In accounting for the actual costs of the product, and fixing upon an adequate plan, we are confronted principally with the problem of accounting for the burden of fixed charges, non-productive labor, and miscellaneous expenses, and it is just here that many otherwise good accountants fail to show the facts and conditions that it is important to know.

While the cost clerk must be a good bookkeeper, with a clear insight into all the clerical phases of the problems involved and an ability to prepare correct records of the business transacted, he must also often reason as a mechanic with a certain array of facts, in order to deduce from them conclusions of value to the degree of efficiency the shop has attained in the manufacture of a machine part and its efficient routine through the works. These conditions will be puzzling to a man who is simply a commercial accountant. We should hardly expect that a bank accountant would be much of a success in handling the cost system of a manufacturing establishment.

We may easily ascertain the sum total of all fixed charges and miscellaneous expenses, and so divide this sum as to have "all moneys paid out (except for material and labor) charged against something," but this method could hardly be dignified as a cost system. To properly divide and apportion these costs is the correct aim and sphere of a cost system if it is to be a valuable aid in understanding the details of manufacturing and increasing the efficiency of equipment and employees.

Two general plans are frequently used for this purpose and their variations adapted to suit individual conditions. In the first of these the method charges to each job a percentage of the total burden of fixed and of miscellaneous expenses in proportion to the number of hours of direct labor. This is found by dividing the total burden of expenses by the total number of hours worked for a given period, say three or six months, or a year, thus obtaining an hour rate which may be added to the cost of labor and material to make up the actual cost of the job. This plan is defective, as it places all classes of labor, skilled or unskilled, and whether working with a few hand tools or with an expensive machine, on a level. By this method a job done largely on machines would not bear its fair share, while the job done at a bench, by hand, will bear excessive burden. Such a plan could only be of any reasonable degree of accuracy where the employees were on a near equality as to wages and the work done on machines of nearly equal cost, floor space and power. These conditions will seldom be met, hardly ever over an entire factory and we might say never in a machine shop.

The second plan apportions the expense burden on a basis of the direct labor cost for each job. In this case the total burden is divided by the total amount paid for direct labor for a given period (as before), and, using this quotient as a percentage of burden, it is to be added to the cost of direct labor and material on each job. The fallacy 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 twice the pay, it naturally follows that while the cost of labor has been the same, the cheap man has occupied the machine twice as long and yet the burden charged against the machine has been the same. This is manifestly wrong, and might easily make a great deal of difference in the correctness of the outcome, particularly in a shop where there is a great diversity in the cost of the machines, and in fact render the system useless so far as giving accurate results or even uniform results.

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 a thousand, and a speed lathe might be assessed with just as much burden as a 72-inch planer. Again, a boy earning six dollars a week would count for as much by this plan as a machinist getting three dollars a day, so far as the expense burden is concerned. This plan would work many glaring errors, particularly in a manufactory with a large variety of machines and where the work ranges from comparatively small to quite large and heavy parts. In manufacturing establishments where 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 purposes.

But if we are to carefully examine the matter we shall see that where these conditions do not prevail we must look for some plan better suited to the prevailing conditions, and one that, while necessarily more intricate and expensive to administer, will tell with a reasonable degree of accuracy the costs of our products of whatever class, weight, or material, and enable us to know when and where losses and profits occur and what class of product, what department, or what individuals are responsible for the one or the other.

By "fixed charges" will be understood interest on the cost of land, buildings, and fixtures, insurance, taxes, water rates, etc. By "expense burden" will be meant the cost of so-called non-productive labor, the cost of power, lighting, heating, and ventilating, cleaning shop, interest on cost, and the depreciation of value of machines, etc. By "supplemental expenses" will be meant the burden charge on idle machines, etc. By "general burden" will be understood the sum of all three of the above charges.