DISTRIBUTION OF ADMINISTRATIVE EXPENSE-RESUME 1. Distribution of administrative expense.—Ad ministrative expense and selling expense in most fac tories, and particularly in small factories, are treated as one item, under the name of general expense, and are usually distributed as a percentage on factory cost. In many such cases it is not possible to make a clear cut division between these two classes of 65(pense, but whenever possible they should be treated independ ently, if for no other reason than to fix responsibility. In large enterprises it is usually possible to segregate them, since the sales organization of a large works is usually an independent one; but even here there may be items of general superintendence that should be di vided between the two branches of general expense.
It is difficult to distribute administrative expense over factory product in proportion to services ren dered, by any method of allocation. Where the fac tory is very large and divided into departments, each with its own office force, an approach to intelligent allocation can be made, but the average factory is not so arranged. The usual method is, therefore, to dis tribute the administrative expense as a percentage on factory cost.
Thus, if the factory output for any month is $50, 000 and the administrative expense for that period is $10,000, the percentage by which the factory cost of each article must be increased in order to absorb the 10,000 administrative expense will be = 20 per cent.
50,000 If, then, the shop cost of a given machine is $200, its cost, including administrative expense, will be $200 --I $40 -= $240. The factory cost plus the administra tive cost is sometimes called the gross cost.
2. Selling expense.—Selling expense is even more difficult to distribute over the product in proportion to services rendered. In the first place, selling has no connection with manufacturing. The factory may be in the country and the sales office may be, and often is, in the city. There is no relation between the two branches, and hence there can be no relation between individual items of selling expense and factory orders. Occasionally, of course, a salesman may do work on securing an order for a particular machine and may be successful. On the other hand, he may fail to se cure it, and an order for it may come in unsolicited from some other quarter. Much of the work of the
salesman is "missionary," or advertising work, and it is difficult, often, to trace and identify the results of his efforts.
Where the enterprise is very large, and the sales force is divided into departments according to the sev eral lines of product, the cost of selling the several lines may be intelligently allocated against each line.
But here, again, there is seldom any connection be tween the cost of selling an article in any given line and the cost of producing it, the latter being fixed by conditions that are entirely independent of the cost of selling. The best that can be done, therefore, is to distribute the selling cost as a percentage, just as in the case of the administrative expense.
The computation is simplified, of course, if both administrative and selling expenses are lumped to gether and so distributed, and this procedure is cus tomary in most plants. It should be noted, however, that there is no reason why the details of such expenses should not be carefully segregated so that the man ager can see not only the separated totals of adminis trative and selling expense, but also the important details of these expenditures. Some suggested de tails of these expenditures are given in Section 7, Chapter X, but evidently the extent to which such detail may be logically carried will depend on the size and the character of the enterprise. The method of adding the selling expense as a percentage on the manufacturing cost, as discussed in Section 10, Chap ter III, should be carefully noted.
3. advantages of depart mentization with reference to cost finding have been referred to several times in the preceding discussion; it may be helpful to note several other aspects of this feature of factory organization. From what has al ready been said, it will be evident that cost finding is closely connected with factory management; and yet, in times past, little or no attention has been paid to the problem of cost finding, either in arranging the plant or in organizing its personnel. It will appear, how ever, that this question should at least be kept in mind in perfecting both plant arrangement and organiza tion.