Cost keeping and scientific management

Preface

This book is written for jobbing shops and small manufacturing plants where accurate cost keeping and the principles of good management have received but little attention. It is hoped that it will not be without interest to the officials of large manufacturing establishments and shipbuilding plants.

Many owners and managers desire to improve the cost system, but are deterred by the belief that this cannot be done without the aid of expert accountants who will devise an elaborate system which will require a large clerical force to maintain. The methods which I have outlined are simple and require but little clerical labor. Any manager can adapt . this system to meet the requirements of his work.

The efficiency of a large plant under my supervision has been greatly improved by adopting and following the principles of management advocated by Mr. Fred W. Taylor. I believe that in thousands of shops marked improvement will be made if these principles are followed. The methods described in the chapters devoted to management should be of assistance to the manager who wishes to take the first steps towards Scientific Management.

Holden A. Evans.

Seattle, Wash.,

• CONTENTS

CHAPTER PAGE

I. THE IMPORTANCE OF ACCURATE COSTS . . . . i _ Cost keeping for manufacturing establishments comparatively simple — Repair and jobbing shops present difficulties in cost accounting — Inaccurate costs among manufacturers making standard articles — Lack of knowledge of costs disturbs trade — The reasons for so few accurate cost systems

— Cost keeping versus accounting — Cost systems secret and not subject to criticism — Value of accurate costs frequently not realized by some successful managers — Can an establishment make money without a good cost system?

II. THE PURPOSES OF A COST SYSTEM .' n

Little literature on cost systems for manufacturing establishments — What a manager can learn from a proper cost system — Monthly scrutiny of indirect charges — Monthly balance desirable — Dividends which are paid from capital and not from profits — Is every department a money maker?

— Definition of good judgment.

III. THE VARIOUS ELEMENTS OF COST 23

Direct labor — Importance of accuracy in obtaining direct labor charges — Direct material — Indirect cost — Total factory cost — Elements of the indirect cost — Depreciation — Usual methods of determining depreciation — Determination of depreciation to be charged off each year — Methods followed for estimating and apportioning depreciation usually unsatisfactory — Taxes and insurance — Up-keep of plant — Interest and rent.

IV. DISTRIBUTION OF INDIRECT COSTS ...... 40

Distribute indirect costs in accordance with benefits received — Distribution by machine rates the most scientific method — Difficulties in using the machine rate system — Inaccuracies of distribution by direct labor method — Distribution by direct labor — The use of monthly rates or average rates — Most simple method of distribution best for majority of shops — The work in each shop or department should carry its own expense burden — Power plant expense — Storehouse expense — General expense — Distribution of general expense and shop expense — Selling expense.

V. PRODUCTION ORDER, SHOP ORDER AND COST SEC- TION RECORDS 55

Uniform sizes for blank forms — The production order — Shop orders issued by authority of the production order — Mustering the workmen — Record of labor charges — Record of material charges — Labor and material charged to expense orders — Cost section records — Job order card — Cost figures should be used and not treated as mere records — The cost of work card — Summary of material requisitions

— Advantages and disadvantages of the system.

vii

CONTEXTS CHAPTER PAGE

VI. INDIRECT CHARGES 71

Subdivision of indirect charges — Charge symbols for expense account orders — General expense subdivisions — Shop expense subdivisions — Power, heat and light subdivisions — Storehouse expense subdivisions — Distribution of storehouse expense — Part plant development — Plant development account — Selling expense subdivisions — Distribution of selling expense.

VII. SUPERVISION OF THE EXPENSE ACCOUNTS ... 88 Works manager versus financial control — Ignorance of the relation of overhead charges to total cost — Danger of superficial criticism of expense accounts — Increase of shop expense frequently results in increased efficiency, while a decrease results in decreased efficiency — Comparison of expense percentages of different establishments gives no information — The control of the expense charges — Monthly analysis of all expenses.

VIII. METHODS FOLLOWED IN THE PAYMENT OF LABOR 100 Day work system — Contract system — Halsey premium system — Premium system compared with the bonus system — Gantt bonus system — Taylor differential piece rate system — Fixing rates and standard times.

IX. MANAGEMENT 114

Improvement made by an analysis of costs compared with improvement due to scientific methods — The correct type of management — Management is an art — Opposition to the new type of management — Scientific management defined — Analysis should be made of work to be accomplished before it is undertaken — Best methods for accomplishing work should be determined before it is begun — Men best suited to the work should be used — Importance of maintaining, tools and appliances in excellent condition — Real cooperation between employers and employees — To follow the principles of scientific management is not a simple problem.

X. WASTED TIME DETECTED BY TIME STUDIES . . 127 Few managers realize the large amount of time wasted in the average shop — Time wasted due to loafing — Wasted time due to employment on unsuitable work — Time wasted due to unnecessary waits — Time wasted due to poor equipment — A manager should know the time wasted and the causes — 'Stop-watch time studies expose defects in methods, organization and equipment — Stop-watch time studies in a drop forge shop — Stop-watch time studies bring out fundamental conditions under which work is accomplished — Improvements made in a large smith shop due to time studies.

XI. THE PRINCIPLES OF SCIENTIFIC MANAGEMENT

WHICH CAN BE FOLLOWED BY A MANAGER . . 137

It requires both ability and experience to become an expert in scientific management — Duties of officials should be clearly defined — Diagram of organization should show limits of authority and responsibility of each department head, and their relations to each other — Similar duties should be brought together to be performed by one man or group of men — Shops should be controlled by an expert shop superviii

CONTENTS CHAPTER PAGE

intendent — Shop superintendents should have competent assistants — Changes should not be undertaken until thoroughly investigated and effects fully considered — Investigation of small tool equipment — Investigation of the care of belting — Investigation of machine tools and transmission machinery — Care of jigs, and special tools — Introduction of functional duties — Selection of assistants and gang bosses — Beginning of the planning department — The use of time studies — Improvement of plant equipment — Standardization of shop methods — Functional management outside of shops — Improvement of store system.

XII. METHODS WHICH LEAD TOWARDS SCIENTIFIC

Improvement in a government establishment made by the application of the principles of scientific management — Shop system employed based on the teachings of Mr. F. W. Taylor — Delivery of papers between shops and offices — Records of workmen — Shop orders and promises for completion of work — -Material supply — Urgent work or papers

— Transportation of material — Plant railway system — Receiving and dispatching space in each shop — Central tool grinding and issue room — Weekly conference of heads of departments and foremen — Daily conference of manager and heads of departments.

XIII. MACHINE SHOP METHODS .184

General instructions — The results to be obtained by the planning department — Planning department and shop staff

— Duties of the chief planner — Duties of the material man

— Duties of the instruction card man — Duties of the standing order board man : — Duties of the shop clerk — Duties of the time study man — Duties of the foreman — Duties of the gang boss — Duties of the speed boss — 'Duties of the inspector — Duties of the move man — Duties of the head tool maker — Duties of the repair man — Duties of the belt man

— Delivery of tools to machines — The operation of the system — Cooperation among the planners and the shop staff.

XIV. ORGANIZATION OF A SMITH SHOP, A WOOD- WORK-

ING SHOP, AND A CANVAS AND FLAG SHOP . . 208

The blacksmith shop — General arrangement of shop — Subdepartments of the shop — ■ Duties of foreman — Duties of assistant foremen — Duties of route man — Duties of office clerk — Duties of material man and move man — Operation of the shop system — Organization of a large wood-working shop — Details of shop system — Organization of a canvas shop and flag shop — Details of shop system.

XV. REDUCTIONS IN COST DUE TO SCIENTIFIC METH- ODS ..... 232

Reductions made in shipbuilding costs — Reductions in boat building costs — Reductions in the cost of wood calking

— Changes made in a boiler shop and resulting reductions in costs — -Reductions in the cost of machine shop work — Records of time reductions in canvas work.

Chapter I

Many manufacturing establishments throughout the country have excellent cost systems, and in the majority of these the value of costs is well understood and the data obtained from the cost records are utilized to their full value. On the other hand, there are far too many establishments in which little use is made of costs other than in fixing selling prices, and in some cases costs are not obtained.

The most accurate cost systems are usually found in establishments where but few classes of standard articles are manufactured. This is readily explained, as it is comparatively easy to devise a satisfactory system for such an establishment, and it is so simple that it is difficult to go wrong in its application. Moreover, the cost of maintaining such a system is small. Accurate cost keeping in its simplest form may be applied to the manufacture of a single class of standard articles. As the number of classes is enlarged, particularly if the products vary greatly, cost keeping becomes more difficult and expensive. Notwithstanding this, nearly all strictly manufacturing establishments have fairly satisfactory cost accounts.

In a jobbing shop or in a combined manufacture and repair shop accurate cost keeping is not simple. The principal difficulty experienced is the proper distribution of the expense burden. It is, therefore, natural that the worst examples of cost keeping should be found in these classes of shops. In some of these establishments attempts are made

I to obtain accurate costs, but in the great majority the results are not worthy of the name of cost records. Little is known of the advantages to be gained by accurate costs, and there is comparatively little interest shown in the subject. In many of the smaller establishments the owner or manager has risen from the shop and he knows little or nothing of modern accounting. When he worked in the shop the cost record consisted of the time books. Such an owner or manager has a horror of red tape, and to him modern cost keeping is red tape to an extreme degree. Under these conditions it is not surprising that accurate cost records in jobbing repair shops are very rare.

Accurate cost keeping is very difficult in a large shipyard which is engaged both on new work and repair work. There are numerous independent shops in such an establishment which vary greatly in equipment and in the class of the products. It is necessary that the costs should be known not only by the many jobs included in the whole, but also by shops, and by the classes of labor employed. The proper distribution of the overhead burden is also exceedingly difficult. These questions will be discussed in detail in subsequent chapters.

INACCURATE COSTS AMONG MANUFACTURERS MAKING STANDARD ARTICLES.

Accurate costs are sometimes not obtained even in establishments where more or less standard articles are manufactured. The report of the cost committee of the National Machine Tool Builders' Association contains the following significant statement : " Machine tool manufacturers making similar and competitive machine tools discovered among themselves ruinous and unprofitable competition, based, presumably, on actual costs. Comparisons showed, however, that even where there were fair cost system methods, important and appreciably large elements were treated by different manufacturers in different ways."

This is a polite way of stating that some of the members of the machine-tool builders' association did not obtain actual costs, in that they omitted some of the important elements that go to make up total costs. These makers were selling their goods below cost and were demoralizing the entire business. They, however, did not know this; they undoubtedly considered that they were making a fair profit, when suddenly they found themselves face to face with bankruptcy.

If these conditions exist in the manufacture of machine tools, is it to be wondered at that the shipyards, where cost keeping is far more difficult, do not know their costs? Is it surprising that the thousands of jobbing repair shops do not know what cost keeping means ?

The machine-tool builders were aroused by the gravity of the situation. They appointed a committee which devised a uniform cost-keeping system which can be successfully employed by all makers of machine tools. No doubt this system is not used by all machine-tool builders, but the report of the committee was widely read and studied by them and general interest was created in the importance of accurate costs. This brought beneficial results, and the costs now recorded more nearly represent actual costs.

Unfortunately no uniform cost system can be devised for the various manufacture and repair plants throughout the country. The successful system must be developed for each class of work and adapted to meet local conditions. There are, however, fundamental principles of great importance which are applicable to all systems. These principles are violated in thousands of establishments, and until this is corrected actual costs are impossible.

It is of importance to every manufacturer, it is to the benefit of every stockholder in an industrial establishment, that interest should be awakened in cost accounting, and that accurate costs should be obtained in every manufacturing shop and every repair shop in the country. Just so long as costs are not known there will be the same ruinous competition that existed in the machine-tool trade.

LACK OF KNOWLEDGE OF COSTS DISTURBS TRADE.

The competition which is most feared by a well-conducted establishment is that of the establishment which does not know its costs. It is often the case that a well-conducted, efficient establishment which has figured on a moderate profit is far underbid by a less efficient establishment, and the work taken at a price below actual cost. It is no satisfaction to the efficient establishment to know that the successful bidder will soon go into bankruptcy, for there will be someone else in the field with as little knowledge of real costs. These conditions demoralize business and they will continue until actual costs are known. This situation explains what otherwise might be considered remarkable variations in bids submitted for the same work by a number of establishments located in the same vicinity and working under approximately the same conditions. It is not unusual to see such bids vary from 50 per cent, to 100 per cent.

In a large repair job which recently came under my observation, the specifications of the work were in great detail, and called for exactly the work to be accomplished. The bids that were received ran all the way from $425,000 to $517,000. I recently obtained bids on some small cast-iron cylinders, rough machined, for small engines. These ran from 6 cents to 21 cents per pound.

A few years ago it was not unusual for bids on battleships to differ by as much as half a million dollars. This enormous difference did not represent difference in efficiency of the shipyards, nor difference in the cost of labor or material, nor difference in the figured profits. It was almost entirely' due to lack of knowledge of actual cost of similar battleships previously built. It was due to these causes that large contracts for warships were taken at prices far below cost, and consequently several yards were forced into bankruptcy. These experiences have taught their lessons and there are few of the shipyards that do not now know at least their total costs on each contract.

In small shops, however, the lesson is not so quickly learned. A shop goes under here and there, but the real cause is not known, and another takes its place, and there always seems to be enough shops without a knowledge of costs to keep business disturbed. On the Pacific Coast these conditions prevail at present, and there is little prospect, except through luck, of the most efficient shop, which has figured on a moderate profit, securing a contract where bids are required. It is fortunate for these that many contracts are placed without requiring bids. Not only would accurate cost keeping prevent this demoralization of business, but it points the way to more efficient production.

WHY ARE THERE SO FEW ACCURATE COST SYSTEMS?

The present condition of affairs is difficult to explain, as competition is keen and the American manufacturer is progressive. In many cases the owner or manager has risen from his tools and his success is due to his intimate knowledge of the work and his ability to direct shop operations. When the plant was small he figured his own costs and made his estimates for new work. With his ability and his intimate knowledge of every detail of the work he was able to do this with considerable accuracy. His plant has now grown beyond the one-man stage. The costs are kept by men who have no shop experience, and estimates for new work are made by men who have neither the experience nor the afftlity of the manager and are based on the cost records of previous similar work. The manager does not realize that his subordinates cannot with the same machinery produce the results that he obtained. He also forgets that the times have changed and that keen competition requires that his cost records should clearly show him how every penny is expended. In his day in the shops there were no elaborate cost systems, and he can see no need for such systems now. He has been progressive in keeping his plant supplied with up-to-date machine tools ; this is his line and he sees the benefits to be derived from modern plant equipment. He is out of date with his cost system ; this is not his line and he cannot see the benefits to be obtained. He cannot realize that one is fully as important as the other.

Sometimes a manager erroneously believes himself to be progressive regarding his cost records. He has read something on cost keeping and has heard a discussion of the importance of the subject at the last meeting of his technical society. He decides that he will improve his methods and directs his secretary or bookkeeper to put in a modern system. The latter has made no special study of the subject, and after getting the information that he can obtain from nearby plants and securing some of their blank forms he makes a number of changes and perhaps secures somewhat better results. Frequently, however, no improvement is made in the accuracy of the results, and the shops are required to make a number of useless reports. The secretary reports progress to the manager, and points out the advantages of his system over that of a nearby competitor. If the manager were trying new methods in the shop he would not be satisfied with general reports. He Would see for himself exactly the changes made and the results obtained. He, however, is little interested in accounting and knows but little of cost keeping, and he accepts the statements of his secretary and is satisfied, while in reality little or no improvement has been made.

Some owners and managers who have been impressed with the value of accurate costs, and see the necessity for improvement in their cost systems, have employed expert accountants to install a cost system, who have had no shop experience and who have no knowledge of shop methods. This has resulted in a system entirely unsuited to the business, which has brought endless red tape without producing results.

COST KEEPING VERSUS ACCOUNTING.

There is a line, faint, perhaps, but nevertheless a dividing line, between cost keeping and accounting. Cost keeping is only concerned in placing in the most direct way the cost of every element that goes to make the total cost of the product.

These costs should be so recorded that the manager can readily discover all excessive costs, whether they be direct costs or an element of the expense burden. Accounting begins where cost keeping leaves off. The preparation and installation of a cost system is the work of a shop expert who has made a study of the application of simple accounting to shop methods. Scientific shop management and accurate cost keeping are inseparable. Scientific management cannot exist without accurate costs. The methods followed in obtaining good management in the shops are closely interwoven with the methods employed to secure accurate costs. Costs are a means to secure a certain definite end, and the most important function of costs is to aid in securing better management, greater efficiency, and a reduction in the cost of manufacture.

The shop organizer knows exactly the form in which costs will give the greatest aid. He is not interested in costs as costs, but only as a step to secure better results. He knows what is really required and what is useless. He knows whether the routine required to secure certain data will retard the production of work or not. In other words, he has a comprehensive view of the whole subject and is able to reject all that is of no value in securing the end for which he is striving, that is, the greatest efficiency and the lowest production cost.

An expert accountant has no such view of the subject. He does not know what will aid in the reduction of costs and that which will not. He does not know the form in which costs can best be used in producing efficiency. He is only interested in costs as such. He has no knowledge of the actual work and has no interest in it. He will require records which cost much to obtain, which interfere with the operation of the work and which serve no useful purpose in increasing efficiency after they are secured.

An expert on shop management can learn the simple accounting required in a very short time. In fact, he cannot be an expert without this knowledge. An expert accountant cannot learn shop methods and shop conditions in years. An expert shop organizer will not undertake the reorganization and improvement of a plant unless he is allowed to devise and install the cost system. He knows that any attempt to use a cost system which does not dovetail with his shop methods will greatly retard his work in producing greater efficiency. The employment of an expert accountant to devise and install a cost system in a manufacturing and repairing plant is an absurdity. Yet this mistake has been made by many and the results are almost invariably unsatisfactory.

COST SYSTEMS SECRET AND NOT SUBJECT TO CRITICISM.

The manufacturer who closes his shop to visitors soon finds himself behind the times. The exchange of ideas and criticism among manufacturers assists in advancement. Some years ago many manufacturers did not welcome visitors, but now a progressive manager welcomes a competitive manager and gives up his time to show him the plant, and both gain by such visits. This condition does not obtain regarding the cost system, and it is very rare for a manager to permit a competitor to examine his cost system, nor does he desire to explain the methods followed. The cost system is, therefore, not subjected to criticism, and managers and owners are ignorant of glaring defects which would be brought to light if secret methods were not employed. It is curious that nearly all managers believe that they have very satisfactory cost systems, and the worst are usually described as " simple and effective."

Less secrecy will bring about the downfall of many cost clerks, but will also improve the accuracy of costs.

VALUE OF ACCURATE COST KEEPING FREQUENTLY NOT REAL- IZED BY SUCCESSFUL MANAGERS.

Many successful managers do not know the value of accurate costs. They know the necessity for the total cost to fix the selling price of manufactured articles, but they do not know that well-kept costs will point the way for greater efficiency in production and a consequent reduction in costs. The successful manager as he advanced from his tools to foreman and from foreman to superintendent was employed in plants much smaller than the present-day plants. As he advanced in the supervisory positions he had absolute control of every operation. He knew the ability of each man under him. He was quick to see every extravagance, every lost moment of time, every leak, and he was quick to apply corrective measures. It was these qualities that made him manager or owner of the large plant that he now controls.

He expects his subordinates — his department heads — to do as he did. He forgets that the work is more exacting, that the department heads have more sub-departments, more men. He forgets that these department heads frequently have not his ability, and that many extravagances, many leaks, will not be remedied. Such a manager should provide the necessary machinery to point the way for improvements, and establish a check on subordinate officials. A well-devised, accurate cost system is the machinery required.

In the report of the committee of the National Machine Tool Builders' Association the following statement is made : " The day will come when no manufacturer who has a permanent and growing success can have that success without a complete and accurate cost system. And such a system will be as essential in the business of manufacture as a good superintendent and a good organizer and good workmen."

CAN AN ESTABLISHMENT MAKE MONEY WITHOUT A GOOD COST

SYSTEM ?

The question naturally arises, are not many of the concerns which are without good cost systems making money? Undoubtedly they are, but how often do we see a shop with antiquated machinery making money? Owing to other advantages this is done in spite of the inferior plant equipment. If the same shop had modern tools it would make much more money. The same is true of the cost system. The manufacturer who once gets an accurate cost system will never give it up. He considers it far more important than his best machine tools. The shop that is making money without a cost system is depending almost entirely on the good judgment of its manager and superintendent, and luck. Oftentimes the manager and superintendent must guess when they should know. Give these same men the facts that are given by accurate costs — give them an accurate record of what is taking place in the plant, as shown by a proper cost system — and they can apply their judgment to much better effect. Knowledge then takes the place of guesswork.

CHAPTER II The- Purposes of a Cost System

There is a remarkable lack of interest on the part of many owners and managers in accurate cost accounting. Approach a manager to tell him of a new tool or appliance which will reduce the cost of production and he is immediately interested. He listens to the explanation of the new machine and if it appears to have merit he investigates its application to his work, and if he sees that the reduction that can be made in production costs warrants the outlay, he will purchase. Not a few managers employ outside experts to study the products of the concern and the methods of manufacture in order that better suited machine tools may be provided or better appliances devised. The manager knows that these methods mean progress; that by them greater efficiency is obtained and the cost of production reduced. This increases profits and he is not only interested because of the pecuniary reward, but also because increased profits mean success.

Nearly all men are more interested in what the world calls success than in the pecuniary rewards that come with success. To the majority of men the striving for success and its attainment makes life worth living.

It is very different in regard to suggested improvements in the cost system. To many managers detail cost figures are not an essential part of the system that brings success. To a great many, costs are mere data — the record of what is past and gone. To such, costs are a necessary evil — necessary in that they are required to tell whether the manager has failed or succeeded, and this to many is told only by the final balance.

Very few managers can tell how their costs are kept.

II

They can tell in detail every operation in the shops, because they know the importance of these and are interested. They do not know the value and importance of costs and they are not interested. They leave the cost keeping to the bookkeeper and the cost clerk. They consider this a detail of the organization that can well be left to poorly paid clerks. Interest in scientific shop management will bring intelligent interest in costs, for scientific management cannot exist without accurate costs. An organizer cannot intelligently organize unless he knows conditions, and an accurate cost system is an exact record of the conditions. It is the pulse of the organization and every beat that is out of harmony in the organization is faithfully recorded.