(e) Figuring by percentages can be done rapidly, and in many instances it is but a mental calculation and almost instantaneous. Were hours recorded, the frequent use of fractions would render the process of figuring expense less rapid.
(f) It is an equitable means of distribution, for it is based on the direct labor cost, which is not only the most reliable element of cost to use as a basis, but which is one of the principal factors by which the amount of expense is influenced.
(g) It has the endorsement of our best factory accountants and auditors, and it is noted that where "systems" are being installed by factory organizers to-day, the percentage method is continually being adopted as the most satisfactory, for it brings the best results with the least machinery to operate.
PERCENTAGE METHOD EXEMPLIFIED
11. Before proceeding to show in detail the method to be pursued in arriving at the various percentages to be used in distributing expense by the percentage method, it may be well at the outset to clearly understand what constitutes productive labor and expense, or non-productive labor, for it is on the former that all calculations are based.
12. Productive Labor. The wages paid to the workmen for labor spent on productive work which is offered by the manufacturer for sale, and from which the business derives its regular revenue, is properly classed as productive labor. In other words, the amount of productive labor is commensurate with the productive output.
It is frequently asked whether labor spent on plant extensions or new equipment, when made for one's own use, may be considered productive labor and should carry its share of the expense in its distribution. Most assuredly, yes. If this same work were performed to be sold again in trade it would be considered productive labor and the expense would be added. The reverse is also true; if it were purchased from another manufacturer he would treat it as productive labor, and include expense in his cost and selling price, and the purchaser would have to pay for it, and would carry same in his ledger, in his plant or equipment accounts, and on his balance sheet as an asset. The only difference, if any, is in making new equipment himself, in which case it goes on his books at the cost price to him, thereby saving the manufacturer's profit he would have to pay if he purchased it. Is it, then, any less productive labor because a manufacturer prefers to make his plant extensions or new machinery, himself, instead of buying? It does not appear so; it certainly is productive labor.
13. Non-Productive Labor. All other labor, not distinctly productive as just outlined, must be classed as non-productive. This includes clerks and offices, foremen, assistants, watchmen, repairs and renewals, small tools, etc., and all the many expense men not working on product but necessary to keep the plant in repair and operation. Non-productive labor is a question of keeping the factory organization and management up to concert pitch, and is not regulated by the quantity of production.
Inter-department work in a plant often raises an interesting question. Shall labor expended by one department on repairs for another department receive credit for same as productive labor? The foreman of the department often claims that the repairs his men are doing for another department are just as much production, so far as he is concerned, as though his men were building a machine for sale, and should shoulder part of his expense. In a certain sense, all labor is productive, and from a selfish point of view, the foreman's argument is a fair one. But from the broader view of the manufacturer, all such inter-department repairs, or similar work, are a part of the operating expense of the plant, and are necessary for the up-keep of the equipment; they are not made for sale, as is a production order, and must be carried as expense—non-productive labor.
14. Expense and Production Cost Ledgers. Without digressing from our general subject, it may not be out of place at this point to call attention to a most convenient method of keeping cost records. Inasmuch as the cost of production must absorb the expense costs of manufacturing, it will be found advantageous to keep these two classes of accounts in separate binders, putting all the non-productive labor cost records in one binder, calling it Expense Ledger No. 1, and all the productive labor in Production Ledger No. 2. When the expense distribution is to be figured, it will be noted that all the entries will be made in Ledger No. 2, while Ledger No. 1 furnishes the amount and details of expense to be distributed.