What do the above figures show?
(a) That the total operating expenses of the plant are 59.1% of its productive labor, of which amount, 32.6%, is necessary to cover the general expenses, and 26.5%, the average for all shop operations.
(b) That the expense of operating the different productive departments vary according to conditions. That while Department E's expense is found to be 21.8% of its productive labor, that for Department F is found to be but 17.3%; each department having its own rate based on its own actual figures.
(c) Since, as already shown, each department must shoulder its own expense and its share of the general expense, it is seen from results just shown that for every dollar spent on productive work in Department E, 21.8 cents must be added to cover its own operating expense, and 32.6 cents as its share of the general plant expense, and that every dollar spent on production here cost $1.544. This has been covered in detail under heading, True Cost.
21. How to Use Percentages. Let us continue the use of the same figures. It is apparent that, if to the cost of each productive order worked on in Department E during the period of six months just considered—all of which is shown in detail in Production Ledger No. 2, the sum total of whose labor cost is $104,409.00—21.8% is added, the amount thus added will be $22,731.00 (the actual figure is a trifle more), which is just the amount of Department E's expense shown in the Private Ledger and found in detail in Expense Ledger No. 1.
Again, if to the cost of each productive order worked on by any and all departments in the plant during this same period—the sum total of whose labor cost is found to be $208,133.21 and which is shown in detail by the individual cost sheets in Production Ledger No. 2—32.6% is added, the amount thus added will be $67,840.00 (actual figure is a few dollars more), which is just the amount of total expense shown by the Distribution Account in the Private Ledger.
It is now a simple proposition. Having found our average ratio of expense to productive labor for each department, and also for general expense covering a period of six months' operations, we can begin to distribute the expenses of succeeding months on the same basis with the same results.
In closing up the Production Ledger at the end of each month preparatory to drawing off a monthly summary of all the totals therein to obtain the total cost of production for the month for entry through the journal into the Private Ledger, it is simply necessary to enter on each cost-sheet, in columns provided for that particular purpose, two items of expense, one for department expense and one for general expense. In the case of Department E, just cited, the expense for the department is to be calculated at 21.8%, and the general expense item at 32.6%.
22. Even Percentages May Be Used. In a large plant with an elaborate system of manufacturing job orders worked on daily with perhaps hundreds of cost-sheets on which an expense calculation must be made, the use of percentages with three figures may require more time in figuring than desirable, in which case an even percentage may be used. Instead of 21.8 for Department E use 22, and for general expense, instead of 32.6 use 33. This means that under usual conditions, more expense would be added to production than shown by the expense accounts, and the Private Ledger would show whether there had been an over-distribution or an under-distribution in each department's account after the distribution had been made. Turning to Private Ledger Account, Department E, while it is shown that, for January, the expense that should have been distributed, if done exactly, would have been $3,697.33 (had the productive labor for the same month been, say, $17,095.45), the amount added to production by using 22% would have been $3,761.00, an over-distribution of $63.67. To adjust this overdraft in figuring the next month, use 21%, the idea being to have the ledger accounts as nearly balanced out as possible. Should the general expense rate prove more than sufficient when 33% is used, reduce it or increase it to meet the fluctuations of the expense, with the thought always in mind to keep all balances as small as possible, and to make as nearly a perfect distribution as figures will permit.