G. F Wetzel.

Machine hour rate method of distribution of factory indirect expense online

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decidecl to ap^jly the H&. chine -Hour -Rate Plan to
their plant, and to the aathor of this paper
was assigned the work of putting the plan into
operation. The Companj^ is engaged in mailing
railroad car and locojaotive axles, and other
heayy f orgings and doing the heat treating and
rough machining on some of them. The plant is
comprised of a steam hammer department, hydrau-
lic press department , machine shop for malcing
dies and forging tools, a heat treating depart-
ment, machine shop for rough machining f orgings ,
■black-smith shop for mailing tongs , clamps and
other accessories used in forging operations,
carpenter and pattern shop , pov/er plant , and
office building. In the past few years , the
plant has nearly douhled in size to take care
of increased "business, and has grown so rapid-
ly that the organization could scarcely keep up


with, the grov/tli. This mer.nt that the duties of
those v/orking for the company previous to its
expansion, increased considerahly to tal^ care
of the increased work to he done, in addition to
ahsorhing and hreaking in a large nunher of em-
ployees. The resiilt was that every effort was
made to increase production, and get the new
additions into operation, letting efficiency,
records and cost methods go for the time heing,
to a working minimum. TMs , under the circui:i-
staaces was the most advisable course to pur-
sue , hut it complicated considerably the pro-
blem of getting things into shape after the de-
sired production was approached and attention
could be turned to it.

The problem of gathering up the loose
ends , and carrying out the plans of management
in regard to the method of distribution of the
indirect plant expense briefly stated was ,- to
classify and group the plant equipment in order
to establish production centers , each member of


wh,ich would do the same kind of work, and carry
the same hourly rate; to provide for collecting
the data necessary to determine total amounts
under the heads of building charge, shop adminis-
tration and general administration; to get the
data for figuring the operation charges for each
machine, and then to distribute all these to es-
tablish the desired result,- the machine hour
rate for each productive machine.

As no definite written instructions had
been issued to the shOp in permanent or standard-
ized form, it was decided that as the different
steps were worked out, these would be written up
as factory instructions, and issued to those in-
terested and entitled to them. A copy of part
of these instructions is included in this paper.

In classifying the machines, these had
to be numbered all over again, as they had prev-
iously been numbered just as they were placed in
the shop, and the nev/ machines numbered in the
order in which they were received. Thus number
twelve might be a sensitive drill press, thirteen
a heavy duty engine lathe, fourteen a pov/er hack-

\ .


saw and so on, the niunbers having no relation i
to each other or to the machines. Following a
suggestion from the Ivlanufacturing Instructions
of one of the plants near Chicago using the
Taylor system of scientific ipanagement, a num-
bering system was worked out, classi^ing the
machines by functions, types and sizes, so that
similar machines would have similar numbers, and
the numbers would mean something to those
familiar with the plan. The use of the machine
numbers for running order numbers for expense
supplies and labor, and accounting classifica-
tions as explained in Section One of the Factory
Instructions, was an addition to the original
numbering plan. It furnishes a simple way of
collecting much necessary data, and means the
elimination of considerable worlc, confusion and
chances of errou The detailed working out of
the machine classification is given in Section
Two, which will illustrate this method of mach-
ine numbering. The numbers were painted on the


machines, and later will be stamped on metal
tags and attached to them.

In addition to the numbers assigned to
the machines, the different piping systems,
electrical distributing system, line shaft units,
etc., were given numbers for the purpose of fur-
nishing running order numbers to assist in es-
tablishing the net costrto the company of steam,
compressed air, electrical power, and the like.
!Ehe list of these with their descriptive notes,
given in Section Three, will be self explanatory.

Following the plan previously used, it
was decided that the factory costs would be fig-
ured monthly as before. Because of the nature
of the work , turned out by the plant, this is a
satisfactory policy, and as it effects the burden
distribution problem, is quite an advantage. By
establishing the rate at the end of the month,
it is practically the distribution of knoxm
amounts, so that the burden as spread to the pro-
duct should balance very closely with actual ex-


penditures not aceoiiiited for by direct labor
aiid material, and items chargeable to plant ^
account, excluding depreciation on plant and
e quipment •

The running order number scheme is an
expansion and broader application of a system
previously in use to a limited extent, combin-
ed with the machine classification plan, for
the purpose of collecting and classifying the
charges for maintenance and repair of the plant
equipment and buildings, including both labor
and materials coming under these heads.

To show how the labor charges are ob-
tained, an explanation of the time-keeping-
plan will be necessary. All the factory?- employees
except those on the monthly roll (foremen,
master mechanics, superintendents, etc.) re-
port their time on cards, one side of which is
printed for stamping the time of coming in and
going out, by the time clock, and the other
side printed to provide spaces for reporting the



job number and nature of work done, number of
hours on each job, and the nature of the machine
worked on. These cards are collected daily,
sind sent to the time office, after being checked
by the shop clerk to see that each man turns in
his card with all the information req.uired. The
job numbers for new construction, production,
repair and maintenance work are all distinctive,
so that theJre will be no duplication of numbers
and no difficulty in deciding what the work is
in the cost department. Any work on repairs,
maintenance, expense tools, or other items in-
cluded in the burden, is assigned a job number
by the shop office taken from the list of runn-
ing order numbers, or if not found there, from
the number of the machine or production center
involved. The time keeping department then
distributes the labor charge as shown on the
cards, under the proper order numbers, by de-
partments. Thus the monthly expense labor
charge is obtained, properly classified for

' V


distribution into tlie items making up the mach-
rates. This information, together with the pro-
ductive labor is summed up, giving the amount
of money expended for labor in each department
for each job.

ReqLUisitions for expense supplies,
that is, those which are part of the burden,
are handled in a similar manner. The same order
numbers are used on requisitions turned into the
store room, when materials are dra\Mi out, and these
are sent to the cost department to be grouped
by number and totaled. In this way a large part
of the indirect expense is obtained with the mini-
mum amount of labor, It is assumed that expense
supplies from the stores department are used as
dravm out, so that the month's requisitions re-
present the consumption for that period.

The tool making department is treated as
a productive one, the machines being given hourly
rates, which are added to the charges for labor
and material, the total being taken as the cost


of the tool or other work produced, even though
it is a repair part. It may seen at first that
in this way, some of the burden will "be charged
twice, since the costs of the tools and repairs
go into the loading rates of the machines they
are for, Hov/ever, this way of handling the
charges is correct, because the rate of each mach-
ine is computed by dividing its share of the
burden by the number of hours its in use, and if
some work is done (as repairs) and the loading
rate not charged, there will be a deficit for
the machines so treated. This deficit would
then have to be made up by increasing the rates
of the machines for hours worked on the factory
product, or spreading the deficit over all the
machines . The net result would then be that
the tool^cost would be less, and the balance of
the rate greater by the same amount.

After getting the figures for mainten-
ance and repairs from the time cards and requisi-
tions, the remaining elements going into the


burden are,- administrative expense, indirect
labor not otbervase disposed of, supplies not
issued by the stores department such as coal
an^ fuel oil, and the charges for water, pur-
chased electrical power, insurance, taxes and
depreciation. All of the above are charged to
the departmental burden as far as practicable,
the balance going into general administration
and divided among the departments on the rate
hour basis, which was discussed in Part One.
Coal and fuel oil consumption are obtained by
taking the amounts at the first of the month
plus receipts, less inventory at the end of
the month. Administrative salaries and in-
direct labor are obtained from the payroll,
and electric power, water, taxes, and so on,
from the bills rendered. Depreciation is fig-
ured from the cost of the machine plus installa-
tion charge, and the probable length of useful 1
service under the conditioEs of operation. The
machines are used on heavy work and tough


material, in addition to being in use from
eighteen to twenty-two hours per day, The rates
of depreciation will therefore vary from fifteen
to forty percent,

A portion of. the equipment requires con-
siderable ausciliary apparatus, for which rates
will be established using the operating expense
and buildin? charges only. These will be then
added to the rate of the principal machine, and
its rate will include the administration charges
for all, based on the total floor space.

It will be evident that in applying this
expense distribution plan, there is a large amount
of data that must be collected, tabulated, summar-
ized and kept up to date. The principal heads
under which this is collected are,- descriptive
data on machines, including machine floor spaces
per machine and department; machine hours and
kilowatt -hours per machine; relative amounts of
steam, coal, fuel oil, cutting compound, etc,
per department or per machine per month, labor


s^nd material included in the burden, collected "by
^oTj num'bers; macliine repair records; administra-
tive expense, divided into departmental, general
administrative of plant, and general administra-
tive for the business as whole. In addition
there is a quantity of miscellaneous data necess-
ary for determining the net cost to the company
of electric current as used in the plant, steam,
fuel oil, cutting compound, compressed air and

The descriptive data on the machines
was obtained from the few records that were
available and by going out in the shop and gett-
ing the balance. The form used for recording
this information is shown in Figure 1, the
"Machine Data" card. One of these was filled
out for each piece of equipment coming under
the machine classification. The floor space
of each productive machine was taken as the
number of square feet occupied by the machine
plus the space used by the operator, and the
total of the individual spaces thus measured.


l^chiiies in . . Plant.


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taken as the department floor space. TMs, as
mentioned in Part One, automatically disposes
of aisle and other space not occupied by pro-
ductive machines.

The machine -hours per month are found hy
going over the time cards turned in by the men,
talcing off the hours shown on each, and tabulat-
ing them on a sheet with vertical columns headed
by the machine number, on lines niimbered to
correspond to the days of the month. This is
done daily, as soon as the cards can be spared
by the time -Ice e ping department, i. e«, about
two days after being turned in. At the end of
the month, the columns are totaled on the add-
ing machine to get machine-hours per machine
for the month. The data so obtained is then
entered on the "Machine Hour Summary" shown in
Figure Two, together with the average kilowatts
used, from which the kilowatt-hours used is
figured and entered. In starting out with the
system, the power required was assumed to be


the same as the rated power, which later will
he corrected by making tests of actual power
used. The average machine hours and power for
each production center or group of machines
bearing the same loading class number, was used
finding the rate for that group.

The relative amounts of steam, coal, fuel
oil, cutting compound, water and air, are found
by observation, tests and reports, and the
charges for them pro-rated on the basis of re-
lative amount compared with total amount account-
ed for. The charges are then entered on the
"Iflachine Rate Data" sheet shown in Figure Three,
in the proper space.

The expense labor and material are stimmed
up under the running order numbers by the time-
keeping and accounting departments, respectiveitv,
and submitted to the loading Rates department.
Here the amounts are distributed to the proper
production centers, or charged into the items
such as steam charge, or electrical charge. The

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t/) (Ai (/ (/)

t/i ■(/, t/i (/;

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f/i vi c/-. (/)

achine No ; L. C. Machine Nn


Date Installed

Date Descr. 1


Date Descr. L

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Date Descr. I











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total administrative expense is obtained from
accounting and time records, and distributed to
the different departments. ■

The charges for machine repairs are re-
corded on the "1/Iachine Bepair Record" card shown
in Figure Pour. This is not used in setting the
rate, hut for record only. The amounts of labor
and material involved are determined from time
cards and requisitions, and the burden (when
work on another productive machine is required)
is found from the time cards and machine rate
list. These are entered in the proper places,
marked L, (labor), M, (material), B, (burden)
and T, (total), with a short description of the
repair .

The electrical power used is purchased
from a power company, and is gotten at a low rate,
but by the time the power has reached the mach-
ines using it, it has accumulated a number of
charges in addition to the pov/er company's bill.
The current is delivered to the plant over high


tension wires, -passes through transformers and
motor generator sets, so that 4€|0 volt alternat-
ing, and 220 volt direct current are made avail-
able. Thus, in addition to the electrical ser-
vice department and supplies, there are the
charges for the generator house, switchboard,
transformers, and distributing system maintenance
and depreciation. All these are summed up, which
gives the total charge f6r electrical power de-
livered to the machines. This amount is then
divided by the total kilowatt-hours for the month
accounted for by the productive machines, which,
gives a power rate to be used in charging them
for power.

The steam cost is found from the coal and
water used, labor and attendance, maintenance and
depreciation, etc., for the boiler house and steam
distributing system. The cost as found is used as
the basis for determining what amount to add to the
rate of the steam hammers for steam used, how much
to add to the pumping charges for fuel oil, com-

Machine Name

Size and Descriptioii.

Made by

Driv-en by

Machine No.,

..L. C. Machine No.


.Date Purch'd

.Maker's No.


.Floor Space.

..Est. Life..

.Auxil. Equip. (Name, No., Descr.).

Further Data

Revision Date


Elect. Power

Steam « ^


Air (Comp.) ; 5

Water $ 1

; 1
Cutt. Comp. $


$ i

Repairs !

$ i



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AuxJI. Equip.

, 1


BIdg. Cliarge I

$ 1

Shop Adminis't'n
Gen'l Adminis't'n^
Total Charae

Ave. Mach. Hr. Per Day

Mach. Hr. Per Pd.

Mach. Hr.

Deot. Mach. Hr.

Mach. Fl. Spa ce

Dept. Ma ch. PI. Space

Burden Earned


^^Gi/^e 3


pressed air (the steam compressors), cutting *
compound, circulating quenching water for the
heat treating department, etc# The other
items mentioned are handled in a similar manner,
all "being analyzed, totals determined, and then
distributed either to building charges, or to
production centers , as part of the machine hour

After the various costs mentioned are
found, the next step is the distribution, which
with a few additional items makes, up the rate re-
quired. The various charges, in the final dis-
tribution, are recorded on the "Machine Rate Data"
sheet, (Figure 3), one of which is filled out for
each production center, regardless of the number
of machines in that center. The sheet was designed
to apply to all the machines coming under the
loading classification, that is, furnaces, anvils,
and other equipment perfonming an operation on
productive worlc, as well as machines as usually
meant by that name. There are twelve vertical


cbliunns, one for each, montli, so each sheet will
serve for one year. In addition to cutting dorai
clerical labor, th.is also furnishes an easy means
of comparing the different elements from month to
month, which is important, for if any item shovirs
an unusual rise or drop, it indicates a condition
requiring investigation, A detailed description
of the itens on the "Idachine Rate Data" form is
given in Section 4 of the Factory Instructions.

When the machine-hour, rates are deter-
mined each month, a list is made up, giving the
rate for each production center, and fiiamished
to the cost department. Here, by means of in-
formation taken from the time cards, giving the
machine number and number of hours it was
occupied by the work, knov/ing the machine rate,
the burden is easily figured for each job. The
amount charged for direct labor as previously
stated, is furnished by the time-keeping depart-
ment. The material is figured from production
reports, giving number of pieces finished, and


number of pieces spoiled, or rejected by the
inspection department because of poor steel.
Thus the three elements of the factory cost,
labor, material and burden are determined,
which is the final result wanted.

The following part of this paper is
taken from instructions and the machine classi-
fication written by the author and issued to
those requiring them, in the plant herein dis-

Issued To



Written "by the Author.

I H D B Z.

!•- Machine numbering system description,

2.- Machine classification lists.

3.- Running order numbers, and instructions.

4,- Machine rate data & instructions,

Hote:- In order to provide for the
addition of new sheets without disarranging prev-
iously numbered pages, the follovang method will
he used in numbering pages:- The page number will
be made up of two parts, separated by a decimal
point, the figure to the left being the section
number as given above in the index, and figure to the
right being the page number in that section. Thus
1,4 is page 4 in sedtion 1, the "Machine numbering
system description,"


The machine ntunhering system is designed
to perform three functions, (1) to group the
machines "by functions, types and sizes for ease
in applying the machine hour rates, (E) to nmn-
her the machines for identification purposes,
and for ease in locating a machine when its num-
ber is ]movm, and (3) to furnish rmining order
numbers for repairs and supplies, which will
assist in properly distributing charges and in
keeping records,

For the purpose of identification and re-
cords, all pieces of equipment are given numbers,
in accordance with the general classification for
loading purposes, including tsuaks, pumps, motors,
cranes, etc. There will be two general divisions
of these nximbered pieces,- direct or productive
( machines which contribute directly to the product)
and indirect or non-productive (machines which do
not contribute directly to the product). All pro-
ductive machines will carry Machine Hour Rates or


loading hourly rates, each class having its rate.
The non-productive machines will not carry load-
ing rates, but their charges will be carried by
the productive machines. To distinguish between
the two classes, the numbers of the non-product-
ive machines will have the prefix "IS" before the
number, for example II81S-5.

For the purpose of cost finding, pract-
ically all of the plant equipment except build-
ings, furniture and fixtures will be considered
as machines and assigned numbers. This includes
the various piping systems, such as hydraulic
piping, live and exhaust steam piping, cutting
compound system, etc., line shaft units with
their counter shafting and belts, boilers, furn-
aces and so on, as given in the classification

The machine numbers will be made up of
two sections, the first section being the load-
ing class niunber, referred to as L. 0. Eo., and
the second the serial number of the machine in
that class, the two being separated by a dash (-).


The 1. C. Ho. will consist of three fibres,
the first, reading from left to right, indicat-
ing the functional classification, such as
pressure, rotation, drilling and boring^ and
cutting; the second indicating the type classi-
fication, such as steam hammer or forging press,
drill press or boring mill, engine lathe or
boring lathe; the third indicating the size
cla^fication, or a more detailed type classifi-
cation. These will be referred to as main load-
ing classification, sub-classification and de-
tailed sub -classification, respectively. The
prefix "N" will be added where this applies as
previously explained. With few excet>tions, all
productive machines having the same L. C. Mo.
will also have the same loading hourly rate.
Machine number meains the complete number on a
machine, such as 241-8 or 521-4.

In order to properly charge the over-
head or loading, it will be necessary that every
time card of a man working on a productive mach-


ine carry the machine nimiber, and also state
clearly the miniher of hours that the machine ^
was occupied by the work. This information,
together with the hourly rate, will enable the
cost department to readily determine the leading
charge, which with the direct labor and material
make up the manufacturing cost.

The L, C. Ho. will also be a running order
number for each machine for repairs (labor and
material) and indirect supplies. The machine
number must be given on each order, when for one
machine only. In the case of any changes or
additions which should be charged to Plant Account,
the I* C. Ho, vd.ll not be used, but a different
number will be assigned, by the shop clerk, to

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Online LibraryG. F WetzelMachine hour rate method of distribution of factory indirect expense → online text (page 2 of 4)