Machine Hour Method
The machine-hour method of expense distribution makes
a much closer approach to accuracy than either of those so
far described, because it recognizes the fact that in modern
manufacturing the producing unit is not a single individual,
but a complex combination of the machine or piece of ap-
paratus, the man or men tending this machine, the equipment
surrounding the machine, and the suitably prepared space
necessary for the installation and operation of the machine.
In further explanation of this method of expense distribu-
tion the term " machine " is used in a general sense, with
the understanding that it includes anything from a soap
kettle to a jeweler's lathe.
In the administration of the machine-hour method of
apportioning factory expense, the preliminary step is to de-
termine on an hourly basis the cost of running each machine
in the works. This cost includes the charge for rental,
lighting and heating of the space the machine occupies, and
the surrounding space necessary for its operation; interest
on the cost of the machine and allowance for repairs and
depreciation; cost of power to run the machine; cost of
services, such as cranage and transportation of various
kinds to feed or to remove materials; cost of indirect labor
attendant upon the machine; any incidental or special ex-
penses; and a just proportion of the general burden of
administration, superintendence, non-productive factory
labor, etc.
Having obtained the totals of these various charges for
a month or a year, they are divided by the number of hours
during that time the machine can be expected to run, this
figure being reached by a careful study of past experience,
and if necessary corrected by later actual observation. The
quotient is the hourly rate of that machine. Every job
coming to the machine is then assessed with this charge for
the number of hours or fraction of an hour it spends on
the machine.
Evidently, if each machine in the plant is thus rated,
and each job coming to each machine is thus assessed with
its individual expense burden, and if all the machines are
in operation during the normal and expected portion of
the time, the whole expense burden would be distributed in
close accordance with the use each job has made of the
facilities of the shop. This seems as fair a basis as could
be found. The trouble begins when the activity of the
plant differs largely from normal. The machine rates then
distribute too much or not enough to cover the actual ex-
pense, according as the plant is running overfull or is partly
idle. This, however, is the unavoidable difficulty caused
by the inherent nature of expense, as pointed out at the
beginning of this study. When too much expense is thus
charged against the jobs of an active period it may be al-
lowed to go as a reserve to be drawn upon in a sub-normal
period, or it may be credited back to the operations of that
period pro rata. When too little is charged, the undis-
tributed expense remains to be apportioned by what Mr.
Church calls a " supplementary rate," either on an hourly
basis or in the same proportion as the original machine rate. 1
There is another perplexity in the use of machine rates
which need not be discussed at length here, but should be
noted in passing because of the active discussion it excites
amongst accountants. Suppose a small job, which comes
along when its regular machines are all full, is done for
convenience's sake on a heavy and expensive machine that
might perhaps otherwise have stood idle; this normally in-
expensive little job is charged under these peculiar circum-
stances with the high machine-hour rate, corresponding to
the expensive machine on which it was accidentally done.
The result is that its cost appears abnormally high. If used
as an estimate for further transactions this cost would lead
to distorted results. Yet if it is not used, the rigid account-
ant says, we are doctoring our records and taking costs not
as they were, but as we thought they ought to have been.
This is what is known as the problem of the penalized
job. It is somewhat academic, and we will not go into
1 " The Distribution of Expense Burden."
it further than to point out that if the case arises very often
in the practice of any plant, it suggests some inefficiency in
the balance of the equipment which may be remedied by
proper changes.
The machine-hour method of expense distribution makes
a much closer approach to accuracy than either of those so
far described, because it recognizes the fact that in modern
manufacturing the producing unit is not a single individual,
but a complex combination of the machine or piece of ap-
paratus, the man or men tending this machine, the equipment
surrounding the machine, and the suitably prepared space
necessary for the installation and operation of the machine.
In further explanation of this method of expense distribu-
tion the term " machine " is used in a general sense, with
the understanding that it includes anything from a soap
kettle to a jeweler's lathe.
In the administration of the machine-hour method of
apportioning factory expense, the preliminary step is to de-
termine on an hourly basis the cost of running each machine
in the works. This cost includes the charge for rental,
lighting and heating of the space the machine occupies, and
the surrounding space necessary for its operation; interest
on the cost of the machine and allowance for repairs and
depreciation; cost of power to run the machine; cost of
services, such as cranage and transportation of various
kinds to feed or to remove materials; cost of indirect labor
attendant upon the machine; any incidental or special ex-
penses; and a just proportion of the general burden of
administration, superintendence, non-productive factory
labor, etc.
Having obtained the totals of these various charges for
a month or a year, they are divided by the number of hours
during that time the machine can be expected to run, this
figure being reached by a careful study of past experience,
and if necessary corrected by later actual observation. The
quotient is the hourly rate of that machine. Every job
coming to the machine is then assessed with this charge for
the number of hours or fraction of an hour it spends on
the machine.
Evidently, if each machine in the plant is thus rated,
and each job coming to each machine is thus assessed with
its individual expense burden, and if all the machines are
in operation during the normal and expected portion of
the time, the whole expense burden would be distributed in
close accordance with the use each job has made of the
facilities of the shop. This seems as fair a basis as could
be found. The trouble begins when the activity of the
plant differs largely from normal. The machine rates then
distribute too much or not enough to cover the actual ex-
pense, according as the plant is running overfull or is partly
idle. This, however, is the unavoidable difficulty caused
by the inherent nature of expense, as pointed out at the
beginning of this study. When too much expense is thus
charged against the jobs of an active period it may be al-
lowed to go as a reserve to be drawn upon in a sub-normal
period, or it may be credited back to the operations of that
period pro rata. When too little is charged, the undis-
tributed expense remains to be apportioned by what Mr.
Church calls a " supplementary rate," either on an hourly
basis or in the same proportion as the original machine rate. 1
There is another perplexity in the use of machine rates
which need not be discussed at length here, but should be
noted in passing because of the active discussion it excites
amongst accountants. Suppose a small job, which comes
along when its regular machines are all full, is done for
convenience's sake on a heavy and expensive machine that
might perhaps otherwise have stood idle; this normally in-
expensive little job is charged under these peculiar circum-
stances with the high machine-hour rate, corresponding to
the expensive machine on which it was accidentally done.
The result is that its cost appears abnormally high. If used
as an estimate for further transactions this cost would lead
to distorted results. Yet if it is not used, the rigid account-
ant says, we are doctoring our records and taking costs not
as they were, but as we thought they ought to have been.
This is what is known as the problem of the penalized
job. It is somewhat academic, and we will not go into
1 " The Distribution of Expense Burden."
it further than to point out that if the case arises very often
in the practice of any plant, it suggests some inefficiency in
the balance of the equipment which may be remedied by
proper changes.
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