OPERATING EXPENSE STATEMENTS

28. To properly analyze detailed records, and to be able to extract therefrom the essentials and eliminate all items of minor importance, so that the exact situation and final conclusions can be expressed briefly and in an attractive manner, is an art in itself. A bookkeeper may be ever so well posted in up-to-date methods, and his books may show great care, and be models in appearance, yet when it comes to preparing an intelligent statement of any feature of the company's business, he may be sadly deficient. It does not necessarily follow that because he can do the one thing well, he can make a success of the other. Even as the pleasure naturally to be derived from a carefully prepared dinner may be completely wrecked by poor service, so can the intent of what would otherwise be an interesting tabulation of statistics be made meaningless by the presentation of a jumbled and carelessly arranged lot of figures.

It is as necessary to clearly show on paper the results of the factory operations as it is that they should be correctly recorded on the company's books. While the two operations are entirely distinct and separate, they are closely allied, and every progressive accountant should be interested in both.

The object of a statement is to convey to the reader certain information in an intelligent manner; if it does not do this, it might as well not have been written. This leads us at once to the question: "What constitutes a good statement?"

29. Lengthy Statements Undesirable. That we may have "too much of a good thing," and that even those things worthwhile may be overdone, is true in the matter of statements. The general tendency seems to be to elaborate rather than simplify, and to crowd into the tabulation a lot of figures representing details which are almost always passed over without examination, or are even hardly looked at. If the same amount of time is spent in studying such a statement that is spent in its preparation, it would not be altogether without value, but the fact remains that it seldom is thus considered.

The size of a company's statement is oftentimes all out of proportion to the size of the business; some of the smaller industries present reports of their operations so voluminous in size as to rival that of the United States Steel Corporation, or that prepared by the actuary of one of the mammoth insurance companies.

It should be remembered that a busy manager is more interested in economical management than in wholesale bookkeeping, and has but little use for a formidable array of figures, except in so far as they show general results. Such a statement, when presented to him, is usually tossed aside to be examined later, while if it were condensed and served up to him in a more attractive form, it would probably be eagerly examined and studied with interest. A multitude of figures is more apt to confuse than to enlighten the situation, is a waste of an accountant's time, and, being a source of displeasure to the employer, thereby defeats the very object for which it was made.

Detailed records should always be kept, and in such shape as to be immediately available when called for, but it is hardly necessary to incorporate them in a tabulation intended to show results. It will be well, in submitting figures to the manager, to always bear in mind an imaginary notice over his desk: "This is my busy day; be brief." It is safe to say that a good statement should contain as few figures as possible to intelligently show the desired result.

30. Tabulate the Essentials. The data for a good statement should be well chosen. A manufacturer wants results. He is in business for profit making, and wants to know the true condition of his shop operation and the expense, in a concise presentation of facts, and has but little use for comparisons beyond those necessary for showing him the result of his management. He is not often found to be a philanthropist, eager to load down his expense account so that his clerical assistants may use his time to pursue their studies in the science of accounting. He wants to know what his costs of production and the expense of operation are, and where they may be cut, and it is as much to an accountant's interest to show him this in a clear and self-explanatory statement as it is by an elaborate and dazzling array of statistics to show his own ability in handling figures.

A manufacturer will doubtless obtain just as much solid comfort and real pleasure in knowing that special tools recently made have enabled him to clip a few cents off the cost of one of the units of his product, and that economics in his shops have reduced his operating expenses 2% or 3%, as to be furnished the startling information that his Printing and Stationery account is .7148% of his General Expense, his Insurance, 6.2714%, Postage, .5218%, Telephone and Telegraph, .6538%, and so on down the list.

The illustration used is not an imaginary one either. Statements are occasionally seen wherein all the individual items of expense are thus figured and the percentages carried out four decimal places. Of what conceivable use can such figures be? The only imaginable excuse seems to be that the accountant hoped to lower these percentages in the next period—possibly the third and fourth figures in the decimal—by bringing pressure to bear on the telephone company and on the insurance underwriters sufficient to get the rates reduced, and by telling the mail boy he must use less postage stamps. Rather a peculiar method of cutting expenses, and it is quite safe to say that the same effort applied in other directions would be productive of far more satisfactory results. A good statement, then, should be clear, concise, and complete.

31. What the Statement Should Show. The two elements in a factory, in which the management is directly interested, are the productive output and the operating expense. The former should be pushed to the utmost limit, while the latter should be trimmed at every point possible; and it is readily seen that the point of greatest efficiency is reached when the plant is producing at its full capacity. A factory with a complete organization is operated at a heavy expense when running at but 50% of its full capacity. These two elements, output and operating expense, are so closely related that a change in one immediately affects the other, and the relationship between the two, which is expressed in a percentage, is either raised or lowered according to the character of the change.

(a) If the operating expense remains stationary and the production increases, or

(b) If the operating expense is lowered and the production remains unchanged, or

(d) If the output decreases at a lower rate than does the expense, then the percentage which expresses the ratio of expense to production is lowered, which means increased operating efficiency and a decrease in the cost of production.

On the other hand:

(a) If the operating expense remains stationary and the production decreases, or

(b) If the operating expenses are on the increase while the production remains unchanged, or

(d) If the operating expense decreases at a less rate than does the productive output, then these tell-tale percentages automatically increase also, which the manager is quick to note, and mean a falling-off in the economy with which the plant is being operated, for increased expense means increased cost of production.

This means, then, in order to be in complete control of his plant, a manager must have production costs and operating expense well in hand, for these two factors are the keys to successful management. It is up to the accountant to show the manager, in figures, the facts as to the true conditions in the shops, and the statement presented to him monthly must be sufficiently explicit to show him at short notice what the expense of operating each department of his plant has been, and what the items were that made it up.

32. Comparative Figures. It is quite unnecessary to demonstrate the value of comparative statements, for this is generally admitted without argument. They portray at once whether what now is, shows an improvement or a falling short over what has been; in fact the degree of success or failure in any line is gauged by comparison with results previously attained.

A statement showing operating conditions with those of a previous period cannot help being interesting as well as instructive; in fact it is from this source that a manager obtains the information which enables him to size up the changing conditions in his plant, and in case of loss in efficiency, shows him where the remedy should be applied.

If a comparison or test is made between the operating expense and productive output, covering a period of, say, six months or a year for each department or process in the plant, as well as for the general expense, the resulting percentages show what the factory conditions will average in the long run. Any departure or deviation from this average in any succeeding month, as shown by the operating statement, serves to indicate to the manager what he may expect as the results of the present period when actual figures are in hand and actual results known. If a falling off in efficiency is noted, opportunity is offered to make economies before it is too late, and for the balance of the period to make a better showing. While it is true that an extraordinary expense, such as a breakdown of machinery, may cause an unfavorable showing for a particular month, it is quite essential that this long run average should be closely followed, in order to show that the previous efficiency has again been maintained, or better still, improved upon.

AIR-COMPRESSOR ERECTING ROOM, CLAREMONT, N. H., FACTORY, SULLIVAN MACHINERY CO.

A comparative statement shows at once any radical departure from normal conditions and accepted standards, and is, in reality, the manager's barometer of factory operating. The discovery that his operating expenses are increasing without a corresponding increase in the output, means that the storm signals are immediately raised, and there are likely to be squalls ahead in the department responsible for the increase, with an explanation in order from its foreman. The operating statement, then, should show up excessive operating expense, what it is, where it is, and what caused it.

33. Source of Data Used. Having now in mind what characteristics should be embodied in the tabulation, proceed to gather the necessary data for the statements.

Continue the original plan and make the Operating Expense Statement consistent with the Percentage Method, and extract the data for same from the cost records and books of account in a factory where this method is used.

34. Expense Manufacturing Departments. First prepare the shop operating expense statement for the manufacturing departments. If the cost records have been kept in two binders—one for operating expense in Expense Ledger No. 1, and the other for production in Production Ledger No. 2—the procedure is simple. The Private Ledger account for each department shows the total expense for each month posted in total, with all the details shown in Expense Ledger No. 1, to which now refer.

Inasmuch as everything is charged to some job number, both labor and material, it is simply a matter of drawing off the job totals, which will check the department total expense as shown in the Private Ledger. A convenient grouping of job numbers will be found of great assistance; say

Jobs 1-99. Standing expense orders.
100-999. Special expense orders.

Generally, Job 1 is used to cover miscellaneous expense costs not covered by other job numbers, and includes foremen, sub-foremen, clerks, tool-room men, helpers, watchman, small repairs, etc., both labor and material. In the matter of repairs, it will be noted that such charges originate from two different sources: those done by the department for itself, and those done for the department by another department, and frequently spoken of as inter-department work. By providing two cost-sheets for labor items on Job 1, one for direct labor charges, and the other for inter-department labor, the two items may be easily kept separate.

The material on Job 1 should also be kept in the same manner. The reason for this is apparent, as it shows up at once how much a foreman is charging to his department himself, and how much is being charged to him by other foremen on inter-department work.

Jobs 2, 3, 4, and so on down the list, can cover the various subdivisions of shop expense, such as new small tools, repairs to tools, repairs to machinery, and as many detailed items as may be considered desirable. If expensive repairs are to be made to one of the large machines, it is desirable to keep a separate cost of same by assigning a special job number for the work, say Job 100, rather than throw the cost into one of the standing orders, where it is lost. In fact, a limit of cost should be placed on all new tool-costs, or repairs chargeable to standing orders, so that these jobs may not be used as a dumping ground for extensive repairs, which a foreman may be inclined to conceal from the manager's notice, and for which a special permit should be given by the manager, and job number assigned, before such repairs are begun.

The productive labor of the department will be found in Production Ledger No. 2, the total of which, if added to the total of the non-productive labor found in Expense Ledger No. 1, will equal the total department pay-roll.

The resulting percentage of expense to productive labor expresses the ratio existing between the two, and is used as the basis for distributing the same expense over the various items of production. The question of distributing expense is only referred to here, having been discussed at length elsewhere. Inasmuch as it will be seen that this percentage will fluctuate somewhat each month, it will be well to show on our statement, the same percentage for the previous month for comparative purposes. The extent of the monthly fluctuation is the key to the situation, for these percentages sum up in one figure the actual results of shop management, toward the lowering of which the best energies of the manager are always directed.

For the sake of illustration, take a plant with a weekly pay-roll of about $10,000.00. Having drawn up a form in which the features already discussed have been provided for, extract from the Expense Ledger some imaginary figures. The expense accounts of the different producing departments in the plant will appear as shown in Fig. 4.

Fig. 4. Statement of Departmental Operating Expense

After studying the same a moment, what will the manager of the plant discover? Among other things he will see at once:

(a) The total expense of operating each department in the works, with the principal items which go to make it up.

(b) That the total productive labor was 79.9% of the total monthly pay-roll while the non-productive was 20.1%; that the former has been apportioned over the various departments and every dollar of same accounted for.

(c) The ratio of expense to productive labor for each department reduced to a percentage, the average of which for all the productive departments is 25.7%.

(d) From the comparative figures, that the August percentage showed an improvement in operating expenses in most of the productive departments over those for July and that they are a trifle lower than the average for the first six months of the year.

(e) That the operating percentage for Department F has jumped up 4.7%, which means that something is wrong in that department, and must be investigated.

(f) That for every dollar spent for productive labor, he must add 56.8 cents to cover operating expenses, of which amount, 25.7 cents covers the expense of operating the shops and 31.1 cents covers the general expense of the plant.

The item of General Expense = 31.1% is not derived from any figures that appear in this statement, but is taken from the tabulation covering General Operating Expense presented later. It is desirable to have this appear here, as well as the Department average percentage, in order to show the total operating expense (56.8%) on the labor, bringing total plant results on one sheet.

35. General Expense Statement. This statement serves as the companion sheet to the one just shown for Departmental Expense, every operating expense appearing on either one of these two statements. It is drawn off in just the same manner as the Departmental statement, the total of the various expense accounts in the Private Ledger and the details of the four expense departments shown in Expense Ledger No. 1 checking the total General Expense Distribution account shown in the Private Ledger. It will be seen at once that the General Expenses of the plant may be reduced to the following general divisions:

Special Ledger Accounts:

Executive, Insurance, Taxes, Depreciation, Freight, Express, Cartage, Printing and Stationery, Telephone and Telegraph, Traveling, Postage, Legal, etc.

Department A—Offices:	Clerks and supplies.
Department B—Storehouse:	Clerks, laborers, and supplies.
Department C—Power House:	Engineers, firemen, coal, etc.
Department D—Yard:	Laborers, teams, and supplies.
Unclassified Expense:	Not included in above.

The General Expense Distribution account referred to originates by closing monthly all the various ledger accounts listed above into one account. This brings all these scattered expense accounts together in one total, necessary not only for the purpose of distribution, but for convenience in ascertaining and handling general expense. The details can be readily taken from the individual accounts before thus closed, while Departments A, B, C, and D are carried in detail in the Expense Ledger. The total General Expense shown then by the statement will check the total shown by the Distribution account in the Private Ledger.

The form Fig. 5, will be found a very convenient and satisfactory exhibit. Detailed explanation is quite unnecessary; the tabulation explains itself and needs no assistance. The general conclusion arrived at is that the plant's general expense is found for the month of August to be 31.1% of the productive labor; in other words 31.1 cents must be added to every dollar of productive labor to cover its proportion of the general and administration expense of the plant. The same figures are also shown for comparative purposes for the previous month, and also for the first six months of the year; the manager can see at once exactly how the plant is running.

The same summary figures are placed at the bottom of this statement as were shown on the departmental statement, that each may show the final results of the other.

36. Statements for Foremen. It is often asked whether or not it is a good plan to furnish the foremen of the various departments any cost figures. In a good many shops, it is the rule to tell them nothing and to keep them in entire ignorance of their expense costs, the feeling being that in case of an unsatisfactory showing they will be inclined to doctor their expense returns by diverting them into production in order to make a more favorable showing.

While it is undoubtedly true that a foreman is frequently tempted to resort to such measures—not a very far-sighted policy to be sure, for it is bound to be shown up later—it would seem advisable to furnish him a copy of his operating expenses not only for his information but as an incentive to practice economies on his own initiative without waiting for a call from the manager. Most foremen are quick to see that it is for their own interests to do this and to make the best possible showing for their department. It also creates a good-natured rivalry among the various foremen, which tends towards good results in which both foremen and management share.

Fig. 5. Tabulation of General Operating Expense

Fig. 6. Statement of Departmental Expense Made to Foremen

Fig. 7. Graphic Chart Showing Fluctuations in Labor Costs

Fig. 8. Graphic Chart Showing Fluctuations in Operating Expense

The statement furnished the foreman is simply a copy of the expense of his department as shown on the Departmental Expense Statement, and may be made up substantially as shown on the form herewith presented, Fig. 6.

37. Charts. While the value of chart records is generally admitted, there will probably be no one in the plant who will appreciate this form of presenting figures more than the manager, who, from his mechanical training, will at once grasp the situation as thus presented. The general trend of operations for the whole period is immediately revealed at a mere glance, without any systematic study of the figures involved, and any unusual condition is detected at once.

To show the possibilities of thus arranging comparative statements, two charts, Figs. 7 and 8, are presented, on which are plotted the same results appearing on the tabulated statements already shown, or previously used for the purpose of illustration on Pages 31 and 34.

On one chart is shown the total pay-rolls with split-up of same into productive and non-productive labor, with the percentage of each on the total; the other shows the total expense, also subdivided into shop and general expense, with the resulting percentages of same on the productive labor as shown on the first chart.

38. In Conclusion. While there is no end to the number of statements that can be prepared and that can be elaborated almost indefinitely, it is well to continually bear in mind that the statement which best serves its purpose is the one which conveys the most information in the fewest figures; is not overloaded with unnecessary detail; whose tabulated data is well chosen, and whose make-up is sufficiently attractive to cause it to be read and studied, and not thrown into the waste basket.