expense that appears each month, comparisons made on conditions
shown by one month's operations are apt to be found abnormal, while
a comparison made on results of operations extending over six months
or more will give an average nearer the true condition of the plant's
activities than one made on results shown by a shorter period.
=16. Pay─Rolls Dissected.= For our first statement, let us examine the
pay─rolls and find out what portion may be classed as non─productive
labor and what as productive labor, both by departments and in totals,
our examination of same to cover a period of six months as just
suggested.
For the sake of illustration, let us take a plant with a weekly
pay─roll of about $10,000. Ordinarily there will be four pay─rolls each
month, but in order to provide for thirteen rolls quarterly, it will be
necessary every third month to have the labor account cover five weeks
instead of four. Turning to our _Private Ledger_, we find our _labor
account_ appears as shown in Fig. 1.
It is now seen at a glance that the total pay─roll for six months is
$266,155.00. It is now necessary to know the split─up of the above
figures into productive and non─productive labor by departments, and
this is easily obtained. By reverting to the pay─sheets, can be found
the total pay─rolls for each department during the above period, and
from _Ledger No. 1_ can be found the portion of these same rolls that
were classed as non─productive labor, and the balance will be found
entered in _Production Ledger No. 2_, the sum total of which will in
each case balance with the totals in the _Private Ledger_. Every dollar
of labor is accounted for in either one or the other of the two cost
ledgers. Having done this, the labor statement resolves itself into
something like the following:
PAY─ROLL DISTRIBUTION
Jan. 1 to June 30, 1908
══════════════════╦════════════════╦══════════════╦════════════
║ Non─Productive ║ Productive ║ Total
║ Labor ║ Labor ║ Pay─Roll
──────────────────╫─────────┬──────╫─────────┬────╫────────┬───
Dept. A─Offices ║ $9,828│00 ║ │ ║ $ 9,828│00
B─Store ║ 2,180│00 ║ │ ║ 2,180│00
C─Power ║ 4,524│00 ║ │ ║ 4,524│00
D─Yard ║ 9,316│00 ║ │ ║ 9,316│00
E ║ 9,971│00 ║ 104,409│00 ║ 114,380│00
F ║ 7,082│00 ║ 31,429│00 ║ 38,511│00
G ║ 1,749│00 ║ 5,528│00 ║ 7,277│00
H ║ 2,488│00 ║ 10,659│00 ║ 13,147│00
I ║ │ ║ │ ║ │
J ║ │ ║ │ ║ │
K ║ │ ║ │ ║ │
Etc. ║ │ ║ │ ║ │
Totals ║ 58,021│79 ║ 208,133│21 ║ 266,155│00
║ 21│8% ║ 78│2% ║ │
──────────────────╨─────────┴──────╨─────────┴────╨────────┴───
The above figures are all that are needed so far as the labor end of
the comparison is concerned. In fact, the non─productive labor is not
necessary and is shown here merely as a matter of interest, as are also
the proportionate percentages of each division to the total pay─roll,
for it will be remembered that the productive labor is the figure used
in all costs on which the expense is calculated.
=17. Departmental Expenses.= Against the amount of productive labor
for each department shown in the statement just made, place the
total expenses for the same departments. This is readily found
by again referring to the _Private Ledger_, where the amount of
_Operating Expense, Department E_, for the same months the pay─rolls
were tabulated, appears as in Fig. 2. The expenses of all the other
departments should be similarly treated.
[Illustration: Fig. 2. Private Ledger Operating Expense Account]
=18. General Expense.= The general expense of a plant, for the sake of
convenience as well as information, is kept usually in considerable
detail, different ledger accounts being opened to carry the various
subdivisions of expense. The use of a _General Expense Account_ in the
ledger is not recommended, for its very name has the earmarks of a
general dumping ground for all miscellaneous items, and is often found
a convenient place to hide expense, trusting it will there be lost
sight of and thereby escape observation.
The combined total of these various expense accounts is the total
general expense, a part of which each productive job is to carry.
As they now appear in the ledger as separate accounts, _Executive_,
_Office_, _Store_, _Power_, _Yard_, _Taxes_, _Insurance_, _Printing_
and _Stationery_, _Telephone_ and _Telegraph_, _Postage_, etc., it will
be seen that each account is in itself but a part of the amount to be
distributed, and, to better show this combined total, these individual
accounts should be closed out monthly and brought together in another
account, called _General Expense Distribution_. This is done by journal
entry.
═══════════════════════════════════════════════════════════
Dr. Cr.
────────┬───╥────────────────────────────────╥─────────┬───
$10,293│28 ║ General Expense Distribution ║ │
│ ║ Executive Salaries ║ │
│ ║ Insurance ║ │
│ ║ Taxes ║ │
│ ║ Depreciation ║ │
│ ║ Freight ║ │
│ ║ Express ║ │
│ ║ Cartage ║ │
│ ║ Printing and Stationery ║ │
│ ║ Telephone and Telegraph ║ │
│ ║ Traveling Expense ║ │
│ ║ Postage ║ │
│ ║ Legal ║ │
│ ║ Water ║ │
│ ║ Advertising ║ │
│ ║ Etc. ║ │
│ ║ Operating Expense Dept. A ║ │
│ ║ " B ║ │
│ ║ " C ║ │
│ ║ " D ║ │
│ ║ ║ ───────┼──
│ ║ ║ $10,293│28
────────┴───╨────────────────────────────────╨─────────┴───
These accounts are now balanced out and combined in total in the
_Distribution Account_. The _Distribution Account_ is now examined to
ascertain the total general expense for the same six months previously
used, and the _Private Ledger_ shows it to be $67,840.00, Fig. 3.
=19. Power.= While the cost of operating the power─house is
unquestionably a legitimate charge to the operating expense of each
department according to quantity used, it is noted that, by the journal
entry just made, the cost of same is closed into _General Expense
Distribution_.
In a plant operating a central power station with electrically driven
machinery, the power used in each shop can be metered and accurately
known, in which case, each shop can be charged with the amount actually
used. To do this requires considerable extra expense, and although it
is done in many works, most plants do not consider the expense worth
the results, and are inclined to treat all power as general expense
rather than departmental.
In a plant driven by shafting and belting, the power consumed cannot
be registered or recorded, and the power required only estimated from
tests made as often as desired. Although there may be a heavy draft
on the power─house at certain times, when all the machinery is in
operation, there are frequently times when but few machines are running
and the power required is down, although there is no way of recording
it.
It is, therefore, extremely difficult to arrive at the actual power
used during a month, and for this reason most plants do not attempt
its calculation, and are quite ready to charge its cost off as a whole
to general expense. To departmentalize it, means extra expense with no
benefit gained──except to engineering science.
[Illustration: Fig. 3. Expense Distribution Account in Private Ledger]
=20. Productive Labor and Expense Compared.= Having now dissected the
pay─rolls and drawn off the departmental and general expense accounts,
it is but a matter of bringing these two statements together to produce
the final results. It will be remembered that all that is necessary to
know is the rate between the two, therefore place them side by side,
item for item, as already shown:
───────────────╥─────────────╥─────────────╥──────────────────
║ Productive ║ ║ % Expense to
║ Labor ║ Expense ║ Prod. Labor
───────────────╫─────────┬───╫─────────┬───╫────────┬─────────
General ║ │ ║ $67,840│00 ║ │ 32.6
Department E ║ $104,409│00 ║ 22,731│00 ║ 21.8 │
" F ║ 31,429│00 ║ 5,419│00 ║ 17.3 │
" G ║ 5,528│00 ║ 2,465│00 ║ 44.6 │
" H ║ 10,659│00 ║ 3,174│00 ║ 29.8 │
" I ║ │ ║ │ ║ │
" J ║ │ ║ │ ║ │
Etc.║ │ ║ │ ║ │ 26.5
───────────────╫─────────┼───╫─────────┼───╫────────┼─────────
Total ║ $208,133│21 ║ $122,985│00 ║ │ 59.1
───────────────╨─────────┴───╨─────────┴───╨────────┴─────────
The percentage columns shown give us what may be considered a very
close figure as to what are the actual factory conditions of operating
expense and productive labor, and the relationship of the former to
the latter. These results are all the more reliable because they are
based on actual figures taken from the books of the company, thereby
eliminating all estimating and the basing of important calculations on
guesses and assumptions, which later generally prove to be far from the
real facts in the case. The above results, gathered from six months'
operation of the plant, are a fair statement of what the same expenses
will be found to be in the long run, although if it is desired to go
into the matter still deeper, the same tabulation may be made covering
a year, with practically the same results.
What do the above figures show?
(a) That the total operating expenses of the plant are 59.1% of its
productive labor, of which amount, 32.6%, is necessary to cover the
general expenses, and 26.5%, the average for all shop operations.
(b) That the expense of operating the different productive departments
vary according to conditions. That while _Department E's_ expense is
found to be 21.8% of its productive labor, that for _Department F_ is
found to be but 17.3%; each department having its own rate based on its
own actual figures.
(c) Since, as already shown, each department must shoulder its
own expense and its share of the general expense, it is seen from
results just shown that for every dollar spent on productive work in
_Department E_, 21.8 cents must be added to cover its own operating
expense, and 32.6 cents as its share of the general plant expense, and
that every dollar spent on production here cost $1.544. This has been
covered in detail under heading, _True Cost_.
=21. How to Use Percentages.= Let us continue the use of the same
figures. It is apparent that, if to the cost of each productive order
worked on in _Department E_ during the period of six months just
considered──all of which is shown in detail in _Production Ledger No.
2_, the sum total of whose labor cost is $104,409.00──21.8% is added,
the amount thus added will be $22,731.00 (the actual figure is a trifle
more), which is just the amount of _Department E_'s expense shown in
the _Private Ledger_ and found in detail in _Expense Ledger No. 1_.
Again, if to the cost of each productive order worked on by any and
all departments in the plant during this same period──the sum total
of whose labor cost is found to be $208,133.21 and which is shown
in detail by the individual cost sheets in _Production Ledger No.
2_──32.6% is added, the amount thus added will be $67,840.00 (actual
figure is a few dollars more), which is just the amount of total
expense shown by the _Distribution Account_ in the _Private Ledger_.
It is now a simple proposition. Having found our average ratio of
expense to productive labor for each department, and also for general
expense covering a period of six months' operations, we can begin to
distribute the expenses of succeeding months on the same basis with the
same results.
In closing up the _Production Ledger_ at the end of each month
preparatory to drawing off a monthly summary of all the totals therein
to obtain the total cost of production for the month for entry through
the journal into the _Private Ledger_, it is simply necessary to enter
on each cost─sheet, in columns provided for that particular purpose,
two items of expense, one for department expense and one for general
expense. In the case of _Department E_, just cited, the expense for the
department is to be calculated at 21.8%, and the general expense item
at 32.6%.
=22. Even Percentages May Be Used.= In a large plant with an elaborate
system of manufacturing job orders worked on daily with perhaps
hundreds of cost─sheets on which an expense calculation must be made,
the use of percentages with three figures may require more time in
figuring than desirable, in which case an even percentage may be used.
Instead of 21.8 for _Department E_ use 22, and for general expense,
instead of 32.6 use 33. This means that under usual conditions,
more expense would be added to production than shown by the expense
accounts, and the _Private Ledger_ would show whether there had been
an over─distribution or an under─distribution in each department's
account after the distribution had been made. Turning to _Private
Ledger Account, Department E_, while it is shown that, for January,
the expense that should have been distributed, if done exactly, would
have been $3,697.33 (had the productive labor for the same month been,
say, $17,095.45), the amount added to production by using 22% would
have been $3,761.00, an over─distribution of $63.67. To adjust this
overdraft in figuring the next month, use 21%, the idea being to
have the ledger accounts as nearly balanced out as possible. Should
the general expense rate prove more than sufficient when 33% is used,
reduce it or increase it to meet the fluctuations of the expense, with
the thought always in mind to keep all balances as small as possible,
and to make as nearly a perfect distribution as figures will permit.
It is suggested that where these percentages come close to 16⅔,
20, 25, 33⅓, etc., that these figures may be used to advantage.
By so doing the expense calculations can be figured mentally and
very rapidly, and generally without interfering with a satisfactory
distribution. If, however, the overlap each month increases, these
should be modified to bring closer results.
=23. Journal Entry for Distribution.= While it is not the intention in
the consideration of this subject of _Expense Distribution_ to depart
therefrom into the general field of cost accounts and cost records, it
is assumed that on whatever form of cost─sheet used, provision will be
made for the proper recording of the three elements of cost: labor,
material, and expense, the latter in two items. Inasmuch as only totals
should be carried into the _Private Ledger_, it is only necessary
for drawing off the amounts on the individual sheets in _Production
Ledger No. 2_ to provide summary sheets with sufficient money columns
to accommodate, among other credits, all items for each department's
expense and also for general expense. This, when done and totaled,
will give the total cost of production for the month, made up of the
following items:
(a) Labor──amount of which should check total of productive labor
shown by the dissection of the monthly pay─roll.
(b) Material──amount of which represents withdrawals from stores
during month.
(c) Departmental Expense──each separate, representing the amount of
expense actually distributed and thrown into production.
(d) General Expense──representing the total amount actually
distributed and absorbed by production.
This done, our journal entry will be:
Debit Production.
(This may be subdivided
into as many accounts as
desired.)
Credit Labor.
Material.
Expense Dept. E
" F
" G
" H
" I
Gen'l Exp. Distribution.
=24. Expense Ledger.= The totals from the _Expense Ledger_ should also
be drawn off in a similar manner, and the same items will appear as
those shown in the _Production Ledger_, except that no expense will
be added, for it will be remembered that the entries in the _Expense
Ledger_ constitute the very items which are transferred to the
_Production Ledger_ through the percentage added.
The journal entry for this ledger will be:
Debit Expense Dept. A
" B
" C
" D
" E
" Etc.
Credit Labor.
Material.
=25. Results of Distribution.= Having posted the journal, turn
again to the _Private Ledger_ and note what has taken place. It is
found that the two items of labor posted have just balanced out the
_Labor Account_, and every dollar of pay─roll has been accounted for
somewhere, either into expense or into production. It it also found
that all the debits in the shop─expense accounts have originated
in _Expense Ledger No. 1_, and the credits have originated in the
_Production Ledger_. The various subdivisions of general expense have
been consolidated in one _Distribution Account_, which has also been
disposed of through the _Production Ledger_. What once appeared as
an expense cost has now been wiped out, absorbed by production and
converted into an asset, just as Mr. Clinton E. Woods, previously
quoted, states it should be. A glance at the trial balance reveals
scarcely a trace of expense, the small undistributed balances only
remaining.
=26. Undistributed Balances.= Under any method of distributing
expense on a _pro─rata_ basis, it is apparent there will be small
balances left, representing either an over─distribution or an
under─distribution, as already explained. These may be treated
in either one of two ways. If the product manufactured has been
practically completed during the year, and but little carried over into
the next year to be finished, these balances can be charged off and
become a part of the _Loss and Gain_ account for the year in which they
were created, and the new year begun with a "clean score."
If the product, however, consists of large contract work but partially
finished when the year closes, the work on same continuing for some
time into the new year, these balances may be also carried over to be
worked out in succeeding monthly distributions as the work continues.
When this latter method is chosen, of course it will be necessary that
these balances be taken into consideration when preparing the _Balance
Sheet_.
=27. In Conclusion.= While it is realized that the _Percentage Method_
is not perfect in all its details, yet it is quite generally admitted
to be the best means that has yet been devised for distributing
expenses. A manufacturer using it may be assured that his costs thus
figured are correctly shown, from the fact that this method is used
and recommended by our highest technical authorities in accounting.
From the practical side, it appeals to the manufacturer who is more
interested in successful manufacturing than he is in the science of
accounts, by the simplicity of the method and economy with which it
is operated. The same amount of time spent in planning economies and
devising means for cheapening the cost of production that is often
spent in lengthy attempts at fine figuring, which, when finished, prove
unsatisfactory, will be productive of far better results. Any method
which eliminates the unnecessary and simplifies the essentials cannot
help but prove attractive both to the successful manufacturer and the
progressive accountant.
OPERATING EXPENSE STATEMENTS
=28.= To properly analyze detailed records, and to be able to extract
therefrom the essentials and eliminate all items of minor importance,
so that the exact situation and final conclusions can be expressed
briefly and in an attractive manner, is an art in itself. A bookkeeper
may be ever so well posted in up─to─date methods, and his books may
show great care, and be models in appearance, yet when it comes to
preparing an intelligent statement of any feature of the company's
business, he may be sadly deficient. It does not necessarily follow
that because he can do the one thing well, he can make a success of the
other. Even as the pleasure naturally to be derived from a carefully
prepared dinner may be completely wrecked by poor service, so can
the intent of what would otherwise be an interesting tabulation of
statistics be made meaningless by the presentation of a jumbled and
carelessly arranged lot of figures.
It is as necessary to clearly show _on paper_ the results of the
factory operations as it is that they should be correctly recorded on
the company's books. While the two operations are entirely distinct and
separate, they are closely allied, and every progressive accountant
should be interested in both.
The object of a statement is to convey to the reader certain
information in an intelligent manner; if it does not do this, it might
as well not have been written. This leads us at once to the question:
"What constitutes a good statement?"
=29. Lengthy Statements Undesirable.= That we may have "too much of a
good thing," and that even those things worthwhile may be overdone,
is true in the matter of statements. The general tendency seems to be
to elaborate rather than simplify, and to crowd into the tabulation
a lot of figures representing details which are almost always passed
over without examination, or are even hardly looked at. If the same
amount of time is spent in studying such a statement that is spent in
its preparation, it would not be altogether without value, but the fact
remains that it seldom is thus considered.
The size of a company's statement is oftentimes all out of proportion
to the size of the business; some of the smaller industries present
reports of their operations so voluminous in size as to rival that of
the United States Steel Corporation, or that prepared by the actuary of
one of the mammoth insurance companies.
It should be remembered that a busy manager is more interested in
economical management than in wholesale bookkeeping, and has but little
use for a formidable array of figures, except in so far as they show
general results. Such a statement, when presented to him, is usually
tossed aside to be examined later, while if it were condensed and
served up to him in a more attractive form, it would probably be
eagerly examined and studied with interest. A multitude of figures is
more apt to confuse than to enlighten the situation, is a waste of an
accountant's time, and, being a source of displeasure to the employer,
thereby defeats the very object for which it was made.
Detailed records should always be kept, and in such shape as to be
immediately available when called for, but it is hardly necessary to
incorporate them in a tabulation intended to show results. It will be
well, in submitting figures to the manager, to always bear in mind an
imaginary notice over his desk: "This is my busy day; be brief." It
is safe to say that a good statement should contain as few figures as
possible to intelligently show the desired result.
=30. Tabulate the Essentials.= The data for a good statement should be
well chosen. A manufacturer wants results. He is in business for profit
making, and wants to know the true condition of his shop operation and
the expense, in a concise presentation of facts, and has but little
use for comparisons beyond those necessary for showing him the result
of his management. He is not often found to be a philanthropist, eager
to load down his expense account so that his clerical assistants may
use his time to pursue their studies in the science of accounting. He
wants to know what his costs of production and the expense of operation
are, and where they may be cut, and it is as much to an accountant's
interest to show him this in a clear and self─explanatory statement as
it is by an elaborate and dazzling array of statistics to show his own
ability in handling figures.
A manufacturer will doubtless obtain just as much solid comfort and
real pleasure in knowing that special tools recently made have enabled
him to clip a few cents off the cost of one of the units of his
product, and that economics in his shops have reduced his operating
expenses 2% or 3%, as to be furnished the startling information that
his _Printing and Stationery_ account is .7148% of his _General
Expense_, his _Insurance_, 6.2714%, _Postage_, .5218%, _Telephone_ and
_Telegraph_, .6538%, and so on down the list.
The illustration used is not an imaginary one either. Statements are
occasionally seen wherein all the individual items of expense are
thus figured and the percentages carried out four decimal places. Of
what conceivable use can such figures be? The only imaginable excuse
seems to be that the accountant hoped to lower these percentages
in the next period──possibly the third and fourth figures in the
decimal──by bringing pressure to bear on the telephone company and on
the insurance underwriters sufficient to get the rates reduced, and by
telling the mail boy he must use less postage stamps. Rather a peculiar
method of cutting expenses, and it is quite safe to say that the same
effort applied in other directions would be productive of far more
satisfactory results. A good statement, then, should be clear, concise,
and complete.