3. Proportional distribution.—It has, therefore, been advocated by some that the expense distributed against any product should be strictly proportional to the use it has made of the facilities; and that any other expense belonging to any other product should be disposed of in some other way. In judging this suggestion, however, the purposes of cost finding must be kept in mind. If the purpose is to measure the efficiency of production by comparative costs, the method of distributing expense in proportion to service rendered is undoubtedly correct. It does not seem fair to the manufacturing department to charge against it expenses that are caused by idle machines for which it is not responsible. In fairness to the manu facturing superintendent, therefore, these expenses, if included in current costs, should not be confused with the true costs as determined proportionally.
On the other hand, it must be remembered that any expense that is not included in the costs and recov ered in the sales price is a loss. Expense cannot be carried to some account and disposed of, any more than it can be safely forgotten. Entirely aside from any logical principles of expense distribution, expedi ency would dictate that as much expense as possible be buried in the sales price, regardless of the origin of these expenses. It would be obviously foolish, how ever, to overburden an active line of production with the expense of inactive lines to such an extent that sales would be impossible; this would seem to be the only danger from a procedure of this kind.
4. Solution of the problem.—Two methods of solv ing this problem have been proposed. The first plan is to carry all expenses due to idleness, directly to the profit and loss account and charge them off as a loss against the business. The error in the reasoning which is back of this plan is that it assumes that all machines should be in operation constantly, and, therefore, that all expense due to idleness is irrecov erable, an assumption that is not necessarily true. A machine may be indispensable and yet be idle a con siderable portion of the time, and the expense charge for the machine should be set so as to discharge the total yearly expense over the production for that pe riod. If expenses due to idleness are carried to the profit-and-loss account, the corresponding expense that is discharged when the machine is in operation should also be carried to the same account as a credit, if the usefulness of the machine, and of the line of product produced upon it, is to be judged correctly.
The other plan is to carry all expense to an ex pense account and distribute it by one of the averag ing methods discussed in Chapter XIII, but to adjust the rate of distribution according to the experience of an entire year, at least, instead of according to the records of the preceding month. The expense ac count, therefore, will act as a reservoir, discharging more of the expenses in busy periods and fewer of them in dull times. It will, of course, also equalize pe riodic expenditures, such as taxes, etc. If the rate of discharge is accurately set the entire expense should be discharged at the end of the period for which the rate of discharge is computed. Should there be an
undistributed balance in the account at the end of the fiscal year, it can be carried to profit and loss, or it can be carried forward into the next period and the rate can be adjusted so as to distribute it over that period. While this method provides for distributing all the expense without great danger of unduly over burdening production during dull times, it is, of course, open to the same objections that have been urged against all averaging methods (see Section 10, Chapter XIII) .
It would appear, however, that an intelligently com puted machine rate, like that discussed in Section 13, Chapter XIII, in connection with a supplementary rate based on a long period of time, would do much to solve this perplexing problem. The ma chine rate would distribute all expenses that are attached to the machine, or process, in propor tion to the use that is made of it, irrespective of the volume of product. The bulk of the costs would, therefore, be proportionally distributed ex cept in periods of great depression when, as has been noted, practically any method is of doubt ful accuracy. The supplementary rate, containing the expense due to idle time, would be equalized not only over processes, but also over periods of prosperity and of depression; thus the danger of overburden during dull periods would be obviated. The writer is not aware that this method has been tried; it would seem to be worth investigating.
5. Other limitations to proportional distribution.— Mr. H. L. Gantt, discussing this problem in an in teresting paper 1 presented before the American So ciety of Mechanical Engineers, argues that "the in direct expense chargeable to the output of a factory bears the same ratio to the indirect expense necessary to run the factory at normal capacity, as the output in question bears to the normal output of the fac tory." That is, if the production falls to, say, one half the normal volume, this production should be burdened with only one-half the normal expense so that, everything else remaining the same, the manu facturing costs would not change with change in vol ume of product. Granting that proportional distri bution is correct in theory, Mr. Gantt's statement is strictly logical only when the decrease in volume of product is brought about by the complete suspension of production in some lines, while the remaining lines are continued at normal volume. Mr. Gantt's theory will hold approximately true also for moderate de crease in all lines. But if a great decrease in volume takes place in all lines, which often happens, a rise in productive prices will result from causes which lie in the nature of the expense itself that rightly belongs to every line. As explained in Section 2, Chapter X, expense, in general, does not vary directly with vol ume of output, but becomes greater in proportion as the volume decreases, since, in practically all expense, there is an irreducible minimum that must be cared for, no matter how small the output may be. There is, therefore, a minimum volume of product that can be manufactured profitably, and beyond which it may be disastrous to continue.