Thus we see that this averaging process of dividing the burden must necessarily result in an overcharge on small work and an under charge on large work. To work with any reasonable degree of accuracy and equity it would require that the employees be on a near equality as to wages and the work done on machines of nearly equal cost, occupying the same area of floor space and absorbing an equal amount of power. These conditions will seldom be encountered over an entire factory and never in a machine shop.

### Second. The Percentage Plan

This plan assesses the overhead burden on a basis of the cost of direct, or productive labor on each job or order. In this case the total overhead burden is divided by the total amount paid for direct labor for a given period, as previously explained, and, using this quotient as a percentage of burdens, it is to be added to the cost of direct or productive labor and material on each job.

One of the fallacies of this plan is that it takes no account of the very important factor of time. For instance, if a low-priced man occupies twice the time in doing a job on a certain machine, as a man getting double the pay (which is by no means an unusual case), it naturally follows that while the cost of direct labor has been the same, the cheap man has occupied the machine twice as long, and yet the overhead charge has been the same.

The actual result with a properly fixed machine rate, as in the last case, will be as follows:

In the case of the low-priced man:

 Machine rate, 2 hours at 30 cents...... 60 cents. Wages of man, 2 hours at 25 cents..... 50 cents. Total................ \$1.10

In the case of the high-priced man:

 Machine rate, 1 hour ............................... 30 cents. Wages of man, 1 hour ........ 50 cents. Total................. 80 cents.

By this it will be seen that the job will actually cost 37« per cent more when done by the low-priced man than if done by the high-priced man, which is in line with the usual experience of machine shop work requiring more or less skill. If the percentage plan is used, the cost would be the same, but there would be this very important difference in this practical question. The output per day or week would be reduced 50 per cent, which is a very important phase of the matter, and to recover this 50 per cent under the low-priced man condition we must double the machine equipment.

Therefore the plan of accounting is manifestly wrong, and might easily make a great deal of difference in the correctness of the resulting accounts, particularly in a shop where there is a great diversity in the cost of the machines in use. In fact, it might render the method useless, so far as giving accurate, or even uniform, results is concerned.

A competent authority thus comments on these two plans. "The most unsatisfactory feature of both plans is that they make no provision for charging against a piece of work the interest and depreciation belonging to the machine on which the work is done. Both plans add the gross interest and depreciation to the other items of shop expense and then charge the total amount against the work on a flat rate or average basis which ignores the individual machines. On small and medium sized machines the interest and depreciation item is of small importance, but on the large ones it is the most important of any, and, indeed, on very large ones more important than all the others added together".

While the time or hourly plan corrects some of the defects of the plan of percentage of burden to the cost of labor plan, it brings in quite as erroneous ones of its own. It takes no cognizance of the value of the machines used, whether they cost a hundred dollars or several thousands, and a speed lathe might be assessed with just as much burden as a 72-inch planer.

Again, a boy earning seven dollars a week would count for as much as a machinist getting four dollars per day, so far as overhead charges are concerned. This plan would work many glaring errors, particularly in a manufactory having a large variety of machines, and where the work ranges from comparatively small to quite large and heavy parts. In a manufactory in which the work is quite uniform and the machines upon which it is done are nearly of the same first cost, and where the wages of the operatives do not vary to any considerable extent, either of the above plans may answer all reasonable requirements.

However, if we carefully consider the questions, we shall be forced to the conclusions that where these conditions do not prevail we must look for some more comprehensive plan that, while necessarily more intricate and difficult to administer, will give with a reasonable degree of accuracy the actual costs of products, and enable us to know in what department profits and losses occur, and what product, department, or individuals are responsible for the one condition or the other.

To do this we must take a comprehensive view of the questions involved and not content ourselves with the idea that all the factors in the case are considered at their proper value when we say that "we have labor, so much; material, so much; and general expenses, so much; and the sum of these is the total cost." As to total amounts this may be perfectly correct, but it is detailed information that we want. We know that the total is so much, but why is it such a large amount? To answer this question we must analyze this expense and ascertain what are its component factors.

Neither can we consider in lump sum such expenses as interest, insurance, depreciation, and similar burdens, since some of these will enter into plant accounts, some into equipment accounts, and some will be chargeable to the labor account. It is true that all expenses for interest, insurance, depreciation, etc., must eventually be borne as part of the cost of the product, but the time and the method of taking them into the account are matters to be carefully considered if we are to avail ourselves of the opportunities which this operation presents to record and make use of the valuable detailed information that may be derived from the procedure at this stage of accounting.