‘ a1 Jinn-I4 I!!!

SOME SIGNIFICANT APPLICATICNS
of
ACCOUNTING TO AUTOMOTIVE PRODUCTION

A Case Study for the Industrial Management Student

by

Maurice L Strait

A THESIS
Submitted to the School of Graduate Studies of Michigan
State College of Agriculture and Applied Science in
partial fulfillment of the requirements for
the degree of
MASTER OF ARTS

Department of General Business

1952

 

I‘IIIII‘I‘IIIII
Isl

ACKNOWLEDGEMENTS

 

The author wishes to eXpress his sin-
cere thanks to Professor E. A. Gee, Dr. R. H.
Simonds, and Dr. S. E. Bryan for their encour~
agement and cooperation.

Grateful acknowledgement is also due to
Mr. C. W. Otto, Lansing, Michigan; Mr. C. F.
Shaw, Flint, Michigan; and Mr. Richard Demlow,
Mason, Michigan, for their help in distributing
questionnaires to the executives whose comments
formed part of the basis for the advice offered
to industrial management students.

.\

 

 

.‘Il '{

Chapter
I.

II.
III.
IV.
V.
VI.
VII.
VIII.

TABLE OF CONTENTS

Page

Introduction .................................1
Product Engineering ..........................6
Production Engineering .......................9
Material ....................................15
Labor .......................................19
Burden ......................................27
Super Burden ................................42
Budgeting ...................................46
Conclusion ..................................57
Questionnaires

Footnotes

Bibliography

Index of Persons

I. INTRODUCTION

Many college students do not decide what their major endea-
vor will be until the time that they must decide upon the elec-
tive courses that they will have to take in order to fill in
their complete schedule. Assuming that a student decides he
wants to major in the industrial management field, most colleges
allow him a certain group of background courses to be filled in
with selections from outside departments. These may or may not
aid him along the line of his particular endeavor. His adviser
will attempt to keep him enrolled in practical subjects that
have a bearing upon industry, management, or business, but too
often the average student will attempt to avoid recommended
courses, because he has heard that they are too difficult or
too theoretical, perhaps because he thinks he won't like the
professor as someone else has prejudiced him, perhaps because
he Just wants a change from business courses or is interested
iqdiscovering a way to some easy credits -- "the any old thing
just so I get to graduate" philOSOphy.1

It was because of this attitude of uncertainty on the part
of the student and in order to lend a little more weight to
characteristic suggestions of advisers that the author of this
thesis made a survey of top men in the management field as well
as key personnel in the cost accounting field in this section
of Michigan. He hoped to ascertain what they would recommend in
the way of courses for students to take that would help them
most in case they should go into industry as potential managers.

- 1 -

Many questions were posed concerning how much.accounting
the industrial management student should have. They were given
copies of the questionnaires shown on pages three and four.
Cost accountants were consulted because of the fact that it is
up to them to work with industrial management peeple in an at-
tempt to show them the efficiency of their operations. The
breadth of knowledge displayed by the latter in the accounting
field has a direct bearing upon the amount of effort a cost
accountant has to put out in order to explain efficiencies,'
budgeting, and other pertinent accounting facts useful for
management purposes.

The results tabulated from one hundred questionnaires

and interviews are indicated in the following table:

RECOMMENDED SKILLS TYPE OF MANAGEMENT
Accounting Manufacturing and
Selling
Elementary accounting 50 50
Statement preparation & analysis 4 32
Accounting terminology 4 16
Budgeting 38 22
Cost accounting 58 26
Break-even analysis 12 20
Promising (Long range forecasting) 4 12

This table indicates that fifty men in the accounting
field and fifty in the manufacturing and selling field recom-
mend that industrial management students take elementary
accounting, while but four accounting men feel that they need
knowledge of statement preparation and analysis.

In general the survey reveals that management executives

believe these students need more work in cost accounting and

- 2 -

budgeting. The cost accountants tended even more heavily to-
ward the same point. It should be stated that an extensive
knowledge of cost accounting is most desirable for a thorough
knowledge of budgeting, premising, and break-even analysis.
The accounting terminology will automatically become a part

of the industrial management students' vocabulary if he takes
the additional work in the accounting fields mentioned. By

the same token, a knowledge of these areas will result in
more familiarity with statement analysis. This would arise from
the fact that management people receive their reports, usually,
in a complete statement form of one type or another.

Some of the remarks made by the executives filling out the
questionnaires bear repeating:

Mr. Earle Edmunds, a former plant superintendent, stated,
"Successful shop management in the past needed, and will need
even more in the future, a greater and greater knowledge ofcom:
accounting."

The owner of the Lansing Pattern and Manufacturing Com-
pany, Mr. Gordon S. Bygrave, said, "Knowledge of basic cost
accounting principles and a mind flexible enough to appre-
ciate the value of changing methods will be a pre-requisite to
future Management."

A Princeton graduate with a Master's degree in engineering,
Mr. Robert Seyferth, declared,"The large organization has your
work assigned so that an individual is very busy every hour of

the working day. Broad backgrounds of management techniques,

- 5 -

particularly those pertaining to accounting, must be obtained
through either preliminary college training or night-school
courses.

Besides these few selected remarks, there were many general
statements that ran all the way from the Opinion, "potential in-
dustrial managers should have all the college accounting offered,"
to the statement that " a thorough knowledge of machine tabula-
tion should be given to all potential administrators, whether
they be factory or office."

The survey bore out a conviction widespread in industry
today that because of competition, governmental controls over
wages and materials, and the great number of taxes, the effi-
cient manager must have a more adequate knowledge of accounting.

This conviction is also indicated in the typical training
courses given to industrial management people by their execu-
tives. Oldsmobile Motor Division sponsored a course of this
type during World War II in which a manual was used, called,
Control of Manufacturing Costs.The Buick Motor Division ran
a Management Conference Program over a period of time in con-
nection with General Motors Institute. In this program they
covered the following subjects: suggestion plans, getting
along with peeple and getting the job done, management con-

cepts, factory burden control, fire department, organizational

responsibilities to plant protection. Here, too, a very import-
ant part of the program was that of accounting controls.

Just prior to World War II, the Chevrolet Motor Division

- 4 -

conducted a management training program, which was open to a
few selected Business Administration graduates with a major in
accounting."a In this program the subjects included General Mo-
tors accounting, time and motion study, plant layout and tech-
nique, and machine Operation. The latter involved actual work
upon the milling, grindirg and drilling machines. In addition
members of these groups worked in the plants for three months
between the two school sessions at General Motors Institute.
Again, however, accounting was stressed.

Because of the apparent desire of management people to
have their potential trainees more familiar with accounting
and budgeting, this paper was written. The General Motors
background was chosen because it is the largest of the auto-
motive enterprises and because many of the other plants have
adopted several of their management and accounting procedures.3
Judging from the year to year growth and profits of this cor-
poration, it is probably one of the most efficiently managed
of all the automobile manufacturers.

In order to understand the principles of budgeting and the
problems involved, it is necessary to have a background know-
ledge of how costs are compiled. The first part of this thesis
is, therefore, a brief picture of the automotive manufacturing
Operation with a tie-in to basic accounting procedures; the
second part includes a case study to bring out pertinent points

concerning budgeting.

II. PRODUCT ENGINEERING

Before a car can be produced, it must be planned as to
design and engineering. The function of the Product-Engin-
eering Department is to present the design-information by
means of prints and specifications which.will be necessary
to produce the parts of an automobile. This may be inform-
ation needed for ithe manufacture of a new car for super-
seding a currently produced part by a new, improved one.

The department is headed by a chief engineer who has
under him a group of department heads, namely the Body
Engineer, Motor Engineer, Chassis Engineer, Transmission
Engineer, Standards' Engineer. Experimental Engineer,
Electrical Engineer, and Styling Engineer. Under each one
of these men, a particular phase of work is constantly be-
ing planned, studi ed, tested, or built in as much as two
years in advance 0 f the current model.

The brunt of the planning is borne by the project
engineers who are assigned to some particular part or pro-
ject to which they devote all of their time and effort. One
may, for instance, be assigned to the exhaust manifold. His
duties are to design a manifold for a new model or to run
tests upon a manifold already in production, checking new
inventions and innovations which may be incorporated into
the current part and possibly enabling the company to man-
ufacture it more cheaply through using a substitute mater-

ial or a changed design.

When the project engineer has his idea ready to put into
material form, he works through the experimental engineer who
has charge of all the shops where the experimental parts are
made by hand. The latter also is in control of the proving
grounds where all sorts of road conditions, cold rooms, hills,
speed tracks, and other devices are used for continuous test-
ing of new and old model cars.

Once the parts have met all prescribed tests, specifica-
tions are drawn up and the parts are released to the proper
departments so that planning for the production of the part
may get under way.

The accounting in the department is handled by the ad-
ministrative engineer, who, when a new model is to be pro-
duced, determines the number of experimental cars to be
manufactured and any other costs that may be incurred in
connection with the new program. He works with the chief
engineer until his cost estimates have been approved.

Costs of this department are charged to current oper-
ating expense for the most part and will be explained in the

section on burden.

\~

 

 

 

PART OPER.LABOR OPERATION NAME DEPT. NO. PCS. STD. hAX.PREM.BUR LABOR COST DETAIL TOOL AND jEQUIPMENT COST DETAIL
NO. NO. TOOL & EQUIP. DESCRIPTION NO. MEN REQ.PER TIME HRLYRATE DEN BASIC OVER TOTAL BUR TOTAL TOOL EQUIP. ‘ j V ‘
HOURHOURS RATE E RATEDIRECT TIME &DIRECT DEN . COST COST: COST FREIGHT TOOL EQUIP. RE-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.TON 5% LABOR NIGHT LABORUV‘LFG.) . TRYOUT {INSTALi ARRANGE- ‘ TOTAL
PREM. EXP.) ‘ . ‘ ' ELATION ; MENT ,
Li‘ SHIFTER FORK - i T . --
(Forging) F
10 Shear to length 1.0 375 .0027 1.11.. .0031 I
#13 Buffalo Shear
1.2 Help on Shears 1.0 375 .0027 1.09 .001.) I 1
15 Inspect D.W.
20 Heat ISlot Type Furnace) 1.0 200 .0050 1.21. .0061;
' 2i. Forge (Waterblast) 1.0 200 .0050 1.51.. .0017
Descaling Unit "‘ __
30 Forge (Block as; Finish) 1.0 200 .0050 1.5L. Loom ‘
77% Maxie Press '
(llSet of forging dies 43.539 14.331 0
(2)0ie sets agate.» '0 o
1.0 Trim 1.0 200 .0050 1.24 .00.; ' l J
#56 Bliss Press . '
(1) Set Trimmer Dies 9' An”.
A 4'" g x, {21.02
A5 Inspect D.W.
‘50 Pickle jldesta Pickling) 1.5 3125 .0005 1.09 ' .0005
60 Coin 1.0 #00 .0025 1.2A .003].
600 Ten Knuckle Press ,
(,1) Set (Joining Dies g 2.423.; L6H,”
Heat Beggar) .000 (L '
(2%fiof forging Std. Tm. .0005 1.2L. '
Die Set .0167 1.37 «041”?
(1-#A Maxie Press, 1—
#5O Bliss Press, 1-600
Ton Knuckle Press) 25
hours fer 1, 500 pieces A L 1
65 Inspect (Final) Diw’. = 7 T 7
Gages i ’35-“; /3J’. oo
Forging Total .0456 11.0533/.§ .oépc', .006; .aé 1‘2 4,33; 0043731155352” /3..7JI£J~¢
TOTAL }
A
TOTAL TOOL COST ’43; 951,753-

TOTAL EQUIPMENT COST

 

 

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‘v

“v— M? " a. ___-__,-. ..

' ‘ ‘ . l - '- . _
------------------------------------- \ I c O - -| I O A .- .' - - a - ° .- -o 'w .- a . _! a 9 v -0 O -— I " ' ' ‘. ' .“I' A‘t.£" ,'«D "IA." .7: -" a .r -‘ ' I . .
' .. _ . . ' a- _ , _—a_ g «’5 0.7.3.”; - .H _‘ J~_ ‘Iq-&._ -.
I - - , ~ , ~-—— «aw:

 

 

 

MANUFACTURING COST ESTIMATE

Sheet 1 of 1 Sheets Reg. No. Date 5-16-52

 

 

 

Requested By John Doe Part Number 2849-C-29

 

 

Part Name Shifter Fork (Forging)

 

Contract w-20—01s-ORD-985 Standard Steel Spring Co. Replaces Part #

 

Pieces Required Per Completed Unit Pieces Required Per Hour

Estimated Volume 27,418 pieces @ 2,000 per month

________.4.

 

 

Estimated Total Tool Cost $13,955.55

 

(See detailed projectfiv

Estimated Total Equipment Cost #416-2-5) Est. Total Rearrangement Cost_

 

COST SUMMARY
Comparative Estimated Estimated

_4‘

 

 

 

 

 

 

 

 

 

 

 

 

Cost Cost Cost Per

Per Unit Completed Unfi;
_Direct Maférial’ OSEL
Basic Direct Labor 05g;
Trequms DUEL
’TOtal’Direct’Labor 0676
—Bufien (Manui‘S—cfurfngLExpense) 239174
Total CostI SONL
Super Burden - 2091
TotaILCostn-Ifidluding Super SST?
Burden ##d

Remarks:

This estimate based on (2) shifts per day - (26) days per month
working schedule.

It is estimated that the total scrap will average 6%.

See Part No. 54892 for Misc. Tongs to be used in handling this
forging.

 

‘Estimafed’By Date
CostvDetaiIiBy
Checkedey

 

 

 

 

 

Approved ProdUcfionISuth
—Approved TOOI or Die Shp‘t
vApproved Sup'vTr Estimating Dept.

Approved Produdtion EngIfieer

Approved Factory Manager

LHHHH

 

III. PRODUCTION ENGINEERING

Production en/gineering means the whole process of the
development of a plant layout and techniques of manufacture
to bring an engineered part into production. Plant engineer-
ing and production engineering have methods men and layout
men who are specialists in planning the manufacture of a
part. By looking at the designs and specifications furn-
ished by the produ/ct engineers, they can establish a lay-
out for a proposed Operation complete with token men, mach-
ines, tools, conveyors, and so forth. All layout work is
done on a three-dimensional basis and presents a very com-
plete picture of the proposed manufacturing process.

In order to transmit these ideas for use by the plan-
ners and approval by management, schedules are drawn up
somewhat like the one on the opposite pageé This form will
familiarize the individual with the detail for portions of
the manufacturing cost estimate. The material description
of the latter is obtained from specifications prepared by
the product engineering division.

The cost of the material for the new part is taken
from quotations which are furnished by the purchasing de-
partment. This cos./t has to take into consideration poss-
ible changes in market prices, freight charges, type of
material, sources of supply, and all other factors which may

affect a material price during a production period.

- 9 -

Details of the layout of the plant, tools and equip-
ment to be used, and the amount of production that they can
be expected to give under specified conditions are furnished
by production engi/neering. This production expressed in
pieces per hour multiplied by standard time and by hourly rate
of labor to be use/d on the job gives the estimated unit
direct-labor cost. This time is the standard time -- which is
expected time based on time study -- and is used as a basis
for initial group routings. These are very important plans
and are the key not only to the process, but to the building
of costs for the production of the part. They are used by
manufacturing supervision to check on Operation detail, men
required, rate of pay for the operation, production per hour,
and the standard t/ime for each operation. The inspection de-
partment, on the o-ther hand, uses them to establish the most
efficient placement of their man-power and to supply inform-
ation as to the causes of scrap.

Group routing is used by the material control department
to route material through the plant, while the production en-
gineering men use it as a guide for processing, better methods,
and plant layout. The standards department utilize it in fore-
casting man power requirements and developing cost analyses.
It is the backbone of the derivation of the labor cost of a
part and is used to build the first labor costs on a part in
the accounting department.

Corrections to the original group routing may be made

and new routings reissued once a pa_.rt goes into production.

- 10 -

Occasionally an error is made in estimating the time which
an operation may take. Forkhat reason, once a part is in
production, there will be time and motion studies made on
the operations involved, and if they are in need of cor-
rection, the original group routings will be superseded by
new ones based upon the actual time.

The building of the group routing involves the effort
of time-study men experienced in both time and motion study.
They know average times and motions for the average worker
for all kinds of work performed. These times have been
standardized due to years of study so that they can be fore-
casted very accurately. Of course, these routings would have
to be changed a great many times if the layout men did not
understand motion study and the principles of operating a
machine or a group of machines efficiently.

Another term found upon a manufacturing cost estimate
is pgemiums, which are bonuses that may be paid to workers
because of overtime work or night-shift work. These are ex-
pressed as a percentage of direct labor. By adding together
the cost of direct labor and the premiums in connection with
it, we get a total direct-labor cost.

The "burden-rate percentage" is applied to the direct-
labor cost, exclusive of any premium time, this amount be-
coming the share of manufacturing expense which each part
produced will be expected to absorb.

Super-burden charges are unit charges per piece, which

- 11 -

FION CN.ART
FOR PROCESSING TN? NA UFA<TH TRIN3 COST ESTINATE AND PROPOSAL

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      

 

 

PLA"T Etfd caniv" n u; Pl‘rn43’ITe ‘TNSPEC* EPaRiLEL‘
Plant Eng. Estimate \ , Design IthrmatiOn Memo
(Form Olds 1425) \\ /Erints A Specification \ A Gage Cost
\ . 4_Af .1
.’ \2 I I
:
PRODUCTION EN zINEERING i COST SECTION
3 ACCOUNTING DEPARTNENT
_ M 3
Cost estimate 3 1/ Memo
(Form Olds 16208) : ~’ Burden Rates
“TURCRISIEE"errRNNNT* *, \{. \y, ;,4 ' ;.' ‘1; r
.= '3 : STANDARDS DEPARTNENT
Nemo-Raw Material and "-.m.\ A ‘u / Manpower Forecast
Purchased Parts Cost -&_ ‘3, . Awe ‘

 

 

 

 

 

 

SUPERVISOR OF ESTI'S'IATING

Correlates Information for~
Preparation of Estimate. ‘\\\\

M l

 

 

 

 

 

 

 

 

 

 

 

 

 

 

_\z
PROPOSAL SUBNITTL D FOR P -
REVIEW AND SIGNATURE ' ? STANDARDS DEPARTMENT
'Supervisor of Standards gPrepares Manufacturing
Process Engineer EDepartment proposal
.Process Engineering Sup' r;complete with detailed
.Iethods & Layout Sup'r :Nanufacturing cost
.Production Engineer =estimate.
iPlant Banager or General A (Form Olds 398)
A Superintendent
\If

§——SUPERVISOR OW COST SECTION
I Au‘n J OITIATT INB DE P ART NEN‘T

S

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preposal suBmitted t V A
Production Aanager (A Billing price and Proposal 2 Mfg. Cost—Eatimaté_
for approval and i prepared by Cost Control F—%Distribution (398)
signature. 3 Section A Contracts Section: ’ E
} L—~ ‘ Time Study Sup'r E
For preparation of f
preliminary routing-
Copy Distribution Project‘COHfFOI Sud“
AProcess Eng. Sup' r
General Manager Erocess Engineer
Cost Control Section L For reference to
Executive Accountant art COSt & record a
- 12 _ Nanufacturing Manager bf estimated cost
A Production Hanager Pf f30111t188-
I

 

 

 

must be absorbed by the piece for such costs as engineering used
in the development of the part, costs of special tools to be
used in the production of the part, or rearrangement costs in
order to set up a portion of the plant for the manufacturing
process.

Material, labor, and burden are not described in detail at
this point, but questions pertaining to them are discussed in
succeeding chapters.

From the many departments and specialists involved in
bringing an engineered part into production,cne may assume
that it is a rather complicated process, as is the computing
0! its cost. For that reason, the Flow Chart5 on the Opposite
page has been included, as it shows the process used to deter-
mine the cost of a new product.

Upon this Flow Chart one can see the contributions or the
various departments to the processing of‘a manufacturing cost
estimate,6 the purpose or which is to give the anticipated
expenditures on a new product, so that they may be compared
with the actual cost of subsequent manufacture.

The formulae for determining details of these costs are
Total tool and equipment cost divided by total units produced

equals super burden rate per piece
'standard time hours multiplied by maximum hourly rate equal

unit direct labor rate
Unit direct labor rate multiplied by premium rate percent

equals bonus direct labor rate per unit
Unit direct labor rate multiplied by burden rate equal unit
expense absorption rate.

At this point one may assume that all of the requests for

- 15 -

authorization have been approved by management executives. As
a result, the work of tooling up the plant, organizing the
production line according to the group routing, and pro-pro-
duction runs on the new part have been completed. There will
be additional explanation of these steps in the sections on
burden and super burden, after a discussion of the elements
of cost in connection with the manufacturing process, mater-

ial, and labor.

- 14 -

IV. MATERIAL

In order to realize the importance of material control,
the reader should know that expenditures for material in many
manufacturing concerns run from approximately forty-five to
sixty-five percent of their total costs. The material referred
to in this section is what we call direct material, an inher-
ent part of the product: a sheet of steel, a coat of paint, a
piece of cloth.

The problem of controlling material and costs in connect-
ion with it has been heightened considerably in the past few
years because of quotas, extreme competition for available
supplies, and government restrictions upon certain types of
materials. As a result, more sources of supply are needed in
order to keep a steady flow of material coming into the
plants. Also, it has resulted in more research for the pro-
duct engineers in an effort to find suitable substitutes
which may be utilized in place of those currently in use that
are either short in supply or limited as to availability.

The Production Management Division schedules all direct
materials in and finished goods out of the plant. From pro-
duction scheduled for the year, they can give to the material
control group the estimated quantities of direct material
needed to meet cur_rent production. This group takes these
schedules and then by using them determines just how much
material is needed for the month.

Because the material control group uses machine tabu-

- 15 -

lation, they can initiate a combined requisition and purchase
order on quantities of material which.may be sufficient for
from six to sixty working days. These records are established
and purchases are made against contracts, possibly for as
much as a year's supply of steel for one model. Each.month
they can inform the supplier in advance as to how much is
needed for the current month. They can also tell him what

has been received by the plant against his contract. Too,
contracts are set up so that they may provide for additional
quantities over and above committed amounts if it becomes
necessary. Hence it becomes very important that all reports
prepared by a foreman or supervisor concerning material be
very accurate.

Group routings and plant layouts provide for the most
efficient handling of this material. Also, in order to keep
the production control department operating efficiently, it
must be known what materiaids on hand. A break in routine,
careless handling of small parts, thefts, removal of mater-
ials and parts for engineering or experimental purposes,
scrap, samples, special inspections or repairs can all
throw off the accuracy of the material records. Thus the
proper use of requisitions and scrap tickets is necessary
in order to keep control of direct material.

To trace the control of material in the plant and its
relationship to accounting procedures, one may assume that
the material is at the docks ready to be unloaded. Material

control has ordered it, and it has been scheduled to arrive
- 15 -

in the plant today.

The receiving department checks it; it is probably in-
spected; then it is moved by the trucking department either
to the production lines where it will be put into process or
to a storage area where it can be readily controlled. The re-
ceiving department writes up a series of receiving slips of
which one copy goe.s to the accounting department and another
to material control.

The cepy of the receiving slip procured by the account-
ing department is matched with the supplier's invoice to
make sure that the quantity received is the same as the
quantity billed. The accounting clerk classifies the invoice
as to whether it is productive material for the motor,
pressed metal, or whatever plant it may be. In a large con-
cern, this is done by using a numerical classification sys-
tem._ror instance, a 2A - A75 account could be productive
material for the assembly plant; @A f_§75, for the motor

plant; and 2A - 075 for the pressed metal plant. Expressed

as a simple journal entry, this would be
2A - A75 - Productive Material - Assembly
18 - Accounts Payable - Other
To record purchase of material
However, due to the fact that the volume of invoices re-
ceived from outside concerns as well as from allied concerns
runs into the thousands every month, a voucher system is

used. This enables the accounting entry to be made from the

voucher register as one summary entry at the end of the

-17-

month.

In order to get the entry for the cost of sales at the end
of the month, it is necessary to make a summary entry based
upon the car costs that have been built up during the month.
The background for this entry is based, of course, upon the
units sold during the month. It is built up by taking the
material cost of each individual part on the car, relieving
that amount out of the inventory accounts.

Once a year in some plants, in others quarterly, a
physical inventory is taken. This gives an actual count of
all materials on hand and is used to bring all records up
to date. The process is supervised by outside auditors.
plant accountants. and material handlers. Over a year's time
it is almost unbelievable the number of shortages that will
show up, particularly in small parts, such as nuts and bolts.
For that reason it is a good idea for each prospective mana-
ger to become as fully cognizant of all phases of inventory

control as is possible.

V. LABOR

The second element of cost to be considered is that of
direct labor, or that labor applied to a productive phase of
operation that changes direct material into a finished pro-

duct. It is the element of cost over which there is probably
more control than any other.

Referring back to the section on production engineer-
ing, the reader will recall that there was a form called the
Group Routing included there. This schedule of production
indicated the number of men and machines necessary to turn
out a finished part. \

Assuming that the factory is making a front fender - a
pressed-metal operation - and that it is to be produced in
Plant 6, department 76, by group A-l, in order to get the
part into production, machines have been rearranged and dies
have been installed. Men have been requisitioned from the
personnel departmeint, which has job specifications and rates
for the various operations on the fender and which hires men
to do the work. The men report and are assigned numbers be-
ginning with 676021. This number identifies the employee as
to plant and deparitment and is used from that time on as a
means of identifying and paying him.

Employee 676021 reports for work along with the other
employees assigned to Plant 6, department 76, group A-l,
which the group routing indicates is a front fender pro-
cessing operation. How can one tell whether this individual

- 19 -

and the men working with him are doing a fair day's work? He
can check with the standard time allotted for the operation.
This is based upon prior time and motion studies. If the fen-
der is the same as that of the prior year, then the standard
cost of that fender will probably be used as the correct
standard. If it is an entirely new part, the preliminary
group routing will provide the standard time which, multi-
plied by the workers' rates, gives the standard labor cost
for current production.

The measurement of a fair day's work by an individual or
a group of individuals is then based upon a standard of per-
formance. In order to arrive at accurate standards, one must
presuppose that the production process on the fender, or on
any other item of production, is based upon the best method
of Operation, safest and most efficient tools and equipment,
material up to specification, and a knowledge of the time re-
quired by the averiage operator to do the Job.

Time study gives this information, helped by motion
study. It also enables one to ascertain variations of actual
labor costs from standard labor costs in order to set up
production schedules and determine delivery dates for pro-
ducts.

The time study department also presents to the indust-
rial manager a preliminary group routing, which is released
even before his Operation goes into production. Thus he may

have a thorough knowledge of the Operations which he super-

xvises. Furthermore the routing gives him

1. a blue print of his operations, explaining each step
and the machines used in it

2. the number of men that will be required to perform
these operations

5. the standard time for each operation

4. in some cases, the rate of pay

5. the production per hour

6. the point in the operation where a count is taken of

all pieces completed or passed by inspection.
This is called the credit point.

The information recorded thus far is preliminary inform-
ation issued prior to the production process. Now imagining
that the plant is on an operating basis, how can the efficien-
cy of the employees in the department be measured?

In some of the plants this is accomplished by use of the
group credit sheet, a copy of which may be found on the follow-
ing page. Many parts of it are self-explanatory, but those
parts which might prove confusing will be clarified in the en-
suing discussion.

The group credit sheet shows the number of pieces pro-
duced and the percentage of efficiency for each group. It dis-
closes a daily record and in its entirety covers a period of
one week. Production supervision utilizes it as a guide in
controlling the efficiency of a group or groups in a depart-
ment; the inspection department uses it to record the number
of pieces produced by each production group; the accounting

department makes use of it to compile the reports required

 

GROUP CREDIT SHEET

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROUP DESCRIPTION N-48 Centering, Rough TIN?
Turn and Form Nose SHIFT 8: 00 TO 2:00
GROUP 22-62-14 FOR FAY ENDING Jan. 9, 1952 Page Ito. 1_or""““§§ges
"PART NO. OPER.SPEOIAL GROUP ‘70 EDIT PIECES PRODUCED f:]
NO.EORDER OR STAND4§DE GROUP M T ’ ”ZEV. T . .E
ALCOLNT R0049 E _fiNOh.TthtfihD«IHUFSjPRI SAT.SU“
E M-48 150 i .0266 E E453636904536 4536 30004536 __E
E M-48 250 E E .0229 4 E45 3645364536§4536 ‘45364536 E
E M-48 260 E .0070 4455645364536E4536 45364536 ‘4
3 N-4e 270 E .0176 E E453645364536 4536 E45364536
E M-48 280 44 i .0053 E 3453645364536 4536 45364536 E
E E ‘
4 E E 7 E
T E f 4
TEN REQUIRED TO NE ET GROUP ST NDARD 454E445" 45E 45 4E 45'; 45 E
l'CTUAL NEN WORKING IN GROUP ‘4 45E 45 45: 45 ; 4g 45 E
4ACTUAL HOURS TRANSFERRE IN OUT/E :7; 3//j4/////E L////:g//h
iACTUAL HOURS IRREGULARITIES E E E a E E 4
;DAILY GROUP STANDARD HOURS E36 33566606660.2r31934602 E
iACCUMULATED GROUP STANDARD FOURS 695.6/M417E/4/ofq 17:24:21.2,544
EDAILY ACTUAL HOURS :360 35L64356366 460 360 44
EACCUMULATED ACTUAL HOURS E 711.5/0434‘16‘3/5‘ maid/5w:
EDAILY PERCENT EFFICIENCY 100 95 102 96 1E 100 4,_
EACCUMULATED PERCENT EFFICIENCY 98 99 99 E97 97 4 4
FOREMAN'S CERTIFICATION QQL/Aao’dué/zzzc/ 444/ 621/ 4
OREOK‘IF'IOWZOR*HIGR‘EFFICIENCY E I ‘I
‘IS EXPLAINED ON REVERSE SIDE E x x x E
L________I__i_____ _,_____n _3__._“ _ _.Eh 4_.. 1 _

- 22 -

 

 

 

 

 

 

REASON FOR LOW OR FIGH EFFICIENCY

 

 

 

 

 

 

 

 

 

 

 

MONDAY_ _ _ _RRS. GAINED DUE TO
LOST
TUESDAY HRS. GRINEB DUE TO 2 Excello Vertical lathes down 8 hours
_ — — LOST 4
Vachine and Fixture Repair.
WEDNESDAY VRS. GAINED DUE TO
. -4. LOST
THURSDAY _ _HRS-GAINEB DUE TO One man did not punch out Wednesday;

 

LOST
his 8 hours were o.k.'d and charged today.

 

 

 

'FRIDAY 40.7 HRS. GAINED DUE TO Nosing Press down 8 hours (broken crank)
" ‘ " LOST

 

 

 

 

SATURDAY _ _HRS. GAINED DUE T
" " LOST

 

 

SUNDAY FRS. GAINED DUE TO

LOST

- 23 -

for cost analysis.

The group standard hours is the standard time on all
Operations up to a given credit point. It is to be remem-
bered that standard time is the estimated time-study period
allowed an employee to perform his operation, while credit
point is that in which a count is made of pieces produced
by a group.

The line headings in the lower half of the group
credit sheet can be explained as follows:

Men required to meet group standard: This figure is
taken from the grQDup routing. It is calculated by multi-
plying group standard hours by group standard.

Actual men working in group: This is taken from a
floor-check sheet prepared by the time clerks in the plant.
The time department has cost clerks checking the men in the
manufacturing groups each day.

Actual hours transferred in or out: The floor-checker
picks this up from actual counts of men in the groups or
from.reports prepared by the foreman.

Actual hour irregularities: Failure to ring a clock
card by an employee may throw extra hours into a succeeding?y
as there might have been a failure by the floor-checkers and
timekeepers to pick upthe employees' time on the preper day.
Irregularities on employees' clock cards are generally not
handled until succeeding days, as any time extended where

there is a failure to ring, for instance, will have to be

authorized by the plant superintendent.
-24-

Daily group standard hours: Thesefigures are calculated
by multiplying the number of pieces produced on each opera-
tion by the group standard hours and then adding together
the time of all operations.

Accumulated group standard hours are the total group
standard hours for the week.

Daily actual hours are those worked by the men in the
group, plus or minus irregularities of time during the day.

Accumulated actual hours are the actual hours worked
by the group and others transferred in or out.

Daily percent efficiency shows efficiency of the group.
This figure is arrived at by dividing daily group standard
hours by daily actual hours.

Accumulated percent of efficiency is computed by the
time department the same as the daily percent cfficiency.’

The back of the sheet gives spaces in which the fore-
man can explain why he has low or high efficiency.

This sheet is issued in triplicate by the time study
department preceding the week in which it is to be used. One
copy goes to the superintendent of the plant, who, in turn,
forwards it to the inspection department. The time depart-
ment picks it up each day and makes it out when it goes back
to the superintendent and then to inspection. It 3130 pre-
pares the other two sheets each day and sends reports on time
worked daily to the payroll and cost sections of the account-
ing department. At the end of the week when all copies of the

-25-

group credit sheet are complete, the original goes to the
plant superintendent, one copy is sent to the cost and fac-
tory accounting section; and the other copy is returned to
the time study department.

A study of the group credit sheet will reveal just how
closely one's efficiency as a manager in a plant can be
checked. This sheet. of course, refers to direct labor only.

With the preceding information well in mind, one may
now consider the third phase of cost - burden - which the

industrial manager has to control.

VI- BURDEN

In order to understand the subsequent chapter on budget-

ing, it is very important to be familiar with the types of

costs that go into factory expenses. These costs may be

called manufacturing expense burden, factory burden, or some-

times overhead, but they are all costs incurred by, or as a

direct result of, a manufacturing operation. If one is to be

able to analyze his expenses, he must have some means of seg-

regating them. This is done by classification. General Motors

Corporation has a standard accounting system which classifies

all factory expenses under a control account, number 12, with

nine sub-title accounts, namely

100
200
500
400
500
600
700
800
900

“Indirect labor and salaries

Operating supplies

Expense tools

Utilities

Maintenance, repairs, and rearrangements
Employee insurance and taxes

Losses, errors, and defects

Fixed charges

Sundry manufacturing

A discussion of these items and how they may be controlled

now follows:

Indirect Labor and Salaries - 100

The more information one wants about anything, the more

classifications he provides in his accounting system. The

item, 12A - 110, doesn't mean much to a foreman, but when it

is explained that the 12 account is manufacturing expense,

that the A is for the assembly plant, and that the 110 sig-

nifies supervision ( which.might mean plant superintendents,

-27-

foremen of departments, or general foreman ), then the numer-
ical system of classification begins to mean something.

waever, there is also a great deal of clerical help in
the plants. An accaount coded 12 B - 120 would indicate motor
plant clerical help, including production control clerks, typ-
ists, and so forth. On the other hand, an account coded 12 C -
130 might indicate material-handling labor such as truckers
and crane-operators, while the C would refer to pressed metal
plants.

In addition to the above accounts, the following ones
under the one hundred series of manufacturing expense are
standard classifications throughout the corporation.

140 - Building and property attendants, which in-
clude janitors, plant protection men. fire department per-
sonnel, yardmen, and elevator Operators.

150 - Machine and tool and die-setting labor, in-
cluding any other labor charged to this account, even though
it may concern productive men that have been transferred to
a non-productive operation.

160 - Unapplied drafting and engineering costs which
are due to the work of tool, equipment, process, and research
engineers and designers.

180 - All costs of inspection of supplies, tools,
materials, and assemblies.

190 - Sundry indirect labor which.may cover costs of

the tool crib attendants. hospital attendants, safety engin-

- 28 -

eers, student wages, and time-study men.

The reader will notice that here there are broken down
and readily available for analysis all types of labor. Now
the question arises: What actions can be taken to control
these types of cost by the plant superintendents or factory
supervision?

Probably one of the first things is to have the services
of "tsp-notch" efficiency and time-study men. They can give
information not only upon factory processes but on any type
of work whatsoever. Also clerical jobs should be checked
regularly to make certain that they are really necessary.
Clerks should be trained prOperly and kept busy all of the
time. Unnecessary reports should be eliminated. A continual
effort should be made to improve methods of handling mater-
ial through use of conveyors, hoists, and racks. Poor house
keeping and utilization of space should be continuously cor-
rected.

Operating Supplies - 200

The second series of accounts, the operating supplies
in the 200 series, is broken down into eight captions, as
follows:

210 - Fuel: This might be gasoline, coal, natural
gas, and fuel oil.

220 - Lubn.icants and cutting compounds: These may
include greases, hydraulic oils for machines, and all types

of special cutting oils and coolants.

-29..

230 - Mill supplies: These include gloves, aprons,
towels, rags, and protective clothing.

240 - Stationery and office supplies.

250 - Testing supplies: Included are all samples and
supplies used in laboratories and experimental engineering.

260 - Packing and shipping supplies: Here one finds
the usual nails, cartons, lumber, and twine.

270 - Processing supplies: These are anodes for plat-
ing, pickling acids, fire brick and clay for foundry cupolas,
welding flux, and cleaners for productive materials.

290 - Sundry materials: This covers such items as
safety signs and prizes, police uniforms, rest room supplies,
commissary and restaurant equipment, and reading material.

Now what can a supervisor do to control the costs of
these operating supplies? As far as fuel users are concerned,
he can be sure that burners are clean and properly adjusted.
Too, furnaces, ovens, and trucks should be carefully main-
tained. The flow of material should be planned so that fur-
naces can be operated to capacity and not cooled and heated
alternately. Employees should be schooled, watched, and re-
minded of the necessity for the proper use of supplies and
the elimination of waste.

Furthermore, one should watch the requisitions that are
written by the members of his department, so that he indi-
cates an awareness of the relationship between what is used
and what should be used. Supplies should be selected for giv-

ing the greatest unit value for funds eXpended upon them.
- 30 -

Leaks in pipes, machinery, and containers should be repaired.
It would pay to continuously educate employees as to the
proper utilization and handling of supplies.
Expense Tools - 300

Included in the third main account are such items as
cutters, drills, grinding wheels, wrenches, diamonds, punches,
files, chucks, hammers, screw drivers, shovels, pliers, hones,
scrapers, and steel-marking stamps. Many of these items,
though small, are very expensive and unless special means of
checking are employed, they tend to disappear. In most cases
these tools are passed out of tool cribs to the men who are
then responsible for their return. If they are lost, the em-
ployees have their cost deducted from their pay checks.

In addition to this precaution, there are other means
of controlling tool expense. One should endeavor to keep
tools in the plant and not permit the men to take them home.
Also he should keep a continual watch upon the Operations
where they are used and make certain that they are not re-
ceiving excessive usage, abuse, or mishandling. Machines use
ing them should be checked for most efficient speed and
feeding rate, and the operator should be trained accordingly.
In most cases men in the tool crib can be made responsible
for regrinding tools that need it. A dontinual check should
be made to see to it that specified lubricants and coolants
are used on cutting Jobs.

Part of training the new worker for his job is educat-

- 31 -

ing him as to the correct use and maintenance of his tools.
Utilities - 400

The costs of utilities are found in the 400 series of
accounts, which area broken down into electric power, number
410, and electric lights, account number 440. This breakdown
is made because the former might refer to the 440 volt cir-
cuits and the latter to the 110 volt circuits. Each build-
ing in a plant generally has its own meter. and the allo-
cation of cost to the proper production groups can be quite
an accurate process. Supervisors can aid in cutting costs on
electricity by watching the use Of lights and by maintaining
as steady a flow of production as possible. It costs Just as
much to run an empty draw-die on a front fender as it does to
have a sheet Of steel in it.

Account 430 carries the charges for water, which in some
cases is pumped in from the plant's own wells and in other
instances is purchased from the city. Continual checks for
leaks in the plumbing and the use of recirculating systems
in manufacturing Operations have cut down on the total
amounts used.

Accounts 440 and 470 cover the costs of steam heat and
steam for processing, respectively, high pressure steam for
processing generally being metered to the departments using
it. Loss of heat in the plant can be cut by proper control of
pipes and radiators, immediate repair of broken windows, and

refusal to allow open windows or doors.

- 32 -

Account 450 covers the costs in connection with the com-
pression Of air, a good deal of which is used in the manu-
facturing process. Because air is readily lost through leaks
in pipes and equipment, it has been found through cost stud-
ies that air loss through improper maintenance of lines or
machines is the most expensive of all utility losses.

One finds that account 490 includes all expenses Of the
powerhouse and is prorated back tO the departments using the
utilities. Some of the plants. by employing a prefix such as
1 for all of their expenses. use this complete set of expense
accounts for the powerhouse and then prorate the costs back
at the end Of an accounting period.

Maintenance, Repairs, and Rearrangements - 500

Account 510 is for labor and material costs for main-
tenance and minor replacements of foundations, walls, roofs,
elevators, plumbing and heating systems.

Account 540 cov ers maintenance and minor replacement
costs on all types of machinery and equipment.

Maintenance and repair costs of dies. fixtures, tools,
and replacement Of minor component parts on these items are
covered by account 550.

Included in account 570 are the same things as in 550
except that the subject items are furniture and fixtures.

Account 580 comprises all rearrangement costs where
machines, conveyors, washers, and such items are relocated.

Newly purchased equipment costs of installation are capital-

-55-

ized, that is charged to the equipment account. which is an
asset account. Cos.ts are recovered through depreciation
charges over the life of the machine.

This group of accounts represents quite a large share of
the expenses incurred in a plant. In order to control costs
of this type, the industrial manager has to be constantly
aware of cracks developing in cement foundations and paving,
leaks in the roof, minor breaks in machines which.may not
stop the Operation of the machine but which eventually might
result in the need for a major repair, thus interfering with
the whole manufacturing process. There is constant talk among
cost-conscious supervision of preventive maintenance. "Get
those minor breaks and weaknesses befdre they develop into
major breaks," is their by-word. Preventive maintenance con-
sists primarily of regular systematic checks and servicings
of machines, plants, and grounds.

Other methods of cutting costs in this group of accounts
are tO

1. Watch employees to prevent malicious damage Of
property, tools, and equipment. '
2. Train truck drivers carefully, as a carelessly
controlled truck can cause considerable damage.
3. Keep down plant rearrangement costs unless there is
a valid reason for change such as
A. Improved safety
B. More production
C. Changed design in product

D. More efficient use of floor space
E. Improved working conditions

-34-

Employee Insurance and Taxes - 600

Just so that the reader will realize somewhat the number

Of tax and insurance costs that will be paid by an employer,

The various accounts are listed.

611 - Employee group insurance

613a
613b
614
621
622
623
625a
653
634
641

642
643

This account accumulates costs of addition-
al funds paid to such companies as the Met-
ropolitan Insurance Company to supplement
employees' contributions.

Compensation insurance

Outside medical expense

Surety bond premiums

State unemployment compensation tax

Federal unemployment compensation tax

Federal old-age benefits tax

Separation allowance for salary employees

Vacation payments for hourly employees

Holiday payments for hourly employees

Provision for employees' contributory retire-

ment plan

Past service and special credit benefits

Service pension plans

The nature of these accounts somewhat prohibits any di-

rect method of decreasing their costs. However, the attempt

to keep labor turnover to a minimum might make accidents few-

er, as there would be a smaller number of inexperienced men

to break in. Also, by attempting to schedule production even-

ly over a production year, one might keep lower the number

- 35 -

of layoffs with their attendant cost.
Losses, Errors, and Defects - 700
Account 710 - Process rejects scrapped.
This refers to production partsIsuch as a motor
blocklwhich have been scrapped due to a material or labor
fault. In cases where the error is a material fault, it may
be that the supplier can be billed back for the material
cost. The labor cost is the amount of direct labor which.was
expended on the part and which is taken out of direct labor
costs and thrown into this account.
Account 720 - Process reoperations and repairs.

This account covers material and labor repairs
upon the finished automobile or any component parts that are
reworked rather than scrapped. Some defects may be the result
of supplier errors.

The next two accounts in this group have only a
small number Of charges entered into them. Large costs which
might fall into the following accounts generally are entered
into either administrative or commercial expense, because the
units have been sold and the manufacturing operations have
been completed.

Account 752 - Factory guarantees
Account 740 - Change in design
Account 760 - Manufacturing delays
This account does not ordinarily have much cost

entered into it either. This is due to the fact that the

-35-

factory group losing time because of break-downs or other
miscellaneous causes generally stands its own costs through
a lower efficiency rating in its direct labor accounts.
Account 791 - Substituted Material
Excess costs may result from the use of substituted
material which has been put into production because Of run-
ning out of the regular specified material.

Account 792 - Uninsured losses and wages paid for labor

lost as a result of theft, floods, or fires

From the foremen's point of view, the most important
item in the 700 series of accounts is the reduction of scrap.
Too much scrap affects the efficiency rating of his group,
and it shows up every week on the group credit sheet, which
was discussed in the section upon direct labor. The inspect-
ion department keeps the foreman informed about scrap and
rejections by verbal and written reports. It is then up to
him to analyze the reports, try to ascertain the reason be-
hind the difficulty, then do something about it.

If there is a material fault such as steel not drawing
properly. he should have it inspected to see whether it is
up to engineering specifications. If there is a labor fault,
he should check the guilty individual as to whether he has
been instructed properly concerning his particular Operation.
Quite Often a few extra minutes of instruction for a beginner
will cut down measurably upon material rejects. Again, an Op-

erator's errors may be the result of illness, weak eyesight.

- 37 -

or poor hearing: these possibilities must also be considered
and probably can be alleviated.

A continuous program of education in a department as to
causes and remedies for scrap and rejects may materially in-
crease group efficiency. In addition, by insisting upon good
housekeeping and a continual striving for top production,
there may be an "esprit de corps" built up which will help the
group as well as result in greater production.

Fixed Charges - 800
Account 810 - Insurance
This account consists of money paid to insurance
companies for protection against losses. Cost of this in-
surance is, to a certain extent, based upon experience
losses. Good housekeeping and cooperation with the plant
fire department will help keep losses to a minimum.

Account 820 - Taxes

Here one finds an account which accepts charges
for all types of city, county, and state taxes, including
both property and intangible taxes. The State of Michigan
intangibles tax is based upon the amount of money required
to operate a business. Inventories particularly affect the
amount of intangibles tax, so that if they are low at the
time the tax is paiid, the tax will be lowered. State sales
tax and federal excise tax are included in the costs of
material and equipment purchases and lose their identity in

that '&y e

- 38 -

Account 830 - Depreciation
This refers to the decline in value of a fixed
asset because of wear and tear, obsolescence, and inade-
quacy. There is a break down in the account to show de-
preciation costs on land improvements, buildings, machin-
ery, and equipment, and furniture and fixtures. The plant
supervision can cut down on depreciation costs by increas-
ing the productive capacity of machines. This might be done
by adding an additional shift or by using better methods of
feeding a machine in order to eliminate the necessity of
buying additional equipment. Furthermore they can use verti-
cal distances as much as possible for the storage of mater-
ial and, perhaps, improve upon the original planned floor
space layouts afte.r the machines are in actual production.
This would help, too, to cut down unit cost of depreciation
upon buildings.
Account 840 - Rentals
The largest item in this account is the cost of
renting tabulating equipment. However, there are additional
charges which may go into the account for the costs of rent-
ing other types of machines. equipment, buildings, and land.
Account 860 - Amortization of special facilities
This account is similar to the depreciation account
except that it covers the write-Offs of equipment for special
jobs which.may last only two or three years. The accounts in

this group are fixed accounts only in the sense that they are

- 39 -

not tied in directly with production and they will continue

to exist even if production stops completely.

tory

Sundry Expense - 900

This section is divided into a group of self-explana-

account titles.

Account
Account
Account
Account
Account
Account
Account
Account

Account

Account
Account
Account
Account

Account

Account

911 - Traveling expense

912
921
922
925
940
950
971
972

Company car expense
Telephone expense
Telegraph expense
Teletype expense
Experimental work
Postage
Inbound transportation unapplied
Demurrage charges
These are costs caused by holding

railroad cars and highway trucks longer
than the time allowed by the carriers.

991 - Employee-suggestion-plan awards

992A - Committeemen bargaining time

992B - Claims paid under union agreement

997 - Permanent disability leave of absence

998A - Employee leave of absence for temporary

military duty

999A - Inventory expense

This account includes the cost of
labor and materials for the taking of the
yearly inventory.

Account 9998 - Incoming bags and containers

-40-

Account
Account
Account
Account
Account

Account

999D
999E
999F
9993
999K
9998

Welfare and recreation
Membership and dues
Outside truck hire
Lost time -- no work
Miscellaneous expense

Savings Bond bank fee

Manufacturing supervisors can exercise quite obvious

methods for contro—iling this group of costs. Inventory tak-

ing costs are high: but proper preparation, prior planning,

and good housekeeping throughout the year can help keep down

expenses in connection with it.

The user or consumer of all these expense items is the

employee. Hence, the management executives' control of these

costs comes through the actions that supervisory personnel

take in controlling their employees. As potential supervisory

personnel, remember that expenses always tend to increase, and

if they are ignored, they will never decrease of their own

accord.

-41-

VII. SUPER BURDEN

Super burden is not quite the same thing as manufacturing
expense: yet, in many small plants, what is referred to here
as super burden is charged into manufacturing expense accounts
directly. However, as the name implies, one can assume that
costs in connection with super burden are costs superimposed,
or costs above ordinary, which do not regularly occur after
production is once started.

These costs are, for the most part, costs in connection
with pro-planning and getting into production upon a new
model automobile. They might be broken down into four cate-
gories:

1. Product-engineering costs
2. Special tools

3. Rearrangement costs

4. Pro-production costs

Product-engineering costs are those of engineering a
new model before it‘can be produced. This work has to be
completed before production is started: therefore, to charge
the costs against current revenue would be to charge current
sales with next year's expense. Naturally this would be vio-
lating the old theoretical accounting principle of matching
cost against its own revenue; so charges are made against
the next model year's production on a per-unit basis which
is determined by the budgeting process.

Product engineering also works all during a year upon

- 42 -

the improvement of the current model. This cost becomes a
current expense and may go into the cost picture as addi-
tional expense or as an increase in the super burden rate.

Special tools are special in that they are develOped
to produce a new model. A special tool for a new-model fen-
der might be a large fender-shaping die to be installed in
a piece of equipment. As it is used, its original cost is
spread out over its production. Other examples of special
tools are jigs and fixtures.

Rearrangement expense includes all expenses in con-
nection with the rearrangement and preparation of a par-
ticular area. The plant engineering and plant layout de-
partments are instigators of this necessary work, which is
completed before actual production begins. The accumulated
costs are apportioned over the quantity of parts to be pro-
duced.

Pro-production costs are the same as tool tryout costs.
This is a period of final adjustment and correction before
actual production begins. During this period the following
matters are taken care of:

1. Obtaining and training men for the machines
2. Developing methods

3. Correcting tools

4. Revising specifications

5. Establishing checking points

These costs are absorbed on the basis of the parts pro-

- 45 -

duced after our process swings into production.

Super burden is controlled by budgeting. Through the
processes of planning explained in the section on produc-
tion engineering, amounts are requested in advance for
particular purposes, which amounts are carefully determined
in advance, and if they should prove to be in error, addition-
al amounts have to be authorized. Pro-production costs have to
be watched quite carefully, for of all super burden costs, they

are the ones most likely to get out of line.

-44-

VIII. BUDGETING

TOp management men are in general agreement that a
knowledge of budgeting is essential for the potential in-
dustrial manager. It is interesting to note their unan-
imous feeling that this type of education is becoming more
and more necessary for a prOper supervision of manufactur-
ing Operations. Undoubtedly the reason behind their Opinion
is that it is basic common sense to feel that the peOple
who have to live under a budget, such as the foremen and
plant superintendents, in other words those who have to
make the budget work, must have a hand in its preparation.

Too often in the past budgets have been prepared upon
historical data which is not going to be at all character-
istic Of succeeding periods Of Operations. Many of the peo-
ple who attempt to make a budget work have become bitter,
because they have had to try to operate under what were un-
doubtedly inequities in their budget allotments. This sub-
ject was treated in a survey made by the Controllers Insti-
tute of New York:‘3 it shows some of the widespread resent-
ment characteristic of people Operating under budgets:
Foreman often think that the accounting department is tat-
tling to tOp management when it reports inefficiencies and
errors: factory supervisors think they should be allowed to
participate as a group upon preparing the budget. The In-
stitute suggests that human relations should be taught to
the budget people.

- 45 -

The above will give some idea of the characteristic
points of dissension that arise among those forming and
those working under the budgeting program.

What, then, are some of the prerequisites for setting
up a budget so that it will be successful?

1. A good accounting system. Men engaged in the
budgeting process should have a thorough knowledge of the
accounting aspects of the business, how information per-
taining to the budget is recorded, and how it is reported.

2. Thorough knowledge of the business. This would
be necessary in order to permit orderly and progressive anal-
ysis of individual department requirements.

3. Complete company data, past and present. This
data would give an indication of economic trends in a busi-
ness. In some cases, future rates of growth can be prog-
nosticated from these figures.

4. A sound organizational plan, so that the bud-
get will be set up based upon this plan. Budgets place re-
sponsibilities for performance; therefore duties must be
clear cut.

5. Detailed analysis of economic, industrial,
financial, and business statistics of the territory served
by the company.

6. Good judgment in interpreting all statistics
accumulated.

7. A.tharough knowledge of human relations. This

- 47 -

is becoming more and more necessary, as for many years it
has been a weak point in the accountants' attack of most
problems involving human beings.

Assuming that a company has available a group of men
highly versed in the subject Of making, reporting, and inter-
preting a budget, what would the foremen like these men to do
when they prepare the manufacturing budget?

They would appreciate having the budgeters work with
them individually, and as a gro~up, so that information as
to the figures which they must live under and work to meet
may be understood and accepted. They would like to know the
reasons for the figures under which they are to Operate.

Also they should like to know in advance how their
departments are supposed to be managed. This implies that
they should know what will be produced for the succeeding
year, how many shifts they will have to run, how many men
they are to be allowed for production, how their burden
charges were built up, and other things that they don't
know enough to ask abougfinless there is group discussion
between the budget men and them.

Now, from the point of view of the budget men, at the
time that they are building the budget with the supervisory
personnel of the plants, they should try to conduct a sell-
ing program for their performance. To the foremen they might
explain that in the automotive industry there is continual

and keen competition, the latter tending to drive down pro-

-48-

fits. They can, however, work together to keep profits up.
EXplaining that for the most part, competition determines

selling price, they might add that normally a manufactur-
ing company cannot advance selling prices upon automobiles
or upon any other commodity unless there is a correspond-

ing increase in selling price by their competitors.

Also if they are to get the profit figure up, they
must get costs down. But why, ask some skeptical foremen,
all th_is intera_st in profits, and they point to the large
dividends paid to stockholders. Then the budget men, as
salesmen for capital and the free enterprise system, bring
up the idea that profit ensures accumulation of capital and
that accumulations of capital insure Jobs for the average
individual who never has much.more than a family, a home,
and a living. They could also point out that the budgeting
process they are about to undertake is a planning procedure
which is Job insurance for everyone involved, as with that
process they don't go into production upon items that will
cost more than they can sell them for, nor are they likely
to manufacture more than they can sell. As a result of this
pl_anning, they conserve capital and save themselves many
unhappy momeants at later dates.

And then they endeavor to convince the foremen that
this process of preparing the budget is a planning process
now, but that in tdhe future when the new models go into

production, it becomes a control process. Management uses

-49-

these figures for Just those reasons, planning and control,
but the success of the planning and the efficiency of the
control are dependent upon each of the supervisors and fore-
men. Something like the following could be said:

"Next year we plan upon building 300,000 cars. This
means that we shall work two shifts a day, eight hours each,
for eleven months. We want to know what each one of you, as
foremen, will;need in your department. Here is a schedule of
previous costs and another of contemplated costs. Do they
tie in with what you'll need. If not, why not??

And they could give each one a schedule for his depart-
ment, which.might look like this.9

Total Deduct Actual
Fixed Variable
Indirect labor $10,000 $8,000 $2,000
Operating supplies 2,000 ‘ 2,000
Tools 500 400 100
Heat, light, power 2,500 500 2,000
Maintenance - labor 3,000 1,500 1,500
Maintenance - material 3,000 1,500 1,500
Insurance, taxes 2,000 2,000
Losses 4,000 4,000
Fixed charges 2,000 2,000
Sundry mfg. expenses 1 500 1,500
Total burden soften $57560 1m

They could alaso provide for the foremen a schedule of
the accounts as listed in the section on burden, so that they
might know exactly what types of charges go into each account.
Then they should spend some time with each one and have per-
sonal interviews with him until he understood that it was his
responsibility to try to control the variable portion of ex-

pense. If he desired any changes in his allotted budget, he

- 5o -

could offer the reasons for his requests, and the budget men
would explain hmw they arrived at their figures. After any
further discussion necessary, they would settle upon the
prOper amounts of the various expenses to allow each foreman
in his department.

Once this process is completed in all departments in a
plant, the totals are added, and aicomp_leted manufacturing
budget is attained, as far ashxpense is concerned.

After the analysis of manufacturing expenses as to those
that are fixed or non-controllable and those which are vari-
able and controllable, the cost department is ready to build
up the burden rate. This is the rate by which they will mul-
tiply direct labor in order to find out how much burden
should be absorbed by eachh part produced.

For instance in the event that the company is going to
manufacture 300,000 automobiles, for each one of them they
assume that they will spend $400. for direct labor. This fig-
ure is obtained by adding together the standard (estimated)
direct labor for each part that is produced and which goes
into the car. This results in‘a total dinaect labor cost of
$120,000,000. After adding up all of the manufacturing ex-
pense estimates for each department in the plant, it is
found that there is a total estimated expense cost of
$210,000,000. Using the following formula, it is perceived.
that the burden rate is 175 percent of the direct labor cost.

Bud eted 1951 burden = 210,000,000.=
SEanHarE 1951:”3153'555' labor gm 175% burden

rate
- 51 -

DAILY PLANT REPORT

 

 

 

 

 

 

 

 

 

 

 

 

 

GENERAL MOTORS CORPORATION PLANT xxxxx
DIVISION

DATE 12/1/52

TODAV A MONTH TO‘DATE
TOTAL DEDUCT ACTUAL STANDARD SAVING SAVING VARIABLE
BURDEN EINED VARIABLE VARIABLE RATE
_ “due I 3‘!ther
INDIRECT LA30R QIZTIOU I35OU ICsEDC IOaIOE 198 498 1" 45
OPERATING SUPP. 2,100 2,100 2,245- 145 145 9 10
TOOLS 550 200 550 449 99 99 2 2
PONER 2,500 600 1,700 1,796 96 96 6 6
NAINTENANCEaLAENz 5,050 1,450 1,600 1,571 29 29 7 7
" Material 5,050 1,450 1,600 1,571 29 29 7 7
ENPLOTEE TAXES 5,600*“I;065 4,715 4,715 21 21
LOSSES 4,100 4,100 5,592 508 506 16 16
FIXED CHARGES 650 150 700 674 26 26 5 5
Miscellaneous 900 300 600 674 74 74 3 3
TOTALS-BURDEN 55,000 6,955 26,065 27,569 676 676 25 122

 

TODAY MO. TO YR. TO
7 DATE DATE

 

 

 

 

 

 

 

 

ACTUAL DIR. LABOR 21,100 21,100 DATE TIME
ISSUED ISSUED

STD. DIR. LABOR 22,450 22,450

SAVING - LABOR 1,550 1,550 §$GNED

SAVING - BURDEN 676 676 PLANT MANAGER

TOTAL SAVING 674 674

- 52 -

Using this rate and assuming that the costs are accur-
ate, one should be able to charge the finished unit with
$1.75 burden for each dollar of direct labor cost.

For purposes va checking on the manufacturing plant,
one can break this rate down to ascertain how much of the

estimated expense is fixed non-controllable cost.

d d
ggzzégggd ete f:§%€_%§%%r equals 53% fixed burden rate

For the purpose of checking variable expense costs,

this formula can be utilized:

Total budgeted variable cost := Standard variable burden
an ar rec a or rate

The standard variable rate could be broken down by di-
viding each group of variable burden accounts as indirect
labor by the direct labor cost. This would result in the
figures for the standard variable rate column on the daily

plant report.lo

Now considering the daily plant report figures found
upon the facing page, one may examine the manner of analyz-
ing the efficiency of a hypothetical assembly plant.

The left-hand column lists the burden control accounts,
which are explained inn detail in the section on burden. The
report is organized in this way so that manufacturing manage-
ment executives can tie in their expense variations with
accounting classifications and with their original estimate of

individual burden costs.

The column headings across the tOp of the page represent
- 53 -

costs for the date given and may be explained as follows:

Total Burden - Actual figures for the day. Indirect
labor costs come from the time clerks in the plant to the
cost department. Operating supplies would be procured from
requisitions for supplies issued out of the storeroom. Gen-
erally speaking, material costs would come from requisitions;
labor costs wOuld be derived from time tickets made out by
foremen in the plant and forwarded through the time depart-
ment; cost estimates and allocations as depreciation, power,
and so forth would be arrived at from figures prepared in
the cost department; and other miscellaneous costs might be
procured from invoice classifications forwardedrfrom the
accounats payable department.

Deduct Fixed - These costs are fixed costs which
are non-controllable as far as the foremen and plant super-
intendents are concerned.0ver a year's period they should
run fifty-three percent of the total direct labor cost.

Actual Variable equals Total burden minus fixed

Standard Variable Bquals Standard variable rate
times the standard direct labor cost. This is what the ex-
pense should be in terms of budgeted figures. Standard di-
rect labor is the number of units produced times the stand-
ard labor cost for each unit. .

Saving - This figure is equal to the difference
between actual variable cost and standard variable cost for

the day. It can be either a loss or a gain when compared to

- 54 -

the standard set.
Month to date columns are figured as explained in the
following paragraphs:

Saving - This figure is the total of the savings
for today added to the accumulated savings for the month,
the latter being received upon the prior day's plant report.

Variable rate - actual - This group of percentages
is equal to the actual variable figures divided by standard
direct labor. The difference between the actual variable and
the standard variable percentages reflect the savings or
loss on original budgeted figures. It gives the plant mana-
ger an easy way to check the efficiency of the plant, and in
case of excess variation, he can readily go into a depart-
mental analysis of individual expense captions.

Actual Direct Labor - This is the total cost of
direct labor hours. It is the time reported from the fore-
man's timefsheets,which are actual group times on specified
parts. The timekeeper working for the payroll department
ties in the direct labor reported by the foreman with the
amount of time punched upon the employees' clock cards.

Standard Direct Labor - The units produced for
the day multiplied by the standard labor cost per unit.

Savings - Labor equals direct labor subtracted
from standard direct labor.

Savings - Burden equals total burden loss taken
from the savings columns on the right-hand side of the sheet.

-55..

Total savings equal gain or loss on total savings
for day, month, or year.

This concludes the discussion of one form used in hand-
ling a budget. Though there are many other ways of determin-
ing budget variations, in most cases the daily plant report
should be adequate, because the reporting of actual perform-
ance as Opposed to budget or expected performance is the key

to most budgeting procedures.

-56-

IX. CONCLUSION

It now seems apprOpriate to make a summary of points
in the develOpment of this case study, indicating where
there is a tie-in between operating management and account-
ing practices. This will enable the management student to
go to each operational phase and ascertain how it is hand-
led.

As far as cost estimates are concerned, the adminis-
trative engineer performs the accounting which is deemed
necessary in the product engineering department. On a day-
to-day basis, hourly rated employees and salary personnel
below a certain level of income fill out time tickets
which give the nature Of their work and the time spent
upon it.

The timekeepers pick up labor tickets from the day rate
men and some salary personnel in the production engineering
division. This time is develOpment time and is handled as
super burden. It is charged to an apprOpriation number to
be accumulated until the contemplated Operation is completed.
At the time the total costs are removed from the appropria-
tion account and are amortized over the ensuing production.
This allocates the expense as a charge against the revenue
of the period in which the new developments are used.

The material receiving department is responsible for
proper checking of incoming material and the write-ups of

the receiving slip. The supervisory personnel have to be

- 57 -

sure that accurate checks are made of incoming material, as
it becomes the basis for records in both the materials con-
trol department and the accounts payable department. Im-
prOper training of personnel and careless counts by irres-
ponsible employees can cause improper payment to suppliers
and inaccurate material records.

Foremen in charge Of productive labor are responsible
for accurate counts Of their men and correct classification
to their Operations. Their production reports are checked by
timekeepers who forward their employee times and piece re-
ports tO the payroll and cost accounting departments. Inac-
curacies on the Group Credit Sheet will be revealed, as
they will throw group efficiencies out Of line.

Burden control is the direct responsibility of all
management personnel, who should conduct as much Of an edu-
cational program as they possibly can among their employees.
Detail as to how burden can ce controlled and special meth-
Ods which may be used are included in the burden section.
The accounting for this aspect of cost may be originated
from time tickets for indirect labor, scrap tickets, requis-
itions for indirect materials, and classified invoice charges
for items being allocated to the burden accounts.

As far as the making Of a budget is concerned, all fore-
men should have received previous training regarding this
procedure and the need for it. Then, after conferences with

management executives and budget men, they should have a

- 58 -

chance to participate in the construction of their own bud-
gets. In this way, when the actual budget is adopted, each
foreman should basically agree as to its workability, and
not feel that he is being forced to do the impossible.

By checking on the various burden accounts in the chap-
ter on burden, the industrial management student can per-
ceive exactly what each special item of burden might be and
what a foreman would be able to do in order to control it.

When the budget is put into use and<oempared with
actual cost figures, the foreman has an Opportunity to
observe the manner in which his actual costs compare with
his estimated costs. 'This is done through the use Of the
daily plant report. If there are any variations of actual
burden from his original estimate, they are immediately
apparent upon this form. The expenses analyzed in this
report are controllable, variable cost. A working fam-
iliarity with this or any other budget report presupposes
an understanding of the entire manufacturing process with
an accounting tie-in.

To arrive at the information included in this thesis,
an institutional approach was utilized. Beginning with
the develOpment of the car, the entire manufacturing
process was reviewed, being allied to accounting procedures
through.use of forms and cases.

It is hoped that the information presented will be
enlightening to all potential industrial managers, that

it will help them select more profitable courses, and
.. 59 -

that it will provide them with a better understanding of
cost accounting and budgeting-~those two very important

phases of scientific management.

- 50 -

LANSING CHAPTER
NATIONAL ASSOCIATION OF COST ACCOUNTANTS

TO: SELECTED EXECUTIVES - LANSING AREA.
FROM: FAURICE I. STRAIT - DIRECTOR OF EDUCATION.
SUBJECT: MANAGEMENT'S USE OF ACCOUNTING.

PURPOSE: IMPROVEMENT 0F ,ACCOUNTING INSTRUCTION IN RELATION TO GENERAL
BUSINESS STUDENTS RATHER THAN T0 ACCOUNTING MAJORS.

I. NAME
2. POSITION 3. FIRM
A. PLEASE LIST THE ACCOUNTING STATEMENTS 0R FORMS WHICH You USE IN

MANAGING YOUR OPERATION OR BUSINESS. (USE BACK OF SHEET IF MORE
SPACE IS NEEDED.)

B. CHECK THE ITEMS WHICH YOU WOULD LIKE COLLEGE GRADUATES THAT YOU
MIGHT HIRE FOR POTENTIAL MANAGEMENT POSITIONS TO KNOW OR 6E
FAMILIAR WITH:

 

I. ELEMENTARY ACCOUNTING ( ) 5. COST ACCOUNTING ( )
2. STATEMENT PREPARATION 6. BREAK-EVEN ANALYSIS ( )
AND ANALYSIS ( )

5. ACCOUNTING TERMINOLOGY ( ) 7. PREMISING (LONG RANGE
FORECASTING) ( )

h. BUDGETING ( )
8. REASONS FOR ACCOUNTING

I.E. BACKGROUND OF
DEVELOPMENT ( )
C. DO YOU USE ACCOUNTING PRIMARILY FOR
A. PLANNING ( ) B. CONTROL ( )

THANKS FOR YOUR COOPERATION AND ASSISTANCE.

TRULY YOURS,C{

7yfifhfifi¥¥74

MAURICE I. STRAIT.

. [ , WW) .W-Sfo ._
$7600.64

FOOTNOTES

1. The author is a former accounting instructor at Michigan
State College and was a counselor to industrial management
students for three years.

2. The author was one of the ten selected to take this course
in 1937-38, hence became extremely familiar with the feelings
of the executives as well.as with those of the foremen.

3. After completing the management training program, the author
was employed by Chevrolet Motor Division for several years,
where he worked through all the plants in the division as well
as in various sections of the accounting department.

4. Oldsmobile Division, General Motors Corporation, Control of
Manufacturing Costs,Lansing, Michigan, 1945, chapter 5, p. 7.

50 Ibido, p. 4.
60 396 page 80
'70 Ibid' Chapter 5, p. 20

8. "Foremen, 'Slide Rule Boys' Clashing in Budget Battles," The
State Journal, Lansing, Michigan, March 19, 1952, p.26, cols. I-4.

 

9. Compiled by author.
10. Compiled by author.

BIBLIOGRAPHY
(BOOKS)
Buick Motor Division in Cooperation with General Motors
Institute, Buick Management Conference Program, Flint,
Michigan, 19497

General Motors Corporation, Appropriations Manual. Lansing,
Michigan, 1947.

 

General Motors Institute, Department of Business, Graduate
Accounting Program, Units I-V, Flint, Michigan, 1936.

----------------- , Time and Motion Study Notes,Flint, Mich-
igan, 1936.

Oldsmobile Division, General Motors Corporation, Control of
Manufacturing Costs, Lansing, Michigan, 1945.

 

 

(MAGAZINE ARTICLES, SIGNED)

Hewitt, Ralston C., " Some Practical ASpects of Management,"
NOAOCOAO Bulletin, V010 52, no. 1, pp. 62‘66 (Septem-
ber,I195077

 

Hogan, R. F., "Control of Manufacturing Expense," The Account-
ants Digest, vol. XIV, no. 4, pp. 159-161 (June, 195I7.

 

Holland, C. C., "Accountancy as an Aid to Management," The
Accountants DIgesE} v61. XIV, n6? 4, pp. 173-176 lJune,

 

 

Kay, R. M., "Budgets and Budgetary Control in Industry." The
Accountants Digest, vol. XIV, no. 4, pp. 153-156 (June,
1951).

Park, Colin, "Giving Budgeting Appeal for the Foreman," N.A.
C.A. Bulletin, vol. 33. no. 2, pp. 181-188 (October.
I951).

 

(MAGAZINE ARTICLES, UNSIGNED)
"Management Accounting in the United States," compiled by the
Anglo American Council on Productivity, N.A.C.A. Bulle-
tin, vol. 32, no. 6. pp. 643-657 (February, 1951).
(COPY OF LECTURE)

Devlin, Paul, "A Survey of Accounting Education in New England."

(INTERVIEWS)

H. F. Brown, Supervisor Material Control, Oldsmobile Motor Divis-
ion, Lansing, Michigan

Wade w. Cranston. Project and Records Accountant, Oldsmobile Motor
Division. Lansing, Michigan

C. C. Early, Supervisor Payroll, Oldsmobile Motor Division, Lan-
sing, Michig an

Earle Edmunds, Former Plant Superintendent now assigned to Spec-
ial Projects, Buick Motor Division, Flint, Michigan

Benjamin Hanna, Accountant. Project Controls Section, Oldsmobile
Motor Division, Lansing, Michigan

Clare Harrington, Head Factory Accountant, Oldsmobile Motor Div-
ision, Lansing, Michigan

George A. Hirshman, Administrative Engineer. Oldsmobile Motor
Division, Lansing, Michigan

R. F. McKim, Secretary Reo Motor Incorporation. Lansing, Mich-
igan

L. A. Murray. Production Manager, Federal Drop Forge, Lansing,
Michigan

Charles F. Shaw, Bead Factory Accountant. Buick Motor Division.
Flint. Michigan

Robert Seyfarth, Project Engineer. Oldsmobile Motor Division,
Lansing, Michigan

Wendell Strait, Accountant. Taxes & Insurance Section, Oldsmo-
bile Motor Division, Lansing, Michigan

G. H. White, Former General Supervisor, Chevrolet Motor Divis-
ion, Flint, Michigan

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