11. Relation between machine processes and ex pense.—As a matter of fact, the majority of factory expenses do not attach themselves to labor or to ma terial, but gather around machines and processes. Consider, for instance, the items of interest and de preciation. In the averaging method referred to, these expenses are distributed over the entire product with other items of expense, and lose their identity en tirely, so far as any particular machine or process is concerned. Yet these items of expense are intimately connected with individual machines or processes and are definite parts of the cost of operation. They are not connected with the wages of the operator, since they continue to accrue even when the machine is idle. In fact this is one of the fundamental defects in using wages or labor hours as a basis of expense distribution. Many items of expense continue to accrue even when no wages are being paid and the factory is closed down. It is not logical that an article produced by hand labor should be allowed to bear a portion of the expense equal to that borne by a part machined on a large boring mill; yet this is just what the averaging methods accomplish if they are applied over diverse product of varied size. Similar reasoning applies -to such expenses as heat, light, power, insurance, rent, taxes, repairs, and in fact to the greater part of shop expense.
It should be remembered also that the amount of these expenses may be very large. Shop expense fre quently amounts to 100 per cent, and sometimes goes as high as 150 per cent, of the direct wages. It is fully as important that this expense be accurately al located as that the labor cost be correctly recorded. This is particularly true where it is desired to know the cost of different sized articles or different lines of goods, with a view to meeting competitor on a correct basis.
12. Old 'machine rate.—When, therefore, the tra ditional influence of wages and labor hours is once dis carded, it becomes clear that many of the items of ex pense are naturally connected with the use of equip ment of one kind or another. Rent, insurance, taxes, interest and depreciation are connected with the use of buildings and machines. Heating, lighting and power are likewise connected as much with machines as with men, and if costs are to be intelligently ap plied this factor must be taken into account. This aspect of cost finding was recognized in mixed manu facturing many years ago, and so-called machine rates have long been in use. In fact, the conception is a very old one and had its origin, no doubt, in an in stinctive effort to discharge the interest on investment and wear and tear of the machine, in a degree in some proportion to its size and cost. This effort probably was a natural result of the growth in the variety and size of machines.
In its original form the machine rate made no ef fort to insure accurate allocation of the total factory expense, but attempted rather to equalize in some de gree such items of expense as clearly attached them selves to machines and processes; it perhaps took into account the probable life of the machine. All ma
chines and processes were divided into a few classes designated often by letters or numbers. A gradu ated hourly rate was then assigned to each class, and each piece of work done on every machine was taxed accordingly, and in proportion to the time during which it made use of the utility concerned. In most cases, by some averaging method an additional ex pense charge was added to the factory cost so deter mined ; the profit which was added was sufficient to cover all discrepancies. This method, which might be said to belong to the "stone age" of cost finding, is not to be recommended. It is of importance, how ever, because of the principle involved.
13. Modern 'machine rate.—As the need for more accurate costs grew, it was a most natural tendency to extend the method to cover handwork as well as machine processes. Under such systems the hourly burden imposed on the work for the services of a skilled handworker might be forty cents per hour, while the hourly rate for a large machine tool might be $5 per hour. Furthermore, as the need for accu rate costs became still more important, it was also nat ural to extend this system so as to distribute the total factory cost, if possible. The fundamental principle, then, in the modern machine rate is to assign to each machine its own share of expense for a given period of time. This total expense is then divided by the estimated number of hours that the machine or proc ess will be in use for this same period; this estimate, of course, is based on previous records or some similar source of information. The dividend so obtained is the hourly rate which must be applied to each job using the tool or process. It is clear that a close and proportional allocation of all expenses will be accom plished if each tool and process is in operation during the exact time which has been estimated, and if no additions or deductions are made to the equipment and working force during the period considered. It should be noted that in using this method a machine, in this sense, will be any machine or process from a vise to the largest tool. In fact, as will appear pres ently, allocation may be made, in this manner, to any place where the work of men involves the use of ex pense items. The idea underlying this method, there fore, is to measure off directly to each "machine," as thus defined, its own share of expense, basing this measurement on the use each machine makes of the several expense utilities, and not on some arbitrarily chosen standard, such as wages or material, which is in most cases only remotely connected with the meas urement of these expenses.