Part 13

To provide for an analysis of material costs, the form shown in Fig. 19 is used. This is similar to the form shown in Fig. 18, the difference being that it shows detailed costs of each separate kind of material. Fig. 19 is printed on the reverse of Fig. 18. The form is loose leaf and the sheets are filed in a binder in the order of part numbers.

Fig. 20 is a card form used for a monthly comparison of costs of standing orders or expense orders, with labor and material costs separated. The form provides for a comparison of monthly costs covering a period of four years──a very valuable record. As an illustration of the manner of using this form, it will be supposed that machine shop repairs are made on order No. 460. Both material and labor are included in the cost of repairs. One of these cards would be used for this order and, at the end of each month, the totals of material and labor used on machine─shop repairs would be entered. The total would be extended in the third column.

CONTINUOUS PROCESS FACTORIES

=46.= A distinct class of manufacture, which involves certain special problems in cost accounting, is the business in which the process is continuous. For convenience, we refer to such factories as _continuous process factories_. Any factory in which a definite quantity of raw material is converted into a finished product, the quantity of the product not being definitely determined in advance, is classed as a continuous process factory. Examples are flour mills, sugar and salt refineries, nail mills, button and pin factories, and yarn mills.

The problem in factories of this class is to find the total cost of production and the total number of units of production; the former divided by the latter will give the cost per unit.

The cost of production includes the cost of material, labor, and expense. It is necessary, therefore, to keep an accurate record of material and supplies issued to the factory, just as is done in factories manufacturing goods on special orders. Labor costs should be recorded by departments, and the distribution of expense should be by departments, as far as possible. Forms similar to those shown in the preceding pages can be used.

=47. By─Products.= A special problem found in certain industries is to provide for an accounting of salvage, which is either sold in its natural state or manufactured into other products──known as _by─products_. For example, the operation of the cutting room of a harness factory is a continuous process──sides of leather are cut to produce the largest possible quantity of stock that can be used in the manufacture of harness. The pieces produced vary in size, and it is necessary to figure the cost of cut stock by weight. After this stock has been produced, there remains a certain quantity of scrap leather. This scrap leather is not worth what it originally cost in the sides of leather, but has a certain market value. It should, therefore, be weighed and the value credited against the gross charge for leather to the cutting room.

Now, some manufacturers, instead of selling this scrap as it comes from the cutting tables, convert the best of it into such by─products as heels and washers, selling the residue as scrap. Here is an added manufacturing process──a new department, operated because the price obtained for the by─product makes it profitable. The natural thing to do is to keep accurate cost records for this department, charging the material at scrap prices and take credit for the profits. But some accountants contend that the value of the by─product──less cost of production──should be credited against the material charge to the principal product. Provided the volume and value of the by─product is small, there is no serious objection to this plan, but it is not a safe rule to follow.

In some industries, the value of the by─products is greater than that of the so─called principal product. The large soap factories make glycerine and other by─products of greater value than the soap products. So profitable is this branch of the business that the scrap or residue from the manufacture of soap, is bought from smaller factories, to be used in the manufacture of these by─products. The by─products from the manufacture of gas produces a revenue, in the case of a large gas company, more than sufficient to pay the entire cost of operating the plant. Under these conditions, it is readily seen that the manufacture and sale of by─products should be treated as a distinct branch of the business; otherwise it might easily be shown that the principal product is without cost.

PRODUCTION RECORDS

=48.= Methods of recording the cost of material and labor used, and of tabulating these costs for individual jobs, have been discussed in the preceding pages. To complete the cost department records, there should be a record of total production──a record showing the cost of all finished jobs. This information has an important bearing on the general accounting system.

The form of the report of production will naturally vary in different lines of business, though the information needed follows the same lines in all cases. The essential feature is an exact record covering every article manufactured in the factory; and every order for parts must be considered as an order for finished product.

[Illustration: Fig. 21. Monthly Recapitulation of Job Costs]

Sometimes daily reports of finished orders will be required by the main office, especially when the factory is located at a distance. As a rule, however, a report covering a period of a week or a month will serve the purpose.

A form that is adapted for most industries, and for daily, weekly, or monthly reports, is shown in Fig. 21. In the heading of this form, provision is made for the name of the department. When it is desired to keep separate records of two or more classes of goods made in the same factory, it is necessary to make a report of each class. The class is usually indicated by the name of the department; when it is not, the name of the class should be substituted. The body of the form records the date started, order number, date finished, quantity, and cost in detail.

The making of this report requires very little additional labor in the cost department. Each day, when costs are tabulated on the finished job cost cards, the details are entered on the report, each job being placed in its proper class. At the end of the week or month, the total column is footed and the report is sent to the general accounting office. If the office and factory are widely separated, the report should be made in duplicate, and a copy retained in the cost department.

CONTROLLING ACCOUNTS

=49.= Certain controlling accounts are required in the general ledger to complete the connection between the cost and general accounting system──to bind the two together. These controlling accounts, which absorb all of the elements of cost from month to month, furnish the means of proving the accuracy of cost figures; they change the cost system from single entry to double entry.

Two controlling accounts are necessary──_Manufacturing_ and _Expense Distribution_. The former finally absorbs the latter and is, therefore, the principal controlling account.

One manufacturing account may represent the entire product of the plant, or there may be several accounts representing different classes of goods, or departments of the business. In machinery manufacture, the foundry is frequently treated as a separate business; in the manufacture of knit underwear, the yarn and knitting mills are operated as separate plants; in a harness factory, separate accounts are kept of the manufacture of harness, collars, and saddles. Each of these divisions, whether departments or kinds of goods, calls for a manufacturing account.

Expense distribution is subdivided in every business having more than one department or shop. The subdivisions of this account are _General Expense Distribution_ and _Shop Expense Distribution_, an account with the latter being kept for each shop.

The sources of charges to manufacturing accounts are reports of material issued to the factory on production orders, Fig. 9, reports of direct and indirect labor employed on production, Fig. 12, and the expense distribution accounts. Credits to manufacturing accounts are derived from reports of finished jobs, as in Fig. 21.

The sources of charges to expense distribution accounts are: reports of material issued to the factory to be used for repairs, Fig. 9, reports of supplies issued, Fig. 11, reports of labor employed on repair jobs, Fig. 12, and the different accounts covering expense items that must be apportioned. A credit to expense distribution account, with a corresponding charge to manufacturing account, closes this account monthly.

=50. Controlling Account Entries.= The accuracy of the entries to controlling accounts in the general books is of the utmost importance. Upon them depends the proof of accuracy of the cost figures of the cost department on individual jobs.

Material and labor costs are accurately determined. The value of material drawn for all purposes, as shown by the report in Fig. 9, is credited to material purchase accounts, and these accounts are checked against the storeroom records. Reports of supplies drawn are handled in the same manner. The labor report, Fig. 12, covers all labor charges and must agree with the pay─roll for the period covered.

In the distribution of expense, however, there are many opportunities for error. While the total expense to be charged against the factory for a given period is accurately determined, the amount is not known until the end of the period. This is represented by the amounts charged to the different expense distribution accounts. In the meantime, to determine the cost of individual jobs, it is necessary to apportion expense on a percentage basis, as explained in the discussion of that subject. Since that ratio for the current period is unknown, it is necessary to assume that the actual ratio for the preceding period still is correct; therefore, that ratio is used in figuring the cost of all jobs. It is only when the expense distribution for the current period is made on the general books and the true ratio determined, that discrepancies, if any, are discovered. Unless the distribution is accurate, the resulting ratio will be incorrect.

[Illustration: GENERAL OFFICES OF THE PLATT IRON WORKS, DAYTON, OHIO]

Formerly, it was the custom to base the expense ratio on the actual figure for the preceding year, which meant that changes in expense ratio were not taken into account for an entire year. As a result, the total manufacturing cost shown by the books at the end of the year, did not agree with the costs as figured in the cost department; it was usually much higher.

By operating the controlling accounts, making accurate distributions of expense, the period can be limited to one month. Discrepancies are then quickly discovered and the necessary adjustment made in the expense ratio used. If it is found, at the end of the month that the true ratio of expense is higher or lower than for the preceding month, the percentage to be used for the next month is raised or lowered accordingly. With a careful distribution of the expense items each month, the variations in the ratio should be very slight.

The objection is sometimes made that a monthly distribution of expense is inequitable──that certain expenses may be abnormally high in some months and below the average in others. But with proper controlling accounts, this objection ceases to be serious. Certain expenses are paid in one month that should be distributed over an entire year──as taxes, insurance, and repairs. The amounts charged to the expense distribution accounts each month, are only the amounts that should be apportioned to that month. Taking taxes as an example, one─twelfth of the entire amount should be charged each month.

As an example of adjusting entries for controlling accounts, journal pages are illustrated, in Fig. 21, containing entries made at the end of the month──with explanations. It will be noted that the last entry is a charge to _manufactured goods_ account, and a credit to _manufacturing_ account of the total cost of finished goods, as shown in the report, Fig. 20.

This account, _manufactured goods_, occupies the same position as a purchase account. It represents the cost of finished goods to the commercial division of the business. To this cost must be added an amount sufficient to cover selling expense and provide a profit, as is done when goods are purchased for resale. Selling expense should not be included in the cost department's figures; nothing should be added to the actual cost of manufacture, unless it is desired to add a small amount to provide a factory profit.

[Illustration: Fig. 22. Journal Showing Adjusting Entries]

[Illustration: Fig. 23. Journal Showing Adjusting Entries]

_Manufacturing_ account has been charged for the cost of manufacture──material, labor, and expense──and credited with the cost of finished goods. This does not close the account, however, because all jobs started have not been finished, as there still is work in process. The _balance_ of the manufacturing account, then, represents the cost of this work and should agree with an actual inventory of work in process.

No attempt has been made to describe a cost system for a particular business──principles only have been considered in this discussion. Proper application of these principles, however, will result in a practical system for any manufacturing business. The exact manner of applying these principles──the detail──depends on the nature of the business; the results desired are the same in all lines. Physical conditions, nature of the product, the policy of the management, the manner in which the business is conducted──all of these factors must be studied and given due consideration in outlining the system. Then the most simple system that will produce results is best, but in the effort to make the system simple, _necessary_ details should not be overlooked. It must be remembered that in a comparison of details of cost, increases are more quickly located than if the comparison refers to finished work.

[Illustration: PART OF THE INTERIOR OF THE GENERAL STORES OF THE SANTA FE AT TOPEKA Showing Arrangement of Racks and Shelving for Holding Materials, and Longitudinal Disposition of the Bins Enabling the Foreman, from His Office at the End, to Command a View of the Whole Floor. Courtesy of the Engineering Magazine.]

MACHINE SHOP MANAGEMENT

MANUFACTURING

=Manufacturing Conditions and Developments.= Millions of dollars are annually spent in building new factories. Other millions are spent in equipping them with the best machinery that trained and experienced men have been able to devise. Still more millions of money are annually paid to the officials who manage and the employees who man these enormous manufacturing plants.

Why? Why could not these expert employees labor in their own homes or their individual shops, and produce the manufactured goods without all these enormous expenses? What are the necessities which impel men to spend these vast sums of money in erecting, equipping, and operating these immense plants?

Casually considering the question, the _factory_ or _manufacturing plant_ does not seem to be a real necessity. A large force of employees working under a single management does not seem to be the most economical method of producing the desired goods. Certainly every man is free to choose his own particular line of work; and there are many persons who, seeing a large force of employees giving their entire life work to the enrichment of successful manufacturers, while the employees themselves work long hours at hard and laborious tasks and fare so poorly that they are seldom enabled to save any considerable portion of their wages, not infrequently ending an industrious life in poverty and want, are led to believe that the factory is not a necessity or even a benefit to mankind, but rather a means for reducing the individual worker to a condition of grinding servitude, voluntary perhaps, but often the result of dire necessity.

These people, considering all the hardships in the life of factory employees, are likely to hold and often to express the opinion that the highest welfare of the human race really demands a return to the simpler life of early days, when a much larger proportion of the people lived upon farms, producing their own provisions, raising the flax and the wool wherewith they clothed themselves, quite independently of the wealthy classes, whether bankers, capitalists, or manufacturers, the factory as we know it to─day having hardly begun its marvelous era of existence.

Let us consider for a moment how all this has come about. In the earlier years of the independence of this country, the chief dependence was upon the results of agricultural work. In due time the development of the resources of the country has placed manufacturers at the front, so that in very recent years the value of manufactured products has become nearly double that of agricultural.

These results, like many others of a less notable character, commenced from very small beginnings; and it has been by inborn mechanical ability, remarkable ingenuity, patient development, and tireless energy, that mechanical undertakings have been developed from meager initial facilities, until, in the vast manufacturing enterprises of the present day, the American mechanic in nearly all lines leads the world in originality and practical achievement.

=Early New England Mechanics.= When the early settlers of New England labored under the restrictive and harassing laws of the Mother Country, and under their administration were goaded and exasperated beyond endurance in many ways, not the least of which was that of being obliged to purchase many manufactured articles from England at extortionate prices──or, if purchased from other countries, still paying taxes to England for the privilege──they rebelled. Determining to buy no more foreign goods, they set out, at first in most clumsy and primitive fashion, to make for themselves such articles as were really necessaries, and, in noble self─denial, to live without those which they could not make for themselves. They doubtless little realized, however, that they were thereby laying the foundations of the greatest manufacturing country in the world. By the principles thus inaugurated, they instituted the first industrial _boycott_ in the history of the country──the one that has had more important and far─reaching influences than anything of the kind before or since.

=Industrial Freedom.= While the departure of the Pilgrims for this country, and the making of their homes on the "stern and rock─bound coast" of New England, were for the purpose of seeking religious freedom, it is also true that freedom soon meant very much more than this to them; and with a larger conception of their opportunities and possibilities, some of which were in reality forced upon them by adverse circumstances, there came to them the inspiration of _industrial_ as well as _religious freedom_. The world has seen and has given them due credit for the determined and heroic manner in which they went about their self─appointed task; and they have amply demonstrated to posterity their appreciation of and grasp upon the possibilities and conditions, and the breadth and nobility of character which they exhibited in working out the many perplexing problems that confronted them.

=Development of American Industrial Enterprises.= American manufacturing came into being with these small beginnings and crude efforts to fashion those common objects of household necessity and daily use, which, although crude and clumsy, yet answered the purpose until supplanted later by those of more improved form and workmanship. These primitive successes led to greater endeavors, and developed into still broader usefulness, when the time came that necessities had been provided for and luxuries were now demanded by the higher plane of living to which the people had in due time advanced.

Thus the crude beginnings and rude surroundings among which the early American mechanic performed his work, were in his own house. Soon he outgrew these primitive facilities, and built small shops, frequently in the garden or back yard of his home. These gradually enlarged. The development of the business demanded increased facilities, and buildings were erected quite independent of the home surroundings, and two or more men were associated as manufacturers. These plants developed and enlarged, and in due course of time became the machine shops and the factories, which have since multiplied many hundreds of times, not only in number and in value, but in influence and importance, until to─day our country stands the foremost manufacturing nation of the world. This is true, not only as to the volume and value of her manufactured productions, but also as to their great range and diversity of kind and usefulness. One by one the American mechanic has taken up the various classes of work formerly monopolized by this country or that, failing perhaps at first, but always progressing and developing, until, by native ingenuity and unflagging energy, all obstacles have been overcome, all difficulties put aside, new industries have come into being, and other "victories" of peace "no less than those of war" have been added to the laurels of the American mechanic and of his ever─ready and ever─confident partner, the American manufacturer and capitalist. It is to this combination, each confident of and faithful to the abilities and honor of the other, and each

## acting his part in his own sphere of usefulness, that the immense

success of American manufacturing is due.

The factories of to─day are the logical results of a natural growth and development of the various branches of business for which they were originally built and organized. As the buildings increased in numbers and dimensions, the methods of construction, the equipment, and the systems by which they were managed, developed methods of greater economy and efficiency.

=Tools of the Early Mechanic.= The early mechanic had few tools and appliances wherewith to perform his work; and these were crude and primitive, consisting principally of a limited number of hand─tools brought from the Old Country, and occasionally a hand─lathe of modern dimensions and operated by foot─power. But with their few tools and meager facilities, and animated by the condition that "necessity is the mother of invention," these old─time mechanics proceeded with practical common sense and ingenuity to design and construct better tools and machines──which have continually developed, until we have the splendid array of manufacturing machinery seen on every hand to─day. As machinery developed, larger and larger amounts of money had to be expended; and the banker had to be called upon to provide it. Thus the capitalist became the partner of the manufacturer, the one furnishing the mechanical ability and inventive genius for the actual designing and building of machinery and manufactured goods, while the other contributed the money to carry on the work, and the business ability necessary to market the product.

=Relations of Capital and Labor.= In brief, this is the condition to─day. But, says the carping critic, "there are often hundreds of struggling and hard─working employees where there is one rich manufacturer." This may be partly true, although it is a fact beyond dispute that the American mechanic is the best paid workman in the world. It is true that there are hundreds of workmen to one capitalist. Why? The Creator has so ordained that there shall be many of moderate ability, and but few possessing the unusual ability and talent to lead them. So it has ever been since the days of Moses, and so it probably will ever continue to be. Doestick's regiment composed entirely of colonels was a manifest absurdity, and so intended as an illustration of a well─known and natural condition that should be realized by every reasonable and thoughtful man who considers these questions.