Expense distribution by production factors is an extension
or development of the machine-rate method influenced by a
new way of looking at the whole process of production. The
central idea of it, as developed by its sponsor, Mr. A. Ham-
ilton Church, 1 is that manufacturing is carried on by a com-
bination of what this authority calls " services," of which
labor is but one. On account of its vitality and visibility,
labor (in Mr. Church's view) has been given undue promi-
nence and placed by itself as if it were the only direct factor
and standard t>y which everything else is measured, while
the various other services have been dumped into the ex-
pense account which is afterwards redistributed by some
method of approximation or average or percentage on labor,
as we have just seen.
Mr. Church's production-factor method proposes to re-
store these various services to separate individual recognition.
In place of the heterogeneous general expense account, he
would keep separate accounts with every identifiable factor
of service other than labor, and then he would apportion
these separate factor accounts separately, each by a logical
method representing its actual relation to the various lines
of manufacture carried on. The principal of these services
or production factors other than labor are Land and Build-
ings, Lighting Heating and Ventilation, Power, Stores and
Transport, Organization, Management and Supervision.
These are distributed by various methods of apportionment,
Mr. Church's test question being always : " How would a
manufacturer pay for this service if (as might be the case
with light or power or land and buildings) he purchased or
1 " Production Factors in Cost Accounting and Works Management," by
A. Hamilton Church; The Engineering Magazine.
hired it from an outside source instead of mingling the supply
of it with his own characteristic function as mere man-
ufacturer?" Thus, the expense attendant on the provi-
sion of land and buildings, or of light, heating and ventila-
tion, is distributed on the basis of square feet or square
yards of floor space, or, to use Mr. Church's term, on " ca-
pacity-area "; power is distributed by horse-power years or
horse-power hours; stores and transport are assessed depart-
mentally, with consideration of the weight, bulk, activity of
movement, and other matters affecting the actual cost of
storage and movement of materials. These separately dis-
tributed rates are then combined into hourly rates applying
to various so-called " production centers," a production cen-
ter being a machine, a group of machines, an individual
work bench, an area of floor space, or any distinct element
in the process of manufacture; these hourly production-cen-
ter rates are then imposed on individual jobs, as these jobs
in their progress employ the time of the different produc-
tion centers.
The system evidently demands elaborate preliminary
study, but when the production-center rates have once been
determined the application thereafter would be no more in-
tricate than that of the machine-hour rate, which is in prac-
tical and highly satisfactory use. So far as I know, the
complete production-factor method of expense distribution is
not yet in service anywhere. It would produce, as Mr.
Church points out, one highly valuable result that intel-
ligent comparison of costs in different establishments could
be made and the quantitative effect of, say, expensive power
in one locality, high rent in another, over-elaborate organi-
zation in the third, and so on, would become instructively
apparent. At present it is rarely possible to contrast costs
in different establishments with any effective practical re-
sult, or at least with any clear discovery as to why they vary,
or just what points are more efficient in one than in the
other.
Of all the expense-distribution systems outlined, the ma-
chine rate probably best combines practical workability and
a reasonable approach to mathematical correctness. It is
not as scientific as the production-factor method, but it is
much more within the comprehension of many industrial man-
agers and within the powers of the average industrial ac-
counting staff. When it is used the machines are often
grouped into classes and class rates are determined instead
of individual rates for each and every machine. Probably
only progressive managers will go even as far as this; but
this far they will go, and have gone, and the method is in
every-day use and has been in use . for years in some im-
portant establishments. Most plants, however, will still re-
fuse to consider anything but the percentage-on-wages or the
man-hour plans. Either of these can be made fairly correct
for ordinary purposes, even with diversified product, if this
product is classified into homogeneous groups, and an ap-
propriate percentage apportioned to each group, corre-
sponding generally to its relative expense-creating charac-
teristics.
So much for factory burden.
The treatment of the general expense presents substan-
tially the same sort of problem as the distribution of fac-
tory expense, but the elements composing it are not as many
nor as complex, and hence the process is not as intricate.
The principal components of general expense are corre-
spondence, advertising and other forms of publicity, sell-
ing, collecting, accounting, and office administration. The
principal danger against which accountants generally have
to be warned is that of assuming that the scale used in dis-
tributing factory expense may be used also for general ex-
pense. There is no necessary relation whatever between
them; that is, there is no necessary correspondence be-
tween the proportionate expense of making an article and
of selling it. A sufficiently satisfactory method of dis-
tributing general expense is what might be termed an ap-
portionment by inspection : That is, we take our principal
classes of product which in one line of business might be
bank vaults, safes, and steel furniture, or in another line of
business might be chain blocks, locks, and architectural iron
work. We next take our principal general-expense ac-
counts, which may be correspondence, catalogues, general
advertising, salesmen's salaries or commissions, and travel-
ing expenses. We decide from the general characteristics
and circumstances what proportion of each of these accounts
is fairly chargeable to each line of product. And finally we
reduce the resultant totals to a percentage basis. This is not
a scientific mode of solution. No mode of scientific solu-
tion is possible. The element of judgment enters largely
into our analysis and distribution of the various accounts
but, as Mr. Church says, " there is a great difference between
judgment and mere guesswork," and by taking the various
items of expense in detail we arrive at a result immensely
more valuable than any that could be reached by guessing at
the whole lump of expense.
The expense accounts we have been discussing, although
they appeared to be indirectly connected with individual
units of product, nevertheless have been actual accounts,
sums of money positively and visibly expended.
or development of the machine-rate method influenced by a
new way of looking at the whole process of production. The
central idea of it, as developed by its sponsor, Mr. A. Ham-
ilton Church, 1 is that manufacturing is carried on by a com-
bination of what this authority calls " services," of which
labor is but one. On account of its vitality and visibility,
labor (in Mr. Church's view) has been given undue promi-
nence and placed by itself as if it were the only direct factor
and standard t>y which everything else is measured, while
the various other services have been dumped into the ex-
pense account which is afterwards redistributed by some
method of approximation or average or percentage on labor,
as we have just seen.
Mr. Church's production-factor method proposes to re-
store these various services to separate individual recognition.
In place of the heterogeneous general expense account, he
would keep separate accounts with every identifiable factor
of service other than labor, and then he would apportion
these separate factor accounts separately, each by a logical
method representing its actual relation to the various lines
of manufacture carried on. The principal of these services
or production factors other than labor are Land and Build-
ings, Lighting Heating and Ventilation, Power, Stores and
Transport, Organization, Management and Supervision.
These are distributed by various methods of apportionment,
Mr. Church's test question being always : " How would a
manufacturer pay for this service if (as might be the case
with light or power or land and buildings) he purchased or
1 " Production Factors in Cost Accounting and Works Management," by
A. Hamilton Church; The Engineering Magazine.
hired it from an outside source instead of mingling the supply
of it with his own characteristic function as mere man-
ufacturer?" Thus, the expense attendant on the provi-
sion of land and buildings, or of light, heating and ventila-
tion, is distributed on the basis of square feet or square
yards of floor space, or, to use Mr. Church's term, on " ca-
pacity-area "; power is distributed by horse-power years or
horse-power hours; stores and transport are assessed depart-
mentally, with consideration of the weight, bulk, activity of
movement, and other matters affecting the actual cost of
storage and movement of materials. These separately dis-
tributed rates are then combined into hourly rates applying
to various so-called " production centers," a production cen-
ter being a machine, a group of machines, an individual
work bench, an area of floor space, or any distinct element
in the process of manufacture; these hourly production-cen-
ter rates are then imposed on individual jobs, as these jobs
in their progress employ the time of the different produc-
tion centers.
The system evidently demands elaborate preliminary
study, but when the production-center rates have once been
determined the application thereafter would be no more in-
tricate than that of the machine-hour rate, which is in prac-
tical and highly satisfactory use. So far as I know, the
complete production-factor method of expense distribution is
not yet in service anywhere. It would produce, as Mr.
Church points out, one highly valuable result that intel-
ligent comparison of costs in different establishments could
be made and the quantitative effect of, say, expensive power
in one locality, high rent in another, over-elaborate organi-
zation in the third, and so on, would become instructively
apparent. At present it is rarely possible to contrast costs
in different establishments with any effective practical re-
sult, or at least with any clear discovery as to why they vary,
or just what points are more efficient in one than in the
other.
Of all the expense-distribution systems outlined, the ma-
chine rate probably best combines practical workability and
a reasonable approach to mathematical correctness. It is
not as scientific as the production-factor method, but it is
much more within the comprehension of many industrial man-
agers and within the powers of the average industrial ac-
counting staff. When it is used the machines are often
grouped into classes and class rates are determined instead
of individual rates for each and every machine. Probably
only progressive managers will go even as far as this; but
this far they will go, and have gone, and the method is in
every-day use and has been in use . for years in some im-
portant establishments. Most plants, however, will still re-
fuse to consider anything but the percentage-on-wages or the
man-hour plans. Either of these can be made fairly correct
for ordinary purposes, even with diversified product, if this
product is classified into homogeneous groups, and an ap-
propriate percentage apportioned to each group, corre-
sponding generally to its relative expense-creating charac-
teristics.
So much for factory burden.
The treatment of the general expense presents substan-
tially the same sort of problem as the distribution of fac-
tory expense, but the elements composing it are not as many
nor as complex, and hence the process is not as intricate.
The principal components of general expense are corre-
spondence, advertising and other forms of publicity, sell-
ing, collecting, accounting, and office administration. The
principal danger against which accountants generally have
to be warned is that of assuming that the scale used in dis-
tributing factory expense may be used also for general ex-
pense. There is no necessary relation whatever between
them; that is, there is no necessary correspondence be-
tween the proportionate expense of making an article and
of selling it. A sufficiently satisfactory method of dis-
tributing general expense is what might be termed an ap-
portionment by inspection : That is, we take our principal
classes of product which in one line of business might be
bank vaults, safes, and steel furniture, or in another line of
business might be chain blocks, locks, and architectural iron
work. We next take our principal general-expense ac-
counts, which may be correspondence, catalogues, general
advertising, salesmen's salaries or commissions, and travel-
ing expenses. We decide from the general characteristics
and circumstances what proportion of each of these accounts
is fairly chargeable to each line of product. And finally we
reduce the resultant totals to a percentage basis. This is not
a scientific mode of solution. No mode of scientific solu-
tion is possible. The element of judgment enters largely
into our analysis and distribution of the various accounts
but, as Mr. Church says, " there is a great difference between
judgment and mere guesswork," and by taking the various
items of expense in detail we arrive at a result immensely
more valuable than any that could be reached by guessing at
the whole lump of expense.
The expense accounts we have been discussing, although
they appeared to be indirectly connected with individual
units of product, nevertheless have been actual accounts,
sums of money positively and visibly expended.
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