The Manufacturing or Production Department of a Large Organization. - Going Industrial Engineering

The manufacturing or production department of a large organization.




We are con-
cerned only with a brief general outline of the principal in-
stitutions by which industrial operations are carried on; and
having now broadly sketched such an outline, we will pro-
ceed to an equally rapid survey of the methods generally
followed in the particular department in which we are spe-
cially interested the manufacturing or production de-
partment of a large organization. That is, we will resur-
vey the operations of organized manufacturing, not sci-
entifically dissected and disconnected as in the foregoing
chapter, but in actual operation.

The fundamental proposition is that nothing shall be
made no order to manufacture shall be given out
without authority of some duly authorized and responsible
official. Whether the article to be manufactured is special,
from special or original plans, or whether it is a stock article
made by standard patterns, someone in authority " vivifies,"





by his signature, the order that starts the process of manu-
facture. Such an order to manufacture an article or a lot
of articles is usually called a production order.

The production order is general. It may call for (say)
" 20, No. 2 milling machines," or " 10 Eclipse engines,
8x12 " or " 100 type C, 10 k.w. d. c. motors." Every pro-
duction order is therefore likely to involve several or many
different items or acts of production. The production order
is therefore first sent to the engineering or drafting depart-
ment and is there reduced to these specific elements,
although, in the case of strictly standard products, standard-
ized lists of details may be filed in the production depart-
ment and may be taken off as a matter of routine. In either
case, the production order next appears as an itemized list
of materials and jobs, immediately understandable by the
shop officials. The superintendent of the shop or depart-
ment or his duly authorized subordinates then secure the
materials needed, by a requisition upon another department
which has custody of all materials. This department is
called the stores department. The materials being secured,
the various jobs of work upon them are then given out to
individual workmen, sometimes by a central work-dispatch-
ing office, sometimes by the foremen of the various depart-
ments. These separate orders to do specific parts of the
work are generally called works orders or job tickets. Each
job ticket, for convenience in accounting with the men, has
its own serial number; but each job ticket carries in addi-
tion the number of the general production order to which
it belongs.

Each work order or job when finished is delivered to the
finished-stores department, or to the assembling or erecting
department by which it is in turn delivered to the finished
stores. Notice of the completion of the entire production
order, or of each installment of it until it is complete, is
returned by this finished-stores department to the office from



which the production order originated and the cycle is
thus completed.

The original production-order number appearing on the
ticket or instruction card accompanying each job passing
through the shop serves to identify it and direct it surely to
the intended destination, though it may be mingled among
all sorts of other work at various points on its way. This
is something like the way in which an address carries a let-
ter to its destination, although that letter travels part of the
way in the mail bag with thousands of other letters. Rec-
ords of starting and finishing times- for each job are made
on the individual job tickets; these serve as checks against
the total time of the workmen employed, and afford data
for cost computations. Manifold copies of the production
orders and the work orders, sent ahead to the departments
participating in their production, notify these departments
of work in progress for which preparation must be made.
When the original comes through with the completed job
it falls naturally into the files under the same number with
the manifold, thus automatically announcing and identify-
ing itself. Manifolds of which the originals have not yet
appeared reveal work unfinished or delayed. You have
here a hint at the basis of the system of stock tracing by
which the operations of the plant may be kept up to
schedule.

It will be noticed, probably, that the cycle of manufactur-
ing begins and ends in the stores department. Before the
operations can begin, material must be secured from the stores
department by authorized requisition. When the process
is complete, the finished goods are delivered to the stores
department again for shipment or delivery. Indeed, mate-
rial is supposed to be always in the custody of the stores
department is supposed to be and often is actually returned
to the stores department after each successive step or opera-
tion in the entire process of manufacture. It is, therefore,





frequent and very good practice to proceed upon the theory
that the stores department is the responsible agency for see-
ing that a stock of both finished product and raw material
is always maintained sufficient to meet the expected demands;
that all shipping orders are issued to the stores department
and not to the manufacturing department; and that what-
ever manufacturing orders are necessary for the maintenance
of the warehouse stock of finished product, shall be issued
by the storeskeeper. Even in the case of special machinery
the same routine can be observed, except that in that case
the finished product of Course will not be stock and will have
to be manufactured in accordance with the special designs
after the shipping order has been received. A very impor-
tant function of the stores department, therefore, is to insure
against delays or interruptions either to manufacture or to
shipment which would occur if items in the stock of either
raw or finished goods were allowed to run out, and at the
same time to avoid tying up an unnecessary amount of capi-
tal in wasteful idleness by keeping too large a stock either
of raw materials or of finished product on hand. The
actual procurement of raw materials is generally handled by
a sub-department called the purchasing department, which is
responsible for quality, prices, and arrivals of the requisite
supplies, but makes purchases only upon requisition from the
stores department, so far at least as materials are concerned.
In many cases machinery, tools, fuel or equipment not clas-
sified as raw material for manufacturing purposes and not
kept in the storekeeper's stock, are purchased directly upon
requisition from departments by which they are used.

The last great industrial function recognized by a sepa-
rate department is selling. In several senses it dominates
the whole. Things are not usually made unless they can
be sold. In cases of special manufacturing, such as ma-
chinery made to order from individual plans, the manufac-
turing plant produces what the sales department specifies.





In the case of standard stock manufacturing, like watches
or sewing machines, it turns out an article for which the
sales department can find a demand. On the other hand,
the operations of the sales department will not result in
profits unless they are carried on with a correct knowledge
of manufacturing department costs, of the limits of the manu-
facturing department's ability or capacity, and so on. There
must be close co-operation and co-ordination. The engi-
neering department is to a considerable extent the co-ordinat-
ing center between manufactures and sales. But being a
little nearer to the latter, it is usually found forming a sub-
division or part of the selling department.

Certain very able critics have urged forcibly that modern
tendencies, especially American tendencies, are toward over-
magnification of the salesman and his functions, and under-
appreciation of the engineer and his capabilities. It is a
natural frailty, whether human or commercial. The sales-
man is the man who brings the money in. The engineer
usually directs its outgo. The man who visibly or ap-
parently stands nearest to income and profits has the first
consideration. But it is a serious fact that in a large way we
have nationally devoted too much thought to obtaining and
raising prices a salesman's function and too little to
lowering the costs of production an engineer's function.



Attention to lowering production costs by cultivating higher
efficiency, by eliminating wastes of material, of labor, of
power, or of any other industrial element, is now at a phase
of rapid increase. It is here that the greatest opportunity
lies for the industrial engineer and the works manager.



Source: Chapter 4 Going

Distribution of Expenses - Going Industrial Engineering - Chapter 6

CHAPTER VI

DISTRIBUTION OF EXPENSE

ONE underlying idea appears in all the methods of ex-
pense distribution or apportionment that are com-
monly employed. It is this : Expense, as has been re-
peatedly pointed out, does not naturally connect itself
with individual jobs or individual units of product. It
gathers like one general cloud over the whole business, but
not in distinct wreaths around each transaction. Material
and direct labor, however, do, from the beginning, identify
themselves with individual operations or individual units
of product. You can almost see each job, as it goes through,
attach to itself successive items of material and of work.
You can see each man and each machine putting material
and work together, in visible and measurable quantities,
until each piece of product is completed. Now, the under-
lying idea of all methods of expense distribution or appor-
tionment is to use some one or more of these visible, tangible,
measurable elements as a gauge, and to pro-rate the ex-
pense allotment by it. That is, they burden each job or
each unit of product in proportion to the material that
goes into it, or the wages paid for it, or the time spent
working on it, or the use it makes of the machines and
other facilities in the factory. This gives us five cardinal
methods of expense distribution : By material, by percentage
on wages, by man hours, by machine rates, and by produc-
tion factors. We will take up their operation and their
characteristics successively.


Distribution of expense by material


Distribution of expense by material is a method of
limited applicability. Its usefulness is confined to com-
paratively simple industries such as metallurgical or
structural-material works, where the product is nearly or
quite uniform. In a brick yard, or a blast-furnace plant,
or a gas works or perhaps in a pipe foundry or other
establishments of like character, it may work as well as
any other plan, simply because there is no need of distribu-
tion, properly speaking, but only of equal sub-division.
Indeed, if the product of a plant is absolutely homogeneous

all just alike it makes no difference whether you ap-
portion expense by count or weight or measure or flat cost

you can not get wrong as between one unit and another.
An expense rate per ton or per thousand is quite sufficient
for purposes of estimating or for comparison between one
period and another. But when the product is not all alike,
the introduction of material into expense-distribution calcula-
tions only confuses and distorts results. In the remaining
methods, therefore, we shall hear no more of material or
value of material.


percentage-on-wages method

The percentage-on-wages method of apportioning factory
expense is probably the most generally used. As a start-
ing point in this method, we take the total for a given time
(say a month or a year) first of the wages of the productive
labor during that period, and second of the factory expense
during the same period, and we find what is the percentage
relation of the expense to these wages paid to productive
labor. Suppose we find that the total factory expense is
60 per cent of the direct labor payroll; then we load every
job done during the period with 60 cents additional for
each dollar of direct wages that is expended upon it. If
we find, for instance, that a certain small steam pump is
shown by the job ticket to have cost $50 for material and
$100 for labor, we add 60 per cent of $100, or another
$60, for the factory burden, and obtain as the shop cost of
the product $50 plus $100 plus $60 equals $210.

If our output is all substantially of the one general class,





and if the various machines, tools, or pieces of apparatus
in our manufacturing plant are not very different one from
another as to expense of operation, and if our wages are
fairly uniform as between one operative and another, the
results obtained by this method will be quite accurate. But
if we have a great difference in equipment, having some
very smr/ll machines taking little room and power, and
cheaply operated, and some very large machines taking up
a great deal of room and power, and involving large ex-
pense for operation and wages; if we have passing through
the shop some very heavy work and some very small and
light work; if some of our labor is highly paid and some is
very cheap this method may lead to very inaccurate re-
sults. A job of fitting, taking 50 cents worth of a man's
time on a little bench lathe, tucked away in an otherwise
useless corner, would be burdened just .the same as a job
taking 50 cents worth of a man's time on a huge costly
boring mill, occupying the whole end of a building; for the
percentage-on-wages method recognizes only the one visible
factor of money paid for human labor and ignores differences
in the extent to which different items of product make use
of mechanical equipment. As a large proportion of the
expense burden arises from the cost of installing and re-
pairing machinery, and moving product to and from the
machines, we can not arrive at true results by a method of
averaging that allows no weight to this particular factor.


man-hour plan

The third method is the man-hour plan. It varies from
the preceding system in that the distribution is made pro-
portionate to the time worked on each job instead of to the
money paid for that time. At the first glance this might
seem like the same thing, but on further consideration it
will become evident that there are important differences.
For example, suppose we take a job away from a $3-a-day
man, and give it experimentally to a good clever $i.5<>a-
day helper who completes it in the same number of hours




that his predecessor did. Under the man-hour plan it will
still carry the same expense burden as it did before, be-
cause it takes the same time. This is a correct result, for
the mere change of operative has not changed in any way
the demand which the work makes upon the general organi-
zation and facilities of the plant; has not changed in any
way the amount of expense it creates, and hence should not
change the expense apportioned to it. But under the per-
centage-on-wages plan, as we saw a few moments ago, the
expense burden distributed to this job would have been
cut in half by the mere fact that the man who did it was a
$1.50 man instead of a $3 man. Suppose, on the other hand,
the $1.50 man proves clumsy and inexpert, and takes twice as
long as the $3 man did to finish the job. Under the man-
hour plan the job would be burdened twice as heavily for
expense as it ought to be, since it has been twice as long
occupying floor space, occupying space on the machines, tak-
ing the attention of foreman and timekeepers to look after
the bungling job. Under the percentage-on-wages method,
as we saw, this slow job, done by the cheap man, clogging
up the shop and delaying the progress of other work, would
be charged with just the same expense burden as the job
done in half the time by the competent man, because the
total wages were the same in both cases.

In some particulars, therefore, the man-hour plan is more
correct than the percentage-on-wages plan, but when we
look a little further we find that, like the percentage-on-
wages plan, it takes no cognizance of the machine element.
All jobs taking two hours are burdened the same, whether
the two hours' time is on a valve-seat grinder or on the
largest engine-bed planer in the shop.

Machine Hour Method - Expense Distribution - Going

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.

Expense Distribution by Production Factors - Hamilton Church - Going's Explanation

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.

Distribution - Depreciation Expense Going

There is,
however, another element in the cost of manufacture closely
associated with expense (so closely that I have not hereto-
fore referred to it) and yet characterized by qualities quite
distinctively its own qualities which differentiate it from
expense and suggest the need of a different mode of treat-
ment. This last element of cost is depreciation. Deprecia-
tion is the decrease in value of our property, that is, espe-
cially our buildings, machinery, and equipment, by the fact


that it is growing older and is drawing nearer the time when
it will be worn out, or when through some change of condi-
tions, processes or methods it will become obsolete, and will
have to be discarded, scrapped and replaced by something
new. We must therefore anticipate this inevitable depreci-
ation by estimating in our costs, and recovering from our
sales, a reserve fund, thus accumulating in advance a fund
from which the depreciated equipment may be replaced.
Our cost must include not only the material and the labor
that have actually gone into the product, plus a share of the
expense burden actually incurred. It must include further
a factor for something that has not yet happened, or at least
has not yet materialized in the form of an expenditure in-
curred and recorded on our books. We must provide for
the depreciation which is going on day by day, even though
it may not make itself evident for a long time to come, or
until the wear and tear have grown serious enough to re-
quire overhauling or replacing of the depreciated item.

In reckoning the allowance to be made for depreciation,
we have not only the same difficulties that we have in the case
of expense,- that is, the difficulty of apportioning an indi-
rect account to direct classes or items of product but we
have the additional problem of determining what amount we
must thus apportion.

We have seen that authorities differ in their treatment of
the expense account. They differ more widely and aggres-
sively yet over depreciation. Some treat it rather curtly, al-
most with indifference, maintaining that where repairs and
renewals are consistently kept up, depreciation need be rec-
ognized only by comparison of annual inventories and the
use of such averaged figures as may be thus disclosed. At
the other extreme, some accountants argue fiercely that de-
preciation should be assumed at an arbitrary percentage of
the value of our equipment, and they split hairs in the debate
whether this percentage should be taken always on the orig-
inal investment, or each succeeding year on the investment
as reduced by preceding deductions. 1

It is a proposition upon which it is perhaps impossible to
generalize except perhaps to this extent:

First, that it is very dangerous to regard investment in
short-lived equipment (such as small tools, for example) as
a plant account a part of our fixed capital at all; it
should be considered an expense and so charged at once, or
if carried as an asset should be given only a nominal value.

Second, that items of intermediate permanency such as
drawings, patterns, should be credited as an asset only at a
fraction of the cost and a very high factor of depreciation
should be applied to them year by year until they are
charged off and disappear.

Third, that as to the permanent items such as machinery,
apparatus, power-plant, heavy tools, structures, etc., the
chief danger to the continuance of their value is not so much
that they may be destroyed by wear and tear as that they
may be superseded by some new and radical development.
Suppose we are building large reciprocating steam engines:
Our costly drawings, patterns, templates and equipment for
a great horizontal and vertical compound type may be made
obsolete in a year or two by the introduction of the steam
turbine. Suppose we are operating a cable-road: our
power-plant may have to be scrapped to put in electric trac-
tion. Suppose we own a bicycle factory: it may be thrown
into idleness because the popular whim turns to tennis and
golf. Suppose we are prosperous manufacturers of tin-
plates in Wales: our mills may be closed by the Dingley
tariff in the United States. Suppose we are proprietors of
a machine-shop : it may have to be remodelled throughout
and largely re-equipped for electric driving and the use of
high-speed steel. In some of these cases, even, it might be

1 A standard work on depreciation is " The Depreciation of Factories,
and their Valuation," by Ewing Matheson; E. & F. N. Spon.





argued that the renewal expense should not be charged
against the profits of the past as a depreciation, but rather
as a new investment justified by the larger profits obtain-
able in the future through the improvement. Others might
be held to be " risks of the business " rather than cases of
depreciation. If we are to provide for such contingencies
by a factor of depreciation, depreciation becomes to a cer-
tain extent a sort of insurance against an indeterminable
risk. It is prudent to provide for it; to consider that cer-
tain future expense not yet visible is yet inevitable; to assess
a provision for it as a part of our calculated costs, and to
set aside a corresponding share of our current receipts as a
reserve fund to meet the contingency. But what the factor
should be in any given case I think can be determined only
by the method of inspection and the exercise of deliberate
and intelligent common-sense.

There is, however, a certain ethical consideration, as
pointed out by Prof. L. S. Randolph, 1 which should not be
overlooked when a rate of allowance for depreciation is de-
termined. It is this: In industrial and corporate undertak-
ings generally there are usually at least two classes of owner-
ship interests, typically represented by the bondholder and
the stockholder. The bondholder lends capital on the se-
curity of the actual physical property. In view of this
security he lends the money at a comparatively low rate of
interest, looking to this physical property for the ultimate
return of his principal. The stockholder seeks his return
from the profits of the business and generally expects to re-
ceive a higher rate of interest. He owns the business, sub-
ject only to the lien given to the bondholders for the bor-
rowed capital. He manages the business. Its success is
proportionate to his skill and ability and all surplus earn-
ings accrue to him.

Now if in calculating and distributing his profits the
1 The Engineering Magazine, August, 1910.





stockholder does not make proper provision for restoring
wear and tear, replacing worn-out equipment, and main-
taining the value of the plant, which is the bondholder's se-
curity, he is not keeping up the value that he has pledged
against the money borrowed from the bondholders. He is
not dealing fairly with his creditors.

If, on the other hand, the stockholder set aside an un-
necessarily large proportion of his gross earnings for a de-
preciation fund, thereby diminishing his apparent net profits
or his surplus available for dividends, this fund nevertheless
remains in his hands for administration and need be drawn
upon only so far as actual depreciation occurs, the remain-
der reverting to the stockholder, so that he does himself no
wrong. This is, in other words, an argument for a high
rather than a low depreciation allowance.

Clearly, the distribution we have been talking of is all
retrospective. It shows us the dollars and cents of what we
have done. This is very important, but it is even more im-
portant to know what we can do in the future. In other
words, the gift of prophecy is often more valuable
than the knowledge of history. Therefore the chief
object of putting history into this form is to make
it effective for prophecy that is, for determining the
cost of new product, estimating the cost of new work,
and directing the expansion of business along the most
profitable channels. And beyond that, figures of cost in-
telligently prepared and analyzed serve as true guides show-
ing exactly where our losses, wastes, and inefficiencies occur,
revealing changes or irregularities requiring investigation,
and calling as loudly as figures can call for the reforms and
economies that will make our output larger, better, or lower
in cost of production. The real purpose of cost finding is
cost reduction. 

The Primary Wage System and Issues - Going Industrial Engineering - Chapter 7

CHAPTER VII
LABOR. THE PRIMARY WAGE SYSTEMS




LABOR represents the most interesting, the most difficult, and probably the best studied part of works man- agement and yet the part which is furthest from finality. This is because it has to deal not with a pas-
sive " party of the second part," such as we have
to consider in material and machinery, but with human
ambitions, hopes, fears, and prejudices in short; with
" the other fellow.' 1 Until the race reaches the end of its
evolution we shall never reach the end of the labor problem.
Labor may of itself be the largest element entering into
manufacturing costs, and therefore may deserve per se the
largest measure of attention because of its intrinsic impor-
tance; but even when it is relatively one of the smaller fac-
tors in the equation, it may have immense potentiality in af-
fecting the values of the others which appear intrinsically
larger. It may, so to speak, be not a separate quantity in
the equation, prefixed by a plus or minus sign, but a co-effi-
cient or even an exponent, affecting the value of an intrin-
sically much larger quantity. A man whose wages are 30
cents an hour may control the operation of a machine
which, for interest on its first cost, maintenance, depreciation,
floor space, and stand-by losses, represents a fixed charge of
$3 an hour. If the man is slow in his movements, and takes
an hour and a half to do a job which he should finish in an
hour, the important loss is not the 15 cents in wages for the
man's time, but the $1.50 for the machine's time. If his
work is badly laid out so that he waits 15 minutes between
jobs, the important loss is not the 7^ cents paid him for his
time of idleness, but the 75 cents loss through the idleness
of the machine. Or, again, the $3 a day man may work half
a day on a piece worth $15 and by carelessness or incom-
petency may spoil the job. The important loss is not the
$1.50 paid in wages for which we get no return, but the $15
for the material destr9yed. In many classes of manufacture
the investment in general plant and mechanical equipment,
and the fixed charges for power and transmission, main-
tenance, superintendence, management, etc., make what is
called the " overhead burden " a larger tax than the pay-
roll; in such a case it may be a wise policy to stimulate pro-
duction by an increase in wages more than proportionate to
the increase of output, because we shall recoup our extra
wages expense by the reduction of the burden resting upon
each unit or product. To be more specific: Suppose we
are turning out 100 machines a day, our daily labor bill be-
ing $500, the cost of our material another $500, and our
general expense $1,500 per day. The cost of each machine
is then 500 plus 500 plus $1,500, divided by 100, equals $25.
Suppose next, by doubling their wages we can spur our men
on to such zeal that they turn out 150 machines a day. We
are paying 100 per cent more for labor and getting only 50
per cent more product. Nevertheless, our total cost of
$1,000 for labor, $750 for material, plus $1,500 for fixed
expense, equals but $3,250, and when this is divided up
among 150 machines the cost of each is shown to be only
$21.67. We have reduced our total manufacturing cost
$3-33 n each unit, or about i2 l / 2 per cent. And, in addi-
tion, by the increased output we have secured another ad-
vantage; that is, the more rapid turnover of our invested
capital.

The general principle involved is this: Material cost and
labor cost per unit of product naturally vary directly with
the number of units we manufacture; but expense costs are,
in a very large proportion at least, invariable. They remain
just the same whether the amount of product we turn out is
large or small. If we turn out but few units the expense
cost of each, therefore, becomes great. If we turn out a
great many units the expense cost of each becomes very
small. We can therefore often, and indeed almost always,
well afford to increase the wages cost per unit, if by so doing
we can stimulate the workers to turn out a large volume of
work and so cut down the expense cost per unit. The sav-
ing in expense cost compensates the manufacturer for the in-
crease of wages cost. The increase of wages compensates
the workman for his extra effort. This is the fundamental
idea underlying the advanced wage systems. It is quite
simple, but failure to understand it and realize its impor-
tance has been the cause of most of the resistance to the intro-
duction of these systems and to many of the labor troubles
between employers and employees.




______________________



At the root of the whole thing, as already pointed out,
is the fact that the enormous expansion of the manufacturing
system made it difficult to maintain individual relations be-
tween the employer and the individual workman. The
conditions were defined somewhat fully in the second chapter
but the argument may be summarized again here. There
was first the mere difficulty of numbers the collection of
hundreds and thousands of men in one establishment or one
organization; the identity of the workman and the effi-
ciency of his work was lost sight of in the crowd. There
was next the tendency to specialization, under which the in-
dividual worker seldom turns out any complete article, but
only performs some part of the process or operation, pass-
ing the work on then to the next specialist, who performs
the next operation, so that it becomes still more difficult to
pick out and identify the work of any one man. Thirdly,
there is the tendency to standardization, under which the
individual worker does not put much of his own thought or
his own skill into the job, but simply repeats mechanically a
routine marked out by the patterns or the more or less auto-
matic machines and the detailed instructions provided for
him by the thought of somebody else. The almost over-
powering influence of these tendencies is to weld workmen
into classes and to substitute dealing with a class for dealing
with an individual. And when this happens without the bal-
ancing influence of any other principle, the next inevitable
step is that the inducement to individual efficiency disap-
pears. Under ordinary conditions it is a very small and
very uncertain profit for a workman at the bench, in the
ditch, on the wall, to work harder and better than his
fellows. He is not noticed and he gets no reward. There-
fore, as Mr. Gantt has so ably pointed out, 1 the next nec-
essary consequence is that the man of more than usual abil-
ity, finding that he can not make anything by putting that
ability into his work, turns his ability to agitation. He sees
that he is treated as a member of a class and can get no more
than the ruling wages paid to that class; so he endeavors to
enlist the whole class in getting those ruling wages raised.
Trade unions have been occupied chiefly with efforts to raise
wages or to shorten hours because it was only by united
action that the individuals composing the union could get
more. If the scheme of employment and payment for work
done were so adjusted that a good worker would automatic-
ally be singled out, rated according to his performance, and
paid according to his ability, the energetic workers would be
much less interested in strikes for higher wages regardless of
efficiency. The trade unions would not go out of existence
by any means, but they would find other and, as it would
eventually prove, economically better matters to which to
turn their attention.






The advanced wage systems are all efforts, earnest and
conscientious efforts, to provide a natural and automatic
means for paying the able workman in accordance with his



1 Work, Wages and Profits. The Engineering Magazine.




ability, while they protect the less efficient workman in at
least the standard wages of his class. That is, they do not
undertake altogether to break up the class system, but to
enable any man who is superior to the average to rise above
it. They are all based upon some sort of a combination of
two elementary ideas of paying men for services rendered.
These two ideas are day pay and piece rate. Fundamen-
tally, these are the only two methods of wage payment.

Under day pay a man is paid for the length of time he
works, regardless of the amount of work he may do during
that time.

Under piece rates the man is paid for the amount of
work he does, regardless of the time it takes him to do it.

If I hire a man to shovel sand at $1.50 for ten hours, that
is day pay. If I hire him to put a load of coal into my cel-
lar at 15 cents a ton, that is piece rate. If I hire a stone
mason at $4 a day for eight hours, that is day pay. If I
agree with him to build me a wall at $1.25 a perch, that is
piece rate. Under the one system you pay a man according
to the length of time he is in your employment, and under
the other system you pay according to the amount he does
for you. In the bonus system, the premium system, the
efficiency system, and all the others which we shall shortly
take up in detail, these two elementary ideas are somehow
blended; but blending ideas is something like blending col-
ors; the result is not like either of the elementary colors you
started with, and mixtures of the same two colors in differ-
ent proportions are unlike one another. So each of the va-
rious wage systems has its own individual color, so to speak;
and as certain colors are pleasing to some eyes and other
colors pleasing to other eyes, so certain wage systems are
pleasing to certain minds and others more pleasing to other
minds.

Let us now take up the several wage systems in order, be-
ginning with that which is probably the oldest, if indeed it
was not originally the only, method of paying for labor. G

Wages - Day Rate Payment - Going

This is the method of day pay. It is indeed so old and so deep-rooted that one is almost tempted to say that if we go back to the source of things it is the only wage method; for when piece rates are fixed you will always find that, consciously or unconsciously, the employer and the workman  both compare in their minds the piece rate proposed with the  time they think the job is going to take, so that it seems to come down, after all, to the question not what is the job worth, but what is the time that it takes to do the job worth?
Now the conception underlying day pay is that a certain sum of money is arithmetically equal to a certain number of hours spent by a man any man at doing a certain kind of work. For example, every man digging dirt is worth $1.50 for ten hours' labor; every man laying brick is worth $5 for eight hours' labor. Stated this way, baldly and with- out qualification, the notion seems so foolish that it is hard to see how it ever became so generally adopted in practice.
It would be as intelligent to base an economic system on the
hypothesis that a string is always 6 feet long or that all
horses run equally fast. Nevertheless, the conception per-
sists, and will long continue to persist, and you will have to
deal with it. It is in the moral code of many labor unions as
the first and great commandment. The reason, as already
suggested, is that the unions have found it necessary to re-
sort to collective bargaining and to demand a universal wage
rate, chiefly because there has been in general no method
practiced by employers for fair and honest individual bar-
gaining with each man according to his ability. The result
of the whole thing is a struggle between opposing forces,
the employer trying to push the day wage down because he
has no satisfactory assurance of anything but minimum effi-
ciency on the part of his workmen, and therefore he wants
to pay the minimum price; and the men trying to force the
rate up because they can not get it up in any way except by





force. This sort of struggle is constantly going on, with
variable results. Where labor is abundant or poorly organ-
ized, and where the employer or sub-bosses have a genius
for driving, probably as highly efficient results are secured
under the day-wage plan as under any other ; that is, the em-
ployer gets as high a product for the dollar he expends as he
can get by any method. Where labor is powerful and well
organized and much in demand, the results secured under the
day-wage system are perhaps as inefficient, and as little re-
turn is obtained for each dollar expended, as in any applica-
tion of capital to productive or constructive work, except,
perhaps, in deliberately dishonest political jobs.

Nevertheless, the day wage remains to-day the method of
payment for a very large proportion, perhaps a large ma-
jority, of all service. I have dwelt strongly upon its un-
favorable features, but of course they are to a certain extent,
even if imperfectly, remedied in practice. The extremely
good man cannot be held down, and he will break through
even the dead level of day pay ; so the fallacy of assuming that
all men are equally worth $1.50 a day is corrected fractionally
by picking out here and there a peculiarly able man and mak-
ing him a job boss or a sub-foreman at $2 or $2.50, while
the hopelessly incapable fellow is fired off the job and gets no
wages at all. The plan as a whole is one of those rough
and ready ones that the world has always used and always
will use. And k does express, although it expresses it badly,
a certain vital truth; that is, that time, after all, is the one
supreme value that must be seized and used moment by mo-
ment or it is lost forever. If machinery is idle the oppor-
tunity may usefully be taken to overhaul and repair it; if
material is idle it may be worked over into something else
which is active; if dollars are idle they are only dormant and
will come to life and into circulation as soon as there is an
opportunity. But if hours are idle they are dead and gone
forever. This truth of the fundamental value of time is





recognized by the day-pay system. You will find the system
in use everywhere and you will have to get along with it;
nevertheless, in most cases a much more intelligent plan for
hiring time than the day-wages plan can be devised and may
be applicable.

Perhaps the first deliberate effort in this direction was the
establishment of piece rates in place of day pay. By these
rates the unit of adjustment as between employer and em-
ployee is not so much time spent at labor, but so much work
completed. The unit task may be of the most diverse kind
in different occupations a ton of coal mined, a locomotive
mile run, a yard of cloth woven, a casting made, a certain
area of type set, a face shaved or a head of hair cut. The
fundamental idea of day pay is that of mathematical equiva-
lence between money and time; the fundamental idea of piece
work is that of mathematical equivalence between money and
jobs.

If, for example, I am working as a journeyman hat-
maker 1 at day wages, I tacitly accept the truth of the
proposition that ten hours of my time are worth, say, $2.
That is, I agree with my employer upon the truth of this
equation :

(A) 10 hours time=$2.oo

I come into the shop at 7, go home at 6, with an hour for
lunch. I loaf as much as I dare; the boss watches me and
drives me as much as he can, and perhaps in the average I
make about one hat a day. Now suppose I go on to piece
work. I set in the background the proposition " ten hours
equals $2," and base my creed on the tenet that u making one
hat equals $2." In other words, my employer and I fix
our eyes on a new equation :

(B) Making one hat=$2.oo

1 It is scarcely necessary to say that the supposition is taken at ran-
dom, for illustration only, and does not in the least reflect actual con-
ditions in the hat-making industry.





The longer I dawdle, the longer it takes me to get that
$2. On the other hand, if I work fast I can perhaps get
through by mid-afternoon or even earlier and go fishing.
Or if I choose to stay I can begin on another hat. Very
possibly by diligence and study I can improve the tools or
the operations a little, or I may carry on the making of two
hats at once, working on each during necessary pauses for
the maturing of processes on the other ; and I may soon be
turning out three hats in two days or even two hats in one
day. The boss will be paying me 50 per cent to 100 per
cent more wages in a given time than he did formerly. Yet
his hats are costing him no more. Indeed, they are costing
him less, for his general expenses for shop rent, light, heat,
superintendence (that " overhead burden " of which we
have already spoken) are no greater than they were before,
and yet he is turning out more hats to absorb these charges.
A smaller fraction of this cost, therefore, attaches to each
hat.

Now I said that in going on to piece rates the boss and I
both set in the background the proposition that ten hours
equal $2. I used those particular words advisedly, be-
cause that idea at best is only retired. It is not dismissed.
It lurks in the background of our minds persistently. The
price of $2 per hat was fixed as a piece rate not because we
really believed it was worth $2 to make a hat, but because
on the average that paid me $2 for a day's time. In other
words, we accepted formula (B) not because we believed
in its abstract truth, but because we believed this :

(C) Making one hat=io hours time.

As soon as (C) proves untrue, (B) no longer follows
from (A) and my employer at least loses faith in it. When
I begin to get $3 a day the boss begins to get uneasy, and
when I make $4 a day he is probably certain that some-
thing is wrong. He believes no journeyman's time is worth




$4 a day. The fact that he is turning out larger product
from his shop in the same time at less cost does not impress
him as it should, while the $4 a day to a " $2 man " looks
enormous. He begins to believe that he is paying too
much for the making of a hat. Probably he decides that
if two hats can be made in one day, the making of a hat
is not worth more than $i, and he cuts my piece rate in
half. I have to work twice as hard as I did before and
get no more for it. On the other side, my fellow workmen
are displeased. They are contented with the old order and
want to work along turning out about one hat a day and
getting $2 for the day's time. They say " if you show
the boss that two hats can be made in a day, he will think
that we are all a worthless lazy lot, and he will want to
drive us up to your pitch or get rid of us. You are killing
the job." So these two influences combine to discourage
me against the great and apparently fortunate incentive
which first led me to rejoice in the piece rate and to see so
much apparent advantage in it.