8. The Man-Hour Rate Method. This method, once quite popular, is now but little used, and it is doubtful if it can be found in operation in many up-to-date plants at the present time. The name of the method suggests its intent, which was to distribute factory expense over the various production job orders according to the amount of time spent by the workmen at an hourly rate. This rate is easily calculated, and was established by dividing the total expense for any period by the total number of hours spent on productive work for the same period, reducing the rate of distribution to so much per hour. If 100 hours of labor were spent on a productive job, the cost of the wages paid the workman for this time was not considered, the expense to be borne by the job being figured at the hourly rate for the 100 hours. It will be seen that this is hardly an equitable arrangement, and to rectify a serious defect in the method, some adjustment must be made:
(a) The inability to fix a standard for the efficiency of the labor lays the man-hour rate open to criticism. Could this be done, this method would in many cases prove a very equitable way of distributing expense. It will, however, be seen at once that as it is, a skilled workman carries no more expense than an apprentice boy, and if both work on a productive job a full week, the expense in either case is the same regardless of the wages paid. This is hardly a fair proposition. Either the apprentice's time must be accepted as standard and the skilled workman considered twice as efficient in work-hours, or vice versâ. To do this would lead to endless complications, yet the quantity and quality of the output between these two classes of labor should be considered and adjusted in some way so that the injustice done the manufacturing cost may be corrected. But this is not an easy matter to regulate, and means extra work on the part of the cost clerks in recording the time spent on job work and adjusting these inequalities in the labor.
(b) The man-hour rate requires that the hours worked be carefully recorded and totaled, as well as the cost. Many concerns with heavy pay-rolls to be apportioned over a large number of job orders, ignore the footing of the long columns of hours and fractions, and use only the totals of labor cost, which are of course necessary for entry in the commercial books. It is obvious that in doing this an immense amount of clerical labor is saved. The man-hour method requires that both hours and labor cost should be recorded and totaled—a double operation and duplication of work, which, unless it can be simplified, should be avoided, as it means time and unnecessary expense.
9. Machine-Hour Rate Method. This machine-rate plan of distributing expense was designed to meet the needs of a shop where the product is largely the result of a machine or tool operation, rather than the labor of the mechanic himself. It somewhat resembles the man-hour plan in that the rate of distributing expense is reduced to an hourly rate for the time the machine is working on the job instead of the time of the operator. Each machine is intended to have its own rate.
The method of arriving at the machine rate is easily understood, and reduces itself to the item of depreciation on the original cost price of the machine with its shafting, belting, tools, and installation cost figured at, say, 5%, the power to operate machine at an estimated cost per horse-power, ordinary repairs, divided by the number of hours the machine is estimated to be in operation for the same period; this will give the hourly rate of cost to operate. Some mechanical engineers advocate including in the above cost, interest on the investment at 6%, also insurance and taxes; and by others, the value of the floor space occupied by the machine is also included; but in all these latter points referred to, engineers greatly differ in opinion, and it is generally decided by each manufacturer for himself according to his own ideas.
On the question of the value of machine rates there is probably more argument by mechanical engineers and accountants than on any question in factory accounting; in fact, engineers themselves are very far apart in their opinions and do not seem to agree among themselves. Accountants generally are inclined to take a somewhat different view of the situation from our mechanical friends. While it is admitted there is good argument for both positions, it is to be remembered that we are considering the question of machine rates as a means of distributing the expense account, and it seems to be the prevailing opinion among accountants that as such it is found wanting. While, theoretically, it is undoubtedly the correct solution of the problem, it is more often found in practice to be a case of a "distribution that does not distribute," and for this reason is not used by the very class of factories and machine works for which it was designed and intended to benefit.
Let us consider in detail a few of the objections that may be raised to the machine-rate method:
(a) It will be noticed there are other expenses in the shop than that of operating the machines and not covered at all by the machine expense. Machine rates are absolutely worthless for bench labor and the assembling room, for these two must also share in carrying the shop burden. Not to do so would be manifestly unfair. It is therefore necessary that a second distribution must be made entirely different in its calculation, to handle this undistributed expense not covered by the machine rates, which means two different operations for the same shop.
This necessitates two different time records to be kept, one card for each machine showing jobs worked on and hours idle, and another time card for the workman. Is is easy to appreciate that this double operation greatly increases the clerical work in the shop, besides two sets of entries by the cost clerks, and more detail for all concerned. If a method can be found which requires but one time record to be kept, this double process can be done away with and the duplication of work avoided.