Theoretically at least, this method makes the most intelligent allocation of the bulk of the expenses, and with this supplementary rate the total expense will be distributed with as much certainty as by the averag ing methods. The supplementary rate serves also as an index to the volume of work in the shop. A rising supplementary rate would indicate lack of work, while a falling rate would indicate reverse conditions. In principle, at least, the machine rate, with the supple mentary rate, offers an attractive solution to one of the most difficult problems of cost finding.
It will be obvious, also, that in many cases approxi mate machine rates can be assigned without great dif ficulty. In the general case of mixed manufacturing, however, the assigning of the machine rate requires considerable preliminary work, if any approach to accuracy is to be obtained, and this weakness con stitutes the greatest defect of the method. Mr.
Church's plan is so logical, however, that it is dis cussed more fully in the succeeding chapter.
1. General principles.—The method of distributing expense by the machine rate and the supplementary rate has come into prominence thru the writings of Mr. A. Hamilton who has investigated the plan very thoroly, and whose reasoning presents a somewhat different point of view from that upon which the old averaging methods are based. As a re sult of this reasoning the shop or factory, instead of being regarded as an organized whole, as in the aver aging methods, is regarded as "a collection of pro duction centers, each differing from the other, with certain common connecting bonds," which are the averaged or general factors in the expense charge.
As Mr. Church explains: A production center is, of course, either a machine or a bench at which a handicraftsman works. Each of these is in the position of a little shop carrying on one little spe cial industry, paying rent for the floor space occupied, inter est for the capital involved, depreciation for wear and tear, and so on, quite independently of what may be paid by other production centers in the same shop. Then, in addition to this, there will be a separate debit representing those items of expense which can be treated only as an average all-round charge.
2. Production centers conception will become clearer if the factory be regarded as con sisting of a large number of small productive units, separated physically from each other and supplied with heat, light and power from a central station in such a way that all such services can be measured and debited against each little shop. These little shops will necessarily vary in size and in the size and char acter of their equipment.
If, now, the owner of this factory should rent some of these little shops to employes and should operate others himself, he would not charge off the operating expense by any system of averaging. He would, necessarily, keep an independent account with each production center so as to be able to show the exact amount of each service (or production factor) that he supplies to each shop. Some of these services, such as insurance, depreciation, taxes and supplies, could be accurately recorded and charged to each center. Others, such as heat, light and power, could not be charged with quite the same accuracy, but still with accuracy enough for all ordinary purposes. Other items of general service, such as transportation and telephone service, might give still greater trouble ; yet a fair approximation could be made even in these cases. And lastly, there might be a small residuum of expense, so general that it might have to be dis tributed by some averaging method.
The workman renting one of these little imaginary shops would then receive a periodical statement of his indebtedness to the owner. He could add thereto any other expenses peculiar to his work and, by esti mating the number of hours during which his machine was in operation, he could compute a machine rate that would discharge all of his expense in the man ner already described. By means of a supplementary rate, as previously explained, he could also care for any other expense which could not be controlled in this manner, and also for the difference between the actual and the estimated number of hours during which his machine was in service.
3. Application to actual conditions.—It would seem that these conditions do not change simply be cause the imaginary walls are taken away from these little shops and a large building, housing them all, is erected over them. Mr. Church's argument that this method is the only accurate one of finding costs seems logical. The possible functions of a manufacturer are numerous. He may be an owner or he may be a renter. He may supply his own power or he may buy it. He may furnish his own heat and light, or he may depend on others for these services. Viewing the man ufacturer from this standpoint, it is clearly more log ical to segregate his expenditures according to func tions than it is to segregate them according to the kinds of workmen employed. The workman who rents one of the little shops discussed above, will be interested, for instance, in the cost of power per kilowatt as meas ured by his meter, and will not be interested in the average cost of repairs to the entire factory of which the power plant forms a part.