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presumably been acquired as much for the purpose of sheltering and accommodating the employees and storing materials, as for affording “floor space” for the machines. They must therefore be considered as indirect or overhead costs, and, as such, assessed over all three elements of direct cost as a " loading " along with other charges of a similar nature in the manner described later in this article.

The next complication that spoils the simplicity of Mr. Whitmore's scheme is “crane service,” the cost of which he thinks must be distributed over the machines served. Why? When a laborer handles materials between machines or departments there is no such complication. We either charge his time direct to the job or assess it as a general labor charge over the direct manual labor. So it is with “crane service.” A crane is a machine, and its time should be reported as such and either charged along with other machine time direct to the jobs or assessed as a general labor charge over the direct machine labor.

Similarly we dispose of his item No. 8, “ Proportion of Superintendence which is special to a limited number of machines.” We much prefer to treat all manual labor as a separate and distinct element of direct cost as explained above. Even the wages of a foreman should be distributed to the work whenever it becomes apparent that he is spending more time on any particular job than is allowable as general superintendence.

Mr. Whitmore's final stumbling block is “expense of interest, repairs and depreciation on tools whose use is confined to the machine." As the original value of the machines includes a complete outfit of such tools; interest, repairs, and depreciation have therefore already been figured. If special tools are bought for a particular job, their cost must, of course, be entirely taken up by that job, unless there is a reasonable probability of their being used again, when a proportionate balance might be carried over in a separate cost ledger account to be absorbed later. But the whole question of loose tools is one which we feel perfectly safe in relegating to the “loading" class of costs to be imposed in a general percentage as a function of machine or manual labor, according as the tools operated are machine tools or hand tools. If we must enter into the cost of every one of some thousands of loose tools used in a large machine shop for the purpose of differentiating between fractional parts of a cent in the total

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cost, we need not be surprised if our clients find reason to complain of the expense of the work of installing a system based on such futile elaboration. The whole cost of upkeep of loose tools in a machine shop does not exceed 5 per cent. of the total cost, and to attempt to identify and charge out the details of such a mass of minutiæ would result in additional costs appearing in the " loading” in respect of accountancy charges probably far in excess of the cost of all the tools in the shop.

Having now arrived at the conclusion that no further complication need be added to the above five items of machine cost, I shall briefly comment on each one with special reference to Mr. Whitmore's views.

1. Interest on Value of Machines. This is simply the annual income that would accrue from the ascertained value at the usual rate of interest. In his lecture printed in the November number of THE JOURNAL OF ACCOUNTANCY, page 23, Mr. Whitmore says: “I think I ought to warn you that this is a method of my own, and that as far as I know it is not used except where I have used it.” As a matter of fact, I introduced the idea three years ago in connection with certain factory accounts.

2. Insurance and Taxes. This covers the annual premium in respect of fire insurance and the taxes payable by the owner.

3. Depreciation. According to Mr. Whitmore, this charge must be made to decrease yearly with the diminishing value of the machine. I prefer to assume, however, that the efficiency of a machine remains constant during the entire period of its operating life; that, in fact, its operating life is really the duration of its efficiency, and that consequently the charges for interest, insurance, taxes, and depreciation remain the same as long as the machine is capable of turning out work. This is strictly in line with the hypothesis that we are simply paying rent for the use of the machines during their working life, and is further supported by the argument that the value of the work done by a machine in any two hours, even years apart, will not vary to any appreciable extent. So long as a machine is kept in good working order it will turn out practically the same value of work per hour. When it ceases to perform efficient work it is time to dispose of it and buy a new machine, and the charge should be figured on this basis. Accordingly we should fix the future efficient life of each machine and determine therefrom a percentage of the value to adopt as an annual charge for replacement.

4. Power Expense. The ascertained annual expense of power, including maintenance and depreciation of plant, will form the charge for distribution over the full capacity horsepower hours of all the machines.

5. Operating and Maintenance Expense. This is purely a charge against costs in respect of actual operation, representing the tear and wear of running, which eventually necessitates expenditure on repairs or renewals. The actual cost of repairing such tear and wear cannot, however, be immediately ascertained for each job handled, as repair work done at any particular time may be in respect of the operations of the machine for weeks previous; so we are forced to establish a fixed charge from the ascertained annual expenditure required to maintain each machine in a proper state of efficiency, including oil and waste and other running expenses.

Having established the annual charges for each machine, as above, we proceed to figure equivalent hourly rates in the following manner:

Items 1, 2, and 3 are by nature “time " charges; that is, they accrue whether the machines are operating or not. We accordingly divide the total of the three by the number of working hours in the year, say 2,700, the result being the rate per hour to be charged to the cost accounts or to idle machine expense, according as the machine is operating or idle, and credited in total to interest, insurance, taxes, and depreciation reserve accounts in their respective proportions. Item 4, as already stated, is divisible over the full capacity horse-power hours, and the result, being multiplied by the individual machine horse power, will give the required hourly rate in respect of power to be charged to costs or idle machines expense and credited to power expense reserve account. Item 5, being purely an operating charge not incurred during idle time, is therefore only assessable over operating hours. We accordingly divide the ascertained year's expenditure by the actual number of hours which the machine ran, getting as a result the hourly rate to be charged to costs in respect of repairs and credited to maintenance reserve account.

The distinction proposed by Mr. Whitmore as between machines in general use and those used for special purposes only would virtually mean establishing an individual standard of full capacity for every machine in the shop. In my opinion, such elaboration would not only be a hair-splitting proceeding, but would undoubtedly destroy much of the usefulness of the record of idle machines for purposes of comparison. A machine shop that installs special machines without being in a position to use their full capacity wants particularly to have the idle time shown up on the same basis as other machines, so as to get a line on the loss resulting from their installation.

The three elementary direct costs being now ascertained and established on a working basis, the second step is to segregate all factory expenses according as they are functions of one or other or more of these direct costs, in order to determine the percentages by which they may be most equitably absorbed.

The following is a rough schedule of such expenses arranged according to the direct costs on which they are naturally assessable: A. Material.

Interest on average investment.
Purchasing department and storeroom expense.
Note.—These expenses (which include rent, taxes, insurance, re-

pairs, and depreciation in respect of storeroom, etc.) should be

taken up in the value of the material when stocked. B. Manual Labor.

Employer's liability insurance.

Hand tools expense. C. Machine Labor.

Machine tools expense. * B and C.

Foremen, timekeepers, and factory clerks' wages.
Land and building expense (after charging off proportions for

storeroom and offices) including rent, taxes, insurance, re

pairs and depreciation.
Departments general labor and expense.
* A + B + C + foregoing percentages.

Superintendents' department salaries.
Factory office expense.

Factory general expense. We are now in possession of what is known as factory cost," and in order to evolve therefrom the total cost of production, it only remains as a third and final step to superimpose another loading to take care of expenses of administration. As these expenses often run to as much as 50 per cent. of the cost,

Expenses marked thus are reduced to a full capacity basis; that is, the percentage is figured over the full output, and the balance not absorbed by the actual production is charged to "Idle Capacity Expense."

and cover the cost of governing both the production and selling departments, great care must be taken to obtain a correct classification of them. In the books all such expenses should be distributed over three columns, as follows: (1) production, (2) selling, (3) general.

The third column is used only when the expense cannot possibly be identified with either of the other two headings. Then, with a completed year's figures before us, we can prorate the third over the other two, and so arrive at a fairly safe estimate of the total overhead expenses chargeable against the year's production as well as those forming a deduction from the sales. The former is the figure which enables us to determine the full capacity percentage, which it will be necessary to add to the factory cost in order to arrive at the total cost, and further than this it is not necessary for us to go. We have now arrived at a satisfactory estimate of what we may call the legitimate or full capacity cost of our finished product. We tag it accordingly, and hand it over to the sales department, on whom devolves the duty of so adjusting the selling price that sufficient margin may be left between that and the cost to provide for selling expense and profit.

The only expense not taken care of is that arising from “ Idle Capacity.” The loading for profit must be made ample enough to cover this, as the selling department cannot be saddled with such expense specifically. The expense caused by machinery standing idle is the result of accident or bad management, and the proper cost figure to quote to the sales department for competitive purposes is the minimum at which the factory can produce the goods while running full swing, leaving it up to the executive to see that the production department keeps it down as near that minimum as possible.

It may be of interest to show that the above rather formidable looking array of percentages may always be reduced to three, one on each element of direct cost.

Using the letters A, B, C for the direct costs, as above, p1, pe, ps, etc. for straight percentages, and f1. f, fs, etc., for full capacity percentages, we get the following formula for the factory cost: F C=A+B+C

+01B+'C+f1B+C

tự (A+B+C++B+poCef BefoC) =(1+43) A+(1+1+1+f3+pifs+fifs) B+(1+ 2+2+3+p?f8+f9f8)C Of course it follows that'

Total Cost = FC (1+f4) which changes the co-efficients of A, B and C in proportion.

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