DISTRIBUTION OF FACTORY EXPENSE 1. General.—From the foregoing discussion it will be clear that while the cost of direct labor and direct material can, in general, be allocated with a fair de gree of accuracy to the jobs into which they enter, the problem of distributing the factory expense so that each job shall bear its share of burden is difficult and is one that seldom admits of an accurate solution. Expense items differ in their characteris tics, and industrial enterprises themselves vary so widely both in size and character that it is not possible to formulate any one system of distributing expense that will be universally applicable and that will give accurate results. It should be remembered, also, that the difficulty of allocating expense grows with the size of the industry and becomes more complex as the number of lines of goods increase.
Nevertheless, it is essential that these expenses be allocated as closely as possible, especially where sev eral lines of product are manufactured. Not only should each production order be charged with expense in proportion to the use it has made of the manufac turing facilities, but if close watch is to be kept of these expenses their distribution should show the de partmental responsibility for their creation. On the other hand, managers are usually opposed to complex systems and methods and are content with only a fair degree of accuracy. Nearly all cost-flriding systems in use, therefore, are compromises which give approxi mate costs only. A number of these approximate methods are in wide use and it may be helpful to dis cuss briefly the characteristics and limitations of the most important ones. It will be understood also that the present discussion refers to the distribution of factory or manufacturing expense, the distribution of general expense being treated separately later on.
The basic principle of all of these methods is to use some tangible element in the job as a basis of compari son by which to measure the indirect expense which should be charged against it. It will be remembered that direct material and direct labor are tangible ele ments that attach themselves to all jobs in a direct and measurable fashion. The time expended upon a job is also an element that can be determined accurately, whether it be the time of the workman himself or the time of a machine which has been used. Practically all systems of expense distribution assume that one or more of these tangible elements will form a measure of the proportionate amount of expense that the job should bear. The most important of these systems which will be briefly discussed are : (1) Distribution by percentage on material cost (2) Distribution by percentage on labor cost (3) Distribution by percentage on prime cost (4) Distribution by percentage on man-hours (.5) Distribution by machine rates.
For simplicity, it will be assumed at present that these systems are applicable to the distribution of the factory expense as a whole; the limitations to this supposition will be discussed later. A more ad vanced and more accurate method known as distribu tion by production factors deserves special attention and will receive consideration.
2. Distribution by percentage on material cost.— In distributing expense by percentage on the ma terial cost it is assumed that the burden varies directly with the amount or cost of the material that enters into the product. Suppose, for in stance, that a machine is built involving an out lay of $300 for direct labor, and $100 for direct material. Suppose, further, that during the pe riod of its construction the total expenditure in the factory for material is $2,500 and the total expense for the same period is $5,000. Then by this method of distributing expense each dollar's worth of ma terial that goes into a machine should carry with it 000 into the cost thereof 5 ' $2 of factory expenses.
2,500 The expense which the job in question must bear is then $100 X 2 = $200, and the factory cost will be: 3. Advantages and defeets.—It will be clear that in a simple continuous process involving the production of only one commodity, as is the case in a rail mill or a cement plant, where every part of the product makes the same use of all the facilities of the plant, the system discussed in the previous section will often be adequate. It is sufficient, in fact, in such simple cases to divide the entire cost of production by the total weight or volume of the product and establish unit factory costs that are fairly accurate. This is not because of any inherent accuracy in the method, but because, in these simple cases, allocation in a distri butive sense is not necessary. All that is required is division of the expense over a uniform product. In other cases, also, where the material value entering the factory product is very large compared with the direct and the indirect labor cost, this method may be sufficiently accurate. The method is applicable also to mercantile establishments where the units handled do not vary widely in size and value, and the cost of storage, insurance, clerical assistance, etc., is fairly constant.