we can show a foreman that his machine rates, and hence his costs, are being materially increased by several machines being habitually idle, he will either get busy in finding profitable work for the machines or getting rid of them altogether.

Frequently a machine that is idle much of the time in one department may be transferred to another department where it may be profitably employed. This fact, being demonstrated, will be of value in bringing the foremen together in discussing these matters and the foreman who has more work of a certain kind than he has machines to do it with will be alert to find another foreman who has such a machine and not enough work to keep it occupied. An exchange will be effected that will be a saving in idle machine rates to one department and an increase in the machine capacity of the other, and consequently a matter of considerable value to the plant in a general way.

Usually such good results will be automatically brought about without the intervention of the superintendent or controlling authority. There will be the continual tendency to keep the foreman alert to a higher plane of machine efficiency for the entire plant.

CHAPTER XXXVI

MANUFACTURING COST SYSTEMS

The so-called cost system. Bookkeepers and shop men. A growth but not a system. Requirements of an efficient cost system. Analysis of requirements. Relation between the cost system and the shop management. What is an accurate accounting for manufacturing operations? Real estate. Power Lighting. Heating. Shop transportation. Tools and fixtures. Materials. Non-productive labor. General office. Machine rate. Man rate. Productive labor. Sales department. The various forms of orders. Progress of orders. Drawing material. Inaugurating a cost system. Careful examination of conditions and accurate analysis necessary to success.

THERE should be no argument as to the necessity of a well formulated and accurate system for ascertaining the actual costs of the product, including every item of expenditure that may have been incurred directly in turning it out, completely finished and ready for shipment.

Yet if we examine the so-called cost systems in many manufacturing establishments of the present day, we shall find that what is by courtesy called a cost system has grown out of the old-time methods of commercial bookkeeping, to which has been added from time to time a plan, a card, or blank, for this detail or that; the method having been arranged sometimes by one man and sometimes by another, with no general plan to guide and direct these detail matters. Thus, if a detail is a matter of shop work, a shop man is likely to arrange it from a shop man's point of view without much. regard to its effect upon the commercial accounts or the office methods of the concern.

In a similar manner, if the matter should come to the attention of the manager, he is likely to set a bookkeeper to devise a plan, and he, being prone to view the matter from the bookkeeper's position without regard to the shop condition which may effect, or which may be effected by it, will arrange some plan entirely at variance with good shop practice.

Therefore, the work of attempted cost accounting becomes a thing of shreds and patches, a growth, but not a system in any proper sense of the word. Much of the work is duplicated, and there is very liable to be a maximum of expense and a minimum of efficiency. The information gained under such circumstances and by such methods is of an uncertain character and of no great value in determining actual facts in relation to the conditions of the

business. The effect on the management and efficiency of the shop is rather to discourage honest effort toward better conditions than to be any incentive to increasing the output or raising its standard.

An efficient cost system should work to the advantage of both the shop and the office. In fact, it ought to have a beneficial effect upon the sales department as well, thus increasing the efficiency of the administrative, the manufacturing, and the selling of the product.

The requirements of a good cost system are quite definite and important in the management of a manufacturing enterprise as well as in the duty of accurately accounting for the cost of the work. The most prominent of these requirements are as follows:

First. To give, within a reasonable time after the work is completed, the actual and complete costs, including every item of expense to the ownership of the plant, of the operation of the plant as a whole; of the operations of each department of the plant; of the costs of each operation, and the cost of each machine part; of the cost of assembling the groups of related parts; of the cost of erecting the completed machine; of finishing, testing, and shipping it; and the cost of advertising, and selling, or marketing the product.

Second. It should tend to the closest economy in the purchase of all material, and in the care, issue, accounting for, and the use of it.

Third. It should secure the greatest economy of the wages paid for labor, not through lowering wages, but through increasing the efficiency of the workmen by accurately accounting for their work and providing for special remuneration for special individual effort and efficiency.

Fourth. To decrease the cost of all manufacturing operations through accurate records of past and present performances, and their logical analysis and comparison, by which improved methods may be formulated and the efficiency of men and machines secured.

Fifth. To increase the volume of output of the concern by means of the economies mentioned in the last paragraph, whereby the increase of efficiency, the shortening of the time necessary to do the work, and the decrease of costs have combined to largely increase the producing capacity of the plant.

Sixth. To increase the profits of the concern, by reason of the fact that costs of all parts of the work having been accurately determined, correct estimates may be given with confidence, and closer figures may be made upon proposed work than is possible with a rival firm not so accurately informed as to costs; whereby the concern stands upon a better basis in getting new business. Losses are also avoided, as an accurate knowledge of costs shows the manager what works to avoid as unprofitable.

The cost system must not only show a correct record of all manufacturing operations and all fluctuations of costs, but it must show why these fluctuations have occurred and fix the responsibility, first, upon the proper department, and, second, upon the official or individual who may be held responsible.

There is a close relation between the cost system, the shop methods, and the commercial accounts. It should be thoroughly understood that the cost system and the shop methods must not only work in harmony with each other, but, also, with the general accounting system of the concern, so that each may assist and support the other in attaining that success which comes from the union of effort on the part of all concerned.

While some of the results here enumerated are not, strictly speaking, within the province of the cost system, and belong more particularly to the work of shop management, these two branches of the work are so interwoven with each other that it is not practicable to discuss the one without including more or less of the other.

In inaugurating a cost system there are certain calculations to be made as to the fixed charges or expenses that are of the utmost importance, and without which it is impossible to formulate a complete or accurate system of cost accounting. It is not sufficient to say that there are commercial costs with which the manufacturing department have nothing to do, but which will be properly taken care of by the bookkeepers. It is not possible to obtain accurate costs of manufacturing operations, and properly distributed as commercial charges after the product is turned out.

Interest, taxes, insurance, and like charges are as properly a part of the cost of manufacturing as the wages of the workmen or the cost of material.

Machines vary greatly in first cost, hence there is much difference in interest charges. They also vary in a similar degree as to power to drive them and the cost to house them, hence in the real estate and similar charges properly assessed against their operation and output.

There are many other and equally good reasons why all these expenses should be taken into the accounts of manufacturing operations at the earliest possible moment.

By accurate accounting for manufacturing operations is not meant simply all the expenses of a department as compared with all the output of that department. Costs should be in detail and not only cover an order for a machine, but the cost of its several parts, and if a portion of a regular production order, we should have the costs of the different operations on the parts, and also the cost of assembling the groups of related parts and that of erection, finishing, and testing the machine or device. Therefore we must arrange the plan of the general accounts and work out the necessary calcula

tions before entering upon the detailed work of the plan. The classification of accounts and the methods of using them will be as follows, namely:

First. Real Estate. (a) Interest, 5 per cent on the cost of the land and preparing it for the buildings, and on the cost of the buildings and the fire equipment for them; (b) Depreciation of real estate, unless the charge is balanced by the appreciated value of the land; (c) Maintenance and renewal of buildings; (d) Fire insurance and taxes.

The sum of these expenses for a year is divided by the number of square feet of floor surface of the entire plant. This gives a burden per square foot per year. It is reduced to an hourly rate by dividing it by 2500.

Second. Power. (a) Interest, 5 per cent on the cost of equipment for power generation and transmission, and its installation; (b) Depreciation, 5 per cent; (c) Maintenance and renewals; (d) Fire and boiler insurance; (e) Floor rate of boiler and engine rooms as ascertained in first paragraph; (f) Cost of fuel, water, and supplies; (g) Wages of engineer and fireman.

The sum of these expenses for a year divided by the horse power generated, and this amount by 2500, gives the cost per horse power hour.

Third. Lighting. (a) Interest, 5 per cent on equipment and its installation; (b) Depreciation, 6 per cent; (c) Maintenance and renewals; (d) Power, charged per horse power hour as in the second paragraph; (e) Supplies, wages of electrician, etc.

The sum of these expenses for a year divided by the number of lights, on the basis of incandescent lamps (allowing 10 incandescent lamps as equal to one arc lamp), and dividing this amount by the number of hours of lighting during the year, will give a cost of maintaining each light. With this factor the cost of lighting any and all departments is readily computed. As there will be considerable variation from month to month, this account should be made up monthly.

Fourth. Heating. (a) Interest, 5 per cent on the cost of equipment and its installation; (b) Depreciation, 6 per cent; (c) Maintenance and renewals; (d) Power, or its equivalent in steam, for heating; (e) Labor as may be necessary.

The sum of these expenses divided by the space to be heated (100 cubic feet being taken as a unit) gives the cost of heating, from which the expense of heating any room or department may be calculated. This account is to be made up monthly as it will fluctuate considerably from month to month.

Fifth. Shop Transportation. Shop tracks, cars, elevators, cranes, etc. (a) Interest, 5 per cent on equipment and its installation; (b) Depreciation, 5 per cent; (c) Maintenance and renewals; (d) Power to operate cranes, elevators, etc.; (e) Wages of operators.

This being a general account floor rate is not charged.