in which the management is directly interested, are the _productive
output_ and the _operating expense_. The former should be pushed to
the utmost limit, while the latter should be trimmed at every point
possible; and it is readily seen that the point of greatest efficiency
is reached when the plant is producing at its full capacity. A
factory with a complete organization is operated at a heavy expense
when running at but 50% of its full capacity. These two elements,
output and operating expense, are so closely related that a change in
one immediately affects the other, and the relationship between the
two, which is expressed in a percentage, is either raised or lowered
according to the character of the change.
(a) If the operating expense remains stationary and the production
increases, or
(b) If the operating expense is lowered and the production remains
unchanged, or
(c) If the output increases at a greater rate than the expense
increases, or
(d) If the output decreases at a lower rate than does the expense,
then the percentage which expresses the ratio of expense to production
is lowered, which means increased operating efficiency and a decrease
in the cost of production.
On the other hand:
(a) If the operating expense remains stationary and the production
decreases, or
(b) If the operating expenses are on the increase while the production
remains unchanged, or
(c) If the operating expenses increase faster than the production
increases, or
(d) If the operating expense decreases at a less rate than does the
productive output, then these tell─tale percentages automatically
increase also, which the manager is quick to note, and mean a
falling─off in the economy with which the plant is being operated, for
increased expense means increased cost of production.
This means, then, in order to be in complete control of his plant, a
manager must have production costs and operating expense well in hand,
for these two factors are the keys to successful management. It is up
to the accountant to show the manager, in figures, the facts as to
the true conditions in the shops, and the statement presented to him
monthly must be sufficiently explicit to show him at short notice what
the expense of operating each department of his plant has been, and
what the items were that made it up.
=32. Comparative Figures.= It is quite unnecessary to demonstrate
the value of comparative statements, for this is generally admitted
without argument. They portray at once whether what now is, shows an
improvement or a falling short over what has been; in fact the degree
of success or failure in any line is gauged by comparison with results
previously attained.
A statement showing operating conditions with those of a previous
period cannot help being interesting as well as instructive; in fact
it is from this source that a manager obtains the information which
enables him to size up the changing conditions in his plant, and in
case of loss in efficiency, shows him where the remedy should be
applied.
If a comparison or test is made between the operating expense and
productive output, covering a period of, say, six months or a year for
each department or process in the plant, as well as for the general
expense, the resulting percentages show what the factory conditions
will average in the long run. Any departure or deviation from this
average in any succeeding month, as shown by the operating statement,
serves to indicate to the manager what he may expect as the results of
the present period when actual figures are in hand and actual results
known. If a falling off in efficiency is noted, opportunity is offered
to make economies before it is too late, and for the balance of the
period to make a better showing. While it is true that an extraordinary
expense, such as a breakdown of machinery, may cause an unfavorable
showing for a particular month, it is quite essential that this
long run average should be closely followed, in order to show that
the previous efficiency has again been maintained, or better still,
improved upon.
[Illustration: AIR─COMPRESSOR ERECTING ROOM, CLAREMONT, N. H., FACTORY,
SULLIVAN MACHINERY CO.]
A comparative statement shows at once any radical departure from normal
conditions and accepted standards, and is, in reality, the manager's
barometer of factory operating. The discovery that his operating
expenses are increasing without a corresponding increase in the output,
means that the storm signals are immediately raised, and there are
likely to be squalls ahead in the department responsible for the
increase, with an explanation in order from its foreman. The operating
statement, then, should show up excessive operating expense, what it
is, where it is, and what caused it.
=33. Source of Data Used.= Having now in mind what characteristics
should be embodied in the tabulation, proceed to gather the necessary
data for the statements.
Continue the original plan and make the _Operating Expense Statement_
consistent with the _Percentage Method_, and extract the data for same
from the cost records and books of account in a factory where this
method is used.
=34. Expense Manufacturing Departments.= First prepare the shop
operating expense statement for the manufacturing departments. If the
cost records have been kept in two binders──one for operating expense
in _Expense Ledger No. 1_, and the other for production in _Production
Ledger No. 2_──the procedure is simple. The _Private Ledger_ account
for each department shows the total expense for each month posted in
total, with all the details shown in _Expense Ledger No. 1_, to which
now refer.
Inasmuch as everything is charged to some job number, both labor and
material, it is simply a matter of drawing off the job totals, which
will check the department total expense as shown in the _Private
Ledger_. A convenient grouping of job numbers will be found of great
assistance; say
_Jobs 1─99. Standing expense orders._
_100─999. Special expense orders._
Generally, _Job 1_ is used to cover miscellaneous expense costs not
covered by other job numbers, and includes _foremen_, _sub─foremen_,
_clerks_, _tool─room men_, _helpers_, _watchman_, _small repairs_,
etc., both labor and material. In the matter of repairs, it will be
noted that such charges originate from two different sources: those
done by the department for itself, and those done for the department
by another department, and frequently spoken of as _inter─department_
work. By providing two cost─sheets for labor items on _Job 1_, one for
direct labor charges, and the other for inter─department labor, the
two items may be easily kept separate.
The material on _Job 1_ should also be kept in the same manner. The
reason for this is apparent, as it shows up at once how much a foreman
is charging to his department himself, and how much is being charged to
him by other foremen on inter─department work.
_Jobs 2, 3, 4_, and so on down the list, can cover the various
subdivisions of shop expense, such as new small tools, repairs to
tools, repairs to machinery, and as many detailed items as may be
considered desirable. If expensive repairs are to be made to one of
the large machines, it is desirable to keep a separate cost of same
by assigning a special job number for the work, say _Job 100_, rather
than throw the cost into one of the standing orders, where it is lost.
In fact, a limit of cost should be placed on all new tool─costs, or
repairs chargeable to standing orders, so that these jobs may not be
used as a dumping ground for extensive repairs, which a foreman may be
inclined to conceal from the manager's notice, and for which a special
permit should be given by the manager, and job number assigned, before
such repairs are begun.
The productive labor of the department will be found in _Production
Ledger No. 2_, the total of which, if added to the total of the
non─productive labor found in _Expense Ledger No. 1_, will equal the
total department pay─roll.
The resulting percentage of expense to productive labor expresses
the ratio existing between the two, and is used as the basis for
distributing the same expense over the various items of production.
The question of distributing expense is only referred to here, having
been discussed at length elsewhere. Inasmuch as it will be seen that
this percentage will fluctuate somewhat each month, it will be well to
show on our statement, the same percentage for the previous month for
comparative purposes. The extent of the monthly fluctuation is the key
to the situation, for these percentages sum up in one figure the actual
results of shop management, toward the lowering of which the best
energies of the manager are always directed.
For the sake of illustration, take a plant with a weekly pay─roll of
about $10,000.00. Having drawn up a form in which the features already
discussed have been provided for, extract from the _Expense Ledger_
some imaginary figures. The expense accounts of the different producing
departments in the plant will appear as shown in Fig. 4.
[Illustration: Fig. 4. Statement of Departmental Operating Expense]
After studying the same a moment, what will the manager of the plant
discover? Among other things he will see at once:
(a) The total expense of operating each department in the works, with
the principal items which go to make it up.
(b) That the total productive labor was 79.9% of the total monthly
pay─roll while the non─productive was 20.1%; that the former has been
apportioned over the various departments and every dollar of same
accounted for.
(c) The ratio of expense to productive labor for each department
reduced to a percentage, the average of which for all the productive
departments is 25.7%.
(d) From the comparative figures, that the August percentage showed
an improvement in operating expenses in most of the productive
departments over those for July and that they are a trifle lower than
the average for the first six months of the year.
(e) That the operating percentage for _Department F_ has jumped up
4.7%, which means that something is wrong in that department, and must
be investigated.
(f) That for every dollar spent for productive labor, he must add 56.8
cents to cover operating expenses, of which amount, 25.7 cents covers
the expense of operating the shops and 31.1 cents covers the general
expense of the plant.
The item of _General Expense_ = 31.1% is not derived from any figures
that appear in this statement, but is taken from the tabulation
covering _General Operating Expense_ presented later. It is desirable
to have this appear here, as well as the _Department_ average
percentage, in order to show the total operating expense (56.8%) on the
labor, bringing total plant results on one sheet.
=35. General Expense Statement.= This statement serves as the companion
sheet to the one just shown for _Departmental Expense_, every operating
expense appearing on either one of these two statements. It is drawn
off in just the same manner as the _Departmental_ statement, the
total of the various expense accounts in the _Private Ledger_ and the
details of the four expense departments shown in _Expense Ledger No. 1_
checking the total _General Expense Distribution_ account shown in the
_Private Ledger_. It will be seen at once that the _General Expenses_
of the plant may be reduced to the following general divisions:
Special Ledger Accounts:
Executive, Insurance, Taxes, Depreciation, Freight, Express, Cartage,
Printing and Stationery, Telephone and Telegraph, Traveling, Postage,
Legal, etc.
Department A──Offices: Clerks and supplies.
Department B──Storehouse: Clerks, laborers, and supplies.
Department C──Power House: Engineers, firemen, coal, etc.
Department D──Yard: Laborers, teams, and supplies.
Unclassified Expense: Not included in above.
The _General Expense Distribution_ account referred to originates by
closing monthly all the various ledger accounts listed above into one
account. This brings all these scattered expense accounts together in
one total, necessary not only for the purpose of distribution, but for
convenience in ascertaining and handling general expense. The details
can be readily taken from the individual accounts before thus closed,
while _Departments A_, _B_, _C_, and _D_ are carried in detail in
the _Expense Ledger_. The total _General Expense_ shown then by the
statement will check the total shown by the _Distribution_ account in
the _Private Ledger_.
The form Fig. 5, will be found a very convenient and satisfactory
exhibit. Detailed explanation is quite unnecessary; the tabulation
explains itself and needs no assistance. The general conclusion arrived
at is that the plant's general expense is found for the month of August
to be 31.1% of the productive labor; in other words 31.1 cents must be
added to every dollar of productive labor to cover its proportion of
the general and administration expense of the plant. The same figures
are also shown for comparative purposes for the previous month, and
also for the first six months of the year; the manager can see at once
exactly how the plant is running.
The same summary figures are placed at the bottom of this statement as
were shown on the departmental statement, that each may show the final
results of the other.
=36. Statements for Foremen.= It is often asked whether or not it is
a good plan to furnish the foremen of the various departments any
cost figures. In a good many shops, it is the rule to _tell them
nothing_ and to keep them in entire ignorance of their expense costs,
the feeling being that in case of an unsatisfactory showing they will
be inclined to _doctor_ their expense returns by diverting them into
production in order to make a more favorable showing.
While it is undoubtedly true that a foreman is frequently tempted to
resort to such measures──not a very far─sighted policy to be sure, for
it is bound to be shown up later──it would seem advisable to furnish
him a copy of his operating expenses not only for his information but
as an incentive to practice economies on his own initiative without
waiting for a _call_ from the manager. Most foremen are quick to see
that it is for their own interests to do this and to make the best
possible showing for their department. It also creates a good─natured
rivalry among the various foremen, which tends towards good results in
which both foremen and management share.
[Illustration: Fig. 5. Tabulation of General Operating Expense]
[Illustration: Fig. 6. Statement of Departmental Expense Made to
Foremen]
[Illustration: Fig. 7. Graphic Chart Showing Fluctuations in Labor
Costs]
[Illustration: Fig. 8. Graphic Chart Showing Fluctuations in Operating
Expense]
The statement furnished the foreman is simply a copy of the expense of
his department as shown on the _Departmental Expense Statement_, and
may be made up substantially as shown on the form herewith presented,
Fig. 6.
=37. Charts.= While the value of chart records is generally admitted,
there will probably be no one in the plant who will appreciate
this form of presenting figures more than the manager, who, from
his mechanical training, will at once grasp the situation as thus
presented. The general trend of operations for the whole period is
immediately revealed at a mere glance, without any systematic study of
the figures involved, and any unusual condition is detected at once.
To show the possibilities of thus arranging comparative statements,
two charts, Figs. 7 and 8, are presented, on which are plotted the
same results appearing on the tabulated statements already shown, or
previously used for the purpose of illustration on Pages 31 and 34.
On one chart is shown the total pay─rolls with split─up of same into
productive and non─productive labor, with the percentage of each on the
total; the other shows the total expense, also subdivided into shop
and general expense, with the resulting percentages of same on the
productive labor as shown on the first chart.
=38. In Conclusion.= While there is no end to the number of statements
that can be prepared and that can be elaborated almost indefinitely,
it is well to continually bear in mind that the statement which best
serves its purpose is the one which conveys the most information in
the fewest figures; is not overloaded with unnecessary detail; whose
tabulated data is well chosen, and whose make─up is sufficiently
attractive to cause it to be read and studied, and not thrown into the
waste basket.
COST SUMMARIES
=39.= Any system of cost records is deficient that does not provide
for the tabulation of all items entering into the cost of individual
units or jobs, in such form as will permit of the computation of the
total of such costs for comparison with records of total manufacturing
expenditures. Three elements enter into the cost of the finished
product──_material_, _labor_, and _expense_.
Under the head of material is included the cost of materials of all
kinds of which the product is made.
Labor is of two classes, _direct_ and _indirect_. Direct labor is
that which is applied directly to the manufacture of a given article;
indirect labor is that which, while necessary to the operation of a
shop or factory, is not applied to specific jobs or the production
of individual units. In a manufacturing industry operating a machine
shop, the labor of machine operators would be classed as _direct_,
while the labor of porters, oilers, and general workers employed in the
shop would be classed as _indirect_. The superintendent of the plant,
shop foreman, factory clerks, engineers, firemen, and general workers
also belong in the indirect classification. For accounting purposes,
indirect labor is divided into two classes──shop indirect and general
indirect. Shop foremen and general workers employed exclusively in the
operation of a single shop are properly classified as _shop indirect_,
and their wages are charged against the operation of the shop. The
superintendent, factory clerks, and general workers necessary to the
operation of the plant, whose time cannot be charged against the
operation of any one shop or department, are classified as _general
indirect_.
Expense includes all items entering into the cost of the product or
the operation of the plant, that are not included in the charge for
material and labor. Expense, like labor, is properly divided into _shop
expense_ and _general expense_. General expense includes the cost
of all supplies and miscellaneous items of expense incurred in the
operation of the plant, which cannot be charged to individual shops.
Such items as heat, light, building maintenance, taxes, insurance, and
depreciation belong in the classification of general expense.
Any classification of expense items that is not made with reference
to a specific plant, must be general; items that in one plant must be
classed as general expense, are applied in others as shop expense. The
item of power costs furnishes an example. In a plant equipped according
to modern engineering ideas, with electrical transmission of power and
each machine equipped with its own motor, an exact distribution of
power costs to individual shops is a simple problem. The total cost
of power for a month is divided among the several shops in proportion
to the amount used by each, as shown by meters. Even the hourly cost
of power for each machine can then be determined. With a shaft─and
belt─driven plant the problem of distributing power costs is less
simple. When power costs can be distributed accurately to departments,
however, it should be done; otherwise such departments as the drafting
room will be charged for power when none is used.
COLLECTING COST DATA
=40.= For the purpose of making the necessary summaries, complete
details of all items of cost for each operation must be collected. This
data supplies the foundation for all tabulations of cost statistics.
The first step necessary to insure a record of the cost of manufacture
of a given article is the entering of a production order, followed
by the necessary shop orders, and the orders of the foremen to the
workers. The details of these orders are fully described in another
section.
When a foreman receives a shop order, his first duty is to ascertain
what material will be needed. He then orders this material from the
storeroom, using a requisition as described in the discussion of
systems for the stores department.
On receipt of the material the quantity is checked against the
foreman's copy of the requisition, which is then sent to the cost
department. In the storeroom, the necessary entries are made on the
stores records, after which the requisition is sent to the cost
department.
When the foreman is ready to assign the work, he issues work orders to
his men. As explained in the discussion of labor records, the usual
form for work orders is a time─card. On completion of each job, the men
deposit the time─cards in the rack provided for that purpose. These are
later sent to the cost department.
In actual practice, it is usually best to have all requisitions and
time─cards collected once during each day by a messenger from the
cost department. Sometimes, the cards are also filled out in the cost
department and delivered to the foreman with his shop order, leaving
him to enter only the man's number. When this plan is followed, the
cost clerk must be familiar with all of the operations required, and
must keep the foreman supplied with work orders to keep the shop
employed for at least a day ahead.
The receipt of the requisitions and time─cards supplies the cost
department with the necessary data for material and direct labor
charges to individual jobs. Data for similar charges on account of
repairs is secured in the same way.
The character of the records compiled from this data determines the
real value of the entire system of cost accounting. If, as is so often
the case, the compiling extends no farther than a mere tabulation of
costs of individual jobs, it does not reach its full value as a part
of the accounting records. Like single─entry bookkeeping, such records
are no more than mere memoranda. The full value is reached only when
the records of the cost department are made a part of the general
accounting system of the business; where controlling accounts absorb
all individual items of cost.
=41. Material Costs.= The compilation of material costs from the
requisitions should exhibit the total cost of all material used in the
plant and the total cost of material used on each job.
The records intended to exhibit the cost of _all_ material issued to
the factory should be divided according to classes, following the same
classifications as used for material purchase accounts in the general
ledger. This is very important as the information secured from such
classifications is needed to form the connecting link between the cost
and general accounting systems.
The value of the accounting records is greatly enhanced if, in the
general ledger, a purchase account is kept for each class of material
and supplies. If but one kind of material is used, only one material
purchase account is needed, but in a furniture business, for instance,
separate accounts should be kept for purchases of lumber and hardware;
in a harness manufacturing business, accounts should be kept for
harness leather, patent leather, saddle leather, and hardware. The
proper classification for any special business will readily suggest
itself, but the material should be classified according to its most
natural divisions.