reserve" should be credited and the manufacturing (shop) expense ac- count debited. In this way the original values of the respective plant accounts will remain unchanged. When any part of the plant or equipment is sold or junked manufacturing expense is debited with the loss incurred. The form of depreciation report on page 86 will show clearly what amounts have been set aside and how they compare in percentage form with the original values. Insurance and tax charges to manufacturing ex- pense do not require much analysis. Insurable values are determined from an analysis of the plant accounts, deductions being made for such parts of the plant as foundations, piping, etc., on which no insurance is found warranted. Some companies are carrying self -insurance on iso- lated risks where values do not exceed a few thousand dollars in each case. The plan is based on the assump- tion that where a sufficient number of such small units exist, the aggregate premiums will more than pay for the losses involved. In this way a fund is built up which will eventually be large enough so that the in- 86 SHOP EXPENSE ANALYSIS o H "A O Pi O' O.bf p g o oj-L- ^ o 03 OQ ill? fA 9< S3^ 1^ S "B 02 X ^ • 02 O 2 i-H n o ^ -^^ & g:^ t3 ^ 2 i^ o • 00 CO O (M Ot-- t> O »o t^ CO t^ Tt< CO 1— I CO I »0(N 1 CO 05 lOOO 00 t^ Oi "<^ (M 00 O O icTcd^i— T CO T-l lO t^ CO »o O lO »o CO lO CO !>• 05 r-t CO rH (M o 00 CO 05 o CO lo CO CO lO o coi>i> o »o Ol T-H 1— I Ttl CO ocr(©o »0 (N f-H »0 00 s tHO oooo ccTr-T rt f^ Of 4i . o I CD i o o o o o CO 00 o >o d »o 00 W o & ft 3 '^.> m 0) M a. ftoS' ;^ CO ( ) rtH tH CO OS 05 1— 1 :S 1 lO 1 00 CO «c< 03C> Wl .a i -s g §• ft o C3 o3 ft MACHINE UNIT SYSTEM 101 $57,210.45 to be assessed as a material expense loading against production costs. This macliine expense, as shown above, is made up of various kinds of expense, each of which must now be distributed to production centers according to different units. For analytical purposes let us consider the expense figures used here- with as representing the manufacturing expense which has been obtained, as "normal." This expense to- gether with the units and rates of distribution would then be as shown on the following pages. Having assembled the machine expense by classifi- cations, rates, and units of distribution, we are ready to consider each kind of expense more in detail : Administration. Administration expense may be arbitrarily divided into two parts, (a) "general shop administration" and {h) "departmental administra- tion" expense respectively. ( a ) The ' ' general ' ' administration expense is made up of the administration and clerical expenses of the shop organization which cannot be assessed directly against any of the manufacturing departments. It in- cludes salaries of the shop superintendent and his as- sistants, salaries of employment, cost, and payroll de- partments, traveling expenses of shop executives, etc. (b) The "departmental" administration expense is more or less self-explanatory, as it consists of the salaries of departmental foremen, foremen's clerks, and any other administration expense which can be as- sessed against specific manufacturing departments. Administration expense is distributable on the basis of productive man hours, determined by multiplying the average number of productive employees by the normal yearly working hours per employee. On an average of fifty hours per week, these hours would 102 SHOP EXPENSE ANALYSIS z s o i % o3 i 1 o o g oj tH O cc o -2 i CQ Q 1 d .2 ;3 P^ o CJ 1 1 o o 03 0 to ^ d to CO (N T-i o T-H Ot*< lO o odd d o e© €© €© IP Oi o CO to o CO CO "lO o o s P4 t^ »o to c CD t^ t- o to !^ 02 tH rH TfH^ CO ^ ^ o' CO s" g »o (M 7—1 to (X) f4 o 1—1 H €©■ m ^ €/§■ €©■ CO r-t CO o 00 1> g^ CO CO 1-1 CO 1-1 to z di> i-H t^ CO d g CO'* C5 00 (N '^ o 1 (N b^T-H OCOOi CO CO c^ oT 1—1 !>. ^ ^ 1 g fl Oi O bC*+3 « ■^ fH S c:> o3 Q^ • 9 ' « o o.>: g ® M-4 tJ-H 1 «4-l — ^ X) -^ If O ^02 012 -1-3 .t^43 a, 2 2 O o 1^ III O Eh -SI ^1^ o 0) £ -S 2 9 & g&g •alig fl o - ||c5| s tH tH o i lO !>. (M ••fi 00 § ^ Ills 7-^ ^ TtH (N !>. fe t^ oi rH CfO 'Cj'g 0)43 o CO O O t^ CO Tt< co^ »C CM h3 CO T-T i2 t'SS'-i (H B tH •^ S °° c4 1 O €^ €& m CO 'S.s si^ < P P o 4 Vi 03 •Pii 1 eg 02 03 2 t-^ M j3 o3.9 'S ^ S fl 2 "3 t3 W H CI 03^ 104 SHOP EXPENSE ANALYSIS equal 2,600 per man per year. It will be seen, there- fore, that the "general" administration rate will be the same per man hour for all departments, while the "departmental*' rate will vary according to the ad- ministration expense of each separate department. As- suming, therefore, that on analysis the administration expense of $50,967.39, which we have used, is divided in a ratio of one-third to "general'* and two-thirds to "departmental," the expense figures would be; General shop administration expense $16,989 . 13 Departmental administration expense 33,978 . 26 Total $50,967.39 Eeducing the "general" administration expense to a rate per man, by dividing it by the number of pro- ductive employees (1,000) and then further reducing this rate ($16.99) to a rate per man hour by dividing it by the normal hours per year (2,600), this rate is found to be $0.0065 per man hour. The "departmen- tal" expense of $33,978.26 is made up of a total of different departments' administration expenses, and must be distributed by dividing each department's ad- ministration expense by its productive man hours : Department Number of Employes Departmental Administration Expense Productive Man Hours Rate per Man Hour A B C D 100 200 300 400 $ 4,000.00 7,000.00 9,000.00 13,978.26 260,000 520,000 780,000 1,040,000 $0.0154 0.0135 0.0115 0.0135 Total 1,000 $33,978.26 2,600,000 $0.0131 ^ Not used. MACHINE UNIT SYSTEM 105 Adding the ''general** administration rate to the rate of each department, the total rate per man hour for the respective departments would then be: Department Departmental Rate General Rate Final Administration Rate per Productive Man Hour - A B C D $0.0154 0.0135 0.0115 0.0135 $0.0065 0.0065 0.0065 0.0065 $0.0219 0.0200 0.0180 0.0200 PowEK. Power expense is distributed in propor- tion to the amount of steam, electric current, or com- pressed air used by each machine or bench. This dis- tribution is based on actual tests made on each type of machine under working conditions, or on estimates, where such tests cannot be made. In plants where a considerable part of the machine- tool equipment is operated directly by motors, an al- lowance should be made in the rate per kilowatt hour for power so used as against power sent through the general transmission (line shafting) system. This rate for direct motor drive would be based on the ' * current distributing expense" figures, and the regular trans- mitted power rate on the transmission expense figures. The rate for power transmitted would, therefore, be somewhat higher than that for current distributed, due to the additional expense of operating the line shafting. By referring back to Chapter IV it will be seen that the maintenance of this transmission system amounted to $3,111.10. If we assume that one-third of the 693,522 kilowatt hours is distributed directly to machines, and 106 SHOP EXPENSE ANALYSIS S Q O pq pi . S < % 1 >> aa § : g o o : >^W cq" 02 m f-i w CD ^ O fH M i > 73 o •r^ Ph O s ibossi pecia achir p ( 1 (=1 ► 1 oj s^^ 04 ! 5 a> »^ CD o S to c3 9 T-H l^il MACHINE UNIT SYSTEM 107 two-tMrds transmitted through line shafting, we can obtain both the costs and rates per kilowatt hour for each method of current conveyance, as follows: The total expense for electric current, distributed and transmitted, is $16,747.31 (see ''unit analysis" table, pages 102 and 103), of which the direct charges to transmission expense, as per power expense analysis is Chapter IV, are $3,111.10, leaving a net distribut- ing expense of $13,636.21 to be closed out, one-third ($4,545.40) to distributing expense, and two-thirds ($9,090.81) to transmission expense, a total transmis- sion expense of $9,090.81 + $3,111.10, or $12,201.91. To find the rates per kilowatt hour for distribution and transmission we would proceed as follows: The total current is 693,522 kilowatt hours, one-third of which, 231,174, is distributed, and two-thirds, 462,348, is transmitted; the rate for distributing current is, therefore, 4,545.40 -^ 231,174, or $0.0197 per kilowatt hour ; and the rate for transmitting current is 12,201.91 -f- 462,348, or $0.0264 per kilowatt hour. Before proceeding to distribute power expense a list of all productive and non-productive machines in each department should be compiled, showing the class let- ters, description of each type of machine, and the num- ber of machines covered by the description. A list should also be compiled of distinctively different kinds of ''productive bench work," with a description of the general line of work done. Non-productive machines should be listed by departments, with a record in each case of the number, description, and classification of the productive machine or bench against which all of the expense of this non-productive machine is charge- able. On the page opposite is shown a practical method of assembling this information together with the ad- OE8CRIPTIOW OF MACHIN6y eun SHOP NO — JCbCJt' ISji. . . - mho e« tMCNun aUlLBCRS HAMt — •'HVfffci^ ■Lju-^ powew TeaTi ■*eNrt(t Dnifyn sv. motsm hcitio on dwccti e* UNC amifT. MJlin BtlT. DiiiviN* ruujr Ion naeMifni. miwTeii fi*voHLV en Mb* or THIS •nnr imwt e* M. ». ■..^ y*. M«rYi^ f J«J3 , e X i = w ■tA-r.. CjtJi^f^XiJ. -w V ttf'mt^ti-t- tiJ>tuei-£» lialfatt i. H.I tUiJMja "r:- Cr^i^ • iP • ' ' • r J ' ^.,.-*- — ~ ■ ^y^ X T,„„ ,- M:2(Hs ......r^h^. . FORM FOE MAKING POWER TEST REPORTS 108 MACHINE UNIT SYSTEM 109 ditional information required with regard to floor space, hours of operation, etc. Separate sheets should be used for listing productive and non-productive ma- chinery. Where a number of machines of different types are being operated from the same line shafting, the line- shaft load should be assessed against the respective machines on the line in proportion to their watt-hour consumption under operating conditions. The "power test report" form, shown on page 108, has been used by the writer in making machine power tests, and will give a general idea of the method of procedure. In this instance the unit tested was a special machine geared to and driven by a three-eighths-horsepower motor. The test showed a power consumption of 253 watt hours and, as the machine was direct connected, the power expense rate used was that for "current distributed" ($0.0197 per kilowatt hour). Assuming the yearly hours of operation of this machine to be 2,000, the power expense chargeable thereto would be .0197 253 X 2000 X = $9.97. 1000 One of the objects of making power tests is to estab- lish a relation between specific grades of work done on different types of machines. Certain rules must there- fore be observed in making these tests. For example, when making tests on lathes the following information is required : First, size of cut taken — 1/16, 3/16, 5/16, or 7/16 inches; second, speed of operation — ^low, me- dium, or high. General points to be observed on other machines are : 110 SHOP EXPENSE ANALYSIS Drill Presses : The cubic inches of metal removed per minute. Punch Presses: The revolutions per minute of fly wheel and nmnber of strokes. Milling Machines: The cubic inches of metal removed and the speed. (Where traverse is controlled by hand, a stop watch should be used to determine exact time of removing a certain number of cubic inches of metal.) Shapers and Planers: The cubic inches of metal removed per minute. Squaring Shears: The square inches of metal sheared per minute. Tappers: The size of hole tapped and the speed. Grinders: The speed and pressure applied by operator. Tests made on types of machines other than those listed above mnst be made in each case along specific lines governed by the particular type of machine under consideration. Stock used in making these tests should be similar to that worked on under average manufac- turing conditions. The making of these power tests should be carried out under the supervision of an elec- trical engineer who will see that aU connections are properly made. Many valuable recording instruments are often destroyed through carelessness in connecting up ammeters and voltmeters used in making power tests, and hence all possible safeguards should be used in order to avoid this useless expense. Rent Expense. This expense is distributed and as- sessed against machines, benches, and erection areas of both productive and non-productive classification at a uniform rate per square foot according to the space oc- cupied. These areas should be carefully measured, and should include the projected obstructive area for each machine and any additional space necessary for its proper operation and maintenance. The total of all floor areas so assessed must equal the floor space charged to machine expense, any vacant space in manu- MACHINE UNIT SYSTEM 111 facturing departments being divided proportionately among all machines, benches, erection areas, etc. The proportionate amount for rent expense can then be charged to each machine on the basis of these areas at the established rate per square foot. (See Eent Ex- pense, Chapter V.) Tool Expense. This expense is first distributed by departments and then, by dividing and sub-dividing it by analysis and estimate, it is finally charged against the benches and machines in each department of the shop. Depreciation of small tools is assessed against each department on the basis of face values of the small tool account found by analysis. Supplies should be similarly distributed to departments on the basis of amounts furnished each department and then to ma- chines and benches by estimates of quantity used. Sal- aries of tool inspectors, tool draughtsmen, and any other expenses incidental to tool stock, are distribu- table according to services rendered. If information pertaining thereto is not available, then this expense should be distributed to departments on the basis of face values of the machine and tool equipment in each, and then by estimate to the machines and benches. Any other classifications of tool expense must be an- alyzed and distributed until they are finally assessed against machines and benches. The distribution sheet presented on the following page shows how tool ex- pense is so distributed. Fixed Charges. Depreciation, insurance, and tax charges are assessed directly against each machine in the factory on the basis of face values. In the speci- men analysis, pages 102 and 103, the rate used for all fixed charges was found to be 10 per cent ; therefore 10 112 SHOP EXPENSE ANALYSIS CQ • (M t^ C^ O to CO • CO • »0 TjH 00 CO TjH (N . 1—1 f^ (»f:_|.S T-( T-H lei o »c • "^ CQ (N "5 C0 00 tH • TjH COCQCCIi-(C0(NCOt-i • O Oi l:^ 00 (N CO • CO 03 S'^ ^H-g 1-1 (N' O lO C • Ci Tji no CO lO (N • rH CO -^ cc (N (N 00 CO O <^^ CO 1 ^ ^ ^^ ^S O»0t-(t— lr-llOC.COlC • CO to to 00 CO rt^ • »o ^g|« O CO tH 00 rH CD C • 00 ■rl^ O l> O 00 • ^' u 1— 1 CO rH O CO — • CO COTfH riH 05 < CO rH . • -* •^CCi— lOirHOi— It— • O Ol t^ CO O l> • CO < N> -1 1 1 N \ v \ ^ "^N '^\. "^ ■^ H ^.^ 1 % ^ '-t5 \ *.— — tu 11 •v^ i si' \ N ^1 •-% K ill OQ ^1 K » t 1^! • 1 1^1^ \ o « 500.000 400.000 (A < 300.000 o 200,000 100,000 « 118 CUKEENT VAEIATION EATIOS 119 diture for shop expense. That is, under normal ac- tivity the expense would equal 100 per cent of the pro- ductive labor. The writer has used the productive labor in this instance as being indicative of shop ac- tivity. Plotting these figures on cross-section paper, using the abscissae for ''expense" and the ordinates for ''productive labor," we establish the normal points A and F, from which we can construct the line COD which intersects the lines A and i^ at the normal point 0. This line C D we shall call the "standard" or "machine unit" line, as it is indicative of the amount of manufacturing expense distributed to costs of production by the machine unit system at any de- gree of shop activity. A study of the expense figures for any factory will show that a certain portion of this expense is fixed; that is, it goes on irrespective of the fluctuating de- grees of shop activity. This fixed or "constant" ex- pense is composed of such items as the salaries of the shop superintendent and his assistants, which go on irrespective of the amount of effort expended by the shop; a certain portion of the power plant expense necessitated for heating, lighting, operating elevators, etc. ; rent of buildings or its equivalent interest on the capital outlay in grounds and buildings ; depreciation, insurance, and taxes on the plant and its equipment; fire protection expense; care of the tool equipment; etc. In fact, there are innumerable other items gov- erned by operating factors in different kinds of manu- facturing which could be added to those here men- tioned. This condition can be fully appreciated by an inspection of the average plant during a slack year, where it will be seen that a large part of its "expense organization" has been kept intact, waiting for a pos- 120 SHOP EXPENSE ANALYSIS sible increase in production activity. A comparison of the shop expense figures on the books of the com- pany will usually show that whil6 production may have fallen off to practically nothing, expense has not been reduced in anything like this proportion. The average manufacturing company's organization is composed of three distinct sub-organizations: gen- eral, sales, and manufacturing branches respec- tively. These organizations work independently of each other to a large extent, especially the sales and manufacturing branches. The shop is not concerned with the placing of its product nor with the general financial policies of the company, and hence has very little control, if any, over the volume of its output. Its function consists of meeting the requirements of the sales organization as reflected either by filling direct orders or by stocking up to meet future demands, based on the judgment of either the general or the sales branches of the company, or both. It is therefore a most difficult matter for the manufacturing branch to anticipate production requirements far enough ahead to reduce its floating or variable expense in propor- tion. According to the customary methods of determining costs and distributing overhead, the manufacturing organization is charged with all of the expense due to factors over which it has no control. The functions of the sales and general organizations of a manufactur- ing company consist of devising means for keeping the shop busy, yet according to present methods the shop is charged with all of the short-comings of these two other branches. Furthermore, in periods of de- pression costs of manufacture often appear high, when actually the shop management has shown an increase CURBElSrT VAEIATIOIT EATIOS 121 in efficiency that would have been reflected by lower costs if this additional load due to the constant expense were not included. This is readily explained by the fact that the manufacturing expense increases (as a percentage of productive labor) as the activity of the shop decreases, and is due to the influence of the con- stant expense which does not show any decrease even at the lowest degree of activity. A study made by the writer several years ago of this very interesting question of ** constant expense" in a number of factories showed that it amounted to an average of approximately 40 per cent of the total manufacturing expense incurred under normal operat- ing conditions. This percentage will vary depending on circumstances, but experience has shown that where all items are considered it will tend to be higher rather than lower than the figure here used. To illustrate the effect of this constant expense on costs of production, in the factory under consideration for which we have determined the standard or ma- chine unit line on Chart III, let us assume that the constant expense amounts to $200,000 a year, or 40 per cent of the normal shop expense. It is composed of that expense which will go on even if each depart- ment has only one man employed in production, and is indicated on the chart by the point B. If we draw a line from this point B through the normal point 0, the line so drawn will then indicate the approximate ex- pense for any degree of shop activity. It will not nec- essarily agree with the actual expense for any current period, but will at least be a safe basis for purposes of control. A study of the relation which this line BOB bears to the standard or machine unit line COD wiU show 122 SHOP EXPENSE ANALYSIS very clearly the effect of constant expense on costs un- der different conditions of activity. For example, it will be noted, first, that these lines coincide at only one place, at the normal point 0. At the $400,000 labor point the expense is already somewhat greater than the expense applied through the machine unit method, and for each lesser degree of shop activity we find a greater variation existing, until at the $100,- 000 a year productive labor point we find that this ex- pense amounts to 160 per cent of the expense dis- tributed by the machine unit system. Therefore, if a slack period were to reduce the shop activity to one- fifth of its normal activity, we should find a greater portion of the shop expense undistributed than has actually been distributed to costs. This difference is known as the "current variation" and is distributed to costs in the form of a "supplementary rate" which is added as a percentage to the expense already ap- plied, as shown in the table opposite for varying de- grees of shop activity. By referring to the table it will be seen that when the activity of the shop is above normal this current variation or supplementary rate becomes a minus quan- tity (see last column) and the equivalent expense is deducted from current costs instead of being added, as in the instances cited heretofore. The variation in expense for any period is the actual difference between the amount incurred and the amount applied. The line B E can be safely used by the management for esti- mating purposes when the probable activity can be determined, but the actual adjustment for this current variation is made to conform with the actual current expense for any period. This expense will be some- where near the expense indicated by the current ex- Productive labor (Normal point at $500,000) Actual shop expense (constant expense $200,000) Estimated shop expense applied to current costs by Machine Unit System Current Varia- tion to be added to or subtracted from current costs Per cent actual expense of applied expense Per cent of expense ap- plied, which is to be added to or sub- tracted from current costs $20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 220,000 240,000 260,000 280,000 300,000 320,000 340,000 360,000 380,000 400,000 420,000 440,000 460,000 480,000 $212,000 224,000 236,000 248,000 260,000 272,000 284,000 296,000 308,000 320,000 332,000 344,000 356,000 368,000 380,000 392,000 404,000 416,000 428,000 440,000 452,000 464,000 476,000 488,000 $20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 220,000 240,000 260,000 280,000 300,000 320,000 340,000 360,000 380,000 400,000 420,000 440,000 460,000 480,000 add $192,000 " 184,000 « 176,000 « 168,000 « 160,000 " 152,000 " 144,000 " 136,000 " 128,000 « 120,000 « 112,000 " 104,000 " 96,000 " 88,000 " 80,000 « 72,000 « 64,000 « 56,000 « 48,000 « 40,000 " 32,000 « 24,000 " 16,000 8,000 1060 560 393 310 260 227 203 185 171 160 151 143 137 131 127 123 119 116 113 110 108 105 103 102 add 960 « 460 " 293 " 210 " 160 « 127 « 103 85 71 60 51 43 « 37 31 « 27 23 « 19 16 13 10 8 5 3 2 500,000 500,000 500,000 100 Normal 520,000 540,000 560,000 580,000 600,000 620,000 640,000 660,000 680,000 700,000 512,000 524,000 536,000 548,000 560,000 572,000 584,000 596,000 608,000 620,000 520,000 540,000 560,000 580,000 600,000 620,000 640,000 660,000 680,000 700,000 deduct 8,000 « 16,000 " 24,000 « 32,000 « 40,000 « 48,000 « 56,000 « 64,000 « 72,000 « 80,000 98 97 95 94 93 92 91 90 89 88 deduct 2 3 5 6 u 7 8 9 « 10 « 11 « 12 123 124 SHOP EXPENSE ANALYSIS pense line B E, ii the figures have been correctly compiled and conditions affecting it have not changed. Differences can be caused, however, by conditions which were not foreseen at the time when the normal expenses were compiled. These may be due to more or less efficient administration of the shop, fluctuations in the prices of supplies and expense materials, such expenditures as extensive repairs which may be of benefit for several years, or to the introduction of equipment having a high operating expense but which would be more than offset by a reduction in the pro- ductive labor account. Any of these items will affect the relation of expense to labor; hence, the importance of a proper classification of expense items, on which the writer laid particular emphasis in an. earlier chap- ter, will become apparent, as by such a segregation of expenses abnormal increases can be easily diagnosed and the proper adjustments made for them. These adjustments may also affect the *' constant" expense through such items as variation in the rates for in- surance, taxes, etc., and adjustments may have to be made occasionally to correct these expense figures. In order to note the effect on production costs of a possible period of depression to the $100,000 labor point, let us consider an actual cost summary under both the normal and reduced degrees of activity. A cost, compiled for a certain article which was manu- factured when the shop was operating at the $500,000 normal labor and expense point 0, might show : Productive labor $10.00 Manufacturing expense 100 per cent of labor (actually distributed on basis of machine hours) 10.00 Material 5.00 Total shop cost $25.00 CUBRBNT VARIATION RATIOS 125 At the $100,000 labor point, however, this same ar- ticle would appear to have cost $41, or $16 in excess of the normal manufacturing cost, the cost being made up as follows: Productive labor. $10.00 Manufacturing expense 100 per cent of labor (actually distributed on basis of machine hours) 10 . 00 Material 5.00 Standard cost $25.00 To which is added, Current Variation (160 per cent of expense) 16 . 00 Total shop cost $41.00 It is obvious, therefore, that in times of depression when the factory needs business most, its basis of cost figuring for new work is so prohibitive as to make such new business unobtainable. In other words, the present scheme of cost accounting falls down when we need it the most. When the activity is above normal, this same cost would be even less than that shown under normal conditions. Yet at such a time a manu- factory could easily shoulder an increase without af- fecting its normal costs. We must again revert to the factor of constant expense for the cause and solution. We have proved that this expense is the cause of this variation and have likewise shown the lack of respon- sibility which the management shoulders for this ex- cess burden on the shop. What, then, is the solution? If a shop has excessive floor space beyond its re- quirements, the expense incidental thereto would not ordinarily be assessed as a burden on the shop. If a company had three plants and shut two down, it would not charge the remaining one with the upkeep 126 SHOP EXPENSE ANALYSIS of the two idle ones. Yet, is not this same condition true if we consider each machine as a separate shop, paying for its own rent, depreciation, administration, taxes, tools, etc., which is precisely what is done in distributing the shop expense by the machine unit sys- tem? The facts seem indisputable, and again we ask the question, Why does the shop have to bear this burden? Is the supplementary rate fair to the shop? During the latter part of the year 1907 and through most of the year 1908, when the financial panic which occurred at that time was manifesting itself with tell- ing effect on every phase of our commercial life, one of the largest manufacturing companies in the coun- try took on contracts for grinding safety-razor blades, something entirely different from their regular line of product, on the basis of billing this work at shop cost as figured at the normal point and with no other ad- ditions for profit, etc. The effect of this policy will be evident when it is seen that by this scheme the activity of the shop was raised to something near the normal point, and, hence, the standard product of the factory was not loaded with the tremendous burden of the constant overhead expense which it would have had to bear if this scheme had not been devised for spreading it over a greater output. In addition to these benefits it must also be remembered that the manufacturer kept his organization intact, so that when the reaction occurred and business in his line improved he was in a commanding position over those of his competitors who did not have the foresight to adopt a similar policy. The writer has cited the foregoing practical ex- ample in substantiation of the case against the present practice of charging the current variation, as expressed CXJREENT VARIATION RATIOS I'^T by the supplementary rate, against the shop. The general or the sales branch of the company in this in- stance was able to meet the emergency with rare judg- ment and foresight. Yet if it had failed would it seem fair to have charged the shop with the short- comings of the general or sales branches of the com- pany? It certainly does not seem so, and the more consideration which we give to this phase of produc- tioii the more easily is it possible to marshal an in- disputable array of facts arguing against the use of the supplementary rate as an extra loading on costs of production. There is still another factor of paramount impor- tance pertaining to the supplementary rate. The rapid development of automatic machinery in this country of late years has introduced an element in the form of increased expense with lower labor costs. Where formerly a large portion of manufacturing was done by manual labor, this has now been superseded by ma- chinery, the operation of which entails considerable additional expense. Take, for example, the case of screw machines which have been developed in practi- cally four periods. Originally screws were turned by hand ; then pin machines were developed by which the turned parts, which had been cut to size, were threaded automatically; in the third stage the operations of turning and threading were done simultaneously on a rod which had been cut off to the correct length ; finally, the development was carried to the point where drill- ing, tapping, and slotting were added. Each of these stages of development has increased the expense, but, on the other hand, has reduced manual labor by mudi greater proportion. A. Hamilton Church, in his book, "Expense Bur- 128 SHOP EXPENSE ANALYSIS den," says in justification of the snpplementary rate, ' ' Cheaper methods of doing work will be promptly reflected by this rate." This is true only in such in- stances where no improvements, similar to those of the automatic machines cited above, are made and where the same methods of production exist year in and year out. In a modem manufactory, however, where labor- saving devices are continually being installed, an in- crease or decrease in expense will not necessarily re- flect the efficiency of the shop management and might even indicate conditions directly contrary to those actu- ally existing at the time. Again, in reference to idle time, Mr. Church says, "We are obliged, therefore, from motives of expediency, to look upon idle time as a kind of visitation of 'Providence' which the whole shop ought to bear." The experience of the writer has been that the gen- eral management of a manufactory very often finds such visitations of Providence an easy medium for shifting its own responsibilities. However, if periods of idleness can be traced to Providence, why should the shop be the organization to suffer? Surely, it is not allied with Providence I It would seem to the writer, from this analysis and from a study of conditions in many plants throughout the country, that there is something fundamentally wrong with our present method of cost compilation. Our costs are useless when we need them the most. We charge the shop with the shortcomings of the sales and general administrative branches of the company, and we look upon an increase in shop expense over a former period of similar activity as being indicative of inefficiency, when the opposite state of affairs may be the true condition. Where shall we look, then, for CUREENT VAEIATION EATIOS 129 a remedy? If we do not charge the shop with this vari- ation in expense, what is to become of it? The solution seems to point straight to the manage- ment, which alone should assume the ** current varia- tion expense, ' ' and not the shop. Manufacturing costs would then reflect production efficiency, not through the component parts of costs, such as labor, material, and expense, but by the summaries of these three elements f or-different classes of work. If the shop activity falls below normal, the surplus expense as expressed by the current variation or supplementary rate could be charged to a separate account, where it will remain until it is offset by credits due to activity above normal or until it is charged up to the management. The expense chargeable against the shop should be that portion of the constant expense which the current activity/ is of the normal activity, plus the actual cur- rent variable expense. That is, if the activity for a cer- tain year was found to be 60 per cent of the normal activity, then the expense chargeable against the shop for that year would be 60 per cent of the constant expense, plus the actual variable expense incurred dur- ing that period. At the $100,000 productive labor point on Chart III the manufacturing expense would be 20 per cent of the $200,000 constant expense ($40,- 000), plus the variable expense (BE) $60,000, making a total of $100,000, which is the same as that indicated by the machine unit line COD. In specific instances this line might be a curve rather than a straight line, but this can be readily determined from an analysis of the expense figures for different periods. "While we have been considering instances where the shop activity has fallen below normal, we must not lose sight of the fact that it is just as possible for the 130 SHOP EXPENSE ANALYSIS output of the factory to rise above the normal point as it is to fall below it. When the activity of the shop is above normal the amount of expense chargeable against costs of produc- tion will be greater than the actual expense incurred. This additional expense is measured by the variation existing between the machine unit line COD and the current expense line B E at any specific degree of shop activity. It will be seen, therefore, that inasmuch as the expense applied through the machine unit system as indicated by the line COD will be greater than the actual shop expense incurred as indicated by the line B E, then when the shop is operating above the nor- mal point this excess expense naturally becomes a credit to the general management. Credits of this na- ture will tend to offset charges made against the man- agement when the factory is operating below normal and will, if taken over a period of years, reflect the efficiency of the administration. A careful analysis and study of the method herein advocated by the writer will show several very de- cided advantages over the old method of applying a supplementary rate. By this new method the shop in times of prosperity will absorb a greater amount of expense than is actually incurred, which will tend to off- set and equalize benefits which it has derived during periods of depression. In like manner the general management will receive credit for increasing the pro- duction activity above normal, and in this way have a chance also to equalize charges which were made against it during periods when the production fell be- low normal. By this method, costs will be low when business is most needed and will be higher when busi- ness is more easily obtainable. Furthermore, shop CUEEENT VAEIATION EATIOS 131 costs will be comparative and will reflect the efficiency of the shop administration for different periods. The writer has endeavored to point out in the fore- going eight chapters on ''manufacturing expense" dis- tribution the ramifications of this most important ele- ment pertaining to production, and has hoped to show the effect of both correct and incorrect methods of dis- tributing this expense on the ultimate achievements of a manufacturing business. The manufacturer who to- day looks upon his so-called "overhead" as a loss is far behind the procession, and he must either get abreast of it or fall by the wayside. Expense today, as exemplified and incurred by planning and routing departments, statistical corps, time studies, and all of the other phases of scientific management, is a neces- sary adjunct to production, and should really cease to be classified as expense in the strict sense of the word. Manufacturers are often too prone to consider the terms "waste" and "expense" as synonymous. The extent to which cost reduction can be carried depends to a large degree upon the capacity of the management to incur expense with this end in view. Too much em- phasis cannot be laid, therefore, on the proper inter- pretation of what we have chosen to call "expense." Some manufacturers who still consider the term in its old sense remind the writer of the story told of the farmer who criticised the city clocks for the reason that, of the five he saw in the course of a mile walk, no two agreed as to the time. Conditions change, progress is being made, and new methods are being developed from day to day on the basis of past experience. Hence, it behooves those who would forge ahead to keep posted on these various changes. Chaptee IX OEGANIZATION nPHE question of organization is so closely allied -^ with, that of the proper control of the indirect or overhead expense of a manufacturing establishment that it is of paramount importance to give careful consideration to the scope and efficiency of the various types of organizations in use today. Factory management may be arbitrarily divided into *' superficial" or rule-of-thumb management and "sci- entific" or intensive management respectively. The former relies for its successful operation on the par- ticular ability of the executive in control of the plant, while the latter divides this responsibility among a group of functional specialists, known as the operat- ing staff. The two distinct types of modem industrial organi- zation in use today are known as the ''military" or line type of organization and the "functional" or staff form of organization. The former derives its title from its parallel as found in organizations of a military character, where responsibility for the successful car- rying out of any order is passed down through a long line of officers until it finally reaches the private in the ranks, or the workman at his bench or machine as found in the industrial counterpart. The functional 132 ORGANIZATION" 133 type of organization differs from the military in that it passes responsibility np the line, where it really be- longs, to the functional specialists, an outline of whose duties will be discussed more fully a little later on in this chapter. Both of these types of organization are in use throughout the industrial field, but in view of the won- derful strides which the functional type has been mak- ing during the past few years, it would seem reasonable to assume that it will eventually supplant, if not en- tirely, at least to a large extent, the military or line type of organization. The late Frederick Winslow Taylor very properly classified the military form of management as '' man- agement of initiative and incentive." It is what is commonly called the rule-of-thumb method of pro- cedure. Functional management relies for its success in operation on specialization by functions of manu- facturing, centered in a staff of men rather than in one head who is supposed to be qualified to direct all of these functions himself. Under functional management the department fore- man — who, under the military form, held full sway over all of the various functions of his department, which included the hiring of labor, the setting up of machines, the selection of tools and equipment, the de- termination of cutting speeds, and often even the rout- ing of materials in process — is now superseded by a corps of specialists, each of whom has his own line of activity to pursue. These specialists we find typified in the modern speed boss, repair boss, gang boss, in- spector, disciplinarian, route clerk, piece-work clerk, time clerk, etc., all of whom, while acting independently of each other, form a coordination of the various units 134 SHOP EXPENSE ANALYSIS and functions of the factory, thereby achieving a mnch greater degree of efficiency than that possible under the hit-or-miss method as exemplified by the military form of organization. This history of industrialism brings out some very interesting points which it might be worth while to con- sider at this time, especially with respect to the mar- vellous growth of manufacturing since the beginning of the nineteenth century. The history of ancient Egypt shows us that her skilled artisans consisted of brickworkers, weavers, upholsterers, potters, black- smiths, coppersmiths, glass blowers, shoemakers, ar- morers, etc., all of whom are found in counterpart in our industries today. In fact going back still further we find that mention is made of iron tools being used during the time of Solomon, and of axes, saws, ham- mers and nails during the time of David. Saws, picks, armor, and helmets have been found in the ruins of Nineveh, and many other excavations have conclusively proven that as far back as the history of our modern existence can be traced evidence is found substantiat- ing the fact that some portion of the peoples of those times were engaged in what we call manufacturing. Even as far back as the period portrayed in the fourth chapter of Genesis we find reference made to a man called Tubal Cain, who was born seven generations after Adam and who is spoken of as ''the forger of every cutting instrument of brass and iron." Up to the beginning of the nineteenth century, how- ever, the growth of manufacturing as a means of occu- pation and livelihood had not progressed very rapidly. A bulletin issued by the Bureau of Census, U. S. De- partment of Commerce and Labor, in 1900, entitled "A Century of Population Growth," states that "at the ORGANIZATION 135 close of the eighteenth century the greater part of the inhabitants of the United States derived their support from agriculture, nine-tenths of the bread winners be- ing so engaged. ' ' What little manufacturing was done then was practically all for home consumption. Speaking before the House of Eepresentatives in 1791, Alexander Hamilton gave a ''Report on Manu- factures," in which he laid much stress on "the vast sclieme of household manufacturing" which then ex- isted in the original thirteen states of the Union. His report stated that "great quantities of coarse clothes, coatings, serges, hosiery of wool, cotton and threads, jeans and muslins, checked and striped cotton and linen goods, table linen, etc.," were made in a house- hold way to an extent in many cases not only suffi- cient for the supply of the family in which they were made, but for sale and even, in some cases, for ex- portation. Compared with the ninety per cent of population engaged in agriculture at the close of the eighteenth century, we find approximately only one-third of the population so engaged in 1900. It will therefore be seen that more progress has been made in the manu- facturing field of industry since the beginning of the nineteenth century than had theretofore been made since the beginning of man's existence. The rapid growth during the past century has been directly due to the improvements made in machinery and other operating methods. With this evolution we find, how- ever, that a finer and finer allocation of the various factors entering into production has had to be made, caused first by competition, and later by what is known as functional or scientific management. The change from hand labor to machinery, which 136 SHOP EXPENSE ANALYSIS occurred during tlie early part of the nineteentli cen- tury, caused such an upheaval of methods in manufac- turing that it has often been referred to as the period of the industrial revolution. Up to that time each workman had his own spinning wheels, looms, etc., and lived almost entirely by the product of his own individual effort. Following the introduction of ma- chinery, however, these workmen were no longer able to maintain their industrial entity, because of the fact that machinery made possible a much greater output at a correspondingly lower cost than was possible by the methods in vogue prior to that time. The cost of these machines being too prohibitive to permit each workman to own his own equipment, naturally the workers split up into groups, pooled their financial resources, built factories, and equipped them with ma- chinery. Those workers who did not have the necessary capi- tal to join one or another of these groups found em- ployment with those who did, and hence we find at this point the origin of our modern system of industrial organization due to the replacement of individual ef- fort by collective effort. The early effect of this col- lective effort, forced through the introduction of ma- chinery, can be noted by comparing the cost of cotton thread which in the year 1786 cost thirteen times what it did in the year 1832. In 1800 a hand weaver earned on an average of 25 shillings a week in England, as compared with only 514 shillings in 1830. As these manufacturing enterprises grew and ex- panded, each in their chosen field, certain men were naturally selected to oversee the work of others, and so industrial organization has grown and expanded until we find its outgrowth in such marvellous and ORGANIZATION" 137 efficient examples as the TJ. S. Steel Corporation, the Standard Oil Company, the Knipp Works of Germany, and the Sheffield Steel Works of England. From the foregoing brief outline of the evolution of industrialism it is apparent that the development has been accomplished by three distinct stages of ef- fort : First we find individual effort with no organiza- tion ; then collective effort with a military form of or- ganization; and finally collective effort with its func- tional form of organization, the latter being in process of development at the present time. Each of these three stages of industrial development has been a step forward in specialization. Wherever specialization has been resorted to — ^in the arts, science, commerce, etc. — the then existing methods have almost without exception been discarded for more efficient ones ; and, as the keynote of functional organization is specializa- tion and because such specialization is conducive to greater efficiency wherever applied, it would seem rea- sonable to presume that collective effort with its mili- tary form of organization must eventually give way to functional specialization, just as surely as individual effort was supplanted one hundred years ago by col- lective effort. A weak point in our industrial scheme is that we are often too prone to look upon the expense of maintain- ing an efficient organization as just so much non-pro- ductive expense. This policy of near-sightedness has been the cause of many failures in the manufacturing field as well as in other lines of business ; and therefore the sooner that our manufacturers come to realize this in its true significance, the sooner will greater economy be experienced. Andrew Carnegie when asked some years ago ygtQg vjg- g CO ■iii§' i8's S=^ i-ix ^^ If 111 lis 5 II 1^. 5| 1 1 138 OEGANIZATIOF 139 whicli he would choose to retain if it were necessary for him to part with either his wonderfully efficient steel plants or his directing organization, very promptly replied that he would instantly choose to re- tain his organization. His factory plants, he said, could be duplicated if necessary, but the organization which it had taken him years to perfect and weld together and on which the success of his business depended was something almost impossible of replacement within any reasonable period of time. It is therefore worthy of notice that an efficient organization has an intrinsic value in dollars and cents which can be measured by its coordination to accomplish certain definite results efficiently. In order to present a comprehensive comparison of the differences which exist between organizations of a military form and those of the functional form, let us analyze them graphically. It is always good practice to draw up a chart of the organization of a manufac- turing or any other company, as by this means a quicker portrayal of all of the various units making up the complete organization is possible than by any other means. Chart IV, opposite, shows a method of plotting a large and complex manufacturing organization of the military type. In drawing up such an organization chart careful consideration should be given to the methods of grouping the various units. The scope of the various departments must be studied and the de- partments then grouped to get the best results. A standard method of designating the various units is decided upon. The manufactory is divided into its va- rious branches; the branches are then divided into divisions, the divisions into departments, the depart- 140 SHOP EXPENSE ANALYSIS ments into sections, and the sections into groups or gangs, each having its own special organization. These various sub-divisions may then be assembled in a chart which will show their relations. The organization shown by Chart IV is that of a typical metal working company. Here we see the plant divided into five distinct branches^ — ^mechanical, manu- facturing, inspection, service and maintenance, and production and clerical. The mechanical branch is composed of the purely mechanical departments, such as tool design, tool mak- ing, pattern making, etc., and is usually under the supervision of the master mechanic. The manufacturing branch includes all of those de- partments which are actually engaged in productive work. This branch, as shown by the chart, is subdi- vided into the foundry, machine, finishing and special divisions respectively, each being under the supervision of a division head to whom the foremen of the various departments report. The general foreman is in charge of this branch of the organization and is held respon- sible for the output and quality of workmanship of the various departments coming under his supervision. The inspection branch comprises the raw material, process, final, and tool inspection departments respec- tively, and also in many cases a chemical and physical laboratory used for testing and inspection purposes, such as determining the specific gravity of oils, or the hardness of steels in accordance with specification re- quirements. Each of these several stages of inspection is essential from an efi&cient operating standpoint as well as from a quality point of view. Efficient inspec- tion will reduce the factor of waste to a large degree, especially that which is incurred in the form of labor ORGANIZATIOIT 141 which would otherwise have been employed on defec^ tive material Here again we see the relation between organization and overhead expense control. The highest standard of quality and workmanship can be best attained where the inspection department is not influenced in any way by those concerned with the various phases of purchasing or production. Where the organization of the inspection department is not of a distinct unit nature it will be readily ap- preciated that the decisions of departmental inspec- tors, who through faulty organization are under the jurisdiction of the foremen of these departments, will tend to be biased ia favor of such departments. Self- preservation being the first law of nature, criticism of the inspector in such cases for failing to antagonize his superior by reporting bad workmanship or mistakes and errors is hardly just. The fault lies with th^ management rather than with the immediate point of attack. "While this state of affairs can be easily remedied by taking the local inspector from under the jurisdiction of department heads, which is done by keeping the in- spection branch of the company distinct from the man- ufacturing branch, it should be clearly understood that the work of the inspection branch must at all times be in full sympathy with the manufacturing work and that a state of cooperation should exist which will make such coordination possible. The scope of the inspection branch of a manufactur- ing organization is so broad and its operation is so closely allied with the success or failure of the busi- ness that the executive head of this organization unit should be chosen most carefully. He should be a man thoroughly experienced in shop methods and in engi- 142 SHOP EXPENSE AISTALYSIS neering principles and practice, £ind have an extensive knowledge of the uses to which the manufactured prod- uct is put after it reached the ultimate consumer. The average sales organization is usually too anxious to hold the factory accountable, without careful investi- gation, for all complaints of its customers as to unsat- isfactory workmanship, material, etc. As the chief in- spector is the one to whom these complaints are eventu- ally made he often comes in direct contact with the customer through his investigation and report on the case, and in this way can be of valuable service to the company by making these reports of such a thorough and convincing nature that the customer may see the matter in an entirely different light. The next division shown by Chart IV is that of the service and maintenance branch. This branch is under the supervision of the factory engineer, and is here shown as comprised of the factory service department, house carpenters' department, millwright department, steam and electric generating plant, and house wiring department. All of these departments are engaged in providing suitable accommodation for the enactment of work throughout the factory plant. The production and clerical branch is seen in this organization to be comprised of two distinct divisions : First, the production division, which includes the shop stores, stock records, shop tracing and receiving de- partments respectively, all of which are engaged in exercising their respective functions in connection with the question of materials ; and second, the clerical and accounting division, which includes such office depart- ments as the shop cost, shop expense, payroll, em- ployment, piece-work rates, voucher, shop purchasing, and efficiency departments respectively, all of which ORGANIZATION 143 are engaged in keeping and fnrnisliing statistics for controlling tlie various units of the factory, devising and installing methods conducive to accurate cost find- ing, compiling piece-work rates, and controlling waste by proper accounting and statistical information. This branch of the company is under the supervision of a production engineer, whose qualifications should in- clude those of a mechanical engineer, office manager, and expert accountant. While the organization shown by Chart IV is a good one as a military or line organization type, it does not endeavor, as will be seen by a closer inspection of the chart, to specialize in functions below those included in the several main branches which have just been dis- cussed. For example, it is left entirely optional with the department foremen to decide at what speeds their machines shall be operated, what class of labor shall be employed, which machines shall be used for certain classes of work, what discipline shall be meted out to the operatives for real or seeming infractions of the rules, etc. In this way it differs from the functional or staff form of organization, where these matters are taken entirely out of the jurisdiction of the department foremen and reposed in the staff of functional special- ists, as will be seen later in the analysis of the func- tional organization. While the illustration which the writer has used per- tains to the machine shop type of manufacturing, the same methods of dividing and subdividing the organi- zation, where the military form of management pre- vails, applies also to other lines. In a paint factory, for example, very different conditions hold than in a machine shop, yet the method of subdividing is not dissimilar. The purpose of a military form of organi- n E t A - V v/ s s , — I *^>*S? // / f / f / I / / I'' ll H 111 ll 11 Is % 10 ll la ll 1 d> fc X CO r r z < E^ a. 1 ■Pi IS - 5: to t ^^' I I I 144 OBGANIZATION 145 zation is simply to divide the plant so closely that the duties and scope of each part thereof are so plainly mapped out that friction between the various units will be practically eliminated. Chart V shows a method of mapping out a func- tional form of organization. The example used is that of a factory plant consisting of a brass foundry and machine shop. In fact, it is very much like the class of work done by the manufactory shown by Chart IV, although it differs materially, however, from the view- point of organization and operation. The responsi- bility instead of being centered in the head of each branch, as in Chart IV, is here reposed in a staff who specialize in various functions pertaining to produc- tion. In Chart V we see this functional specialization covering equipment, service and maintenance, labor, material, despatch, inspection, and accounting respec- tively, and that its jurisdiction includes both the foun- dry and metal working shop. The writer wishes to call special attention, before proceeding further with this discussion on functional analysis, to the two important controlling factors des- ignated as ''financial budget" and "symmetry of ap- propriations" respectively. The first of these repre- sents the amount of money available for manufactur- ing; and the second, the expenditure of this fund for the carrying on of this work. Symmetry of appropria- tions means the disbursement of the available fund ac- cording to carefully thought out lines of procedure and in such proportions that no one or more of the ele- ments entering into production will suffer because of an excessive appropriation made for some other part. It is a lamentable fact that more attention has not been given to this question of the distributioji of manu- 146 SHOP EXPENSE ANALYSIS facturing funds, especially by our leading exponents of scientific management. In accordance with the old rule, ''a chain is no stronger than its weakest link," the whole structure of successful plant operation de- pends on the proper allotment of plant expenditures. It applies not only to active plants, but to contemplated ones as well. Unless a sufficient amount of the avail- able capital is set aside for the purchasing of material and the hiring of labor, for instance, what will it profit a company to have splendid up-to-date equipment in the form of machinery and tools unless this equipment can be operated by workmen and can be supplied with material ? In like manner, what profit can be realized on excessive production which cannot be marketed, and which remains in stock-rooms until it very often be- comes obsolete through changes or improvements m application or design! The writer has been thrown in contact with this same question in new plants where, through failure to con- sider this matter in its true significance, beautiful plants have been erected and money lavishly expended for equipment, only to end in financial disaster because of lack of funds to keep the plant supplied with the necessary labor and material. The factor of plant lo- cation also very often seriously affects this question, especially in such cases where through more or less isolation of the factory site, labor is hard to obtain or excessive payment has to be made as an incentive to secure help. Still another factor is that of the indirect or over- head expense, which most manufacturers, largely through ignorance in this most important element en- tering into manufacturing, fail to comprehend and pro- vide for in their plant appropriations. No provision OEGANIZATION" 147 is made for depreciation of buildings and equipment; no reserve is set aside to provide for fire or accident contingencies ; no attention is given to tlie question of repairs, upkeep, etc. The direct effect produced by failure to give any or all of these matters proper con- sideration at the time of making up the shop budget, is that the entire scheme of manufacturing is carried on in anything but a scientific manner, and that some on^ or more parts of the factory as a whole are bene- fiting at the expense of others. The importance of establishing a degree of symmetry in making manufac- turing appropriations will therefore be readily under- stood. A perfectly balanced scheme of production is a prerequisite to eflScient plant operation and should as such be considered of paramount importance from a management viewpoint. Eeverting again to Chart V, we find that the func- tional form of organization differs from the military or line type of organization shown by Chart IV in that the entire system of production rests in the staff of functional specialists ; with the result that responsibil- ity, instead of being passed down the line as under the military plan, is passed up the line to the operating staff. Therefore, instead of the general foreman, shown at the head of the manufacturing branch in Chart IV, attending to all matters pertaining to the actual manufacturing done in the foundry and ma- chine shops, this responsibility is taken away from Mm and transferred to the functional staff. In like manner it practically divests the departmental foreman of all responsibility except that of seeing that the workmen keep busy and conform to the required standard of discipline. Even in such matters of discipline these foremen cannot act entirely independent of the staff, ; % p,ls 1 ^sq \ i \ V » c Ik ■»t «, (} * <> tl — §- \ J V \ \ \ z \ V o F \ \ \ \ 1 " w i u ■'s « \ \ 1 ~sl \\ ^ \ W ! \ w ^ i \\\ at \ \\ x2 «5 ac a. t O 1 ts%^ \\\ ^^1 <^ r < OS Ul ■< ' ^^ cc ^ 51 cc £ lU i: -"wf ^ / // Oil- «L ^. / // <5 / // O / // >»£ / // 1 c *i / 11 o<3 / / / o 1 // r / / ^ .. 5 11 1 f/ 15 / IJ? ^^ 148 OEGANIZATION 149 wMcli includes a labor section as will be seen in Chart V. To the close student of this question of organization the advantages of the functional over the line or mili- tary type will be especially apparent when considered from an expansion point of view. It permits of a much greater degree of flexibility, which makes it possible to adapt itself easily to any sudden growth of the busi- ness as a whole. It shifts the additional study, plan- ning, and responsibility for this extra work to the staff, instead of loading up the foreman and his assist- ants with all of this cumbersome amount of detail. In relieving the departmental heads of this detail it there- fore permits them to get a much better perspective of existing conditions, and consequently to attain a greater degree of efficiency. Chart VI shows the functional plan originated by Frederick W. Taylor. While it differs considerably from that shown by Chart V, the effect of the principles of functional specialization laid down by Taylor can be readily seen in this later organization chart. Chart V when considered in comparison with Chart VI also shows fairly well the advancement which has been made along this line of functional specialization. And so, while the principles established by Taylor hold more true now than ever, the extent to which these princi- ples have been amplified during the past few years and the apparent possibilities of further amplification and improvement force the opinion that this question of functional organization has been and will be carried further than Taylor had dared hope for or believed possible when he laid down his doctrine. By referring again to Chart V it wiU be noted that after the actual production phase of the work is en- EXECUTIVE DEPARTMENT ~ \ : PRESIDENT Vice-F^sidenf ir? charge oF Opffrcr^/on. Vice President 'in Charge of Real Estate Resident Assistant to V/ce President in Pur.ctiases and Insurance. charqe of Operation, Ne>v York. Vice President in Ctiarge of Accounfing Vice President in Charge of Traffic. Secretary. Vice President in Charge of Finance. Treasurer. J—- . , ._ ___j Legal Dept. Engineering Dept. Chief Mechanleaf General Counsel Chief Engineer Engineer Vice B-esidenf in charge of Operation (Resident Ass A fa V-P " " - " NerrYork) OPERATING DEPARTMENT General Manager P- 1 I General Superir7fendenf Trans^rtation ^Supt. of Stations Supt. Freight Trans. duptPassengerTmns. and Transfers Supt. of Car Service General Supt. of Motive fhwer \ -T \ 1 ' Engineer Mainfenanceof Way Valuation Engineer Signal Engineer Suf>f of Telegraph General Superintendents. Gfneral DiYisiona Supt. ofMoh\efbyfer | Principal A »9t Engineer Superintendents, Lpcal Divisions Agents. Local Freight and fbesen^erSfafions freight Tra&icAfanagt Vice Presiden / in Charge of Traffic TRAFFIC DEfARTMENT Traffic Manager General Freight Agent I D'rrision Freight Agents Agents & Freig ht Solicitors Freight Claim Agent Passenger Trtrffie ftanoger General Passenger Agent Division Passenger Agents District Pa ssenger Solicitors Cool Traffic Manager General Baggage Agent Vice Fi^esident in charci e of Finance I ^ - ' * ■ I Treasury. Department Employes Saving Fund Treasurer Superintendent Vice President in charqe of ReaJ Estate. Purchases and Insurance Real Estate, Department Insurance Department Fhrchasing Department tfeal Estate Agent Supt. In surance Dei^. Purchasing Agent. Vice President in charge of Accounting Accounting department Comptroller AucTitors fl.tFieteeK. CHART VII. TYPICAL RAILWAY ORGANIZATION 150 OKGANIZATION" 151 tered into, a further division is made by process points. For example, in the foundry the separate sections as indicated by core-making, moulding, melting, and clean- ing respectively become actual process points, for the reason that each completely performs its respective process operation. The cores are first made in the core room, the mould is then made from the pattern, the metal is melted and poured into the moulds, and th^ casting so produced is finally cleaned. Each of these operations represents a complete process point. The time actually consumed by each process point is called a process period, and the unit of such a period is the process hour. While we find these process points easy of alloca- tion in the foundry, it is somewhat more difficult, how- ever, to segregate them in the metal shop, also indi- cated on Chart V. An automatic machine, for example, may be a process point, while on the other hand a gang of six or seven men may also be a process point. The segregation of these process points under the func- tional plan of organization makes possible a greater control than where these distinctions are not made. The process hours for any process point can be used, for example, as a basis of overhead expense distribu- tion or for authorizing expenditures during any pe- riod, based on the estimated total of process hours for that period. In this way a much finer allocation of the indirect shop expense can be made than where this ex- pense is simply split up by departments. This, then, results not only in better control from an executive viewpoint, but also it produces truer costs of produc- tion because of the finer allocation of expense by proc- ess points. Chart Vn shows a combination of the functional 152 SHOP EXPENSE ANALYSIS and line type of organization as used by the Pennsyl- vania Railroad Company. Here we see a staff com- posed primarily of the vice-presidents of the company, each of whom has what might be called general func- tional supervision over his branch of the business. The functional specialization is not carried out so exten- sively, however, as is that indicated by Chart V, as it is composed mainly of a line type of organization for each branch. But exceptions are found in committees formed to exercise functional supervision. For ex- ample, a discipline committee composed of freight agents from various stations on a local division, make suggestions and recommendations to the superinten- dent of the local division relative to the action to be taken on cases covering breaches of discipline. Another example is that of the cooperative claims committee, composed of a representative from each station of a local division, who makes suggestions and recommendations to the superintendent of the local division (copy of which is also sent to the superinten- dent of stations and transfer) relative to the elimina- tion of causes of losses and damage. Other commit- tees in like manner make investigations, suggestions, and recommendations and report to their respective organization heads; so that while we find here a line type of control existing, it is supplemented by author- ity reposed in special committees. In summing up this question of industrial organi- zation with respect to its relation to indirect or over- head expense, it need simply be reiterated that the distribution and control of this expense vary practi- cally directly in proportion with the degree to which the factor of organization has been developed in any plant. We have seen how the functional form of or- ORGAzsrizATioiir 153 ganization is rapidly supplanting the old military form simply because it offers a better means of executive control over all phases of production. The writer has endeavored to show also how this can be used to con- trol directly the extent of the charges to indirect ex- pense by allocation according to process points. It will be seen, therefore, that much depends on the selection and operation of the proper type of organization for specific classes of manufacturing. Chaptee X WASTE IN MANUFACTURING WASTE in a mannfacturing establishment may be arbitrarily divided into three main divisions — material waste, time waste, and miscellaneons waste. Material waste may be divided into raw material waste, worked material waste, and finished material waste. Raw material waste comprises such waste as that induced by wasteful cutting of stock, shrinkage in stock rooms, discarding or junking of material which is found defective and which had been accepted at the time of purchase because of poor inspection, and such waste as may be incurred through the improper storing of raw materials which may result in fires, leakage, etc. Worked material waste is due to defective workman- ship; lax stock-room system; defective work and er- rors in manufacturing ; shrinkage in stock room due to stealing, etc. ; losses sustained through forced sales of over-stock at sacrifice prices ; bad castings from foun- dries, which are not discovered until considerable ma- chine work has been done on them; shrinkage sus- tained in melting metals in the foundry ; and such waste as that incurred through a lack of proper inspection of work done on a piece-work basis, where the quality of the product is sacrificed and where mistakes are made because of haste on the part of the workmen 154 WASTE IN MANUFACTURING 155 in rnsliing through maximuni quantities in a given pe- riod of time. Finished material waste is caused by stock-room shrinkage, leakage, junking of obsolete merchandise which has been stocked up, loss sustained due to dam- age to the finish of completely assembled merchan- dise because of faulty stocking and handling, poor judgment used in the disposal of junk or scrap metals, and to stealing and other results of poor stock-keeping methods. In enumerating the foregoing varieties of material waste it is not the intention of the writer to convey the impression that these cover by any means all of the many factors which enter into the loss of ma- terials, but simply to show in a general way some of the main forms of waste which can be grouped under each division. The student of this question will un- doubtedly be able to add many other illustrations from personal experience or after investigation. While it is often impossible to inaugurate methods for curbing such sources of material waste as those found in the form of defective castings where blow holes do not appear on the surface, it is true, nevertheless, that in the vast majority of cases the large losses which are incurred can be eliminated by a proper and efficient form of factory management. A concrete illustration of material waste was re- cently found by the writer in a plant engaged in the manufacture of automobile parts. Much of the work of this company consisted in the welding by oxy-acety- lene and soldering of manifold pipes, in which work a large quantity of silver solder was used. This solder was purchased in small bars at a cost of approximately $2.50 per pound. The management provided no method 156 SHOP EXPENSE ANALYSIS for checking either the purchases or the consumption of this valuable material ; with the result that purchase requisitions for additional solder were issued whenever the stock on hand got low. Even then, when this stock was received it was immediately sent to the several store rooms in the shop, from which it was later drawn as needed by the workmen, without being weighed or the quantity previously drawn out and used being checked. The workman simply filled out a requisition on the stock room for as much as he thought he needed at any given time, and had the foreman 0. K. these requisitions. It would seem reasonable to suppose that a foreman of any executive ability whatever would have kept some sort of a check on the consumption of this silver solder by the workmen in his department for his own protection. The facts in the case, however, showed that because of the volume of work which he was called upon to supervise the foreman never found time to look into this question and, in fact, never con- sidered it of enough importance to require more atten- tion on his part than the small amount of time con- sumed in initialing the requisitions brought to him for approval by his workmen. In order to appreciate fully what this leakage meant to the manufacturing company concerned it might be stated that the matter was first discovered by the writer through curiosity in asking the management what it was that caused the peculiar bright appearance of the cracks in the floors of the departments where this sil- ver solder was used. It was found on investigation that this material had been used so carelessly and promiscuously that small pieces had become scattered over the floors in such abundance that the floors were practically inlaid with silver. This matter was brou^t WASTE IN MANUFACTUEING 157 to the attention of the management, and when the quantity of the sUver solder which should have been consumed on the basis of the past year's output was es- timated, it was found that the value of the amount so used was $10,000. A further examination of the pur- chases of the company for that period, with proper allowance for the amount of stock on hand at the be- ginning and end of the period, showed that the ac- tual consumption amounted to approximately $35,000. From these figures it was seen that a waste of $25,000 a year, or 250 per cent of the stock required, was in- curred. It seems almost inconceivable that a condition such as the one just cited could have existed without the knowledge of the factory management. That it did exist, however, is an actuality; and the extent of the waste involved as measured in dollars and cents is certainly chargeable in much greater proportion to the inefficient form of management than to loss in- curred by indiscriminate waste and stealing. If a proper form of store-room control had been in exist- ence, and if the foremen had had this question brought forcibly to their attention, together with the proper in- structions for exercising control over this material, such a condition could not have existed. In justice to the management in charge at the plant above mentioned, it might be stated that in practically all other phases of their manufacturing routine effi- cient methods of control were in operation. It was mainly through a lack of a proper accounting system capable of showing at periodic intervals such leaks of vital importance as the one illustrated that losses of this kind were possible. It is hardly necessary to add that after the presentation of these facts the man- a: 3 H •< u. D I ha UJ 5 <<( S 111 QIC is fe • ».S : 1U !.> ft * fill 5 s It 5C 5-S * 158 "WASTE HSJ" MAN-UFACTURING 159 agement did not lose miicli time in making provisions for exercising the proper form of control. Another form of "worked material waste" was found by the writer in a plant engaged in the manufac- ture of brass goods. The brass foundry melted, on an average, six million pounds of metal each year in up- right tilting furnaces, using coke fuel and with com- bii^tion induced by the air blast method. Examination of the records of the company showed that a shrink- age of eight per cent took place from the time the ingot copper and other metals were sent to the foundry to the time the finished castings were sent to the chipping and sand-blasting section of the foundry. The value of the raw material in this case was only twenty cents per pound at a maximum, as compared with the silver solder at two dollars and fifty cents per pound in the manufacturing plant previously referred to. The question of stealing, therefore, could be al- most eliminated on first consideration because of the ta*emendous bulk involved; but in order to eliminate all question of doubt on this point a thorough investi- gation was promptly instituted, with the result that no leak through theft was found. The question then re- solved itself into an internal proposition rather than what might be called an external one. After an in- volved examination it was found that the loss actually took place during the melting of the metals. That is, an actual loss of eight per cent was found to have taken place between the time at which a heat was begun and the time at which it was poured. For the benefit of those who are not familiar with the normal shrinkage which takes place in the melt- ing of brass it might be stated that the average is between two per cent and three per cent under stand- 160 SHOP EXPENSE ANALYSIS ard conditions. But in the case mentioned it was found that an excess of air blast was being used, with the result that the metal flux was actually blown out into the air, resulting in a loss of metal corresponding to approximately five per cent in excess of the usual loss. In this case the batteries of these furnaces in operation represented an investment running into many thousands of dollars, but the losses incurred through their operation necessitated their prompt re- moval and the substitution of the pit-fire method of melting. This condition had been going on for five years, and when we stop to consider that an excess shrinkage of five per cent on a melt of 6,500,000 pounds per year represents 325,000 pounds of metal each year, or a loss, when figured at 20 cents per pound, of $65,000 for one year, or $325,000 for five years, the management could hardly be criticized for making radical changes. In the case just mentioned we again find material waste that was due to a lack of executive control. This case differs from the first one in that records were actually kept of the work of the foundry in all of its operations. In fact, a complete history was kept of the work of each particular furnace, showing the number of heats per day, the quantity of metal poured, the amount of coke used, the repairs and relining expense incurred by each furnace, and- the labor charged against them. There was no lack of available data from which to make comparisons which would reflect this condition and very easily make possible an effi- cient means of control. Through some inexplicable reason, however, a comparison was never made which brought out this form of waste. Just why such a condition could go on from year WASTE IN MANUFACTUBING 161 to year without the management becoming aware of its existence is something which no one but a psycholo- gist can explain. Experience in many plants under diversified conditions has shown, however, that often the lines of least resistance in exercising proper admin- istrative control over the various factors of produc- tion are overlooked, with the result that conditions such as those here mentioned are possible. The only explanation that the writer can give from his experi- ence has been that it is mainly due to the fact that the average factory manager is so lost in a mass of routine, and has his nose so close to the grindstone, that he does not get the proper perspective. Many other similar illustrations could be given. For example, in a paint factory a large factor of shrinkage was discovered in the form of leakage from barrels. In fact, this same condition has been found in a number of plants where fluid materials are used in large quan- tities and are kept in barrels, and where faucets are inserted for the drawing off of these liquids by the workmen. Sometimes faucets are found to have been left wide open by the workmen through carelessness, thereby incurring substantial losses. In the modern manufacturing plant where fluid materials are used in considerable volume, they are stored in tanks at a cen- tral distributing station and are drawn off at various places throughout the shop through attachments of a special nature which cannot be left open and which eliminate all loss through seepage. This method also eliminates the fire risk involved by the old method — an especially important element where inflammable ma- terials, such as naphtha, gasolene, and varnishes are used. The material waste factor in some lines of business 162 SHOP EXPENSE ANALYSIS is not appreciable, while in others it is a serious prob- lem. For example, in the manufacture of jewelry waste occurs at nearly every stage of production. In the punch-press operations the punchings often be- come scattered or lost; at the workmen's benches screened drawers are used to catch the filings ; in pol- ishing, more of the precious metal is taken off in the form of fine powder; in fact the very air of the fac- tory is laden with gold and silver dust. The sweepings, which are sent to refiners from time to time, become a source of revenue of no mean proportion which should be credited to the factory. In citron and peel factories still another example of waste occurs. In producing candied citron the first stage of the process is the removal of the peel from the pulp; the peel is then squeezed out and is packed in tubs of syrup. In this bath the brine is displaced by the syrup, after which the citron is dried and the weight further increased by another coating of syrup. Although lemon and orange peels undergo much the same course of treatment, yet the amount of spoil- age is very much greater than in producing candied citron. And this factor of the excessive waste in the one over the other produced an error in the final cost, because of the fact that in figuring this final cost the citron, orange, and lemon products were all computed as being directly proportional to the original cost of the citrons, lemons, and oranges purchased. This rela- tion was not true when the excessive waste involved in the orange and lemon peel treatment was considered. In New York some fifty-five million cocoanuts are opened yearly. Twenty-five cents a hundred is paid for opening the nuts and washing the meat. In the production of shredded cocoanut, sugar, salt, and glyc- WASTE IlSr MANTJFACTTJEING 163 erine are mixed "with, tlie meat of the nut to give it more flavor. The greater the quantities of these in- gredients used, the more will be the profit accruing to the manufacturer. The important point in this illus- tration, however, is that of the utilization of by-prod- ucts. The heat value of one ton of cocoanut shells is equal to that of one ton of coal. Therefore the power generating plant of such a factory should be charged and" the factory itself credited with each ton of cocoa- nut shells so used for fuel purposes. Again, the bar- rels in which the sugar is received are worth 34 cents each, so that when they are used for packing purposes, as is usually the case, the factory should be credited for the number of barrels so used. In this way we see the by-product of one branch of manufacturing becom- ing the material for another. Eancid and decayed nuts are also another form of waste found in this line of production and proper rec- ords should therefore be kept in order to help in exer- cising control over this source of wasted profits. In worsted mills waste occurs almost at the start. Shrinkage takes place from the time the vendor weighs the yarn in a damp room until the time when it is bone dried. On dry, clear days this shrinkage loss in drying will be about six per cent of the weight, and on a rainy day eight per cent. In the dyeing process the yarn will first lose approximately three per cent of its own weight, and then gain weight because of the dyes used. This is especially true of black, blue, or brown dyed yarn. Another five per cent is wasted in dressing, weaving, and finishing, of which only about one-fifth of the original cost is redeemable. The extent of this loss is quite considerable when we appreciate the fact that the yam is worth approximately eighty cents a 164 SHOP EXPENSE ANALYSIS pound. Still another waste is incurred because of holes, mispicks, and bad and uneven threads which cannot be repaired by the sewers. Samples used by salesmen or given away through other mediums by the mill are like- wise a source of loss, credit for which should be given to the mill and debit made as a part of the sales ex- pense. Losses incurred by stealing were so extensive in a plant engaged in the manufacture of gasolene engines that it was found at the end of one year that enough parts for 125 complete engines had disappeared. The importance of controlling these forms of material waste is evident. Of equal, if not greater importance than material waste is time waste. Time waste may be arbitrarily divided into two distinct classes : direct time waste and efficiency waste. Under the former we would place the time lost by the workmen while waiting for work to be assigned to them when paid on a straight day-work wage basis; the time lost in educating new workmen; the defective work and errors ; and the time waste in- curred where break-downs occur in the transmission system of the factory or where the power is cut off while needed. Under *' efficiency waste" would be charged the loss of time incurred where, through poor routing of jobs, a machine has to be set up first for a certain operation, then broken down for a different operation and then set up again for an operation similar to the first one, etc, when by proper routing and scheduling the same kinds of operations could have been worked succes- sively by the same machine tooL Efficiency waste would also include the time lost by workmen in reporting the time of starting and finishing every job to which they WASTE IN MANUFACTURING 165 are assigned to the time clerk of their department, or in stamping their time tickets at some centrally located time clock. The amount of time so wasted can readily be appreciated if we consider, for example, a small fac- tory of only 100 employees changing jobs on an aver- age of five times a day. The time consumed by the workman in going to the time clerk or time clock at the start and completion of each of these jobs would amount to at least 2 minutes for each job, making in all a total of 10 minutes per day lost by each workman. Extending this time loss for 100 workmen for a year of 300 working days, we find that it amounts to 5,000 hours, which if figured at a nominal rate of 25 cents per hour is equivalent to a direct loss of $1,250. This same ratio, when applied to plants employing thousands of operatives, increases this loss in correspondingly greater proportions. Still another form of waste coming under this classi- fication is that caused by a low production because of lack of incentive through the wage payment plan in force. Where workmen are paid at a straight rate per hour, with no inducement in the form of increased wages through bonuses or piece-work premiums for in- creased production, it necessarily follows that a shop run on this plan cannot show a daily output corre- sponding to that of the plant using one or another of the modern wage payment schemes. It is a matter of record that men paid at a straight rate per hour do not work, on an average, at more than 60 per cent of what would be their normal speed under an incentive wage scheme ; and so we find a medium of waste of vital im- portance to the management where the study of the wage question has not been considered in its true sig- nificance to ultimate costs. 166 SHOP EXPENSE ANALYSIS Finally, under this classification of "efficiency waste," we come to the question of motion studies. Taylor, who applied the principles of motion studies at the plant of the Midvale Steel Company a number of years ago, established certain laws relating to the speeds at which machines should be run for different classes of work in order to secure the maximum amount of production in a given period of time. Later he carried this analysis still further to a study of human motions, and conclusively proved that the output of al- most any machine could be increased by a systematic study of the motions of the workman operating that machine. By a system of instruction cards, which Taylor originated and which are now being followed in many of our manufacturing establishments, the workmen are supplied with instructions as to the method which they are to pursue and the motions which they are to go through, so that the greatest possible amount of production may result from a minimum ex- penditure of effort. The work begun by Taylor at the Midvale Steel Com- pany and later expanded and perfected by him at the plant of the Tabor Manufacturing Company, laid the groundwork for the application of these principles in present-day manufacturing methods. That organized labor, harboring the impression that a standardization of human motions would tend to make workmen sim- ply automatons, has fought the introduction of mo- tion studies into our industrial scheme, has been short- sighted. The history of industrial development clearly shows that wherever greater perfection has been pos- sible, either through mechanical or other means, the then existing methods have been discarded for the more efficient ones. WASTE IN MANUFACTUKIFG 167 It seems therefore to be a foregone conclusion, in view of the fact that since the introduction of motion studies where the methods as advocated by Mr. Taylor have been correctly applied, and where increased pro- duction and corresponding increase in economy of manufacture has been made possible through the stand- ardization of human motions, that the opposition of organized labor will eventually have to give way, if simply for no other reason than that motion study makes possible a conservation of human energy in ex- actly the same manner as that which takes place where an automatic machine supplants the hand method of manufacture. Mr. W. E. Whitney, of the Naval Consulting Board, writing on the subject of "Modern Scientific Meth- ods," recently stated that "scientific management is substantially identical in its economic purpose and net results with the use of automatic machinery. Both aim to reduce the amount and fatigue of manual labor by increasing its efficiency ; and both result in decreas- ing the cost of production and raising the standard of living. Severe discipline, driving methods and un- fair bonuses are characteristics of individuals and not of the system. In fighting efficiency, labor is mistak- enly fighting its own best interests." That time waste can be eliminated by a standardiza- tion of operating motions has been conclusively proven in many cases. For example, at the plant of the Pack- ard Motor Car Company, employing over ten thousand operatives, seven-eighths of the machine workers and assemblers are working under the bonus or premium system of wage payment based on standards estab- lished by time and motion studies. At this plant the average premium at the time of this writing amounts to 168 SHOP EXPENSE ANALYSIS 25 per cent of the day wages which the workmen would have received had this system not been inaugurated. That is, the average has been increased 27 per cent and has resulted in increased output, increased working force due to the increased bonus obtainable, and a con- siderable shortening of the hours of labor. Mr. F. F. Beall, vice-president of the company, recently stated that the stop watch and time study method has saved the employees of his company many unnecessary move- ments, and has correspondingly reduced the physical and mental fatigue from that under the old day work wage rate method. Another concrete illustration of the results possible through motion studies was found in the plant of a paper-box manufacturing firm, who stated that after two and a half years of operation under this method the benefits derived by their employees were repre- sented by an average increase of 15 per cent in wages, a reduction of 10 per cent in working hours, and a feel- ing of greater confidence on the part of the workmen because the tasks set by means of a scientific study of their work were found to have been accurate. A recent test at this plant on machines producing 85 per cent of the output showed that the difference between the time allowed for 2,000 hours of work and the time actu- ally consumed on this work amount to less than three- quarters of an hour. The contention of opponents of motion studies has been that the individuality of the workman is lessened, if not entirely taken away from him. Experience to date, however, has shown that the reverse has actually taken place. That we have not as yet reached the point where we can feel reasonably assured that we have definitely established all of the laws of fatigue, and while we WASTE IN MANUFACTUEINQ 169 should not be too hasty in accepting as established facts each and every hypothesis which is advanced by even the advocates of this method of industrial econ- omy, it would seem reasonable to accept as an estab- lished fact the laws laid down by Mr. Taylor. That scientific management embraces a much wider field than that of motion studies should not be forgotten. From the viewpoint of waste, however, we are vitally inter- ested in the standardization of human motions as a medium of eliminating, to a great extent, waste which existed under the old regime. Coming now to the third and last of the three main divisions of waste, let us now analyze the various kinds of waste which cannot be charged directly either to material or to time waste, and which we have classified as * * miscellaneous waste. ' * Wherever time or material waste occurs, a third or indirect form of waste is also incurred. For example, where material waste occurs because stock has had to be junked or disposed of by reason of obsolescence or overstocking, we find indirect forms of waste incurred through interest charges on the stock which has been so disposed of, through rent expense chargeable on the basis of the floor space which has been occupied by the stock, through insurance and taxes, through administrative and stock-room expense incurred during the time that the material has been stored, and through the depreciation of stock-room fix- tures, material conveyors, containers, etc., used in con- nection therewith ; all of which charges represent waste in exactly the same form as though they could have been individually allocated. Other illustrations of in- direct waste are those incurred through power waste, and through needless breakage of dies or other tools, because of carelessness on the part of the workmen 170 SHOP EXPENSE ANALYSIS or because of lack of proper instrxictioiis as to their use from the management. From the foregoing analysis of some of the main elements of indirect waste it will be readily seen that they are of equal importance and worthy of just as careful diagnosis and study as those forms of waste which can be charged directly against material or time. It will be remembered that in the construction of a shop cost we find three elements represented by pro- ductive labor, raw material, and overhead expense. All forms of waste in their final analysis become part of the charges included in this third and most important element of costs known as '^ overhead expense." It is of paramount importance that the student of this ques- tion should thoroughly understand that there is no get- ting away from the losses incurred by either labor or material. These charges for waste will eventually find their way into and become a part of the overhead ex- pense; and as this expense is eventually segregated into labor expense and material expense, as explained in detail in an earlier chapter, and is charged back to productive labor or material directly in the final sum- mary of costs, it is of vital importance that the differ- ent forms of waste be curtailed at their source. Chapteb XI GEAPHIC DETEEMINATION OF COSTS ^T^HE proper control of manufacturing expense can -■■ be best attained through a comprehensive system of statistics which, when compiled at periodic intervals, will reflect the true condition either of the shop as a whole or of any part thereof. There is probably no better way of presenting these data than by the graphic method. By plotting the units of time, money, volume of output, etc., on cross- section paper, a much better comparison can be made than is possible where the information is contained in numer- ous typewritten reports embodying a mass of figures. From the standpoint of manufacturing expense analysis, probably the first of these charts should show a comparison of the shop payroll as segregated into productive and non-productive labor. By referring to Chart IX it will be noted that the average monthly payroll amounted to about $30,000, divided into ap- proximately $20,000 for productive labor and $10,000 for non-productive labor. A closer examination of this chart will show in the month of January, for example, that with a productive labor payroll of $21,500, the non-productive labor for the same period was $10,000. In the month of March, 171 78tO0O 7(^000 esiPOo eiiooo 55000 50,000 4AO00 S 40000 ; -■ . ' : ■ • ,,, i\ \ / \ 3SbO00 3QD00 45.000 20.000 15^000 ^ } "N 122 \ / \ 1 ^ / V % s J \ Pro^ f \ Z \ S -^ / \ \ y^ .^ .Ataiw lf»-a tp\ elai 2C^ x^ ■^^ ■^ 5,000 «^"^ 4 t flj c C MX * •% u. : < 4Q0OO _) -1 O SStOOO o 30.000 25P00 2Q000' iStOOO J0.0OO £>POO 3 J \ r>/ \ A / / 4'/ Vv? m 1 » .// \\ \ ik An i — -aV --y / \ --- h k ^ / i/ \ f iece I J Parts' u Ovei 'head I Expe fse Pr V oduci ^ive Li •3bor \ s^ ^^ 4 s // s / \ > ^ / > '6>y 7 -> -.«_ ,-' -.^>? Pjy t^^"^ > .^* ^v ^«*"' onrt •— — , *■**"» .'"I^ /9ce """ .•••^' .MONTHS ^^f'» 5 CHAKT XII. COMPARISON OP MERCHANDISE MANUFACTURED TO THE TOTAL OF THE SHOP OUTPUT The cost of meFchandke maniifactured is further analyzed into raw mat^ial, productive labor, and overhead expense 177 178 SHOP EXPENSE ANALYSIS ing off in production, or on others that may show too much of an increase — an increase which might possibly have a disastrous effect on other more remunerative classes of output. Chart XII is a comparison of the merchandise manu- factured to the total output of the shop. It should be remembered at this point that the cost of any article manufactured in the shop is made up of the raw ma- terial, productive labor and manufacturing expense chargeable thereto. The sum of these three would be the cost of the merchandise manufactured, but it would not reflect the cost of the merchandise when completely assembled and delivered by the shop to the warehouses or stock rooms of the company. This is due to the fact that in most manufacturing plants a certain num- ber of parts are purchased from outside sources and are assembled with the goods manufactured in the shop as part of the finished apparatus, or its equivalent. It is therefore necessary to show the amount of such piece parts used during any month in order to arrive at the total cost of the manufactured product. This can be shown quite clearly by plotting curves, similar to those shown on Chart XII, where we may find, first, a total of the merchandise manufactured by the shop during any month, and then, with the addition of piece parts used, the total cost of the shop output for the month under consideration. A detailed study of this form of analyzing costs will show that it has many good features from an ex- ecutive point of view ; as, for example, if the purpose of the management were eventually to manufacture every part used in the finished product, the progress made in this direction could be instantly seen on a chart of this kind. GRAPHIC COST STATISTICS 179 Chart XIII shows in a very comprehensive manner, first, an analysis of the productive labor payroll be- tween day-work and piece-work labor respectively, and also a comparison of the equivalent number of pro- ductive employees as segregated by day-work and piece-work employees. The particular value of a du- plex chart of this kind lies in the fact that it will show at a glance the exact status of the labor situation, and is SD arranged that abnormal conditions will be easily reflected. If we compare the month of April with the month of January, for example, a close study of Chart XIII- A will show that while the productive labor payroll has increased considerably for the month of April, the increase is due entirely to piece-work labor. Now, by referring to Chart XIII-B, it will be seen that the piece- work employees for the month of April were exactly the same as for the month of January. This would indicate on its face that the operatives on piece work were earning more in the month of April than in the month of January. In other words, it would show that the output per piece-work employee had increased con- siderably, indicating a very healthy condition. Ee- ferring again to Chart XIII- A, it will be seen that in the months of November and December the piece-work labor payroll has overlapped the day-work labor pay- roll to a considerable degree. Eeferring to Chart XIII-B, we find in these same months of November and December, that there were 25 fewer piece-work employees during each month than in the month of January, and that there were between 50 and 85 fewer day work employees than in the month of January. This would indicate on its face that while the total number of productive employees had dropped from < W-><ozD HONTHS JLnmsss. chart xiii. (a) comparison of day-work and piece-work labor payroll to total productive wages (b) COMPARISON OF DAY-WORK AND PIECE-WORK EMPLOYEES TO TOTAL PRODUCTIVE EMPLOYEES 180 75,000 70.000 65,000 ^, 60.000 Q 55000 V 50,000 450 SO ^r:=^^ J\ -5 'JiLJ Vi. V ^^ -f v- 03 q: bj < UJ > z: u -> -J MONTHS i3 § g o z o NXFickcr CHART XIV. COMPARISON OF TOTAL WORTH OF MERCHAN- DISE PRODUCED TO THE PRODUCT PER EMPLOYEE 181 182 SHOP EXPENSE ANALYSIS 225 in January to 120 in December, the actual payroll of these employees had decreased very slightly, as shown by Chart XIII-A. The conclusion to be derived from a study of these curves is that a much greater output per employee has resulted because of the increase in piece-work labor; and hence a very healthy condition is reflected because of the increase in earnings of the majority of the em- ployees and also because of the benefit to the manage- ment through increased production. A chart of this kind when used by the management of a factory will show very clearly conditions just as they exist and also the progress that is being made either to improve or to remedy existing conditions. The chart that we have just analyzed indicates that the management in this case should encourage the fur- ther extension of piece-work labor instead of day-work labor, as it has been conclusively demonstrated in this factory that when the employees are put on piece work, not only do they improve their own earning power, but also they produce an increased efficiency with its corresponding saving to the factory as a whole. Chart XIV is a comparison of the merchandise pro- duced for different periods to the number of produc- tive employees required to do the producing. The unit of measurement in this case is "the production value per employee." This chart supplements Chart XIII, and shows the result of the extension of piece work during the latter part of the year in the factory under consideration. A study of the curve representing the "value of product per employee" will show how very marked was its increase. For example, in the month of January this "product per employee" was less than $250; while at the end of the year, in the month of GRAPHIC COST STATISTICS 183 December, the output had been increased to $425 per employee. It should be remembered, of course, that a chart of this kind is of value only when an approximately stand- ard line of manufacturing work is being done. It would not give a good basis of comparison under condi- tions where the value of the material used in manufac- tujing advanced considerably in price, or where an entirely new line of work might be introduced. This latter condition may be illustrated by consid- ering a factory making cheap jewelry where the only precious metals used were employed just in plating. If the management of the factory, however, should suddenly decide to go into the manufacture of solid silver or solid gold trinkets, the "value of the product per employee" would naturally increase very materi- ally; and hence a chart of this kind would not reflect the true condition for comparative purposes. While such a situation as this is entirely within the range of possibility, as a general rule, however, the chart which the writer has drawn up, or a similar one, should prove of real value from an administrative standpoint under the average manufacturing conditions. Chart XV is a comparison of the productive labor to the manufacturing expense for different periods. The red line on the upper set of curves indicates the ex- pense, and the black line the productive labor. By plotting the totals for these two elements of cost in this way, any abnormal increases or decreases in manu- facturing expense will be clearly reflected, and a cor- responding signal of danger indicated to the manage- ment. From the analysis of manufacturing expense in the preceding chapters, we have found that this expense is PER CENT OVERHEAD EXPENSE OF PRODUCTIVE LABOR 100 106 125 104 III 95 90 106 107 87 100 96 35,000 52,500 30,000 27,500 CHART \5-A Tofal Productive Labor 1 \ 25,000 22,500 '"-i./ A i v / \ / \ / / / \\ t m \ I \ (0 < 20,000 s / r / \ Si f\ ■^^^ r \\ V X \ ^^ ". 1 '"x,^_^ / w y _i O 17.500 15,000 12,500 ^ f r< ■>fal Overh pense ead_ s /" ' CHART 15-B 1 1 — 1 7,500 5,000 2^00 / ffer —Adr V- —/■ // 1. ■ ■ ■■ Fix edCh ■irges vMat erial tense :±i 7^. ±:i ^ ^ •*-\ 7^- Ts vmt ::< ^^^bofZ ^ j!£iiV ■» i^.^ t •i FEB. MAR. APR. MAY JUNE JULY AUO SEPT OCT NOV- 5 3 MONTHS NT. FiCKER CHART XV. (a) compaeison of productive labor to manufacturing EXPENSE (b) analysis of manufacturing expense into expenses for power, rent, tool, administration, ma- terial, fixed charges, and idle labor 184 GRAPHIC COST STATISTICS 185 made up of a certain number of sub-divisions which have clear-cut lines of distinction between them. For example, all manufacturing expense was segregated into shop administrative expense, rent expense, tool ex- pense, material expense, idle labor expense, and fixed charges, the latter term being used to designate de- preciation, insurance, and taxes. Knowing, then, that anj. abnormal increase in the total manufacturing ex- pense must be due to increases in some one or more of these sub-divisions, it becomes necessary, therefore, to allocate this expense according to these sub-di- visions, so that the necessary effort may be expended to control the expense of those divisions which may be re- sponsible for the total increase in the manufacturing expense for any period. This has been done on Chart XV as indicated by the curves marked (B), where the charges against the dif- ferent divisions of manufacturing expense have been plotted as separate curves, month by month. Refer- ring to the upper curves, marked (A), which represent the totals for manufacturing expense and productive labor, we find that in the month of January the manu- facturing expense was 100 per cent of the productive labor. In the month of March we find that the expense is practically equivalent to that of the month of Janu- ary, while the productive labor has fallen off consider- ably. In order, therefore, to find where an increase in expense, or its equivalent, has occurred, we refer to curves (B) for that month. Here we find a slight in- crease in power expense and material expense over the month of January; and we also find that other divi- sions, such as tool expense and idle labor expense, have not decreased proportionately to the decrease in the productive labor. Again, in the month of April we find 186 SHOP EXPENSE ANALYSIS that wliile the productive labor has increased consider- ably over that in the month of January, the manufac- turing expense, which should have been less or at least not more than 100 per cent of the productive labor for that period, has increased to 104 per cent. This in- crease is very easily discovered by referring to the analysis shown by (B), which indicates that there is a decided peak in tool expense. This might possibly be due to excessive repairs to machinery or to tools dur- ing that month, or possibly to damage to the machine or tool equipment in some way or other. Whatever the cause may be, however, is a matter of simple analysis of the charges made to the one or more divi- sions of expense showing an increase. The responsibil- ity for such increases, therefore, can be placed by a simple set of curves plotted in this manner. Still another advantage of this method of expense .analysis is that of reflecting increases in some one or more of these different classes of expense, even when the total manufacturing expense for that period is well within normal limits. This is forcibly illustrated by examining the month of July, where we find the total manufacturing expense to be only 90 per cent of the productive labor, and where, if an analysis were not made in the manner here outlined or in some other similar way, the management would naturally feel sat- isfied that the manufacturing expense was being kept within the required limits. An examination of Chart XV-B, however, will show that a very decided increase in material expense occurred in the month of July, due probably to a large amount of defective work. With this indication of something wrong, the proper means can be applied to remedy the situation, and the ex- pense may be even further reduced to its proper level. GRAPHIC COST STATISTICS 187 Chart XVI is a companion chart to Chart XY. The difference between the two is simply one of construc- tion. Chart XVI is called a constructive graphic analysis and differs from Chart XV in that each set of curves is plotted by using the point of the curve pre- ceding it for that month as the zero point instead of having these curves overlap each other as in Chart XY-B. The method of constructing these curves is to plot from the zero line any one of the divisions of manufacturing expense. In this case tool expense was first plotted; after which the curve for fixed charges was then plotted by using the tool expense curve as a starting point for each month. In the same way power expense was plotted by using the fixed charges curve as a starting or zero point in each month. Administra- tive expense, rent expense, idle labor expense, and ma- terial expense were also plotted in like manner ; and in this way the top curve is indicative of the total manu- facturing expense for any period. A productive labor curve has also been plotted in black on this chart, so as to show how these two total curves coincide with the curves shown on Chart XV- A. It will be noted that none of the expense curves overlap as they do in Chart XV-B ; and the space between the curves is indicative of the charges against the various divisions of expense, rather than the peaks as in Chart XV-B. Each square designates $2,500, which is exactly the same basis as that used in Chart XV. This method of constructive graphic analysis is espe- cially valuable where a large number of curves have to be drawn, and where they would not be easily distin- guishable if they were all plotted from the same zero point, as in Chart XV-B. Where only a few curves are employed, however, the writer believes that the 55,000 ' 32,500 30.000 27500 25,000 22,500 < 20,000 g 17500 1 5.000 12,500 J \ j \ ii ^ / i// \ L \ V / H ^ "N.^-^ ibor ^ r \ ^ t^ f/ . N \M 'sT^ ^ \ / 7- A^ \ \ // ^^ '^>> \ ■:; V / 7 V \ /a -, \ / V / y NA \ ' ay"^ y \ / 10.000 7500 5,000 2,500 \ w- ?^\1 4^L^ k /, \' f ^ ^ / .^ >'-"C ^ V \ // V J / \ -<3 ^ ^t y V \ / k f V /^ \ / >• J 1 \ r • FEB. MAR e ^ 1 i § fc" (: i t ^ ^ ^ \i 't MONTHS > o u > c c n.T. FtcKElt. CHART XVI. CONSTRUCTIVE GRAPHIC ANALYSIS OF MANU- FACTURING EXPENSE Each successive expense line is plotted by using the preceding expense point for that month as zero Red Imes denote expense items. Black lines denote productive labor 188 WQNTHS Kt-fJCKEIj CHART XVII. DEPARTMENTAL COMPARISON OF OVERHEAD EXPENSE TO PRODUCTIVE LABOR AT THE SAME PERIODS B.ed lines denote overhead. Black lin^ denote productive labor 189 190 SHOP EXPENSE ANALYSIS constructive method, as indicated by Chart XVI, does not reflect variations quite so clearly as when these curves are plotted as in Chart XV-B. The constructive method is employed by a large number of manufactur- ing concerns, however, who have found it especially valuable in their analysis work. Chart XVII shows a further analysis of the produc- tive labor and manufacturing expense by departments of the shop, and is used as a supplementary analysis of the figures indicated by Charts XV and XVI. Any abnormal variations in expense or productive labor will be very apparent from an inspection of curves drawn in this way. For example: Under approxi- mately normal working conditions, a decrease in the amount of productive labor should show a descending curve in the manufacturing expense for that period. If this expense should remain stationary or even possibly show an increase, it would immediately be a signal for investigation. It is a comparatively simple matter to inaugurate the necessary means for controlling abnormal condi- tions when they are once indicated. In order to do this, however, it is necessary to know when and where the causes of trouble have occurred; and, therefore, the greater the extent to which analysis of the kind here indicated can be carried, the greater will be the corresponding value resulting from the exercising of proper control over these leakages of profit. Chart XVIII is known as the ''Current Variation Chart" and is used to indicate the amount of allow- able monthly manufacturing expense for different de- grees of shop activity. Chart IV, in Chapter VIII, somewhat similar to the one here shown, was drawn to establish the fact that the manufacturing expense GKAPHIC COST STATISTICS 191 increased proportionately as the activity of the shop decreased below normal activity. This was due, as there explained, to the fact that a considerable por- tion of the manufacturing expense was made up of what the writer called ''constant expense," which did not decrease even when the shop was operating at the very lowest point. This was due to such constant charges as rent, depreciation, insurance, taxes, and up- keep expense, which had to be carried on even if the plant employed only one man. The principle estab- lished by Chart IV was that as the activity of the shop fell below normal, the costs of production increased because of the fact that they had to absorb all of the constant expense which had previously been spread over a larger output. In Chart XVIII this constant expense is indicated by the line B-B', which shows that the monthly constant expense is $10,000. The variable expense, which is made up of all expenses other than constant shop expenses, is the difference between the constant expense and the allowable monthly manufac- turing expense for any period. This variable expense, as will be seen, increases in direct proportion to the increase in activity of the shop. A careful study of the relation of these two curves will show that of the total manufacturing expense in- curred for any month, there is only a certain portion thereof which can be controlled by the factory manage- ment. This controllable expense is what has herein been denoted as variable expense. It is unnecessary at this point to enter into a discussion of the recom- mendation made in Chapter VIII, that the shop or- ganization should be charged with only that proportion of the constant expense which the current activity bears to the normal activity; but the intention, how- msoo 35,000 '52,500 30,000 S7.500 25j000 a 22.500 § 21,500 J 20,000 H '7,500 u § 15,000 CC Cl t5;,50O laooo tsoo 5P0O 2500 ■ ; " . . / 1 / . / / A Normal -B' , ■ W 1-' pensey .vJL 4\ 1^ 1^ ■ ,;<^ f It 1^ / C Co. ist'an 'Exp? ■»s« B rVifn ■jbleE (pertst (Noiwt 1^ •o o' o o o o- o o e o c OOOOOOOQQKc •O. Q »0 0», •a Pt «> Q «0 o u M iff I-- o of wT !<■ o N i». r> OVERHEAP EXPEMSE.pOUAftS NXFicK > a CHART XVIII. CUERENT VARIATION CHART Assume the normal yearly productive labor is $258,000, and the normal yearly overhead expense is $258,000, or 100 per cent; then the normal monthly productive labor and overhead is $21,500 each. Assume also that the constant expense is $120,000 yearly, or $10,000 monthly; then the normal monthly variable expense will be $11,500; and,|therefore, for every dollar of productive labor incurred monthly, there wiU be $0,535 variable expense incurred. Hence, the current expense for any month will equal 0.535(x) + $10,000, in which (x) represents current productive labor. Productive labor is used in this chart as indicative of shop activity. To be theoretically correct, "productive hours" should be used instead of "productive labor" 192 37.500 35,000 32,500 . 50,000 CHART 19-B 27,500 25,000 22,500 2 20.000 < ^ 17,500 a 1 5,000 12.500 10,000 7,500 5/500 yoo 1 1 1 1 YO^/^l Prnrlijr.l-'iMP 1 nhnr Total Overh ead Ex pense / . \ A w y k V / 7 >>^ ^ ^^ M\ ^ 1 7^-' / ^ MIowa tile Oy erhea i Exp ?/75«'\ ■'/ / \ J i \ \ \J ,y X— ' vS \ ^ \ \ \ \ ^ ■^ ^r ' < 'onsfanf Oyerhead Exp ! . . J 1 inse- y^ \ \ Ach al Ya Ex.pe riable nse CHA \i 1 9-A 2 - < FEB. MAR. APR. MAY f JUNE X *"JULY AUG. SEPT OCT NOV 5 J NIFte/ren CHART XIX. Above: Comparison of actual overhead exi)ense to allowable expense for different degrees of shop activity. (Activity is here represented by productive labor) Below: Comparison of actual variable or controllable expenee with variable expense allowable by Chart XVIII 193 194 SHOP EXPENSE ANALYSIS ever, is to illustrate forcibly tlie fact that it is not pos- sible for the shop administration to reduce expenses beyond a certain point, this point being the total for constant expense. Chart XIX is composed of two sets of curves. The lower set, A, is made up of three separate curves, one of which is a straight line and represents the constant expense referred to in the preceding paragraph. The other solid red line is drawn to indicate the difference between the total manufacturing expense for any month and the constant expense for the same month, or in other words, it shows the controllable variable expense. In this way the total manufacturing expense, as in- dicated by the solid red line in the upper set of curves, B, is split up each month between constant and all other manufacturing expense charges. This is done in order to indicate to the management the amount of manufacturing expense which they could actually control at any time. Using *' productive labor," charted in black, as a measurement of shop activity, and referring again to Chart XVIII, it will be seen that for the amount of productive labor shown for any month a corresponding allowable manufacturing or overhead expense for that degree of activity is established. For example : In the month of January, when the productive labor of the shop was $21,500, the shop was running at normal, as indicated by the line A-0 on Chart XVIII. It will also be seen that the manufacturing expense for the month of January was also $21,500 and agreed with the normal expense in- dicated by the line 0-F. Therefore, by referring again to Chart XIX-B, it will be found that in the month of January the manufacturing expense and the produc- GRAPHIC COST STATISTICS 195 tive labor coincided. In the month of February, how- ever, the productive labor had dropped to $17,750, and the manufacturing expense had dropped to $18,750, as indicated by the solid red line in this chart. In order to ascertain, therefore, whether or not this manufac- turing expense was well within the allowable limits, we turn back again to Chart XVIII, which shows that for a shop activity represented by $17,750, the allowable expense is $19,506; so that the actual manufacturing expense which has been incurred for the month of Feb- ruary is $750 less than that allowed by Chart XVIII. In other words, it reJBiects efficient shop management. In the month of April, however, we find that the pro- ductive labor of the shop has increased to $24,000, and that the manufacturing expense has jumped to $25,000. Following the same procedure, we find from Chart XVIII that for a shop activity represented by a pro- ductive labor of $24,000, the manufacturing expense should have been only $22,840. In other words, the manufacturing expense for the month of April is $2,160 in excess of what it should be. The dotted red line in Chart XIX-A indicates this allowable variable expense for any month as compared with the total variable ex- pense incurred during that period. It is of paramount importance to understand this principle of constant and fluctuating expenses of the shop thoroughly; and also to realize that there is a relation more or less fixed between the activity of the shop and the amount of expense which it is permissible to incur for any period of activity. The cur\^es which the writer has brought out in Chart XIX are original so far as he is aware. He has been forced of neces- sity at various times to allocate manufacturing ex- pense in such a way as to demonstrate conclusively to J 5 ro/?!^ To/aJ Square Feet oi' Floor' Space Unoc cup'ied Sp ace / N^^ xo ^ .^ ^ N ^cfce ,y ^ y / x^ / y M 7nuf acta. nng Sf>ac 9 ^ ^ — Mat er'iat Sf>c ce 10.000 Scf.Ft Miscellaneous ^ ^paci ■ office Space' J 1 a < • i I 6 c ti < k 3 i i z * «2=^ ->t^t-'-ICOO5 •* o> IN to oo 00 CJ >a to (Ne0Cq>-HOt^T-lc 00 1H la © O t-OOW-'J'COCDOSINtxai to d r-tto t- e © us CO o °-R >^ i-HC0050050>OOOCO to IN 00 00 to 3 N CO Gr( Addit: Depre( Resei 19 O i-H t- CQ t^ 00 ■* CI CO to o •* into cq © °i rHC»t01> to" CO" t> ICC» m" © r." r>r 'l* CO in to to »» «© ss§§sgs^§§ ut ■* COtH © o O o © © IN ©•« © o o o us N us th ei th QO -*' >a r^ as r« d aii^ p- d d d «* M«>o»iH^Naiw©eo r» Tl( S?*' SE e* U9««iH©as0OtO 99 «D r-_ i-H e*r» ®. © to «> sei^eO'* CO !» IN QOM iH p»- i-ItHiHtH © rH© GO 09 05, .S ae- i, ID i-icoootot>.-iiocoa3 ^ ^ W^ 00 CO N us m a P COiOmcD-^t^OINOO to l> t'O IN 1-1 >« © 00 gS ■*T-it>mcoo50scot>05 IC t> ©lO m © © us d fl.2 coa>tDooOT)( 05 >* 00 1 ■* (N 0> t> 1CI> O 00 CO to «>(NINCO iO to CO iHIN NO" o 00* ©■ « l^ 03 C3 S» IN to THIN © «@ ^ h-i+» o o gg^SS^SJSSS ^ lO »-l© tH 00 N us us QJ e 05 '*'*l CO iH US e © ^ cc^Mr»r«oo-*co(Dd N t^ ©N iH © » us r» as © fj « r» r» CO ■* e<9 o 00© © ^ N us w ©WNwe* cooo tH C ©us"©©' i-T M in ©■« M © r- ©- KH «»l-llHlH 03 *9^ r» © 1-1 2,-H (M «ot>i>o5aioiMio>ot^ t> o 050 Ol o O o 00 O 0000iO>l3tOO5tOCOT)tO5 00 lO to IN 00 o o o IS >n ioo)to-tOOOOt^iOiOtOtDOO CO 03 t»>n CO CO >rH- c woonoot-ot> to 00-* CO -P . CO OSOiOlNtOTt<* O"* m' CO t- TlOtOt»rH(MT-10505b- 00 ^ ^0. 00 o o o OS 1 05l>C<|T-l00-*OC0t0iO t-lOO(N-*t005NOO CO 1(5 CO mm dd o o o d o d IN d BJCO 1^^ co-*-*eotot-iM.-iTi o o o m d CO-*OOS Tjit- (M t~ o CO to ■3 . ■g comcocOfi-^cocO'*-* ■* lO dd l^ IN CO (N m § toocoio"5-Hu:ioo>-i lO 00 coco tO Tt< to Ttitj((MiM00Ttr-iin in to OiO 03 t^ 05 00 < t^Or-lt^lNiOININTHtO co- -*7-< m" I> to' in Q< ,-l-Ha>J>rHiHtO co ■*tD o ■* CO OS S> lO lO m to t> to Q m ^ § 2 (N ffii-HtOOO^iMtOQOIMrt -* to ^00 03 IN to IN ^ a tD-*C01>I>(NI>r-lC0O Tl< (N i-HOl o 1> o CO 00 IT c^ o o t^ to en "O u5 •* CO ■* d .-I03 ^ IN CO IN <3S «: •^t-THcoiMtooincoo 05 00 -HOO o T)< O OS o- C^NtOT-HOOi-HCOiONCO^ to CO 00-* CO t- ai o O l^» a !>'-!' too 03 010 in" o'l-J •* oo' mm r-T to 00 i> COI>(M->lli-l(Mrt(Mr-((N Tt< mo3 m -* CO OS CO « Q) 3 COC^dlN (N "* t> i> 00 t- ■* fe Q « > g & .. m 3 b o 1 1 •^ ^11 FC c c e I* dtE d P5 "5 1 5 ax 03 01 d -2 "o o § m 1 s^l 1 "3 a ll^ •^ 03 E ^ 1 ( 4 i a -8 Pk 03 CC o 1 Ph o 02 STANDAED EEPOETS 201 st> ^fl rati Q ^n^. :r 3^ O tH us © «* o •oo«o©Nao« •©(NOAMO T-< O Ca Oi t^ rH iH(N>OC0INC0 50 Tjl 00 «D 00 ■* ■-ilM_>0 ■* CO O ot^oTco C<5 ro M 2 r "-J.- total output has then been added the piece parts used during the year, these piece parts being parts made by the company in preceding years and carried in stock, or possibly piece parts pur- chased from other manufac- turers and used in the as- sembling of the finished product of the shop. The total of these two columns, "Total Output" and "Piece Parts Used," represents the total deliveries of the shop for the fiscal year. The term "Total Deliveries" as here used represents the total cost of all work performed during the year, and includes the cost of unfinished work in the shop at the end of the year. A study of this report will show that the manufactured product is first classified ac- cording to certain kinds of goods manufactured by the company, to which are then added * ' Other Merchandise ' ' and "Plant and Expense Groods Manufactured," re- spectively. Plant and Ex- pense Goods refers to the 202 SHOP EXPENSE ANALYSIS o (4 rH S '^ ^ fc^ a O g cu (D ^ r- 1 +3 O 02 g :? d ^3 !2; o C> ft ^ ^^ . I— I ^ O H w o •-5 o ^ 05 • •rteOOOi-KNOOOlMrH .■*( •«0 rH .00 •03IIMIC0 .« • rH o O . .Tt(rot~t>IMt>.-lCCO •■*! ;(N rH .ffi •c t~ o -o- •M -is (N • • oi d l> «0 OS lO lO ■*' CO '-^ •O rH ^03 \^ C*i CO 'C^ :§" a: •* • -t^rJlMINtOOincoO ■O' •00 rH .00 -c ■* rH -C >^- a cq . -(Ntq<-H^oOrHcoiq 03_ •C •03 8o ot t^ ; Ii-HCDoaToiocio'i-H' ;■* loo ir m •^ ' t> CD r- 'oo i> ■X) : .l>(N-*.-HINrt(MrH(N .■- .■* ir .03 .*in •^ CO . .t- oc i> :■- ^ fep ^ > '^1 .«© .«fS •s" Net Change in Face Values in 1916 a> •« •>*«oc^iNrt . • • ■^in H ■e 1H 00 e« :©"©" rH w'lO © :m 00 eo ^_ « •^ OS ;r. » .y-i .iHi-( . . . ^ 50 .^ ^S • •© © m •N « la © -r* :3 -a •;©;;;;;•;;■© 00 ;M eo © us ■© ^ : :■« : 1 : : '. : : I : ta © •OS OS W tH •© •'i • •© © ■ • r- r- ^ r. •© .■.■**■.■ r r .' c ;;;;**■ ." 1-i .la us © ^ •© • 'S l-Tl :« t a •'* 00 1 5 •N fj tK • •« •us CO •p» r» r, . .J* ;® 2 OS '• • 1-1 iH ■»«' • -00 •^' o © •«o US « • •iH •eo 02 © « ; •00 !oo 00 -* • •© .iH pS-.-, t ^etor-oocacc^!©© • • ihco »ce« •^ -THin "*0 sferred t from (1 r Ledge counts c co3T-iot»'«*>oao^© • • i^io ooo «se«co coi- w •i*cq ©(M *i>©r-i©r.r.QC©iH ■ • r-o os O tH t^rnU; an th ' e d ' Srt©t~QO^i»i»(or» • ■ oDoo aio^(Ne«©M ose* • • ©i> r- lO ©usoo ooiis © -i-t- iao3 i S in i^i^rH i-H'^ rH Mr»"Tjr TtH'^' eQ 'QOio I co' us_o_ ©"in Trans (a) or Othe Ac H T-l iHtH . . US 00 N as-so 00 03 i «■ . . «»■ (» s3Xl SJ2 c3 o3 !S ca S (S • • 03,^ OS J2 03 ^XllXt 03 ca •' is.n tSX2 - --^^— - ■ ' '—^ ^ -,^|-- , 2l '^-^ -^-' TS £ ^ . © © «K '^ •« OS»H 8« » © © es © N© 09 ansfer Othi W. E, House ^' r» ■g © 30 r» © odes © I' 00 eo eooo 1H eo © © r^ iH 00© N « «e r^" « '* oo" os" I-.-P » N ■« us « © H as- se- J^ • -(N • •O'-l • • i-l ■* • 30 00 r-i OOO c^ +5 c 13 . -lO • -lOcD ■ • O rH •< ■0 CO rH in(N o bi) c ■j" : -co • •CD*-*' • • ■*' «3 • m' im' CO COt>^ (> 3 o -t . .cCO CO e Sf . .irj • -corH • • o l^ •! -» l> ■* rH m : ! ; :«orH : : oo" ! . . . . » in !< 6 o «© ^" 03" CO 9^ c 3 lO Tjlco . .00 • ■ • o in * ■* 00 t>co t- (X 3 CO cot- . .N • • • lO y-i oq t>-o 00 13 a 3 irj lN.tO . -00 • • • to CO in © 0303 cq" c^ « 3 rH inO . .05 • • . CO a in CO oo U) S « 3 00 . .Qd . . . ^ • c 00 o coos (^ «^ ^ :::::« ^ |o oo" <£ (N •^ ! ; . . . ^ e© w CO in «© ID»0 (N a 3 CO O 00 OltO ■* t^ . lO 00 0>(N O ■* ■-H CO O ■* CO inc 03 03 inco ■* lO c ) CO CO tJ( rH 00 r-l(N .* CO «0 (m' de J> 1^ to n < 00 «OtDO-*l>rHCOO C^ (> oc » 03 M com CO >^- 05 c J^ lO oqcO(N CO 00 r^ (NC » rH <-^ 00-* CO . 00 cc > O CDOo"ocOr-<'o''-<' t> CO too o" in 1> t-'oo" 00 U o t~ t~ . 00 CO in (N(N i-H (M rH (N "0 t^ 000 C> ^ -p d c3 . ........ a v :^ 1 • d : '1 : % : >> : :::::::: 3 : :.:■::• -^ E i2 1 : : :s • -s 1 11 2§ PQ dOHEtidM -^ J g 9 Ml— I : J o :£ c3 ■5 1 c8 , ^ o I H 2 gcQ QQ Ph csoqC 5 1^5 o M c Q pmS STANDARD EEPOETS 203 a •c am OOt^ 1-H CO CO iOC CD05C0N (N i> l>COCD 00 CD CO tH CO O O ^ 1> lO i>TiHc;i ^' die cod to i> lOOCO 05 00 CO COO e3H fl ■TtH CD 05 05 (N 00 (N ,-1 00 IN 00 00 CD CO lr^-:tco^-*_ d~ 05 CO^O^(N^ io~T-r,-r CDl>OCOr-l l>(^f•rJ^~rHl^^ ^1^ C<) «3 05 CO 1-H CO ^ 00 10 COIN 00 (N CO rHC^ CO tH irao5CD CD (N coooo (NC0 05r-l (N 3 C ,— 1 05 T-H (m' CO IN "^ CO I— 1 !>. 02 00 CD o_^ CO THrf^THt^ lO o^Gq_io__ CO CDINCD^1> c3 cr t-T cco O5'~05'"i>rcgco § ■* -rti 05 tH ,-H ThiOTtI rjH ■* 05 ■* 10 CD SS N CO CD l>CDCO'-ll> m tH CO ^'^ IS o 00 CO 00 05 CO T-ia5(N (M 05rHl>lM r-I CD IN CO >0 -§ 05 00 ^ 00 looo^ 00 OIMOOO 00 ,-1005 (N OcDOOiO 1^ r-I O O CO (N 05t-(0 r-t O3C0T-fO5 CD d OO'^CO CD IN IN 06 (N (D t^ t^t^ CD t^ ^ (M CDOO nn 05 05Cqi^ C35(N001> 10 to •| i>rTjrod 05^ oT lO o CO Tti 1> CO (N 10" 00 COIN 10 (N r~,-j^ooo-^ OOIN (N"od" Oi § (N CD 05 rH T-H CO CO •* 00 IN -^INiOt^ 1— 1 CO ■ri 2 7-^ ,— I (M CO 1-1 10 T-H CO 00 05 ^ C5 ■^ t^ ■* lO CO t> cot> t> (NcDt-(CO CD 00 CDCDO IN ,-H ,-( coco d ^1 ^ >^ ;3 0050 o lO ,-110 05 CD l>C0(NO5 1> 05 (M^^iO IN tH 05 T-I ,-H -& IC CO CD »o lO OCO(N 05 (Mt-h doo T-l Tfi ICC0O5 o6i>^o6t-^d 3 (N O CD 05 lO 05 CD lO cD00»Ot^ 05 CD t^OOiO rH -rfl ,-H CO ^H Cri>ric (^ cT co~»o~ic (N l>^ oToTt-T Lo~-*'~co'orcd" s 05CD(N M CD 05 CO (M CD 05 rH ,-H r— 1 »0 g H ^ ,-r ,-riO,-H'~(N00 03 CO .2 "S t^ iC O (M 05 ,-( OCO T}^ (M»O00O 05 ^ 05000 l>(NC0O»O 0^ n coo5(ra CD (M CO lO o CO OO lO 05 lo 'co d OTtlC0 05 OOTjir-JcO (M05C0CD (N CO 05 ot^co (N "t-i CD (N ,-H 05 05 ,-H »0 tH im' r^^ d CO C0OINO,-H > 1 § 1> 05^05^ CD CD Tt< ■<* r-tr-lTHO °i. 1>;^ 10 05^ ■riH^ cq_ 10 o^t^ Deli (NrH(N 10 05 00 T-H (N T-H r-T ■* CO oT lO C0~O5~lN CDin" CDCOO0:^(N 10 10 r-ll>_Tjl r-T CO ,-r Cf CD o ^ i s 03 B T-H C^ "^ 1> to 00 CO o ,— 1 '^rH 05C0 IC (M ICCOOO 05 CO ■* CO tH >-3 •c rt<05(N lO CD 05005 05 t^OOlCQO (M (M CO ,-H 00 coooo (Nl>- ^ O5(M00 00COO5 1>OOIM_ ^ 00 101>CD d O IC tH lO 05 1>,-^-* CO 00 lO i>^Tt0 00 r-T tH lOOCjT T-H -^ ■* 05" CO (NoTcO g^oo O5"c0"lO 10 05 t>lO00CO5-; COIN r-llCOO §- ^ o S©^" c^' CO cooTin'^'O'* cd ,-H d Acces- ifactures. Co.Mfr.) ds Mfrd. 1916 . . . 1915 . . . ies igie. ies 1915. ^ ttl S : a 6 c an iseO e. . Goo put put iver iver C3 1 a 3 ■ t 1 S ,0. i .■^ c3 Lamps Lindry M erchand rchandis expense 1 hop Out hop Out bs Made hop Del hop Del 1 ft- -' c a iC '3S ill 1 CO C >-* 1 i1 11 5 t 5P& 1 a a a a 11 < i=> <0 02 .11 CO H TotalM Other Me Plant & I Total S Total S Piece Pan Total S Total S 204 SHOP EXPENSE ANALYSIS work performed in the shop during the course of the year for the use of the shop itself in the form of parts necessary for repairs to its own equipment, etc. Report No. 2-A is a supplement to Eeport No. 2 in that it shows the deliveries made by the shop during the year as divided between Work in Process, Piece Parts Completed, Special Apparatus, and Plant Ex- pense items. The totals against each of these divisions are naturally assessable against different accounts ; for it will readily be seen that it would not be good policy to credit all work whether completed or not into the same accounts. A careful analysis and study of this report will show, in the first place, the cost of the Work in Process as segregated according to Labor, Labor Expense, Material and Material Expense, shown by the columns so headed. For example, we find Work in Process, Account No. 30, debited with $2,522,449.15 ; Shop Deliveries Account credited with $1,093,968.34; and Shop Piece Parts Account credited with $1,428,- 480.81, the debits balancing with the credits, these parts being used thus far in the work in process. These fig- ures represent the cost of work in process at the end of the fiscal year. In like manner. Finished Merchan- dise Account No. 45 is debited with $2,146,612.04; Shop Deliveries Account is credited with $964,087.11; and Shop Piece Parts Account credited with $1,182,524.93. This same method is followed for the Special Appa- ratus Account and the Plant and Expense Goods Manu- factured, and also for the total shown for special work done for annexed plants. It will be found that the grand totals for all of the columns shown on this re- port and marked (a) agree with the total Shop De- liveries for the year 1916 as shown on the next to the last row of Report No. 2, also marked (a) . Report No. 2^A JOHN JONES MFG. CO., Inc. Summary of Regular Shop Transfers For Fiscal Year Ending November 30, 1916 The amounts in the column headed Total Deliveries are debited the fol- lowing accounts. Sec. No. Class 30 001 002 00.3 004 005 006 Work 007 in 008 Pro- 009 cess 010 Oil 012 013 014 015 016 017 018 019 020 021 022 45 000 001 075 O 150 <: 190 200 ■3 300 400 435 ^l>T-t » O»i-H(M00 00 Q ■*05 lO 000 1^ CD MiOO ro 00 cocoon CO TtHlO 00 i>«co CO CO OodcD «> CDiOCOt^Tii CO CO(M d CD«00 1—1 t^ A osriHt^coai »o -^co I— 1 t^soo (M T— 1 eo W l-ICOOO'-H '^ CO c^co T-H |o<^ oTTiruf 0' 1> l-H^TiTlOlO CD COt^" CD Jag t^r*--! (N (N I-HIM -* 05IM CO I— ( T— 1 1—1 1—1 m-g ^ Ot^O 1> 10 •oo»oo iCi t>o 1> S£? COO 10 00 1-1 1— ( t^O t^ •51 »>cdco CD d • d rfH t^ d tH do d 3 * 1=1—. T)HC0»O CO 00 •TfHC0O3Ttl c^ ^"■1 05 (NOrH -* CO •e0'-iO5»o cot^ CD~(NrH" oT ccT ci~(N" lO aw ^Tj< 10 CO CO i: m ^ CO 5 ;;; O Oi O ^ O5eoi> CO 10 ^I^t-H » esT-KMcoco 10 1>«S 00 ^ ^ 1>OSIO -# »o OS 100 r» QOO5 00(NCO Tt< COM5 ^ ^ 05»«10 05 00 ooc o> 9d oj as CO CO 10 (N oao (M c^ So- lOWC^ i> (N C*5 N TH Oi 1> r-J^O CD tJH CO q_ 0)3 eo«©co CO ^ TT ^ rfT r-T |1 P CO « OtHt-h CO (N i-KN Tt* COM Q S^ T— 1 i-\ o S Ph (N»01> TfH C COOJ>01> t^ QOO CO o o - ro (©00 CO >— 1 r-l cc^oo CO cooit^cooo t- cot- '*. 4=-S oioOW T-H id r)<'rjid Oi i>^ d (N d .-I 00 ■<*"d T-H CDOCO -*l CO (N (M GOt^l-^OOO (M coco i^s (N»OC0 I— 1 CO '^^ T-H 10 10 rH_(N <» (M rH -*^c» CO oTcCco <£ CO i-T T^ TdTioiooT 10" i-ToT r-T 0^ lOOCO CO-"** 05 000 05 02 O (£11> CO '^ 05 Oi ^^tH (N" (N of Anal- MFG. thMtH 1> IC 00 coo T— 1 •^ i-H oscoio (M lOcO T-I in '^CTXM IQ CO 02005 05 t^00»O00(N (N COi-H 10 "Sg oiiNOO d 06 idt^d d OiCi— 1 iOtJ* GO 1^-* T— 1 '^p> 00COO3 (M (M »-i IM C5t^i-H TjH CO lO CO 00 0(N 05 05 i-H T-H C^_ COt-h0 05_(N t^ GO-* CO XJl ga^ CO 0010 ^ ci CO .-HT#1> CO T— 1 CO 10 CO CO li^ ! » I ^ • gw vl : S" : fc o •g • ^ : H t-3 * xn p^ \i : 6 I • ■3 : : u. T 58 Is 00 1 o3 ;raph Apparatus, ature Lamps and otal , CO . ^ . Pi • o3 . Si ^^ 03 « § < 2 * » 1 1 0! 1 1 * pti 2 1 § 1 'I a 1 a Less Goods in Transit and Material held at Factories i 03 .3 i O O o . 1 ; '"a o" O ^3 a 1 ^ 6 p "^ cot- to 1-1 00005, weoio eD03?0t- O0O5_O0_ (MOOOi-H (NOOOIN »0 T-l CO eoioooc oocq_ tCcoeo i-HOiM CO CO CO »o POO0t-hC<1 Ol^OO coooT O 05 "O (N CO CO(NOOI>. t-OOlOlO CO 05C0 00 00l>_ t-Tooto oocoio O t-4 (MfOiCt- CD_CO_Oi_ -rlTcOt^ CO 05 lO t-cooco lOrH t- CO l-HC0-5j< (NOOOO CO00>O^ S'oToT CO CO CO eo CO CD 00 00 COOOcOt-^ (NOO'-HlM 05I>I> ?! CO I. OJ(MrHCO T-liOt>.(N 00 (NO coi>-* c4" w O"— • T-i O Oi ^ CO CO OOrH^O, O0O0I> lOrflO lONOO t^COO"5 r-( to 00 (M oq_ioeo_ Ot>00 cooO'^ iOt-H> OSICtHOO lOCOOS'-t •^(Mcq, to cOi-i i-H(Mrl< coco CO 05 lOi— I CO 1-1 coco 05_ TjT-^OO o ■gflHQQHPH 218 SHOP EXPENSE ANALYSIS it for manufacturing purposes. The latter can only be accomplished, of course, through the procuring of more business. In the opinion of the writer, this re- port, while of a very simple nature, is of immense value and should be compiled for the use of the management wherever possible. Eeport No. 10 is a comparative statement of the Manufacturing Expense for the fiscal years 1915 and 1916, as divided between the main shop of the company and its annex "A." Eeports of this kind should al- ways be made up in comparative form wherever pos- sible, as one year's figures in themselves do not serve the purpose for which a report of this kind is intended, that is, executive control. When arranged in compara- tive form, as in this report, excessive increases in any of the items of expense immediately become apparent ; and while in most cases they can in all probability be easily explained and justified, at least they serve the purpose of causing an investigation, and where ex- cesses are found to have been unwarranted, the neces- sary control can be exercised to reduce them. Eeport No. 11 is known as a Piece Work Percentage Eeport, in that it is intended to show the percentage of piece work being done in each department of the fac- tory. This percentage is determined on the basis of the total productive hours turned in on time tickets by the various departments. The total hours are first divided between expense hours and productive hours. The productive hours are then further subdivided between standard and premium piece-work hours, gang piece- work hours, and straight day-work. On this report the day-work hours are omitted. On examination of this report it will be seen that in only two departments of the factory is all work done on a piece-work basis. In Report No. 10 JOHN JONES MFG. CO., Inc. Statement of Expense of Manufacturing Department for Fiscal Years 1915 and 1916 Salaries, Administration Clerical Department Production Department Inspection Branch Manufacturing Branch Service and Maintenance Branch Belting Changes Defective Work or Errors Depreciation on Buildings Permanent Fixtures . . Machinery Small Tools Patterns Shop Fixtures Experiments Express Fuel for Power Plant Fuel, Other (except Gas) Gas Purchased Injuries (Inc. Legal and Med. Service) Insurance Inventory Expense Moving Expense. Postage Povrer Purchased Rent of Real Estate Repairs to Buildings Permanent Fixtures Machinery Small Tools Patterns Shop Fixtures Shop Worn Stock Shop Expense Materials Shop Expense Supplies Stationery Used Taxes Telephone Rentals and Calls Telegrams TraveUng Expenses Water Written Off Buildings . ..'. '..'.'.'.. Permanent Fixtures , Machinery SmaU Tools Patterns Shop Fixtures Unclassified Charges from other Departments Charges to Other Accounts Total, 1915 S15,263. 98,487 . 152,234. 54,730. 299,260. 112,869. 3,200. 69,144. 23,737 . 43,705. 33,356. 68,860. 67,751. 1,897. 20,655 . 2,920. 252. 56,215. 2,629 . 5,331. 3,728. 15,506. 4,682. 09 06 12 17 21 73 84 92 93 40 63 76 69 16 79 77 10 77 99 36 37 30 7,084. 21,236. 24,985 . 35,610. 73,722. 70,736. 641. 8,295. Total . 15,815. 55,677 . 18,679, 23,930 3,963 52 197 16,801 04 76 43 30 10 06 18 16 1,044. 5,111 138,407. 1,984. 2,831 , 49,975 51,123 136,113 $1,630,837.24 Total, 191G $10,059.08 65,486.36 82,950.67 25,932.68 128,004.26 82,307.24 "l'9',749!44 6,251.12 43,068.48 37,679 . 26 64,172.75 69,405.88 936.53 11,335.07 6,119.60 32.20 31,668.53 977.00 2,622.30 2,308.11 12,367 . 66 2,733 . 79 357.63 14.00 253.08 1,012.60 16,288.53 21,418.72 29,946.83 30,605.24 1,176.07 5,539 . 55 1.32 8,918.73 44,238.97 8,135.73 27,654.84 2,496.83 90.14 443.68 13,230.45 67.21 532.70 6,039 . 04 118,422.40 1,309.79 13,905.62 17,977.77 30,553.61 70,399.85 $860,996.01 Main Shop $9,671.66 63,079.50 81,950.43 25,932.68 114,375.06 77,410.85 "15,380 .53 5,772.79 30,489.58 26,109.35 43,158.00 73,369.36 915.51 13,550.33 6,119.50 32.20 27,554.27 588.42 2,207.30 2,165.60 10,455.57 2,633.49 357.63 14.00 253.08 711.08 12,513.30 18,998.94 24,408.69 30,360.68 1.176.07 5,290.47 1.32 8,888.81 43,640.03 8,028.72 19,650.87 2,461.16 89.57 430.64 13,020.65 56.79 540.77 5,686.88 122,010.55 1,298.78 13,953.10 17,249 . 13 25,592.77 66,563.35 Annex "A" Shop $758,100.05 $337.42 2,406.86 1,000.24 13,629 .'26 4,896.39 "2,655 .'21 478.33 3,396.30 2,749.75 6,096.22 2,863.38 11.01 1,054.21 4,114.26 388.58 415.00 142.51 902.80 100.30 87.08 893.83 2,258.23 5,538.14 244.56 "i33'58 ""29.92 598.94 107.01 2,295.08 35.67 .57 13.04 209.80 1.22 14.53 343 16 3,588.15 11.01 101.26 566.56 4,960.84 3,837 50 Annex "B" Shop >,313.70 9,182.60 8,820.16 14,918.53 171.05 1,009.29 214.34 2,881.40 161.55 115.50 5,708.89 9.20 6.45 162.08 $57,369.96 $45,526.00 STANDABD KEPOETS 219 Report No. 11 JOHN JONES MFG. CO., Inc. Piece Work Percentage Report Number Total Hours Expense Hours Prod. Hours Piece Work Stand and Premium Hours Gang Hours Total Hours %of Prod. Hours 101 102 103 104 105 106 107 108 109 , 110 Ill 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 Total Special Dbpabtmbnts Annealing Brass Foundry Lacquering Japanning Iron Working Inspection Plating Contract Tinsmith Tool Shop_ Stores Special Work Grand Total.... 16,926 11,944 16,357 20,856 36,725 2,672 6,748 2,751 24,817 35,930 47,955 7,244 1,453 38,046 5,861 15,685 18,575 19,585 13,141 927 11,908 13,550 57,408 16,721 16,881 11,728 750 6,244 9,466 11,243 61,142 4,799 1,083 3,449 3,552 3,027 353 1,073 4,400 5,444 7,309 955 183 1,087 778 874 3,869 6,065 1,251 157 828 1,064 3,313 4,906 966 1,433 '1,646 - 779 1,158 5,984 12,127 10,861 12,908 17,303 33,698 2,219 6,748 1,678 20,417 30,486 40,646 6,289 1,270 36,959 5,083 14,811 14,706 13,520 11,890 770 11,080 12,486 54,095 11,816 16,915 10,296 760 5,204 8,686 10,085 55,168 12,127 6,064 535 14,497 20,366 442 6,760 14,816 22,266 30,452 1,277 219 " 2,583 2 10,405 10,780 7,971 613 600 394 6,627 1,611 15,915 8,945 668 1,347 4,416 3,975 45,921 2,544 3,619 10,240 781 1,440 26 2,740 36,6 ig 210 13,071 16 9,595 1,696 44,701 178 3,181 2,536 12,127 8,608 4,164 14,497 30,606 1,223 5,760 1,440 14,810 22,266 30,478 4,017 219 36,019 2,793 13,073 10,406 10,780 7,971 629 10,195 2,090 51,328 1,689 15,915 8,945 668 1,347 7,597 6,511 46,921 661,137 71,178 489,959 261,378 132,593 383.971 100.0 79.2 32.2 83.7 90.8 55.1 86.2 86.8 72.5 73.3 74.9 63.9 17.3 97.4 55.0 88.4 70.8 79.8 67.1 68.8 92.1 16.8 94.9 14.2 100.0 87.0 89.2 26.8 87.3 65.1 83.2 78.9 2,126 1,010 7,144 18,225 7,873 123,517 13,811 610 2,876 38,764 33,782 28,691 238 567 3,480 10,710 529 29,642 747 242 2,079 36,395 32,305 1.271 1,888 443 3,664 7,515 7,344 93,875 13,064 368 797 2,359 1,477 27,420 115 226 982 1,082 29 333 1,439 132 5,193 115 358 6,175 1,082 29 333 1,439 6.1 4.8 6.5 8.3 1.2 22.7 5.3 839,556 189,383 650,173 257,138 137,918 395,056 60.6 220 SHOP EXPENSE ANALYSIS loco ooeo CO cot >o.eo 1 CO CO coco t^ ^ CO a s »0- OOOOOSOt I' ft a 8 >oeq-<#TH o l-HOSi-H CO C0 05 lOrH OOOiO co§ 3 I'' Sft ft" ' ^i .ss Qg' Q o. s? COlNdOOO •a os Ph s> Q S-^Q O<©C0»CiO 1005 coi-Hi-ieokCi OOCH M CO ■* N 1-1 tOi-HNNN NCO M a) o o fl 05a> (MINO(3i«D05t~0 oooooo oco NioocoNooiio oooooo cots. 00 00 (>. ■* N CO O •* O >0 to 03 N .H Ot~ 0> O iH cq ■«* "3 CO p NCOt--*-* •-l(N OCO CDUSC»O0W r-(C0C0tO->* ;hi-i OJTtI OOOi»HCOT)(rHO>-l O N '-H ■* IH rH g S s 0>0'**l(N OOrH COXOOJ " " .it-OO OOOOOO OOOOOO 3lOOM<500rtlO 000050stOi-l 3C0 TltlNCOO (NO-* 00 00 COI>CO-*® 2 •§ s 1 M 5 I I ►^ BTANDAED KEPOETS 225 Report No. 15 JOHN JONES MFG. CO., Inc. Shop Statistics for Fiscal Year 1916 Per Cent of Prod. Labor Average Number of Employees: Expense Productive (A) 551 1,155 Total , Productive Labor . . , Raw Material Used. Shop Expense 1,706 792,552 803,002 758,100 Total . Cost per Productive Employee of Labor, Material and Expense (C) Shop Expense: Salaries (B) Changes and Repairs Defective Work Supplies Depreciation on Buildings, Permanent Fixtures and Machinery Other Depreciation Insurance Written oiff Plant. .....................[...... Miscellaneous Charges between Manufacturing Departments (Hawthorne Only) Charges to Other Accounts 2,353,654 2,038 372,420 108,130 5,773 90,908 99,757 85,735 10,456 32,672 132,171 58,100 66,563 Total . Standard Loading on Labor and Material. 758,100 540,813 Deficit in Loading Per Cent Deficit to Standard Loading To Sxma of Labor, Material and Standard Loading 217,287 40 10 48 101 47 14 1 12 13 n 1 4 17 7 96 68 28 226 SHOP EXPENSE ANALYSIS ^t>^ o « CO O H P5 o O •-3 ^ 00 CO CO •* N o eo 00 N t»03 CO CON t-eo t-ineo 00 s lH.HOSIOt- 1 t->Ot>N(N05'OU5>-l 00 TiOrHlH^O to eoeo t»03 OI> OO'*© OS m OCOf-OS 1 Tfodt^Minoiocco eo" cs-* i-trHfff rfrH l^ IN w 00 «>0dt-rrH CO ■*'^t»{NIM-*'-l-*lO CO rH I-< mN eo in •*«IN ■Ol~l>'-lcDO ■* ot^ PJt^lN eo • • -r- eo c:s .£ .H rH r^ CD 00 00 «0 T(<_C<3 OS t-in lOrtrH t- • O t» Q NTftCrt'oTrHr-rTjt'oS OS »Heo 00 : Os" eo oo>-t -^1-1 CO . CD t^ to CO O CO N iH to • o TjlO int-o coco • Clin ^ in -OS - • eo i OS e«3 IN lO i<5 CO lO CO • CO coco OCOIN CD 00 .TttO) CO rH •CO • • in OOOiOOl^fflUiUJiO • •^ inm e>»rHrH OSrH • Tit l> O -Oi • • i> - . - .^> . z T-riou5r-r-*e«5rH ■ l> (NN N rH .CO . i> CO t^i-H : »H 00 : : : t- IN ^COlOMN'HrH . . ~ eo-* I^INCO • eo • O W ©ino •CO •* CDCDOOC0O>0 • • MOS OOSOO :"* : CO t- rHrHCO •CO in o c»O_(N«^lM_C0 • ■ t- t» t- moos • •* O ■o Si CO Nrtco : N rH . IN IN IN -H CO ^ N t« W M M OooincT*->Kcot^eococo in COM OrHrH eo • (N (N •■* • •^ s -Hc<5«oiN>oo'rHco"ei eo N OS : in (d 00 :eo ! >o t».-< 00 . (N '-* . eo eo eo ■* to CO IN i^ OS 00 THeo INOOO eo • IN 00 •osineo nrHCOOi>'5CO'-100 ss ■*t^r- OS • Tl( -inrHCO m ioo"3(Niot^aiioo (NrHe* ■* • eo_ 00 •oos_ "1 Ol d'-*i>c« eo •* CO m N CO eo >noco-Hcot~osi>oo 05 S?2 rJlOOOO eo ■ IN CO rHCO • • • o _>. in OOOOCO CO • m ■* rHO • • • rH O "O 00 ■* CO O 00 00 rH IN ■*t~ 0,-H-l Ol • •* (N wt- . . . (N 3 •-5 O'c0">ri'rHC0*O"rHrn"l0 rH co- rH 00 ; CO CO inrH : : : OS eo m^ ^ ■* . TjIrH . : . ■* IN WINOOOINNINCOrH 00 in IN osinw ^ . • in • o OS o • • ■ • 00 r3O rHO CONW ^ . • in 00 05 OS coo • • • 00 >, i-iin (Nino OS • •C<1-* ■* o m-* • • • o S^ cqt-^05oqcoooo_t-^o XrHIN o • •rHCO q_ c<« Os_05_ : • • l> § COeOlOrHoT'^rHINTl!' e>nTj(eoeo(N •OS rHrH OS in • •00-* OS 00 CO lO-*rHINO>nOO(NCO t^iOW C<1 • •oseo m eo a OS (D O 00 in (N ■* rH in i'* 0,rHrH •* > • in OS o IN -< ooNcOrHco'co" eo'co r^ in : ; ■* ef t- in tH COrH ^ T)<0 •OS eqinin 00 OS ej ca OS lO CO IN CO ^- 00 rH IN ■o_ 0_rHrH coco O CO 00 CO S osiniOi-TcdiN cieo IrH IN CO in CO CD CO mrH T-t O OS IN COi-l-HOOOO-^WOOOO ~i CO 00 ascot- (>t- CO • • OS CO •s NiNosininmcorHTH •*■* CDt»I> eo(N OS • • 00 in O O CO lO CO rH 00 IN CO ■«1< •<*rHrH i-iin Ti( . . (N Ci fe 00-*-^rH-*O OSrH ta OS 05 ■*- '. '. -f 00 «0 COrH M § :»t^OS-*T)iOinOSrHinoooo-*oo :°i t»rHrH rHCO 03 ►? oococo(Nmi>.-iOrH CO lO rH •'^ (NCO 00 : CO "3 1 'f 5 1 e 1 f i c3:= Bad Castings .... Spoiled Castings. . Castings from Basement Odds and Ends: (Lubricator) . . . (Injector) Scrap Punched Metal Hardening Phosphor Tin .... Nassau Composi- tion Red Ingot Copper Composi- tion Auto Cooler Tubes Sterung Composi- tion Destroyed Lubri- jectors Wipple and Chote Composition . . . Copper Scrap .... Copper Wire Vanadium No. 1. . Antimony "o t STANDAED EEPOETS 227 o o d en "^ o ^ O •-» w o •-3 t-(N»He« us 00 (3i«0 o CONrH o> cjwor* 05 1 • "l 00O-* i-llO C^ '^" eo" OOOtH : gg^ : ^ t^t^o a> a> OOOO • -^OOiN • CO Q lOt-Tco ; tCcD^ : N O0O5IM ! IN>0 . 05 XSOOJ • t-^»l^^ln in ^ ^■^o • 00>Ot>O eo .MiHTf • OCOtO-* N !z; lOt-Tcq ; NbTo" WQO(M ; r-l>HTtl N U5«OtO • t-ow^ O T-i>Oe<3 . ooooeot- 00 43 M_tH-.JH_ • 00_OiO'-l «5 O mtoos ; eicjoi =2 OOOOiH : r-iT-(ri< to CO (N MOOS • Ot-TH • N 1— ( 43 (N00O5 • TfOOCO • t-- ft q^oosq • 050JO • "1 ^ odtoxs : oi'^'oo : CO e3 05O1M ; M . 00 J^ N l>H lOCOt" • t-OiTjl ■ W 3 1-1 CO (N • OINO ; w" CO fOO; >H QJ '*"t-; : efiri'ic : 'S ;:3 00 05 CO ; •* . «o -i3 >< rHT)(,*l • i-it^O • t- >, t-IMO oco^ • CO s 3 OSlNTfl ■ i*inoo • : loiood" : •* s (N ooooo • 1-lCOIN • o» § • Tlfl >> OSlOt- • looos • T»< fe 03 ooooo • (NtOO! • co_ C4-I tf>05>0 . '-"O . S O c^ -t^ OOCOtJ) ■ COINCO • ^ ;3 ^ OOrtil^ • ooom • S3 i>q.os • rtOJ-* • ■^ *i! oo"?qc< : iflo-Qo : 00 IO00U5 : '-I'* : o 5OCOC0 • INIMOO • coeor-i • eOrH>-l . ^ c3 s ■*•*« • coooo • -^ % lO-^iH ; «rHrH ; iH O tooo-* : iMo : 00 H CT COt^Ol oot^oo rH t-r-tCO • T)< 4 CO t~r-lTj( . rHt>t^ O OOt- • S Pc< usinco ■at^o : CO lOOSCO "o ; §S^ 00 oooso • r>. US oot-eo ■ « S 0> (N-*rt • •^ Ol-T-^ O* eotfjcf : OS USt^-* -1 CO . C<) :« 5 : It b :•* go 3 S w C*" 3u: CC t« p-l 6 6c 2 <»'2 6 6 6 lw ;z ^ ;z OZ ^ ;z Z H 00 to CO o Oco ■* »o •^'Os l, , 1* CO us r;|50w il eo co" t> P K fl ^H <= >. ■a « E? ft •'§'? vP "^ us O O "5 -'?*»_, _ W bO II -g^ Iri PQ o a cs • g c3 o 113 s a CO 2^* "-I H .0 OS _-»»!> d)*S ^ ® 'C «i." a. a, a> m o ft fc. . - ".2 -Si 0-0 JJo m © oS.S " . l-grs-s 228 SHOP EXPENSE ANALYSIS mamifacturing and general departments of the com- pany. A report of this kind will serve as a basis for any provision the management may make toward a general increase or decrease in the wage scale of their employees, either because of extraordinary profits or otherwise. Eeport No. 15 shows in a very condensed way the shop statistics for the current year. It analyzes the average number of employees by expense and produc- tive employees, and then shows the three elements en- tering into the cost of manufacturing — productive la- bor, raw material, and shop expense. The total of these three elements of cost is then reduced to a **cost per productive employee." The shop expense for the year is also analyzed according to its main divisions, the difference between the actual expense applied on production orders and that incurred during the year being shown as a deficit or surplus as the case may be. In this case the deficit amounted to 40 per cent of the actual manufacturing expense incurred. Reports Nos. 16 and 17 are typical brass foundry reports and are practically self-explanatory. Report No. 16 shows the total input of metals to the foundry by months ; while Report No. 17 shows the output of the foundry by mixtures. On this latter report special attention is called to the amount of shrinkage which will be seen by comparing the weight of the input, as shown on the report, with the output of finished cast- ings. After making due allowance for inventories of metals on hand at the beginning and end of the year, tiie percentage of shrinkage in this case was found to be 3^ per cent of the input, ar equivalent to a shrink- age of 115,091 pounds. This factor of shrinkage is a very important and serious one in a large percentage STANDARD REPOKTS 229 of brass foundries, and a report of tMs Idnd will serve to assist the management in taking the necessary steps to guard against unwarranted excesses over normal shrinkages. The different specimens of reports which the author has used in this chapter should not be considered as standard in any way. They have been used simply to bring to the attention of the reader some of the dif- ferent methods pursued in collecting manufacturing statistics, so that they will serve whatever purposes the management may have in mind. There are, of course, many other reports used in manufacturing work which could be described. Those included in this chapter, however, should be sufficient to bring to the attention of the reader the importance of following some systematic method in assembling the data, and also to show the value which these reports have from an executive viewpoint. In conclusion the author wishes to call attention again to the importance of giving the distribution of manufacturing expense serious consideration, for it will be evident, no doubt, to any student of this subject that it is by far the most important factor in manu- facturing. Sincere appreciation of its importance by those in charge of manufacturing plants will do much towards promoting industrial economy and welfare. INDEX Accounts, classification of manu- facturing, 30 AdiflSnistration expense, analysis of, 47 by machine unit system, 101 charges for, 16 composition of, 46 Agriculture, population engaged in, 135 Analysis of normal manufactur- ing expense, 99 Appropriations, symmetry of, 145 Automatic machinery, effect on costs, 127 Automobile, waste in parts manu- facture, 155 Averages, errors in, 4 Balance sheet, standard, 208 BeaU, F. F., on time study, 168 Brass foundry, reports, 226, 227 waste, 159 Budget, financial, 145 Buildings account, 36 permanent fixtures pertaining to, 38 Bulk as basis for material ex- pense distribution, 23 Burden during business depres- sion, 125 Candied citron, waste in, 162 Carnegie, Andrew, 137 Centers of production, 45 Church, A. Hamilton, justifies the supplementary rate, 127 Classification, by reference lists, 35 of expense items, 15 of manufacturing accounts, 30 of productive machines, 97 of raw material expense, 91 of tool expense, 89 of worked material expense, 91 reference list of rent expense, 67 Coeoanut, shredded, waste in, 162 Compressed air expense, 62 Constant expense, 121 Costs, graphic determination of, 171 Current variation, 116, 117 chart, 118, 192 Day-work and piece-work labor payroll compared to total wages, 180 Deliveries report, 203 Department, special, expense, 220 Departmental expense, based on productive labor, 4 Departmental administration ex- pense, 47 by machine unit system, 101 Depreciation, determination of, 78 of plant, 66 repair reserve, 82 report, 86 231 232 INDEX DepreciatioB, Contvimed reserve, 78, 81, 199, 202 schemes, factors governing, 80 Depreciation rates, English practice, 83 on buildings and permanent fixtures, 84 on machinery, 84 Depressions, cost accounting for, 125 Direct charges, 45 Distribution of steam expense, 59 Efpecttve floor space, 65 Efficiency waste, 164 Electric current, distributing expense, 61 generating expense, 60 Electric illuminating expense, 63 Employee and average wage re- port, 224 Expense items, classification of, 15 Factory plant accounts, 31 sub-classification, 36 Fatigue, 168 Financial budget, 145 Fixed charges, by machine unit system, 111 three divisions of, 77 Floor space, 65 chargeable to each division of manufacturing expense, 74 comparative statement of, 222 monthly analysis of, 196 report, 212 typical summary of, 70 Foundry reports, 226, 227 Foundry waste, brass, 159 Functional organization, 132 chart, 144, 148 Gas generating expense, classifi- cation of, 72 Groneral administration expense, 47 by machine unit system, 101 Graphic analysis, of departmental overhead ex- pense, 189 of effective floor space, 196 of manufacturing expense, 184, 188 of non-productive labor, 173 of productive payroll, 180 of shop payroll, 172 of total merchandise per em- ployee, 181 Graphic comparison, of merchandise manufactured to total output, 177 of weight of output by classes of merchandise, 176 Graphic determination of costs, 171 Grounds, classification of expenses, 73 distribution of maintenance of, 73 Hamilton, Alexander, ** Report of Manufacturers," 135 Idlk labor expense, 18 by machine unit system, 113 Illuminating expense, 63 classification of, 72 Industry, history of growth, 134 Interest on factory equipment, 87 Inspection, of material, 90 branch of organization, 141 Insurable values, statement of, 213 Insurance and tax charges, 85 Insurance expense report, 216 Inventory and report cost, 209 INDEX 233 Inventory cost of permanent and perishable small tools, 211 Jewelet manufacture, waste in, 162 Labor, graph of productive and non- productive, 172 non-productive, 17 non-productive, analysis of by non-productive and produc- tive expense labor, 173 Ledger, primary object of, 29 Life of a property, 81 Line or military organization, 132 Liquidation value of plant, 81 Machine classification, 91 Machine expense, definition of, 22 distribution of, 15 unit analysis of normal, 102 Machine unit expense, summary of productive, 115 Machine unit system, 94, 117 Machinery account, 41 Management, factory, divisions of, 132 Manufactories, three organiza- tions of, 14 Manufacturers, report on by Alexander Hamilton, 135 Manufacturing accounts, classi- fication of, 30 Manufacturing expense, analysis of normal, 100 as function of time, 9 as percentage of productive la- bor, 3 common distribution of, 2 comparative statement, 218 defined, 14 Manuf aoturingexpense, Ckmtimted graphic analysis of, 184, 188 summary of, 46 Material, inspection, 90 permanent fixtures pertaining to, 41 vraste, divisions of, 154 Material expense, definition of, 21 distributed by classes of mer- chandise, 26 distribution of, 15, 23 Merchandise, accounts, 32 comparison of total worth to product per employee, 181 manufactured compared to total shop output, 177 Midvale Steel Company, 166 Military organization, branches of, 139 chart of, 138 definition of, 132 Motion studies to minimize waste, 166 NON-PRODUCnVE, bench, definition of, 98 machine, definition of, 98 ^ Non-productive labor, 17 analysis of by aon-produetive expense labor and productive labor, 173 Normal machine expense, 95 unit analysis of, 102 Normal manufacturing expense, 100 Organization, chart of functional, 144, 148 chart of military type, 138 evolution of, 137 of a manufactory, 132 of a railway, 150 234 INDEX Output, comparison of weight of by classes of merchandise, 176 Overhead expense, compared to allowable expense, 193 compared to productive labor, 189 Packard Motor Car Company, 167 Paint making, waste in, 161 Paper-box making, experiences from time study, 168 Patterns account, 43 Payroll, monthly chart of produc- tive and non-productive la- bor, 172 Permanent fixtures account, 37 Percentages, averaged when composed of differing units, 4 standard vs. variable, 6 Piece-work, a function of quantity, 9 and day-work labor payroll, 180 error of as basis for expense distribution, 10 percentage report, 219 Plant accounts and depreciation reserve, 199, 202 Power consumption, fluctuations in, 54 Power expense, by machine unit system, 105 composition of, 49 control of, 52 distribution of, 17 summary, 50 typical analysis of, 57 Power plant, permanent fixtures pertaining to, 38 Power test report, 108 Process point and process period, 151 Production, branch of organization, 142 centers, 45 efficiency, current variation as a measure of, 129 Productive, and non-productive labor, monthly chart of, 172 bench, definition of, 98 employees, graphic analysis of, 180 labor as basis for manufac- turing expense, 2 labor compared to depart- mental overhead, 189 machine, definition of, 98 machine, unit expense, sum- mary of, 115 machines, classifications and sub- divisions of, 96 wages, graphic analysis of, 180 Eailwat organization chart, 150 Eates, standard vs. variable, 6 Eaw material, account, 32 as basis of material expense, 23 expense, classification reference list, 91 Eeference list, classification by, 35 Eental report, 212 Eent expense, by machine unit system, 110 classification reference list, 67 distribution of, 17 the two divisions of, 64 transfers to, 68 typical analysis of, 69 unit of, 64 INDEX 235 Eeport, of annual rental and cost of effective floor space, 212 of annual manufacturing ex- pense, 218 of employees and average wages, 224 of insurance expense, 216 of plant account and deprecia- tion reserve, 200, 202 oi shop output and deliveries, 203, 206 of special department expense, 220 Salaeies chargeable to power ex- pense, 51 Scientific management, 135 Service charges, 45 Shop, expense, determination of, 129 fixtures account, 43 output report, 203, 206 payroll, monthly chart of, 172 statistics per year, 225 Shop cost, 124 composition of, 1 construction of, 22 Shrinkage, in brass founding, 159 in paint factory, 161 in worsted making, 163 Silver solder, waste of, 155 Small tools account, 43 Staff organization, 132 Standard reports, 198 Standardization of machine types, 95 Statement of inventory cost, 209 Statistical reports, 198 Statistics, annual, for shop, 225 graphic presentation of, 171 Stealing, losses incurred by, 164 Steam, distributing expense, 57 expense, distribution of, 49 generating expense closed out to material and machine ac- counts, 56 generating expense, typical analysis of, 58 Store room control, 157 Summary of manufacturing ex- pense, 46 of productive machine unit ex- pense, 115 Supplementary rate, 116, 122 Symbols for classification, 16 Symmetry of appropriations, 145 Tabor Manufacturing Company, 166 Tax and insurance charges, 85 Taylor, Frederick W., system of functional management, 133 motion studies by, 166 scheme of functional organiza- tion, 148 Time, keeping on piece-work jobs, 12 manufacturing expense as a fimetion of, 9 studies, 168 waste, divisions of, 164 wasted through faulty plan- ning, 19 Tool, account, 43 expense by machine unit sys- tem, 111 expense, classification reference list, 89 expense, definition of, 89 expense, distribution sheet, 112 inventory, 211 Transfers, from rent expense, 70 236 INDEX Transfer, Contiimed of service charges, 45 to power ^sterns, 55 to rent expense, 68 Transmisson expense, 62 Unclassitied expense by ma- chine unit system, 114 Unit, analysis of normal nmehine ex- pense, 102 of rent expense, 64 of time as basis for expense distribution, 12 Wage, payment^ 165 Wage, Conlmued per employee report, 224 Waste, factor in manufacturing, 158 in efficiency, 164 miscellaneous, 169 of material, 154 through low wages, 165 Wasted time, 164 Water, permanent fixtures per- taining to, 40 Whitney, W. R, "Modern Sci- entific Methods," 167 Work in process accoimts, 32 Worked material expense, classi- fication reference list, 91 Worsted nulls, waste in, 163 LIBRARY OF CONGRESS 021 485 315 2 Ki.iiiii If 'ii'liil Hir,(iillN '111 I i' i !'ii i i!i:"ii! !''! l' iiiiiiillii'^ ! 1; I. i''l I!:: '