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WORKS MANAGEMENT

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McGraw-Hill Book. Company

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McGraw Publishing Company Hill Publishing1 Company

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Electrical World The Engineering and Mining Journal

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WOEKS MANAGEMENT

WILLIAM1DUANE ENNIS, M. E.

MEMBER AMERICAN SOCIETY MECHANICAL ENGINEERS
PROFESSOR OF MECHANICAL ENGINEERING IN
THE POLYTECHNIC INSTITUTE OF BROOKLYN

McGRAW-HILL BOOK COMPANY
239 WEST 39TH STREET, NEW YORK

6 BOUVERIE STREET, LONDON, E. C.
1911

BY
McGRAw-HiLL BOOK COMPANY

Printed and Electrotyped

by The Maple Press

York, Pa.

TO
THE MEMORY OF

MY FATHER

MANAGER OF THE ONE WORKS FOR A
QUARTER OF A CENTURY

241315

PREFACE

In a former book (Linseed Oil: An Industrial Manual], the
present writer has undertaken to discuss some of the condi-
tions of efficiency in a special industry. It seems to be the
current belief now that there exists an art of management with-
out regard to special application; that there are underlying
principles of efficiency germane to any business. Participation
in this belief has suggested the present volume.

Every American is concerned that the United States may
attain and maintain industrial supremacy. We no longer hold
with Carlyle and Ruskin that machinery is bad. Machinery is a
blessing to man. It has permitted him to substitute head work
for hand work and has made him free.

We can have no industrial supremacy as we go on now. We
are the most wasteful nation on earth. We burn up money in
human lives, wasted by preventable disease. We recklessly
consume our natural resources of land, forest and mine. No-
where do we waste more thoroughly or more rapidly than in our
factories; nowhere are we more childish than in some of our
" business" methods.

The remedy is not this or that widely heralded " system. "
Industrial incapacity is not a specific disease needing an antidote:
it is a characteristic of our frame, which we must survive and
outgrow. No one of us is individually greatly to blame; we are
all greatly to blame as a people, because we do not do the best we
can. Profits are no index to efficiency. A man may be rich, yet
a spendthrift.

The growth of a philosophy of works management has been
an American growth. This philosophy is one that comes home to
every individual, no matter how far he be removed (as he may
think) from industrial affairs. Every man should know some-
thing of the new ideals of industrial management. Superficial
knowledge may have little available value, but there are things
so important that we must all know something about them, even
if that something have only the force of a suggestion. To the

vii

viii PREFACE

administrator of the factory the subject of management comes
with infinitely greater force. He has only in part originated it;
it has had some portion of its genesis in extraneous sources, -but
he had best take hold of it and work with it if he, individually, is
to survive.

This book is not (other than incidentally) a presentation of
Taylorism. No one could more than the writer admire the
thoroughness, the certainty, of the achievements of Mr. F. W.
Taylor in cost-reduction, particularly in the machine shop and
engineering works; nor the far-reaching scope of his conclusions;
nor (most of all) that reticence and scientific spirit which induced
him to say almost nothing about his work for nearly a generation,
until he had proved it. But Mr. Taylor's machine shop accom-
plishments are largely matters of mechanical method rather than
of jnanagement, and his plan of management is not a universal
plan.

It has seemed that a presentation of some underlying principles
of factory administration in general would be profitable. There
are industrial management problems to be attacked by other
methods than those which have had widespread recent discus-
sion. There is no text-book on management; no primer for the
novice. The subject cannot be taught in books. The novice
must learn a great many things about management before he
can intelligently read a book on the subject. Such books as we
have are not the books that he should even then first read for
his definite instruction. They deal with cost-keeping and records
in a highly specialized way; with filing systems and conventions,
and the mechanism of administration; with applications to some
special trade which may have no interest to the reader, or with
philosophical generalizations which may inspire us but give us
no very clear conception of what it is all about.

The writer endeavors here to be specific as to some of the
principles which underlie the methods of what seems to him
good management. In truth, no one man could have had the
experience to write such a book as it should be written; this book
is admittedly sketchy, incomplete, in some phases very ele-
mentary; but one man may contribute what he best can. And
every man should. For industrial administration is the vital
human problem in its latest aspect. Increase of profit through
better management costs no man anything and benefits every

PREFACE ix

man in some measure. There can be no danger that the antagon-
ism of labor organizations or the apprehension of the public may
destroy the newly-created ideals of increased production. To
increase the labor-hour production has been justly called the
"highest human good." Dean Swift's well known eulogy of the
man who makes two blades of grass grow where one grew before
appeals to universal human nature.

The man who argues for a restriction of production, for
" soldiering" deliberate, or for that apathy and conservatism
which are equally harmful, is arguing against progress. He is
on the wrong side of a moral issue.

POLYTECHNIC INSTITUTE OF BEOOKLYN,
NEW YORK, 1911.

NOTE. — A number of exercises, mostly numerical,
have been incorporated at the end of the text matter
(page 174). These are intended for use where the book
is employed in class-room instruction, to emphasize the
principles and illustrations presented. Many of these
problems will seem absurdly simple to readers having
had business experience ; but it is thought that they are
of a class in which the average student is exceedingly
apt to err.

CONTENTS

PAGE

CHAPTER I. MANAGEMENT UNITS 1

Cost divisors. The consumption unit cost divisor. Unit costs.
Unit costs and the consumption unit divisor.

CHAPTER II. COST ELEMENTS AND CLASSIFICATIONS 8

The elements of cost.' Cost-keeping generalizations. Classification
of accounts. Method of using the classification.

CHAPTER III. STATISTICAL RECORDS 17

Establishing consumption records. Unnecessary statistics. Total-
ized curves. Totalizations and comparisons. Consumption totali-
zation. Special records.

CHAPTER IV. LABOR 29

Labor cost apportionment. Systems of paying labor. Profit-
sharing. The Halsey premium system. The differential piece rate
system. The Gannt bonus plan. The Emerson " efficiency " system.
Remarks. Profit-sharing as a management problem. The introduc-
tion of profit-sharing systems. Objections to modern labor systems.
Apprenticeship. The effect on the workman.

CHAPTER V. MATERIAL 55

Cost-keeping system. Purchasing methods. Inspection. Central-
ized buying. Purchasing problems. The place of the storeroom.
Storeroom accounts. Stock despatching. The stores department
in the mechanism of production. Economy in materials.

CHAPTER VI. BURDEN 72

Departmental division. Unit division. Division on the basis of
equivalent values. The direct labor basis; time; value. Horse-
power and time bases. Objections to these systems. Discussion of
relationships. Recapitulation. Objections to the definite system.

CHAPTER VII. DEPRECIATION 82

Reasons for depreciation. Systems of depreciation. Depreciation
rates. The depreciation fund. Tables. Betterments. Deprecia-
tion accounting.

CHAPTER VIII. INDUSTRIAL ORGANIZATION 100

The plant must grow. The manager as a watch dog. Insurance.
Fire losses in the United States. The general forms of industrial
ownership. The corporation. Organizing an industry on corporate
lines. Patents. Forms of industrial organization. Building up the
organization. Technical training, its successes and failures. Organ-

xii CONTENTS

ization axioms. Line organization. Divisional, Departmental and
Staff organization. Selling systems. The salesman's record. Whole-
saling. Agency. Consignments. Integrated industries. The new
type of works manager. The organization of labor. Labor warfare.

CHAPTER IX. PRINCIPLES OF ACCOUNTING 136

The three rules. Summing up. Books of account. Inventory.
Example. Examples of statements.

CHAPTER X. PLANT: THE PHYSICAL BASIS OF THE INDUSTRY 148

Systems for carrying on construction work. General principles of
plant location. Desirable characteristics of site. Preliminary plan-
ning. Building standards. Process mapping. Grouping of Build-
ings. Transportation questions in grouping. Other considerations
in grouping. Buildings, types and materials. Construction con-
tracts. Valuations of manufacturing plant. Power valuations.

PROBLEMS . 174

WORKS MANAGEMENT

CHAPTER I

MANAGEMENT UNITS

The public has had every opportunity, in recent months, of
learning the significance of the term Scientific Management.
Not only have the engineering periodicals, with some degree
of unanimity, propounded its principles; even the popular
monthlies and the daily press have taken up this or that
" system" as matters of news value and general interest.

Yet what scientific management really is may perhaps, in
many minds, be still doubtful. Its exponents take too much
for granted. They deal with generalizations and illustrations.
For the most part they have failed to establish any fundamental
scientific principle. Valuable as their discussions have been,
they have been valuable as inspiration rather than as precepts.

As a matter of fact, management is rather an art than a
science. To some extent, the manager, like the -poet, is born,
not made. To reduce management to a compact and complete
body of rules and principles is chimerical, and any attempt to
do so must fail. Yet there are, as in all arts, certain established
methods, customs and expressions; defined things to be observed
or avoided; a partly explored and charted route. It is an
entirely feasible thing to present these matters in orderly form
for the guidance of those whose avocations are supervisory
and who seek to profit by the accumulated experience of others.

Management, then, is the science or art of reaching a given
end with economy of means; of creating a material or ideal
product with the minimum of expenditure. In the broadest
sense, all of our interests call for the exercise of management.
The education of a child is subject matter for the application of
management of the highest type; but here the product is not of
that material class with which we are at present concerned.
From our standpoint, management is evidenced in the transfor-

2 'VPORKS MANAGEMENT

mation of tangible objects from one condition to another by
the application of human effort; and good management is
applied when such transformation is efficiently consummated.

The conception of efficiency is with the engineer one of perfect
definiteness. Efficiency is the quotient of the thing accom-
plished by the effort expended, of effect by cause, both being
measured in the same definite unit. In heat engineering, this
unit is the foot-pound, or British thermal .unit. The obvious
unit for measuring efficiency in management is the dollar; and
from this standpoint, efficiency is the quotient of receipts by
expenses, its numerical value being evidenced by profits.

The dollar (or its exchange equivalent) is scarcely a definite
unit when we consider extreme variations in place and time.
Possibly the final unit of efficiencies and values is the labor-hour;
so that product should be measured in proportion to the hours
of labor it commands, and cost in the labor-hours consumed.
But this aspect of the question is academic rather than practical.

COST DIVISORS

Of the two factors which define efficiency, the first, that of
effect, receipts, products, is rather easily known. The deter-
mination of causes, costs, consumption, particularly if any
degree of subdivision is desired, is more difficult. Since manage-
ment efficiency is to be measured in dollars, the principal field
for investigation is that of costs. A thorough study of costs
therefore covers a large part of the whole field of management.

In order that statements of cost may have the greatest signi-
ficance, all costs must relate to some common unit. Thus, in a
power plant, we are to analyze not the whole cost of fuel in a
month or year, but its cost per kilowatt-hour of output. In a
gas works, the interesting figure is not the monthly consumption
of coal, but the consumption per thousand cubic feet of gas made.

Here the cost "divisor" or "unit" or "basis," as it may be
described, is a unit of production — the kilowatt-hour or the
thousand cubic feet of gas. This constitutes a satisfactory
sort of divisor only when the product is an invariable staple.
In neither of the illustrations given is the product absolutely
invariable. A kilowatt-hour in 2200 volt 3 phase alternating
current is different, and may involve a different cost of pro-
duction, from a kilowatt-hour in 220 volt direct current. A

MANAGEMENT UNITS 3

cubic foot of illuminating gas may -vary in composition from
day to day or from hour to hour; and a gas works produces and
sells several things besides gas. Yet for commerical purposes
the kilowatt-hour or the cubic foot of gas is frequently regarded
as an invariable unit and is far more nearly so in point of fact
than many others commonly treated as invariable.

Divisors of this sort — production units — are used in a large
majority of industries; as in those concerned with the manu-
facture of fabrics, textiles, many oils, paints, liquors, food-stuffs
and the like.

As an example of an industry in which the productive unit,
although constantly employed for the purpose, is an unsatis-
factory cost divisor, consider a paper mill. The definite unit
is the pound (or hundred pounds) of paper. The expenditures
for steam, labor, bleach, etc., are all reduced each month to the
comparative figures per pound or hundredweight of paper
made. Yet in a soda-process book-paper mill, a machine which
could turn out 7 tons of heavy cartridge paper per day would
be doing equally well when it produced 5 tons of ordinary
book, or 3 tons of light "bond" paper. The whole expense
for labor would be about the same in either of the cases; the
unit cost of steam would be a maximum for the bond paper.
If the pound of paper is used as the cost divisor, regardless of
grade, then all divided costs will appear high in mills where
much bond paper is made and all will appear low where cartridge
is the product. A comparison of costs as between the two kinds
of mill will be of little significance.

Furthermore, a similar condition of things holds in the average
mill making several kinds of paper. The relative costs to pro-
duce the various kinds are guessed at, or prices are adjusted to
meet competition, on the principle that the mill must be kept
running; so that as. a result certain grades may actually be sold
at a loss.

There are two ways of improving this situation. If the
product may be grouped into a few general classes, then costs
may be kept over irregular periods during each of which a run
is made on a particular class. Instead of obtaining average
costs monthly, we should then obtain, say, after a three weeks'
run on cartridge paper a cost statement for that run; after a
further operation of six weeks on book paper a statement of
the results of that operation; and so on.

4 WORKS MANAGEMENT

The second method is perhaps simpler, and is the only one
available when the orders are "short," i.e., when the grades of
product change frequently. It involves, besides usual monthly
average statements, the obtaining of special costs by grades
from records covering occasional runs on the different grades.
This means, virtually, putting the factory under a "test."

THE CONSUMPTION UNIT COST DIVISOR

There are certain industries in which no single staple product is
made, but in which a single staple raw material is consumed.
Take, for example, the case of a linseed-oil mill. Here flaxseed
is crushed and the oil expressed, and two prime products — the
oil and the pressed "cake" — besides a number of specialties,
are sold. The oil is the most valuable product, and in deter-
mining its selling price it is necessary to consider the cost of the
seed, the yield of oil and cake from the seed, the cost of mill
operation and the price obtained for the cake.

The yield of oil varies greatly with the character of the seed
purchased, but there is no corresponding variation in the cost
of working. If oil production were used as a cost divisor,
costs would appear high whenever a low-yielding seed was used.
Yet this seed might be offered at so low a price that it would be
desirable to employ it; or, conceivably, the cake value from
such seed might be unusually high. From the management
standpoint, the best cost divisor is the consumption unit, rather
than the production unit; the number of bushels of flaxseed
treated, for example. This is the usual cost divisor in linseed
mills. In cottonseed-oil works, the divisor is the number of
tons of seed worked.

UNIT COSTS

In the great majority of engineering works, the product is
diversified, and no single divisor is possible. There may have
been a time in a locomotive plant when a reduction of all costs
to "so much" per locomotive would have been satisfactory;
but at the present time weights and costs of locomotives differ
to such an extreme degree that the only possible divisor is one
of weight — the pound, the ton or the hundred tons; the last is
the divisor used (when any is used) in the majority of the
locomotive works of this country.

MANAGEMENT UNITS 5

But suppose such works to build not only locomotives of a
great variety of sizes, but also steam shovels, snow plows and
(to make the illustration more striking) aeroplanes. Cost
will then bear no relation to weight. The same condition holds
in the large electrical manufacturing plants, where thousands
of articles are made, ranging from a 15-cent incandescent lamp
up to a hundred-thousand-dollar generator.

An obvious way of handling such cases would be to divide
the works into departments, in each of which the volume of
production of some standard product would be the cost divisor
for the expense of operating that department. This is some-
times done. The same idea underlies a more common method
of comparing costs in a works making a diversified product;
that method in which instead of dividing total costs by a figure
representing either product turned out or raw material con-
sumed, no such thing as " total cost" is recognized.

In this system, every expenditure either for labor or for
materials is immediately charged against the item of output
affected. Thus, suppose a plant having a pay-roll of $1000 to
produce concurrently 20 motors of a certain type. Under the
cost divisor system, the labor cost would have been reckoned
at $1000-=- 20 = $50 per motor. But suppose the plant to pro-
duce both 20 of these motors and 6000 incandescent lamps,
under a pay roll of $1200; of which labor cost, $300 represented
expenditure for producing lamps and $900 for producing motors.
The cost of labor per motor is then $900 -r- 20 = $45, and that
per lamp is $300-^6000 = $0.05. Expenses for materials
would be handled in the same way.

This, then, represents the extreme of complication in cost
finding. As far as labor costs are concerned, the necessary data
are derived from the time cards, on which the day-workman
must show the disposition of every hour of his time; or the piece
work slip, on which the contract worker must show the pro-
duction for which he claims remuneration.

But with material costs more difficulty may be experienced.
No special purchase of material is made in order that 20 motors
(to return to our illustration) may be produced; the pig iron,
sheets and copper are obtained in bulk, and may be intended
for use not only in the building of these motors but also for
various other purposes, perhaps some months in the future.

When these materials are purchased, it is impossible to

6 WORKS MANAGEMENT

charge them against the specific production in which they may
be employed; and here is evolved the fundamental need for the
stock department or store room. To this important department
all standard materials will be charged. It in turn will charge
against production those materials issued for production; and
it must account, either by inventory or by charges against
specific items of output, for everything it receives.

UNIT COSTS AND THE CONSUMPTION UNIT DIVISOR

In the utilization of a cost-finding system to determine selling
prices, it sometimes happens that various trade " differentials"
or variations in price to cover more or less variation in product
are found to be unfair. A linseed-oil mill, for example, sells not
only raw linseed oil in bulk, and oil cake; it sells also various
boiled and refined oils, meal (ground cake) and oil in barrels.

Unless some caution is exercised in computing unit costs in
a case like this, an incorrect statement of cost of the staple
product will be obtained. For example, most linseed-oil mills
make a computation like the following:

Cost of 1 bu. of flaxseed $1 .00

Cost of mill operation, per bushel 25

1.25
Produced 36 Ib. cake, from which revenue

derived was. . . .36

Leaving as the cost of oil from 1 bu. of seed. . . 89
Nineteen Ibs. of oil were produced: therefore

cost per pound is . 04684

Following usual practice, 375 Ib. (50 gal.) of bulk oil (i.e.,
oil in tanks) could be sold at the mill for $17.57. With the
established differential of 2 cents per gallon for oil in barrels,
this same oil, in a barrel, could be sold for $18.57.

Now suppose that during the period discussed 100,000 bu.
of flaxseed were treated, the total mill operating cost of
100,000 X $0.25- $25,000 consisting of $15,000 of expense
incurred in producing raw bulk oil and unpacked cake, and
$10,000 of such expenses as freight on oil and cake, cost of
boiling, refining and barreling oil and grinding cake, etc. Sup-
pose also that a part of this $10,000— say $1,000— was expended

MANAGEMENT UNITS 7

in barreling 35,000 gal. of oil; the remainder of the oil being
delivered in bulk.

It would seem then that the mill operating cost for producing
bulk raw oil is $15,000 or 15 cents per bushel, and that the cost
per pound of such oil, at the mill, is not $0.04684, as computed,
but ($1 .00 + $0 . 15 - $0 . 36) -^ 19 = $0 . 04158. The equivalent of a
barrel of this oil could be sold for 375 X $0.04158 = $15.59;
while the same oil, in a barrel, would cost

This same point might easily be made the subject of several
illustrations. The cost of barreling has now been separated
from other expenses, and applied against the amount of oil
barreled. A similar procedure should be followed with the
costs of packing cake, grinding cake to meal and bagging the
meal, and boiling and refining oil. In each case the expenditure
will be separated from that incurred in producing the staple
product, and applied against the specialties produced thereby.

The principle thus presented is applied in a broad way in
many industries in connection with costs of freight on product.
Freight expenses are not included in manufacturing costs; the
latter cover only such expenses as are necessary to deliver the
product ready for shipment; and the individual customer should
be "quoted" such a price that he will ultimately pay the freight
(if it is " prepaid") on his own particular shipment.

CHAPTER II

COST ELEMENTS AND CLASSIFICATIONS

Standards of method and efficiency in industry vary widely.
Every business has its conventions. No one has ever formally
classified industrial enterprises. We have now an extension1 of
the Dewey decimal system, worked out in great detail to cover
the range of engineering information; this might be used as a
basis for our present purpose, but it would classify industries
according to their technical rather than their commercial
relations.

Physical proximity, similarity of organization or machinery
or of raw materials used, are insufficient bases for grouping
enterprises into a class. The broad division into " manufactur-
ing" and " trading" industries is inadequate; so also is the
grouping into engineering works (shipyard), process works
(paper mill) , and public works (city gas plant) .

The present writer has suggested2 the use of the " determining-
ratio" first cost of plant -*- value of annual output as permitting
of a degree of classification of industrial enterprises into groups
characterized each by standards of equipment, organization and
method; and as explaining certain dissimilarities in those stand-
ards between different groups. This determining ratio appears
to be of useful application in connection even with individuals
and machines as well as with industrial plants.

As a simple illustration, consider two power stations, precisely
equal in capacity, one of which runs continuously while the other
is merely the reserve auxiliary to a water power development,
operating say not over 48 hours in the year. The first will have
the most economical machinery attainable, almost regardless of
cost; the latter will have the simplest and cheapest machinery,
almost regardless of thermal efficiency. In the one case, operat-
ing expenses per unit of product are large in proportion to those
fixed charges which are reduced by a large production divisor.

1 Bulletin No. 9 of the University of Illinois Engineering Experiment Station, November,
1906.

2 The Classification of Industrial Enterprises, Stevens Institute Indicator, January, 1908.

COST ELEMENTS AND CLASSIFICATIONS 9

In the other case, the rate of fixed charge per unit of output is
necessarily high, because the output is low.1

The two types of plant will usually be differentiated by any
engineer by reference to what is called the load factor. The
determining ratio here suggested is in a sense a load factor (or
rather a function of its reciprocal), and is of more general appli
cation than the latter. This question will not be discussed
further. It has been introduced here because the reader,
associated with some special industry, may find some of the
principles presented to be inapplicable in his work and may
therefore doubt their soundness. The prediction is ventured that
when any well-ordered business departs widely from the practices
to be discussed, the explanation will be suggested by a study of
the " determining ratio" suggested, as it works out for that
particular business.

THE ELEMENTS OF COST

The items of cost which most directly and obviously enter
into the total cost of any manufactured article are labor and
materials. In fact, all expenditures are for one of these two
items; perhaps ultimately for the first alone. But in the
special sense, labor and material costs include only those expen-
ditures for these commodities which can be directly charged against
the item of production considered.

Besides these, there is a cost called expense or burden, which
cannot be regarded as either labor or material. For example,
in the building of an engine, provision might be made for certain
tests and analyses of cast iron, involving an expenditure clearly
applicable to this particular output. This would be direct ex-
pense; expense, because it is neither labor nor materials and
does not become a part of the product; direct, because it is
clearly chargeable to the engine in question. The three items,
labor, materials and direct expense, make up what may be called
the direct cost.

In addition, we have the item of factory expense, including
such elements as lighting, repairs, taxes, and factory office

1 So also the steadily-running power plant will have a high grade chief engineer, expert in
fuel economy, while the reserve plant will get along with any man capable of starting up and
keeping going in an emergency. In the first plant we will find flue gas recorders and com-
position indicators and all other devices likely to ensure economy through scientific method ;
in the second there will be nothing of the sort, since it is a matter of comparatively little
importance whether the boilers are efficiently operated or not.

10 WORKS MANAGEMENT

salaries; the total of which, added to the direct cost, gives the
factory cost. Included in factory expense (in small works) is the
general administration cost. In larger works, this expense may
(because applicable to a number of factories or for other reason)
be separately noted, as is also the item of selling expense.

The following chart then shows the grouping of the items
which make up the market price of an industrial product:

Value
Cost Profit

Labor Materials

| j

Direct Factory Expense
Expense |

Day

Piece Stock Special

Direct

, fRemt T io-Vif

Indirect
(Office;

Prime Cost
i

Heat, Power,
Superintendence,

Repairs and Replacements,

IS on-productive Labor,

Depreciation, Insurance,

Taxes, etc.)

Factory Cost

Selling Expense Administration Expense

(General Offices)

Salesmen's Sal- Freight on Salesrooms
aries, Expenses Product
and Commissions

The problem of cost keeping is to ascertain the amount of
expenditure for each of these items, chargeable against each
unit of product. This is a sufficiently easy matter where a single
staple is either the product or the raw material; a far more difficult
matter where the output is diversified; and in no case is this
problem the whole problem of management.

The manager must not only know costs in this degree of detail;
he must know the reasons for the costs which exist and whether
they are what they should be. In order to determine as to the
first point he must consider: 1. the price paid per unit of raw
material (in the broadest sense, including all items), a matter of
purchasing; 2. the consumption of raw material per unit of prod-
uct, a matter of superintendence; 3. the cost of raw material
per unit of output, a matter of general management.

COST ELEMENTS AND CLASSIFICATIONS 11

In order to determine the degree of approximation of his costs
to ideal costs, he must further investigate these three points in
detail, attempting by scientific methods to establish ideal
standards of performance for every operation. It is in this
direction that the vocation of management is becoming domi-
nated by the engineer. To determine ideal costs, and then to
approximate them; this is the specific program of the industrial
administrator. The first requires science; the second, executive
ability. Thus far, training in engineering has, of all types of
education, most nearly succeeded in combining the two.

COST KEEPING: SOME GENERALIZATIONS

Cost keeping is something more than a series of tabulations
and comparisons based on books of account. It is true that
bookkeeping furnishes much of the data for the statistician, and
the latter should not call for original information, the essentials
of which are already at hand in the hands of the accountants:
but the cost keeper requires more detailed and comprehensive
reports than any with which the accountant is concerned. The
accountant seeks to- know the facts; the cost keeper the reasons
for the facts. The latter must constantly group, analyze and
compare.

A cost system does not produce economies and it does add to
cost of operation. It gives opportunity for a capable manager
to produce savings, in comparison with which the clerical and
other expense added to operating cost is relatively trifling. No
cost system, however perfect, can take the pla'ce of competent
management. Better no records of cost, with a strong executive,
than the most perfect records, with a weak administrator. The
manager whose grip is insecure will not strengthen that grip by
adding to his office a costly clerical staff.

The question of cost of cost keeping is sometimes important,
and often overlooked. Just how far the manager should go in
the matter of statistical records is a debatable matter. In
general, no record should be continued unless it is found useful
to the management; but the determination of usefulness may be
a matter of months or even of years. The system of keeping costs,
as will have already suggested itself to the reader, must be
specifically adapted to the business, or at least to that group of
industries to which the business belongs. Yet the technicalities

12 WORKS MANAGEMENT

of these systems are such that it is desirable that the general plan
of keeping costs should be devised by an expert in the matter,
rather than by an expert in the particular business concerned.
The carrying on of a system once devised may be conducted with
ordinary clerical assistance; but the inherent tendency to degener-
ation found in industrial systems is such that in large enterprises
it will probably always be best to permanently retain the cost
expert.

CLASSIFICATION OF ACCOUNTS

In the fabrication of staple or semi-staple products, the items
of cost are so many that some grouping is necessary. A very
broad grouping of expenditures has been given in the table on
page 10. A more detailed grouping of the elements (particularly
those entering into the prime cost or factory cost) is commonly
attempted by accountants and cost keepers. The basis for such
a grouping is what is known as the classification of accounts.

As an example, all operative expenditures, in a certain linseed-
oil mill, were first separated from the selling and administration
expense. These operating costs were then divided into " manu-
facturing expense," strictly so-called, and "sales deductions "-
the expenditures for barreling, boiling and refining, etc., making
up the $10,000 referred to on page 6. Manufacturing expense
was itself subdivided as follows:

MANUFACTURING EXPENSE

Plant Steam Labor

Superintendent, Fuel, Pressmen,

Watchman, Water, Holders,

Lighting, Engineers, firemen, etc., Strippers,

Mill expense, Boiler repairs, Packers,

Press cloths, Oils and supplies. Temperers,

Repairs. Trimmers,

Filterers.

This classification is peculiar in that both labor and material
items are grouped together under "Plant" and "Steam."

A standard classification sheet of this sort is used in nearly
every manufacturing business. Special forms have been devel-
oped for gas works, paper mills, locomotive shops, etc. The list
of accounts, with short instructions regarding them, privately

COST ELEMENTS AND CLASSIFICATIONS 13

issued by one large corporation to its accounting staff, makes a
pamphlet of over a hundred pages. Railways group their oper-
ating expenses into five general classes:

RAILWAY OPERATING EXPENSE

1. Maintenance of way and structures

2. Maintenance of equipment

3. General expense

4. Traffic expense (commercial)

/Power

5. Transportation expense < ~

The Interstate Commerce Commission prescribes in detail the
names of the subordinate accounts included in each of these five
groups, for both railways and street railways. For a small road
of the latter class, 39 operating accounts are used; for a large
road the number of accounts runs up into the hundreds.

The following (from the 1909 Report of the New York Public
Service Commission, Second District) shows the average operat-
ing costs of 75 electric railways in New York state, in cents per
car mile. The numbers first given refer to the standard enumera-
tion of accounts.

Maintenance of Way and Structure:

1. Track and roadway 1 . 602

2. Electric line 353

3. Buildings 091 2.046

Maintenance of Equipment :

4. Steam plant 060

5. Electric plant 068

6. Cars 768

7. Electric equipment of cars 600

8. Miscellaneous equipment 039

9. Shop expense. . * 125 1 . 660

Operating Power Plant:

10. Wages... 345

11. Fuel 476

12. Lubricants 023

13. Miscellaneous supplies and equip. . .039

14. Hired power 2 . 163 3 .046

Operation of Cars:

15. Superintendence 335

16. Wages, conductor 2.507

17. Wages, motormen 2.570

18. Wages, miscellaneous car service. .250

14 WORKS MANAGEMENT

19. Wages, car housemen 448

20. Supplies car service 124

21. Miscellaneous expense car service . .324

22. Hired equipment 045

23. Cleaning and sanding track 125

24. Removing snow and ice 109

25. Undistributed expense 063 6.901

General expense:

26. Salaries, general office 333

27. Salaries, clerk. 281

28. Printing and stationery 046

29. Miscellaneous office expense 064

30. Store expense 046

31. Stable expense 033

32. Advertising and attraction 138

33. Miscellaneous general expense. .. . . .344

34. Damages 985

35. Legal expense due to damages 048

36. Legal expense, miscellaneous 072

37. Rent, land and buildings 050

38. Rent, track and terminals 197

39. Insurance 208 2 . 845

Total.. 16.498

In general, the greatest number of specific accounts is included
in that class which was formerly lumped by bookkeepers as
" manufacturing" (factory) cost. It will easily be appreciated
that to devise a broad and flexible classification of accounts for
any business involves much detailed knowledge of that business.
A proper classification is fundamental to proper accounting, to
cost-keeping, and in a large measure, to good management.
Many firms keep their classification systems as much to them-
selves as possible; they represent too great an expenditure of
time and thought to be given freely to the general (and competing)
public. ^

METHOD OF USING THE CLASSIFICATION

Whenever an expenditure is made, or when goods are delivered
from the store-room, a corresponding charge is made to the proper
account. If the classification of accounts has been properly
made, there can never be any real question as to what account is
chargeable.

A method sometimes employed is to use a voucher (see page
15), which is practically a restatement of the amount of the bill,

COST ELEMENTS AND CLASSIFICATIONS 15

on the reverse of which the whole classification of accounts is
printed, the amount of the bill being entered opposite its appro-
priate classification. This method has the objection that who-
ever receives the voucher for signature sees and may copy the
entire classification system.

The preferred plan is to designate all accounts by numbers or
letters, the meaning of which need be known to only a few of the
clerical staff. The appropriate number is merely noted on the
face of the voucher.

VOUCHER

(Face)

New York, Jan'y 2, 1902

AMERICAN PRODUCT COMPANY,

To John Smith,

Dr.

190.1

Dec.

200 empty secondhand refined oil
barrels © $1 .20

$240

Vouchered by | Examined by

A. B.

C.D.

Approved for Entry
C.D.

Received January 3, 1902 of AMERICAN
PRODUCT COMPANY

Two hundred and Forty Dollars

$240.00 in full payment of above account.

Approved for Payment
....E. F Auditor

.Secretary
..Treasurer

This voucher must be
signed by the firm or
individual in whose
favor it is made.
When signed by an-
other, the authority
for doing so must in
all cases accompany it.
Name and title of per-
son signing must bt>
given in full.

John Smith.

WORKS MANAGEMENT

VOUCHER

(Reverse)

Voucher No. 695
AMERICAN PRODUCT COMPANY
Date Recorded, Jany 2, 1902
Date Paid, Jaw' y 2, 1902
favor
John Smith
for account
Philadelphia mill

•
Brought forward,

Labor
Pressmen,

Molders,

Strippers,

Packers,

Temperers,

Trimmers,

MANUFACTURING EXPENSE

Filterers,

Oil sales account,

Plant

Superintendent,

Cake and meal sales,

Watchman,

Executive expense,

Lighting,

Selling expense,

Mill expense,

Barrel account,

240

Press cloths,

Boiling and refining,

Repairs,

Freight and dray age,

Steam
Fuel,

Insurance,

—

Taxes,

Water,

Equipment,

Engineers, etc.,

Material,

Boiler repairs,

Discount,

Oils and supplies,

Contingent fund,

Forward,

Total,

240

It is not common practice to make out separate vouchers for
payments of wages, although if payment is made by check it
would be logical to do so. A usual method is to take the receipt
of the paymaster or manager for the whole amount of the pay roll,
the attached pay-roll or the receipt itself showing the standard
accounts chargeable.

CHAPTER III

STATISTICAL RECORDS

The diagnosis of management is continual, but formal records
need be made only at more or less intermittent periods. The
period-interval for the recording of essential data may be prac-
tically zero, as when a recording instrument is employed; and
from this minimum it may range up to hourly, daily, monthly,
and even yearly. Much depends upon the kind of datum to be
noted. In general, detailed data are recorded more frequently
than summarizing data; consumption records may be kept daily;
price records, for every purchase; while "cost statements" are
more frequently taken at monthly intervals.

ESTABLISHING CONSUMPTION RECORDS

The class of records in which no dollar unit appears — like that
of coal consumption per kilowatt-hour in a power plant — is of
the first importance from a management standpoint, and it is in
the devising of such records that the maximum of executive
capacity is frequently required. Many offices spend time and
money on perfectly useless consumption records. Others leave
gaps that destroy the usefulness of a whole system. The ideal
is to make the records so consecutively logical that there is a
direct linkage of cause and effect, and to discard any element that
is not an essential part of this linkage.

For example, in a power plant, consider the question of coal
consumption per kilowatt-hour. The following are among the
factors concerned: Heat value of the coal; boiler efficiency; load
on the equipment, boilers and engines.

The heat value of the coal may be fairly constant, but in pro-
gressive plants it is common practice to check this by analysis.
The boiler efficiency is highly variable; to determine this accu-
rately, we should need to know (besides the heat value of the coal)
the weight of coal burned, weight of water evaporated, feed water
temperature, steam pressure, and quality or dryness of the
steam. Since much coal is consumed in banking fires, or when

L> 17

18 WORKS MANAGEMENT

the load is light, it is desirable also that there be a continual
record of the number of boilers (or amount of heating surface) in
service. In addition, to throw light on the reasons for variation
in boiler efficiency, there should be some attempt made to ascer-
tain the amounts of various of the larger losses; which would
involve recording the flue gas temperature and composition, with
possibly the weight of ash and the percentage of coal in the ash.

The engine efficiency (for engines of a given type) will vary
chiefly with the load on the engines; so that this record must also
be obtained, either by the use of the indicator or by reading from
instruments the electrical output, if the engines drive generators.

This brief, rough outline will suggest the following prime
records:

1. Heat value of the coal, per pound; every car-load or ship-
ment.

2. Weight of coal burned; intervals from 1 to 24 hours.

3. Weight of water evaporated; intervals from 1 to 24 hours.

4. Feed water temperature; by recording instrument.

5. Pressure of steam; by recording instrument.

6. Dryness of steam (not necessary, unless the load fluctuates
greatly).

7. Amount of heating surface in service, each hour.

8. Flue gas temperature; by recording instrument.

9. Flue gas composition (per cent, of carbon dioxide) ; by
recording instrument.

10. Weight of ash; intervals from 1 to 24 hours.

11. Percentage of coal in ash; intervals from 1 to 24 hours.

12. Load on engines; preferably a continuous record.

Some of these records will check others; the flue gas tempera-
ture and composition, for example, will usually be in harmony
with the boiler efficiency, and the load on the engines will bear
a more or less definite relation to the amount of water evaporated.

If we drop the record marked 6 as an unnecessary refinement,
the eleven data remaining might lead to the following principal
and auxiliary statistical records:

PRINCIPAL

a. Thermal efficiency from coal to steam.

b. Thermal efficiency from steam to power.

c. Thermal efficiency from coal to power.

(I. Pounds of coal consumed per unit of power output.

STATISTICAL RECORDS 19

AUXILIAHY

al. Heat imparted to each pound of steam, from feed water
temperature to boiler pressure.

a2. Average equivalent rate of evaporation (pounds of water
evaporated, from and at 212° F., per square foot of heating sur-
face, per hour) .

a3. Percentage of heat of fuel lost to the stack, as shown by flue
gas temperature and analysis.

a4. Percentage of fuel lost to ash pit, as shown by weight and
analysis of the ash.

bl. Average load factor on engines (average load divided by
rated capacity).

It is not claimed that the prime records, or the auxiliary and
principal statistical records, here presented, are complete; in the
first named, particularly, there is room for extension. Such
matters as draft conditions might be noted; if there are, as usual,
several types of engine in the plant, various additional items of
information may be needed. Particulars as to vacuum, etc.,
would usually be desirable as throwing light on variations in
engine efficiency.

But we are now studying not power-plant operation, but
statistical records; and this simple analysis will answer for its
purpose. The four principal records called for show the varia-
tion in the vital figure we are after — the coal consumption per
unit of output — and the leading factors which affect that figure.

UNNECESSARY STATISTICS

Many good managers would also tabulate a large number of
additional observed or deduced facts, such as:

m. Water evaporated per pound of coal.

n. Water evaporated per pound of coal from and at 212° F.

o. Steam consumption per kilowatt-hour.

p. Rate of combustion (pounds of coal burned per square foot
of boiler grate per hour) .

q. Characteristics of coal, as to moisture, ash, volatile matter,
and fixed carbon.

Of these items, (m) is an indefinite measure of efficiency and
n is only another expression for the "principal statistical
record " (a). Similarly, (o) is an alternative (and less definite)

WORKS MANAGEMENT

way of stating the result called for under (b). In some cases the
record (p) may be desirable, either in place of, or supplementary
to (a2) ; while the items under (q) are usually kept sufficiently
under observation by occasional action. Such records as those
suggested by (m), (n), and (o) are clearly superfluous and when
used instead of (a) and (b) are usually employed merely because
of a lack of sufficient technical knowledge to make the computa-
tions necessary for determining (a) and (b).

GRAPHICAL STATISTICS
Consider a statement like the following;:

STATISTICAL RECORD OF THE A. B. C. CO., FOR THE FISCAL

YEAR 1910-'ll

Month

Gross
earnings

Operating
expenses

Interest on
bonds

Preferred
stock
dividend

Common
stock
dividend

Surplus

1910

June

$100,000

$112,000

$12,000 (deficit)

July

110,000

115,000

5,000 (deficit)

August. . . .

165,000

120,000

$50,000

5,000 (deficit)

September.

160,000

125,000

35,000

October. . . .

175,000

120,000

55,000

November.

130,000

100,000

50,000

20,000

40,000 (deficit)

December. .

189,000

110,000

79,000

1911

January . . .

212,000

112,000

100,000

February.. .

280,000

140,000

50,000

20,000

30,000

40,000

March

360,000

190,000

170,000

April

400,000

180,000

220,000

May

410,000

205,000

50,000

20,000

60,000

75,000

2,691,000

1,629,000

200,000

60,000

90,000

712,000

The totals at the foot of this table are significant, but (to the
writer — perhaps not to a trained accountant) the details,
without concentrated mental effort, are meaningless. Now take
the accompanying chart, which represents the same figures
graphically. We are looking, not at a printed description, but
at a picture; and the innate sense of direction, rather than any
conscious intellectual effort, tells us what happended to the
A. B. C. Co. during its fiscal year. Figures and chart both tell
the same story; but the chart tells it more quickly and clearly.

STATISTICAL RECORDS

Graphical Statistical Record of the A. B. C. Co. For the Fiscal Year 191O-'ll,

WORKS MANAGEMENT

Even the chart, however, does not give an ideal record. The
strong upward trend in gross earnings is evident, but it suggests,
without defining, what the year's gross earnings will be. The
surplus curve is highly irregular, and is necessarily made so by
the quarterly disbursements for interest and dividends.

TOTALIZED CURVES

Let us draw off from the previous record the following new
tabulation:

STATISTICAL RECORD NO. 2

AVERAGES PER MONTH, FROM THE BEGINNING OF THE FISCAL YEAR TO AND
INCLUDING MONTH SPECIFIED

Month

Gross
earnings

Operating
expenses

Interest on
bonds

Preferred

stock
dividend

Common |
stock Surplus
dividend

1910
June
July

$100,000
105,000
125,000
133,750
142,000
140,000
147,000

155,125
169,000
188,100
207,374
224,250

$112,000
113.500
115,667
118,000
118,400
115,333
114,571

114,250
117,111
124,400
129,455
135,750

I
$12,000

(deficit)
(deficit)
(deficit)

16,667

8,500
7,334
15,750
23 600

August. . . .
September.
October . . .
November.
December. .
1911
January . . .
February.. .
March
April
May

16,667

3333

4,667
32.429

| [ "'""
i 40,875

16,667 4444 3333 27,445
' 63,700

7fi Q1Q

16,667 5000

7500 59,333

Chart 2 shows these results. The irregularities in the "sur-
plus" curve are now much less conspicuous; they appear in
proper relation to the year's business. It would have been
equally satisfactory to have charted totals instead of averages,
in this particular instance, but the latter basis has been adopted
as more nearly representing the method when applied to the
graphical tabulation of consumption records. These new curves
show at any moment the condition of things for the expired
portion of the fiscal year, at the given date.

It may be noted that, under this present method, fluctuations
will be necessarily more perceptible at the beginning of the year,
and that they will have less and less influence on previous results
as the months go on. To remedy this, it might be desirable in

STATISTICAL RECORDS

some cases (particularly with consumption records) to totalize
all figures for the previous twelve months, regardless of the date
of beginning of the fiscal year. But with the average manager,
"last year" means ancient history. The living present is what
concerns him; his interest lies primarily in what is being accom-
plished this year. Furthermore, it is useful in many industries
to compare results in a given month with those of the same month in
previous years; for manufacturing plants have their seasonal
conditions.

220,000
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000

<*/

•^

^x-

-'"

^~*

"erati

g£

"pevis<

r'"

Int6i

Comi

ion D

videi

.d.^-

De7f

SLD

Preft

•red :

)ivid«

1 § | 1

» "9 <5 K

| | -| 84 | ' 3 s S

Graphical Statistical Record (No. 2) of the A. B. C. Co. For the Fiscal^Year 1910-' 11.
(Amounts Totalized and^Averaged.)

TOTALIZATIONS AND COMPARISONS

The following classes of final records and charts may then be
kept:

1. The chronological, as in the first chart, page 21.

2. The totalized, from the beginning of the fiscal year, as in
Chart 2.

3. The comparative chronological, in which figures for successive
months of various years are tabulated on one sheet or diagram,
the same scales of months and figures being used for all the years.

WORKS MANAGEMENT

4. The comparative totalized, like 3, excepting that the entry
for each month is a total or average figure.

As permitting of illustrative examples , take the set of figures
given in the following table:

STATISTICAL RECORD OF THE A. B. C. CO. (No. 3)
OPERATING EXPENSES

Months

Mill A

Mill B

Total

1909

June

$40,000

$ 10,000

$50,000

July

30,000

12,000

42,000

August

35,000

16,000

51,000

September

20,000

28,000

48,000

October

15,000

25,000

40,000

November

35,000

15,000

50,000

December

40,000

35,000

75,000

1910

January

40,000

45,000

85,000

February

45,000

55,000

100,000

March

50,000

60,000

110,000

April

55,000

70,000

125,000

May

50,000

55,000

105,000

June

50,000

62,000

112,000

July

60,000

55,000

115,000

August. . :

60,000

120,000

September

60,000

65,000

125,000

O3tober

50,000

70,000

120,000

November

55,000

45,000

100,000

December

55,000

110,000

1911

January

50,000

62,000

112,000

February

60,000

80,000

140,000

March

75,000

115,000

190,000

April

80,000

100,000

180,000

May

80,000

125,000

205,000

From the figures in the first column, we derive solid lines which
form the "comparative chronological" graphical record (No. 3).
A "comparative totalized" curve would be based on the following
record (No. 4) and is also shown (dotted) on page 25.

STATISTICAL RECORDS

400,000 p

Graphical Statistical Records (Nos. 3 & 4) of the A. B. C. Co. Operating Expenses, Mill A

WORKS MANAGEMENT

STATISTICAL RECORD OF THE A. B. C. CO. (NO. 4)
OPERATING EXPENSES

Twelve Months Ending

Cost to Date, Mill A

1910
May

$455 000

June

465 000

July..

495 000

August .

520 000

September

560 000

October

595 000

November . ...

615 000

December

630,000

1911
January

640,000

Februrary .

655 000

March

680 000

April

705,000

May..

735,000

In addition to these, in a business having several independently
operated plants, there is an unending opportunity for side-by-
side comparisons of the efficiency of the different mills. The
obvious record in this case is that which shows on one diagram
the chronological (type 1) performance of all of the mills with
respect to some one particular feature. It is the record numbered
(3) adapted for several mills at concurrent time instead of one
mill at various times.

CONSUMPTION TOTALIZATION
Let us assume this data:

Months

Coal consumed,
pounds

Output, kilowatt-
hours

Pounds coal per
kilowatt-hour

January
February

800,000
1,200,000

200,000
240,000

4.0
5.0

March
April

1,400,000
1,100,000

350,000
275,000

4.0
4.0

STATISTICAL RECORDS

If to these figures we apply the method suggested under (2)
in the previous paragraph, we obtain:

Months

Coal consumed
to date, pounds

Output to date,
kilowatt-hours

Coal per kilowatt-
hour, to date

January ....

800,000

200,000

4.0 .

February

2,000,000

440,000

4.55

March

3 400,000

790,000

4.3

April

4,500,000

1,065,000

4.23

The figures in the last column are those significant to the
manager, and such figures are typical of the mass of detail found
in well-kept consumption records. If in the month of May, the
load, in this illustration, fell off to 10,000 kw.-hrs.; the coal con-
sumption might easily be 200,000 lb., giving coal per kw.-hr., 20
Ib. — a sky-high figure. To know what this really means in the
year's business we have only to carry on our totalization: the coal
consumed to date becomes 4,700,000 lb., the output 1, 075,000 kw.-
hrs., and the consumption rate 4,700,000-^-1,075,000 = 4.38.
The bad month has put up the average from 4.23 to 4.38. This
is what we want to know as well as the startling fact that the
consumption rate for that month was 20.0. On the other hand,
a good month, with high production, improves efficiency rates
more than its own unit consumption figures alone would indicate.

SPECIAL RECORDS

A striking modification of the second of the charts presented
in this chapter (page 23) would be possible by laying off down-
ward from the "gross-earnings" line successive distances repre-
senting operating expenses, interest, dividends and surplus.
The point at which funds became available for dividend would
thus be clearly shown.

A graph sometimes prepared is one showing the relation be-
tween improvement expenditures and increase in gross earnings.
If the latter are laid off horizontally, and we assume (not an un-
common assumption) that an improvement should "pay for
itself" in six years, then the tangent of the angle made by the
graph with the horizontal should be 6.0.

Cost keeping statistics, for completeness, should include a

28 WORKS MANAGEMENT

great variety of factors. The statistical interval should be short
and the tabulations prompt. There is no use in crying over spilled
milk, but quick action may help. Subdivision of data should
be carried to the farthest possible extent. Such matters as
rates of wages, length of working day, conditions controlling the
cost of supplies, climate, weather, rainfall, etc. — all of these may
have to be considered as secondary or subordinate data in the
general analysis: and the raw material for such data should be
kept at hand.

CHAPTER IV
LABOR

Practically speaking, all costs in industrial production are
ultimately labor costs. The vital problem in management is
the reduction of labor cost, or, to put it in a phrase probably
more acceptable to many people, it is the increase of human
productiveness, which may either reduce the average length of
the working day (to 5 or 6 hours, as some think) or, by decreasing
commodity values generally, elevate the standard of living.
Not only from this standpoint, however, is a high labor-hour
production desirable: the fixed costs of maintaining a manufac-
turing plant — such as rent, taxes, and the like — are so great that
in order to keep them low per unit of output, the output
must be high. Efficiency in workmanship is in a large proportion
of works less important in itself than in its effect on the rate of
fixed cost. In order to secure this last beneficial effect it is
sometimes (if not usually) even permissible to increase the labor
cost rate.

Without supervision and the spur that supervision gives, men
degenerate in productiveness. There is an innate tendency
toward inefficiency that must be checked by special means.
Such a tendency, during the early part of the present generation,
had shown pronounced results in the great majority of engineer-
ing workshops. The powerful stimulus which is now being-
applied to offset it had its origin in the apparently unrelated
factor, the introduction of improved tool steels.

The " self-hardening" or "high speed" steels have had two
curious effects. In the first place, they have compelled the re-
design of practically all of our machine tools. The old machines
were too light to stand the heavy cuts and feeds which the new
tool steels invited. Secondly, the new steels have afforded the
opportunity for an increase of two to four times in the speed of
cutting metals.

This increased machine tool production has in a subtle way
been associated with a general increase (where proper methods

30 WORKS MANAGEMENT

have been applied) in labor efficiency. Men have not only turned
out three times the former amount of work in a lathe or planer;
they have learned how to triple their production in operations
where no improved steels were available, in such work as shovel-
ing, moving materials, etc.

LABOR COST APPORTIONMENT

Some trouble and expense are necessary in order to learn the
correct distribution of labor costs in a plant making a diversified
output. Apparently, no invoices are received for labor, yet in
reality the pay roll is an invoice which, like any other, must be
classified in two ways. Its payment must be recorded as squar-
ing accounts with its maker — the workman, and also as against
some specific item of production.

A magazine article1 describes the system employed at the Lynn
works of the General Electric Company, where some 5000 articles
are made. Here about one-third of the employees are on day
work, two-thirds on piece work. For the various operations
involved in constructing and assembling the 5000 items of pro-
duction, there exist some 20,000 piece work standard schedule
rates.

The result of the system to be described is such that within a
day or two after the pay-roll period the manager knows the exact
distribution of the $150,000 weekly labor expense.

No man employed works an hour of time excepting under the
authority of a numbered shop order. Some of these, as for " ex-
pense" labor, are standing orders; the great majority are issued
as occasion requires. Every shop order number includes six
digits. The first of these refers to the general classification:
1. production, 2. construction (about the works), 3. repairs
(made for customers), 4. expense, 5. experimentation, 6. engineer-
ing and designing. The second and third digits describe one of
the 50-odd classification subdivisions, while the last three spe-
cifically describe type, size, finish, etc.

Thus, order 127436 might refer to

1. Production.

27. Enclosed arc lamp.

4. 220 volt. d. c. type.

3. 2.8 amperes.

6. Black japanned finish.

1 The Engineering Magazine, March, 1908.

LABOR 31

The shop orders containing this number are each a direction
to some one workman to do some one thing necessary for the pro-
duction of such enclosed arc lamps. They contain, besides the
shop order number, the workman's number, the date, a brief
statement of what is to be done, with blue prints and specifica-
tions attached if necessary, and a signature.

The " invoices" for labor are of two kinds: the time card and the
piece work slip. Each originates with the employee to be paid.
The clay worker writes on his time card the number of hours spent
on each shop order, signing his name or number. The piece
worker, in the same way, signs a statement of the number of
pieces made and the appropriate piece work schedule number,
for each shop order on which he has worked.

These two forms are of course arranged for necessary checking
and clerical entries. They then go to the paymaster's depart-
ment, where they are grouped by workmen's numbers, and the
amount due each man is computed. Next they pass to the cost
department, where they are arranged in order of shop order
numbers, each of which will require, on the average, 200 cards,
about 1000 separate shop orders being current in an average
week. The cost department then draws up a statement showing
for each shop order number the expenditure for both day work
and piece work. Summaries are made for various groups of
output, and the final summary appears on a slip the size of a
visiting card, in the following form:

WEEK ENDING MAY 31, 1907

Production 65.09 per cent.

Construction 11 .81 per cent.

Repairs 6 . 50 per cent.

Expense 8 . 40 per cent.

Experimentation 4. 10 per cent.

Engineering 4.10 per cent.

100,00 per cent.

The slightest variation of these percentages from normal may
be investigated by referring to the itemized figures in the cost
department.

This system shows the cost of labor for producing, say a shop
lot of 100 lamps, but not necessarily the cost of labor for the 27
lamps which may have been purchased by John Smith of Buffalo.
That is, costs are not determined for individual customer's orders,

32 WORKS MANAGEMENT

nor is it necessary that they should be, when the lamps sold
to Smith are precisely the same as hundreds of lamps sold
elsewhere.

But where a less standardized product — say large steam
engines — is being made, costs will vary even on two precisely
duplicate items of product; and in such cases the record is some-
times kept for individual customer's orders. No additional
complication is. involved, excepting possibly two or three more
digits on the shop order number.

SYSTEMS OF PAYING LABOR

The most common method of purchasing labor is by the unit
of time; in the lower grades, by the hour. The higher in the
scale of life the laborer stands, the longer, generally speaking,
is his wage interval: the ditcher is paid by the hour, the book-
keeper by the week, the engineer perhaps by the month, the man-
ager possibly (nominally) by the year; and with this increasing
wage period there goes an increasing lack of relation between the
number of hours worked and the rate of compensation, the
assumption being, apparently, that the higher grade workman
may be depended upon to consider rather the doing of his work
well than the time he spends on it.

When we pay a man by the hour, we virtually assume that
it is his time that is of value to us, although this is in very few in-
stances the actual case. The day wage system is contrary to
human nature. It encourages the man to husband his strength
either for his amusements or that he may not exhaust his
market ; and it encourages the master to drive the man regard-
less of humanitarian, sociological or even higher economic
considerations.

Piece work is diametrically opposed to this. Here we pay the
man for what he produces, regardless of the time he spends in
producing it. Under piece work, the relation of master and man
ceases, and there is substituted the relation of two parties to a
business transaction. The interest of the workman should now
be, the highest rate of production possible.

The interest of the employer is more difficult to define: and
here lies the whole explanation of the failure of piece work in
practice. Piece work was originally introduced solely as a
method for reducing labor costs. In order that piece work

LABOR 33

might be attractive to the man, it had to increase his earnings.
In order that it might interest the employer, it had to reduce the
labor cost to him per piece produced. When it did both of these
things it demonstrated conclusively past bad management.

For example, a man made 20 bolts in a day, receiving the day-
work wage of $2.00, equivalent to a cost per bolt of 10 cents.
Put on piece work, at a rate of 8 cents, he produced 30 bolts per
day, making his wage $2.40. The man was satisfied, and the
employer should have been. But after a time the man unwisely
allowed his production to increase to 50 bolts per day, bringing
in for him $4.00.

Then the employer felt this to be too high a wage for a man of
this class; he reasoned that if the man could produce 50 bolts a
day he must have been ' 'soldiering " frightfully in the past when
his regular day's output was only 20 bolts. Acting on resent-
ment and greed, he cut the piece work rate to 6 cents.

The workman now finds himself obliged to turn out 33 bolts
daily — 70 per cent, more than his former day's work output — in
order to make his former day-wage. At maximum effort, he can
make only $3.00 a day. He concludes that piece work is bad;
that it has increased his burden 70 per cent., an evil not to be
offset by the possibility of somewhat higher earnings than the
old, on condition of the most strenuous exertion; a possibility
which, moreover, he feels may at any time disappear.

If we analyze this unfortunate state of affairs, we find:

(a) The original piece work price of 8 cents was a mere guess;
if the man was capable of making 50 bolts a day, and the manager
had known it, the latter would probably never have agreed to
such a price as he did agree to.

(b) The employer was shortsighted in losing sight of the fact
that a production of 50 bolts per day, even at 8 cents, was profita-
ble to him from the standpoint of fixed charge reduction as well
as from the labor cost standpoint.

(d) The employer must have been a poor manager not to have
found this out.

These considerations will serve to introduce what may be
described in general as "profit-sharing" systems of wage pay-
ment: systems which differ from strict piece work psychologically
rather than in essence.

34 WORKS MANAGEMENT

PROFIT-SHARING1

A major premise of the profit-sharing advocates is that the
average man, under old style management, does about one-
third as much as he might do: a premise which the present writer
is on the whole prepared to endorse. The difference in produc-
tiveness of the average man and the first-class man, working
under proper conditions, is simply tremendous. In order to
triple present production, modern management proposes:

(a) To furnish the workman with an ample supply of tools
scientifically correct.

(b) To furnish such jigs, fixtures and general facilities as will
most expedite the work.

(d) To give expert instruction in methods and processes; these
instructions to be as detailed and as much matters of course, as
the drawings issued by the designing engineers.

(e) To scientifically determine under the foregoing conditions,
what production the man should attain; and, finally,

(f) To reward the man in proportion to his degree of attain-
ment of this ideal standard.

The standard of production fixed under (e) is never to be
changed unless standard methods, tools or processes are changed.
Here is the sharp contrast with pure piece work. The standard
of production with the latter was established by a guess (usually
based on the workman's previous performance), and the employer
demanded the privilege of making repeated guesses. Under the
profit-sharing systems, the aim is that this standard shall be
accurately ascertained; if it is not, these systems lose one of their
psychological advantages over piece work. Not the whole
advantage, however, for in the very process of setting the stan-
dard rate the employer's attention will have been caused to dwell
on the momentous question of fixed charges.2

As an example, suppose the fixed charges, reduced to their

1 This phrase is here used in a sense technically incorrect: not to describe those philan-
thropic and paternal schemes exemplified by the employees' stock-sharing scheme of the
United States Steel Corporation, but (in default of a generic word) as covering all forms of

'bonus," "premium" or "efficiency" systems of wage-payment.

2 But it may as well be remarked here that in the writer's opinion the profit-sharing
systems are weak in their psychological foundation. Unlike a steam engine, a man has no
clearly defined maximum efficiency. We can never safely predict what a human being can
do. Proposition (e) seems therefore one that cannot be definitively realized.

LABOR 35

proportion per employee, to amount to $4.00 per day: the work-
man producing, under day work, 20 bolts, with a wage of $2.00.
The total cost per bolt is 30 cents. On piece work at an 8-cent
rate and a production of 30 bolts, the fixed charges are still $4.00,
the workman is paid $2.40, and the cost per bolt is 21.3 cents.
Both man and employer should be satisfied.

Now, as in the previous illustration, suppose the workman to
produce 50 bolts in a day, for which he receives $4.00. The total
cost of $8.00 per day now amounts to 16 cents per bolt. Appar-
ently both man and employer should be better satisfied still.
And so they should be; so perhaps they would have been if both
had looked at the subject in all of its bearings. But since piece
work is supposed to be a labor saving device, the exorbitant type
of employer cuts the rate to 6 cents, making the total cost per
bolt (with a 50 bolt daily production), 14 cents. He has thus
made a little further gain — but he has probably killed the goose
that laid the golden egg; and piece work falls into disrepute.

The employer could in reality have well afforded to pay a rate
equivalent to the old day labor cost of 10 cents per bolt; this
would have led to the following results:

Total cost,

Daily production Paid to workman j including fixed ! Cost per bolt

charges

20 (day work)

|
$2.00

$6.00

30 cents

3.00

7.00

23 1/3 cents

4.00

8.00

20 cents

5.00

9.00

18 cents

On this basis the workman would have had no possible ground
for complaint. The trade union might have had, if it were one of
those unions which preach the restriction of production; this is a
matter which must be looked into in detail presently. The
employer, on the other hand, should have no fault to find.
True, the workman is getting full benefit from an increased pro-
duction toward which, at some pains and expense, the employer
has provided the incentive. The former is not, perhaps, entitled
to all, and the profit-sharing systems undertake to decide what
part he is entitled to; but the figures show that as compared with
day work, in cases where fixed charges are a serious factor, the

36 WORKS MANAGEMENT

employer would profit richly even if he had to give the workmen
all.

There is here, then, a gain due to the incentive provided; a
gain due to the extra effort of the workman; and a third gain,
working while all parties sleep — almost — in the reduced rate of
fixed charge.

THE HALSEY PREMIUM SYSTEM

This is perhaps the oldest of the accepted plans of profit-
sharing. It is the one probably in most general use in machine
shops. The workman is guaranteed his full day wage, regardless
of production. Under the piece work system first described, if
a man produced 20 bolts (as under day work) he earned only
$1.60 instead of his former $2.00. Under the Halsey system he
would still get the $2.00. Thus far, the plan gives a sop to the
laborer and thus disposes of one of the more elementary objec-
tions to piece work.

But now, suppose the man to produce 30 bolts in a day.
Under the old day work basis, this would have required 1 1/2
days. If paid at a piece rate equivalent to the former day rate,
he would receive $3.00 for his day's work. He has saved half a
day as compared with his former record. Under the Halsey plan,
he is now paid one-third (or generally from 25 to 50 per cent.) of
the value of what he has saved, i.e., for 1/6 day's time; or 33 1/3
cents, as a premium, making his compensation for the day
$2.33 1/3.

Two points should be noted; the basis on which the bonus is
computed is the previous record of the man;1 and the saving in
time is so divided that the employer and the employee each get a
share. As to the first point, there is no reason why the standard
performance should not be based on a scientific study, as in more
fully developed systems. If this were the case, the system would
be more satisfactory. As to the division of profits, no hard and
fast rule can be laid down. Under piece work, the employee
gets all of the benefit from the time saved, although to accomplish
this saving he has driven machines harder, consumed more
power, etc. It would seem that the employer is entitled to part

1 Previous records are regarded in much the same way as athletic records. It would
probably be safe to assume that no man in the world could run a hundred yards in much less
than ten seconds!

LABOR

of the benefit; and by giving him a part we reduce his temptation
toward a cutting of rates.

How this principle works out may perhaps be shown more
clearly by the following figures :

Daily
production

Time saved, based
on a normal pro-
duction of 20
bolts per day

Workman's
share
of
time saved

Workman's
wage

Workman's
wage per
bolt

Total
cost per
bolt*

$2.00

20 cents

60 cents

20 j

2.00

10 cents

30 cents

$.33*

2.33£

7.8 cents

21.1 cents

40 1 .66|

2.66§

6.7 cents

16.7 cents

1.00

3.00

6.0 cents

14 cents

We here note that the workman's daily wage steadily increases
as his production increases, though not as rapidly as under a
pure piece work rate, because the wage per bo^t steadily decreases
as the production increases. The total cost per bolt (the thing
that concerns the employer) also steadily decreases. These
features are not peculiar to the 2:1 division of profits; they are
characteristic of the system for all possible ratios of division.

The gist of the matter lies here. It is the interest of the
employer that the total cost per bolt shall be a minimum; there-
fore, also, that the number of bolts produced shall be a maximum.
Is the incentive toward maximum production sufficient when the
workman receives less per piece, the more he produces? In
many cases, no; but no absolute answer can be given, because it
is the day's earnings which after all count with most men. Yet
it seems hard task-mastery to bait men on to efforts continually
more strenuous and as continually less profitable.3

1 Fixed charges constant at $4.00 per day.

2 The Halsey plan makes no pretence to a "scientific" character in the current sense. No
standard methods are contemplated ; the workman is left undisturbed to increase his pro-
ductiveness in his own way. The system may be introduced with practically no friction or
disturbance.

In Rowan's modification of the Towne-Halsey system, provision is made that the work-
man shall be unable under any circumstances to more than double his earnings. Thus, let
A be the standardized timefora job, B the time actually consumed by the man: then the per-
centage of time consumed for which the workman is paid a premium is

if B = A/2, he is paid a premium for half the time consumed, so that his hourly rate increases
50 per cent.; if B = A/4, his hourly rate increases 75 per cent.; but it can never increase to
more than double. If B = A, there is, of course, no premium.

WORKS MANAGEMENT
THE DIFFERENTIAL PIECE RATE SYSTEM

To bring this point out clearly, let us consider a system in
which because of high fixed charges (due to the use of expensive
machinery) it is profitable not merely to keep up the wage per
piece, but actually to increase it as the production increases.
Here we have a differential piece rate system in which the work-
man is given the value not only of all the time he saves, but more.

Let the day's production be standardized at 20 bolts, the day
wage be $2.00, and the compensation adjusted so that the man is
given 11/2 times the value of the time he saves: fixed charges
applicable being in this case $12.00 per day. We then have:

Time saved, based

Workman's

Cost per bolt,

Daily

on a normal pro-

compensation

Workman's

Wage per

including

production

duction of 20

for

wage

bolt

fixed charges

bolts per day

time saved

$2.00

0.20

$1.40

2.00

0.10

0.70

}

i = $1.50

3.50

0.11§

0.51§

H= 3.00

5.00

0.12*

0.42*

2J= 4.50

6.50

0.13

0.37

Here the workman's wage per day runs very high, because his
wage per piece increases with his production. His recompense
varies not directly, but as some power of his productivity.
Meanwhile the cost to the employer per piece steadily decreases.
Under the Halsey system, as previously described, it would have
been about 30 cents, instead of the 37 cents here tabulated, for
a production of 50 bolts per day. It is a fair question whether
under the assumed conditions a 50-bolt daily production, with
the accompanying differential rate wage of $6.50 would not
be far more likely of realization than a 40-bolt production at a
Halsey wage of $2.66 2/3. The total cost per bolt would be
about 37 cents in either case.

Suppose such production to represent so high an attainment
that only the best men, under the inspiration of the highest
incentive, will reach it. The incentive of a day's wage of $6.50
may be assumed to be just sufficient. Suppose also that under
the much lower wage scale of the Halsey system the production
reached was only 30 bolts per day, at which the day's wage
would be $2.33 1/3 and the total cost per bolt 48 cents, nearly.

LABOR 39

The employer would be much worse off, obviously, than if he had
paid $6.50 as the day's wage and in so doing have reached the
total unit cost of 37 cents. The workman is worse off by
$4.16 2/3 per day than he would have been under the differential
piece rate; but he had no opportunity at this rate; his loss, as he
views it, is merely the difference between $3.00 — the maximum
under the Halsey system— and $2.33 1/3, or 66 2/3 cents, a loss
which he may regard as endurable since he works only 60 per
cent, as hard as he would have to work to eliminate it.

Based on the figures selected, then, the employer must decide
whether he will pay the workman $6.50 per day instead of
$2.33 1/3, in order to secure a unit cost of 37 cents instead of 48
cents, Will he give the man $4.16 2/3 in order that he may save
$5.50 over and above what he gives the man? Most people
would if they approached the subject in a cool and rational
manner, but of course the proportion of fixed charges has in this
illustration been purposely made high.

The characteristic of the differential rate system (introduced
by Mr. F. W. Taylor) as thus illustrated, is the existence of two
(or more) distinct piece rates. (Mr. Taylor uses only two.) The
low rate is paid for low production, the high rate for high pro-
duction. This is the directly opposite plan to that of Mr. Halsey.
In the absence of a guaranteed daily wage — a characteristic not
shown by the tabulation — the differential plan also differs from
Mr. Halsey's. It gives the workman more than his "share" of
the benefit from increased production. In the table, for example,
an increase in production of 25 per cent, (from 40 to 50 bolts per
day) raises the daily wage $1.50 or 30 per cent.

THE GANNT BONUS PLAN

Thus far the workman's additional compensation has come to
him as a payment for time saved, bearing some relation to the
amount of time saved. In the Gannt bonus system, the reward
on the contrary took the form of a definite prize for a definite
achievement. This system was perhaps the first (of those now
under general discussion) in which an earnest effort was made
to determine how much time a job should take, regardless of
previous average performances. The same effort is made, how-
ever, in the more recently discussed differential rate system.

Suppose the day-worker producing 20 bolts at a daily wage of

WORKS MANAGEMENT

$2.00 to be put under scientific observation, as a result of which
it is concluded that a proper day's production is 30 bolts. He is
now offered a bonus, which may be any sum of money whatever,
under the condition that he produce 30 bolts. If he produce 29,
he receives his hourly wage, but no bonus.1 If he produce 50
(which is unlikely, because careful study has shown a production
of 30 bolts to represent genuinely good work), he receives the
standard bonus, but no more. Let the bonus be $1.002 and the
fixed charges $4.00 per day, giving the following results:

Daily
production

Bonus

Workman's Wage per Total cost per
wage piece, cents piece, cents

$2.00 20

2.00 10

$1.00 3.00

23^

40 1.00 ! 3.00

50 1.00

3.00

The bonus system is claimed to be one that can be readily
introduced without friction, particularly (when the bonus is
fairly high) as a step forward from piece work. An essential
feature is that standard methods and instructions are provided
so that the workman may feel that he is being helped to earn his
bonus. These may cause friction. The piece work pitfall —
excessive earnings by the workman — is avoided.3

But the plan discourages individuality. The workmen are
grouped into two grades only, the bonus-earners and the non-
bonus-earners. There is no opportunity for each man to do his
individual best, no premium on distinction, no reward for the
passably good man. The Halsey and Gannt plans are in this
respect diametrically opposed.

These defects may be in part remedied by the device of ' 'stand-
ard time." Instead of standardizing production at 30 bolts per
day, we will standardize time at the equivalent: 1/30 day per

1 The present day's wage is guaranteed.

2 The bonus usually ranges between 20 and 50 per cent, of the previous day's wage.

3 Curiously enough, it is claimed that a change in standard rates under the Gannt system
is possible without the disturbance which such a change is sure to create in a piece work
shop. The Gannt standard is a time rate, so that when a change is made it is technically one
in time, not directly one in money.

LABOR 41

bolt. Let us agree to pay the workmen 1/30 of a day's wages —
62/3 cents — for every bolt he produces, providing he produces 30
in a day. The system then becomes pure piece work excepting
for its minimum provision — the production of 30 bolts per day;
and since the presence of any man who produced less would be
unsatisfactory to both man and employer, such men would soon
be weeded out and the system would become piece work pure and
simple.

The bonus system is frequently applied to gang work, where
the men (and often their foreman as well) receive a bonus con-
ditionally upon the completion of the prescribed gang task
within the standard time. The contract system, found in large
works, involves either a gang piece rate or a gang bonus. Even
the higher shop officers are in some plants given a bonus as a re-
ward for realization of some set standard of performance by the
whole department or works. A contract rate may be accompa-
nied by piece work or bonus rates for the men working under the
contractor; or their men may be straight day workers, having no
share in the profits which the contractor derives from their labor.

THE EMERSON "EFFICIENCY" SYSTEM

This last of the systems is a development from both the bonus
and the premium plans; combining good elements of both, and
recognizing the human element by giving, within reason, a
tempting incentive to every man to do his personal best. Mr.
Going has given the striking illustration which compares the
Halsey plan with an inclined plane, that of Gannt with a preci-
pice up which the workman must jump, and that of Emerson
with a hill of gradually increasing steepness.

The "efficiency" scheme may be illustrated from the same
data as the other systems: day wage $2.00, production 20 bolts,
fixed charges, $4.00. Let the standard production be set at 30
bolts ( = 100 per cent, efficiency) for which a 20 per cent, bonus
(40 cents) is given. For a production of 27 bolts (27/30-0.90
efficiency), the bonus will be 10 per cent., or 20 cents; for 24
bolts (24/30 = 0.80 efficiency), it will be 3 1/4 per cent, or 6 1/2
cents; falling to no bonus at 66 2/3 per cent, efficiency or a
20-bolt daily production. (A curve is plotted to show the rate
of bonus for each rate of production.) The present daily wage
is guaranteed. For an efficiency of 120 per cent. (36 bolts per

WORKS MANAGEMENT

day), the bonus is 40 per cent. — 80 cents — and so on: the higher
the efficiency, the higher the bonus. This leads to the following
results :

Daily
production

Daily
wage

Wage per
piece, cents

Total cost per
piece, cents

Efficiency

20
24
27
30
36

$2.00

2.20
2.40

2.80

10
8.6
8.1
8

7.8

30.0
25.2
23.0
21.3
19.0

0.6667

0.8

0.9

1.0

1.2

Here the equivalent piece rate falls off somewhat as production-
increases; the total cost per piece might be reduced even if
no such falling off were contemplated.

£32

2™

20
33

10
12

Efficiency, Per Cent
Relation Between Bonus and Efficiency.

REMARKS

In all of the systems, excepting the pure differential, the
workman is guaranteed his present daily wage: the plan is to

LABOR 48

share profits, but not losses, with him. He is not, however,
guaranteed continuous employment should he fail to reach the
standard of performance desired.

Care should be taken not to make comparisons or draw con-
clusions from the tabulated figures which are accidental
rather than essential. For example, if the curve on page 42,
showing the relation between efficiency and bonus, were differently
drawn, the costs per piece and wages per day would all compare
differently with those under the other systems described. With
almost every system, there is an endless variety of definite com-
pensation scales possible.

Just what the scale should be is always a nice problem. The
writer's sentiment in the matter is that it should be liberal to
the workmen; one in which a doubling of present earnings may
be a realizable possibility. There are of course some business con-
ditions under which this would be impracticable. But in general,
a highly profitable business ought to pay its workmen handsomely
—to give them a share. Intensified production is the most
highly profitable industry we know of. Let us therefore be
generous with the man whose cooperation we must have in order
to make that industry succeed, and give him a big share in the
profits. Mr Taylor, however, finds that an increase exceeding
by more than about 60 per cent, the present wage scale is detri-
mental to the steadiness of the men. Perhaps a sudden increase
in salary of 60 per cent, would have bad effects on any of us!
Business, we are told, is war; but if wages and profits can be
increased together, where is there adequate ground for
belligerency?

Labor management is thus attacked as a psychological problem.
A "measuring-stick" is provided, one that is "definite, accurate
and fair," by which each man's individual performance is to be
judged. Conditions must be such that, as far as possible, all
modifying factors shall be eliminated, and that the man's output
shall depend wholly upon himself.

This last stipulation is often difficult of realization, sometimes
impracticable. The workman then "takes his chance" and he
will in the long run win, if the conditions have been fair. In a
large mill power plant, for example, it was found entirely satis-
factory to pay a prize to that gang of firemen which had during
the stated period burned the least fuel, regardless of all modifying
conditions whatever. The wrong men sometimes won; but in the

44 WORKS MANAGEMENT

long run the prize money was distributed about in accordance
with merit.

Mr. Gannt regards the determination of scale of payment as
only one of three essential elements in the development of a
profit-sharing system; the others being the ascertainment of
the proper day's task and the planning for continuous efficient
work.

To make a man's earnings depend upon his proficiency elevates
rather than lowers him in the industrial scale. To impose a
tacit penalty for inefficiency dignifies those who are efficient and
gradually eliminates the unfit. A continuous record of the
efficiency of each man1 becomes as essential to the manager as
a Babcock tester is to the dairyman who cannot afford to maintain
an unprofitable cow. The whole series of such records tells the
degree of efficiency of the management.

The new school of labor management has for its immediate
aim a tripling of the labor-hour production at a 20 to 100 per
cent, increase in daily wage. The first two years with the modern
methods at the Topeka railway repair shops are authoritatively
stated to have resulted in an average increase of pay of 14 1/2
per cent., an increase in output of 57 per cent, and a reduction in
cost of 36 per cent.

PROFIT-SHARING AS A MANAGEMENT PROBLEM

The introduction of these systems should now be considered
from another standpoint than that of costs — from the immediate
standpoint of the shop supervisor. Their most fundamental
feature in this respect is the prescription of method and tool by
and with which the workman is to do his work.

The concession has been made that a boss need rather know
how a thing should be done than be able to do it himself. But now,
someone in authority must not only know how — he must know
how infinitely better than any of his men — but he must also if
necessity arise, show how. We thus have the modern ideas of
the tool-room staff and the testers. These men, experts in their
particular kinds of work, determine definitely the best tool
and the best method to be employed for each operation.

In order that the reward to the man may appear as an addition

1 It has been stated that the older men, in the machine shops, uniformly do better under
profit-sharing wage-systems than the others.

LABOR 45

to his present daily wage, time and cost must be determined for
both present conditions (by observation) and for proposed
standardized conditions (by calculation, experiment and ob-
servation). The steps in the study have been presented in the
following order:

1. Devise a method for determining present expenditure of
time on a particular piece of work;

2. Make such improvement in conditions as can be effected
readily, and may reduce the expenditure of time;

3. Determine the elements of time and cost, as for

a. Handling the raw material,

b. Setting up the work in the machine,

c. Machining, and

d. Removing the finished product;

4. Determine what expenditure of time and cost would be
necessary under ideal conditions as to all four elements, checking-
conclusions by experiment, if necessary;

5. Establish the scale of "bonus," "premium," or "efficiency"
payments ;

6.. Guarantee the present wage (?) and establish a basis for a
bonus to foremen, etc.

If the bonus scale has been carefully worked out, it may be
safely predicted that the workmen as a whole will realize or im-
prove to some slight extent on the standard time expenditure
ascertained under (4); and some enthusiasts even go as far as
to contend for the use of these "standard" rather than of actually
observed time rates in estimating on new work.

In the study of time consumption, various aids like the stop
watch, invisible watches inserted in the note-book, mechanical
time recorders, etc., are employed. Cut meters are used in the
machine shop for determining cutting speeds on machine tools.
All original "time study" records are carefully filed for future
reference.

The "testers" are men employed to experimentally create
time records for performing standard operations; they constitute
a force working by themselves in a locked room, independently
of the shop foreman. The "speed boss," in a staff-organized
shop, has jurisdiction over cuts, feeds and speeds of machine
tools, specifying such as are proper for the material at hand and
the accuracy and finish desired. He sees that tools are standard
and set in the standard way, and prescribes as to the use of

46 WORKS MANAGEMENT

cutting oils, soaps and compounds. He may have jurisdiction
over belts and belt speeds, and will in any case insist on good
condition of machine driving belts.1 He is the man who will
surely discover the badly-manned department. In a shop
making small machined parts, the force of 63 men was reduced to
22 men within one month after the advent of the speed boss.

Three elements in operation have been emphasized as a result
of recent time studies. The first of these is the material " des-
patching" element. To get materials and tools to the man when
and where he needs them is an important matter. Under day-
work organization, any delay in this respect gave the man an
excuse for low productiveness. Now he wants no excuse and
resents delays. An adequate system and proper facilities for the
interdepartmental despatch of new and finished materials is
now at least as important as a power plant. "Lost motion"
must be eliminated; materials and tools are brought to the work-
man by lower-priced labor; a program or plan is provided so that
at any hour each item of material or equipment shall be where it
is needed and not elsewhere. The old-fashioned grindstone —
the village tavern of the shop, gathering place for gossip and
recuperation — is a thing of the past.

Marked improvement in productivity has been realized in
erecting and assembling machinery; and in such work despatch
is of particular importance. Failure of a boy to drill one hole
may delay a large gang of men a long time.

Tools must not only be at hand when wanted, they must be
conveniently at hand, placed where accessible and where they
can be easily identified one from another, and they must be
supplied in excess of probable requirements. The same stipula-
tion applies to material to be used, and the proper devices for
handling that material must be concurrently available.

A second factor now strongly emphasized is the setting up of
work. With many machine jobs, a large proportion of the total
time is consumed in getting the piece in the machine. Experi-
ence has shown that a saving of 30 to 50 per cent, is possible in
this respect by scientific improvement of conditions. Thoroughly
suitable jigs and chucks should be standardized for the various
classes of work, and the variety of makeshifts which accumulate
about the average shop should be inexorably scrapped. All

1 In one instance, attention to these matters reduced the cost of belt maintenance 74 per
cent., while simultaneously decreasing belt failures by 68 per cent.

LABOR 47

clamping devices for hand work on the assembly floor and else-
where must be interchangeable, and the system for serving the
workman with tools should also supply him with setting-up
equipment. The tool-room experts and time-study men will
determine as to the proper time allowance for setting up work.
In some shops, the regular men simply run the. machines, a
special set of men being charged with the work of placing the
material in the machine.

A third feature of the modern system is in the inspection.
Material transferred between departments, if defective in any
respect which may impair the recipient's productivity, will be
sure to have its defect exposed: but if the fault is not of this kind,
no such result may follow. Product leaving the last hand for the
consumer may need especially rigorous inspection under inten-
sified production conditions. Tools, gages, and templates
furnished the workman may also require such special inspection.

On the whole, the modern systems necessitate a more detailed
and rigorous system of inspection of work passing between
departments, and of finished work, than did older systems of
management. Mr. F. W. Taylor gives an interesting example
illustrative of this point, in connection with the inspection of
bicycle balls in a shop where this very work of inspection was
changed from a day-rate to a piece-rate basis.

An opponent of intensified production systems would certainly
regard inspection as the very last kind of work in which a profit-
sharing system of payment could be applied. About 120 girls
were employed in this instance, to inspect an annual output of
many millions of these balls, each of which had to be examined
individually for dents, softness, scratches, and fire cracks. The
girls were skilled in the work, which had been regularly carried on
for eight or ten years.

"The first move before in any way stimulating them toward a
larger output was to insure against a falling off in quality. This
was accomplished through over-inspection. Four of the most
trustworthy girls were given each a lot of balls which had been
examined the day before by one of the regular inspectors, the
number identifying the lot having been changed by the foreman
so that none of the over-inspectors knew whose work she was
examining. In addition, one of the lots inspected by the four
over-inspectors was examined on the following day by the chief
inspector, selected on account of her accuracy and integrity.

48 WORKS MANAGEMENT

"An effective expedient was adopted for checking the honesty
and accuracy of the over-inspection. Every two or three days
a lot of balls was especially prepared by the foreman, who counted
out a definite number of perfect balls, and added a recorded
number of defective balls of each kind. The inspectors had no
means of distinguishing this lot from the regular commercial lots.
And in this way all temptation to slight their work or make false
returns was removed." (Trans. A. S. M. E.} XXIV, 1383.)

Following this plan of insurance against deterioration in quality
of work, accurate daily records were started of the quantity and
quality of output of each girl. The scale of day pay was read-
justed on the basis of the information given by these records.
Detailed time studies were made. Talking while at work was
stopped by separating seats. The day's work was reduced from
10 1/2 to 8 1/2 hours, with two 10-minute recesses allowed each
day. A differential piece rate was then introduced, not for high
output (a definite standard output was established) but for greater
accuracy in inspection as determined by the over-inspectors.
The force of girls was reduced from 120 to 35; average weekly
wages increased from $3.50 or $4.50 per wf»ek up to $6.50-$9.00.
There were 58 per cent, more defective balls sent out under the
old day work system than under the new plan.

THE INTRODUCTION OF PROFIT-SHARING SYSTEMS

Here careful planning and diplomacy are needed. The
thorough reorganization of an existing works along modern lines
may be a matter of two to five years. Nothing can be gained
and much will certainly be lost by undue haste. The system
should be installed gradually and made to justify itself to owner
and employee as it progresses. The right man must be selected
to introduce such a revolutionary change as profit-sharing in-
volves: "none but Ulysses can bind Ulysses' bow."

In an engineering works, the improvement may well begin at
the drafting-room. A chief draftsman of progressive type, pre-
ferably one having had shop experience, should apply it to his
own work. Intensified production1 is by no means inapplicable
to drafting and clerical work. One of the first steps is to abso-

1 Even the typewriting of letters has been paid for on a premium basis. In one office, the
statistical work was thus organized, curves of the type described in Chapter III being drawn
by men whose time expenditure for performing the calculation, marking the point and
drawing the line was standardized at 200 such complete operations per hour.

LABOR 49

lutely eliminate "designing in the shop" by making all draw-
ings, sketches and instructions unusually definite and complete.
In most plants this would mean a considerable increase in ex-
penditure in the drafting room — an increase which is, however,
unquestionably profitable.

This must be faced cheerfully, and the chief draftsman given
such assistance as may be necessary to afford him time and
energy for betterment work. Much preliminary planning in
standardizing parts and products will also be necessary. A
more thorough study of designs with relation to facility and
cheapness in construction and erection will be undertaken.

Regular meetings of officials to be concerned in the reorganiza-
tion will be inaugurated. At these meetings there will be
free criticism and discussion, and the old idea of territorial
sovereignty on the part of departmental foremen will be
seriously modified. No man will be expected to proceed there-
after on the basis of his own unsupported judgment. The
standardization of shop methods under the general supervision
of such a shop committee will be finally entrusted to a properly
qualified subordinate staff.

OBJECTIONS TO MODERN LABOR SYSTEMS

Approval of the methods described in this chapter is by no
means unanimous, even among managers. It is urged that they
involve the assumption that a setter of time rates can be infallible;
that "all the brains are in the office"; that a machine operator
is presumed to have no original ideas of time or money value.
The workman is not encouraged or expected to improve on his in-
structions; such improvement is in fact often positively dis-
couraged.

There is ground for these objections, and the advocates of
profit-sharing systems have not absolutely refuted them, per-
haps because they have been too busy at more profitable en-
terprises. Yet if the modern method is what it is claimed to be,
no expenditure of time in convincing the industrial public of that
fact is too much to contemplate.

The root objection is one that resolves itself into a question
of pure fact. Can the combined capacity of a man and a machine
be determined? Absolutely, perhaps not; nor is it necessary
that it should be. The modern system aims to determine that

50 WORKS MANAGEMENT

capacity within a known reasonable margin of error: the old
piece-work system virtually made no effort at all to determine
it. It guessed.

The rate-setter is not infallible. He may make mistakes;
these can be corrected. He may never — is never — exactly right;
but he can be nearly enough right to reach the desired result,
the setting of a standard of performance which shall permit of a
wage scale remunerative to all parties concerned.

While the idea of task-work under instructions is fundamental,
this should eventually be no more objectionable than the pre-
scription of an apparently awkward method of holding a cold
chisel is to a "green" apprentice. Under the modern systems,
all of the workmen must learn over again how to do certain
things. For the time being, they again become apprentices. If
the new ways of doing things are not better ways they will surely
be abandoned.1

There can be the same incentive offered for improvement as
under the old day work system. The man whose ideas are
valuable will never be discouraged by a sensible supervisor.
The new school merely prescribes that the man shall learn and
perfect himself in the prescribed method first. When he has
attained the standard result, if he then believes a better result to
be possible, his scheme should be tried, honestly tried; and,
if it prove good, it may become the standard.

But what is to be the effect of the new methods on the supply
of skilled workmen? Already in certain trades the all-around
journeyman has practically disappeared. The specialization
which surely accompanies standardizing and intensified produc-
tion will accentuate this condition. Trade apprenticeship is be-
coming uncommon. The limitations imposed by the labor
unions, the unattractiveness of a long apprenticeship to the
average boy, the opportunities for entering avocations deemed
more honorable or profitable than that of the manual worker —
al of these causes are reducing the "birth rate" of skilled work-
men.2 Ordinary laborers may qualify for the economical per-
formance of repetitive work; they may even by a process of

* Mr. Gilbreth's Motion Study goes into the matter more deeply still; he analyzes not
merely methods, but motions, physical movements, in their anatomy and combinations.

2 It has been stated that only 10 per cent, of the boys who become apprentices in machine
tool building plants "serve out their time." * No doubt a factor in this falling off is the
exploitation of the boys by their foremen; they are put on special work where their time
is spent with profit to the employer but without much benefit to the apprentice. The
boy's future prospects are sacrificed for the present gain of the "boss."

LABOR 51

natural selection produce from among themselves the necessary
experts and foremen. Trade schools cannot begin to supply the
demand for skilled men.1

1 Apprenticeship. — An apprentice is a pupil or learner who enters into a contract with an
employer, under which he gives his services in return for his training in the trade plus a
(usually small) wage. The term of the apprenticeship contract or indenture has steadily de-
creased. It was once seven years; three years is the usual time at present. The philoso-
phy of the system may be illustrated from the writer's personal experience. He was appren-
ticed at a i hourly wage of 5 cents for the first year. This was to increase to 7 cents the second
year and 10 cents the third. During the third year, if the boy was worth anything, he
usually became as active a producer as the "laborer," who received from the start 15 cents
an hour, but was given no educational opportunities. But whereas the laborer could never
hope to make more than 15 cents (excepting under most exceptional circumstances) the
apprentice, as soon as his three years had expired, received 20 cents an hour. Piece work
put an end to this (already antiquated) system about 1893.

From the time of the guilds of the middle ages, there existed a sentiment that the trades
and the public must be "protected" by forbidding the practice of a trade excepting by those
men having served a specified apprenticeship. There were laws to this effect. Arbitrary
division lines between the trades were introduced, with the same embarrassing consequences
as exist in the building trades in New York City to-day.

The great economist, Adam Smith, advanced some ideas on this subject that would even
now be regarded as novel. He claimed that long apprenticeships were unnecessary ; that a
few weeks should suffice to teach an intelligent person a manual trade. He proposed pay-
ing to the apprentice full journeyman's wages, with deduction for spoiled work (perhaps a
forecast of the bonus system) , claiming that this would develop habits of efficiency and that
the whole tre id of the then existing systems of iidenture was toward monopoly.

Mr. O. M. Becker (The Engineering Magazine, November, 1906) states three reasons for
the present failure of apprenticeship systems:

1. Greed of foremen who work the boys for immediate productiveresuJts.

2. Loose verbal agreements.

3. Lack of encouragement and instruction.

Mr. Becker recommends the appointment of a supervisor of apprentices who shall correct
these conditions and keep in personal touch with the boys. Carefully worked out apprentice-
ship systems are in vogue in the works of the Brown and Sharp Mfg. Co., R. Hoe & Co., the
Warner and Swasey Co., the All'.s-Chalmers Co. and the Westinghouse Electric and Manu-
facturing Company. A digest of these calls attention to the following factors:

Age Limit. — At start, in one instance, from 17 to 21 years; or (in most cases) a grammar
school education; reduction in term of indenture, sometimes, for boys having had more
schooling.

Term. — Three to four years seems to be the desired ideal. This may be reduced, it is
agreed, if systematic instruction is included in the plan. Neither term nor wage has any
apparent influence on the supply of boys.

Wage. — In one case, 4, 8, 9, 12 cents for the four years. The premium system is some-
times applied. One writer concedes that 8 cents is too low a wage.

Inducements. — A bonus (usually $100) is sometimes paid to those who complete their
term. Tools are occasionally furnished by the employer. Cheap boarding places may be
provided.

Education. — The factory school is an occasional adjunct, instruction more or less sys-
tematic being given by heads of departments. An allowance of time may be made for study
Sometimes boys are required to attend night school outside, with or without such time
allowance.

In the Baldwin Locomotive Works, Philadelphia, three forms of indenture are used :

1. For boys of 17 or more, having had common school education, who are bound to serve
four years, and who agree for three years to attend night school for the study of algebra,
geometry and drafting. Upon satisfactory completion of this service, a bonus of $125 is
paid.

2. For boys of 18 or more, who have had advanced grammar or high school training, who
will agree to attend night school for two years for the study of drafting. These are bound
for three years and receive a bonus of $225 upon completion of indenture.

WORKS MANAGEMENT

But it is unfair to attribute the scarcity of trained men at the
present moment wholly or even in any large measure to the
specialization of profit-sharing systems, for these systems have
not yet come into general application. The causes for this scar-
city would exist (in this country) anyway. And on the whole, is
this scarcity altogether a bad sign? It would seem that Mr.
Gilbreth's suggestion for a reclassification of the trades is justi-
fied from a consideration of the matter. Instead of having ex-
pert machinists and expert bricklayers of all-around ability, we

3. For graduates of technical institutions, 21 years of age. These serve two years under
agreement and the works is obligated to teach them the mechanical art. They receive no
bonus.

In all cases the works retains the right to dismiss for cause. About 33 per cent, of all
apprentices entering have been so dismissed.

TABULAR STATEMENT (1906)

Class 1

Class 2

Class 3

Total

Total number enrolled since 1901

471

224

117

812

Number enrolled in 1904

Number enrolled in 1905

202

Number now on roll

405

DISTRIBUTION OF 1905 ENROLLMENT

Machinists

169

Blacksmiths

Sheet ironworkers 2

Molders

Boiler makers

Brass finishers

Pattern makers

Of the present enrollment, 36 apprentices are from foreign countries.

Of the apprentices enrolled and graduated since 1900, five are now foremen, one is in the
main office, one is assistant engineer of tests, three are assistant foremen, one is a contractor,
24 are erecting shop track bosses, 6 are employed on special work, and a large number
of the remainder have desirable piece work jobs. Of the 41 men specially mentioned,
about 20 are from Class 3, the others being about equally divided between Classes 1 and 2.

Comments. — Engineer-managers, as trained men, should believe in trained men and should
therefore favor those who have at some sacrifice elevated their standard of serviceableness.
But the present ideal of apprenticeship and the present conception of scope in the trades
seem likely to be altered.

A boy cannot do a full day's work and study besides. Every boy in these days should
have at the very least a grammar school training. The education in algebra, geometry and
drafting that he needs to make him a first-class workman should be furnished by the shop in
shop time. Terms of apprenticeship should be further reduced by training boys more
systematically. It should be possible to make such terms vary inversely as the amount of
schooling the boys have had.

Wages are too low. The boys should be self-supporting from the start. An increase in
bonus for completion of the term should be preferred, however, to a great increase in wage
scale. Too much of an increase in this latter direction would be bad on several grounds.
The provision of good board at a reasonable rate would help out the financial difficulty

Wages and terms must vary in different industries and in different sections of the country.
The most promising boys to cultivate are the country lads, having homes not too far from
the manufacturing cities.

LABOR 53

may two or three generations hence have expert men in the
different phases of these trades; an expert tool grinder, who
could scarcely chuck a bar; an expert face bricklayer who could
not set up an arch, etc. Trade apprenticeship would then be
regarded as unnecessary, a waste of three or four years' time at
nominal wages which modern conditions will have made it
possible to dispense with.

Instead, boys (or men) will learn with great rapidity how to
perform some special operation in the trade, attaining a scale of
daily wage now not reached by the most expert of the " all-
around7' men, because of their vastly higher productiveness.

THE EFFECT ON THE WORKMAN

In the discussions of the past few years regarding improved
agricultural methods, the question is sometimes asked, "What if
everyone did so?" If all farmers should tile-drain, irrigate,
rotate crops, grow clover, and spray fruit; would not the increased
reward now obtained by the few who do these things disappear?
And similarly, if the workman's production is generally tripled,
will not the action of competition and of the laws of supply and
demand bring about a gradual lowering of the daily wage again
to its present 'level?

Two suggestions may be made. In the first place, not all
farmers will practice scientific agriculture — not at least for
generations to come. Nor will manufacturers generally practice
scientific management. There are only a few in every industry
who use the best methods; and to these few the large profits are
awarded. The workman who increases his individual produc-
tiveness now will for a long time to come be in a superior position
to the mass of workmen.

And there is an argument still more fundamental. We in this
world have just two things to do: to produce all we can, and to
obtain a just share of what we produce. The first thing is the
economic subject of production, the second suggests the economic
topic of distribution. Nothing can be distributed until it is first
produced. The more that is produced, the more there will be to
distribute. In the last analysis, all of the wealth in the world
comes from human sweat, from the labor-hour. Whatever
increases the labor-hour production augments the supply of
wealth, increases the visible assets of the world. There can be

54 WORKS MANAGEMENT

no harm in this. Other things remaining equal, the more we
produce, the more we shall obtain. If bad economic conditions
temporarily interfere with this, the remedy is to improve those
conditions, certainly not to decrease production.

Money does not measure cost or value. The blacksmith of
King Arthur's age earned a penny a day, but that penny might
feed him for a week. The ultimate measure of value is the labor-
hour. The ultimate determining factor in the available supply
of the good things of this world is the labor-hour output of the
average man.

[Perhaps the best-known application of the methods described in this
chapter has been in connection with the betterments in the motive power
department of the Atchison, Topeka and Santa Fe Railroad. A bibli-
ography of the publications dealing with this enterprise was printed in the
American Engineer in October, 1907.]

CHAPTER V

MATERIAL

Economy in manufacture is related to materials consumed in
the following ways:

1. These materials must be secured at the minimum possible
cost for the necessary quality. In buying coal, for example, the
number of thermal units obtained for one cent is the chief basis
for comparison.

2. The kind and quality of material must be such as will: a.
Involve the least expense in fabrication, and 6. result in the
most valuable product.

For example, flaxseed which had become wet might be secured
at a very low price considering the oil which it contained, but
might nevertheless be undesirable because of the great difficulty
in handling and working the seed in the linseed-oil mill.

Again, rag stock is very costly for a paper mill, but a paper
made from rag stock might sell for 15 cents a pound as against a
3 1/2-cent price for a paper made from wood pulp.

3. Material must be so employed as to obtain therefrom the
greatest possible quantity of product.

4. Any necessarily discarded portion should be, if possible,
profitably utilized.

5. Proper facilities and equipment must be provided for eco-
nomically moving and handling raw, partly finished and finished
materials to and through the works.

6. There must be an adequate system of organization for
insuring that materials shall be at hand where and when wanted,
without maintaining unnecessarily large stocks.

.7. All expenditures for material should be ultimately charged
against some item or unit of productive output.

These considerations may suggest the following topics as nec-
essarily to be treated under the general heading of "materials."
Material costs and methods of cost finding.
Purchasing.

The function of the storeroom.
Economics of material utilization.
55

56 WORKS MANAGEMENT^

COST-KEEPING SYSTEM

When the term cost-keeping is employed without qualification,
material costs are first thought of. And to know the cost even of
materials consumed for each item of product is by no means easy.
Most manufacturers think they know; some only guess. If a
plant made only one thing at a time, and purchased each time
just enough new material to make that one thing, it might con-
ceivably obtain an infallible record of its material cost for pro-
ducing that one thing. But all plants make many things at
once and the purchase of material is often only indirectly related
to the things to be made.

As with statistical records in general, a material cost system
should not merely show the facts, it should give data for ascertain-
ing the reasons for the facts. Such a system is a "tool" (to be
kept in good condition) "for cutting down costs."

Managers have been sometimes known to profess indifference
as to costs. They are making money, there is no competition,
and that suffices. But even a profitable business may^include
some departments or operations which are unprofitable or rela-
tively less profitable. These should be discovered. And a
proper control of costs may enable even a profitable busi-
ness to become more profitable, either directly or by permitting
of increased output without expenditure for equipment. And
finally, the piping times of peace are the times in which to prepare
for war.

A material cost system must tolerate no "averaging," no
grouping by departments. It must not ascertain the consump-
tion and value of raw materials used by occasional computation
or experiment. Its function is to ascertain

The Actual Consumption and Cost of Every Material Consumed
for Every Item or Unit of Product.

This knowledge is necessary in order that selling prices may be
intelligently fixed. It is also necessary for intelligent shop
management. The system should originate with the inception
of the works, but if the plant already exists, then it must be
gradually installed. The larger items of cost— the ' 'high spots"
— are of course the first to be analyzed.

It is in the control of his costs that the superintendent or the
department chief shows whether he is a mere routine man or a

MATERIAL 57

money-saver. If he is burdened with detailed clerical work that
might be performed by cheaper men; or if his clerical assistance
is of such character as to add to rather than detract from his
anxieties — then he cannot be, in the fullest sense, a money-
saver. And if he is sufficiently broad-minded he will recognize
the fact that however much of a specialist he may be in his
business there are outside men, expert not in his business but in
the highly specialized business of reducing costs anywhere, who
can do what he cannot. He should use, not oppose, such men.
He should regard them as he does the real estate man or the
lawyer — men whose advice he needs badly when he needs it;
men of whose services he cannot afford to deprive himself.
Some men there may be, among the "efficiency engineers/'
who are shysters; so also are some men in other professional
fields.

PURCHASING METHODS

The purchasing agent is responsible for the money cost per
unit of quantity and quality of goods received by the works.
He has — or may have — four methods of buying:

1. Purchasing "over the counter/' as when a woman at a
grocery store pays the market price, presumably, for a dozen
eggs.

2. "Shopping," as in the case of a prospective purchaser of
an automobile, who visits several salesrooms inquiring for prices
and finally acts when suited.

3. Ordering from price lists and discount sheets kept on hand
for materials regularly consumed.

4. Contracting with the lowest (or otherwise most desirable)
bidder on goods to be furnished to comply with stipulated
specifications.

The importance of purchasing as one of the industrial opera-
tions varies greatly with the type of industry. In a process-
industry, where some single raw material is subjected to a single
simple process, as in flour mills, wood pulp mills, and some oil
works, purchasing is the most important of all functions, and
may be directly in charge of the chief executive.

In a "factory" (textile mill, machine shop, etc.), where labor
is the chief element of cost, purchasing is less a matter of "close
buying" in the ordinary sense than of expert knowledge regard-

58 WORKS MANAGEMENT

ing the relation between character of raw material and probable
cost of fabrication. A machine shop which purchased all castings
might, for example, do better when paying a fancy price for
exceptionally workable castings than when receiving inferior
material at a lower price.

In a public service corporation, the largest expenditures for
material may be those made by the departments of construction
and maintenance. These departments are officered by engi-
neers, and the materials consumed by them are usually such as
can be intelligently purchased only by men of technical experi-
ence. Consequently, arrangements for the purchase of such
material are made by the department officials themselves, and
this buying often constitutes, in fact, a chief part of their
work.

It is in the ordinary "manufacturing business/' like a paper mill
or a chemical or engineering works, or a railroad, where many
raw materials of comparable importance are consumed, and
where the cost of materials is usually fuPy equal to that of
labor, that the status of the purchasing agent is most firmly
established.

The initial step toward any expenditure for materials is made
when the purchasing agent receives a requisition from some
department head. Nothing is ever bought except upon re-
quisition from some one. This document will have a date, a
number which may be referred to in any inter-departmental cor-
respondence, a signature and an approval signature. It will
state what is wanted, with full specification as to quality, quantity,
and time of delivery required. It may have an acknowledg-
ment stub, beyond a perforated edge, for return to the depart-
ment in which it originated after endorsement with such informa-
tion as may be proper. It should provide space for the buyer's
notations as to quotations relevant, purchasing order number,
dates of action, etc. The requisition remains a ' 'live" document,
and is kept in the "pending" file, until the purchasing order,
which takes its place, has been issued.

Upon receipt of the requisition, the purchasing department
may at once issue its purchasing order (if it is thoroughly posted
at the moment on the applicable market prices) or it may
send out to various parties with whom it deals its regular form
of request for quotation. These may be in duplicate, the duplicate
being printed on a stiff card for permanent filing after the

MATERIAL 59

requested quotation of price has been received and noted ther.eon.1
Such records of prices will be consecutively numbered and filed
and indexed daily, although original letters of quotation may be
temporarily affixed to pending requisitions. Quotations may
be requested, and in many cases received, by telephone, in which
cases, a memorandum of the price is made on the requisition and
afterward transferred to the card form of "request for quotation"
for filing. The receipt of quotations may be acknowledged,
although this is not invariably done.

Alternatively, of course, all materials used may be classified
and a perpetual record kept of prices on each kind of material.

The purchasing order is issued when sufficient knowledge as
to market prices has been obtained. It (or its copy, rather)
then becomes a "live" document, superseding the requisition,
which is now filed. It includes a number, a date, and reference to
the requisition number on which it is based (for convenience in
referring back to the latter). It may contain an acknowledge-
ment stub, to be returned by the firm receiving the order with
its acceptance of all of the conditions of the order. This stub
will, when received by the purchaser, be attached to his copy
of the order. The purchase order states what is wanted, the
price and discount, the shipping instructions, the time, place
and manner of delivery, and gives any necessary special instruc-
tions regarding the billing of the material. A purchase order
given verbally, as over the telephone, is of course immediately
confirmed in the usual form, marked "confirmation/'

These orders are filed in sequence according to the specified
dates of delivery of the materials. At some established interval
of time prior to such specified date (in the case of important
materials) inquiry is made of the shipper regarding delivery
probabilities. At any rate, action of this sort is taken as soon
as the delivery date is reached.2 A copy of the purchase order
(not necessarily with complete price notations) may go to the
stores department for its checking and information. The pur-

1 Probably everyone is familiar with the type of price cipher commonly used by retail
merchants. Take any word or combination of words aggregating ten letters, and let each
letter represent a numeral. Thus:

BLACK HORSE

12345 67890

On the condition that no letter appears twice, each letter has a definite numerical signifi-
cance. A notation of a price of $275 would then appear as LOK, and no one unfamiliar with
the cipher would grasp its significance.

2 This illustrates what is commonly referred to as a "follow-up" system.

60 WORKS MANAGEMENT

chase order is a live document until the goods have been received
and the invoice therefor approved.

The invoice or bill for the goods, received from the seller,
may be drawn off upon the voucher form shown on page 15,
or may be stamped for proper entries, which should include a
statement of order number (sometimes requisition number also) ,
date of receipt of invoice, approval of quantity, quality and
price of goods (date and initials for each approval), name or
number of standard account chargeable, and approval for
payment. It is not essential that the approval of invoices, other
than with respect to price, be committed to the purchasing
department. The matter is mentioned here because it suggests
itself here.

It is customary for a cash discount to be allowed on many
purchases. For this reason, quick action on invoices is neces-
sary, lest the cash discount period may have expired.

If the responsibility for specified delivery of goods rests < upon
the purchasing department, the program of action in case of
deferred deliveries , must be carefully worked out here. Close
contact with dealers so that accurate information may be at
hand as to probable date of deliveries; with operating departments
and store-room, so that it may be known how much delay can be
tolerated; and with the general market, so that the pros and
cons regarding cancellation and replacing of orders can be re-
viewed in a moment : all these are necessary. The buyer must
act quickly, but must never get excited.

In many cases, the operating departments may wish to con-
sider prices in making preliminary estimates for work of produc-
tion or construction. These prices should be obtained through
the purchasing department, and a form of request for prices may
be employed in large plants for this purpose.

The buyer must thoroughly know the markets which he
enters. The trade papers, conference with other buyers, friendly
relations with sellers, personal research into the history, con-
ditions and prospects of industries with which he as buyer comes
in contact — all of these help. He is a speculator, and he should
be at least as well posted on the market for commodities in
which he speculates as is the grain operator on weather condi-
tions in the Northwest. If he is far-sighted, he will see many
opportunities for advantage by accumulating staple stocks at
times of low price. He must then use his expert knowledge to

MATERIAL 61

influence the operating or store-room departments to anticipate
their requirements.

There is no final criterion by which to gauge the efficiency of
purchasing. Prices will vary from uncontrollable factors. In
engineering works, it has been found that in a general way
prices fluctuate with that of pig-iron. A record of such latter
fluctuations may therefore be kept and occasionally compared
with variations in average price of commodities consumed. In
other industries, some alternative standard staple might be con-
sidered as a basis for comparisons.

INSPECTION

A low range of unit prices, with high rates of consumption,
implies that the buyer is disregarding quality in his effort to
reduce price. This is a matter for executive control. Impor-
tant materials (except, unfortunately, coal) are now to a great
extent purchased on the basis of specifications of quality pre-
pared by men having the necessary special knowledge. A check-
ing of quality then becomes as definite a matter as a checking of
measure or weight. This checking should be performed by
trained men and in the laboratory. Shop conditions are too
variable, and shop time is too expensive, for quality to be deter-
mined, excepting in exceptional cases, by "service tests "-
which can scarcely be called tests at all. Any well-managed
works will have its testing laboratory and its standard specifica-
tions for quality; and the determination of compliance with
specifications will rest with the laboratory staff.

CENTRALIZED BUYING

In organizations of controlling magnitude, a central executive
office may include a purchasing department which has staff
jurisdiction over all the works. In such cases, the purchasing
department will often need to have a local staff in each works,
for conducting small, emergency or necessarily local buying.
The degree of freedom of action to be allowed these local staffs
is a debatable matter, to be determined by such considerations
as the size of the works and its location and comparative degree
of isolation. This question is largely one of policy. In any case,
copies of all purchase orders issued by the local staff should go to
the general office.

(52 WORKS MANAGEMENT

PURCHASING PROBLEMS

Ordering Without Prices. — A large buyer who is well posted on
the market and of strong personality may place many orders
(particularly for unimportant materials) without explicit refer-
ence to price. He "does his hammering after the bill comes in,"
and does it so effectively that his work is often quite as closely
conducted as that of the routine man who would not buy a paper
of tacks without two or more bids.

Approval of Inferior Goods. — There is always a chance that a
dishonest seller and a dishonest employee may get together with
a view to passing defective material to the advantage of both and
the detriment of the buyer. Systematic detailed records of the
findings of inspectors, and subdivision of the work of inspection,
have made this chance a rather remote one; and it is seldom that
any large loss will be experienced from this cause, because there
are too many departments or individuals likely to be affected by
the acceptance of bad material.

Graft in the Purchasing Department. — If tales are to be be-
lieved, this was once common — almost a part of accepted good
practice! Gifts of wines, cigars, and other commodities to
favorably influence the buyer toward the seller have for the most
part been eliminated because of the spirited contest between
these two men brought about by modern competitive conditions.
The purchasing agent holds his position because he is a close
buyer, and he cannot afford to impair his efficiency for some
trifling bribe — to sell his birthright for a mess of pottage.

Improper influences in industrial buying, on a much larger
scale, may still exist. When a leading member of the board
of directors has commercial relations with a supply business it is
often easy for him to exert a tremendous pressure on the pur-
chasing agent who must regard him as one of his superior officials.
For example, the director of an automobile manufacturing com-
pany may own a works which makes tires. He would of course
like to sell his tires to the automobile concern; in many cases
he does not hesitate to ask (even in writing) that the purchasing-
agent "give the business" to his concern. If the director were
individually the owner of both the automobile plant and the
tire works, there could be no injustice in it; if he is a principal
owner, the question is debatable, but it is not usually considered
" good business" to interfere in this way. If he is simply one of

MATERIAL (53

a large number of stockholders, the procedure is absolutely
dishonest. It may be winked at by other directors because they
have their own special irons in the fire. The purchasing agent
may feel that he cannot question the wishes of a superior. The
remedy is in permanent and authoritative organization. If a
president is in absolute charge, as he should be, he will not toler-
ate, bnd he will protect his subordinates from, such improper in-
fluences as have been described.

Speculation. — It would be foolish for a buyer not to profit by
anticipation of market fluctuations. His competitors speculate
to their advantage, and so must he. But his main business is
not speculation, and when he buys largely in anticipation of
future requirements he must be ultra-conservative, weighing
interest charges against the probability of a rising market, and
giving due importance to probable future operating conditions.
For him, speculation must be a science; his losses must be ex-
ceedingly few and small.

In certain industries — as in the manufacture of linseed oil —
the conditions are such that it may be necessary occasionally
even to sell raw material or buy the product. In the particular
business mentioned, this is largely due to the comparatively
small supply of flaxseed — less than $100,000,000 would usually
buy a year's world's crop outright. One effect of such extreme
speculation as this is that it naturally engrosses the buyer's entire
attention, so that ordinary purchasing and the important prob-
lems relating to mill operation should be religiously kept in other
hands.

Status. — The purchasing agent was formerly one of the "gilt
edged" officials, ranking almost with the elective officers of the
directorate and considerably above the works manager. Con-
sideration of his function in the productive machinery suggests
that he should rank with the supervisor of plant operation and
under the general manager. If an honest administration is
expected, he should not be too close to the unpaid and otherwise
interested directorate.

Jockeying. — Very few orders are placed at the price quoted
by the would-be seller. The Methodist ideal of avoiding "many
words in buying and selling" has not yet prevailed, although
among the more substantial interests — particularly in engineering-
lines — it is more common than it was a dozen years ago. The
"strictly one-price" plan would be economical in time and trouble.

64 WORKS MANAGEMENT

There are two grounds for dickering as to price. The first is
legitimate. It may be that dealers can suggest modifications of
specification that will be immaterial to the buyer and which may
yet permit of a reduction in price.

The other ground is that of the buyer who tempts or threatens
the seller into a concession — pure hoggishness (to use a highly
appropriate, if inelegant word). One purchasing agent used
to keep careful records of quoted prices and those at which
purchases were made. At the close of each day's business he
spent a few moments summing up the differences between the
two, then announcing the total as what he had " saved the
company that day." It is doubtful whether he saved the com-
pany much, because sellers soon learn that a certain buyer ex-
pects concessions from prices first quoted.

When two or three prices on stated goods have been obtained
from different firms, the negotiation for a lowering of price1 often
begins with a lie. Some men are scrupulous about making a
direct false statement, but will exert themselves strenuously to
produce the desired false impression otherwise. Such men
ought not to be buyers. In some cases, however, the dickering
is taken up, not with the lowest bidder, but, say, with the next to
the lowest. He can be told, of course, that he must cut his
price if he is to receive the order. If he does cut it, the buyer
may then send for the former lowest bidder, who has perhaps
now become second lowest; and so the game of see-saw goes on.

In a contracting business, there is a sort of unwritten law
that if the contractor uses in preparing a bid a price given him
by some material man he should give the order to that man in
case he, the contractor, receives the contract. Thus, if Smith,
who erects steam piping, gets the lowest prices on gate valves
from Brown, and uses that price in making up his bid, then
when he gets the job, Brown should get the gate valves. From
every standpoint, therefore, close attention is given by con-
tractors to the matter of price on sub-contracts or on material,
before the estimate is made; and it is at this period, in such work,
that jockeying goes on most actively.

Emergency Purchasing. — Sometimes in case of accident or
other sudden emergency, a short cut must be taken, the red tape
cut, and a purchase made informally without regard to price.

1 A delay in acknowledging quotations will often result in a call from the seller which may
start this negotiation.

MATERIAL 65

In such cases a special report should be made of the nature of
the emergency, the reason why the purchase was necessary, the
probable excess cost due to the informality, and the estimated
money value of the gain due thereto.

THE PLACE OF THE STOREROOM

Physically, the storehouse is a place where raw or finished
materials may be safely kept. The materials include both ordi-
nary standard stock and special supplies, parts or products.
They are kept partly in the storeroom proper, and partly in the
yard or in branch stockrooms at the different departments; but
in theory at least they are all under the control of the stores
department.

Nearly every business requires some rudimentary form, at
least, of stores department. If for no other reason, there must
be a place provided for the keeping of such supplies as may be
needed in the repair and maintenance of the plant. Some
materials are so costly that they must be specially housed
and guarded. If any attempt whatever is made to keep stock
costs, the stores department is necessary in order that materials
consumed may be properly accounted for. Were there but one
productive depaifoient, the storeroom organization might
possibly be reduced to a simple staff which should merely keep a
record of the amount of material on hand, obtaining from this
record and the invoices for material purchased a statement of
consumption. But when materials go to various departments
(and practically speaking, in all cases) the storeroom force is
responsible for their care from their entry into the works until
they have been charged against specific items or units of product.

The storeroom, thoroughly organized, is concerned with three
classes of material: raw supplies, whether standard or special,
all of which are first charged to the stores department; work in
transit from one department to another in partly finished con-
dition, or parts stored for future assembly; and finished parts
awaiting shipment, all of which also pass through the stores
department, so that the cycle of production, so far as materials
are concerned, begins and ends there.

STOREROOM ACCOUNTS

Most purchase order requisitions (sometimes all of them) will
originate in the storeroom. If these are for unusual or special

66 WORKS MANAGEMENT

material, the initial suggestion therefor may come from design-
ing or operating departments. Ordinary stock material will be
kept on hand in the required amounts without formal reference
to operating departments, small stock being kept in bins, larger
materials in floor or yard sections. For each bin or section a
perpetual inventory will be kept. Original entries of storeroom
accounts may well be made on stock cards, one of which will be
provided for each bin or kind of material. On this card, receipts
will be debited, deliveries to operating departments will be
credited. A pencil ' 'balance" may be noted each time an entry
is made. At the top of the card may be a memorandum of the
minimum (and possibly the maximum) limit of stock to be
kept on hand. When the penciled "balance" figure approaches
this minimum, a requisition for new supplies is sent to the pur-
chasing department. Sometimes two minimum quantities are
specified: the ' 'ordinary/' and the ' 'rush" or ' 'danger" minimum.
When the latter is reached, in consequence of delay in placing or
filling purchasing orders, or for any other reason, quick action is
called for.

These storeroom accounts do not appear on the regular office
books of record, excepting that they may give the data for a
stock inventory when one is required. They illustrate factory
accounting as distinguished from commercial accounting. It
may sometimes be desirable that such accounts be kept in terms
of quantity alone, values being disregarded, and such values
being kept in the possession of the office accounting force only.

The function of the storeroom in approving invoices as to
date of receipt of goods, and their approval as to quantity and
(in a general way) as to quality, has already been suggested.
As an alternative and perhaps preferable plan, the stores
department may report daily as to goods received, giving de-
scription, quantity, condition, quality (?), origin, etc. These
reports will give the purchasing department the necessary data
for approval of invoices, which then need not leave the business
office.

A systematic plan for maintaining suitable stocks not only
ensures against waiting for material; it also permits of greatly
economizing in carrying charges (interest on money) by avoiding
the maintenance of unnecessarily large stocks. When one large
corporation was organized, including some ten works none of
which had anything like an adequate stores department, a

MATERIAL 67

general supervisor of stores was appointed and allowed to organ-
ize a storeroom staff. Within one year, the average investment
in materials was reduced from $6,000,000 to $1,500,000, represent-
ing a saving (with interest at 5 per cent.) of $225,000 per year.
This was a saving through system alone. No appreciable ex-
penditure for equipment was involved.

STOCK DESPATCHING

In the operation of a railroad, one of the most intricate and
fascinating parts of the work is the despatching, or centralized
control of the movement of trains. The train despatcher, by
the telegraph and other aids, must put each train in its proper
place at the proper time designated by the time-table, or if this
in an emergency be impossible, he must temporarily improvise a
new time-table which then becomes his ideal until the emergency
has passed. The fundamental principle of his work is that no
two bodies may occupy the same space at the same time.

In an industrial works, there must be a similar despatching
system. It begins with a time-table (usually called a "schedule"),
establishing dates for definite steps of progress and for completion
and shipment of each piece of work on order. Despatching
instructions based on this time-table take the forms of work
orders, issued to department foremen, and stock orders, issued to
the storeroom. The order to the foreman gives the number of
the production order, the number or designation of the part to
be made, the dates of commencement and completion of the pro-
posed work, the operation to be performed, numbers of drawings
or specifications to be referred to, the names of the departments
from which he is to receive his raw material and to which he is to
deliver his finished product, and (where the planning is managed
with great detail) the number of the machine on which the
work is to be done.

The slip sent to the storeroom will specify the production order
number, the material wanted, the department to which it is
to be delivered, and the date on which it is to be delivered. A
similar slip covering tools to be used may be sent to the toolroom.

For every finished or partly finished piece, some successive
department must give its receipt, this receipt becoming then the
warrant for a charge against that department. No piece work
payment will be made for work not covered by such a receipt.

68 WORKS MANAGEMENT

The office planning department may maintain a schedule or
routing board containing a schedule card for each machine in the
works (sometimes for each man also), so that a glance at a
machine card will tell on what order it is working to-day, or will
be working ten days hence.

Such* a stock despatching system is particularly important in
connection with assembly work, where enormous delays and
losses are common, though often unsuspected by the authorities.
In one machine shop, a force of 13 men was able to assemble
20 machines per month, havig a gross value of $10,000. The
introduction of a despatching system is stated to have reduced
this force to 6 men, who made a record in the assembling of
100 somewhat smaller machines in one month, the gross
value of these being $35,000.

An important individual in the despatching system is the
"stock tracer" or "chaser." Besides constantly checking
scheduled against actual performance dates, and actively
interesting himself in the emergency despatching which is
frequently necessary because of unanticipated delays, he investi-
gates those things which workmen (and sometimes foremen)
are prone to cover up, such as the reasons for delayed schedules,
or the number of pieces or parts spoiled or lost, and the reason
therefor. He also keeps posted on the stages of completion of
parts in the machines, so that he can tell how much the hands
of the clock must be set back, in any department, to make the
ideal time-table correspond with actual conditions.

THE STORES DEPARTMENT IN THE MECHANISM OF PRODUCTION

In one company, the purchasing and works departments are
managed by one vice-president, the correspondence and engi-
neering departments by another. All orders from customers
come to the correspondence department, which bases "general
orders" thereon. The underlying theory of the organization is
that all shipments are made from stock. All general orders
are consequently sent to the storekeeper. He in turn maintains
his stock by issuing a stock order, which is really a production
order, copies being sent to the engineering, manufacturing and
cost-keeping departments. When the general order is received
at the storeroom, a notation is made thereon as to assembly

MATERIAL 69

materials (a) in stock or (6) to be made under a stock order.
A copy of this notation goes back to the correspondence depart-
ment.

The engineering department, upon receipt of its copy of a
stock order, issues a list of raw material required; copies of which
go to the manufacturing, stores and cost departments. Requisi-
tions for this material are made upon the stores department by
•the foremen of the operating departments concerned. The
perpetual inventory of raw materials enables the storeroom to
issue purchase requisitions to the buyer when necessary. Copies
of these are sent to the receiving clerk (an employee of the
stores department) with instructions telling him where to place
such new material when received. This clerk reports all
receipts.

The engineering department furnishes the manufacturing
department, for each shop order, with a list of drawings and
specifications applicable, together with a schedule or plan of
successive operations under which the work is to be done;
this schedule being, however, undated. For new designs, a
''stock order " covering the design is issued to the drafting-
room, and this work of design is scheduled in precisely the
same way as shop work.

The dating of the routing schedule is done by the production
clerk of the assembly department, who checks this schedule in
its entirety every day. When the work is completed, the manu-
facturing department delivers its output to the store-house,
taking a receipt therefor, and notifying the cost department.
A perpetual inventory is maintained of finished parts and prod-
ucts, and abstracts of this are sent weekly to the manufacturing
and sales departments.

The system is open to some criticism, particularly because it
has been built-up rather than devised as a complete entity.
As depicted, it represents the evolution of 15 years, during
which the output of the works has increased 1000 per cent.

ECONOMY IN MATERIALS

This subject is as broad as the whole field of applied science.
It is in this direction that manufacturing is the special work
of the chemist and the engineer. A very brief presentation is
all that can be offered here.

The essential thing in the utilization of material is to consider

70 WORKS MANAGEMENT

what it is that we utilize. In coal, it is the heat unit, in the wood
which comes to a pulp mill it is (mainly) the fiber, in commercial
fertilizers, it is nitrogen, phosphoric acid or potash. It is
seldom the case that the material as we buy it is really the thing
that we want. What we must do is to determine the thing we
want and then to study that thing in all of its associations,
transformations and final dispositions, with a relentless scrutiny.
A good illustration of this point would necessitate great
familiarity on the part of both writer and reader with some one
industry. A fairly satisfactory illustration of what is meant
may be obtained from the ten items of coal loss in railroad service
as suggested by Mr. Harrington Emerson:

(1) Coal charged by mine, but never placed in car.

(2) Coal shrinkage in transit.

(3) Coal lost in unloading.

(4) Coal shrinkage in storage.

(5) Coal lost in loading locomotive.

(6) Coal wasted in firing up and banking fires.

(7) Coal lost through wasteful firing.

(8) Coal lost through wasteful running.

(9) Coal burned while standing at stations or on side tracks.
(10) Coal lost to ash dump.

Items (7) and (8) are of course capable of great subdivision,
and this subdivision should be made. Under item (4) , there is
a loss both of quantity and of quality. All of the elements of
loss should of course be finally computed in heat units.

Good management in the use of materials involves special
training in the industry under consideration, or in some in-
dustry closely resembling it. It is one of the particular func-
tions of the works supervisor as distinguished from the gen-
eral manager. There is an art of management, irrespective
of application to any particular business. This has been long
and generally recognized, men who have shown efficiency in the
general administration of one business being often entrusted
with the affairs of some distinctly different business in an
equally responsible capacity. These men are managers, not
oil-mill or paper-mill men. The latter they employ.

That an art of management exists is perhaps the main con-
tention (possibly an undisputed thesis) of this book. Yet it is
equally true that experience rules and that in the last analysis

MATERIAL 71

the workability of plans must depend upon their approval and
execution by the works superintendent, the man who is trained
and expert in his particular business. He it is whose enthusiasm
and flexibility must not be impaired by half-baked notions
originating with the untrained staff of the economist. We
must maintain his prestige. He is the most useful man of us
all. We must make him more rather than less useful by making
his cooperation the matter of first importance at every step. It
is he who is the knight of the chessboard.

CHAPTER VI
BURDEN

In the case of an industry which produces one single invariable
staple product — say- a city electric railway, which turns out
passenger-miles or passenger-trips as its exclusive output —
there is perhaps no reason for any separation between direct and
indirect expenses. All expenses are divisible by the number of
invariable units of product. But such industries are rare, and
consequently we must in the great majority of cases separately
consider two classes of costs:

(a) Those which are directly chargeable against a specific item
of production; labor, materials and direct expense.

(b) Those which are not directly so chargeable.

The latter class may include the roughly classified items.

Factory Expense.

Direct:

Rent.

Light.

Heat.

Power.

Foremen and supervisors.

Non-productive labor.

Repairs and replacements.

Depreciation.

Insurance.

Taxes.
Indirect:

General management.

Office rent, light, heat and power (factory office).

Factory office salaries and supplies.

Selling Expense.

Salesmen's salaries, expenses and commissions.
Freight and drayage on outgoing product-
Rent, light and heat for salesrooms.

BURDEN 73

Administrative Expense.

Officers' and office salaries, supplies and expenses.
Rent, light and heat for general office.

There is no danger, generally speaking, that the accountants
will forget to charge these expenses against production; they
appear on invoices exactly like charges for labor or materials.
The danger (and the problem to be considered) is one of distri-
bution. In what manner and proportions shall these charges be
finally applied against specific production orders? If not prop-
erly applied, actual costs and proper selling prices will not be
ascertained.

The words burden, surcharge, expense, indirect expense, general
expense, will be regarded as synonymous for our present purpose,
as covering all costs of the nature indicated. The term fixed
expense is more properly used to describe such unvarying charges
as interest on bonds, which go on absolutely regardless of output.
This chapter deals with methods of distributing burden or expense
charges.

DEPARTMENTAL DIVISION

Where a plant is divided into departments in each of which
there may be established some satisfactory unit of product, the
direct factory expense items may usually be separated so that
(as far as this part of the burden is concerned) each department
will bear its proper share. The indirect factory, administration
and selling expenses may then be distributed in a more or less
arbitrary way, on the basis of the value of departmental product,
the number of men employed, or by different bases for different
items of burden.

As an example, let there be three departments. The first
turns out 1000 kegs of nails and employs 100 men. Its costs
are, for labor, materials, direct expense and " factory expense
(direct)," $1200. In the second department, the figures are
1500 kegs of spikes, 75 men, $2250 cost; and in the third, 500
kegs of staples, 50 men, $600 cost. Let the "indirect factory,"
" selling" and " administration" expenses aggregate $4500, and
let the basis for distribution of these be the number of men
employed. The total number of men being 225, the burden
per man is $4500 -r- 225 = $20, and the departmental burdens are
respectively $2000, $1500 and $1000. The departmental costs

74 WORKS MANAGEMENT

corresponding then total $3200 or $3.20 per keg, $3750 or $2.50
per keg and $1600 or $3.20 per keg.

UNIT DIVISION

If the total production is 100,000 units, the direct cost $1000
and the indirect cost $500, the total cost is obviously $1500 or
1 1/2 cents per unit. If — as in a linseed-oil mill — there are
made various special products in addition to the principal
staple, then some of the burden should be placed upon these
specialties. An analysis of direct costs might show a cost per
gallon for raw oil in tanks of 40 cents, the cost in barrels being
42 1/2 cents. Suppose 500,000 gallons of each to have been
produced, and that the whole burden is $5000. It would not be
fair to add 1/2 cent per gallon to the cost of each kind of oil to
absorb the burden, for the oil in barrels has required not only
all of the equipment, indirect labor and supervision of the tank
oil: it has in addition required special expenditure of its own in
these directions. To some extent, these expenditures may be
ascertained; we may compute, for example, the cost of light,
heat and power for the cooperage shop; but administrative and
selling expenses cannot be ascertained separately, and about the
only practicable basis for distribution would be to burden each
class of oil in proportion to its aggregate direct cost.

If the burden of $5000 were found to consist of $1000 clearly
applicable to barreled oil, with the remaining $4000 undivisible,
the total costs would then be computed as follows:

TANK OIL

Direct cost, 40 cents; aggregate cost, $200,000. Since the
aggregate cost of the barreled oil is $212,500, tank oil must carry

200 000

of the joint burden of $4000, or $1939.39, amounting to

4 l^,

$0.003879 per gallon.

The total cost of tank oil per gallon is then 40.3879 cents.

BARRELED OIL

Direct cost, 42 1/2 cents; Departmental burden, $1000 or
1/5 cent per gallon; Share of undivisible burden, $4000-
$1939.39 = $2060.61, or $0.00412 per gallon; Total cost per
gallon, 43.112 cents.

BURDEN 75

DIVISION ON THE BASIS OF EQUIVALENT VALUES

Where the factory is neither departmentally organized nor
engaged on staple product (this being the usual condition), the
problem is quite as unsatisfactory of definite solution, and deci-
dedly more difficult to attack. A plant makes a sewing machine,
a bicycle and a plow. The burden is $100. How much of it
shall each of the three things stand?

One method of division is to consider the money values of the
three things: or, what is easier to determine, the costs for labor,
materials and direct expense. Suppose these three charges to
have aggregated $15, $22 and $13, respectively: a total of $50.
The burden then amounts to $2.00 per $1.00 of direct charge.
It would be applied, then, in the proportions, $30 to the sewing
machine, making its cost $45; $44 to the bicycle, making its

cost $66; and $26 to the plow, making its cost $39; total, $150.

THE DIRECT LABOR BASIS — TIME

A more common system is to apportion burden charges in
proportion to the labor time consumed. If this latter were
30 hours for the sewing machine, 50 for the bicycle and 20 for
the plow, the $100 of burden would amount to $1.00 per hour,
and the burden charge would be distributed to the three products
as $30, $50 and $20, making the total costs (with the direct
costs already assumed) $45, $72 and $33.

THE DIRECT LABOR BASIS — VALUE

Still another way would be to divide the burden on the basis
of labor cost. Suppose the labor costs to have been, respectively,
$6.00, $12.50 and $6.50, totalling $25. The burden is then $4
for each dollar of labor cost, and results in charges of $24, $50
and $26 respectively, making the total costs $39, $72 and $39.

HORSE POAVER AND TIME BASES

The obvious objections to all of these methods of distribution
have suggested others; to which, however, there are objections
scarcely less obvious. Many of the factory expense and other
charges are related rather to the machinery used than to the
men employed. An estimate or measurement of horse-power-

76 WORKS MANAGEMENT

hours consumed by the various machines has been proposed as
a basis for subdividing surcharge. Another plan is to subdivide
on the basis of the time the material is in the works undergoing
fabrication. This latter method virtually regards the sur-
charge as a fixed expense unaffected by shop space conditions.
It makes the cheap, bulky product appear relatively less expen-
sive than the small, costly one. The first mentioned plan is too
unscientific to be worth the expense and trouble it involves.

OBJECTIONS TO THESE SYSTEMS

Not one of these devices for distributing burden in the case
of a diversified output has any relation to the true condition of
things. The cost of power is certainly not as a matter of fact
in any way related to corresponding labor time or labor cost.
The cost of fire insurance is equally without relation to the
number of men employed; that of supervision has no necessary
association with value or cost of product. Certainly the
charge for office salaries does not depend in any way on the power
consumption or use of shop time in producing an item of output.

We must then ask, upon what measurable factors, if any, does
overhead expense depend? Not on any one factor. Heat — to
take an example — is in general1 not necessary for machines,
but for men. Expense for heating the factory is incurred be-
cause men are there. It is entirely logical, then, ^o charge
cost of heating as a surcharge on labor time. That is, if 100
men work 10 hours during which a heating expense of $12.00 is
incurred, we must charge against the production of these men
not only the appropriate wage per hour, but 1.2 cents per man
per hour over and above this, for factory heat alone.

DISCUSSION OF RELATIONSHIPS

Taking up the burden items in the order in which they are
given at the beginning of this chapter, we shall find a large
proportion of the direct factory expense to be thus related to
labor time, or related with equal definiteness to machine time.
Take the case of power. Men do not consume power,2 machines

1 The existence of an automatic sprinkler system in some cases involves expenditure for
warming buildings that would not otherwise be heated.

2 A heating or ventilating fan, or a passenger elevator, might consume power chargeable
.against labor time.

BURDEN 77

do. If we know the amount of power (horse-power-hours)
consumed by each machine, during a month, and also the total
cost of power during that month, we may obtain an hourly
rate of charge for power on each machine. In many cases
this may be once determined experimentally — or at least
the relative proportions of power consumed by the various
machines may be so ascertained. As this is a subject of a
little complication, we will here consider a rather elaborate
illustration.

Suppose the plant to contain three machines, which during
a trial month consume 4000, 8000 and 18,000 horse-power-
hours respectively. The corresponding numbers of hours run
are 400, 200 and 300, so that the horse-power loads on the
three machines are 10, 40 and 60. Suppose the output of the
power plant during the month to have aggregated 35,000
horse-power-hours. This is somewhat more than the total
power consumptions 'of the three machines; the difference rep-
resents power wasted in transmission, or used for running-
non-productive machines like cranes, etc., and this difference
must be of course absorbed in the charges to the productive
machines.

Let the cost of power for the month have been $1200. The
cost per horse-power-hour of that portion of power employed in
production was then $ 1 200 -f- 30,000 = 4 cents. We shall charge
the first machine with 4x10 = 40 cents, per hour run, or with
$160.00 for the month; the second, with $1.60 per hour run
or $320. 00 for the month; and the third with $2 . 40 per hour run
or $720.00 for the month.

An important point should be mentioned here. We now
handle these power charges as direct charges, exactly like
labor — charging each job at so much per hour for machine
time as well as for man time. Machine time, as we shall
find, involves costs additional to that of power. The basis
for charges of machine time will be derived from the time
cards or piece work slips (see Chapter IV), which will always
give the number and time of the machines employed on a
given order.

Now in a following month, we may, unless the power loads
on the machines are quite variable, use the hourly power loads
already determined as a basis of subdivision. We need make
no further record of power consumption at the individual

78 WORKS MANAGEMENT

machines — the only data necessary are the machine times
chargeable.

Suppose the power cost in the succeeding month to be $1550;
the machine times to be, respectively, 300, 400 and 200. Based
on the horse-powers formerly ascertained, the respective
power consumptions (horse-power-hours) are 300X10 = 3000,
400X40 = 16,000 and 200X60 = 12,000; making a total of
31,000. The cost per horse-power-hour is now $1550 -=-3 1,000 =
5 cents. The machine power rates are:

No. 1, 50 cents per hour, $150 for the month;
No. 2, $2.00 per hour, $800 for the month;
No. 3, $3 . 00 per hour, $600 for the month.

$1550

The original measurement of power consumption is easily
made, in the case of motor-driven machines, by a recording
electrical instrument.

Rent. — This is paid to provide space for both men and
machines. In a department which is without (or largely
without) machines, it may be charged wholly against labor time.
In a department full of machines (like an ordinary machine
shop) where a man works as tender to a machine, it should
constitute a part of the machine time charge. In other cases
a more or less arbitrary division may have to be made, part of
the rental cost being distributed in proportion to labor time
and part in proportion to machine time.

Light is clearly chargeable against labor time.

Foremen and supervisors are partly in charge of men and
partly (the shop engineering and repair force) in charge of
machines and buildings. The cost of the first class constitutes
a charge against labor time. The repair and maintenance
supervision cost is related partly to machine time, and partly
to investment in machines and buildings. Probably the best
way of handling it is to regard it as a surcharge on distributed
repair costs, the basis for division being those costs themselves.
Thus, suppose the shop engineer and assistants to receive $1000
per month, and the cost of repairs to have totaled $5000: $1200,
$1800 and $2000 for three machines, respectively. We add
1/5 to each of these figures, making them $1440, $2160 and
$2400, to absorb the supervision charge.

BURDEN 79

Repairs and Replacements. — What has just been said will
suggest that these expenses should when possible be charged
against individual machines. When a non-productive machine
is repaired, the cost should be absorbed in the same way as that
of power for such a machine, by the charges against productive
machines. When a building is repaired, the cost must be ab-
sorbed as a charge like rent, by machines or men or both.

Non-productive Labor. — Such workmen as sweepers, watchmen
and to a certain extent general laborers cannot in all cases
charge their time to specific production orders. (Power house
employees' time is charged against power: repair workmen
charge their time to repairs). To some extent these labor costs
may be clearly applicable to labor time, as where a gang of men
is engaged in bringing parts to an assembly room; or to machine
time, as with a crane operator (the machine is of course non-
productive in this case). Where there is residual doubt as to
whether a non-productive labor charge should be placed against
labor time or machine time, it must be treated as one of the
final indirect expenses, as described below.

Depreciation applies directly against machine time only;
indirectly (depreciation of buildings containing no machinery)
it may apply against labor time. Further consideration of this
important topic will be given in the next chapter.

Insurance is of several kinds: fire, boiler, employees' liability,
plate glass, etc. Fire insurance covers buildings, machinery,
raw and finished material. If that on buildings is separately
kept, it may be treated like rent. Other forms of fire insurance
are grouped in the final indirect expenses. Boiler insurance is
a cost chargeable against power. Employers' liability insurance
is clearly related to labor time.

Taxes are treated like rent.

Final indirect expenses include, besides the few refractory
costs already mentioned, all indirect factory, selling and ad-
ministration charges. They are lumped and distributed as a
percentage surcharge on the otherwise prime cost (in some few
cases, on the labor cost only) .

RECAPITULATION

The following table then shows what becomes of the listed
items of surcharge, and the distribution of elements constituting

WORKS MANAGEMENT

cost in the light of the present discussion. The list is of course
incomplete.1

f Direct labor.
Materials, (a) stock, (b) \ = Initial prime cost.

special.
Direct expense.

Total cost.

Distributed burden:
Charged against labor +
time.

Corrected
prime
cost.

Distributed burden:
Charged against machine
time (productive ma-
chines only).

Distributed burden:
Charged against corrected

prime cost (or labor

cost) .

Wasted time.
Taxes (part).
Heat.

Depreciation (part).
Light.

Foremen and supervisors.
Employers' liability insurance.
Rent (part), fire insurance on build-
ings (part).
( Non-productive labor (part) .

Power, boiler insurance.
Repairs and replacements.
Repair supervision.
Depreciation (part).
Rent, taxes (part of each) .
Non-productive labor (part) .
[ Fire insurance on buildings (part) .

Fire insurance, excepting on buildings.

Non-productive labor (part).

Factory indirect expenses.

Selling expense.

Administrative expense.

Spoiled work.

Standard patterns, tools, jigs and templates.

Designing and development expense.

1 The following is the list or standard classification of factory burden expenses adopted
by one large corporation:

Maintenance of Property Expenses. — Main buildings; other structures; drainage and sewer
pipes; tracks, trestles and turntables; roadways and grounds; permanent shop fixtures;
warming and ventilating system; engines and pumps; accumulators and gas producers;
boilers; electric plant; electric motors; oil, heating and melting furnaces; gas, heating and
melting furnaces; coal, heating and melting furnaces; steam, gas and water pipes; pneumatic
pipes and fittings; hydraulic pipes and fittings; cranes and conveying machinery; fixed
machine tools; foundations and installation of tools; shafting, hangers and pulleys; belting,
renewals; belting, supplies; belting, labor; portable power tools; portable tools, durable;
portable tools, non-durable; formers and cast iron dies; cast steel dies; metal flasks; rolling
stock; fire protective equipment; miscellaneous property.

Other Indirect Factory Expenses. — Foremen and assistants; power, heat and light: fuel,
handling, purchased, supplies, engineers and firemen; other engineers and firemen; water
supply; inspectors; watchmen; oil; waste; car rental and detention; testing material; ship-
ments of patterns ; wooden flasks and templates ; cartage expenses ; stable expenses ; defective
shop work; defective work corrected outside; defective purchased material; drawing room
errors; changes conceded to purchasers; loss on obsolete material; shop supplies; shop
expenses; unloading incoming material; other handling of material; storeroom attendants;
toolroom attendants ; oilers ; unclassified labor ; superintendence ; special mechanical experts ;
shop engineering; traveling engineers; production department, clerical; standardizing engi-
neering; charts and diagrams, clerical expense; accounting, clerical expense; storekeeping,
clerical expense; purchasing, clerical expense; other office clerks and attendants; other shop
clerks ; drawing room expenses ; hastening incoming material ; telegraph expenses ; telephone
expenses; plant traveling expenses; stationery and printing; repairs of plant office furniture
and appliances; injuries to persons; legal expenses; donations and gratuities; taxes; insur-
ance on^property; other plant office supplies; other plant expenses.

BURDEN 81

An examination of this table will show that there may be some
justification for charging a customer 60 to 80 cents per hour
for the time of a workman to whom we actually pay in wages
only 30 or 40 cents. If we remember that interest charges have
not been included here (the percentage of profit may be regarded
as a substitute for interest) we may also understand why ma-
chine time charges of 50 cents and upward per hour are not
uncommon.

OBJECTIONS TO THE DEFINITE SYSTEM

This method of distributing surcharge is as definite, logical
and complete as any system could be. The objection to it is
on the ground of its complication. As a matter of fact, it is
complicated .to devise and first apply, but simple in its con-
tinued application after having once been inaugurated. If it
is worth while to study costs at all, it is worth while to pursue
the study until our knowledge is accurate. It may easily take
two or three years to get a system like this in working order; it
may need frequent modification and revision. Hard and fast
rules cannot be laid down; and in all cases some simplification
is permissible.

CHAPTER VII
DEPRECIATION

There is one item of surcharge for which no invoice is received :
an element of cost which may be forgotten, or at least inade-
quately estimated. Fortunately, however, when this cost — depre-
ciation— is ascertained, there is never any question as to its dis-
tribution. It applies to specific pieces of material equipment.
If these are productive machines, depreciation is a part of the
machine time rate. If they are non-productive machines,
buildings or structures, depreciation may be distributed in the
same way as rent.

Depreciation^ a charge against production intended to offset
the progressive decrease in value of equipment which experience
shows to be universal. Suppose a plant to be built for a million
dollars; and to run ten years, paying its owners $60,000 each
year, accumulating no surplus or reserve funds. It is then put
on the market for sale; but the highest price that can be obtained
for it is $250,000. The owners thought they had made $600,000;
what they had really lost was $150,000. They were paying the
cost of depreciation out of their resources instead of out of their
profits. Depreciation is unavoidable; it is a part of the cost of
operation; our only option is to pay it out of resources or out
of profits.^The latter is the only safe plan.1

1 In this respect, the interests of the bond holders of a manufacturing concern may differ
from those of the stockholders. The latter may be regarded as partners in the business
enterprise; the former virtually (often actually) hold a mortgage on the physical property.
The stockholder wants his dividends; he may wish to sell out at any time, and few things keep
up the price of stock like a steady dividend record. The bondholder cares comparatively
little about dividends, or even about profits in excess of bond interest requirements. He
is more interested in seeing the value of the plant maintained so that if he should ever
have to foreclose his mortgage he may be able to realize on it. The stockholder may try
to ignore depreciation and to declare dividends not really earned; the bondholder prefers
to see earnings "put back into the property." The latter would pay for depreciation out
of profits; the former might seek to pay for it out of resources. Large investors feel that
their bond holdings are safest only when they have adequate stock holdings in the same
enterprises. Many conflicts in management have arisen from the diverse interests of bond
and stock owners. It must be remembered that ownership of a bond gives its holder no
voice in the control of a business. The trust deed under which bonds are issued may,
however, impose certain restrictions on the management.

DEPRECIATION 88

REASONS FOR DEPRECIATION

For a novice, it is not easy to understand why a machine or
structure "kept in good repair" should depreciate. A new
machine is installed. Expenditure for repairs, slight at first,
after a time rapidly increases; it may then become more or less
steady for a long term of years, the machine meanwhile regularly
operating. At some time or times in the history of the machine
a costly change or replacement of parts may be necessary, a
virtual rebuilding perhaps, and finally, in every case, like the
"one hoss shay" the machine becomes no longer a synthetic
structure. No replacement of parts short of an entire recon-
struction— the building of a new machine — can maintain it as a
productive entity. It has reached the "final renewal" stage, and
is itself scrap, as far as its present owners are concerned.

There are three causes of depreciation:

(a) The action of time and the elements;

(b) Necessary or unnnecessary wear in service;

This last factor is the most difficult of prediction. A machine
may last a long time — perhaps a thousand years; but ultimately
these three causes will operate to destroy it.

SYSTEMS OF DEPRECIATION

Since no invoice is ever received to remind us of this expense,
it is particularly necessary that we adopt a system, as nearly as
possible automatic in its operation, whereby attention may be
called to the matter and the proper charges made.

To some moderate extent, expenditures for repairs offset de-
preciation; and if, as is universal practice, current repairs are
charged against cost of operation, a part of the depreciation
cost will be taken care of in this way. "Deferred repairs" or
replacements — large expenditures for maintaining the condition
or operating efficiency of the plant — are sometimes so costly
that the manager hesitates to charge them immediately against
operation; they may result in a "bad showing" for the month
during which they are charged. It is therefore sometimes the
practice to distribute the charge over a series of months,
depending on the anticipated life of the replacement or the
duration of the economy due thereto. For example, suppose

84 WORKS MANAGEMENT

during 6 months of the year the profits have aggregated
$50,000. In July, there is an apparent profit of $8000,
but during this month an old steam engine is replaced by
a new one, costing $12,000. If this $12,000 were at once charged
against operation, the month of July would show a loss of $4000.
The manager may, consequently, order the distribution of the
$12,000 charge over the balance of the year — $2000 each month.
The July profits will then appear as $6000. This is a quite com-
mon practice, although not one to be regarded as conservative.

In this illustration, we have not regarded the new steam
engine as adding to the value of the plant, since it takes the
place of another engine which goes to the junk pile. It has not
increased the potential output of the works one iota, and cannot
therefore be regarded as an "improvement," which might be
associated with an increase in capitalization and not charged
against cost of operation. Nor have we regarded the case as
one of the replacement of a properly depreciated machine for
the replacement of which we have funds on hand, set aside
out of the earnings of past years in anticipation of this very
emergency.

Final renewals eventually become necessary because of de-
preciation. Four methods may be suggested for paying for
them: First, we may wait until they do become necessary and
then pay for them either out of the current month's profits or by
distributing the cost over several future months, borrowing
from our surplus, as in the case of the steam engine, just cited.
Either method involves the borrowing of money or the retention
of an adequate surplus in the treasury. With these disadvantages,
this method of caring for final renewals is not uncommon. The
vital objection is that eventually there comes a time when re-
newals become excessively frequent and costly. The industry
will then be wrecked unless its resources or surplus are very large;
and if they do happen to be very large, it is probably because
this condition of things has been anticipated, the surplus having
been accumulated as a depreciation reserve; for which very
reserve, scientifically adjusted and accumulated, the advocates
of another method presently to be described contend.

A second common method is this: No great surplus is accu-
mulated, and no systematic effort is made to forcast depreciation;
but liberal expenditures are constantly made for the extension,
enlargement and improvement of plant, these betterments

DEPRECIATION 85

being paid for, not by increasing capitalization, but out of earn-
ings. If in the example of the million-dollar plant referred to
the $600,000 profits had been distributed after the expenditure
of $850,000 for betterments, possibly the value of the plant after
its 10 years of operation might have been still a million dollars.
Its apparent profits would then have been real profits.

This system reminds one of a man who refuses to give his wife
a regular allowance, but occasionally when' in good humor hands
her a check or orders flowers and candy sent to the house. There
is nothing scientific about it. It may be safe, if the improvement
expenditures are liberal and judicious; but to determine as to
their liberality and judiciousness involves the same knowledge
of the facts of depreciation that is needed for a far more logical
system.

A third method employed (whether avowedly or not) by
some large corporations is as follows: The management and the
insiders generally wish to retain their positions. This is easy,
providing the stockholders in general are kept satisfied by the
regular payment of dividends and accumulation of surplus.
Every effort is therefore made to keep the dividend rate con-
stant. Each year, a reserve for depreciation is set aside; and
the amount of reserve is that amount which the year's business
"will stand/7 If earnings have been low, little or no addition
will be made to the reserve.

If earnings have been high, the reserve fund will be heavily
augmented. The plan has some attractive aspects: it seems to
care for the income of the "widow and orphan" stockholders as
a prime consideration. But in reality it cares for their income
at the hazard of their capital. It puts first what should come
second; and is unsafe excepting for very prosperous corporations
in industries having no protracted periods of depression.

Whai> may be called the definitive method of depreciating is
not at all common: less common, no doubt, in this country than
in England, where the accountancy of depreciation is carefully
studied and practised.

In this method, the cost of depreciation is an annual charge
against earnings, fixed by estimating the probable life of each
unit of material equipment. The sum of money thus charged
off and laid aside as a depreciation reserve is that sum which,
invested at compound interest, will accumulate in such amounts
as will suffice to replace the units of equipment as their lives expire.

86 WORKS MANAGEMENT

DEPRECIATION RATES

The basis of the depreciation rate is the number of years of
anticipated life. The simplest plan is to consider that the loss
in value will be the same each year throughout the life; so that
a 20 years' life to total worthlessness would involve (ignoring
interest) a charge of 5 per cent, on the initial cost of the machine
each year. What is sometimes referred to as "5 per cent,
depreciation" may have a different meaning, as follows:

Initial value, $1.00; depreciation first year, 5 per cent, of $1.00
= 5 cents, leaving residual value 95 cents; depreciation second
year, 5 per cent, of 95 cents = 4 3/4 cents, leaving residual value
90 1/4 cents; and so on.

It is seldom the case that the equipment is without value at
the end of its productive life. It may be sold, as second hand
machinery or material, or as scrap. In a few instances, however,
the residual value is negative. A marine boiler, for example,
at the end of its life, might be worth less than the cost of remov-
ing it from the hull of the vessel; so that the junk man would
have to be paid for taking it away. The ''initial cost" to be
considered as a basis for depreciation will in such case exceed
the sum of money actually paid for the boiler in the first place.
In ordinary cases, the annual charge will be less than the quo-
tient of initial cost by years of life. If the life is 20 years and
the residual or scrap value 10 per cent, of the initial cost, the
proportion of the initial cost to be annually charged against
earnings for depreciation will be (100—10) -=-20 = 4 1/2 per cent,
(interest being ignored) .

In the case of an industry using leased premises, where all
material equipment reverts to the owner at the expiration of the
lease, the maximum life of any unit cannot exceed the prospective
duration of the lease, and there is no residual value.

The estimate of probable life of various kinds of machinery
and structures is a matter for the expert. Various tables and
opinion have been published.

An English authority gives the following figures :

Electric generators, 30 years life to 8 per cent, residual value.
Electric motors, 25 years life to 9 per cent, residual value.
Armored cables, 35 years life to 15 per cent, residual value.
Storage batteries, 15 years life to 0 per cent, residual value.
Arc lamps, 12 years life to 0 per cent, residual value.
Lamp posts, 40 years life to 0 per cent, residual value.

DEPRECIATION 87

Electrical instruments, 12 years life to 0 per cent, residual
value.

Water tube boilers, 25 years life to 5 per cent, residual value.

Steam engines, 25 years life to 6 per cent, residual value.
The reports of 13 large street railway companies in 1909 showed
the whole depreciation charge to have varied from 0.7 to 13.7
per cent, of gross earnings.

The possibility of early obsolescence through the introduction
of improved machinery must be carefully considered in fixing
probable life. New and unfamiliar machinery is usually heavily
depreciated because it is felt that important improvements are
likely to be made at an early date. Probably the safest estimates
on life duration are those made on live stock — horses, for
example. Small portable tools are depreciated heavily. De-
preciation rates in general are higher than they formerly were.

The estimates of probable life may be (probably should be)
revised every year. Thus, if on the basis of 20 years life of a
machine initially costing $100 we are charging off $5 each year
(scrap value and interest are here ignored), and if after 10 years
we find that the machine is likely to wear out or become obsolete
in 2 years more, we charge off $25 instead of $5 during each of
those remaining two years. On the other hand, if the life
promises to exceed the original estimate, we will decrease the
charge. It is quite possible that after the expiration of the
predicted life term a machine may go on operating for some
years, with no depreciation charge against it. The machine is
carried on the books as scrap; interest earned by its proportion
of the depreciation reserve fund will be "velvet."

THE DEPRECIATION FUND

Having determined the probable loss of value in the term of years
representing the anticipated life of the machine, we must now ascer-
tain what sum of money must be set aside annually in order that it
may eventually equal the sum representing the loss of value.

This depends upon the rate of interest and the frequency of
compounding. Tables are available for the purpose, but the
following formula makes a table unnecessary.

.r - 1

where A is the annual appropriation, in dollars, n is the number
of years of life (compounding assumed to be annual) , r is 1 plus
the fraction indicated by the probable rate of interest; i.e., if

88 WORKS MANAGEMENT

the interest rate is 4 per cent., r = 1.04; and S is the loss in value
in dollars to be offset by the annual appropriation A. Thus,
a machine costing $100, with a residual value of $10, would give
S = $90. If the life is 10 years, and interest costs 4 per cent.,
r = 1.04 and

rn-l
0.04 0.04

04 04802 '

whereas if the reserve fund had not been compounded, the
annual charge would have been $9.00.

The determination of the rate of interest to be assumed in this
computation is a problem for the banker. No small degree of
judgment is involved in fixing upon a rate which shall be fair
and yet conservative over a period of years to come. It is of
course possible to revise the rate from time to time, just as
estimated life rates may be revised. In the example with which
we are dealing, suppose it to be concluded, after 5 years, that a
rate of 5 per cent, instead of four may hereafter be safely
assumed. The present accumulated reserve for depreciation is
first ascertained. This is to go on accumulating interest for
5 years more at 5 per cent.; let the amount which will be thus
realized be called x. Then the amount to be realized by further
annual appropriations is 90 - x, and

from which A, the revised annual appropriation necessary,
may be computed. It will of course be somewhat less than
$7.49 1/2.

BETTERMENTS

While this is a satisfactory system from an accounting stand-
point, though somewhat complicated in application, it is not
yet complete from the manager's point of view. A vital question
with him is the distribution of the depreciation reserve. It is
intended to be used, when the machines wear out, for their re-

1 To evaluate an expression like 1 . 0410, we must employ a table of logarithms. To
multiply two numbers, we add their logarithms; the sum is the logarithm of the product.
To raise a number to any power, we multiply the logarithm of the number by the exponent;
the product is the logarithm of the required quantity. Thus: -

log 1.04 = 0.017033

(log 1. 04) X 10 = 0.17033 = log (1.4802 — 1.04").

DEPRECIATION

placement; and unless so used it is idle money: the plant will
gradually become less productive on account of the presence of
worn-out equipment.

ANNUITY TABLE1

Giving yearly payments in dollars required to redeem $100 at end of any
year from 1 to 100. Interest compounded annually.

Life,
years

Rate of interest

Life,
years

24%

34%

44%

100.00 ! 100.00

100.00 100.00

100.00

49.38 ; 49.26

49.14 49.02

48.90 48.78

48.54

32.51 32.36

32.19 32.03

31.88 31.72

31.41

24.08 ! 23.90

23.73

23.55

23.37

23.20

22.86

19.02 18.84

18.65 18.46

18.28 18.10

17.74

15.65

15.46

15.27 15.08

14.89

14.70

14.34

13.25

13.05

12.85 12.66

12.47

12.28

11.91

11.45

11.25

11.05 10.85

10.66

10.47

10.10

10.05

9.84 9.64

9.45

9.26

9.07

8.70

8.93

8.72 8.52 ; 8.33

8.14 7.95

7.59

. 11

8.01

7.81 7.61 7.42

7.23 7.04

6.68

7.25 7.05 6.85

6.66

6.47

6.28

5.93

6.60 6.40 6.21

6.01

5.83

5.65

5.30

6.05 5.85 5.66

5.47

5.28

5.10

4.76

5.58 5.38

5.18

4.99

4.81

4.63

4.30

5.16 4.96 4.77 4.58

4.40

4.23

3.90

4.79 ! 4.60 i 4.40 j 4.22

4. Q4

3.87

3.54

4.47 ' 4.27 4.08

3.90

3.72

3.55

3.24

4.18 3.98 3.79

3.61

3.44

3.27

2.96

3.91 3.72 1 3.54

3.36

3.19

3.02

2.72

3.68 3.49 3.30

3.13

2.96

2.80

2.50

3.46 3.27 3.09

2.92

2.75

2.60

2.30

3.27 3.08 2.90

2.73

2.57

2.41

2.13

3.09

2.90 2.73

2.56

2.40

2.25

1.97

2.93 2.74 2.57

2.40

2.24

2.10

1.82

2.78

2.59

2.42

2.26

2.10

1.96

1.69

2.64

2.46 2.29

2.12

.97

1.83

1.57

2.51

2.33 2.16

2.00

.85

1.71

1.46

2.39

2.21

2.04

1.89

.74

1.60

1.36

2.28 2.10 1.94

1.78

.64

1.51

1.26

2.17 2.00

1.84

1.69

.54

1.41

1.18

2.08 1.90

1.74

1.60

.46

1.33

1.10

1.99 1.82

1.66

1.51 1.37

1.25

1.03

1.90

1.73

1.58

1.43

1.30

1.18

0.96

1.82

1.65

1.50

1.36

1.23

1.11

.90

1 Reproduced by permission from Lecture Notes on Business Features of En-
gineering Practice (Second Edition, Revised) by President A. C. Humphreys.

WORKS MANAGEMENT
ANNUITY TABLE.— Continued.

Life,

Rat

B of interes

Life,

years

2*%

3i%

4*%

years

1.75

1.58

.43

1.29

1.16

1.04

.84

1.67

1.51

.36

1.22

1.10

0.98

.79

1.61

1.45

.30

1.16

1.04

.93

.74

1.54

1.38

.24

1.11

0.99

.88

.69

1.48

1.33

.18

1.05

.93

.83

.65

.43

1.27

.13

1.00

.89

.78

.61

.37

1.22

.08

0.95

.84

.74

.57

.32

1.17

.03

.91

.80

.70

.53

.27

1.12

0.99

.87

.76

.66

.50

.23

1.08

.95

.83

.72

.63

.47

.18

1.04

.91

.79

.68

.59

.44

.14

1.00

.87

.75

.65

.56

.41

.10

0.96

.83

.72

.62

.53

.39

.06

.92

.80

.69

.59

.50

.37

.03

.89

.76

.66

.56

.48

.34

.99

.85

.73

.63

.53

.45

.32

.96

.82

..70

.60

.51

.43

.30

.93

.79

.67

.57

.48

.41

.29

54.

.89

.76

.65

.55

.46

.39

.27

.87

.73

.62

.52

.44

.37

.25

.84

.71

.60

.50

.42

.35

.24

.81

.68

.57

.48

.40

.33

.22

.78

.66

.55

.46

.38

.31

.21

.76

.64

.53

.44

.36

.30

.20

.74

.61

.51

.42

.35

.28

.19

.71

.59

.49

.40

.33

.27

.18

.69

.57

.47

.39

.31

.26

.17

.67

.55

.45

.37

.30

.24

.16

.65

.53

.44

.35

.29

.23

.15

.63

.51

.42

.34

.27

.22

.14

.61

.50

.40

.32

.26

.21

.13

.59

.48

.39

.31

.25

.20

.12

.57

.46

.37

.30

.24

.19

.12

.56

.45

.36

.29

.23

.18

.11

.54

.43

.35

.27

.22

.17

.10

.52

.42

.33

.26

.21

.16

.10

.51

.41

.32

.25

.20

.15

.09

.49

.39

.31

.24

.19

.15

.09

.48

.38

.30

.23

.18

.14

.08

.47

.37

.29

.22

.17

.13

.08

.45

.35

.28

.21

.16

.13

.07

.44

.34

.27

.21

.16

.12

.07

.43

.33

.26

.20

.15

.11

.06

.41

.32

.25

.19

.14

.11

.06

.40

.31

.24

.18

.14

.10

.06

DEPRECIATION
ANNUITY TABLE.— Continued.

Life,
years

Rate of interest

Life,
years

3*%

41% 5%

.39

.30

.23

.17

.13

.10

.05

.38

.29

.22

.17

.13

.09

.05

.37

.28

.21

.16

.12

.09

.05

.36

.27

.21

.15

.11

.08

.05

.35

.26

.20

.15

.11

.08

.04

.34

.26

.19

.14

.10

.08

.04

.33

.25

.18

.14

.10

.07

.04

.32

.24

.18

.13

.10

.07

.04

.31

.23

.17

.13

.09

.07

.03

90 .30 .23

.17

.12

.09

.06

.03

91 .30 .22

.16

.12

.08

.06

.03

.29 .21

.15

.11

.08

.06

.03

.28 i .21

.15

.11

.08

.05

.03

.27 .20

.14

.10

.07

.05

.03

.26 .19

.14

.10

.07

.05

.02

.26

.19

.13

.09

.07

.05

.02

.25

.18

.13

.09

.06

.04

.02

•98

.24 .18

.12

.09

.06

.04

.02

.24 .17

.12

.08

.06

.04

.02

100

.23

.16

.12

.08

.06

.04

.02

100

EXPLANATION OF TABLES

The Annuity table shows what sum of money must be invested each
year in order that the accumulations, at a stated rate of interest, com-
pounding being annual, may amount to $100 at the expiration of any
number of years from 1 to 100. Thus, for this case considered on page 96,
we wish to know the annual investment at 4 per cent, necessary to realize
$90 at the end of 10 years. The table shows that at 4 per cent., $8.33
would redeem $100 in ten years; consequently, to realize $90 we should
have to set aside, as computed in the text, $7.49| = $8.33 X T\V

The compound interest table may be used to determine the amount of
accumulations of such depreciation fund at any given time. Thus, in the
instance discussed, $1 invested at 4 per cent, would in 5 years become
$1.2167. Proceeding, we write

$1 invested 5 years at 4 per cent. = $1.2167
$1 invested 4 years at 4 per cent. = 1.1699
$1 invested 3 years at 4 per cent. = 1.1249
$1 invested 2 years at 4 per cent. = 1.0816
$1 invested 1 year at 4 per cent.= 1.0400
Total accumulations from $1 annually, in 5 years = $5.6331

The accumulations from an investment of $7.49| annually will then be
$7.49£ X 5.6331= $42.20. Consider now the problem suggested at the

92 WORKS MANAGEMENT

EXPLANATION OF TABLES — Continued

bottom of page 96. The table shows that $1 in 5 years at 5 per cent,
will realize $1.2763. Our accumulation of $42.20 will then realize
$42.20 X 1.2763= $53.87. (This is the amount called x in the formula.)
We have now to realize $90.00 -$53.87= $36.13, in the next five years, at
5 per cent. The annuity table shows that to realize $100 we should have
to set aside $18.10 annually. We shall actually have to set aside
$18.10 X 0.3613= $6.54, which should be equal to the value of A obtained
in solving the formula at the bottom of page 88.

DEPRECIATION

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DEPRECIATION

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DEPRECIATION 97

In general, when a machine is replaced, the effort will be
made not only to fill its place, but to put in something better —
more substantial or economical. This " something better" may
cost more than the loss of value of the machine; so that the
depreciation reserve fund may be insufficient to pay for the
new machine. No matter, it was not the object of this fund
to pay for betterments, but merely to insure the maintenance
of the plant at its original value. If betterments are contem-
plated, they may profitably be paid for by increasing capitali-
zation, for they increase the worth of the plant. But only
the increased expenditure should be regarded as a basis for new
capitalization. If the depreciation accumulations are $90 and
the scrap value $10, while the replacement machine costs $200,
just half of this latter sum will be paid for out of the depreciation
reserve and the scrap sale proceeds; only the balance of $100
will be covered by increase of capitalization.

In many cases of minor betterment, no formal "increase of
capitalization" is made. The procedure is merely (for example)
to take the needed $100 from the cash surplus on hand, account-
ing for it hereafter by adding $100 to the estimated physical
value of the plant, which has been enlarged to this extent. The
betterment expenditure of $100 has thus been charged to capital
instead of to earnings.

Obviously, there is a broad opportunity here for evidence of a
disposition varying anywhere from the safely conservative to
that of a gambler. In general, no charges will be made to
capital unless the "betterment" is one which actually increases
output or decreases cost. Even this last condition is not
deemed sufficient by the most conservative managers.

A corporation may occasionally seek to conceal its profits by
excessive provision for depreciation, the funds thus created
being put back into the plant in the form of replacements and
extensive betterments. Where there is no "graft" in contracts
or orders for betterments, this practice is of course financially
sound, although stockholders might prefer a fuller distribution
of earnings. But from the standpoint of the consuming public
it is beginning to be felt that earnings should not be hidden in
this way: that after a fair provision for depreciation has been
made, and a reasonable profit paid to the owners of the business,
any further surplus should be wiped out by a reduction in price
to the consumer.

WORKS MANAGEMENT

The following table (from Industrial Progress) gives a few examples of betterments paid
for out of earnings:

RETURN INTO PROPERTY FROM INCOME

Company

Kind of service

Year ending

j
Per cent, of
gross earnings
put back into
property as
betterments

United States Census, 1907.

939 electric railway com-

Dec. 31, 1907..

17.1

panies including small

amount of electric light.

United States Census, 1902.

799 companies, all electric

Dec. 31, 1902..

17.4

railways, including some

electric light.

State of N. Y.— D i s t r i c t

Electric railways

June 30, 1907.

11.7

No. 1.

State of N. Y.— District

Electric railways

June 30, 1907..

19.9

No. 2.

State of Massachusetts

Electric railways .

Sept. 30, 1908.

15.3

United Rys. and Elec. Co.,

Urban and suburban rail-

Dec. 31, 1908..

21.7

Baltimore.

way.

Brooklyn Rapid Transit Co.

Surface and elevated rail-

June 30, 1909. .

19.3

way.

International Tract. Co.,

Urban, suburban and inter-

Dec. 31, 1908..

19.3

Buffalo.

urban railway.

Twin City Rapid Transit Co.

Urban and suburban rail-

Dec. 31, 1908..

18.1

way.

Kansas City Ry. and Lt. Co.

Railway and electric light. .

May 31, 1908...

17.8

Boston Elevated Railway...

Surface, elevated, subway

Sept. 30, 1909.

18.6

railway.

American Cities Ry. and Lt.

5 electric railway and light

Dec. 31, 1908..

14.9

Co.

companies, Birmingham,

Memphis, Little Rock,

Knoxville and Houston.

Capital Tract, Co., Wash-

Urban and suburban rail-

Dec. 31, 1908..

14.1

ington.

way.

Philadelphia Rapid Transit

Surface, elevated, subway

June 30, 1909..

9.7

Co.

railway.

Great Britain and Ireland. .

Municipal and company

Dec. 31, 1907..

28.7

railways.

Great Britian and Ireland. .

Municipal raihvays

Mar. 31, 1908..

31.2

Great Britain and Ireland. .

Company railways

Dec. 31, 1907..

22.2

Glasgow Corporation Tram-

Municipal railways

May 31, 1909...

42.6

ways.

DEPRECIATION ACCOUNTING

The simple statement of entries to be made on books of record
here given will perhaps be more intelligible to some readers after
examination of the chapter on principles of accounting. In
order to complete the present discussion, however, we cite the
following rules:

DEPRECIATION 99

At the end of each year, set aside the necessary reserve fund
as computed by debiting Loss and Gain and crediting Depre-
ciation Reserve. This sum of money then disappears as a gain
and appears as a liability. When a machine is replaced, pay
for the replacement, crediting Cash and debiting Depreciation
Reserve.1

This latter account is sometimes alternatively entitled Final
Renewal Fund. Depreciation is thus treated as an accruing
liability, like royalties, insurance, taxes, etc. An artificial ac-
count is created to which we assumedly owe certain money held
in the cash drawer or banks. When the money is spent, we
wipe out our debt to this artificial account. Whenever interest is
declared on money credited to Final Renewal Fund, we credit
such interest also to that fund, debiting cash.

1The distribution of depreciation charges against specific production orders may be
effected in the manner described in the preceding chapter.

CHAPTER VIII
INDUSTRIAL ORGANIZATION

The function of management, somewhat narrowly and briefly
stated, is to control and reduce costs. This is the. ideal in view
in any discussion of types, forms arid functions of industrial
organization. The whole of this book is devoted to a presentation
of the conditions of productive efficiency. There are, however,
three important duties in management which may well be em-
phasized here. They are:

1. To produce a development of the plant that will augment
its importance in the field it serves.

2. To conserve the physical value of the works in all of its
parts.

3. To protect the industry, as far as may be, from sudden and
heavy losses.

THE PLANT MUST GROW

An industry is a living thing, and no living thing is in truly
healthful condition excepting as it grows, changes. The manu-
facturing plant is seldom, and should be never, in settled con-
dition for perfectly standardized operation. If it is not en-
larging, either as a whole or in certain departments, it will be
increasing its output by minor improvements in equipment; or at
least will by such methods be reducing its cost of operation.

The study of industrial investment is then one which the man-
ager must not outgrow. His first care will be that no expen-
ditures are charged to plant improvement which ought to be
charged as repairs against earnings, lest his costs look well now
at the certainty of a serious burden in the future. His expen-
ditures for proposed betterments will be rigorously scrutinized
and recorded and the results weighed. In advance of every
such expenditure, inquiry will be made as to its amount, the
exact benefit to be expected and the time when that benefit will
be realized, and the probable indirect effects of such expenditure

100

INDUSTRIAL ORGANIZATION 101

on every part of the business. After the improvement has been
made the final results will be compared with those anticipated.

Managers — particularly managers who are engineers — are
fond of spending money on equipment which they think will,
after due allowance for interest and depreciation, reduce costs
of operation. It is a difficult thing to say what amount of net
saving must be realized to make the proposed expenditure attrac-
tive. In pure theory, any net saving whatever after all deduc-
tions have been paid would seem to warrant a betterment; but
estimates are so uncertain, conditions so variable, proposed
costs of equipment are so often exceeded and anticipated savings
therefrom so frequently not realized, that some rather large esti-
mated percentage of net saving is usually considered essential.
Many works managers regard 15 to 20 per cent, as not unreason-
ably high. Some ask 25 to 35 per cent. Improvements (and
industrial investments generally) must pay better in the United
States than in most manufacturing countries, because interest
rates are higher here.

There are two classes of betterment: those intended to increase
output, either by the direct addition of machinery or by its
better arrangement and alignment; and those which have in
view a reduction in cost of operation. The latter result is
usually secured as a by-product of improvements of the first class;
and such improvements are, consequently, those to which the
most attention should be devoted.

When it is finally agreed that this or that betterment will pro-
duce some stated saving, it is obvious that every day's failure to
realize such saving means a loss of potential profit. Therefore,
improvements are often installed with such haste that they may
later have to be virtually duplicated; or at least so that they may
require extensive changes and repairs to fit them for satis-
factory operation. We must not be in too much of a hurry to
realize prospective savings. On the other hand, it may be un-
profitable to resort to excessive solidity of construction which
shall either seriously delay the realization of the anticipated
economy, or impair the future flexibility of the plant. The ideal of
a "mill without a repair account" is not necessarily good. English
railways were originally constructed much more substantially,
and at a much greater cost per mile, than American railways.
Operating expenses on the former consumed 60 per cent, of the
gross receipts; on the latter, 90 per cent. But whereas the better

102 WORKS MANAGEMENT

American roads have in the last decade been virtually recon-
structed with increased clearances and weight limits, the cost
of doing this on the English roads, on account of their heavy
masonry structures, would be prohibitive. The latter roads
cannot therefore be made suitable for the heavier equipment
which modern conditions invite.

A large mill was kept down in output to half capacity because
of a four hour overload condition in its power plant. The
suggestion was made that a 250 horse-power steam engine be
installed to overcome this condition; and inquiry was made for
an engine of a highly economical type, on which 4 months was
asked for delivery. The engine finally purchased was some-
what less economical, but it was obtained from stock and was
running within 16 days from the day of decision. The saving in
value of mill time was estimated to be such that it would offset
the difference in fuel consumption of the two engines for 23
years, a period longer than the conservatively estimated life of
either machine.

When a " run down " concern is taken in hand for rehabilitation,
those improvements first made should be, generally, the ones
which will effect the greatest savings. Encouragement is thus
given those who are supplying the money. Naturally, however,
considerations of cost reduction may have to give way to those
of safety or surety of operation. It is necessary to " keep things
running" whether we reduce costs or not.

An improvement looking toward cost economy, to be attrac-
tive, must produce a return at least equal to the profits made on
the business as a whole. If it will not do this, the money might
better be spent in simply enlarging the business. The exception
should be made, however, that in a business subject to great
fluctuations, cost reducing improvements might be preferable to
extensions because they place the industry in a more strategic
competitive position. No one wishes to derive his whole in-
come from low-yielding government bonds; but a few such bonds
mixed with a variety of securities makes the whole mass regarded
as better collateral.

Two points should be especially watched in connection with
improvement expenditures: preliminary estimates should cover
the entire cost of the improvement and related undertakings; and
costs should be totaled frequently during construction so that
early warning may be had in case they are exceeding estimates.

INDUSTRIAL ORGANIZATION 103

THE MANAGER AS A WATCHDOG

The manager virtually holds the property in trust for its
owners. He must be ready to turn it over to them, at any mo-
ment and without notice, in as good condition as when he received
it. The importance of providing for depreciation out of earnings
has been mentioned; and this is one of the principal guarantees
that a conservative manager gives.

Besides machinery, structures and equipment, the physical
property entrusted includes the stocks of raw and finished
materials and of by-products and scrap. These must be inven-
toried, not at their cost (which would seem to be the obvious
way) but at their estimated market value, or (to be conservative)
at some percentage less than that market value. If raw material
were carried on the books at cost, and the price of such material
gradually fell, there might be an ultimate large difference between
book value and actual value. When the plant runs (in a dull
season) at a low output, the unit costs of products are high —
admissibly so, because it is usually better to run at a loss than
not to run. But these products cannot be sold at such high
cost; they must be sold, when sold, at the market price, and
they should be carried on the books, therefore, at market price
rather than cost price. This is the only safe way.

Not merely the good condition of equipment as for exhibition
purposes, but its conservative and effective use are parts of the
watch dog function. The manager must determine (as far as
it is in the province of any individual to determine) whether
the plant shall run 10 hours or 24 hours daily — if the former,
whether the tours shall be 8-hour or 12-hour; whether it shall
run the year round or shall, because of bad business conditions,
lack of storage capacities or other reasons, have its seasonal
shut-downs and consequent periods of disorganization. Twenty-
four hour service reduces fixed cost (interest, taxes, insurance ,
general administration, etc.) per unit of product; but it is not
economical in labor or material because night work is for human
beings necessarily less efficient than day work. The 24-hour
mill will be the one in which fixed charges are important items
in the total cost, in which continuous service is necessary to
the consumer or in which wastes of material occur when opera-
tion ceases. The 8-hour day as compared with the 12-hour day
is apt to lead to a higher cost of labor to the employer and a

104 WORKS MANAGEMENT

lower day's wages to the workman. If coupled with the intro-
duction of a modern system of labor payment, the change from
a 12-hour to an 8-hour day may easily be made without injury
to either. Twelve hours is too long a regular day's work for
any man.

Some industries are fortunate in producing staple commodities
of such small bulk that several months' output may be stored in
times of business depression. Such storage represents cost in in-
terest charges; but the cost may be small in comparison with either
of the two which the industry must face which — because its product
is variable or because it cannot be stored — has to close its doors
in dull times. Tremendous expenses go on, necessarily, whether
the doors are open or closed. Other expenses, like those for
material, are practically eliminated; but the cost of the organi-
zation of employees and their directors must either be nearly
eliminated at great hardship to the men and hampering to the
future of the mill, or else carried on with no production against
which to apply it. This is a dilemma indeed. The decision
must be made with reference to many factors: the probable
duration of the shut down; the inducements offered the men
elsewhere; the degree of skill and training required of the men;
the possibility of utilizing them on such works of repair and
construction as the manager may have courage to undertake, etc.

No expense is so easily reduced by the management as that for
repairs and maintenance. In "hard times," or when attacked
by the public, it is easy for the railways, for example, to produce
immediate large savings in "maintenance of way" and "main-
tenance of equipment" expenditures. But these are frequently
in truth not savings at all. The expenditures have been merely
deferred. Their very postponement will be sure ultimately to
increase them. A manager may refuse to make needed repairs
in order that the cost statements may look well, but the day of
reckoning will come.

INSURANCE

When the manager has done his best to enlarge and conserve
the property, he must still guard against its crippling or destruc-
tion by those fortuitous acts which he can neither foresee nor
prevent. What he cannot guard against, he will insure against;
paying some one, better able to bear the loss, to stand the risk

INDUSTRIAL ORGANIZATION 105

of loss. Certain possible losses of this kind he cannot insure
against. A stupid or malicious employee may produce damage
that is uninsurable; but in few cases can such loss be over-
whelming. Damage by fire, water, cyclone, or boiler explosion,
to materials coming or going by land or water; against such he
may if he will obtain guarantees more or less comprehensive. It
is equally important for him to protect his owners, as far as
may be, against losses by claims for damages on account of
personal injuries sustained by employees or by the public
through the acts of employees. He will cooperate with indemnity
companies by strict adherence to their rules provided for action
in case of such accident,1 just as he may cooperate with the fire

1 A prompt report of any accident, accompanied with names and addresses of witnesses,
is always required. The law, may prescribe the filing of reports with some state official. A
written statement may be secured from a person injured, as to the cause of the accident and
the nature of the injury. Any tools or parts of machines which have figured in an acc.dent
may be marked and preserved for identification. Photographs showing the surrounding
conditions may be useful.

Personal injuries to employees may be settled by (a) re-employment after recovery; (b)
payment of money; (c) guarantee of continuous re-employment in spite of disability.

In all such cases, a full release from liability is usually demanded from the injured person.
Facilities for affording "first aid" and for conveying men to hospitals must be regarded.
' The subject of workmen's compensation (for industrial accidents) is receiving no less
attention than the equally important subject of prevention of such accidents by proper
safeguards. The American Museum of Safety Devices maintains in the Engineering
Societies Building, 29 West 39th Street, New York, a permanent exhibit of safety appliances
of all sorts. Reference should be made to the paper by John Calder, " The Mechanical
Engineer and the Prevention of Accidents," in the Transactions of the American Society
of Mechanical Engineers.

The law has been seriously unjust to the workman in the matter of compensation for
personal injuries. He has borne too large a share of the losses arising from accidents.
This has been due in large measure to the old common-law "fellow servant" doctrine,
under which — briefly speaking — a workman is deprived of adequate redress for injuries
sustained by reason of the contributory neglect of a fellow employee.

The present program of the reformers is, full liability for damages where the employer
is morally wrong; no liability where the moral wrong is on the part of the workman. In
those cases where there has been "fellow servant" negligence, or where there is a necessary
risk associated with the trade, graded liability for compensation is proposed. As the em-
ployer must pay for the depreciation of his plant, so also must he pay for the depreciation
of his men; but in order to more fully distribute losses of the third and least avoidable
class it is proposed that fixed payments be made by the state for each standard injury, the
necessary funds being provided by a tax upon industrial concerns.

Workmen's compensation laws embodying these or similar provisions have been passed
in Ohio, New Jersey, Kansas, Massachusetts, Wisconsin and New York. In the first three
states, the laws have not yet (September, 1911) gone into effect. In Massachusetts, the
statute has been declared constitutional. It provides for voluntary submission to the
statutory scale by any workman who so elects; the indemnities are then paid automatically
without the necessity for an action at law. The "fellow servant" doctrine is abrogated by
a provision of the statute, which thus makes it the employer's interest to voluntarily accede
to the new scale. In Ohio, the workman pays 10 per cent, of the cost of indemnification.
In New York, the law has been declared unconstitutional by the Court of Appeals. The
Wisconsin law, like that of Massachusetts, provides for arbitration at the options of em-
ployer and employee. It abrogates wholly the "assumption of risk" defence and partly,
the "fellow servant" defence. These defences are based on court decisions rather than
on constitutional provision. The Wisconsin statute, unlike that of Massachusetts, leaves

106 WORKS MANAGEMENT

insurance companies (to his manifest advantage in the matter of
rates) by installing automatic sprinklers.

Large concerns with separated plants may " carry their own
insurance/' The works will not all burn at once; a total loss
at one of them might not be crippling, so that the very size of
the organization enables it to distribute its own losses without
recourse to insurance. A carefully estimated fund should in
such cases be set aside in anticipation of losses. As this fund
will grow, withdrawals may occasionally be made unless the
plant also grows.

The modern theory of insurance is that the owner shall in all
cases bear a part of the risk. This is accomplished by not
insuring at full value. Stock insurance companies are ordinary
business corporations— in the mutual companies the insured plants
are part owners. They participate therefore in profits or losses.
Many of the mutual companies limit their operations to certain
classes of plant, and lay great stress on their physical condition
with respect to fire prevention. Their rates may in such cases
be lower than those of the stock companies, but the cost of com-
plying with the requirements which may be set by their various
inspectors is sometimes a serious matter.1

the "contributory negligence" defence unimpaired. It has been upheld by the Supreme
Court of the State.

Some nineteen state legislatures are now considering the question of industrial insurance.

Efforts are being made to secure the passage of a fedaral law by Congress. Compensation
laws should of course be uniform in all the states. Opposition to the proposed enactments
has come not from the employers — the plans are in fact a protection to the smaller in-
dustries— but from the indemnity companies, which regard then as bringing the states into
competition with themselves. The progress of workmen's insurance and compensation
systems in Europe is summarized in the 24th (1909) Annual Report of the United States
Commissioner of Labor (Washington, 1911).

FIRE LOSSES IN THE UNITED STATES

1 In the year 1907, the average fire loss per capita was in this country $2.51, the corre-
sponding average in six European countries being 33 cents, while even in Russia it was only
$1.16 (Bulletin 418, United States Geological Survey, 1910). During the same year,
1449 persons were killed and 5654 injured by fires in the United States. The annual loss
by fire has steadily increased from about $70,000,000 in 1875-'80 to from $150,000,000 to
$200,000,000 at present; the last figure representing a waste of about $23,000 per hour,
days, nights and Sundays included. The payment of insurance does not wipe out the loss;
it merely distributes it; and not much more than half the total direct losses are covered by
insurance. No insurance protects against loss of profits. We pay for maintenance of
fire departments in our large cities, each year, $1.53 per capita; the corresponding average
cost in ten European cities of about the same size is only 20 cents. Our immense invest-
ments in water works, it is estimated, represent a total capitalization such that the 22 per
cent, attributable to fire protection amounts to $157,000,000. The total cost of tires, includ-
ing direct losses, insurance premiums, water works, fire departments and private fire protec-
tion, but not including losses of wages and profits following destruction of plant, aggre-
gates $450,000,000 annually.

The reason is primarily the use of timber for construction. From Europe the almost

INDUSTRIAL ORGANIZATION 107

THE GENERAL FORMS OF INDUSTRIAL OWNERSHIP

A business may be conducted by:

1. An individual.1

2. A partnership.

3. A corporation.

invariable report is "no wooden buildings in the city." Two- thirds of our 1907 loss was
on frame buildings. In our treeless states, the loss per capita was $2.30; in states endowed
with an abundance of timber it was $2 89.

The direct losses in the San Francisco fire of 1906, exclusive of earthquake damage,
probably aggregated $300,000,000. The city had been built with narrow streets lined by
high buildings nearly all of wood or of wooden frames. These were badly congested and
exposed, with excessive wall and floor openings and for the most part of very light flimsy
construction. There was a notable absence of sprinklers or other protective devices; the
public water distribution system was defective; and the topography and meteorological
conditions of the city were such as to increase fire hazard. A special commission of in-
surance experts reported just six months before the fire that San Francisco "had violated all
underwriting traditions and precedents by not burning up." In fact, its whole history had
been one of numerous fires and heavy fire losses. When the final conflagration came, an
official report concluded that "no other result . . could . . have been expected."
(United States Geological Survey, Bulletin 324.)

Nothing is as insidious as fire hazard. An electric cable in a lead sheath seems safe; but
an insect has appeared which gnaws through these sheaths. An electric flat iron caused a
Joss of $1,250,000.

The campaign against fire loss includes agencies both public and private. In the former
class belong municipal fire services by steamer ("fire engine"), fire boat, high-pressure
water supplies and all the equipment and organization of a paid and thoroughly trained
corps of men. In the latter are comprised:

1. The automatic sprinkler system with two sources of water supply. 2. Watchman's
or thermostatic alarm systems. 3. Inside protection by pails, small hose, extinguishers,
etc. 4. Outside protection by private hydrant system and private drilled fire brigade.
5. Protection against exposure.

Insurance Rates. — The rate of insurance is expressed in cents of annual premium paid
per $100 of insured valuation. Rates in each district are fixed by a local rating board, for
each risk, according to its resemblance to or departure from a certain standard of hazard
contemplated in establishing the ' ' base rate " for the district. It often pays to modify plans
for building construction to meet the views of the rating boards as to wall thicknesses,
heights of parapets, etc., particularly in cities; and even more serious questions may have
to be considered in determining as to a proper course between high insurance cost (or
refusal to insure) on the one hand and undesirable construction expense or limitation of
operating conditions on the other. Monitors, for example, expose adjacent roof areas, and
metal sash and frames may be required therein. Every opening in a floor or wall may be
penalized. Automatic fire doors on the latter may reduce the penalty, but an opening
bricked up means insurance money saved. There is a penalty for a bare ceiling which
may be partially avoided by the use of fire-resisting plaster. The mere absence of white-
wash from an exposed ceiling may make a difference of 5 or 6 cents in the rate.

For each risk, the rating board prepares a schedule about like the following (extreme
example) .

1. Base rate $0.30

2. Excessive area $0.02, walls deficient $0.06, joists and posts insufficient, $0 . 04 . 0.12

3. Monitor in roof $0.10, roof plank and floors below standard $0.07 0.17

4. Floor openings $0.02, elevator $0.02, stairway $0.02 0.06

5. Partitions $0.05, steam pipes exposed $0.50 0.55

6. Occupancy $2.00, shavings vault $0.50, blower $0.25, ceilings $0.06 2.81

1 Many very large enterprises are conducted by individuals. Sometimes, in these cases,
the business is called a "company" or "works," with or without inclusion of the name of
the individual owner. In such instances, the responsibility of the individual owner must
be properly declared before some public officer.

108 WORKS MANAGEMENT

To a corporation of controlling magnitude we give the mean-
ingless name, a "trust."

PARTNERSHIP

A partnership is the simplest form of joint ownership. There
may be any number of owners from two upward. A general
partner is liable for the firm's debts, without limit; a special
partner is liable only to the extent of his contribution to the
capital. . Each partner contributes something to the partner-

7. Boiler house openings $0.10, doors on same not standard $0.38 0.48

8. Absence of small protective equipment 0.80

(Clarence K. Mowry in The Factory, August, 1910.) Total, 5.29

In this case, items 2, 3, and 4 could scarcely be remedied without radical reconstruction
of the plant. The following work was done: a partition covered with tin (5 cents, item 5) ;
the basement cleared out (50 cents reduction, "occupancy," item 6); the shavings vault
ventilated by a flue and its exhaust blower repaired "(75 cents, item 6) ; ceilings whitewashed
(6 cents, item 6) ; boiler house openings provided with fire doors (38 cents, item 7) ; and some
barrels, hose and pails were purchased (80 cents, item 8). The entire cost involved was
about $500, and the annual rate was reduced $2.54 thereby. It might have paid to re-
arrange the steam piping (item 5).

Where the hazard is classed as "ordinary," the following clause is often used in insurance
policies covering buildings and contents:

"In consideration of the rate at which this policy is written, it is expressly stipulated that
this [insurance] company shall be liable for no greater proportion of any loss than the

amount hereby insured bears to .... per cent, of the actual cash value of the property

nor for more than the proportion which this policy bears to the total contributing insur-
ance on the property."

This is called the "Contribution Clause" or "Reduced Rate Clause." The percentage
left blank is 90 if the amount of insurance covers buildings and contents as a whole; or 80
if buildings and machinery are insured in an amount separate from that which covers
stock. Consider the following conditions:

a. Buildings and stock separately insured; the former for $6000, their value being
$10,000. A fire causes a building loss of $4000. The first provision of the clause limits the

6000

amount of insurance to be collected to — — X $4000 = $3000.

083X10,030

b. With the same insurance and valuation, let a blanket policy be assumed, covering
buildings and contents (aggregate valuation $10,000, amount of policy $6000). The

insurance company's liability is — X $4000 = $2666 . 67.

0 90X10,000

In the first case, a partial loss of $4000 would be completely covered only when the policy
read for $8000; or, in the second case, for $9000. Most losses are partial losses, and most
policies give only partial protection. The contribution c ause (which is usually accom-
panied by a reduced rate) virtually makes the assured a partner with the insuring company,
compelling him to assume part of the risk.

While buildings or structures are in process of erection, both owner and contractor have
insurable interests therein. There are two ways of protecting these interests. In some
contracts, it is provided that the contractor shall "maintain insurance policies amounting
to .... per cent, of the actual value of all materials or completed work, payable to owner
or contractor as interest may appear." If a fire occur before the owner has made a payment
on account, insurance adjustment is purely a matter for the insurance companies and the
contractor If, however, he has made payments, his interest in the insurance policies is
evidenced by the acknowledgements of such payments. The second method is to stipulate
that the contractor is to protect his own interests only. The owner then sees to it that every
payment he makes is at once supplemented by a policy of insurance in his own interest.
The contractor's bond is a warrant against delinquency on his part.

INDUSTRIAL ORGANIZATION 109

ship: money, technical knowledge or skill, commercial asso-
ciations and acquaintances or the like; it is not necessary that
all contribute money. All partners, however, participate in
profits in such proportion as is agreed upon.

Unlike a corporation, a partnership is not a legal entity; it is
obliged to act (in formal matters) through its individual members.
The objects and scope of the partnership should be defined in its
contract; but the members should consider also what presump-
tive scope it may have, since the public would be warranted in
dealing with one of the partners in all such matters and the
partnership might be bound by contracts made with the public
by an unauthorized partner even though the subject matter of
such contract were not one contemplated in the scope of the
partnership. The acts of the partnership are determined by a
majority vote or majority interest of the general members;
special partners have ordinarily no active voice in the control.

A man may become a member of a partnership without desir-
ing it or even knowing it. If he advance money, expecting to
share profits and losses, he becomes legally a partner of the man
to- whom he advances the funds; and bears the full responsi-
bility of a general partner in that individual's acts.

A partnership may be terminated by the date of limitation
written in the contract; it is necessarily terminated by the death
or insolvency of a member; by mutual agreement; or by judicial
action. A partner cannot assign his partnership interest to
another. He must call for a distribution of assets and retire.
If he become insolvent, his creditors call for such distribution of
assets in order that they may reach his share. When a partner
is determined to retire, and a basis of settlement cannot be
reached, he may ask the courts to appoint a receiver to wind up
the business. Partnerships of two are sometimes dissolved in
this way: one member fixes a price at which he is willing either
to buy or sell the business; the other then decides whether he
will buy or sell at that price, and produces the money or retires
as the case may be. Upon termination of a partnership, the
assets are distributed in the following order: the debts of the firm
are paid ; any money loaned by its members to the firm is repaid ;
the capital put into the firm by the members is repaid; and any
remaining assets are distributed in accordance with the pro-
portions agreed upon for division of profits.

HO WORKS MANAGEMENT

THE CORPORATION

A corporation is an artificial person, created by legal process
under certain regulations fixed by the various states. Unlike
a real person, it may engage only in such acts as its charter
prescribes. The existence of the corporation is evidenced by the
charter, granted at the petition of such persons as are interested.
These persons and their successors have no unlimited individual
liability for the acts or debts of the corporation; an officer may,
however, make himself liable by committing an unlawful act.

This artificial person or legal fiction is empowered to engage
in certain kinds of business, sometimes on condition of making
certain reports regarding the general outcome of that business
to the state which creates it. It is owned, in most cases, by a
large number of individuals called stockholders, whose extent
of ownership is evidenced by the number of shares of stock they
hold. The total number of shares to be issued is stated in the
certificate of incorporation. Stockholders participate in earnings
and in the management in proportion to their stock ownership.
There may be two classes of stock, preferred and common; the
former may have certain prior rights in any eventual distribution
of assets: it usually confers no voting power; it may be guaranteed
a certain dividend out of each year's profits before any dividend
is paid for that year on common stock. If a continuity of such
dividend is guaranteed (unpaid dividends being a lien prior to
any payments on common stock) the preferred stock is called
cumulative.

The management of the corporation is in the hands of its
directors, elected by the stockholders, and more directly still
in charge of officers elected by the directors. Ordinarily, the
individual liability of any stockholder in the affairs of an industrial
corporation, whether he be an officer or not, is limited to the nom-
inal or par value of the shares which he owns. Unprofitable policies
on the part of the corporation may wipe out the value of the
common stock, but can do no further harm to its owner. It is
obvious that to the ordinary small investor, stock ownership
in a corporation has some attractions not accompanying general
participation in a partnership.

ORGANIZING AN INDUSTRY ON CORPORATE LINES

Suppose A to propose the building of a paper mill. He talks
with B and C, who each contribute $50,000. The A. B. C. Co,

INDUSTRIAL ORGANIZATION 111

is organized with a capital of $1,000,000, divided into 10,000
$100 shares. Of these each of the incorporators, A, B and C,
receives $100,000. The balance is put in the hands of A or his
banking friends to sell. The treasury of the corporation con-
tains $100,000 cash. No money is contributed by A; he is the
promoter. His expert knowledge, or ownership of patent rights,1

i Patents. — Ownership of patent rights may give a controlling position in the market to
many kinds of industry. Many concerns regularly encourage their employees to develop
new inventions. The cost of securing patents is in such cases assumed by the company,
while the inventor assigns to the company the right to use the invention in its business.
This right is not in all cases an exclusive right.

A patent is a grant, by the sovereign power.of the exclusive right to make, use and sell any
device that is pronounced to be new and useful — an invention. Mere "good ideas" do not
constitute an invention; a change in size, the omission of an element, the substitution of
equivalents, the introduction of new combinations without new methods of operation; these
things in general do not confer patentability. A change in material used is a patentable
improvement only when such change is associated with a variation in process. The new
use of an old thing — unless in a distinctly different line of application — does not constitute
an invention.

To be new, an invention must show present local novelty. An abandoned pre-use, or
current use abroad, does not destroy novelty. The existence of old models or unpublished
drawings does not stamp an invention as "not new." A thing practically useless becomes
"new" when made useful. With these exceptions, a thing cannot be called new if a single
individual has known and used it.

To be useful, the invention need not show superiority over existing objects; it need not be
more economical. Beauty is regarded as utility. The use must be beneficial; things
injurious to morals or social policy are not patentable.

The application for a patent takes the form of a petition to the United States Patent
Office (a bureau of the Department of the Interior). It is in the formulation of the
application that the skill and knowledge of the inventor count most strongly in his favor.
He should thoroughly know the essentials and underlying principles of his invention, and
should not assume that his solicitors will properly state them. The application is accom-
panied by drawings and specifications, both of which must conform to certain established
rules. The drawings are merely illustrative; the operation of the invention is fully described
in the specifications. The gist of the application is in the "claims" which terminate it.
These are a statement of what the inventor conceives to be new and useful in his invention.
They are framed by the solicitor with extreme care, and as carefully scrutinized by the inven-
tor. A patent confers no rights not "claimed." Features not essential should not be
"claimed" as part of the invention. Claims should not introduce unnecessary limits in
description; if a part may be driven equally well by a gear, belt or chain, no one of these
methods of driving should be specified.

Following the application, an answer is returned to the inventor by the patent office. This
will cite previous patents, which the applicant must then examine. If he can show that
his invention is not invalidated by such patents, the issue of patent will be made in due
course. The period between answer and issue is the critical period in determining the scope
and probable value of the patent on a useful invention. Claims may be disallowed; the
applicant is bound by his original claims.

Several appeals are possible from the decision of the patent office officials.

A question of priority of two pending applications constitutes an interference. Interference
litigation is highly expensive. It is conducted by attorneys who make a specialty of such
work; rarely by ordinary patent solicitors. In usual procedure, each litigant submits a
statement before seeing the application of the other. The burden of proof is on the later
applicant. The underlying principle governing decisions seems to be that the man who
first conceived the thing, if diligent in perfecting it, has a prior right to the man who conceived
it later, even though the latter first worked it out.

The patent (which may cover an art, machine, manufacture or composition) gives an
absolute property right which may on no ground be confiscated. It is an infringement to

112 WORKS MANAGEMENT

or brilliancy of idea, or ability to float stock, have induced B
and C to put each their $50,000 against his talents, and all three
accept equal blocks of the stock.

At this early stage, the concern is really worth $100,000, and
it has stock obligations of $300,000. Now A goes*but and sells
the $700,000 of treasury stock at par, less a banking house
commission of $100,000, taken in stock. The stock liabilities
are now $1,000,000 and the cash assets $700,000.

Construction is begun. As soon as the land is paid for, it is
mortgaged to a trust company and bonds are issued for as
large a proportion of the purchase price as can be managed.
Say the land costs $200,000; the mortgage and bond issue may
be $100,000. As the construction of the plant proceeds, more
bonds are issued, until at completion the works have cost
$1,200,000; of which $500,000 has been paid out of cash in the
treasury, and $700,000 is covered by first mortgage bonds.
The plant now begins business with $200,000 of working capital.
Its total assets are, plant $1,200,000; cash $200,000. Its liabil-
ities are, stock $1,000,000; bonds $700,000. There is a deficit
of $300,000, whiqh is due to the cost of floating the enterprise.

make for one's own use a patented article without permission from the owner of the patent.
This right is granted for a period of 17 years.

Foreign patents are in some countries granted for comparatively short terms. One result
is that when the foreign patent expires the invention is imported. This "discouragement
to home industries" is avoided by a provision of law which makes the United States patent
expire with the foreign patent, should the latter be first obtained. The arrangement so works
out that American inventors do not seek foreign patents excepting on articles intended to be
sold abroad. A reissue is practically a new patent. If the inventor feels insufficiently
protected, he may be permitted to surrender his patent and receive a new one, based on new
claims, good for the unexpired term of the original patent.

A caveat is a filed description of a proposed invention, submitted as evidence of priority
and diligence in anticipation of possible interference. Its effect is that the inventor is given
three months' notice before any conflicting application is considered. The caveat lasts for
one year, and the time may be extended.

The title to a patent may be impaired by a license or grant or by joint inventorship.
A constructing mechanic is not a joint inventor. One who furnishes capital to an inventor
does not thereby become a joint inventor. The patent should be issued in the inventor's
name. Any inventor should keep a daily record of his plans and work.

Assignments of part ownership in a patent may confer great privileges. A proper assign-
ment provides for profit -sharing and constitutes a virtual partnership. A grant gives exclu-
sive proprietorship in some one state. An article sold in that state may be carried to and
used in another. A license merely gives the right to make, use or sell, exclusively or other-
wise, in a certain place for a stated time. In selling grants or licenses to corporations, the
inventor must protect his interests by a formal contract and preferably also by becoming a
member of the board of directors of the corporation.

A man employed to improve machinery is, so to speak, engaged as an inventor, and his
inventions belong to his employer. If not so employed, his inventions may be his private
property. But his title thereto may be impaired if he occupies himself therewith during
time paid for by the employer.

"Trade secrets" are usually so easily infringed without detection that they are rarely
patented. (See Trans. A. S. M. E., xxix, 15.)

INDUSTRIAL ORGANIZATION 113

B and C each received $100,000 stock for $50,000 cash; de-
ficit, $100,000; A received $100,000 for no cash; the bankers
received $100,000 in commissions.

The works begins operation. The first year, its receipts are
$1,500,000; its operating expenses are $900,000. It pays out of
the gross earnings of $600,000, $350,000 for interest on bonds;
and with the remainder declares a dividend of 10 per cent.
($100,000) on the common stock and puts away $150,000 as
surplus or reserve. When this reserve has sufficiently accumu-
lated, it may be employed to pay off bonds as they mature; or
if the business bring in a higher rate of return than the interest
on the bonds, the latter may never be paid, the net earnings
being wholly distributed to the stockholders after the surplus
has reached the desirable safe amount. In many cases, accu-
mulated surplus is invested in improvements so that ultimately
the physical value of the property may exceed its capitalization
liability. When the reverse condition holds, the stock is said
to be "watered."

A stockholder who wishes to terminate his interest in the
company has merely to sell his stock. In a small local corpora-
tion this might not be easy; in a corporation whose stock is
"listed" on the exchanges, it can be done in five minutes. The
corporation itself can go out of existence only by disposition of
its assets and the distribution of their proceeds to the creditors
and stockholders. A corporation is a permanent sort of thing;
deaths and bankruptcies do not destroy it.

When a corporation cannot pay its debts, including interest
on its bonds, a receiver may be appointed by the courts to dis-
pose of its assets. When bondholders are secured by first
mortgages on the property, they have a preferred claim on such
of the physical assets as are covered by the mortgage. They
may apply for a foreclosure sale, applying the proceeds of such
sale to paying off their bonds. Many properties must in the
very nature of things be kept in operation. Railroads are an
example. The least margin of earnings over operating cost will
help pay bond interest. Bondholders will therefore keep the
road running for this reason, as well as to help maintain unim-
paired its physical value.

In case of bad management, the road may default in its
bond interest, although with proper organization it need not
have done so. The bondholders may then form a stock company

114 WORKS MANAGEMENT

to buy the property themselves under the foreclosure sale and
reorganize it to suit their own views. This has been the history
of more than one railroad.

In our previous illustration of the paper mill, an additional
stock issue might be suggested on one of these grounds: to
provide money for extensions or improvements; to make the
dividend rate look less exorbitantly high; or to provide money
for retiring bonds.

For the first of these purposes a new stock issue is perfectly
legitimate, although a bond issue would accomplish the result
at less cost and with less disturbance to the value of existing
stock. For the second, if there is so large a surplus that enough
is accumulated each year to pay the dividend on the proposed
new stock, there should seem to be no valid objection on the
part of present stockholders. If the surplus is small, the issuance
of new stock will depreciate the value of present stock. The
issuance of stock in order to retire bonds means that more
earnings will be needed if a reasonable dividend is to be paid on
the whole stock issue; for bonds bear low rates of interest, com-
paratively speaking.

Generally, therefore, increase of stock issue is not permitted
excepting by assent of the stockholders; and it is quite common
for such stock, when issued, to be allotted to present share-
holders, at a reduced price, in proportion to their present holdings.
If any of the stockholders are not in a position to purchase their
allotments, they may sell their " rights;" and the value of these
" rights" suggests one of the several ways in which large corpora-
tions sometimes " cut melons." For example, the Pennsylvania
Railroad company issued a 10 per cent, allotment of new stock
at par, when the market price of its stock was 122. The holder
of 100 full shares had then the right to buy 10 shares at par;
his " rights" were thus worth about $220, and were negotiable
at some such price.

FORMS OF INDUSTRIAL ORGANIZATION

Although its immaterial organization is concededly the most
important feature of the industrial plant, there is no part of its
being in which standards differ more widely. The plan of or-
ganization will in all cases depend largely upon the men avail-
able to make that organization. Men cannot be purchased, like

INDUSTRIAL ORGANIZATION 115

machinery, to comply with exact specifications. The seeker
for men is in the position of one who in the wilderness
searches for trees with which to make poles for his tent.
He has a clearly denned ideal, perhaps, but does not expect
to realize it. He takes what may answer for his purpose
and adapts his design to his materials. Technically, the
organization should be planned, and the men found who can
fit in that plan. Actually, it is necessary — for a time at least,
and often in permanency — to lay out an organization so as to
most effectively utilize the talent available.

Moreover, ideals of organization will differ in different in-
dustries. The differentiating " fundamental ratio" suggested
in Chapter II will account for variations in organization type as
well as in equipment and policy. Take the case of a building
contractor whose investment in plant is small (as compared
with that of a manufacturer), but who turns over his capital
several times in the year. His business is one in which the funda-
mental ratio is low. We may therefore expect that fixed charges
will be a relatively small element in his cost and that his principal
aim will be toward operative economy — low prime cost of con-
structive work which he undertakes. He will have a force of
expert supervisors in the various trades and will hold these men
or the best of them even in dull times. The salaries of such
men become in a sense fixed charges, however; and if they are,
as usually, a large proportion of his total cost, he will take con-
tracts at small profit when necessary in order to keep the men
employed. The rank and file of employees, both productive and
non-productive, will be recruited or discharged rapidly as the
work on hand warrants; practices which will be facilitated by
including in the supervisory organization men thoroughly famil-
iar with the different trades. He will have little use, however,
for a high grade operating engineer to supervise his power ex-
penditures or for a good shop mechanic to care for his scanty
equipment of cheap buildings.

BUILDING UP THE ORGANIZATION

Of vital, if not in all cases of immediate importance, is the
matter of developing men for positions of authority. No in-
dustry can be permanently sucessful unless consideration is
given this matter. Some of our longest-existing and most

116 WORKS MANAGEMENT

successful corporations are noted for the attention which they
devote to it.

The man trained in applied physical science — the chemist or
the engineer — is admittedly the most promising subject for
training in management. His education fits him to deal with
the problems involved in the economical operation and care of
machinery and in the effective utilization of material. To make
his prospects certainties he must now demonstrate his capacity
to handle men and to deal with those large questions of policy,
which have been suggested, in a masterful way. A large pro-
portion of graduates of technical schools (a proportion still in-
creasing) occupy administrative positions in manufacturing and
public service works. It would be interesting to examine the
reasons1 for this; some are, the ideals of thoroughness and de-
tailed study which commonly prevail in our technical schools;
the training in the quantitative weighing of evidence; the habit
of drawing conclusions from comparisons; the emphasis laid upon
the idea of efficiency; the use of instruments of record and
graphical representations; the development of a thirst for in-
formation and a spirit of original investigation; the training in
rapid execution; and the universal agreement to share experience
which is characteristic of the engineering profession. These
ideals are of course never fully realized; but they are approxi-
mated by the best students, those who later attain to positions
of executive authority.2

1 See the writer's paper, Engineering Management of Industrial Works, in the Engineering
Magazine, 1901.

2 Technical Training, Its Successes and Failures. — It is scarcely worth while to attempt to
justify these assertions, which manufacturers generally have by their action shown that they
believe. The young technical graduate is intermittently under fire, but pretty steadily in
demand. The age from 20 to 25 is an uncomfortable age with any young person; one in
which he seeks his level with some disturbance to surrounding bodies. College professors
are not unaware of the deficiencies of technical training. They debate the subject more than
anyone else (see, for example, the proceedings of the Society for the Promotion of Engineering
Education). Their most common fault is perhaps that they are too eager to fit their courses
to current demand.

Many works make special efforts to secure technically trained men, as either regular or
"special" apprentices. They have great difficulty in finding a satisfactory number of men,
and in keeping them when they get them. The college graduate already represents an
investment of $2000 or so in training. As a rule he must be as quickly as possible, after
graduation, a self sustaining producer. Some companies have been particularly successful
in training such men for positions of authority. They pay them a living wage from the
start, and expect to wait a little while for results.

Two classes of criticism have had wide circulation during the past year or two. WTith that
one class which condemns wholesale all higher educational and professional training, in
colleges and technical schools, for physicians as well as for engineers, we need not deal. The
other class may be illustrated from remarks of Mr. F. W. Taylor, himself a graduate of a
technical school (see American Machinist, Nov. 15, 1906, and The Bent, January, 1910).

INDUSTRIAL ORGANIZATION 117

Some works maintain special apprenticeship departments for
the "breaking in" of young technical graduates. When in these
a genuine and serious effort is made to so teach men the business
that they may be fitted for gradual promotion to administrative
positions, the results are good from all standpoints. In those
works where because of lack of attention or the deliberate desire

Mr. Taylor finds that young engineering graduates are discontented and unhappy, not worth
much for the first two years after graduation; that they lack an earnest and logical purpose;
have had more liberty than is commonly granted to or is good for human beings; that they
have been habitually idle: have not learned team work or obedience; have suffered by not
coming in contact with men working for a living; that they are no "smarter" than even a
poorly educated workman. He regards athletics (purified) as the one interest in which the
student shows earnestness of purpose; favors the man who "works his way through college";
and recommends a six months' course in an outside machine shop early in the college
course.

Mr. Taylor has trained several hundred technical men and invariably selects such men for
large positions when he can; he concedes that those employers who have the most extended
experience with them are the most eager to secure them; and we are prepared to concede
most of his statements as statements of fact (though not of all the facts) ; looking to his
avowed policy for a suggestion of the conclusion which all of the facts warrant him in
reaching. We will go farther. The student's characteristic defects are evidenced even in
his own "student activities," like athletics. He usually lacks the kind of ability that
"carries the message to Garcia." He is a putterer, an atrocious waster of his own and
other men's time; he thinks an excuse is as good as a result always, and his excuses are
often quite transparent. He is prone to pity himself. He thinks he is woefully over-
worked, when he scarcely knows what real productive work is. He resents monotony,
forgetting that practically all of life is monotonous. He is a mere absorber, not a producer.
(The young technical man should be interested in the results of a statistical research made
by Mr. J. L. Gobaille into the causes for executive promotion. An analysis of a large num-
ber of cases showed the following approximate relative weights of various factors in produc-
ing increase of authority and salary:

Detailed knowledge and ability to design 25

Executive initiative ability 20

Total abstinence 15

Promptness 10

Versatility. 5

Youth 10

American citizenship 10

Church membership 5

The present writer would put intellectual alertness as a foremost underlying qualification.1)
These things are all in a measure true. So would they be true of any young man kept out
of productive industry until the age of 23 or thereabout. Suddenly thrown into industry at
that age, our engineering school boys are just old enough to be a little slow in self-adjust-
ment. They are often dissatisfied, and think their employers unappreciative and exacting.
Sometimes the employers are just that. They frequently do not know just what to ex-
pect of an engineering graduate; don't know how to use him. (It is worth while, this
learning how.) They put him on work of mere boys while they make up their minds
To discriminate between round and square p-gs and holes is a great art.

Not all young engineers expect to enter the machine shop. That is only one field even
for the mechanical engineer. An engineering course which unduly emphasizes the machine
shop idea is one-sided. An engineering school aims primarily to develop a certain type of
mind; it does not (though this is commonly forgotten) occupy itself exclusively with the
question of the man's immediate earning power. Engineering education may be as truly
liberal as any type of education that has ever existed on earth. Liberal, that is, in the sense
of man-making.

There is an occasional type of engineering student that one would think would exactly suit
the critics of his class. It is the man who is good with his hands, fond of the laboratory

118 .WORKS MANAGEMENT

to commercially exploit the apprentice he is engaged on work in
which he is immediately remunerative, without regard to his
future, the results are wholly bad. The young man is led to
expect something which it is not intended he shall receive. He
had much better — perhaps had better in any case — go in with
the rank and file under no special understanding or agreement,
and get his head above the general level by virtue of capacity
alone — if he can.

ORGANIZATION AXIOMS

1. While the form of organization necessarily depends upon
the personalities available, it should as far as possible be inde-
pendent of fluctuations in personality. The loss of one man
should not wreck the administrative machinery.

2. The duties prescribed for the elements in an organization

and the shop, apparently well-provided with common sense; but who hates problems and
"theory" and prefers to compete with the hand- worker rather than become a genuine
brain worker He may be the best man after graduation (if he graduates) for the first year
or two. But he has missed the main point. He would have done better never to have
wasted four years in school.

The characteristic weakness which the writer has found in young technical men is timor-
ousness. They are actually afraid, strangely enough, to use what they have learned. Pos-
sibly criticism has unnerved them. A man should employ his knowledge, apply his ' ' theory " ;
we cannot have too much of that theory which is an explanation of facts by their causes.

Men get about what they deserve in the world; so that the best justification for the tech-
nical school is in the records of graduates. Any bright boy can get an engineering educa-
tion nowadays. To borrow money for the purpose is a wise and surely profitable in-
vestment. The sad difficulty, in many cases, is in the question of cost and time for pre-
paration. The writer has talked with many men of mature age who would have been pre-
pared to sacrifice all they had in savings and position if by doing so they could have pur-
sued a real course in engineering; but, in the great majority of cases these men have had
to be told that years of preparatory study would first be necessary.

Classification of Engineering Schools. — There is some confusion in the public mind
regarding the comparative grades of engineering schools. There are good and — not so good —
schools in all grades, but there is a fairly clear distinction between what is properly called an
engineering school and what is (however worthy, rich or successful) the distinctly lower
grade, trade or industrial school. The essential characteristics of the former are:

1. It is either part of a university or one of the few schools which teach engineering or
applied science alone.

2. Its course will be of four years duration (in residence, instruction being daytime
instruction) .

3. It will confer bachelor's or engineering degrees; in some localities, as in New York,
under state sanction.

4. It may be one of the "accepted" institutions (defined as "colleges") of the Carnegie
Foundation. This is, however, a positive but not a negative test; denominational institu-
tions and (originally) state universities were not included in the Carnegie list of "colleges."
There were in July, 1911, seventy-two "accepted" institutions on the Carnegie list, but there
are certainly more than seventy-two genuine colleges (technical and other) in the country.

There are a few of the highest grade engineering schools which admit graduates only to
their courses; in these, the course of study may be one of less than four years. Perhaps the
commonest ear-mark of the "technical graduate," properly called such, is some knowledge
of the calculus; but it is probabb that in the great majority of cases the extent of this knowl-
edge becomes rapidly diminished with advancing years!

INDUSTRIAL ORGANIZATION 119

should be so automatically inter-related as to make minimum
demand upon the extremely fallible human memory. If A
forgets to send C to B7 something should necessarily call B's atten-
tion to that fact.

3. Authority and responsibility should be clearly denned and
coordinated. If A is responsible for the cost of repairs, B must
not be allowed to order a new roof.

4. Every individual should be able to reach a "man higher up"
without being obliged to travel far.

5. Organizations do not spring fully-armed from the head of the
divinity. They must grow and adjust themselves, and should
not be expected to grow too fast.

6. Great changes in form of organization should be made with
extreme reluctance.

7. Close association and frequent conference between superior
and subordinate, and among those of corresponding rank, should
be encouraged.

8. An effective organization must stimulate by the force of
example. Every man should have specific and ascertain able
individual duties which all men can see that he performs
efficiently.

9. Each man must be made to feel a sense of personal pro-
prietorship in the work over which he has authority.

10. The atmosphere must be one of mutual consideration and
appreciation. Orders are orders; business is not palavering;
but it seldom pays to reveal the hand of iron when the glove of
silk may cover it.

1 1 . The system of administration must adequately reward the
competent; and stimulate, penalize or eliminate the unfit.

12. It should provide a spur and prod for every man; not one
that needlessly irritates him, but one that rouses him to do his
best. After all, men differ but little in their capacities; where
they differ is in the uses they make of their capacities.

THE DIFFERENTIATION OF RESPONSIBILITY

The writer's ideal of organization is that which makes each
official an absolute monarch in his field. To work out such an
idea, it might be said, implies ideal men. Yet it is practicable, or
substantially so, to commit a given work to a given man, leaving
methods to him but holding him rigorously accountable for re-

120 WORKS MANAGEMENT

suits. Some of the factors which complicate this simple ideal
may be mentioned:

a. Unmeasured and Unproductive Work. — The man who is
responsible for the cost of repairs may also have the care of the
fire-preventive equipment. The time and attention he devotes to
this counts for nothing in his " record" as kept by the cost de-
partment. He would rather have nothing to do with it. Some
men may have duties of such nature that no formal judgment
of results is possible.

b. Conditions Vary. — The chief engineer may have his record
spoiled by a coal strike which doubles the cost per ton. Con-
sider two points: minor variations in conditions should be ignored.
We may refuse to discuss them. We must all take chances. If

General

Colonels

Majors

Captains
Lieutenants

Sergeants
dvates

DIAGRAM OF PURE LINE ADMINISTRATION.

/ \ Pri

a man is always unlucky we had better try another man. Also :
let us keep detailed records both of cost and of consumption.
If it is the price of coal which accounts for a high unit cost of
power, the records will show that to be the fact, and the chief
engineer will not be blamed.

c. Excuses. — One department may hamper another by delays
or wastes. This will be detected and should be prevented in a
well-managed plant. Adequate system will detect delays and
place the responsibility. No interested party's statement as to
such delays, offered as an excuse for low efficiency, will be
accepted.

d. Punishment. — Unless low efficiency is penalized the whole
plant will degenerate. Lack of graded punishments is as serious

INDUSTRIAL ORGANIZATION

121

a matter as the absence of a system of graded rewards. Reward
and punishment must to some extent be matters of public
knowledge.

LINE ORGANIZATION

If we consider the case of an army organized exclusively
through the successive subordination of general, colonel, major,
captain, lieutenant, sergeant and private, we have an example of
pure line administration, which may be graphically depicted as on
page 121.

This is the oldest and most common form of organization, but
probably never exists in the simple and rigid unmodified con-
dition shown. The simplest and most usual modification con-
sists in the introduction of a group of specialists advisory to the
chief executive, but without formal administrative duties. The
following, for example, is the organization adopted for a large
electrical manufacturing works:

I Accounting.

President,

1st. Vice-
president.

Auditor.

Legal.

[ Cost-keeping.

f Production clerk.

Paymaster. Superintendent, assistants, general foremen ,

Purchasing. foremen.

Superintendent of foundry.
Shipper.

Works manager, -j Rate fixer.
Inspectors.
Works engineer.
Employment agent.

f Clerical staff.
Storekeeper. -I Stock men.

[ Receiving clerk,
f Engineering.
2nd Vice- J Sales,
president. \ Correspondence.
[ Construction.

In this scheme, the backbone of the line organization is clearly
shown through President, 1st Vice President, Works manager
and Superintendent. The balance of the administration is
partly subdivisional and partly advisory. When industries
grow very large, the general administration must be, as here,
divided. The purchasing agent, for example, must be of the
best type; so must the works manager; neither is big enough to
boss the other. Each is a master in his field. There is a clear
differentiation of authority and responsibility throughout the
entire scheme.

But consider now the next plan (page 122).

Here there is no single responsibility anywhere between the

122

WORKS MANAGEMENT

Stockholders Directors

President

Vice-President

Secretary

Treasurer

Cost Clerk
Sales Agent
Accountant
Order Clerks
Stenographers
Purchasing Agent

Chief Engineer
Chief Electrician
Chief Draftsman
Receiving Clerk
Stock Clerk
Shipping Clerk
Foreman
Inspectors
Time Keepers

stockholders and the workmen. The general manager is a
supernumerary. Each of the three managers has at least two
bosses.1 Not one of the four executive officers has definite
control over one man. The cost and order clerks, purchasing
agent, receiving, stock and shipping clerks and inspectors have
each two superiors, which is just one too many. This is an
example of extremely decayed line organization; the kind that
grows up in the absence of planning. The strict line plan shown
in the first (army) diagram would be greatly preferable.

DIVISIONAL, DEPARTMENTAL AND STAFF ORGANIZATION

It is admitted, however, that strict line or divisional organiza-
tion has its defects. Take the case of a railway. For each
operating division there will be a superintendent, a master
mechanic, a maintenance of way engineer, etc. If there are
six divisions there will be six such sets of officials. We cannot
afford to pay them the salaries necessary to obtain the highest
grade men; they will be merely administrative clerks, without
special or expert technical knowledge of the highest grade in
their branches of the work.

Yet a large railway must have a thoroughly competent civil
engineer in charge of maintenance of way. If it cannot afford
one for each division, it will at least have one for the whole road,
calling him, perhaps, the chief engineer. So also it will have a

1 There are two useful words — "boss" and "job" — of such great significance that their
slightly colloquial flavor is to be deplored. Both are full of meaning, worthy of respectable
association No substitutes quite take their place.

INDUSTRIAL ORGANIZATION

123

superintendent of motive power, a glorified master mechanic,
to settle the larger mechanical problems for the whole road.
The pure divisional, or line, organization was this:

General manager.

f Division superintendent.

•j Master mechanic.

( Engineer of maintenance of way.

f Division superintendent.

j Master mechanic.

[ Engineer of maintenance of way.

f Division superintendent.

•j Master mechanic.

I Engineer of maintenance of way.

Division A.

Division B.

Division C.

and this has in some cases been made (if possible) more divisional
still by giving the division superintendent authority over his
division master mechanic and engineer.

The revised plan follows. This plan must stand or fall on the
ground of workability. Can the cooperation of the three division
officers be obtained without destructive friction when the im-
mediate superiors of these men are different individuals located
perhaps a thousand miles away? In railway operation the
answer is in the affirmative; first because of the strictness of
discipline that has been inculcated for a generation and second
because the direction of evolution has clearly defined the limits
of each official's authority and responsibility. From the division
officers downward the organization is of a nearly pure line type;

C Division Superintendent A

"General Superintendent < B

I " " C.

f Master Mechanic A

General Manager ^ Superintendent of Motive Power < B

( " " C

f Engineer of Maintenance of Way A

Chief Engineer J " " " " "

^ „ „ n » »

Division A

Division B

Division C

Possibly this condition of railway operation, or possibly the
gradual trend toward independence of the engineer force (with
regard to navigating officers) in steamship service, may have
called attention to the need, in large organizations, for depart-
mentalism. In such, it works best to have an engineer bossed

124 WORKS MANAGEMENT

by an engineer, an operating man by an operating man, and so on.
One of the simplest applications of such policy is in the " com-
mittee system/' an example of which is shown below. The

Works manager.

Manufacturing committee.

Production department (planning).
Cost department.
Works engineer.

Electrical

superintendent.
General superintendent.

Mechanical \

superintendent. J

"manufacturing committee" is made up of representatives of
the four works departments; it may include, also, subordinates
of the general superintendent ; for its function is deliberative and
advisory, not mandatory. It considers proposed improvements,
and questions of organization, method or policy; making (in
spite of old-fashioned ideas of discipline) recommendations,
through the works manager, to the executive committee of the
board of directors. There may be subsidiary department
committees as well, standing in the same relation to depart-
mental superintendents as the manufacturing committee does
to the works manager. The effort is made to have on these
committees representatives of every class of interest in the works;
and when these have representation on the manufacturing
committee, every department is placed thereby in close informal
touch with the works manager and the directorate.

The -results are: a human contact with the man far down; a
getting together of men which may help to offset departmental
antagonism; a check on arbitrariness of superintendence. The
chief aim is probably that which leads to departmentalism
on railroads: that the maker of bricks may state his case to the
maker of bricks and that the man who shovels coal may deal with
one who know~s what it is to shovel coal. The chief objection is
that discipline may be impaired and the authority of the line
organization undermined.

The ultimate result of departmental and committee control
is an organization which tends to the form on page 125.

At c, is the executive in control. Under him are the staff
advisers b, b, b, each of whom (like the three departmental
chiefs on a railroad) is in charge of some one phase of the work.
At a, a, a, a, are the men farther down. Each man has many

INDUSTRIAL ORGANIZATION 125

masters: one, perhaps, who sees that he is on hand and keeps
busy; another who tells him how fast to run his machine and what
tool to use; another who compels him to keep his machine clean
and properly oiled, and so on.1 Whereas line organization
branches out, staff organization (the type now considered)
focuses. Staff organization puts at the top experts in each
phase; the best men who can be obtained on power, repairs,
cutting speeds, belts, material despatching, handling men, etc.

Line organization demands all-round men for the high positions,
and when in the larger works such men of sufficiently high grade
cannot be found, staff organization is essential. It has its
defects. No man can effectively serve two masters, but the de-
fects are minimized in exact proportion to the clearness of
differentiation of function of the staff experts.2

The modern industry must, as we think, have both line and
staff organization: the latter superimposed on the former, and
differing from the former in that it accomplishes its work by
persuasion founded on knowledge rather than by law backed
by force. Staff experts must be exceptionally high grade men;
but an effective line organization (if one ever existed) would de-
mand men of almost superhuman characteristics.

SELLING SYSTEMS

To keep his plant running, the general manager must sell
his output. There are four recognized methods of selling the
product of a factory:

a. To the consumer through traveling or located representa-
tives.

1 In introducing the more recent "profit-sharing" wage-systems, for example, four staff
officials are usually contemplated; the gang boss, who despatches the work; the speed boss,
the inspector, and the repair boss.

2 Line organization, too, has its defects. According to Mr. Emerson's picturesque state-
ment (too forcible, we think) it is usually "autocratic authority at the top — delegated au-
thority and imposed responsibility all down the line, and anarchy everywhere."

126 WORKS MANAGEMENT

b. To the consumer by mail.

c. To jobbers and dealers.

d. To agencies.

Selling was once regarded as one of those fine arts that defied
rules and standards and could be discussed only by the initiated.
It is now being reduced to a system and a science. Salesmen
are formally trained from suitable raw material. Sales records
are kept with the same detail and thoroughness as records of
manufacturing cost. Selling is being reduced to a business basis,
and bribery as an aid to accomplishment, with exorbitant
expense accounts as necessarily associated evils, is now discoun-
tenanced. The salesman — especially the engineering salesman —
is a higher type of man than he used to be. His is a difficult art,
one in which the attainment of results is often chiefly a matter of
chance; his position is hazardous, he is productively short-lived;
and if he is successful he ought to, and does, receive a high reward.

The salesman must thoroughly know his goods and must
believe in them. He lives closer to the factory than he used to;
he keeps the factory in touch with the requirements and preju-
dices of the ultimate consumer. His manager will plan demon-
stration meetings and conventions where a carefully worked out
program will be carried on for his benefit.

THE SALESMAN'S RECORD

The salesman's responsibility is to sell profitably. A record
will be made of his gross sales and unit prices obtained. He
may daily report all attempts, with reasons for failure or state-
ments of success. He must know what ideal is in mind for him;
what products it is most necessary to sell, and if possible what
quantity should be sold in his territory in a given time. He
must be posted on stocks carried and sufficiently so on produc-
tive conditions that he may intelligently discuss questions of
time of delivery with his customers. The manager should know
the distribution of consuming capacity, so that he can consider
daily whether the channels for outflow of his product are being
properly kept open. By prescribing the volume of sales in each
territory he treats the market like his own plant, as a link in the
conduit system of production. By prescribing limits of selling
price and selling expense, and steadfastly adhering to these ideals,
he virtually standardizes his profits in the same way as he aims
to standardize costs.

INDUSTRIAL ORGANIZATION 127

WHOLESALING

When goods are. sold to dealers, it must be remembered that
they are to sell them again, and that they must make a profit.
Under ideal conditions, the manufacturer would sell to jobbers
(wholesalers) only, or to dealers (retailers) only, as the case may
be. Under most conditions, he has to sell to both and to the
consumer directly as well. He must then "protect" the dis-
tributor by charging the other men a higher price; if the price to
the consumer is $1.00, for example, that to the dealer might be
80 cents and that to the jobber 70 cents. The profit to the
wholesaler is usually less than that to the retailer, because the
former needs a less elaborate equipment in show-room and sales
people; he deals with things in bulk. Usually the differentiation
in price is made excessive; that is, in the example assumed, the
wholesaler would expect to sell to the retailer say for 78 cents,
and the retailer to the consumer perhaps for 95 cents.

In many industries, the product is always sold to the consumer,
and no such differentiation of price is necessary.

AGENCY

Selling methods often give rise to problems connected with the
subject of agency. In law, agency is a contract between one
(a principal) who delegates authority to act for him, and another
(an agent) who acts under such delegated authority. Agency
may be general, covering all affairs, or all affairs of a particular
kind, or special, when the scope is specifically limited. Limi-
tations of agency concern outsiders only when they are made
aware of such limitations. The act of the agent, within the pre-
scribed limitation of his powers, is legally the act of the principal;
the former has no individual responsibility. Agency may be
conferred either prior or subsequent to the performance of a
described act. Conference of authority to accomplish a pre-
scribed result implies a grant of authority to use reasonable
means necessary. An agent must not profit by his acts as an
agent in any way other than that prescribed in his contract.
A principal may and should disavow unauthorized acts of an
agent. Public notice should be given of the termination of an
agency.

The branch sales office of a manufacturing concern is usually
in charge of a sales manager, who may be an agent empowered to

128 WORKS MANAGEMENT

contract for the sale of product. In some cases he has no such
formal authority, ratification of contract being kept in the hands
of the general officers. He may not even have authority to
purchase necessary office supplies, but in many instances a
sufficient number of precedents will accumulate to make the acts
of the sales office binding upon the organization.

CONSIGNMENTS

Sometimes goods are sent to jobbers or retailers, not as the
result of a sale, but merely that they may endeavor to sell them.
Such a shipment is a consignment. Shipments of farmers to
commission merchants are in the nature of consignments. When
goods are consigned to some firm, that firm becomes for the time
being, the agent of the manufacturer. Its authority and respon-
sibility should be clearly defined, so that there may be no ques-
tion as to the price at which the goods may be sold, their insur-
ance, or other vital matter.

INTEGRATED INDUSTRIES

Industrial management has been in recent years profoundly
modified by the growth of large corporations having many works.
In the greater number of cases these have originated by the
combination of existing plants, each owner or set of owners
surrendering his or their ownership in one plant in return for
shares in the integrated organization.

To harmonize conflicting interests and finally effect such a
combination is a gigantic task, a task never quite satisfactorily
completed. Each individual owner must be given what he
agrees to accept as his just share in the total stock; many of
them wish to have important posts in the management of the
new corporation; many, perhaps, are bound by contracts with
their officials (or do bind themselves at the eleventh hour) , which
the new organization must honor no matter how ill they fit in
with its own plans.

In consequence, integration brings about problems, and may
cause losses, peculiar to itself. The anticipated "economies due
to consolidation" are not automatically realized. They must be
worked for, like other good things.

The integration which we are considering is not of that kind
occasionally practised throughout our industrial history, where

INDUSTRIAL ORGANIZATION 129

neighboring industries have united in some one or more of their
activities. It is an integration which ignores or abolishes
geographical lines, putting under one management works located
perhaps thousands of miles apart. One of the first of the
new problems which it confronts has therefore to do with
transportation.

An individual manufacturer usually has one plant to which he
must bring all raw material and from which he must ship prod-
uct. The integrated industry has many plants; and it must
consider, in the light of transportation costs,

a. From which territory it may best s apply each mill with
material.

b. From which mill it should ship to each market its product.

A mine sells its ore to the smelter which offers the highest re-
turns, transportation charge considered. A smelter buys its ore
from whatever source supplies it most cheaply. Combine the
mine and the smelter; the attitude of the new corporation toward
other mines and other smelters will now be determined by a new
policy.

Let us go further: A corporation owns many mines and smel-
ters. The smelters produce product and by-product from the ore.
There is a transportation cost between ore and smelters, between
smelters and metal market, and between smelter and by-product
market. Until conditions are standardized — and they never are
completely standardized — a rather complicated calculation must
be made in arriving at the price to be charged on a proposed
production order — a calculation which must take account of the
particular producing mine, the particular smelter, the cost of ore,
the price realized for by-products, and the three freight rates.

Such problems as these warrant the creation of what is prac-
tically a new functionary under integrated organization — the
traffic manager or supervisor of transportation. There are in-
dustries in which the transportation cost exceeds the cost of
labor and supplies for mill operation. In these, the traffic
manager is an important factor in production economy.

Cost keeping, in the large corporations, takes on a new aspect.
Methods, systems, and records will be now compared and only
the fittest allowed to survive. Records will become comparative
as well as chronological. The unit cost of keeping costs — the
expense of maintaining the statistical department, as related to
the work which it does — will be greatly reduced because the work

130 WORKS MANAGEMENT

becomes more repetitive. A margin of funds may thus be avail-
able for employing a higher type of statistician than could be
afforded by any of the old constituent works. In general, how-
ever, the chronological type of cost comparison (see Chapter III)
will be given less prominence than before. Historical statistics
are a dead language. Side-by-side comparisons of mill operation
are alive, and the data for analysis of the facts they show are at
hand.

The purchasing department, too, in a large aggregation of
works, may be more competently organized and more economic-
ally administered.

Insurance becones a large matter; an expert may be employed
to look after it. The business aspect alone requires special
experience and training, and the construction work associated
with sprinkler and hydrant systems and fire-resisting types of
building demands some degree of engineering ability.

A high grade chief engineer to supervise the general department
of power generation will be found needed; and in general, the
whole tendency following integration is toward the introduction
in the organization of high-grade staff officials, having jurisdiction
not over geographical territory but over certain items of operation
and cost.

A typical organization might be as below:

f Purchasing agent.

J Insurance manager.
Traffic manager,
manager. 1 Chief engineer.

Statistical department.

President.-! I MiU manage, { Mil1

bales [ superintendents.

manager.
Accounting department.

Here the five non-productive officials subordinate to the
general manager form, with the mill manager, the staff or advis-
ory committee. Each of these five men has authority, within
his sphere, over the mill superintendents. The last look to the
mill manager for direction as to matters of production; to the
chief engineer, as to matters of power and repairs; and so on.
The system is not ideal; the authority of the five staff men may not
be sufficiently decisive; the mill superintendents have too many
bosses; but it is the best we have.

INDUSTRIAL ORGANIZATION 131

THE NEW TYPE OF WORKS MANAGER

The works manager of the old regime was a general supervisor,
left comparatively free from matters of detail and occupied
mainly with questions of policy. His responsibility, authority,
and freedom of action were great. The precisely reverse con-
dition has been brought about by integration; and men who
developed under the old system do not easily adapt themselves
to the new.

The works manager now is a local man with local interests,
without the broad view necessary to enable him to decide
questions of policy, concerning which, indeed, new data are now
at hand. Instead of providing good judgment and courage for
his subordinate engineer and repairman and purchasing agent,
he is himself spurred from above by men of these kinds holding
high staff positions in the general office. He must often do
things in his plant which will injuriously affect his cost record,
for the sake of the business as a whole. He used to expect just
this sort of thing from his department chiefs — subordination of
their departments in the interest of the whole works — but never-
theless the shoe pinches now.

In the past, operating cost was only one of the criterions by
which the manager was to be judged. To-day it is everything.
Once he was a general manager. Now he is a shop superintend-
ent. At least this is the way he feels about it. If he is too old to
learn, he retires; and the new type of works manager succeeds
him. This is the man with the pruning-knife for costs, not the
stout well-dressed magnate of former days, but the young man
with his sleeves turned up who knows what is going on everywhere
in the works, and why. He is an " executive officer" — one
who does things; not a directing head. The place for the mag-
nate— if he has a place — is in the general office; not in the bustle
and noisy rhythm of the mill.

THE ORGANIZATION OF LABOR

It is proper to consider here the workingman's ideals of organ-
ization as well as the employer's, for workingmen are getting
quite systematically organized. We may look at this matter in
either of two ways: from the dispassionate standpoint of the
student of industrial conditions, or from the selfishly interested
standpoint of the employer.

132 WORKS MANAGEMENT

The labor organization problem is almost always discussed
with ignorance, prejudice, or indifference — or, strangely enough,
with all three.

In the beginning of things industrial, employers were men who
had been workmen and few shops ever worked more than a
dozen hands. The early colonists who came to America in some
cases aimed at a form of idle communism. We are indebted to
Captain John Smith for the law laid down for their benefit:
"he that will not work shall not eat."

Two hundred and fifty years ago wages in the various trades
were in England fixed by statute. The invention of the steam
engine originated or greatly stimulated the " factory system " of
England, and since then industrial establishments have greatly
increased in size. For many years England prohibited the
export of machinery in the vain attempt to become industrial
mistress of the world. The cotton gin and water-power,
and later, iron and steel, made the United States an industrial
power in its first century. During this century, prices and
wages both increased, and the workman's standard of living was
elevated.

The first " trade union" in the modern sense was founded in
Scotland in 1796. Three years later the members of a union
were tried for a conspiracy to raise wages. The year 1800
witnessed an Act of Parliament virtually prohibitive of labor
unions; they were in consequence organized secretly and were
guilty of many cruelly unlawful acts, to the great detriment of
trade. The first crude attempt at a " Factory Act" for the
protection of workers was made in 1802.

The trades were rapidly organized in the United States during
the first decade of the nineteenth century. The English Parlia-
ment repealed its prohibitory law in 1824. The period from
1825 to 1850 was one of communistic or socialistic agitation
everywhere. The first "welfare work" for employees was prob-
ably that conducted by Robert Owen at Lanark from 1819.
During this period, papers and periodicals devoted to the inter-
ests of labor first appeared, and the "single tax" idea came into
discussion.

Among reforms attempted by the labor element were the
abolishment of imprisonment for debt, decrease in allowable
number of working hours for women and children, increase in
minimum working age, a uniform mechanic's lien law, the eight-

INDUSTRIAL ORGANIZATION 133

hour day on government contracts, the establishment of
bureaus of labor statistics, the passage of factory inspection laws,
curtailment of number of apprentices, abolishment of productive
convict labor, repeal of oppressive laws relating to garnisheeing of
wages, imposition of liability for wages upon stockholders of
corporations, supervision and regulation of " trucking" or
" company stores"; and of course and perpetually, general
decreases in hours of labor and increases in wages.

With all of these reforms excepting possibly those with regard
to apprenticeship, convict labor and stockholders' liability, many
people are in sympathy; probably even many employers, with
reservations as to time, place and opportunity. Many of them
have been accomplished, to the great benefit of the public. Work-
ing hours have been rightfully decreased; the day's wages in-
creased; yet the cost of production cannot have increased else
the standard of living would not have been elevated. The
results (on the basis of this data) of labor organization have been
on the whole good.

The present program of the labor unions (or of the friends of
the workmen) includes:

1. Revision of our workmen's compensation laws, whereby
the loss due to killing or maiming in industrial service shall be
distributed over the industry rather than concentrated on the
workman or his family.

2. An apprehensiveness toward increased production by
profit-sharing systems of wage-payment or other methods. This
fear underlay the old antagonism to machinery. It survives
in the limitations of apprenticeship. It is based on a failure to
comprehend that all our wealth is derived from our productive-
ness, that when costs are reduced, consumption increases in
more than proportionate degree, and that increased productive-
ness ultimately raises the standard of living.

With any proposal to restrict production by direct or indirect
means, either generally or in exceptional cases, we have no sym-
pathy whatever. Such restriction, whether brought about by
employer or employee, is the greatest of industrial misfortunes,
and may evidence the deepest of industrial crimes.

3. The closed shop. This phrase refers to the shop or works
in which union labor only is employed, as against the "open
shop," in which both union and non-union labor are allowed, and
the "scab shop" which employs non-union labor only. We advo-

134 WORKS MANAGEMENT

cate the "open shop" as against either of the others because it
alone aims to stimulate production by free competition.

LABOR WARFARE

The history of industrial strife between employee and employer
is sickening. An organization of manufacturers was formed to
oppose the labor unions as early as 1832. It antagonized the
then "ten-hour" movement. Strikes were once considered
indictable as conspiracy. Strikes, lockouts, boycotts, and
violence of all kinds have been common, often without indict-
ment or punishment for manifest crime, for eighty years. Labor
unions have been united in great federations of national or inter-
national scope, and these have increased their already enormous
power by combinations among themselves, taking into one
organization men of all trades, united solely by their common
interests as union workmen.

As with international war, the direct losses are the smallest.
There is loss of wages by strikers and others, death and injury
by violence and indigence, damage to property, loss of produc-
tion, and great inconvenience and loss to the public. It was
estimated by " Bradstreet's" that the loss to the country by the
Homestead strike of 1892 was not less than $80,000,000. The
coal strike of 1903 for a time doubled the cost of fuel in New York
City.

A large proportion of strikes (possibly also of lockouts, although
this cannot be stated) are based on what may be regarded as
insufficient grounds, such as for recognition of the union, against
objectionable officials and in sympathy with other strikers who
may or may not have a real grievance. A strike for a reduction
of hours or an increase of wages is simply one form of argument,
and may be perfectly justifiable; yet it is too costly and destruc-
tive to be long tolerated as an ordinary measure by an awakened
public. It is the manager's business to keep down costs; it is not
the business of the labor unions to so increase production that
costs may be kept down while wages are simultaneously increased.
The interests of the two are dissimilar. Like two rival depart-
ment heads, they need a common boss to dictate to both. And
that boss is going to be — the public.

Compulsory arbitration is beginning to be talked about even
in international affairs. It is certainly worth considering in

INDUSTRIAL ORGANIZATION 135

affairs industrial. Organization of manufacturers to fight the
labor unions is not the way to finally settle the labor problem.
The British Engineering Trades Agreement of 1907 exemplified
the proper way. The arbitration plan in Canada has developed
good working features. Our National Civic Federation aims at
conciliation and reasonableness of discussion. The road to
industrial supremacy lies through industrial peace.

CHAPTER IX
PRINCIPLES OF ACCOUNTING

The results of industrial operation are expressed in their final
form — in terms of dollars — in a special vocabulary constituting the
practice of formal accounting. The history of an industrial
enterprise is significantly recorded in its books of account.

Ordinary bookkeeping is a highly logical edifice reared on the
foundation of a few arbitrary but simple conventions. Three
rules underly the whole of it. With a thorough grasp of these
rules and the application of a little common sense, any man may
follow — may even in some cases devise — the plan of an ordinary
system of accounts. These rules are:

Make Two Records of Every Transaction. — Every business
transaction concerns two people or interests. One of these
interests is our own. Whenever a thing of value passes from
"us" to A, we debit (charge) A with the money value of that
thing, at the same time crediting ourselves with the same value —
because it has come from us. If the thing of value passes from
A to us, we debit "us" and credit A. Whenever a debit entry
is made, a precisely equal credit entry is simultaneously made to
some other interest or "account," and vice versa.

The total of debit entries (always made on left-hand ledger
pages) will therefore at all times equal the total of credit
entries (on right-hand pages). Double entry bookkeeping is
thus a simple device for checking the correctness of the accounts,

(II)

Subdivide "Us" into the Various Interests of "Us."— If this
were not done, the account or interest "us" would appear too
frequently for convenience and there would be no such classifica-
tion of our interests as is necessary in order to show in what
respects our business operations are going on profitably or

J36

PRINCIPLES OF ACCOUNTING 137

unprofitably. Some of the interests of "us" are given the
artificial titles; —

Cash, signifying the contents of the cash drawer or the bank
account;

Merchandise, signifying goods in warehouse;

Bills receivable, which regards "us" in our aspect as a creditor
(bills the payment of which is receivable by us) ;

Bills payable, having to do with our aspect as a debtor (bills
the payments on which are to be made by us) .

There is thus no account "us." If we pay out money we
credit not "us," but cash. If we receive merchandise, we debit
not "us," but mdse. If a man has received goods from us and,
instead of paying cash, gives us his bill or note for the amount,
we take care of the matter in this way:

Cr. Mdse.} for the goods;

Dr. John Smith, the purchaser, for the goods;

Cr. John Smith for the amount of his note;

Dr. Bills Receivable (notes receivable) with the amount of
such note. Smith has given us his note, which is presumably
good, so that his account is "squared." (Note that the complete
cyclic transaction involves four entries.) But we have not
received any money; we cannot debit cash. We therefore create
an artificial individual, Mr. Notes Receivable. We give the note
to him, debiting him with it. Some day, we expect, it will be
paid; when it is, we will credit Mr. Notes Receivable and debit
cash. The account of the former will then balance.

In the same way, if we give a note, we debit the person to
whom we give the note and credit "Mr. Bills Payable," thereby
virtually assuming that that fictitious individual has paid our
debt for us. When we repay him by honoring the note we will
debit him with the amount and credit cash. His account. will
then balance.

an)

A debit balance represents either a resource or a loss; a credit
balance represents either a liability or a gain. If the sum is one
that we shall eventually either receive or pay, it is correspondingly
either a resource or a liability; otherwise, it is either a loss or a
gain.

When we debit an account, it is because that account has
received something of value. If that something of value came

138 WORKS MANAGEMENT

from us, and the transaction is closed, no return being expected
from the account in question, then the debit represents an
expense, or loss. For example, we buy a broom, crediting
cash for the money and debiting office supplies (one of the arti-
ficial subdivisions of "us"). The debit entry to office supplies
represents an expense or loss, because we never expect to get
back that broom (or anything else in lieu thereof) as value.

If the "something of value" debited came from some one else,
say a supply of merchandise from Thomas Brown, it is in our
possession as a resource as long as it is a debit. When the
merchandise stock is drawn on for distribution, credit entries
will be made which will reduce the debit balance in the same
proportion as our resources in merchandise are reduced. In the
case of the broom, the debit was a loss, because the article was
immediately consumed.

We credit John Smith when he pays us money. If this is the
close of a transaction, the credit represents income or gain from
our last previous condition. But if this money comes to us as
a loan which we must eventually repay, it is not a gain but a
liability.

It is easy to determine whether balances represent resources or
losses, liabilities or gains, if we carefully consider whether or
not the transaction is completed.

SUMMING UP

At the close of a fiscal period we total the debit and credit
entries to the various accounts, making a list of the balances.
These are then grouped into the four classes, resources, losses,
liabilities and gains. The net result of combining losses and
gains (a debit or credit balance, as the case may be) is now trans-
ferred to an account loss and gain. Itemized balances are wiped
out by entries "To (or by) Loss and Gain" and the correspond-
ing centra-entries are made under Loss and Gain account. If the
aggregate of balances is a credit (gain) then the aggregate of
closing entries will be debits and Loss and Gain will be credited.
All accounts (excepting those involving resources and liabilities)
are now closed and a new set of books may be begun. Profits
may then be divided among the owners by debiting Loss and
Gain and crediting the owners.

The only accounts carried forward on the books to the next
year are those involving resources and liabilities and the owner's

PRINCIPLES OF ACCOUNTING 139

accounts. A statement of resources and liabilities is made to
show the condition of the business; the loss and gain account
shows whether its operation has been profitable during the fiscal
period.

BOOKS OF ACCOUNT

Original entries of transactions are made either in the cash
book or the journal. All cash transactions are entered consecu-
tively in the former and the totals only appear in the ledger,
which is the final record. The cash book is virtually a "page
torn out of the ledger," kept separately in order that the large
number of "cash" transactions maybe concentrated and sum-
marized in the final record.

INVENTORY

An account like merchandise might at the end of the year show
a debit balance (loss) were not consideration given to the amount
on hand as shown by examination or inventory. Unless we
have sold merchandise aggregating in value the cost of that which
we have purchased, there will be a debit balance. Inventory
shows this debit balance to represent something physically exist-
ing; the merchandise transaction is not closed, so that the balance
represents a resource instead of a loss. But how shall we ascer-
tain and show what the profit through the sale of merchandise
has been?

The method is thus: Assume that our purchases of merchan-
dise aggregated $4000. One-half of this stock has been sold
at a profit of $1000, bringing us in $3000. The merchandise
account now stands charged with $4000 and credited with $3000,
leaving a debit against it of $1000. We ascertain by inventory
that our stock of merchandise is worth (at cost) $2000. On the
credit side of the merchandise account we write,

By inventory . . . $2000.
On the debit side we write,

Profit on merchandise — to Loss and Gain . . . $1000.

The account now balances. But the contra-entries have not
been made. These are, for the latter, a credit entry under
Loss and Gain of $1000; and for the former, on the "merchan-
dise" page of the next year's ledger, a debit entry "to inventory,"

140 WORKS MANAGEMENT

$2000. This throws the account again out of balance; but the
debit balance now represents a resource — stock on hand; and is
carried forward as such during the next fiscal year.

EXAMPLE

We may sum up all of these principles by considering a simple
illustration. A and B engage in business, each contributing
$2000. The entries are,

Cr. A, stock account, $2000

Cr. B, stock account, 2000

Dr. Cash, $4000

The business starts with resources of $4000 and liabilities of
$4000. Now assume the following transactions:

We buy a desk of J. Smith for $50, paying cash.

Cr. Smith by invoice for desk, $50

Dr. Office Fixtures, 50

Dr. Smith to cash, 50

Cr. Cash, 50

Smith's account balances.

en)

We buy merchandise of T. Brown for $1000, giving a note.

Cr. Brown by invoice for mdse., $1000

Dr. Mdse., $1000

Dr. Brown to note, 1000

Cr. Notes Payable, 1000

Brown's account balances; our stock of merchandise is a
resource, the note we have given is a liability.

(Ill)

We sell $1500 worth of merchandise to A. Green for $200 cash
and a note for $1300.

Cr. Mdse., $1500

Dr. A. Green to mdse., $1500

Cr. A. Green by cash and note, 1500

Dr. Cash, 200

Dr. Notes Receivable, 1300

Green's account balances; we have a resource in the note
receivable by us.

PRINCIPLES OF ACCOUNTING 141

(IV)

We sell $200 worth of merchandise to R. Lee.

Cr. Mdse., $200

Dr. Lee, $200

Payment has not been made by Lee and his debt to us is a
resource.

(V)

We pay the stenographer, Miss Kane, $15 — salary for one week.
Cr. Cash, $15

Dr. Miss Kane, $15

Miss Kane's services virtually balance her account; the tech-
nical debit balance which appears is a loss or expense.

CLOSING

We have now readied the end of the fiscal period. The fol-
lowing accounts are open:

1. Cr. A, stock account, $2000

2. Cr. B, stock account, 2000

3. Dr. Cash, $4135

4. Dr. Office fixtures, 50

5. Cr. Mdse., 700

6. Cr. Notes payable, 1000

7. Dr. Notes receivable, 1300

8. Dr. R. Lee, 200

9. Dr. Miss Kane, 15

5700 5700

Our trial balance thus checks. We count the cash to ascertain
that we actually have the $4135 that the books call for. We
examine our office fixtures and merchandise and find them worth,
respectively, $40 and $200.

These two accounts are then treated as follows:

OFFICE FIXTURES

Dr. to balance, $50

By depreciation, $10

Forward- — by inventory, 40

50 ~50
Brought forward — to inventory, 40

142 WORKS MANAGEMENT

DEPRECIATION

To loss on office fixtures, 10

We now have two accounts instead of one; the debit balance
of $10 to depreciation is a loss; the debit balance of $40 to office
fixtures is a resource and heads this account for the next year.

MERCHANDISE

Cr. by balance, $700

By inventory, 200

To loss and gain, $900

900 ^900
To inventory, 200

The inventory balance of $200 starts the account for the next
fiscal period. The $900 has still to be entered in Loss and Gain
account. Remembering this, we draw off the balances as follows:

Loss AND GAIN

To loss on office fixtures (depre-
ciation), $10
Merchandise, $900
Miss Kane, 15

25 900

Balance, which may be dis-
tributed to the owners of
the business, 875 1

1)00 900
RESOURCES

Cash, $4135

Office fixtures, 40

Mdse., 200

Notes receivable, 1300

R. Lee, 200

5875

LIABILITIES

Stock accounts, A and B, $4000

Notes payable, 1000

5000

This is not an entry, but a memorandum.

PRINCIPLES OF ACCOUNTING 143

The total debits still equal the total credits. The necessary
contra-entries to Loss and Gain balances will of course have been
made to the respective accounts. The net result of the year's
business has been a profit of $875 available for the owners, and
an increase in net assets which is also necessarily $875.

SECONDARY STATEMENT'S

This illustration describes a mercantile business. Practically
the only "operating expense" considered was the $15 stenog-
rapher's salary. In a manufacturing business, operating expense
may be the largest item of cost, and this is often greatly subdi-
vided. The accompanying is an example of the sort of statement
(page 144) which might be made from the data furnished by the
books of account. It is not a wholly satisfactory statement,
because the inventory adjustments do not specify the special
accounts to which they apply; these were probably mainly
repairs in the first instance and fuel in the second.

The data on which the bookkeeper works are: invoices from
shippers or to customers, the payroll, stock material reports,
department reports, the collection department's records, etc.
No unchecked document is regarded as sufficient evidence for a
ledger entry.

The financial operations of a corporation are usually summed
up in a statement which gives

1 . Gross earnings (receipts) .

2. Operating expenses, direct and indirect, including taxes.

3. Net earnings, = 1 — 2.

4. Fixed charges (interest on bonds) .

5. Surplus or gross surplus, =3 — 4.

6. Dividends, common and preferred.

7. Net surplus, = 5-6.

The net surplus for any given year may of course be negative
(a deficit) ; dividends or even bond interest being paid from a pre-
viously accumulated surplus.

In statements of resources and liabilities, a special memoran-
dum is sometimes made of what are called "Quick Assets"—
those which are cash or may be readily converted into cash, like
notes and bills receivable, some merchandise or material, market-
able securities of other companies, etc. Land, buildings, machin-
ery and patent rights are examples of resources not regarded as

144

WORKS MANAGEMENT

quick assets, and not readily available for use in case of financial
emergency.

NATIONAL EXTRACTION COMPANY

MANUFACTURING EXPENSE FROM ELEVATOR TO TANK

AUGUST, 1911

Plant

Superintendent $ 625 . 84

Watchman 581 . 78

Lighting ,.. . 10.93

Mill expense . 789 . 86

Repairs ' 7,657.90

9,666.31

Deduct inventory not used 1,451 . 66 $8,214 . 65

Steam

Fuel 3,063.10

Water rent 162.66

Engineers 1,298 . 16

Firemen 609 . 99

Handling coal and ashes 202 . 97

Engine and boiler repairs 1,329 . 24

Cylinder and engine oils • 50.22

Helpers | 380.30

7,096 . 64

Add inventory used 1,205.36 8,302.00

Labor

Foremen 428.44

Pressmen 1,804.39

Moulders 1,932.44

Cake strippers 1,501 . 00

Packers 704.43

Miscellaneous .*. 2,808.91

Temperers 218.17

Trimmers | 147 . 49

Filterers [ 281 . 60 9,826.87

340,359 bushels seed crushed ; 26,343 . 52

1 Bushel average . 0774

Plant 0.241

Steam 0.0244

Labor.. . 0.289 .0774

PRINCIPLES OF ACCOUNTING

SELLING EXPENSE FROM TANK TO BANK

145

1,937,335.06 gallons oil sold

Barrelling, net $30,659.90

Boiling and refining, net 1,925 . 89

Discounts arid allowances 5,503 . 75

Freight and drayage 19,118.69

Selling expense (managers, salesmen, etc.), net 12,120.45

Executive expense (managers, office salaries, etc.) . . 14,778.74

Interest 20,472.64

Insurance 3,785 . 78

Taxes 3,562 . 38

Contingent fund 923 .37

Per gallon

112,851.59
.0582.

The statement below shows the form in which the final
reports of railway companies are usually made. In this par-
ticular case (that of a first-class road) gross earnings show
a fairly steady increase, and the percentage of net earnings is
high. Maintenance expenses have been increased, but the in-
crease in gross earnings has been in larger proportion. The trend
of gross earnings accounts also for the decreased proportion of
fixed charges. The freight business of the road seems to have
risen from a low ebb in 1902. The " Appropriation of Gross
Income" and the first two lines of the table of "Statistics" are
particularly significant when comparisons are made between
different roads.

DELAWARE, LACKA WANNA AND WESTERN R. R.

Year

Average miles operated

Gross earnings

1896

771

$21 403 506

1897 . . .

771

21 002 017

1898

771

22 168 344

1899

771

21 325 122

1900

771

20 887 763

1901

771

23 507 634

1902

771

21 398 764

1903

770

29 180 964

1904

770

28 701 991

1905

770

31 951 063

146 WORKS MANAGEMENT

INCOME ACCOUNT, YEAR ENDING DECEMBER 31. 1905

Average miles, operated, 770

Total

Per mile

Gross earnings

$31,951,063

$41 494

Operating expenses

17 827,974

23 153

Net earnings

14 123 089

18 341

Miscellaneous receipts

3 938 963

5 115

Total net income

18,062,052

23 456

Fixed charges . .

6 536 137

8 488

Surplus

11,525,915

14 968

OPERATING EXPENSES

Total

Per mile

Maintenance of way

$4 640,207

$ 6026

Maintenance of equipment

2,871,911

3,730

Conducting transportation
General expenses

9,816,196
499,660

12,748
649

Ratio of operating expenses to gross earnings, 55.8 per cent.
Miscellaneous receipts above include $3,295,426 net profits of coal depart-
ment.

APPROPRIATION OF GROSS INCOME

1905

1904

1903

1902

1901

1900

For maintenance

20.9%

20.8%

19.7%

26.9%

22.5%

25.8%

expenses.
For conducting trans-
portation and general

28.7%

27.1%

26.7%

33.4%

30.6%

34.8%

expenses.
For fixed charges
For surplus

18.2%
32.2%

20.9%
31.2%

21.7%
31.9%

30.4%
9.3%

25.0%
21 9%

27.5%
11 9%

100.0%

PRINCIPLES OF ACCOUNTING

STATISTICS

147

1905

1904

1903

1902

Ton miles per mile of road
Passenger miles per mile of road
Miles, second and additional
main track.
Miles yards and sidings

3,826,713
508,363
480

795

3,526,933
477,235
480

756

3,598,454
461,509
480

691

2,247,883
410,691
473

696

CHAPTER X
PLANT: THE PHYSICAL BASIS OF THE INDUSTRY

SYSTEMS FOR CARRYING ON CONSTRUCTION WORK

The planning of an engineering works may be carried on a.
by the regular plant staff, strengthened by the employment of
special men, 6. by a consulting engineer or mill architect, c.
by an engineering-contracting force, or d. by a firm of engineer-
promoters. The objection to method a. arises from interference
with routine work and lack of broad engineering experience, but
it must often be adopted in special lines of manufacture or in case
of extensions to existing plant. Method 6. is most orthodox of
all and the specialist in works construction is apt to possess a
collection of valuable data unavailable to the proprietor or his
staff. Method c. is simple and attractive but the proprietor's
only protection against the diverse interest of the constructor lies
in the latter' s reputation. Under the fourth method, promoters
frequently secure lucrative ' engineering (and often, contracting)
profits by advancing money for construction. The business is
one of money-lendin'g rather than of engineering, and costs are
often high.

GENERAL PRINCIPLES OF PLANT LOCATION

The layout of plant has not been reduced to anything like a
scientific basis, but experience leads to a few well defined rules.
Every feature of construction and equipment, as well as of organ-
ization and operation, will be found to be related to the " funda-
mental ratio" of value of annual output to value of plant. (See
page 8.) The higher the value of annual output, in general,
the greater will be the warrantable expenditure in construction.

Cost of land is seldom a determining factor in location, and
even when it is so, this is frequently not a matter which the design-
ing engineer is required to consider. When the cost of material
is an important item in the business, the proper selection of a
site is of vital importance. Land is often given away to induce

148

THE PHYSICAL BASIS OF THE INDUSTRY 149

manufacturers to locate along a specific railroad or in some
growing town: sometimes a bonus is paid the proprietor in
addition. In most cases, transportation facilities are a first
consideration, although of relatively less importance where a
valuable concentrated product is made and the labor cost is large,
as in jewelry manufacture. Certain cities or districts like
Omaha, Chicago, Minneapolis, St. Paul, Buffalo, etc., are strategic
centers of transportation. Many plants have been erected near
Niagara Falls because cheap power is there available. Water
power has been responsible for the development of many Eastern
cities. Fuel supply is of first importance in some industries, and
this factor is responsible for much of the growth of Pittsburg.
Certain industries depend upon an ample or special supply of
water; a paper and pulp mill, for example, must usually be located
on an unpolluted stream. Where bulky raw materials must be
imported, a seaboard location may be necessary. Pure air must
be sought in some industries.

A frequently preferred location is in the suburbs of a large city,
where a five cent carfare brings an abundant labor supply within
reach. The quality of this labor may be inferior, and the induce-
ments of the city are apt to make workmen somewhat unsteady.
There are well recognized centers of supply of men for various
trades, as Paterson, N. J., for silk workers, Minneapolis for millers,
Southeastern New England for boot and shoe operatives, etc.
An isolated location, involving the establishment of a new indus-
trial community, is often chosen for large works. Here the work-
man's cost of living may be kept low by " betterment" enter-
prises, which, although involving additional investment, may be
made self-supporting. The time spent in construction must be
actively devoted to a canvass for men; but when men are secured
they are apt to remain quite permanently.

An urban or a suburban location has the advantages of munici-
pal fire and police protection, water supply, sewerage system,
and lower fire insurance rates; and the disadvantages arising from
higher taxes, municipal ordinances regarding smoke abatement,
etc. The avoidance of undesirable neighbors, present or future,
is a factor to be weighed.

The general location being determined, the means for ingress
and egress must be considered, llail communication is preferred
to water for nearly all purposes, the latter often being inoperative
for part of the yearv/ Safe approaches for employees must be

150 WORKS MANAGEMENT

conserved, and no peculiarity of construction should be contem-
plated which might cut off the plant from a fire engine.

DESIRABLE CHARACTERISTICS OF SITE

A level plot is usually the ideal, although for some purposes a
sloping hillside makes gravity conveying economical. The
direction of prevailing winds should be dwelt upon in the plan-
ning if comfort and high production are to be attained in hot
weather. A well-drained soil is of advantage and facilitates
trucking during construction. Soils differ widely in bearing power
and cost for excavation, both of which factors seriously influence
the initial expense for foundations. Low undrained spots are not
necessarily objectionable, as they may provide a place for the
disposal of waste.

The entire planning should be for an ultimate plant, even if
a dozen times the size of that to be immediately constructed, and
land purchases should be made on this basis. Land for enlarge-
ments is often held by abutters at prohibitive prices after a plant
is once established. It is desirable at the start to purchase an
ample tract or at least to secure long-term options on adjoining
land not immediately needed. The size of plot necessary depends
upon its shape. The importance of securing sufficient yard room
for storage and various operations is often not fully realized. But
while a purchase once decided on should be made liberally, the
buying (and the construction as well) should not be carried on
too hastily. Large savings in fixed costs may result from defer-
ring expenditures until the opportune time.

PRELIMINARY PLANNING

Even though the proprietor may have ideas apparently definite
regarding the space to be provided for his plant (a condition
most likely to exist when the new works is an extension or dupli-
cation of one already existing) , the mill engineer should make it
one of his first duties to critically examine this subject. If in
active practice in this field, he will gradually accumulate a mass
of statistics as to relation between floor area and output for
various processes. These data never become complete nor are
they ever sufficiently detailed. If they are based on reading
rather than on original experience, they must be employed with
especial caution, since differences in management, etc., may,

THE PHYSICAL BASIS OF THE INDUSTRY 151

even in plants working on the same products with the same
machines, lead to decidedly different rates of output. For
example, a shop in which day work was the rule might give only
half the tonnage per unit of space that would be obtained where
a scientific profit-sharing system of paying workmen was in
operation.

Comparisons, when made, should be based on some adequate
unit of output; generally, the tonnage. Where the output is
diversified, but a single principal raw material is used, its tonnage
may be the unit. In comparing locomotive works, statements
of floor space should be related to tonnage rather than number of
locomotives built; so also, of course, with shipyards. Tonnage
is the unit for a paper or pulp mill, but a ground-wood-pulp mill
may not be compared with a soda-process plant. In a linseed
oil works, the consumption of flaxseed is the unit; in a locomo-
tive repair shop, the number of pits is a crude but sufficient
unit; in a saw and planing mill, the feet of product will answer
for comparing plants working on similar grades; foundries mak-
ing similar products of like materials may be compared on a
tonnage basis, but a malleable iron pipe fittings plant should
not be grouped with one making water pipe.

Marked aberrations and inconsistencies will be found in all
such comparisons. These are due to a variety of causes, and are
perhaps most noticeable in connection with storage and assembly
departments. Nevertheless, after all discounting, properly
analyzed space data is almost invaluable for approximate esti-
mates; even drafting room and office space will be found, for each
manufacturing process, to have some fairly well established
normal ratio to output.

As many sets of figures should be compared as it is possible to
obtain, average ratios of departmental space to output ascer-
tained, and any extreme variations from average ratios separately
investigated. These variations will usually be found to be due
either to (a) special modifications of process or (b) errors in data.
For example, one comparison showed a boiler shop to have an
area of 4100 sq. ft. per unit of output, while the average of nine
other shops making similar types of boiler was 3000 sq. ft. In-
vestigation showed that the exceptional plant was making a
large number of small boilers and also doing an excessive amount
of hand riveting, both necessitating extra space. In another
instance, a preliminary comparison of six engineering works

152 WORKS MANAGEMENT

making the same product indicated that one was using about
half the foundry space per unit of final output that the others
were employing. The statistician afterward recollected that the
first plant purchased the larger proportion of its castings.

Besides ratios of space to output, there are other canons for
determination of plant area. In certain industries (not usually
those where heavy machinery is used) the space necessary
depends quite directly on the number of workmen. In others,
as in forge shops, a man and a machine form a unit from which
both output and space may be determined. (We are not now
concerned with space from the hygienic point of view, but simply
as related to the man's needs as an element of the mechanism).
Certain kinds of plants (e.g., spinning mills), use machinery so
thoroughly standardized that the floor area necessary for a given
output is known with mathematical accuracy. The engineer
needs simply to learn the dimensions and attachments of each
machine. In other works, as in locomotive erecting shops, or the
machine room of a paper mill, the machinery or product is so
special that the plant must virtually be designed to contain it
and no collection of general comparative data is needed.

In large, complex plants, particularly if some new variation in
method or process is to be introduced, it will sometimes be found
that no opportunity for bulk comparison exists. The plant must
then be divided into elements and these elements separately
considered in the light of data on like elements in various plants.
Any uncertainty will then be reduced to apply to one or a few
only of these elements. A paper mill, making its own lime and
soda-process pulp, was to be located at a point where the bulk of
the wood supply was of an extremely resinous nature, nowhere
else regarded as fit for making pulp. Special arrangements had
to be made to treat it. This special equipment having been
decided upon, that particular department, and the lime-burning
department, were designed to suit. All other departments were
planned as usual; the screen, bleach, beater and other buildings
were given such floor space as is usual for those operations in
other plants making the same sort of paper with a corresponding
mixture of fibers.

In these estimates and outlines, all figures should be drawn off
for the proposed ultimate size of plant. There is no other proper
way of "providing for extensions." The proprietor should fix
the size of the final plant, the engineer should plan it, and the

THE PHYSICAL BASIS OF THE INDUSTRY 153

two should trim it down to the dimensions authorized for imme-
diate construction.

Specific conditions may sometimes warrant radical departures
from normal space ratios: the introduction of an improved
machine; excessive cost of land, which may suggest unusual
concentration by high-storied buildings; commercial factors
indicating the advisability of providing excessive space; the
purchase of outside power, making power plant and coal storage
space unnecessary; division of the property as by street or stream,
making normal arrangement impossible, and many others. The
necessary provision for yard room is particularly dependent upon
such factors. The amount of space needed for the temporary
(and also for the more or less permanent) storage of raw materials
as received, in proper proximity both to receiving route and point
of consumption; of work in process; and of finished work; will
vary notably with the activity of the industry, its steadiness or
intermittence, the amount of capital invested, the occurrence of
seasonal shut-downs, etc.

BUILDING STANDARDS

Practically all mill buildings are in plan rectangles or groups of
adjoining rectangles. A trapezoidal form means more expense
in proportion to the floor space, and in many plants would be of
absolutely no more value than the inscribed rectangle, since a
crane could not reach the extended corner. Shapes of greater
irregularity are still worse.

The types of building used in large plants are three: the build-
ing of one high story, that of several stories of nearly equal height,
and that of a single low story. The first type usually appears in
one of the following forms:

(1)

J2L

(4)

(5)

The dotted lines represent optional longitudinal monitors
with louvres or skylights. Crosswise monitors, or flat skylights,

154 WORKS MANAGEMENT

either longitudinal or transverse, may be used alternately or con-
jointly. This type of building is used only on large work, and
its width is seldom less than 75 ft. The side spans in 2 and 3 may
be single story, as in 2, or provided with gallery floors as in 3, on
which light machinery only is used. The side span is not parti-
tioned off from the main span at a and b, as that would obstruct
the lighting of the latter. A high building of this type may
usually be lighted from side windows if the width does not exceed
100 feet, but ordinarily some one of the forms of overhead light
is provided for widths above 75 ft. unless the building is
exceptionally high.

The one-story low building is used (a) for small work where land
is cheap and separation of departments advisable, and (b) where
unusually good light is necessary in all departments. In the
latter case, the building must be narrow if side light is depended
upon, but the best lighting effect is obtained by the use of the saw-
tooth roof, with which there is no limit to the width of a building
which can be adequately lighted. Ordinary low buildings
may have a singly-sloped shed roof, or such a roof as that in
Fig. 1, without the monitor.

There are arguments in favor of a building of several stories,
where it can be employed. It economizes land, of course, but
it decreases the cost of floor space as well. A five-story building
occupying a given ground space requires somewhat more founda-
tion (but only slightly more excavation and form work) and no
more roof than one of a single story on the same space. For
very heavy floor loads, the many-storied building is, however,
impracticable. Light machinery only may be used on upper
floors; and unless the upper stories are abnormally high, standard
traveling cranes cannot be employed. The whole problem of
transportation and communication becomes complicated with
storied construction.

The necessary floor area and type of building having been
determined, the width is next considered. In low buildings
without top light, or buildings of more than one story, adequate
lighting is usually impossible if the width exceeds 60 ft. The
uppermost floor of a storied building may, of course, have top
light from saw-tooth skylights or otherwise. The single story
high building may be of any width, unless the height is beyond
any normal amount — say in the riveting tower of a boiler shop.
The determination of the desirable width depends largely on the

THE PHYSICAL BASIS OF THE INDUSTRY 155

crane service and on the sizes of materials and products to be
handled. Overhead electric traveling cranes have been roughly
standardized in spans of about 40, 55 and 70 ft. and it is usual in
large works to accept these by adopting corresponding building
spans. Those of 50 and 75 ft. should be sufficient for all the
important buildings of an engineering plant. By combining
these, widths of 50, 75, 100, 125, 150, 175 and 200 ft. may be
obtained. A wider single span than 75 ft. is usually considered
undesirable where traveling cranes are to be used.

The length of the building will suit the required area and
determined width as closely as is compatible with the use of a
standard " bay " (distance longitudinally from center to center of
column), adopting preferably, for the latter, an even number
of- feet somewhere between 12 and 20, to suit standard material.
A 20 ft. bay is common in large steel construction buildings.
There are objections from an insurance standpoint to the con-
struction of single buildings covering more than 40,000 sq. ft.
of ground space.

Heights depend upon necessary crane clearances, the method of
transmitting power, the nature of the work, and lighting re-
quirements. In storied buildings without standard cranes, the
floor heights will usually range from 10 to 18 ft. If a line of
shafting runs along a side wall, 10 ft. would be insufficient. A
locomotive erecting shop needs (a) 15 ft. of room above the floor
for the locomotive itself, (b) room for a crane, including overhead
clearance and (c) sufficient additional height for an economically
designed roof truss.

PROCESS MAPPING

The arrangement of buildings must suit the process of manu-
facture, and it is often recommended that the process be mapped
out and the buildings placed on the map to fit in proper points
along the straight or curved process lines. This sounds attractively
logical, but would sometimes lead to practical difficulties. Much
depends upon (a) the value of materials at various stages of com-
pletion and (b) their nature, as fixing appropriate methods for
handling them. In a cottonseed-oil mill, for example, the seed-
grinding must precede expression of the oil, while refining must fol-
low the latter : but so far as building arrangement is concerned, there
is absolutely no reason why the refinery may not be on the opposite

156 WORKS MANAGEMENT

side of the seed house from the press room, for oil can be handled
at an insignificant cost by pumping. Again, the questions of
freight and market are often such that the refinery may be
hundreds of miles distant from the rest of the plant. If the
plant is one in which small parts are made in large quantities
(particularly if the value of these parts is high), the question of
arrangement (or even of shape) of buildings is of relatively
small importance.

Much depends upon the quantitative relation between depart-
ments. A foundry is, of course, a feeder to the machine shop, and is
fed by the pattern shop. To what extent each of these depart-
ments feeds another is to be determined by the value of the
commodity fed. If the foundry is making a line of heavy
repetitional castings, worth not much over a cent a pound, such
a product can stand very little expense for handling, and the
machine shop must be close to the foundry. If a pattern shop
is making complicated, expensive patterns, which may easily
be worth $1.00 per pound, the expense of handling is a small
matter, and there is no need whatever to locate the pattern
shop close to the foundry.

There is no way of handling cheap miscellaneous castings auto-
matically. They must be lifted in and out of trucks or cars and
conveyed in lots from one place to another. It is almost univer-
sal, therefore, for each machine works to have its own foundry,
and to locate the foundry close to the machining department.
By " closeness" is not meant, necessarily, adjacence; but close-
ness with reference to the method of handling. If castings are
to be loaded on flat cars by a traveling crane, and then pushed by
a locomotive to the machine shop, to be similarly unloaded in
that department, it makes little difference whether the locomo-
tive pushes the flat car 100 ft. or 1/2 mile. Either distance is
" close," considering the means of transport. If the flat car is a
light push car, to be manually handled, a half mile distance would
not be " close." When very cheap materials (sand, for example)
must be handled at all, they must be handled with extreme cheap-
ness on account of their own low value. It is essential, then, to
store them close to the department in which they are used. The
labor for handling them may even then cost more than the mate-
rials themselves, yet there is no standard and accepted method of
conveying these cheap materials, on account of the high cost of
all conveying appliances as compared with that of the material.

THE PHYSICAL BASIS OF THE INDUSTRY 157

Some cheap materials are, however, from their physical nature so
cheaply handled that location has little to do with the scheme of
the process. Crude oil is an example. This has a value, even at
seaboard, of about 1/2 cent per pound. Yet two closely asso-
ciated steps of the process of preparation for the market are often
conducted at a distance of hundreds of miles from each other,
since liquids can be readily and cheaply handled by means of a
pump and pipe line.

Again, the physical nature of certain materials makes them
practically non-transportable. The departments of a steam
power plant cannot be separated beyond certain quite narrow
limits, since steam is subject to condensation in transmission.
Water is subject to no similar phenomenon, and we sometimes
find, therefore, boiler feed pumps located a quarter of a mile
from the boilers which they supply, although no process relation
could be logically more intimate than that which exists between
a boiler and its feeder. Electric power may be transmitted 100
miles; and it is not at all unusual to generate power in one city,
and apply it to a shaft in another, many miles away.

Paper is a rather expensive commodity, readily transportable,
while wood is cheap and expensive to handle. We consequently
find wood-pulp paper mills always located near the source of
wood supply rather than near the market. Pulp is cheaper than
paper, but still not one of the class of " cheap" commodities. It
is easily and cheaply transported. We sometimes find, therefore,
the pulp-making and paper-making departments separated —
perhaps a hundred miles or more — although logically the two
should be together.

The importance of the relation between commodity cost and
cost of transportation is evident even in the complexity of railway
rates, in which there is an underlying principle that cheap mate-
rials take low freight rates. The general relation between the
two brings us back to the fundamental relation between value of
product and first cost of transporting plant. When this ratio
is high, transportation cost ceases to be a determining factor in
the arrangement of departments, and buildings may be grouped
without reference to their logical sequence in the process. When
the ratio is low, transportation is an important element, and re-
lated departments must be physically related.

Some ores, for example, are of very low value, and will not
stand much transportation expense. To build a smelter at the

158

WORKS MANAGEMENT ,

mine is often open to serious objection. Mining is usually done
in several separated districts, the combined product of which
supplies a single smelter. The latter could not be strategically
located with respect to all. To locate the smelter with respect
to any one mine might remove it far from the supply of fuel, labor
and other materials. The problem is solved by building "con-
centrators" at the mines. These condense the ore to a product
which has a sufficiently high value to stand the cost of transpor-
tation, and the various " concentrates " are then hauled to a
smelter, perhaps a hundred miles distant, for final treatment.
The smelter is then located strategically with reference to its
necessities as a manufacturing plant. A similar line of argument
justifies the frequent separation of pulp and paper mills; in this
case, however, the ultimate final product is often less valuable
than that of the smelter, and the question of proximity to the
market for that final product is an additional determining factor.
The actual rate of freight is often not the determining element
in the cost of transportation by rail. Oil may be shipped either
in bulk or in barrels, for example. Even at the same rate of
freight, the dead weight of the barrel may result in a loss of 20 to
25 per cent, in transportation cost. Many oil producers and
refiners therefore manufacture their product at some properly
located point, and then ship it in bulk to their own tank stations
in some distant city, where it is barreled in locally purchased
barrels as required by local trade. Here a disorganization into
two entirely separate establishments is found profitable. One
of these, from a strictly logical standpoint, is unnecessary. Strict
logical analysis evidently does not apply.

GROUPING OF BUILDINGS

A strict process grouping of the simplest sort leads to a single
rectangular building, or a group of such buildings arranged in a
line, which may be either straight, or part of the periphery of a
polygon.

THE PHYSICAL BASIS OF THE INDUSTRY 159

It is far more common to find several distinct processes carried
along at once, all culminating at a single assembly department.
This provides groups or trains of buildings leading to a central
erecting shop as in a locomotive works.

When buildings of determined size are thus grouped on the
drawing board, it should be remembered that a unit division of
yard space may often need to be planned for with the same
fixedness of dimensions as a building. This is especially true
when such parts of the yard space are to be commanded by cranes.
One should consider the whole matter of storage requirements in
a comprehensive way, note whether storage must be outside or
inside, and treat both classes of space just as he would buildings
in working up a tentative plan.

A structural steel fabricating plant perhaps best exemplifies
the process type. Here there is one practically unmodified
current from office, drafting-room, template shop, shears, planers
and riveters, to the outbound storage yard. In a locomotive
works, a series of processes — foundry and forge — leads to the
erecting floor, usually by way of the machine shop.

In engineering shops, there are two distinctive methods of
management which powerfully influence grouping. In the first,
separation is by parts; in the second, by function. In the first,
all parts which enter into the construction say of a boiler feed
pump, are machined in one shop, whether they are composed of
steel, cast iron, or brass. In the second, all brass parts requiring
lathe work only are machined in one shop, whether destined to
form part of a boiler feed pump or of a locomotive. The idea of
a "process" is not the same for the two types of shop.

At the outset, it should be ascertained whether any necessity
exists that two or more particular departments be adjacent; and
it should also be determined what departments must be on ground
floors.

Certain principles of insurance engineering must be considered.
The limit of area that is allowable under one roof suggests the

160 WORKS MANAGEMENT

question of space between buildings. Such spaces should be
ample; in general, not less than 50 ft. for main structures. De-
partments where fires are likely to start, like forge shop, foundry,
paint and wood-working shop, should be separated from all the
rest of the property, with wide intervening spaces. Similar
separation should be provided for storehouses and other build-
ings in which the contents may be of exceptionally high value.
Intervening spaces endwise should be multiples of the bay
spacing; those sidewise may well correspond with building spans
where no special reason exsits for the contrary. In this way a
very few crane spans will answer for both outdoor and indoor
cranes and greater interchangeability of handling devices will be
possible.

TRANSPORTATION QUESTIONS IN GROUPING

An outside crane runway will be far less expensive if supported
on one or both sides against a building wall; otherwise, expensive
A-frame columns or diagonal stiffening will be necessary.

A transfer table is a traveling crane without hoist or trolley,
moving in a pit so that its upper surface is flush with the ground.
It is used for moving very heavy loads, which are pushed on and
off the crane bridge while the latter is stationary. Unlike an
overhead traveling crane, a transfer table "kills" the ground
space which it occupies, which then becomes an absolute loss of
available room, and even a blockade to communication between
departments. Its use is to be avoided where land is of high
value. It does nothing that cannot be done by an overhead
traveling crane, but the latter is neither as safe nor as cheap.

For light materials, if the floors are good, much inside trans-
portation may be provided for by two or four wheeled trucks.
If provided with a swivelling front axle, these will turn sharp
corners. They should have ball bearings in all wheels. In
restricted areas, the jib crane may be used both as a prime con-
veyor and as an auxiliary to other devices. The traveling jib
has greater scope; instead of swinging on a fixed foundation, it is
movable along a rail, the top of its post being guided. The mono-
rail traveling hoist is widely applicable for long hauls as well as
for general distribution. Main buildings will have standard
overhead electric traveling cranes, sometimes several on one
runway; or where the work is unusually heavy, more than a single
runway may be provided.

THE PHYSICAL BASIS OF THE INDUSTRY 161

Quick intercommunication between departments in the same
or adjacent buildings is in general best secured by means of
industrial narrow-gage railways. These use a very light rail
section, and the cars employed are of short wheel base, to permit
of sharp curves. Electric storage battery, or trolley, compressed
air or even gasolene motor cars may be used, if any saving is
probable thereby in labor expense or in time. Tracks must be
laid out with ample clearances around columns, machines and
the like, and every effort should be made to avoid grades. A
level track is the only safe track. Short turntables are frequently
employed in lieu of curves, which cut out much more valuable
floor area than the turntable. Unless carefully designed, these
tables will cause trouble.

Gravity conveying — hoisting all materials to top floors and
then lowering them down from floor to floor until the finished
product appears at the ground level — is of limited application,
but should always be considered.

Clearances for standard railway tracks should be perferably 12
ft. in width and 15 ft. in height. The latter distance will clear a
locomotive, but not a man on top of a box car. Unless 22ft. of head
clearance exists, bridge guards should be used. Track curves for
yard service with six wheeled switch locomotives would best be
made of not less than 300 ft. radius. The standard track gage of
4 ft. 81/2 in. is measured from inside to inside of rail head. (Crane
track gages are measured center to center of rails.) When tracks
run alongside of buildings, there is always more or less intercep-
tion of light. This is of little consequence on "running tracks/'
but is often a serious matter if these tracks are used for storage
of cars or are so related to the trackage system that trains are apt
to be stalled thereon. In large works, a main siding should be
installed, usually parallel with the railroad line. This gives room
for the receipt of materials without imposing the necessity for
immediately shunting them to their ultimate destination. A
main shipping track is also desirable, being equivalent to just
that much additional storage space for finished products, and
permitting of a higher "load factor" in the shipping department.
Connections with the railroad at both ends of main siding and
shipping tracks eliminate much of the risk of congestion and
delay. Track crossings are to be avoided, and should be unneces-
sary in any well arranged plot. Where crossings, drawbridges,
etc., exist, as in many present plants, automatic signals may
11

162 « WORKS MANAGEMENT

become necessary. These may be electrically or mechanically
operated, the switches and signals, of course, interlocking.
Tracks should not run into buildings on a curve. At least 100
ft. of straight track should be provided before reaching the
building.

Locomotives for yard trackage may be either four-wheeled or
six-wheeled switchers, the latter being usually much larger and
heavier engines. (The small locomotives built for narrow gage
industrial tracks, common in foundries, are usually four-wheeled.)
Where the service is heavy, a turntable may be desirable. This
should be installed at some readily accessible point. It may be
operated by hand or mechanically. The largest locomotives
require 80-ft. turntables. A housing shed for the locomotives is
sometimes built.

The importance of thoroughly considering track arrangements
cannot be overestimated. A complete list should be made of
materials to be consumed, and means provided for bringing these
in at points where they are to be used. In some organizations,
both received and shipped material are supervised by the same
storeroom force; the in and out trackage and storerooms should
then be adjacent. In large works, however, a small part only
(from a standpoint of bulk) of the material ever passes physically
through the storehouse. The greater part may be kept else-
where, possibly without even a roof over it. Testing room and
laboratory should, of course, be considered in connection with
receipts and deliveries of material or product to be inspected.

OTHER CONSIDERATIONS IN GROUPING

The disposal of liquid or other wastes must be provided for,
including planning for drainage of rain water and from sanitary
apparatus, purification of trade wastes and locations for dumps.

The location of the power plant is important. This must be
considered from a standpoint of coal receipts, coal storage, ash
disposal, condensing water supply, and economy of heating and
power transmission. An approximately central site is usually
preferred.

The general and sales offices, if a part of the works, should be
rather isolated, away from noise, heat, odors and dirt. The works
offices should be central. Due consideration must be given to
the matter of location of "betterment" departments like restau-
rants, rest rooms, etc.

THE PHYSICAL BASIS OF THE INDUSTRY 163

Finally, the easiest plot to lay out is usually of triangular form
with the main trackage parallel to one side and track sidings
entering at an adjacent vertex. Land cost is usually a small
factor in total expenditure for a plant, and purchases should be
made on a liberal scale. Several complete alternative layouts
should be made for comparison and discussion.

BUILDINGS: TYPES AND MATERIALS

It is wise procedure to provide, in advance of any detailed work
on building plans, for all special machinery, power and heating
equipment, systems of artificial lighting, ventilation, sanitation
and fire protection. In this way much unnecessary expense and
delay may be avoided. The cutting through of foundation walls
for pipes, etc., is unprofitable.

The duty of an architect, as usually understood, is to make all
sketches, general and detailed drawings and specifications, and to
generally direct and supervise, the construction of buildings
entrusted to him: usually, for a compensation which is a definite
percentage of the cost of those buildings. When special en-
gineering problems are involved, necessitating the cooperation
of a mechanical expert, the cost of such expert advice is paid by
the proprietor. In large enterprises, continuous local supervision
is afforded by the employment of a "Clerk of the Works," who
is engaged by the architect, but paid by the owner.

Mill buildings are usually designed by engineers. The duty
of the designing mill engineer is then the same as that of the
architect; and when architectural problems are involved, sug-
gesting the cooperation of an artist, that cooperation should be
called for by the engineer. Many questions of harmonious out-
line, appropriateness and general effect cannot be adequately
dealt with by even the best engineer. If he censures the archi-
tect who "saves" the cost of engineering advice regarding power
equipment, he cannot excuse himself for avariciously withholding
a consulting fee from the architect for advice as to the develop-
ment of a cornice.

In some states, no person may design and construct a building
unless he be a duly licensed architect. Any qualified engineer
may, however, obtain a license as an architect under the provi-
sions of the law. •

The carrying out of the engineer's plans may be by a. day work
under engineering or proprietary supervision; b. fixed sum con-

164 WORKS MANAGEMENT

tract; c. cost-plus-percentage contract; d. cost-plus-fixed-sum
contract; e. contract without stipulation of price. Method a.
may result in the soundest construction, but there is usually a
lack of sufficiently tested organization that results in high costs.
Method b. is most common, but the interests of proprietor and
contractor are almost diametrically opposed and too much
depends upon the experience, honesty and shrewdness of the
engineer. These objections have led to c. cost-plus-percentage
contracts, in which the contractor does the work at cost plus an
agreed percentage of profit. Here good work is in mutual
interest; but economy is of no concern to the contractor, and the
engineer's place in the organization may be even more com-
manding than under b. Cost-plus-fixed-sum contracts remove
the contractor's incentive toward high cost of construction, and
have in many cases been highly satisfactory. Method e. has
been occasionally employed, where speed of construction was a
prime factor, or where the proprietary and constructing interests
were practically identical, as in the building of many railways.

From the type of timber frame commonly used in dwellings
have evolved practically all forms of mill building. The parts
are usually erected in about the following order: sills, floor beams,
posts, angle braces, girts, plates, studs, window and door headers,
ridge and supports for ridge, and rafters.

The modified ''balloon frame" is that from which the self-
supporting mill building is more directly derived. Here posts
and studs are continuous from sill to plate, and the upper story
floor beams rest on spiking pieces attached to the vertical mem-
bers. The angle bracing must be especially thorough.

A timber mill building may be (a) practically like the balloon
frame dwelling; (b) of "standard mill construction," all wood; or
(c) of masonry and wood, "slow burning." Types (b) and (c)
are the only ones to be considered in important design.

The simplest of the so-called "permanent structures" in
which timber is eliminated from the frame has masonry walls
supporting structural steel roof trusses, with a roof cover-
ing of metal, tile or boards — type (d). In the "masonry-filled-
wall" type (e) the trusses are supported by steel columns
and a light masonry wall fills the space between the
columns. In the all-metal building (f) there are no walls, but
an outside sheathing of corrugated iron, expanded metal and
plaster, or asbestos composition, encloses the structure. Recent

THE PHYSICAL BASIS OF THE INDUSTRY 165

specimens now exist of the concrete building (g) which may be
either monolithic or built up of small blocks. In either case
the walls are hollow. Parts of concrete buildings which may at
any time be subjected to tension, like floors, roofs, angles and
corners, must be supported or reinforced by working in strips
or fabrics of metal. A concrete beam is so weak in tension that
at a very moderate ratio of span to depth it will break from its
own weight. There exists an enormous number of "systems"
of re-enforcing and many of these are controlled by contractors
who instal them in buildings which they design and construct.
Concrete buildings are fire resisting, rigid and permanent, if
properly designed and put up.1 It is estimated that in ordinary
concrete mill buildings, about two-thirds the entire expense is
for labor and timber for making the forms, the remaining cost
being about equally divided between the concrete material and
the steel. Low cost is attained by standardizing forms and so
designing them that they can be taken down, transported and re-
erected with minimum depreciation. Re-enforcing members
must be protected by an adequate outside thickness of concrete;
usually each inch of thickness will protect the steelwork about
one hour during a fire.

The cost of mill buildings increases in about the following order
of types: b, c, g (re-enforced), f, e, d. A far higher cost is reached
when a building of type (d) has the steel fireproofed with terra-
cotta tile or similar material; one that was formerly considered
prohibitive, although under present price conditions, this is no
longer the case.

The choice of a type is somewhat determined by the imposed
loads and dimensions. Clear spans of 50 and 75 ft. are of course
impossible with untrussed timber construction. With heavy
floor loads, also, steel soon becomes essential, although with
careful design, close posts, etc., an all wood building may support
a load as great as 300 Ib. per sq. ft. on each of four or five stories.
A protected steel beam, however, is to be preferred to closely
spaced timber beams.

CONSTRUCTION CONTRACTS

A contract is an agreement between two qualified parties to
do or refrain from doing certain specified things. In an equip-

1 Cement becomes dehydrated and reduces to a dry powder at about 1100° F., but as this
material is a nonconductor of heat, the damage from a fire of ordinary duration is apt to be
confined to the surface

166 WORKS MANAGEMENT

ment or construction contract, one party (the contractor) agrees
to furnish certain machinery or structures to the other party
(the owner) in consideration of the payment of a certain sum of
money by the owner to the contractor. An ordinary contract
binds the executors, administrators, successors or assigns just as
it binds the original parties.

The place and date of making the contract may have bearing
on its lawfulness, and should be specified. A corporation may
not engage in undertakings not authorized by its charter. In
some states a contract made on a Sunday or a holiday is un-
enforcible. Contracts involving certain minimum money
values must be in writing to be valid. A contract for yearly
employment is not recognized, in some states, unless in writing.

The usual preliminaries to a construction contract are (a) the
issuance of specifications and an invitation to bidders, (b) the
receipt of bids, (c) possibly counter-offers. Execution of the
contract follows when an informal agreement has been
reached. The contract price for work must be sustained by a
"bid" or "proposal" price; if a bid is revised after it has been
made, it should be revised in writing. A bid is binding only
after it has been received; acceptance of a bid is binding on both
parties as soon as such acceptance is sent, whether it is received
by the bidder or not. A "conditional acceptance" is merely a
counter-offer, a revised "bid." It binds its maker as soon as
received by the original bidder. A contract is not completed
until signed and "delivered" or mutually released. Lapse of
time may outlaw a contract; i.e., make compulsory performance
impossible. The effect of a seal may extend the period during
which the contract is legally enforcible.

Municipal contracts must usually go to the lowest bidder, bids
being publicly opened. Such contracts may be ruled illegal be-
cause of non-compliance with statutory requirements as to
advertising, etc. Contracts for work done under definite
appropriation should never be made for the full amount of the
appropriation, else compensation for extra work may be difficult
or impossible of attainment. Public agents are not liable for
negligence. Statutes of limitation do not operate against
government. Informal municipal contracts are not recognizable.

In important contracts, whether public or private, sureties
may be required. The surety is a reliable guarantor of perfor-
mance— usually a company of large financial resources — and is of

THE PHYSICAL BASIS OF THE INDUSTRY 167

course compensated for its services. If the 'contractor defaults,
the surety must carry on his work or otherwise relieve the owner
from loss. The surety guarantees performance of specific
obligations: if these obligations be subsequently changed, the
guarantee does not apply.

The time of completion of contract is usually an essential
matter. This may be guaranteed by the surety, or there may be
a forfeiture clause, under which the contractor loses a certain
part of his remuneration in case of failure to complete on time.
Sometimes the forfeiture is a definite sum of money for each
day's delay; sometimes there is a corresponding bonus paid for
each day saved. Forfeitures may be imposed either as "liqui-
dated damages" or as "penalty." The attitude of the courts
toward the two differs.

Under a construction contract, the architect or engineer
becomes the agent of the owner (see page 127). His respon-
sibilities are regarded severely in law. He must not receive com-
missions from contractors or dealers (the owner may recover
such if paid), must have no interest in the contract, and must
not hold relations of any sort in conflict with those of the
owner.

The contract price will frequently exceed the engineer's
preliminary estimate and the actual cost of the work will almost
invariably exceed the contract price. Some of the reasons are
sufficiently obvious; planning is not an exact science. The better
the engineer and the more definite the owner's conception of
what is wanted, the fewer (assuming a proper allowance of time
for working up the design) will be the extras or additional work
necessary to complete the job beyond what is covered by the
contract. Extras are an inverse measure of efficient planning.

The cause for excess of contract price over estimate lies in the
illegal "pools" which have more or less generally prevailed among
construction contractors. They operate as follows: A trust-
worthy individual is appointed as "secretary." Whenever a
contractor prepares a bid he notifies the secretary. The latter in
return tells him to "add blank dollars for the association." The
amount of addition is a matter of conscience; 10 per cent, is not
unusual. This is eventually divided either among the bidders
or among all the contractors in the district. Sometimes a small
proportion is generally distributed, while the greater part is
divided between those who have been honored with the requests

168 WORKS MANAGEMENT

for bids. Occasionally a lazy contractor will ask the secretary
to give him a safe bid for the job, which he does not happen to
want. This saves him the trouble of making an estimate. The
low bidder may be decided upon in advance and his may be the
only estimate made. If there are contractors in the district who
are not members of the ''Association" it becomes a matter of
some moment to know whether they are bidding or not. Some-
times a chance must be taken. The way out of this, for the owner
or engineer, is to secure bids from such "scab" contractors if
possible; even, when necessary, by going out of the district. But
some of the building trade contractors have been nationally
"organized" for the purpose described.

The specifications are a description of the work to be done under
a contract. They are accompanied with plans or drawings, and
a clause in the specifications should refer to the plans, specifically
identifying them by number or otherwise. The contract should
contain a clause incorporating the specifications. The contract
includes the business agreement; the specifications describe in de-
tail the work to be done. Both necessarily contain a number of
general clauses, which few people stop to read. There is a
"Uniform Contract" for construction work recommended by
the American Institute of Architects and the National Asso-
ciation of Builders which contains a standard set of general
clauses. There are in some standard forms provisions so unrea-
sonable as to be ridiculous. They virtually amount, some one
has said, to the statement from the engineer to the contractor,
"if there is anything I have forgotten, you have got to furnish it
anyway." But certain general stipulations are of course neces-
sary; such as those relating to the method of authorization and
basis for compensation of extra work; provision for arbitration;
authority to make sub-contracts; responsibility for insuring and
otherwise caring for material, and for personal injuries to workmen;
compliance with local building ordinances; responsibility under
mechanic's lien laws; and payments on account, which may be a
fixed proportion of the value of work done, as estimated by the
engineer, or a definite sum at various stipulated stages of comple-
tion of the work.

VALUATIONS OF MANUFACTURING PLANT

"Value" is not a very definite property of matter. What we
may call the value of a thing depends upon the purpose for which

THE PHYSICAL BASIS OF THE INDUSTRY 169

the valuation is made. A thing may be appraised at the price
at which the owner is willing to sell or at that at which some one
is willing to buy it; buildings with power and heating equipment
or privileges may be valued for the purpose of determining a fair
rent, insurance or tax rate. A property may be condemned for
public purposes and the valuation is then made to determine
what remuneration shall be paid the owner. It may be appraised
as a physical entity on the security of which money is to be
loaned;1 the value is then that which would be realized at a forced
sale; or for the adjustment of fire or other losses, in which case
value will not exceed cost of replacing and may be less than this
cost. In general, value cannot be absolutely determined except-
ing at the moment of a sale; two parties (whose interests are
opposed) may at such moment be presumed to agree as to the
value of the thing sold at that moment.

There are two general bases for approximate valuations of
manufacturing plant. The first considers the property as made
up of so many pieces of physical material, the values of which
may be ascertained by comparison with similar materials else-
where. If a factory building contains ten million bricks, it is not
difficult to tell how much the bricks in the building are worth.
The second basis of valuation regards the plant as one element in
a productive enterprise, and determines its value from a consider-
ation of the profits of the enterprise. Value in this sense has no
relation whatever with cost. The first method seems definite
and straightforward; but the value which it gives is not that at
which the owner would sell or another would expect to buy. It
is worthless as the basis of a sale, unless the plant is clearly un-
profitable, and usually worthless even then. Moreover, it pre-
sents difficulties. It is a very difficult thing, for example, to
determine what the site is worth. Regard must be paid not only
to local real estate conditions but also to competitive conditions;
the effect of the site on transportation charges. A bad location
in this respect is equivalent to a mortgage on the plant. Ques-
tions of water supply, water-power, cost of power, tax rate,

When a corporation seeks to "float" an issue of bonds, many considerations will influ-
ence the purchasing syndicate in its judgment as to the safety of the proposed issue. There
will be an examination of physical property by an engineer to determine its original and
replacement cost; a consideration of the profits of the business by an auditor; legal and
financial advice regarding value of intangible resources — patents, franchises, etc. The
value of its securities in the market will be regarded, and the margin of earnings above pro-
posed requirements for bond interest will be carefully considered. Good business judgment
as to the market position of the industry is always sought for.

170 WORKS MANAGEMENT

character of local municipal government, labor supply, cost of
construction work, facilities for installing equipment, oppor-
tunity for safe disposal of wastes, prevailing hours and wages for
workmen, probable nature of the future development of the
neighborhood — all of these are factors which must be considered
in valuing land alone. These or similar factors enter into the
valuation of other physical elements; so that whether we wish it
or not, we cannot fix a valuation for a manufacturing property
without some consideration of its earning power.

Consider also the case of a hydro-electric company. Its
plant might have cost, and as material be worth, $5,000,000,
but if the flow of water were unexpectedly variable, one might
hesitate before buying its bonds even when issued to the aggre-
gate of only half that sum.

The first of the methods of appraisal invariably merges into the
second. The second is fairer. If a plant by long good organiza-
tion and management earns $100,000 a year, it may be worth
$1,000,000 even though it cost only $300,000. Valuation on the
basis of earning power puts a premium on efficiency. But it
must not be forgotten that excessive profits may be due to exces-
sive prices, and a valuation contingent upon unreasonable prices
is hazardous because of the possibility of competition.

Under the second method, the value of the plant is not, how-
ever, a capitalized representation of its earnings: it is the cost of
that plant which, erected to-day, could under equally good manage-
ment produce equally good results. This is the value of the plant;
not the value of the business, which includes, besides plant, an
organization, with special and technical knowledge; good will,
that is, outstanding public and private accounts and future in-
creases therein which have been already earned by development
expenditures; and possibly franchises, or special (often exclusive)
rights to operate in and through streets or elsewhere.

Mr. H. L. Doherty (who has suggested much of the foregoing)
lists the following classification of elements of physical and
organization value in public service industries:

A. Real Estate.

B. Physical property, at cost less depreciation, based not on
books, but on inventory.

C. Omissions, 2 per cent., to cover physical property not
found.

D. Engineering and supervision, 5 per cent, of B and C.

THE PHYSICAL BASIS OF THE INDUSTRY 171

E. Ordinary contingencies, as in construction, 10 per cent, of
B and C.

F. Legal expenses during construction.

G. Insurance risk while building; public, employer's and fire
risks before operating.

H. Allowance for piecemeal construction. 10 per cent, of B,
C and D.

I. Interest while building, 6 per cent, of A, B, C, D, E, F, G.

J. Excess of actual over computed cost, as in construction,
10 per cent, of A-G, I.

K. Organization — printing, engraving, promotion (the last
often as much as 8 per cent, on entire investment).

L. Working capital — stocks of materials — accounts receiv-
able.

M. Unbilled product.

N. Operating organization salaries and expenses, prior to
completion of plant.

0. Operating expenses in excess of earnings during develop-
ment period.

P. Interest in excess of earnings during development.

Q. Cost of developing business not included in O and P,
usually exceeding half the gross receipts for one year.

POWER VALUATIONS

The determination of the value of a water power privilege is
particularly complicated. Such privileges are frequently con-
demned by municipalities aiming at the improvement of the
water supply. In the celebrated Worcester case, the courts
awarded the claimants (owners of the condemned property)
$500,000 and interest for the loss of about 1000 horse power,
which had been available during eleven months of the year. The
claimants maintained that a horse power is a commodity having
a definite ascertainable market value; that the acts of the city
had confiscated such commodity, and they asked for damages,
$1,500,000.

The city pleaded that the claimants had not lost a commodity,
but what the law calls an easement to their estates. It main-
tained that the loss to the claimants was merely the difference
between the original value of their estates and the value after
the loss of the easement. It proposed to ascertain this difference

172 WORKS MANAGEMENT

by ascertaining the difference in cost of water-developed and
steam-developed power. The case was, "Every water power's
value is fixed by some steam engine."

There are arguments in favor of the city's case. The mills had
not been deprived of power, but of water, with which they might
have made power. Virtually, they were deprived of coal,
because to replace the lost power they would have to buy coal.
Figures obtained from 25 mills using steam power showed the
cost of a horse power for a year to average $50.14. But the
standard which the city aimed to establish is one that could not
be applied. A horse power for a year from steam might cost $50
in a mill where the working day was of 10 hours, but it might as
easily cost $100 where the working day was 24 hours. Should the
one owner receive a compensation of $100 and another only $50,
merely because the latter' s was a 10 hour plant and the former's
one running 24 hours?

On this basis, too, the water power might be given an excessive
value. Not a dozen plants in New England have a constant flow
of water throughout the year. Most of them maintain a steam
plant in reserve. Their water power is worth (if we accept the
city's contention) the sum of money which would have to be
invested to maintain an equivalent steam plant in the same place,
less the cost of the reserve steam plant which must be maintained
for emergencies under water power service. Then there is the
further complication of operating cost for such reserve steam
plant, when it runs; and the possibility of using exhaust steam
for heating still further confuses the whole question. A com-
plete discussion of this interesting subject may be found in the
Transactions of the American Society of Mechanical Engineers,
Vol. XXVI, paper by Mr. Chas. T. Main.

Absolute ownership of water power privileges by manufactur-
ing plants is perhaps less common than tenure on long leases, the
power being developed by the leasing company. A common
unit for the sale is then the amount of water which will flow
through an aperture of given depth and area, with a standard
"head " of water above the top of the aperture. The same device
may be used for limiting the delivery to a mill which actually
owns its right.

At Lawrence, Mass., about 10,000 horse power was developed
at a cost of $1,300,000 for dam, canals and machinery. The
fixed expenses chargeable against the development are about

THE PHYSICAL BASIS OF THE INDUSTRY 173

$11.70 per horse power per year. It costs about $2. more to
care for and maintain the equipment, so that the mills get their
power for $13.70 per year. The cost of maintaining and operat-
ing a steam plant in the same district, including fixed charges, is
about $21.80 per year. A credit of 25 per cent, of this, or $5.45,
is made to the steam plant because it furnishes exhaust steam
for heating, for which coal would otherwise have to be purchased.
This leaves $16.35 per year, as the. cost of steam power. The
value of the water power (on the city of Worcester's basis) is
then $16.35 — $13.70 = $2.65 per year; or, capitalized at 5 per cent.
say, $53, per horse power. But if the price of coal should so
decrease that the total cost of producing steam power were
reduced $2.65 per year, or 12 per cent, (not at all an improbable
fluctuation), the water power would on this basis have no value
whatever. It would continue in use, however, because fixed
charges on the development would have to be paid anyway;
but it would not be saleable at its physical value.

EXERCISES

CHAPTER I

1. A paper mill runs 4 weeks on cartridge paper, producing 960,000 Ib.
at a cost of $38,400; then 6 weeks on "bond/7 turning out 720,000
Ib., costing $50,400. What is the percentage difference in cost per
pound of the two kinds of paper?

Ans., bond costs 75 per cent, more than cartridge.

2. The same mill, in order to determine relative costs, makes test runs
of 24-hour duration on each grade, producing 20,000 Ib. of bond and
40,000 Ib. of cartridge. The cost of the day's operation is $1360
in the first case, $1575 in the second. Find the percentage difference
of cost per pound.

Ans., bond costs 98 per cent, more than cartridge.

3. Which of the methods suggested in Exercises 1 and 2 is likely to give
results more closely corresponding to usual costs? What difficulties
arise in making cost determinations by either of the methods? Discuss
the probable accuracy of estimates of daily total cost in Exercise 2.

4. A linseed-oil mill uses the weight of oil output as its cost divisor. During
one month, it crushes 100,000 bu. of seed, yielding 17 Ib. of oil per
bushel, the working cost being $15,000 and the seed costing $0.867
per bushel. During the second month it uses seed costing $1.00
per bushel, crushes 110,000 bu. at a working cost of $16,000, and
shows a yield of 19 1/2 Ib. of oil per bushel. If the oil yield plus the
cake yield aggregates 55 Ib. per bushel in either case, and oil is worth
37 1/2 cents per gallon (7 1/2 Ib.) while cake is worth 1 cent per pound,
compare the profits for the two months and show that these have no
relation to the respective unit costs.

Ans., in the first month the apparent cost of oil per pound is $0 . 0598
and the profits for the month are $21,300. In the second month the
figures are respectively $0.059 and $20,300. Although selling prices
have remained the same, the profits have decreased in spite of a decrease
in unit "cost of operation."

5. A bushel of flaxseed costing $1.00 weighs 56 Ib. and yields 19 Ib.
of oil and 36 Ib. of cake. A ton (2000 Ib.) of cottonseed yields 300
Ib. of crude oil and 800 Ib. of cake. If mill working costs are the
same in either case, at the rate of 14 cents per 56 Ib., and these products
represent all the marketable product from the seeds, and if both
cottonseed cake and linseed cake are worth 1 cent a pound, find the
price of cottonseed per ton at which the cost of linseed oil per pound
is just twice that of crude cottonseed oil.

Ans., $9.157.

175

176 WORKS MANAGEMENT

6. In a locomotive works building eight engines in a given month, the
corresponding cost of production is $148,300. The locomotives
weigh 80,000, 116,000, 180,000, 185,000, 210,000, 212,000, 220,000
and 280,000 lb., respectively. Find (a) the "cost per locomotive,"
using the number produced as the divisor; (b) the cost per 100 lb.
of product; (c) the cost per ton of product; (d) the cost of each loco-
motive, based on item (b) and the weight of the locomotive.

Ans., (a) $18,537.50; (b) $10.00; (c) $200.00; (d) $8000, $11,600,
$18,000, $18,500, $21,000, $21,200, $22,000, $28,000. -Total, $148,300.

7. In the case of the plant making motors and lamps, page 5, the costs of
materials are: for motors, $700; for lamps, $180. Find the total
costs (labor and materials) of one lamp and one motor.

Ans., motor $80; lamp $0.08.

8- The selling price of a standard automobile, at the factory door, is
$1500. During a year, 1000 such machines are shipped at a freight
cost of $30,000, the sum of distances transported being 360,000 miles.
Using the arbitrary factor of cost per machine per mile transported,
find the price to be charged a man 600 miles away for a machine to
be delivered f.o.b. his own city.
Ans., $1550.

CHAPTER II

9. Assume, in the cases of the two power plants, page 8, that two types of
plant are possible: one costing $100 and the other $200 per kilowatt
capacity; and that operating costs corresponding are 3 cents and
2 cents per kilowatt-hour, respectively. If fixed charges may be
taken at 15 per cent, of the first cost per year, find the total cost per
kilowatt-hour for the high-priced and low-priced plants in each of
the two kinds of service described.

Ans., 3.71 cents for the continuously running $100 plant; 3.42 cents
for the continuously running $200 plant — note the decrease; 34.25
cents for the $100 reserve plant; 64 . 5 cents for the $200 reserve plant —
note the increase in this case.

10. Group the following scattered items of cost in accordance with the
chart on page 10, and state the value, the cost, the prime cost and the
factory cost:

Superintendence $160.05 General office expense. ..$ 87.80

Factory office expense.. . . 185.20 Pay roll 1015.45

Piece work labor 622.00 Salesmen's expense 64.30

Freight on raw material. . . 22 . 50 Taxes 24 . 30

Freight on product 65 . 40 Power 415 . 30

Storeroom charges 945.80 Light 84.30

Laboratory expense 65.45 Depreciation 29.03

Profit 410.04

2066.40 2130752

Ans.,prime cost $2671.20; factory cost $3569.38; cost $3786.88;
value $4196.92.

EXERCISES
11. Take the following figures:

177

Cost of fuel,

Tons used

Product, Ib.

January

$6500

1800

179,500

February

8500

2100

182,000

March

7200

1820

206,000

\pril

6600

1830

204,000

Find the price of fuel per ton, the consumption of fuel per pound of
product, and the cost of fuel per pound of product, for each month.
If these were the conditions in an actual plant, what further investi-
gations would be warranted?

12. Suggest the general headings (not the specific items) for a classification
of accounts in operating a power plant.

13. Reclassify the 39 accounts listed on pages 13 and 14 to correspond
with the general plan of the chart on page 10. Suggest reasons why the
new method of classification would be unsatisfactory.

14. Criticise the following methods of paying employees:

(a) By check, in small isolated communities.

(b) In cash, upon identification of the men.

15. Suggest a cost divisor for (a) a school, (b) a department store.

CHAPTER III.

16. In a power plant, 9 Ib. of steam are produced by the boilers for each
pound of coal burned. Each pound of coal contains 14,000 heat units.
Each pound of steam represents 1000 heat units. Of the total heat
supplied by the fuel at the boiler, 20 per cent, goes up the stack, a
portion appears in the steam, 2 per cent, is lost to the ash pit and
the remainder is lost by radiation. Find the boiler efficiency and
the number of heat units lost from each pound of coal by radiation.
Ans., efficiency = 64 . 3 per cent.; radiation loss, 1920 heat units.

17. In Exercise 16 the engines consume 30 Ib. of steam per horse power
per hour (2545 heat units = 1 h.p. hour). The steam expended in
driving auxiliary machinery and lost in transmission is 10 per cent,
of that received by the engines. The engines are direct-connected
to electric generators, and the switchboard shows that 5/8 kilowatt
of electrical output is obtained from each horse power at the engines.
One kilowatt = 1 . 34 horse power. Find (a) the efficiency from steam
to engine power, (b) the efficiency from engine power to switchboard,
and (c) the efficiency from boiler outlet to engine throttle.

Ans., (a) 8.181 per cent., (b) 83.8 per cent., (c) 91 per cent.

18. In Exercises 16 and 17, make a list showing the disposition of the
14,000 heat units received in each pound of coal, giving percentages.

178 WORKS MANAGEMENT

Ans.,

To stack, 2800 h. u.=20 per cent.

To ash pit, 280 h. u. =2 per cent.

Radiation at boilers, 1920 h. u. = 13 . 7 per cent.

Transmission and auxiliary loss, 810 h. u.=5.79 per cent.

Loss between engine and switchboard, 112.2 h. u. =0.80 per cent.

Loss at engine, 7497 h. u. = 53 . 56 per cent.

Useful work, 580.8 h. u.=4.15 per cent.

Total, 14,000 h. u. = 100 per cent.

19. Compute the values of items (m) and (o), page 19, for Exercises 16
and 17.

Ans., 9 lb., 48 Ib.

20. Draw off from statistical record No. 3, page 24, a statement like that of
Record No. 2, page 22, for both mills A and B, for the operating
costs of the fiscal year 1910-'!!.

21. Divide each figure in statistical record No. 4, page 26, by 12; chart
these records along with those for mill A in Exercise 20, and explain
why the two graphs differ.

22. Prepare a statement like No. 4, page 26, for mill B, and chart the
results in red ink on the diagram, page 25.

23. In the consumption totalization of page 26, the output for May is
1,150,000 kilowatt-hours and the coal consumption is 2,875,000 lb.
Find the "coal per kilowatt-hour to date" for May, and compare
this figure with the arithmetical average of the corresponding figures
for the five months.

Ans., 3.01 lb.; arithmetical average, 3.916.

24. Prepare, from the data given in Record No. 2, page 22, a chart of the
type first described under "Special Records," page 27.

25. An improvement expenditure of $100,000 has the following effect:

Months. Gross earnings.

January $110,000

February. 111,000

March 113,000

April 114,300

May 115,800

June 117,200

Does the expenditure appear likely to "pay for itself" in 6 years?

CHAPTER IV

26. In a community of 100 men, raw materials are free and the value
of commodities produced is distributed in equal shares. During the
first year, the production is $100,000 and the wage per man $600.
During the second year a profit-sharing system is introduced, so
that each man is paid $900 and the total production is $175,000.
Compare results as to wage rate, amount of labor per man and total
wealth produced per man.

Ans., wage rate increases 50 per cent., production per man increases
75 per cent., exertion of each man presumably increases 75 per cent.

EXERCISES 179

27. Under conditions like the preceding suppose the men to work fewer
hours during the second year, to receive the same wages as during
the first year, and to produce $100,000 at 50 per cent, greater speed
than formerly. What results follow?

Ans., the total wealth produced will be unchanged, the wage per man
will be unchanged, the hours of work per day will be reduced 43 per
cent., the effort by each man, measured as the product of strength
exerted and time, will be unchanged. The men are working 5.7
hours per day, rapidly, instead of 10 hours per day, slowly.

28. Assume the following data:

Workman's No. Shop Order No. Charge.

304 127,436 $31 . 19

302 127,436 11.22

308 127,436 19.47

306 127,436 12.24

307 127,436 18.11

309 127,436 36.60
320 210,421 7.65
323 209,640 6.40
325 227,044 7.35

360 300,001 4.50

361 309,090 6.65
382 411,212 5.35
304 485,840 5.20
309 490,601 5.95
309 512,311 3.20
307 584,390 6.05
320 590,090 .95
320 620,311 1.65
309 642,095 2.20
361 674,430 1.90
304 682,255 4.05

Make out the pay roll and prepare a statement of expenses like that
on page 31.

29. Prepare copy for the printer for the shop orders, time cards and piece
work slips necessary under the system described on page 31.

30. The day rate of $3.00 gives a production of 20 units per day. A
piece work rate of 12 cents per unit leads to a production of 40 units
per day. Find the effect on wages per piece, wages per hour (10 hour
day) and total cost per piece (a) if fixed charges are 25 cents per
day, (b) if fixed charges are $25 per day.

31. Revise the tabulation on page 37 on the following bases: (a) workman
paid for 1/4 the time saved, (b) workman paid for 1/2 the time saved.

32. Answer Exercise 31 (a) for fixed charges 20 cents per day; (b) for fixed
charges, $8 . 00 per day. What would be the strategic relation between
(ratio of fixed charges to labor cost) and (proportion of time saved
given the workman)?

33. Under the Rowan-Halsey plan, find the increase in hourly wage rate

180 WORKS MANAGEMENT

for each 10 per cent, reduction below standardized time in time con-
sumed for an operation.

34. Tabulate the results of the differential piece rate under the conditions
of page 38, if fixed charges are changed to 12 cents per day.

35. Check the statement made on page 38, " the total cost per bolt would
be about 37 cents in either case."

36. Using the data on page 38, let the Taylor differential rates be 12 cents
per bolt for a daily production of 20 or more, up to 40, above which
the rate becomes 14 cents. Tabulate the results. Compare them
with those in the text. How would they be modified if fixed charges
were only 12 cents per day, instead of $12?

37. Under the Gannt bonus plan, page 40, let the day's production be
standardized at 35 bolts. Other conditions being as in the text,
tabulate the results and discuss the change from the workman's stand-
point. If fixed charges have simultaneously increased to $6.00 per
day, on what ground might the employer justify the change made in
a standard day's work?

38. Consider the systems applied on gang work, page 41. What are
their relative advantages and disadvantages?

39. Plot a new "efficiency curve" on the diagram, page 42, and tabulate
the results under conditions otherwise resembling those of page 41.

40. Can any reasons be given for the special form chosen for the Emerson
efficiency curve?

41. In the case of the Atchison shops, page 44, show that if by "output"
is meant average value of output per man per day, and if by "cost"
is meant average labor cost per man per unit of output, the three
figures given are irreconcilable.

42. Compare the production per girl per hour, page 48, under the old
and the new conditions. Suggest the corresponding probable variation
in total cost of inspection.

43. From the Baldwin Locomotive Works tabulation, page 52, derive
any statistical evidence of the superior position of apprentices in
Class 3.

CHAPTER V

44. Find the cost of the following bill of material at a discount of 40, 10, 10, 5,
per cent. :

500 ft. 1 in. bar at 20 cents per foot.
350 ft. 11/2 in. bar at 22 cents per foot.
675 ft. 2 in. bar at 29 cents per foot.
Ans., $172.10.

45. Prepare, for the printer, copy for the "requisition" form described on
page 58.

46. Prepare the form " request for quotation" with card duplicate, described
on page 58.

47. Interpret the ciphers K.SK, B.OK, SSK, the key-words being black
horse.

EXERCISES

181

48a. In an ordinary business what cipher characters will be oftenest used?

Which ones may be most used in a department store?
48&- The following significances are surmised, in a price cipher:
$1.25=P.YM $9.98 = U.UG $3.60 = R.IN

Give the probable form for the complete key- word.

49. Prepare a form for "acknowledgment of quotation."

50. Prepare a form for a "purchasing order."

51. Write a form letter to a shipper urging haste in the delivery of materials
due.

52. Devise a form for rubber stamp approval of invoices.

53. Interpret "2 per cent. 10 days; 30 days net."

54. Consider the following data and make specific recommendations as
to further investigation:

Month

Fuel consumed,
pounds

Cost of fuel

Product

Heat value of
fuel, by labora-
tory test

January ....

100,000

$200.00

500,000

10,000

February. . .

110,000

260.00

480,000

11,400

March

100,000

245 . 00

495,000

11,330

April

105,000

204.00

511,000

9,980

May

115,000

265 . 00

516,000

11,200

55. A man owns 20 per cent, of the $10,000,000 stock of a corporation
which pays 5 per cent, dividends. He is also individually the pro-
prietor of a plant which may sell its output to the former concern.
Through some illicit arrangement he has the opportunity to make an
individual profit of $100,000 at a loss to the former company just
equal to this sum. Compare his interests as an individual and as a
director of the $10,000,000 corporation.

Ans., he may gain $80,000 by sacrificing the corporation interest.

56. Prepare a form for a "stock card," as described on page 66, and show
some typical entries thereon.

57. Prepare a form for a stores department daily report of goods received.

58. Prepare the "work order" and "stock order" printed forms described
on page 67.

59. Give the essence of the results mentioned at the beginning of page 68,
in a single percentage.

60. Subdivide items 7 and 8, page 70.

CHAPTER VI

61. Distinguish between "direct expense" (a part of "prime cost") and
"direct factory expense." Give an example of each.

62. Take the following data:

182

WORKS MANAGEMENT

Depart-
ment

Output

Distributed
. direct cost

No. of
men

Hours of time

Cost of labor

1000

$115

332

$103

B . .

1400

470

600

620

160

1680

420

1100

1200

300

140

1000

200

If the undistributed "burden" expense is $1185, distribute this on the
basis of the number of men employed and find the total cost per unit
of output in each department.

63. Distribute the burden, in Exercise 62, in proportion to the " distributed
direct cost," and tabulate the results.

64. Distribute the burden, in Exercise 62, in proportion to the "output,"
and tabulate results.

65. A linseed-oil mill produces 700,000 gal. of raw oil. Of this amount,
165,000 gal. are boiled. The direct costs are: raw oil, 55 cents; boiled
oil, 56 cents per gallon. The burden cost applicable to oil production
in general is $3500, the additional burden applicable to boiling oil
is $675. Find the total cost and the cost per gallon of each kind of
oil: (a) as computed on page 74; (b) by distributing the general burden
in proportion to quantity rather than to cost. Which of the methods,
(a) and (b), is to be preferred?

Ans., (a) raw, 55.6 cents; boiled, 56.9 cents; (b) 55 1/2 cents for raw,
56.91 cents for boiled.

66. In Exercise 62, distribute the burden in proportion to the hours of
time, and tabulate the results.

67. In Exercise 62, distribute the burden in proportion to the cost of
labor. Tabulate the results.

68. Find, from Exercise 62, the cost of material, the average wage per
hour, and the average daily wage per man, in each of the five depart-
ments.

69. A plant contains seven machines, giving the following data:

1234567

Hours run 250 218 200 30 204 170 185

Horse-power hours consumed 100010904000 900 408 510 925

Find the average load in horse power on each machine.

70. In a given month, the total power developed costs $358. The machines
in Exercise 69 run the following numbers of hours:

Machine 123 456 7

Hours 250 200 50 331/3 500 3331/3 200

Find the power charge against each machine; how much is the power

charge, for each of the machines, per hour run?

71. $500 rent is paid monthly for a plant in which 50 men are employed
10 hours daily, 300 days per year, at 20 cents per hour. What burden
per hour does the distributed rental expense add to each man's wage?

EXERCISES

183

72. Take the following data:
Direct labor, 100,000 hours. $20,000

Materials 60,000

Direct expense 2000

Wasted time 1600

Heat

Light

Foremen and supervisors. . .
Employers' liability insur-
ance. .

Power

Repairs and replacements . .

400
620
1125

320
1158
1050

300

Fire insurance, other than on

buildings $ 160

Factory indirect expenses. . 1650

Selling expense 675

Administrative expense 900

Spoiled work 130

Standard patterns, etc 600

Rent 1250

Taxes 115

Depreciation 600

Fire insurance on buildings . 75

Non-productive labor 390

Repair supervision

It is agreed that the indirect expenses chargeable against productive
machine time shall be distributed in proportion to the horse-power
loads thereon, as from Exercise 69. Rent and taxes are to be charged
half against labor time, half against machine time. The same remark
applies to depreciation and insurance on buildings. Non-productive
labor is divided equally against machine time and corrected prime
cost. The fourth group of expenses is charged against corrected
prime cost, following the tabulation on page 80.

What, in accordance with this tabulation, are the elements in the total
cost of an item of product on which the labor cost (100 hours) was
$22.00, the material cost $38.00, and the direct expense $1.65, if
machine No. 3 (only), Exercise 69, was used 7 hours in producing it?

CHAPTER VII

73. The cost of a plant is $40,000. It depreciates by $3000 each year.
The apparent profits in 10 years are $22,000, no allowance being made
for depreciation. What are the real profits in 10 years?

Ans., loss is $8000.

74. If in Exercise 73 no change has occurred in other assets than plant,
and if the $22,000 profits have been distributed to the owners, compare
the net assets at the beginning and end of the ten year period.

Ans., have decreased $30,000.

75. Take the following data:

Operating ex-

Years

Gross earnings

penses and

fixed charges

1900

$60 000

$40 000

1901

82,000

55,000

1902

75 000

38 000

1903

77,000

53,000

1904

65,000

54,000

184 WORKS MANAGEMENT

The last column does not include depreciation. The capital stock
is $200,000. Tabulate the dividends, depreciation and surplus under
the conditions (a) 10 per cent, dividend on stock followed by $4000
depreciation charge when possible or by as 'great a charge as is
possible, less than this amount; (b) $4000 depreciation charge, $4000
surplus, balance as dividend.

76. Compare the probable lives of (a) a masonry dam, (b) a wireless
telegraphic outfit, (c) an automobile, (d) a brick dwelling house.

77. In Exercise 75, an engine costing $100,000 is bought in 1900. Distribute
this cost over the five years in such proportions as to make the net
earnings constant.

78. Compare interest rates in the Klondike, New York and Berlin. What
effect have these differences on depreciation charges?

79. A plant depreciates by $200,000. Meanwhile, it has been extended
to the value of $200,000 by improvement expenditures. No depre-
ciation charge has been made. Improvement expenditures have
been treated as operating expense. By what amount has the value
of the plant changed? By what amount do the books show it to
have changed?

80. A machine worth $10,000 has a 30-year life and a 4 per cent, residual
value. With interest at 4 1/2 per cent., what should be the annual
allowance for depreciation?

Ans., $157.44.

81. If the life of an $8200 machine is 11 years, and its negative residual
value is $500, what is the annual allowance for depreciation with
interest at 6 per cent.?

Ans., $581 . 16.

82. How does the value of the fundamental ratio described on page 8
affect the ratio of depreciation to gross earnings? In what sort of
industry is close attention to depreciation charges relatively unim-
portant?

83. Suppose the machine in Exercise 80 to be in good condition after the
expiration of the 30-year period and to keep operating for 8 years
more. How much money will accrue, during the 8 years, in its depre-
ciation reserve fund and what use may be made of this money?
Ans., accumulations will be $4052 . 16.

84. Find by logarithms the value of A for the revised interest rate, page 96.
Ans., $6.90.

85. In Exercise 84, suppose that after 5 years the estimated life as well as
the interest rate is revised, and that it is assumed that the machine
will last only 3 years more; what is the value of A in this case?
Ans., $12.10.

86. In Exercise 80, the machine is ultimately replaced by a better one
costing $18,000. What will be the sources of this $18,000?

87. If the tabular figures on page 98 are fairly comparable with the state-
ment regarding street railway companies at the top of page 87, is
the management generally conservative?

88. Make all the ledger entries necessary to describe the transactions
in Exercise 80 and Exercise 86.

EXERCISES 185

CHAPTER VIII

89. Should the following expenditures be classed as "operating cost"
or as "betterments"? (a) Rebracing an old boiler to fit it for carrying
higher pressure, (b) retubing a boiler, (c) boring an engine cylinder,
(d) replacing common cheap asbestos cocks by high grade expensive
blow-off valves, (e) mechanical draft equipment in an existing power
plant, (f) stoker appliances in an existing power plant.

90. An improvement costing $10,000 is applied to a plant worth $100,000.
If fixed charges are 15 per cent, on the investment and the improve-
ment causes a saving of 5 per cent, on an annual output of $200,000,
what is the net percentage return on the improvement investment?
If the annual output of the plant is $35,000, other conditions being
the same, what result follows?

Ans., net returns are 85 per cent, and 21/2 per cent., respectively.

91. Which is preferable: the expenditure of $50,000 on a plant producing
$200,000 yearly, for the purpose of increasing output 20 per cent,
when the profits are uniformly 25 per cent, of the output value; or the
expenditure of the same sum for producing a saving of 5 per cent,
on the annual output?

Ans., the gross return either way is $10,000 annually.

92. An opportunity exists for a saving of $1000 per month by the expen-
diture of $4500, this saving being immediately attainable. By deferring
expenditure for 6 months and increasing it to $6500, the saving may be
increased to $1100 monthly. If the total fixed charges on either
improvement expenditure are 30 per cent, annually, and both
machines are expected to last 4 years, which should be installed?
What will be the loss if the wrong expenditure is made?

Ans., the lives of the machines may be ignored, because "total fixed
charges" include depreciation. Unless the $6500 machine is installed
there will be a loss of $2400.

93. What is the ratio of fixed charges per unit of output, in 10-hour day
service, to that in 24-hour day service, if the average hourly production
under the latter plan is 0.9 that under the former plan?

Ans., 2.16.

94. What is the ratio of labor cost per unit of output, in 8-hour day service,
to that in 12-hour day service, if the workman's wage per hour is
25 per cent, greater in the former case, and his output per hour is
20 per cent, greater? .

Ans., 1.04.

Compare (a) the number of men employed, total output being fixed,

and (b) the average daily wage.

Ans., (a) inc. 25 per cent.; (b) 16 2/3 per cent. dec.

95. A corporation starts in business with an insurance fund of $1,000,000,
which is regarded as ample. The value of the insurable property does
not change, and the insurance fund bears 5 per cent, interest. What
shall be done with the earnings of this fund?

96. If in the example at the end of page 107 (footnote), the insurance

186 WORKS MANAGEMENT

policy was for $10,000, what percentage gross gain resulted from the
$500 expenditure for improvement?
Ans., 50 . 8 per cent.

97. Buildings are insured for $6500, stock for $9500, both at full cash
value and at a rate of 85 cents. A fire, after premiums have been
paid for 8 years, causes a building loss of $3900. What amount of
insurance could be collected under the "contribution clause"?
Ans., $1980.

98. A plant in process of erection represents the contractor's expenditure
of $80,000, on which the owner has made payments of $60,000, in
strict accordance with the contract terms. The contractor pays
insurance premiums on a policy amounting to 80 per cent, of the
value of work in progress. A total loss occurs. State all the trans-
actions involved in a settlement. How much does each party lose,
if the aggregate of premiums paid is $500?

99. A partnership has assets of $100,000, and owes $60,000, exclusive
of loans from the three partners amounting to $2500, $6500 and
$1000, respectively. The capital put in by the three partners was
$5000 for each. Earnings are divided in the proportions, 42/100,
36/100, 22/100. State the distribution of assets upon termination
of the partnership.

Ans., partners get $13,800, 16,900 and $9300, respectively.

100. In organizing a corporation, a number of individuals contribute
$400,000 in return for $4500 shares (par $100) of stock. The balance
of the capital stock, 5500 shares, is floated at 90 less a brokerage
commission of $160,000. The sum of $65,000 is expended in prelimi-
nary expenses. What, then, are the total real assets of the com-
pany? What proportion of its capitalization may be regarded
as " water"?

Ans., (a) $670,000; (b) $330,000 = 33 per cent.

101. Are the following things patentable? A roulette wheel; a steam
turbine direct-connected to an air-compressor; a rotary engine of the
type invented by Hero of Alexandria: a rug?

102. A trust is formed, which absorbs 22 mills having aggregate physical
assets of $19,000,000. The capital stock issued is $50,000,000.
What items may be suggested as offsetting the apparent deficit
of $31,000,000?

103. A railroad whose stock has a par value of $50 issues a 15 per cent,
stock allotment at par when its stock is selling at 165 1/2 per cent.
What are the rights worth, per share of old stock? How does the
new stock issue affect the surplus of the company?

Ans., value of rights is $4.91 1/4.

104. On the general principles suggested by the diagrams of pages 121,
122 and 123, prepare a chart of the tabulated organizations on pages
121 and 124.

1Q5. Compare the salary costs under the two plans of page 123.

106. Prepare a chart for a combined line and staff organization in a large
engineering works, giving suggestive titles to the various officials.

107. On an article which sells at retail for $100, the retailer expects a

EXERCISES 187

profit of 40 per cent., the wholesaler of 10 per cent. What are
the prices to be charged by the manufacturer to the wholesaler
and by the latter to the retailer?

108. Consider two mines, a and 6. The former has a concentrator, c,
immediately adjacent, which reduces the weight of materials by
two-thirds. There are two smelters, d and e, in which the working costs
are respectively 4 and 5 cents per 100 Ib. of material received. The
working cost in c is 1/2 cent per 100 Ib. of raw material. Freight from
c to d is 9 cents; from a to d is 9 cents; from a to e is 3 1/2 cents; from
b to e is 2 cents; from c to e is 3 1/2 cents; from b to d is 2 3/4 cents,
all per 100 Ib. Assume that mine a brings its product to the con-
centrator at a cost of 32 cents per 100 Ib.; that mine b can put its
product on cars at 29 1/2 cents per 100 Ib. Smelter d obtains 13 1/2
cents per pound, less freight of 19 cents per 100 Ib., for the final
product which it produces (15 Ib. per 100 of raw material from
concentrator, 51/2 Ib. per 100 of raw material from mines). Smelter
e similarly obtains 13 3/4 cents, less freight of 7 cents, with produc-
tions of 15 1/2 and 5 3/4 Ib., respectively. Smelter by-products
are valueless. Find the profits per 100 Ib. of material brought out
of each of the mines, under each of the six conditions possible.

109. Make a chart of the organization tabulated on page 130.

CHAPTER IX

110. What classes of entries are included in the following accounts:
Office fixtures, stable expense, interest, royalties, allowances to
customers?

111. To what accounts should entries be made for the following: A sale
of stable manure; a charitable contribution; insurance paid in advance?

112. Are balances, in Exercise 110, resources or losses, liabilities or gains?

113. What would be the objections to the practice of never taking an
inventory?

114. At the beginning of the fiscal year a business presents, after closing
the books, the following balance sheet:

Dr. Cr.

John Smith, owner $2500

Thomas Brown, owner 2750

Real estate $2200

Office furniture and fixtures. 1600

Bills receivable 1200

Bills payable 2200

Merchandise 2500

Cash 400

Royalties accrued 450

7900 7900

Make ledger entries for the following:

(a) Owners buy merchandise from J. Jones for $1600, paying cash
$200 and note $1400.

(b) Salaries aggregating $1100 are paid in cash.

188 WORKS MANAGEMENT

(d) Office expense $100 is paid in cash.

(e) A loan of $500 is obtained from the bank, a note being given.

(f) The note under (a) is paid, with interest for 6 months at 5 per cent.

(g) Bills receivable from last year's balance are paid in cash, less a
bad debt of $200, plus interest of $160.

(h) Bills payable under last year's balance are paid, with interest

amounting to $30 . 50, in cash.
(i) Accrued royalties under last year's balance are paid in cash.

115. In Exercise 114, inventory shows merchandise to be worth $2260,
office furniture and fixtures $1500. Other assets (except bills
payable and cash) are as before. Interest accrued under the bank
note (e) amounts to $22 . 00. Make the closing entries and prepare
the balance sheet, crediting net profits to the owners of the business
in equal shares.

116. In Exercise 115, what is the value of the "quick assets?"

117. Check the statement on pages 144, 145.

118. Compute the gross earnings per mile, for each year from 1896 to 1905,
page 145. Compute the average for this period.

119. Check the tables on pages 146 and 147, as far as is possible.

CHAPTER X

120. Show how the seven building widths mentioned on page 155 may be
obtained while using only the two standard spans.

121. Freight on oil in 10,000 gallon tanks from Buffalo to Boston is 2
cents per gallon. In barrels (holding 50 gallons) it is $1 . 75 per
barrel. It costs $1.45 per barrel to put oil in barrels at Buffalo,
$1.05 to do this in Boston. There is no leakage on tank car ship-
ments; the average loss to the shipper by leakage, on barrel ship-
ments, is 1 per cent. What is the gross gain per 10,000 gallons, by
shipping oil in tanks from Buffalo and barrelling it in Boston? What
factors must be considered as operating against this gain?

122. Suggest a grouping of buildings, on a square plot, across which a
canal runs diagonally, for a locomotive works including foundry,
forge shop, pattern shop, pattern storage, power plant, boiler shop,
machine shop, paint shop, carpenter shop, erecting shop, storehouse
and offices.

123. WTrite a letter accepting a contractor's bid for doing certain work
according to plans and specifications submitted and appointing a
day for the execution of contract.

124. In Exercise 123, what objection may be made to the following clause
in such a letter: "We are prepared to accept your proposal providing
you can furnish satisfactory sureties."

125. Suppose, in Exercise 98, the contractor has allowed his insurance
premium payments to lapse. What is the obligation of his surety?

126. On pages 170, 171, which of items A to Q would be found by inventory
of the physical property?

127. In the Worcester case, pages 171, 172, state in dollars the contentions
of both parties and the decision of the court. Who won?

INDEX

Accidents to workmen, 105, 133
Accounting, 136, 138, 139

depreciation, 98, 99
Accounts, classification of, 12

impersonal, 137

store room, 65
Administrative cost, 10, 73
Agency, 127, 167
Agent, purchasing, 63
Annuity table, 89-91
Apportionment of burden, 72-81

of labor cost, 30
Apprenticeship, 50, 51, 52, 116
Arbitration, 134
Architect, 163, 167
Art of management, 70
Assembling, 46, 68, 159
Assets, quick, 143
Associations of contractors, 167
A. T. & S. F. R. R., 44, 54
Automatic sprinkler system, 76
Axioms in organization, 118

Bad organization, 121

Baldwin Locomotive Works, 51, 52

Balancing books, 138, 141

Basis for cost division, 2, 4

Bays, building, 155

Belting, 46

Betterments (improvements), 27,

84, 85, 88, 97, 98 100, 101
Betterment enterprises, 149
Book-keeping, 11, 136, 138, 139,

143

Books of account, 139
Bonds, 82, 113, 169
Bonus, 39

Bonus system, 39, 41
Branch offices, 127
Brick and steel buildings, 164
Building bays, 155

Buildings, brick and steel, 164

concrete, 165

contracts for, 165, 166

cost of, 165

cross-sections, 153

grouping, 158

heights, 155

standards, 153
Burden, 9, 72-81
Burden chart, 80
Buying, 57-65

Cash book, 139

Cash discount, 60

Caveat, 112

Centralized buying, 61

Charts, 10, 22, 23, 24, 27, 28, 42, 80

Chaser, 68

Chronological chart, 24

Cipher, 59

Classification of costs, 5, 8, 12

of industries, 8, 12
Closed shop, 133
Closing the books, 138, 141
Collusion, 62
Committee system, 124
Comparative charts, 23
Compound interest, 87, 88
Compound interest tables, 91, 93-96
Concealed profits, 97
Concentrator, 129, 158
Concrete building, 165
Consignments, 128
Construction contracts, 165
Consulting engineer, 163, 167
Consumption records, 17, 26, 27
Consumption unit cost divisor, 4
Contracts, 166
Contract, cost plus fixed sum, 164

cost plus percentage, 164

extras on, 167,

189

190 INDEX

Contract, municipal, 166

penalty on, 167

uniform, 168
Contracting, 64, 148, 164
Contractors' associations, 167
Contract piece work, 41
Contribution clause, 108
Conveying, 161
Corporations, 110

bonds, 82, 113, 169

management, 110

organization, 110

statements, 143

stock, 85, 110, 113, 114
Cost, administrative, 10, 73

basis, 2, 4

chart, 10

classification, 5, 8, 12

direct, 9

divisor, 2, 4

factory, 10, 12

fixed, 9, 29, 36, 72-81

labor, 5, 30

land, 148

materials, 5

mill buildings, 165

prime, 9, 10, 12

unit, 2, 4

Cost keeping, 10, 11, 56, 129
Cotton-seed oil mill, 4, 155
Crane, 155, 159, 160
Credit, 136
Cumulative stock, 110

Day wage system, 32
Debit, 136
Deferred repairs, 83
Deficit, 143
Departmental costs, 5
Departmental division of burden, 73
Departmental organization, 122
Depreciation, 79, 82-99, 142

accounting, 98, 99

definite method, 85

fund, 87

rates, 86, 87

reserve, 88-99

reason for, 83

Tables, 88-95

Despatching, 46, 67, 68, 69
Determining ratio, 8, 115, 148
Development of organization, 115

of plant, 100
Differentials, 6, 7, 74
Differential piece rate, 38
Direct cost, 9
Direct expense, 9
Direct labor basis for burden, 75
Discount, cash, 60
Disposal of waste, 162
Disputes, industrial, 134
Distribution of burden, 72-81
Distribution of depreciation reserve

88-99

Dividends, 85, 143
Divisional organization, 122
Divisor for costs, 2, 4
D. L. & W. R. R., 145
Doherty, H. L., 170
Double-entry bookkeeping, 136
Drafting room, 48
Duties of manager, 100, 121

Economy in materials, 169
Effect on workmen, 53, 133
Efficiency, 2, 34

curve, 42.

engineers, 57

labor, 30

purchasing, 61
Emergency purchasing, 64
Emerson, Harrington, 70

efficiency system, 41
Employers' liability, 105, 133
Engineering graduates, 116

industrial, 157

schools, 118
Engineers, consulting, 163, 167

efficiency, 57

mill, 148

Equipment, life of, 86, 87
Erecting, 46, 68, 159
Estimates, 102
Expense, 9, 72-81, 138

direct, 9

factory, 9, 72

final indirect, 79

general, 73

INDEX

191

Expense, indirect, 79
Extensions, planning for, 152
Extras on contracts, 167

Factor (see Burden).
Factory cost, 10, 12
Factory expense, 9, 72
Final indirect expense, 79

renewals, 84, 99
Financial statements, 143
Fire losses, 106
Fixed cost, 9, 29, 36, 72-81
Foreign patents, 112
Foremen, 78

Forfeiture on contracts, 167
Forms of organization, 114, 121
Freight, 7, 157
Fuel for factories, 149
Fund, depreciation, 87
Fundamental ratio, 8, 115, 148

Gang bonus, 41
Gannt, H. L., 44

bonus system, 39
General Electric Co., 30
General expense, 9, 29, 36, 72-81
Graduates, technical, 116
Graphical records, 20-28
Grouping of buildings, 158
Growth of plant, 100

Halsey premium system, 36
Heights of buildings, 155
High speed steels, 29
Hoist, traveling, 160
Horse-power basis for burden, 75
Hours of labor, 103
Humphreys, A. C., 89-96

Impersonal accounts, 137
Improvements, 27, 84, 85, 88, 97, 98,

100, 101

Improvement expenditures, 27
Incidental records, 28
Increase of capital stock, 114
Indemnity insurance, 105
Indirect expense, 9, 72, 79
Industrial egineering, 57
disputes, 134

Industrial organization, 100-135

railroad, 161

Industries, classification of, 8
Inspection, 47, 61
Insurance, 79, 104, 105, 106, 155, 159

rates, 107
Interest on material stocks, 66

rates 87, 88
Inventory, 66, 69, 139
Invoice, 60, 66

Jib crane, 160
Journal, 139

Laboratory, 61, 162
Land, 148, 163
Labor, 29-54

apportionment of cost, 30

cost, 5

efficiency, 30

non-productive, 79

organization of, 131

reforms, 132

systems for paying, 32, 43

-hour, 2

unions, 120, 133
Layout of plant, 148
Ledger, 139
Length of day, 103
Liability, 137, 142
Licensing architects, 163
Lighting, 78, 154
Liquidated damages, 167
Line organization, 120, 133
Linseed-oil mill, 4, 6, 12, 74
Listed stock, 113
Lives of equipment, 86, 87
Location of plant, 148
Lockouts, 134
Locomotives, 162
Locomotive works, 4, 51, 52
Logarithms, 88
Loss and gain, 138, 142

Main, Chas. T., 171
Maintenance expense, 104
Management, 1, 70

corporations, 110

units, 1

192

INDEX

Management, scientific, 1, 48
Manager, 100, 103, 121
Manufacturing cost, 12
Mapping processes, 155-159
Material, 55-70

costs, 5

economy in, 69
Methods of purchasing, 57
Mill buildings, 164, 165

construction, 164

cost, 165

engineer, 148
Monthly statement, 144
Motion study, 50
Municipal contracts, 166
Mutual insurance, 106

Non-productive labor, 79

Objections, definite burden system,
81

modern labor systems, 49

ordinary burden system, 76

piece work, 33
Oil-mill, 4, 6, 12, 74, 155
Open shop, 133
Order, purchasing, 59

shop, 30
Organization, axioms, 118

corporation, 110

departmental, 122

development, 115

divisional, 122

forms, 114, 121

industrial, 101-135

line, 120, 133

labor, 120, 131, 133

staff, 124

trusts, 130
Ownership, forms of, 107

Paper mill, 3, 157, 158
Partnership, 107, 108

termination of, 109
Patents, 111

foreign, 112

Payment of labor, 32, 41
Payroll, 16

Penalty on contracts, 167
Physical valuation, 169
Piece rates, 50

work, 32, 33, 35, 41
slip, 5, 31
differential, 38
Plant, 148

depreciation of, 83, 86, 87

layout, 148

location, 148

valuation, 168
Pools, 167
Power in factories, 9, 14, 76, 162

plant, 8, 17, 18, 19, 20

valuation, 171

water, 149, 170
Premium (see Bonus).

system, 36
Price cipher, 59
Prime cost, 9, 10, 12

as a burden basis, 75
Problems, cost-keeping, 10, 56

purchasing, 62

transportation, 129
Process mapping, 155, 159
Profit and loss, 138, 142

-sharing, 34
Promoter, 110, 148
Providing for extensions, 152
Public service corporations, 13, 59,

87, 98

Pulp mill, 158
Purchasing, 57-65

agent, 63

importance of, 57

methods, 57

negotiations, 64

order, 59

problems, 62

public service corporations, 57

Quick assets, 143
Quotations, 58-60

Railroads, 44, 54, 70, 101, 122, 145

industrial, 61

operating expense, 13
Rates, depreciation, 87

insurance, 107

INDEX

193

Rates, piece work, 50
Rate of interest, 87, 88

setter, 50

Reclassifying the trades, 52
Records, 11-17

consumption, 26, 27
Reduced rate clause, 108
Reenforced concrete, 165
Reforms proposed by labor unions,

132

Renewals, final, 99
Rent, 78
Repairs and replacements, 79, 83, 84

deferred, 83

Request for quotation, 58, 60
Requisition, 58, 69
Residual value, 86
Reserve for depreciation, 88-99
Resources, 137, 142, 143
Responsibility of manager, 103
Restriction of production, 133
Rights, stock, 114
Routing, 46, 67, 68, 69
Rowan's formula, 37

Salesmen, 126
Saw-tooth roof, 154
Scab shop, 133
Schedule, 67

Schools, engineering, 118
Scientific management, 1, 48
Secondary statements, 143
Secrets, trade, 112
Self-hardening steels, 29
Selling expense, 10, 72, 145

systems, 125
Setting-up, 46
Shop order, 30
Shutting down, 104
Sites for plants, 150 •
Skeleton steel buildings, 164
"Slow-burning" buildings, 164
Smelter, 129, 158
Space data, 150
Spans, 154, 155
Special charts, 27, 28
Specialties, 6, 7, 74
Specifications, 166, 168
Speculation, 60, 63

Speed boss, 45
Sprinkler system, 76
Staff organization, 124
Standardization, 34, 49
Standards for buildings, 163
Staples and specialties, 6, 7, 74
Statements, monthly, 144

secondary, 143
Statistics, 11-17

graphical, 20-28

incidental, 28

unnecessary, 19
Stock, cards, 66

classes of, 110

corporations, 85, 110, 113, 114

department, 6

despatching, 46, 67

insurance companies, 106

inventory, 66

material, 66

order, 67, 68

rights, 114

watered, 113
Storage of product, 104
Storeroom, 6, 14, 65-69
Storied buildings, 154
Street railways, 87, 113
Strikes, 134
Superintendent, 71
Supervision, 10, 73
Supply of workmen, 50
Surcharge, 9, 72-81
Surety, 167
Systems, cost- keeping, 56, 129

paying labor, 32, 43

Table, annuity, 89-91

compound interest, 93-96

Tables, depreciation, 89-96

Tank cars, 158

Tank stations, 158

Taylor, F. W.; 39, 43, 47, 116

Taxes, 79

Technical graduates, 116

Termination of partnership, 109

Tester, 45

Testing laboratory, 61, 162

Time basis for burden, 75
cards, 5, 31

194

INDEX

Time study, 45

Totalized charts, 22

Totalized consumption record, 26, 27

Tracer, 68

Tracks, 161

Trade secrets, 112

unions, 120, 133
Trades, reclassifying, 52
Training workmen, 50-52, 116
Transfer table, 160
Transportation in the plant, 156, 161

facilities, 148

problems, 129

by water, 149
Traveling hoist, 160
Trial balance, 138
Truck, 160
Trusts, 128
Turntable, 161, 162

Uniform contract, 168
Union labor, 35, 120-133
Unit costs, 2, 3, 4

Units in management, 1
Unnecessary records, 19

Valuation of plant, 168, 169

of water power, 171
Value, residual, 86
Voucher, 15, 16, 60

Watered stock, 113
Water power, 149, 170

transportation, 149
Waste disposal, 162
Welfare work, 149
When to improve, 102, 150
Wholesaling, 127
Worcester case, 171
Work order, 67
Workman's interest, 53, 133
Workmen, training of, 50, 51, 52, 116
Workmen's compensation, 105, 133
Working hours, 103

Yard room, 150, 153

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