It will be evident, however, that in shops where the parts manufactured are of approximately the same size and character this method may be fairly appli cable. The same will be true of very large plants where the volume of work is so large as to permit of careful classification and departmentization so that the work in all the departments is similar in size and character. In such cases a different percentage may be necessary for each class or department and, ob viously, this departmental method will give more ac curate results in plants doing mixed work than can be obtained by a flat rate on the entire product. It may be noted in passing that departmentization may not always give the desired result. If one depart ment, for instance, is devoted entirely to generators, another to motors, and another to transformers, great differences may still exist in the size and character of parts within each department. If, however, the de partmentization groups all lathes of one approxi mate size together, all the large boring machines to gether, and so on, this method is clearly more ap plicable. This matter will receive further attention in a later section.
6. Distribution by percentage on prime cost.—In the distribution of expense by percentage on prime cost it is assumed that the expense varies di rectly with the prime cost. Thus, using the same data as in the preceding examples, the expense which every dollar of combined direct labor and material must bear will be: 5,000 — $.666. The expense, therefore, for 5,000 + 2,500 the job under consideration will be ($100 + $300) X .666 = $266.67, and the factory cost will be: Direct labor = $300 Direct material = 100 Expense = 266.67 $666.67 7. Advantages and defects.—Distribution by per centage on prime cost has the same inherent defects and limitations as the methods previously discussed, since it combines the bases of both of them. Where the value of the direct labor entering into the product is small compared with the value of the material, the method approaches the plan of dis tribution by percentage on material. On the other hand, if the material value is relatively low, the method approaches the plan of distribution by percentage on labor. In either case there are involved the errors and limitations of one or the other of those plans.
In the general case of a factory making a varied product, as to both character and size, one piece may have a relatively high labor value and the very next one may have a relatively low labor value; distribu tion by this method is, in such a case, not only inac curate, but illogical. A manufacturer doing a mixed business will find difficulty in competing on jobs in volving much material and little labor if his costs are based on this method. Even tho other work which be performs may justly receive a large amount of ex pense, the selling of a product consisting of little but material does not, in general, involve much factory expense. In fact, in the extreme case, such goods
may not even enter the factory, but may pass directly from the source of supplies to the customer.
8. Distribution by percentage on man-hours.—In distributing the total expense by percentage on man hours it is assumed that the expense which any piece of work should bear is directly proportional to the number of man-hours that have been expended upon it. Suppose that, as in the example already used, the total direct labor is $5,000, and is made up of 12,500 hours of labor at varying rates. Assume,also that the total expense is $5,000 and the total material is $2,500, as in the previous cases. Assume also, as before, that the direct material used on the job under considera tion is worth $100 and the direct labor cost is $300; but assume, moreover, that this labor is made up of 1,200 hours of work at twenty-five cents per hour. Then the expense per man-hour chargeable against every job will be $.40, and the expense which must 12,500 be allocated to the job under consideration will be 8.40 X 1,200 = $480, whence the shop cost of the job will be : Direct labor = $300 Direct material = 100 Expense = 480 $880 9. Advantages and defects.—It might seem at first glance that the man-hours method would give the same results as distribution by percentage on labor alone, and this would be the case if all men received exactly the same rate of wages. Thus, suppose that the total direct labor of $5,000 consisted of 20,000 hours at twenty-five cents per hour. Then the ex pense chargeable against each man-hour would be 5,000 = $.25, and the expense chargeable against the 20,000 job under consideration would be $.25 X 1,200 = $300, or the same as in the method of distribution by percentage on labor.
On the other hand, if the job under consideration received 1,500 hours at twenty cents per hour, or a total of $300 as before, the expense allocated to it by this method would be $.40 X 1,500 = $600, and the shop cost would be $300 + $100 + $600 = $1,000. Again, if it received 500 hours at sixty cents per hour, making the same total labor cost as before, the ex pense chargeable to it would be only $.40 X 500 = $200,.and the shop cost would be only $600. It will be seen, therefore, that under this method the total labor cost may be the same on different jobs, but the expense may vary widely. This method, then, takes into account the value of time spent, the factory cost decreasing and increasing with this factor. A job done by a high-priced man in a short time, and with minimum use of the shop facilities, is not bur dened so heavily as one done by a cheaper and slower man who uses the shop facilities for a much longer period. This is logical, and in this respect the method of percentage on man-hours is an advance on the sys tems previously discussed.