Costs obtained, after adding this inefficiency burden, may be considered the actual costs for the month, but cannot be safely used as standard. Standard costs are the costs obtained under perfect conditions—when the department, shop, or plant is running full time at full capacity; when all of the time of every employe is accounted for by his job time cards; when there is no wasted time or unusual expense. While standard costs may not be attained—probably never will be—this should be the goal, to reach which, managers, engineers, superintendents, foremen, and workmen should strive constantly. As a matter of record, therefore, to show what obstacles must be overcome before the ideal is reached, the inefficiency burden should be added as a separate item after all other items of cost have been computed.
As an example of the effect of the application of this principle of considering efficiency in figuring costs, we will consider an imaginary case. We will suppose that, in a certain month, the pay-roll for direct or productive labor in our shop is $4,000; that 40 completed machines—identical in every respect—are produced; that every minute of the time of every productive employe is accounted for by his productive job cards. This gives a labor cost of $100 per machine. During the next month the same men are employed at the same cost—$4,000—but owing to an unusual breakdown, 2½% of the time of these men is wasted; they are idle while the breakdown is repaired, and but 39 machines are produced.
If the $4,000 wages paid is charged as direct or productive labor it gives a cost of $102.56 each—an increase in cost with nothing in the figures that shows the cause. If, however, an inefficiency charge of $100 (2½% of $4,000) or $2.56 per machine is added as a separate item, it is seen at once that here is an unusual item of expense. The amount ($2.56 per machine) is included in the final costs, but in the right place; there is no cause for confusion on account of an apparent, but not real, increase in the productive labor cost. If the cost of $100 per machine obtained during the preceding month is standard for productive labor, it still is the attainable standard; the fact of an unusual expense has in no way affected the legitimate cost of productive labor.
Another great advantage in presenting the labor cost statistics in this manner is that inefficiencies are shown in an understandable form. The fact that indirect labor is increased, say 2%, might occasion no comment; but if an inefficiency charge of even 1% is shown, it calls for immediate investigation.
The establishment of standard or efficiency labor costs means predetermined costs. This is a radical departure from established custom; on its face, contrary to recognized accounting practice; in results, wonderfully efficient. To determine standards in men, material, and machines is a function of the engineer; the recording of facts—the actual cost—is the function of the comptroller or accountant. The two must work together. Properly prepared accounts, showing actual costs with the items that make them segregated, show the engineer how far short of possible standards the plant is running—the extent of the inefficiency.
Fig. 34. Record Card for Applicants for Employment
RECORDS OF EMPLOYES
18. In connection with the different time records designed to record hours of service and units of production, there should be a personal record of employes; and the more intimately personal it can be made, the more valuable will the record become.