Introduction
To those who have followed the numerous discussions of navy yard industrial methods during the last few years, and who have been interested in the changes and developments which have been taking place, it must have been apparent that there is considerable indefiniteness surrounding the claims and counter-claims for the various systems of management and administration, so far as the ability to prove, on the part of adherents of the plans adopted or proposed, that their methods do or would produce the most economical and satisfactory results. Of the methods actually tried it may be said that while great improvements over the old laissez-faire policy have undoubtedly been effected, it has been most difficult to show specifically where and to just what degree economies have resulted.
For every advocate of one plan who cites figures and instances to prove the efficiency of the work done while his system was in vogue there instantly appears an opponent who not only produces other figures and instances to strengthen his arguments, but who also proceeds to cast considerable doubt on the accuracy of the figures on which the first gentleman’s arguments were based. Thus the impartial observer—if there be any such—is apt to be somewhat confused.
It is the purpose of the writer of this essay to outline a few of the necessary elements of administration and accounts which he believes would, if adopted, largely obviate the difficulties referred to, and render it possible to obtain a better standard of comparison among any and all methods which may be tried. No consistent or detailed description of an administration and accounting system as a whole will be attempted. A certain familiarity with the present methods of our navy yards will be assumed, and remarks will be confined solely to those particulars wherein improvements are recommended.
Readjustments of navy yard organizations and new distributions of authority over component parts will never of themselves produce great economies. Brooms will sweep clean when new, but before long dust accumulates in the old crevices. Unless a constant incentive urges us forward, not only do we fail to progress, we fall back.
The writer is not one of those who believes that authority placed in the hands of one set of men will necessarily produce better results than when in the hands of another set. It seems far more important that a clear definition of the results expected be set down, and that a reasonably accurate system of comparison of efficiencies be developed. The results will then soon prove who are the men most capable of wielding authority.
The subjects covered in the following pages have been, for the most part, largely discussed in recent months. But the writer regrets to state that no great advance has been made towards the solution of the problems involved, although conditions have been improved. By presenting the subject matter at a slightly different angle, and by the introduction of a new element—a record of profit and loss—it is hoped that a well-worn theme may have a certain new interest for the reader.
Some of the steps recommended in this essay are already in effect, as, for example, the division of yard expenses into "Military" and "Industrial." But the writer has deemed it well to go over the ground, as there are many who are opposed to such division. It is also noted that a new system of estimating for the annual appropriations has been put into effect. The writer has not seen this system, and his remarks refer therefore to the methods followed for the current appropriations.
General Remarks on Economy
There is probably no one who will not admit that economy is a good and desirable thing. In the abstract it is acknowledged to be essential in any undertaking in which effort is measured in terms of dollars and cents. In practice, however, it is not always so easy to get complete agreement as to the desirability of economy. In any given venture there are usually a certain number who maintain that attempts to economize in this particular instance will tend to jeopardize results. Whenever the project is a governmental one the tendency to eliminate economical considerations is apt to be marked, and this is especially so in the case of military affairs. The reason of this is that military expenditures are not usually to be measured by results attained, it being felt that a striving after economy may tend to paralyze, in some degree, the efficiency of the military system. Thus, from a purely military standpoint, it often appears that the introduction of too many economical methods in the industrial work leading up to military purposes serves but to retard the attainment of those purposes to the fullest extent. In other words, too much economy results in a "penny wise, pound foolish" policy.
This view is arrived at owing to a confusion as to what really is meant by economy. While, in a narrow sense, the saving of so many dollars and cents in a given series of operations may be called economy, it is of course no actual economy in the broader sense, if the final results to which the series of operations leads are impaired by such savings. Every one knows this; nevertheless, in ordinary discussions this distinction is frequently overlooked.
In the naval world, industrial operations are carried on for the purpose of preparing and maintaining ships for war. There are definite objects to be attained—so many ships to be built, so many ships and outfits to be repaired, so many technical devices to be installed, etc. As long as these objects are attained fully and on time, it is not, to the military mind ordinarily, a matter of exceeding moment whether the most economical methods have been used in their attainment, or not. Of course, all admit that it would be well if these things could be done more cheaply, and that it is a duty owed to the government to be as careful as possible in the expenditure of its funds. On the grounds of patriotism and honesty all would like to see avoidable losses eliminated. It is thought, however, that it has not occurred to the service generally that industrial waste (meaning less economical methods than those possible) means a direct loss in military efficiency. That this is so may be shown in the following way:
The navy has grown tremendously since the Spanish War. The money appropriated annually by Congress for the navy has been:
Naval Appropriations from March 3, 1901 to June 24, 1910
March 3, 1901: $78,101,791.00
July 1, 1902: $78.856.363.13
March 3, 1903: $81,876,791.43
April 27, 1904: $97,505.140.94
March 3, 1905: $100,336,679.94
June 29. 1906: $102,091,670.27
March 2, 1907: $98,958,507.50
May 3, 1908: $122,663.885.47
March 3, 1909: $136,935,19905
June 24, 1910: $128,958.704.76
From an inspection of this table it is seen that our naval expansion has been very rapid in the last decade. During this period the demand on the part of the country at large for an increased navy was so great that Congress appropriated money for that purpose in increasing amounts each year. The cry for economy has gone forth, however, and it is a reasonable expectation that for the next ten years our annual appropriations will hardly exceed on the average those of the last two years. That is to say, it has now come to the point where the main question is not, "How many vessels and armaments is it wise to add to the fleet each year," but "How can we best expend the appropriations available," since it is evident that our increase and maintenance will be limited strictly to the funds Congress and the people are willing to expend for that purpose.
If, in a conflict five years from now, we are able to place in line of battle one vessel which, as the result of economy in industrial methods, amounting to two millions of dollars per year, we are able to obtain in addition to those we would procure under our ordinary methods, it is evident that economy has directly aided military efficiency, instead of retarding it. This example, while crude, is no exaggeration. It is possible to save fully two million dollars per year, by proper methods of administration, accounting and accountability. And since Congress, and the people at large, will probably permit the expenditure each year of at least as much as is now being expended, the saving will accrue directly to the navy, and thus increase its efficiency.
The above argument is not advanced as new or original with the writer. It is pretty generally recognized as being true by those who have given this subject much thought. It is merely -ted here as the basis upon which the balance of this article rests.
It must be perfectly evident, therefore, that the study of economy in naval expenditures is by no means a theoretical subject, but a living, practical issue, calling for the best thought and most earnest effort. The conservation of our resources—naval appropriations—is perhaps the most important military problem now before those engaged in proper preparation for war. Of the total expenditures each year for the naval service, about one-half is made through the various navy yards where industrial work is carried on. The other half consists of purchases of new ships and equipment, pay and subsistence of personnel, etc. It is not the purpose of this article to discuss expenditures under the last mentioned section. The half expended at the navy yards and stations alone will be treated, as it is here that the larger economies are believed to be possible.
The Difficulties in the Way of Economy
It is believed that the necessity for economizing is apparent to all. It is recognized on every side that too much money is expended for the results obtained. Yet the many difficulties surrounding the case have led most people who have carefully considered the subject to conclude that a large part of the waste is unavoidable. They all see clearly that many elements are present in governmental industrial work which do not have to be contended with in ordinary commercial life. Such are: (1) the military necessity of maintaining shops and laborers to meet sporadic demands of the fleet, such shops and laborers being often not fully employed, (2) the political influences affecting government industrial work, causing yards and stations to be maintained which are really unnecessary, (3) the eight-hour law, which has the effect of increasing the rate per hour paid, (4) the granting of leave and holiday, and the payment of disability claims, (5) the absence of the incentive found in the commercial necessity of producing profits, (6) the alleged impossibility of comparing costs at various yards, owing to the varying conditions of equipment and rates of wages paid, to say nothing of comparisons with commercial costs, (7) the complicated appropriation system, which, having for its object the limiting of expenditures by means of express stipulations concerning the objects for which the money may be spent, has actually become so involved and interwoven as to be useless for such purpose, while, on the other hand, it throws a large volume of unnecessary work into the accounting records; such are the main difficulties confronting those who would, if they could, efficiently administer the funds of the naval establishment.
It is the hope of the writer that he may be able to show how some, if not all of the obstacles mentioned may be overcome; and that by degrees a system may be set up which not only will permit the more economical operation of government plants, but which will point the way to methods producing results at least equal in efficiency to a majority of the commercial plants.
Looking at this problem in a broad way, it would seem that conditions exist which should warrant the final development of a thoroughgoing economical system. The navy possesses a number of independent industrial concerns, which, judging from the history of industrial development in the United States, are capable of being welded into one vast corporation, under one general management, in which economies can be introduced which would not be possible if the plants were run separately. We have every reason to believe in the efficiency of this method of doing business. Furthermore, we are in the favorable position of a group of financiers who undertake such a consolidation of plants unrestricted as the available capital to use in putting their plans into effect. It is not a question with us of recognizing the necessity of reforms but not being able to go ahead with them on account of lack of funds, a condition often met in the commercial world. We are not under the inexorable necessity of paying dividends and interest on capital continuously, or going into the hands of a receiver. Any well-defined plan which promises economy in the long run can be put into operation at once, even though the results may not be expected to manifest themselves for a year or more.
If we can but once rid ourselves of the idea that the task is practically hopeless (an idea more common than is generally admitted), it is quite possible to make rapid strides toward the goal of efficiency and economy in industrial work. The government is able to employ the best talent available for the purpose. All that \s needed is for the problem to be definitely set forth and scientifically attacked.
After all is said and done, it will probably be admitted that the real, underlying reason for extravagance in government work is due to the lack of incentive toward economy found in the commercial necessity of showing profits under competition. If that, or an equally good incentive can be furnished, the problem is a long way toward being solved.
Now, just what is this incentive in commercial life which leads to the refinement of processes, the reorganizations of business and the vast combinations of capital for scientific and economical production? Is it the desire to make money, to pile up fortunes, on the part of certain capitalists? While that is the result which is most apparent to the eye of the public, I do not think it is the real underlying reason for the achievements in industrial work which so astonish and charm the imagination.
It is rather the desire implanted in the breasts of some men to achieve results, to do good work, to use their science and education to make two blades of grass grow where but one grew before. Men, absorbed in the delights of scientific and engineering achievements, think very little of the cash returns coming to them individually. And even the industrial managers, the men who solve the problems leading to organization and commercial efficiency, themselves obtain but a small part of the financial reward. True, these men are all well paid, and that fact undoubtedly influences their actions. But it is the desire to achieve, to better the performances of those who preceded them, that furnishes the real incentive for their efforts. Even the capitalists themselves, those men sufficiently astute to reap the results of others' industry, are often enough actuated mainly by the same motives—to excel others.
This leads to the conclusion that cash returns are not absolutely necessary for the proper development of industrial work. Does the present efficient management of the Panama Canal construction depend upon the profits being made by the engineers in charge?
The incentive for commercial efficiency is the desire to excel. This same incentive can be utilized in our navy yard plants. Only, in order to obtain fair competition, the conditions must be such that those competing are cognizant of all the rules and details concerned. And since the competition is to be not only among our own yards, but with commercial plants also, we must be governed by the same rules and conditions governing them, so far as may be practicable.
It is the function of a well-developed accounting system to show clearly and accurately the results of efficient work, to indicate the errors that need correction, and to draw attention to the differences in methods instituted in the various plants, so that the best elements of each may be adopted for all. Such an accounting system should permit of no expenditures being made which in any way affect the plant, without registering accurately and clearly the effect which such expenditures have upon the plant's production. In other words, the product of a plant, when stated in terms of value, must include all the elements of effort, measured in dollars and cents, which have gone to make up that value.
In the government service the cost of a manufactured or repaired article should mean the expenditure which has been necessary to obtain that article or make that repair, being comparable with the expenditure necessary to purchase the article or have the work done by private plants. Anyone who thinks of the "cost" of a government manufactured or repaired article immediately compares such cost in his own mind with what he thinks would be the cost if the work had been done outside. It is psychologically impossible to speak of "cost" without making some such mental comparison, no matter how unconsciously it may be done. Therefore, to say that government "costs" cannot be considered in the same light as commercial "costs" is merely a contradiction in terms. If we wish to substitute for "cost" a "near cost" that is, cost with certain elements eliminated, it will be necessary to use some other word or phrase to express our meaning. Otherwise it must be apparent that we will be continually deceiving ourselves and others, since long habit has made it impossible to prevent the mental comparison to which reference has been made. Of course we could always bear in mind that our costs are different from commercial costs. At least, we could theoretically. But practically we soon leave off the habit of this mental adjustment, and commence comparing in our minds our "near costs" with commercial "costs." Furthermore, it is simply impossible to make others, outside the government service, remember that we mean "near cost" every time we say "cost" in connection with government work.
It will be well to analyze here just what is meant by commercial cost. In the case of a private plant manufacturing articles or making repairs, costs are commonly ascertained in three stages. Assuming that the plant is divided into several departments, or shops, as most well organized plants are, the article manufactured or repaired has charged to it the labor expended directly on it, the material used, and the "overhead" or "indirect" expenses of the departments or shops in which it has been handled. The summation of these charges give what is commonly called the (1) "factory cost." But in order to produce the articles or make the repairs, the expenses of the managing and office force must be considered, as well as all other incidental expenses not chargeable through the shops. By the addition of these elements we get the (2) "production cost," that is, what it actually cost the private plant to produce the articles. Next to be considered are the expenses of marketing the articles, or obtaining orders for repairs, as well as the profit to the plant, so that we finally come to the (3) "selling cost." The last is really a misnomer from the point of view of the plant, but is quite correct from the point of view of the consumer. In government work we have (1) factory cost and (2) production cost, but not (3) selling cost. That is, our (2) production cost is really our ultimate cost, since we carry the process no further. Or, to put it another way, the third element is zero. Therefore, in comparing government costs with commercial costs, it is quite clear that it is our (2) production costs, which are to be compared with commercial (3) selling costs. Thus, in using the term "commercial cost" it is to be understood that the selling cost to us as consumers is meant. All elements of expenditure made by us to produce articles should then be included in our "costs," just as all elements included in the selling price are included by private firms before we obtain the articles from them.
Having thus clearly fixed in our minds the fact that the results of our productive effort, stated in commercial terms, must include all those elements which are commercially considered as parts of productive effort, and which are in fact necessary towards the realization of the results of production, we next come to the problem of providing a method by which a measure of efficiency may be obtained in government industrial plants, in the absence of the usual commercial profit.
The plan to be proposed depends upon the fact being granted that the incentive for commercial efficiency is, as the writer has attempted to show, the desire to excel, rather than the actual pecuniary gain immediately accruing to those who make the efforts towards such efficiency. It should be fully understood, however, that this does not mean that pecuniary reward has no weight in the matter. The distinction which it is desired to make here is this: Economic conditions are brought about by the desire to excel, to better the record of someone else. The reward for having excelled, is, in commercial life, usually a pecuniary one. It could, just as well, be "honor and distinction," were "honor and distinction" prized as much as money. Frequently the reward usually does consist of the former, rather than the latter. In governmental work, and specifically, in the navy, the reward must usually consist of honor and distinction, with pecuniary benefit to the individual eliminated.
Inasmuch as it is commonly granted that the desire to excel produces beneficial results in such things as target practice and steaming competitions, one may be warranted in believing that it will also serve as an adequate stimulus in the matter of industrial efficiency, provided the contest can be conducted in such manner as to guarantee fair competition. As a matter of fact, it is believed that the contest for supremacy in industrial efficiency can be made along fairer lines than in the cases mentioned, if the facts are gone into thoroughly, because the measure of efficiency will be that tested by long years of commercial practice, whereas in target practice and steaming contests the field is new, and the weights given to the various elements are necessarily experimental.
The Measure of Efficiency
The "Profit and Loss" account measures the efficiency of a commercial plant. The distribution of earnings in the form of dividends, etc., marks the point where governmental plants must cease to step side by side with the commercial plants. Up to that point, however, the progress of the two can be compared stage by stage, and though differences will be found to exist, they will not be of such character, nor so great in amount as to prevent fair comparison. Let us then adopt a "Profit and Loss" account in our naval industrial work, cast as nearly as possible along the lines of the same account in commercial practice. The benefit will x twofold. First, comparison with commercial plants will be practicable (and impracticable otherwise), and second, a fair standard of comparison among our own navy yards will be supplied.
The above is the writer's view of what should be done. Just how it may be done will be set forth in sufficient detail to prove, it is hoped, that it can be done. The description of the "Profit and Loss" account to be clear must follow the discussion of the steps leading up to it, and will therefore be placed later on in this essay.
The Military Post and the Industrial Plant
A navy yard has two separate and distinct functions, (1) that of a military post, and (2) that of an industrial plant. Expenditures made on account of a navy yard may be for the military post, for the industrial plant, or partly for one and partly for the other. It is essential that all expenditures should be classified and divided between these two objects, before any attempt is made to ascertain the costs of production of the industrial section.
The military post covers that function of the yard which might still continue to exist were no industrial repair or manufacturing work carried on. It is possible to conceive of a yard in which ships would come for the purpose of receiving and discharging stores, transferring officers and men, carrying on drills, etc., and sometimes going into reserve, or out of commission. All repair work would be done by private contract, as occasion demanded. This yard would be a strictly military post, analogous to an army Post in practically all respects.
All of the above things are done at our existing yards, and in addition an industrial plant is kept operating for the purpose of making repairs and manufacturing articles required by the ships, instead of reliance being placed on private contractors. It may be objected that the whole yard is really military in its function, since it is purely for military reasons that repair and manufacturing work are done in them at all. That is to say, were it not for 'he military necessity of having plants ready and available at all times and particularly in time of war, to make repairs or provide articles needed immediately (and for which it would be unwise to depend upon the resources of private plants possibly unable to accept the work), there would be no need for governmental navy yard industrial plants at all. Except for the military reasons, all work of the nature indicated could well be done in private plants.
The reply to this argument is that while our navy yard shops are maintained for military reasons, they are nevertheless industrial plants which military policy requires us to keep up. Their functions as industrial plants are clear and distinct. The very fact that the work they do could be done by private plants goes to prove this assertion; for, we have only to segregate those expenditures made by us in order to do this work which might be done by private plants, and we have the "industrial expenditures" clearly defined. Furthermore, it is only consonant with good business administration for us to keep an exact record of what the cost is to the government of the military policy which requires us to maintain these industrial plants, to be compared with another policy, the cost of having the same work done elsewhere. And if in the course of time we can show that the policy we adhere to for military reasons costs the government no more than the other policy, we shall have quieted all opposition to the methods we have adopted for military reasons. That time is far distant, but it will arrive.
If any who read this are of the opinion that the cost of naval industrial work is so intimately involved with military expenditures that there can be no real comparison with commercial work, it is pointed out to them that the adoption of such a view renders it hopeless to attempt to achieve any real economies in our plants, since no basis of comparison could ever be used which would not be nullified by the intangible military element. It is, therefore, worth while to adopt the contrary view, and give it at least a trial.
The military expenses of a navy yard include the maintenance of buildings, grounds, sanitary arrangements, walks, fences, piers, sea walls, craft and vehicles, etc., which are used for military purposes and in general all those expenses which the military part of the yard necessitate. There are some expenditures which are made partly for the industrial and partly for the military section of the yard. All of those should be divided according to the benefit accruing to each section. When any expenditure is to be made it should be subjected to the following test: "Does it in any way benefit or assist the production at the yard?" If the answer is "Yes" the expenditure should be classed as industrial. If the answer is "No," the expenditure should be classed as military. If the expenditure is clearly for the benefit of both military and industrial plant it should be charged proportionately to both. The writer would not be warranted in going further into the details of this division of expenditures here. It can be stated, however, that the details have been worked out, and that they are practicable.
The question of economy in the industrial portion of the yard will now be taken up, but first let us recall a conversation which took place during a hearing before the House Naval Committee last winter. The quotation is as follows:
Mr. Padgett.—Now, then, how would it do to make the whole establishment in the navy yard industrial along the same line that the industrial yards of the country are, and let them bid for their work at the department n the same way that they would bid or that bids would be submitted by the private concerns?
Admiral Capps.—I think I fully understand your proposition, Mr. Padgett, and it is rather fascinating as a proposition, but it has many practical difficulties.
The chief constructor then illustrated the difficulties of specifying in detail the exact nature of contemplated work, in order to secure bids. These difficulties are indeed great. The writer believes, however, that they can be overcome, but only after a thorough revision of the navy yard financial system. More will be said about this question under the heading of estimates. The "fascinating" proposition was so exactly in accord with the writer's own view that he cannot forbear quoting it. While it nay not be practicable or desirable to have our yards actually compete for business with private plants, it certainly should be possible to compare costs accurately with those of commercial concerns. To do this we must make the yards industrial "along the same line that the industrial yards of the country are."
Comparison of Expenses in Private and Government Industrial Plants
It is frequently stated that government plants work under a serious disadvantage, as compared with private concerns, in that the former have expenses which the latter do not have to meet. The examples most frequently quoted are (1) the eight-hour law, (2) payments for leave, holiday and disability, and (3) higher rates of wages. These are the most serious obstacles to successful competition with commercial output. Let us examine them in detail and see what effect they have on our navy yard costs, and then take up the other side of the question, expenses of private plants which our plants do not have to contend with.
(1) The eight-hour law.
The tendency to reduce the hours of labor has been very marked during the last two centuries. Against seemingly insurmountable obstacles the number of hours per day which the laboring class must work in order to obtain subsistence has been gradually reduced. Legislation has many times been employed towards this end, and signs are not wanting that it will be frequently used successfully in that direction in the future. The normal period for factory workers is now about ten hours per day. It is urged by those in favor of reduction of this time that the output of a laborer working eight hours per day will equal that of the same class of man working ten hours, the argument being that ten hours is too long for efficient work throughout the day. Whatever may be the merits of this argument, let us ignore it, and assume that of two men receiving the same wages, the one working ten hours does 25% more work than the one working eight hours. Then for work done in a government plant the labor cost will be 25% greater than the same work done in a private plant, assuming that our eight-hour man receives the same daily wages as the ten-hour man. The extra expense due to the eight-hour law is then, under the above assumption, 20% of the total labor cost. The expenditure for labor at the New York Navy Yard during the fiscal year 1909 was $3,913,594.53 (exclusive of pay for leave, holidays and disability). Twenty per cent of this amount is $782,718.91, which represents the cost of the eight-hour law at the Navy Yard, New York. During the same year the expenditures at this yard were, for leave, $140,143.18, for holidays, $136,721.03, and for disability, $9,652.48.
The rates of wages at our navy yards are theoretically the same as in the surrounding industrial plants. As a matter of fact they are nearly always slightly higher, since each trade receives the highest rates paid in surrounding plants. If it is considered that in any given private plant, some trade will receive a somewhat greater rate of pay than the same trade in other plants, but that in no plant do all the trades receive this increase, it will be seen that where a navy yard pays the high rates of each plant, and the low rates of none, its general average of rates must be higher than the general average of any one private plant. At a guess, assume that of the total wages paid, 5% covers this increase in rates, and we get $195,679.73 as this extra cost. We have then
(1) Eight-hour law $782,718.91
(2) Leave, holiday and disability $286,516.69
(3) Higher rates of wages $195,679.73
Total $1,164,915.33
This is a pretty heavy bill for one navy yard to pay annually on account of the items specified, even though it is our largest yard. Each of the others pays much less. But let us now consider certain items with which private plants must be charged before their product can be delivered to us as consumers, and which are not charged to our plants. These are (1) interest, (2) toes, (3) legal expenses, (4) advertising, (5) selling expenses, (6) dividends on stock, and many others. For purposes of comparison we will confine ourselves to but one of these, the last mentioned, dividends on stock.
The industrial plant of the Navy Yard, New York, is worth roughly, $20,000,000.00. Such a plant, privately owned, would be bonded for about that amount.
In addition to the bonds, however, stock to a value at least equal to the bonds (very probably more) would be issued, representing the good will, or going value of the concern. Annual dividends must be declared on this stock, and if the plant is at all successful, these dividends would be at least 6%.
As has been stated, this amount must be covered by the selling costs, and would have to be paid by us as consumers (that is $1,200,000.00). Here is an item which of itself is greater than the extra labor costs of the New York Yard which have been itemized. This one item has been picked out as having a peculiar interest. It represents the amount accruing to the shareholders, that is, the partners in the enterprise. The writer suggests therefore that in our naval accounting the amounts paid for short time (eight hours instead of ten), for leave, holiday and disability, and the slightly higher rates of wages, be considered in the same light as dividends, the workmen themselves being the shareholders in the enterprise. This subject will be further touched upon under the "Profit and Loss" account, and "The Workman's Point of View."
The writer is fully aware that the comparison made above is far from exact. A private plant with an investment of $20,000,000.00, would probably produce a much greater output than does the New York Navy Yard, in order to pay an annual dividend of $1,200,000.00 in addition to the interest on its bonds. But, on the other hand, the New York Yard, under different and improved methods of financial and administrative management, could equal the output of the private plant, without appreciably increasing the extra labor expenses which have been cited.
It is believed that the foregoing will serve to show that many of the claims advanced in connection with high government costs, will, if analyzed, find offsets in private costs, and that there is still " a fair field and no favor." As a matter of fact, it will be found, after thorough examination, that the ordinary expenses of a navy yard plant, after providing for the extra labor costs as indicated above, will be closely similar to those of the usual industrial plant of the same caliber. That is, assuming of course that the purely military expenses have been properly segregated, a problem of no great difficulty when carefully studied. But before going further it will be necessary to consider the capitalization of navy yards.
Capitalization of Navy Yards
In order to arrive at any just estimate of the value of work, the value of the tools which have been used must be considered. It is perfectly apparent that work which is the result of manual labor only has far less value than work which employs the same amount of labor, but which also utilizes expensive machinery and plant facilities of all kinds. The amount of capital invested in an enterprise is evidently, therefore, an essential element towards arriving at a fair appreciation of the cost involved in turning out work.
A navy yard being both military and industrial, the capital investment will fall into these same divisions. A certain number of buildings, grounds and utilities of various kinds have been placed in the yard on account of its military functions, while others are there only for industrial reasons. A large proportion of the capital investment is used for both military and industrial purposes, as for example, the grounds, paving, sewerage, wiring, etc which serve all parts of the yard. In such cases an estimated division must be made, assigning to the military and industrial capital accounts such portions of the common properties as seem most equitable, taking into consideration all the purposes and uses to which all such properties are put. In some instances a fairly simple calculation will determine the proper division, as for example, the sewerage system, whose cost would be divided, other things being equal, according to the values of military and industrial buildings served. Other properties, such as the sea wall, must be divided on a purely estimated basis, and considerable care should be given to this division. The expenses of maintaining each division of property should thereafter be classed as "military" or "industrial" as has already been explained.
It has been the usual practice of the Navy Department to take a decennial inventory of its navy yard properties, but the division indicated above has not been undertaken, as the inventories so made were not intended to be further utilized in any general accounting scheme. Therefore, such inventories, or valuations, have not played a very important part in naval accounting, although they have served to give a general idea of the value of the navy yards.
In the great railroad rate controversy now before the country, the proposed physical valuation of the roads plays an important part. The government experts contend that before rates can be passed upon with any degree of justice, it is essential that the capital invested be known, in order that proper allowances may be made for interest on such capital, as well as for the necessary annual depreciation of machinery and equipment, etc. "Capital invested" does not mean here the values of stocks and bonds issued, as that is easily determined, but the actual present value of the properties.
Involved in this question is that of the value of the "good-will" of the companies, and other considerations, which lead the railroads to cling to the theory that the proper rates are "all that the traffic will bear." With the last mentioned element we are not concerned, but the question of physical valuation is one that interests us, since we also should determine, by appraisal, what the book values of our navy yard properties are.
In a private plant the value and kind of the property determines the expenditures which must be made for (1) interest on capital invested, (2) taxes, (3) depreciation, (4) insurance. To what extent does the value of our properties affect our expenditures?
We pay no interest on capital invested. The funds advanced by the government for the construction of our plants are regarded as expenditures simply, and not as capital in any sense. It has occurred to the writer that it would be equitable to charge against our plants the average rate of interest which the government pays on its outstanding bonds. But this would be a purely fictitious charge, and if actually carried out, would simply result in certain repayments to the general treasury of funds advanced, that is, a reduction of appropriations. Therefore, as matters now stand, no possible advantage would accrue by the charging of interest against our plants, since no such expenditure is actually made.
This opens up the rather interesting question as to whether it would not be advisable for the government to issue bonds for all new construction work such as the building of navy yard plants, instead of paying such amounts directly from yearly revenues. That this would be no new departure is shown by the fact that the Panama Canal is being partly constructed through a bond issue. In the writer's opinion it would be far better if the entire cost of the canal were covered by bond issues, instead of partly, as at present. When the canal is completed, and the problem of the proper toll rates is to be solved, this question of interest charges on bonds will assume considerable importance, and it would be much better if the whole construction cost were then found to be on a recognized sound financial basis.
Our navy yards could very well be bonded, and thus placed in a business like and satisfactory situation. However, there is not space here to go into a detailed discussion of this subject. They are not bonded, and, therefore, there are no interest charges.
As regards taxes, the situation is much the same. Private plants do not pay taxes to the national government, although they do pay State and city taxes. Were it otherwise, it would be proper to charge against our navy yard plants the value of taxes which would be assessed by the national government against a private plant in the same place, since the navy yard plant may be assumed to supplant a private organization of the same capacity. Conditions being as they are, however, it is necessary to ignore taxes also.
Both interest and taxes might be charged on a theoretical basis, but nary difficulties would be involved, and further, it is believed that only actual expenses should be included in our calculations. We do not wish to compare what we might or should expend, but only what we do expend, with the expenditures of commercial plants.
When we come to the subject of depreciation, however, we are no longer on really debatable ground. There is no question that a government plant depreciates, and consequently suffers loss leading to expenditures for that reason. This subject is so important that a separate heading will be given to it. In this connection it is interesting to note that again a parallel can be drawn to the railroads of the country, which were at first opposed to the plan of charging an annual depreciation against their properties. They have, however, become reconciled to the rulings of the Interstate Commerce Commission, requiring this to be done.
Depreciation in Naval Plants
Any plant doing industrial work necessarily suffers wear and tear, which must be offest by renewing and replacing parts. Also, machinery gradually gets out of date, and even though it may be still in good condition structurally, it has nevertheless lost value through obsolescence, and must from time to time be replaced by newer and better types. Thus, in order to maintain a plant at its full value, constant expenditures for new parts must be made, this being entirely independent of increase in size and value of plant made in order to increase the plant's capacity. It is apparent that such expenditures for renewals and replacements are in reality part of the plant's running expenses, and that it is necessary to provide for them, and to consider them when ascertaining the cost of the work produced by the plant. If a shoemaker, in estimating the prices at which he could afford to sell shoes, should overlook the cost of keeping up his supply of tools, he would soon find that he was running behind. The principle is the same in any industrial plant.
While the science of accounting was yet young, it was customary to add to the year's expenses the costs of new tools and equipment, when calculating the costs of production. It was found, however, that this direct method was unsatisfactory in its results, on account of the fact that the expenditures for renewals and replacements during any one year failed to bear a proper relation to the actual wear and tear, and obsolescence during that year. Thus a new plant would, during its first few years, have very few renewals and replacements to make and the costs of production would accordingly be figured to be much less than in succeeding years, when large expenditures had to be made for new machinery and equipment. As a result, costs fluctuated to an unreasonable degree, being too low in the early years, and too high in later years. To meet this difficulty the method of calculating depreciation was devised. This is nothing more or less than the estimated loss by wear and tear, and obsolescence, per year., For example, it has been ascertained that machine tools last, on the average, from 16 to 20 years, after which they must be renewed. Therefore the depreciation rate on machine tools is placed at 5 or 6 per cent per year. This is on the assumption that the loss in value per year is the same throughout the available life of the tool, which is not strictly true, but sufficiently close, as we are only dealing in averages anyway. By fixing a depreciation rate of say 5 per cent on all machine tools in a plant, it is not intended to convey the idea that any one given tool will last just 20 years and should then be discarded. Many machine tools last much longer than this and still render good service. On the other hand, it is often necessary to replace a tool only 8 or 10 years old. But taking all the tools together, over a term of years, experience has shown that the average life is from 16 to 20 years, in plants of the character of our naval establishments. Other kinds of equipment have different rates of depreciation. There are good engineering and accounting precedents for each.
By the use of depreciation, then, it was found that the average loss in value could be charged up each year, and in fact, each month. By the opening of suitable accounts in which the estimated depreciation charged appeared on one side of the ledger, and the renewals and replacements actually made appeared on the other, a check could be obtained over a term of years, and the estimated depreciation could be adjusted accordingly. In commercial practice "Depreciation Reserve Funds" are established, to which are turned over each year the amounts deducted from income on account of estimated depreciation. The costs of renewals and replacements are than defrayed from these "Depreciation Reserve Funds" as fast as new equipment is needed. In the long run it is expected that the amounts placed each year in the "Depreciation Reserve Fund" will approximately provide tor all renewals and replacements of parts of the plant, necessary to maintain it at full value. New plant and equipment which are extensions to the original plant and so increase its value are not paid for from this fund, but require additional capital for their installation. This is one of the difficult problems in industrial accounting calling for considerable skill in its solution. That is, whether a new machine, or other equipment, supplants an old one, or whether it is a direct addition to plant. Common sense and judgment are necessary for a correct decision in each case.
So much for depreciation as handled commercially. The question now is "What necessity, if any, is there for including this element in naval industrial accounts?" The arguments against it are (1) the navy not being a commercial organization, must not endeavor to follow too closely commercial accounting practices. (2) The subject is a theoretical one, not a practical one. (3) The inclusion of depreciation in naval costs would make them excessively high. (4) Congress has not provided for depreciation funds, nor intended that current appropriations should bear such a charge.
There are doubtless other reasons which would be advanced by opponents of the depreciation theory. But in answering these four it is probable that the other objections will be met.
In regard to (1) the writer has already explained his views, and has expressed the belief that we should not use the word "cost" unless we mean "cost." Depreciation of plant is a highly important element of cost. Where depreciation accounts are not maintained in private plants (and it is getting rarer and rarer to find such plants) all replacements and renewals of plant are charged directly as part of the running expenses, and so prorated to the cost of production. In the long run this brings the same results, but is inaccurate for any special period. There is no excuse for naval plants to ignore both depreciation, and its counterpart, "renewals and replacements," and at the same time to refer to the "costs" of our work! What advantage do we reap in deceiving ourselves in the matter?
But, aside from the fact that we record erroneous costs if we fail to take depreciation into account, is there any positive advantage to be gained by including that element in our cost accounts ? That is to say, is it a practical problem or merely a theoretical nicety?
As a matter of fact, it is not only a common sense, practical thing to absorb depreciation into our costs; it is also a direct advantage in the interests of economy. Further, it is practically impossible to reap any lasting results from the application of cost accounting- to naval industrial work, if the element of depreciation be eliminated. The explanation of this is as follows:
Our navy yards are now being placed on a standard basis of accounts, especial care having been given to the arrangement and subdivision of the "expense" accounts. By "expense" accounts are meant the records of those expenditures which are classed as "overhead" or "indirect." Assume that this standardization has been satisfactorily completed, and all yards are running on a similar basis. Depreciation is not, however, considered. The first effect of this standardization is to produce a certain economy, since each yard, being in competition (more or less complete and fair) with the others, and also anxious to better its own past performances, trims expenses as much as possible in order to reduce the percentage of " indirect charges." It soon becomes apparent, however, that the yards which have the newest and best machinery, best buildings and plant equipment generally, have a decided advantage over the more poorly equipped yards. Machinery, buildings and equipment being new and of good quality, fewer minor repairs and adjustments are necessary. The yards having poor equipment find that all sorts of minor repairs are required, thus swelling their expense accounts. Furthermore, the better equipment does better work, thus reducing costs all along the line. Nor is this all. The poorly equipped yards find it necessary to spend larger sums in major repairs and renewals. Although these expenditures do not affect the expense account nor the recorded costs of production, they eat heavily into the allotments of funds.
In order to reduce the apparent "indirect charges," all yards now find it advantageous to consider, as far as possible, most necessary repairs as being "renewals and replacements" instead of "shop" or "general expense." It is obvious that such practice vitiates the worth of the expense account records. Yet it is practically impossible to prevent it, in the absence of the depreciation element. With this element properly accounted for, the difficulty disappears, as will be shown later.
The most grievous result of this improper accounting (ignoring depreciation), is as follows: As has been said, poorly equipped plants are at a disadvantage in the comparison of expense accounts as now made up. The natural result is each plant is eager to purchase and install new equipment. There is no check whatever on the procuring of new machines, etc., save that found in the question of available funds.
If the funds can be secured from the Department, each plant is inclined to procure newer and better tools. Frequently special appropriations are passed by Congress for that purpose. Usually the new tools are put to good use. But the need for such new tools is merely a matter of opinion. No one is able to state whether it would be better business for the government to continue using the old tools a little longer. The converse of this is equally true. When new tools are actually needed, it is still a matter of opinion whether or not they should be procured. Thus large wastes are produced, on the one hand by the unnecessary purchasing of new and discarding of old equipment, and on the other hand (though much less frequently) by using old equipment at a loss which might be averted by the installation of better tools.
The Practical Benefits of Including Depreciation in the Accounting System
By including the element of depreciation in our cost accounts we would obviate many of the difficulties just mentioned. The question of whether or not new machinery should be installed would be settled in a more scientific and practical manner than at present. Assume, for the moment, that Congress has authorized the establishment of depreciation reserve funds at each yard. Each year a sum is placed to the credit of this fund, being calculated by multiplying the value of each class of plant and equipment by the depreciation rate of that class. The summation of these results giving the total estimated depreciation for the year. If the plant is a "going concern," neither old nor new, the amount so placed in the depreciation fund is a fair measure of the amount which ought to be spent in renewals and replacements during the same period, in order to maintain the plant at full value. Of course this is not the exact amount to be spent, taking any one year alone. But over a number of years, carrying balances forward, and assuming that the depreciation rates were carefully fixed, a very just estimate of the amounts properly to be spent for renewals and replacements is obtained.
Again, take the case of two plants, one with generous and the other with indifferent equipment. We have seen that where depreciation is not taken account of, the well-equipped plant has an immense advantage in calculating its expense account. But the inclusion of the element of depreciation changes this situation considerably. The plant with the expensive machinery, and with a great deal of it, also has a heavy depreciation charged up to it. The plant with lower valued machinery, and not much of it, has much less depreciation to contend with. Conditions immediately become more fair, and comparisons of cost of work begin to mean something. The plant with the poorer equipment is not induced to rush into the purchasing of new machinery until it has ascertained whether the lower cost of operation by reason of new equipment is, or is not, offset by the additional amount of depreciation to be charged against its product. This is certainly the most fair and sensible view to take of the question of purchasing new equipment. That is—is it cheaper in the long run? Other considerations have to be taken into account, of course, such as increased speed of production of new equipment, desirable for military reasons, though costing more. But bearing in mind our definition of true economy, we arrive at the same result.
Again, the tendency, which has been mentioned, to charge against the "renewal and replacement" account expenditures properly to be classed as "expense" items, is practically overcome. All expenditures for "renewals and replacements" must be made from the "Depreciation Reserve Fund." Close scrutiny must always be given to expenditures from that fund. Any unwarranted expenditures, such as items properly belonging in the "expense" account would merely cramp the fund for its legitimate purposes, and be decidedly unwise, from the viewpoint of the plant itself. Thus would the temptation to reduce expenses in that way be forestalled.
Trusting that the advantages of including depreciation in our accounting system have been made clear, let us examine further some of the alleged disadvantages.
Would the Inclusion of Depreciation in Naval Costs Made Them Excessively High?
Those with whom the writer has discussed this question of depreciation in cost accounts have usually brought one argument to bear against the proposition which has been extremely difficult to refute. It is this. Our navy yards contain shops, machinery and equipment designed to turn out an amount of work in a given period, which may be called the normal output. Conditions rarely permit this amount of work being done for any continuous time. Consequently, the plants are usually running much below normal in regard to output. Were the depreciation charges of the plant, designed for a large output, entirely located to the cost of production during long periods of low output the resultant cost accounts would be practically worthless, since the depreciation element in such costs would be excessively high. Thus all hoped for advantages to be gained through comparison with commercial costs would fail to be realized. How can this difficulty be obviated? First, let us examine the situation as found in private plants. Here, we find that the depreciation element in costs is based upon the normal output of the plant, and fluctuates but little with variation of output. Should it happen that the plant is compelled to run for a long period below normal output, it would be impossible for it to raise costs of individual articles sufficiently to absorb the entire plant depreciation. It would be unable to market its product at all, if that were done—assuming that our typical plant is running in competition with others. What the plant actually does is to charge the unabsorbed depreciation up against "Profit and Loss." This question is discussed more fully under "Manufacturing in Navy Yards." The point to be observed here is that only the normal depreciation should be charged to current production. If the naval plant is running with low output, part of the depreciation should not be absorbed in the cost of production, but otherwise accounted for. The exact method by which this unabsorbed depreciation can be handled will be described under "Profit and Loss" account.
To adopt this system the following calculations would be necessary which will be described as though already in effect. The depreciation charged to any work in a given plant depends upon the shop or shops in which the work is done. Different shops of the same plant of course have differing depreciation rates, depending upon the quality and quantity of machinery and other equipment in use. The value of all machinery, equipment and buildings for a given shop having been ascertained, and depreciation rates fixed, the depreciation of that shop for a month will be a certain fixed amount. The normal output of that shop is decided upon. To measure this output we use the "productive labor" which is the basis upon which our expense pro-ratings are made. It must be definitely decided just what is the normal productive labor in each shop. This must not be the maximum productive labor possible, but a fair estimate of the amount which would be thus expended were the shop running under a comfortably full complement—not overcrowded. The total monthly depreciation chargeable to a shop, divided by the normal productive labor, then gives the percentage of depreciation to be thereafter added to each dollar of productive labor in that shop. It matters not whether the shop runs full or partially full, the depreciation charge for a given job is now the same. The depreciation not charged to cost of work (in case the shop is running below normal) is carried to the "Profit and Loss" account exactly as in the case of a well-organized private plant. How it is handled there will be described under that heading.
The above described system will prevent any undue charges from the introduction of depreciation in naval cost accounting. It is of course merely approximate in its working. It may, perhaps, be claimed, that unreliable results will be obtained, due to this approximation; that is to say, the fixing of the normal output of a shop might be so erroneous as to prevent true data being furnished in subsequent operations. For example, if the normal productive labor were fixed at too high a figure, the shop would probably run continuously with an output seemingly below normal, and therefore the depreciation which rightly should be distributed entirely to the cost of work (the shop being actually in a normal condition, though erroneously rated below normal) would only be partly so distributed, thus giving erroneous costs. The answer to this argument will be found in the fact that the temptation on the part of those interested in the shop to rate its output too high will not be so great as might at first be supposed. If that is done, it will merely result in a continuous loss in the "Profit and Loss" account being charged to that shop, on account of unabsorbed depreciation. This will be more fully understood after the description of that account has been read.
There remains to be considered the fact that Congress has not authorized "Depreciation Reserve Funds" and that such authorization is necessary before such funds can be established.
Although the ordinary commercial method is to handle the question of depreciation through the establishments of these funds, it is quite possible, in the naval service, to treat the problem differently, by opening "Depreciation Reserve Accounts." It should be understood that in accounting parlance, a "fund" is a sum of money set aside for certain purposes, while an "account" as merely a record of a series of transactions. The depreciation problem, if merely handled through reserve "accounts" will not call for the setting aside of sums of money, and therefore will not require Congressional authority.
Just how the "Depreciation Reserve Account" can be installed and operated it is not thought necessary to describe, as it is not essential for the purposes of this essay. The method has, however, been worked out in detail.
It is to be earnestly hoped that Congress will direct the establishment of proper depreciation funds at the several yards, in order that the system may be modeled after commercial methods, and thus handled without the numerous difficulties which will result from the necessity of departing therefrom.
Insurance
While the government does not insure its property, it does suffer losses by fire, just as a commercial organization would which did not insure. Insurance, in the long run, merely has the effect of spreading fire losses evenly over a long period, instead of paying for such losses as they occur.
The probability of fire among the different classes of property has been carefully worked out, on which basis the insurance companies make their rates. Such rates include, of course, all the necessary expenses and profit of maintaining insurance companies. Since the probability of loss by fire for each class of property is known, it would be a good idea for the navy to establish a fire insurance fund of its own, in the same manner as that urged for a depreciation fund. To the cost of maintaining all kinds of property should be added an item for insurance, at rates less than the ordinary commercial rates for the same classes of property, since no company charges are included. The appropriations paying the cost of maintaining the property, either through the cost of work accounts, or directly in the case of military maintenance, would also pay this insurance item. In that way the fund would be established. As buildings burn at our various yards, the cost of replacement would then come from the insurance fund. Where a larger and better building was put in place of the old one, only the value of the old building could be taken from the insurance fund. The difference must be separately appropriated for as it would be an addition to capital value.
The arguments in favor of this are exactly the same as for the establishment of a depreciation fund. Fire loss is after all nothing but depreciation through fire.
In the absence of Congressional authority for the establishment of such a fund, an "Insurance Reserve Account" can be set up and made to answer the purpose, just as in the case of "Depreciation Reserve Account."
Proposed Legislation
The necessity for including depreciation and insurance (which is but a form of depreciation in our case) in our accounting system has been set forth. In order to accomplish this the following legislation is proposed:
From and after July 1, 1911, the accounts of all naval industrial plants shall include charges for depreciation and internal insurance against loss by fire, in accordance with accepted methods of accounting. Reserve funds shall be established for this purpose, to which the annual estimated depreciation and insurance of naval property shall be added and from which actual replacements and renewals of property shall be deducted. And for the establishment of such reserve funds, the "Naval Supply Fund" amounting to $2,700,000.00 is hereby made available.
The writer can only state that some such legislation is essential for proper accounting in the naval service, and he suggests reference to any firm of expert accountants for corroboration.
Estimating at Navy Yards
Before work is undertaken at a navy yard, an estimate of its probable cost is made. If the work is of importance, such estimate must be approved by the Bureau under whose control the funds about to be expended lie. In general, all estimates are so acted upon, since the jobs of smaller importance are really parts o larger jobs, or the work contemplated is of a routine character, for which a general approval has at sometime been given.
The preparation of estimates is not given that attention which from its importance it really deserves. This is mainly because the work being mostly of a repair nature, it is difficult to estimate very accurately what it will cost. It is very seldom that any siren job is precisely similar to a preceding job. Furthermore, 15 the work proceeds, unexpected difficulties are apt to crop up, lie cost of overcoming which has not been included in the estimate. A private plant doing repair work has exactly the same difficulties to contend with. In its case, however, the estimate nude in advance is of greater importance, since it forms the basis on which the bids for the work were made. If the work actually costs more than was anticipated, a loss to the plant must be charged up. If it costs less, a greater profit accrues. Thus a powerful stimulus is furnished towards accurate estimating, which is not at present to be found in government practice.
It is believed that if a similar stimulus existed for navy yards estimating, there would be very marked improvement shown. And an improvement in the accuracy of estimates would be of tremendous advantages to the various Bureaus who have to pass upon the question of authorizing proposed work. At present, authority is sometimes given for work to be done at a certain proposed cost. That estimate of cost is perhaps the determining factor in the decision as to whether the work should or should not be undertaken. The work is carried to completion, and the resultant cost is found to be far in excess of the estimate. Had the estimate been more accurate the work would probably never have been authorized, and some other more important work would have been undertaken, which now lack of funds prohibits.
The estimate given by a yard for doing a piece of work is equivalent to the bid of a private firm. The writer would like to see a system adopted by which the navy yard's plant is held to its estimate, so that the cost to the Bureau concerned is exactly that estimated (that is, the bids). Such would not be possible under our present appropriation system. But at least it is quite feasible to record the differences between estimates and performances, carrying them to a "Profit and Loss" account (see description of that account).
It is of course not to be expected that estimates should closely approximate the actual costs. But they should at least be reasonably close. Otherwise, there would be practically no use in preparing estimates at all. There is no doubt that if it were known that a careful record was to be maintained, showing the ability of the plant to work within its estimates, and that the records of the various plants would be compared in this respect, great improvement would follow. The "Profit and Loss" account would fulfill this function excellently.
It may perhaps be claimed that no good result would be obtained, since the natural tendency would be to make estimates as high as possible, in order to be sure of living within them, but it should be remembered that in that case authority would often be refused for the undertaking of many jobs which excessive estimates would render out of the question. Also, some classes of work at the various yards would be sufficiently similar to warrant comparison of estimates. Further, in many cases the cost of doing such work in private plants would be known. So that, on the whole, it is not thought that there would be much danger from "loading" of estimates.
There is one class of estimates for which the method just described is peculiarly suitable; viz., the estimates of probable costs of repairs, made by officers when surveying articles of equipage turned in from ships. The line of reasoning usually followed in such cases is this. A damaged article, which in the opinion of the surveying officer can be profitably repaired for future use, is known to be worth, when new, a certain amount. It is considered that after the necessary repairs have been made, the article will then have a value which depends upon its probable degree of fitness. For example, if the repairs will make the article as good as new, the final value after being repaired should be the same as the original value. If the repairs are expected to render the article useful, but not as good as new, the final value should be less than the original value. The surveying officer, after deciding what the repairs would cost (obtaining estimates from the shop or shops where the work is to be done), appraises the article at a price, which, with the estimated cost of repairs added, will bring it up to what he considers will be the correct value after the repairs have been made.
The repairs are made upon the articles. If the cost of such repairs agrees with the estimate, the article is turned into store at a proper invoice value. In most cases, however, the actual cost of repairs differs widely from the estimated cost. Frequently the inference is so greatly in excess as to cause an absurd valuation of the article, and steps are then necessary to readjust such valuation. In the majority of cases the result is not happy, and repaired articles are apt to be invoiced at prices which do not at all represent their value.
In the place of this system it is recommended that surveying officers fix the present appraised value of the article, and at the sane time the final invoice value which it shall have after repairs. The difference will, of course, represent the estimated cost of repairs. No matter what the repairs actually cost, the article should be invoiced at the value fixed by the surveying officer. But the difference between the estimated cost and the actual cost should be carried to the "Profit and Loss" account.
Such a method would prevent improper invoice values of repaired articles, and would immensely simplify what is at present often a difficult and vexatious problem in accounting. At the same time excess costs of repairs would be sharply drawn to the attention of those interested in the expenditure of funds under the various appropriations.
This question of estimating is a big one, and the writer does not intend here to go into the problems concerned with the manner of making estimates. There are many who believe that it is practically impossible to make any great improvement in the accuracy with which the probable cost of naval repair work can be foretold, placing their opinions on the ground that no two jobs are sufficiently alike to warrant the expectation that past performances can be duplicated in future work. They also point to the fact that it is the unexpected element which so frequently renders final cost disproportionate to the estimate, as for example, »hen a boiler, whose condition must be judged from the outside only, is opened up for repairs and found to be in a much worse ate than was anticipated.
The writer believes that a close study of this subject will prove that while practically all repairs differ when considered in toto, yet there is some uniformity in the various operations which go to make up various classes of completed work, and that these operations can be to a certain extent classified. Estimates based upon a series of operations, each of which has a probable cost fixed by experience, should then be more accurate than merely considering the proposed job as a whole. Unexpected elements which present themselves during the course of the work could be segregated and reported as causing the difference between estimated and actual cost. If in the judgment of those authorizing the work this unexpected element is one which could not reasonably have been foreseen, an increase in the estimated amount might be permitted, just as in dealing with a private contractor we sometimes allow an increase in the price to be paid on reasonable grounds. Otherwise the difference must be recorded as a loss in the "Profit and Loss" account.
Manufacturing in Navy Yards
It is usually considered inadvisable to carry the business of manufacturing articles in navy yards any further than is absolutely necessary for the needs of the moment.
With the exception of certain articles, such as cordage, chain and anchors, boats and their outfits, flags, and in general, articles which are either not obtainable commercially in just the form or quality wanted for naval service, or for which custom has established the practice of navy yard production, the Department discourages manufacturing. The reasons for this are (1) the danger of producing large quantities of articles through the temptation of keeping men employed, thus overstocking heavily; (2) the high cost of government manufactured articles, due to the fact that navy plants are not usually equipped to turn out articles as cheaply as private firms, which specialize in them; (3) the plants are primarily repair plants, and manufacturing might interfere with this more legitimate object: (4) the opposition towards competing unnecessarily with private plants. For these reasons, it is sometimes urged that navy yard plants be prohibited entirely from manufacturing articles. It undoubtedly is true that the first two reasons are the more important, and that if they were rendered non-existent, the others could be disposed of. Considering the first two reasons only then, it is desirable to take up this subject from a different, and it is believed, new point of view.
In a properly organized government plant, the manufacture of articles for stock will be controlled absolutely by the average demand for those articles for use. While it may be admitted that in a navy yard, run on indefinite lines, without centralization of authority, and without adequate conception of the evil results following unnecessary manufacturing, overstocking will occur; yet, in i well-administered plant, in which the final effect of errors of this kind are well understood, it is certain that no such danger will exist. It might as well be claimed that excess stock is bound ro accumulate through purchasing in the open market. Yet it is well known that in recent years improved methods of administration and accounting have reduced this danger to a minimum. As i. matter of fact, overstocking has occurred in the past from both manufacturing and purchasing. It has been practically cured in the latter case, and it can be in the former. It is granted at once that under present navy yard methods, manufacturing is a danger. But having improved the general conduct of business in navy yards to the required point, the danger disappears, and manufacturing may be carried on without fear of overstocking, provided it is for other reasons desirable.
We have seen that a navy yard plant, owing to the varying demands made upon it for repair work, fluctuates in activity over a wide range. The equipment must be sufficient to meet maximum demands. In slack periods there is consequently a constant expense going on, due to the upkeep of plant, care of buildings and machinery, and depreciation. This expense is almost, if not quite as heavy as when the plant is fully operated. Furthermore, although there is really not sufficient work for them, many men are kept on the rolls, pending the time when their services will again be urgently needed. Many employees are, of course, discharged at this time. But others must necessarily be retained, as it would be impossible to get hold of them or others equal to them immediately when the rush of work comes. This may be classed as a military necessity, since the yard must be ready to do repair work on demand. The condition, however, is also found in commercial plants. Hence, such plants are constantly hunting for work, not only for the profit to be obtained, but to keep their men and plants employed, until better conditions occur. Thus, in slack times work is often taken and the product sold at prices which show a book loss. But the loss is less than would have occurred had no work of the kind been done. Depreciation and general expense had to go on anyway. Deduct those items from the cost of production of the work referred to, and a profit is shown on the transaction.
In the same way, our navy yard plants and employees, when work is slack, should be utilized if possible. Assume, for purposes of argument, that a list of articles used in the naval service can be prepared, of such a nature that the same plant equipment and workmen employed in repairing ships can also be employed in the manufacture of those articles, when there is but little repairing to be done.
These articles must, for their production, require the usual classes of labor common in navy yards. They must be such that it is economical to carry a fair stock, that is, the demand for them in the service must be constant. They must also be obtainable commercially when needed, since occasions might demand the entire cessation of their manufacture in the yards during long continued repair work. It would then be necessary to procure these articles in the open market.
Having, after careful study and investigation of the facilities for manufacture in every plant, assigned to each a list of articles to be manufactured, of the characteristics described above, we would then be able to offset in some degree the fluctuations of work of a repair nature only. This plan would only be used as an adjunct to that recently put into force by the Department, by which ships go to a yard for general overhauling in rotation, thus distributing the work more evenly than has hitherto been the case. Considering repair work only, there will always be periods of full and slack times in navy yards, as it is impossible to lay down any exact routine for work of this nature, many repairs being necessitated by casualties, attention to which cannot be delayed. The manufacturing program as outlined can be made to partially, if not completely fill in the gaps, if carefully designed and adhered to. It is important that in assigning articles to be manufactured at the several yards, a division be made, so that each yard may manufacture only certain things, instead of all yards manufacturing all the articles on the list. Or to put this in another way, any articles on the list should be manufactured at one yard only. That yard, by frequent repetitions of the process, will be able to bring the cost of production of the article to a much lower point than would be possible if the necessary supply were produced at all yards. This is in reference to stock articles, and does not apply to special appliances which are only manufactured occasionally.
For example, the joiner shop at a certain yard can be profitably employed, when not engaged on repair work for ships, in manufacturing chests of the various kinds used in the naval service. It is found that the entire stock necessary for the navy can be manufactured in that one shop, working in what would otherwise be slack times. Do not allow that shop to manufacture a lot of other stock articles, but confine it to chests. It is evident that better and cheaper chests will be produced than if they were made at each yard, as occasion demanded. Other joiner shops in other yards will have their own specialties. Shipment of such articles km one yard to another is comparatively inexpensive, and the storehouses will be able to maintain stock easily in that way, and it the same time to control the quantity of articles produced; it being understood that each lot manufactured must be to fill a requisition for stock.
It is not pretended that this is a simple problem, or that a great deal can be accomplished in a short time. It is believed to be worthy of serious study, however, and there is no doubt that application of such a system will gradually produce invaluable results.
It is, of course, true that attention is now paid to the desirability of utilizing our shop resources, when not otherwise employed, in manufacturing articles for our own use. But the study given to it is by no means adequate to its importance. This is largely owing to the fact, to which attention has been called, that the policy of the Department is to discourage the growth of manufacturing. Such policy has been correct, inasmuch as there was no well-defined plan is existence as a safeguard to the danger of indiscriminate and excessive manufacturing. But with the adoption of such a plan, great possibilities for economies are introduced. The alert manager, finding from the monthly statements that in certain shops constant loss is going on from lack of employment, begins to search the list of articles needed in the naval service, to discover those in the manufacture of which he thinks his shops might well be employed. He selects certain ones for which his equipment is suited. He knows he cannot turn out these articles at their usual invoice price, but he also knows, and is able to prove to the Bureau interested in the furnishing of such articles, that the loss involved in manufacturing them is less than the loss going on by reason of unemployed shops. Having made good this point, and having received authority to manufacture the articles, which must be invoiced to store at their usual market price (see "Prices of Manufactured Articles"), it now becomes a struggle to reduce the loss shown by the difference between manufacturing cost and invoice value. Here we have a definite object to be attained, and there can be no doubt that gradually the cost of production will be reduced to near the actual value.
This is but an example of what may be achieved. But, it will be asserted, such a system will be liable to abuse. Granted, but since we know it is liable to abuse, and since the whole policy proposed depends upon a system of accounts under which abuses are bound to be recorded, we can safely, under a watchful eye, permit this danger to exist.
In the ordinary repair work falling to the lot of our navy yards, there is usually not much chance to plan ahead for economies by the distribution of the work in such manner as will best suit the shops. Everything must be done in a rush, and it is not possible to know very far in advance how much work is coming, nor when. Manufacturing offers the only field for satisfactory and accurate planning. It is more on a par with ordinary commercial work, and should be extremely useful in showing to what degree of excellence our shops are from time to time arriving. This aside from the actual saving to be effected by the judicious management of manufacturing work.
Prices of Manufactured Articles
Articles manufactured in navy yards usually carry a higher invoice value than the same articles when purchased. Where this is not so at present, it will undoubtedly be the case if all the cost elements are included in such invoice value.
If such articles are issued to the service, bearing high navy yard prices, a discrepancy results in the records of costs of repairs and costs of commission of ship. Especially is this true when articles of the same kind are purchased and issued at lower prices. Under the modern competitive system, this is likely to work serious injustice. Articles manufactured in navy yards should therefore bear prices in accordance with the real values, no matter what it has actually cost to manufacture them. If the same kinds of articles are both purchased and manufactured, the latter should be valued at the market price of the former, so that both may be issued to the service at the same price.
This is practically equivalent to the condition to be met by a private firm which has manufactured articles at a cost higher than the market value. Such a firm must sell its product at the market price, no matter what it has cost to manufacture.
To comply with this condition, all articles manufactured at navy yards for stock should have their invoice prices determined beforehand.
Such prices should agree with those of similar commercial articles, unless there is reason in certain instances to believe that the quality of navy manufactured articles is somewhat better than that of the commercial grade. Rope manufactured at Boston is a case in point. In such instances prices might be placed a little higher than the ruling market price.
There will then have to be accounted for the difference between invoice price and actual cost of manufacture. This difference should be carried to the "Profit and Loss" account (see description of that account).
A study of the amounts carried from the cost sheet of a given article, to the "Profit and Loss" account, will indicate whether or not that article is being manufactured economically. Full control of the cost of production will thus be retained, while excessive expenditures in that direction, if made, will not work injustice in the records of those who use the articles.
The “Profit and Loss” Account
In a commercial enterprise the final proof of success is found in the balance shown in the "Profit and Loss" account. The results of all endeavors towards efficiency are measured here. All errors of omission or commission make themselves felt in this statement, each item of which can be analyzed in such a way as to furnish valuable information in connection with plant economy. Without such an account a private industry would be indeed helpless.
Naval plants are not run for the purpose of making profits, to be distributed in dividends, or otherwise. Or, to express the same idea in another way, the profits of private plants, which are expected to vary from large amounts in some cases to small sums in other, should, in a naval plant, be zero. Aside from this difference, such a plant has so much in common with ordinary industrial concerns that one is led to the conclusion that the absence of so vital an element as a final record of success—or non-success—must necessarily be as fatal to its efficiency as it would be to that of its commercial rivals.
What, then, can be instituted to take the place of this very essential element of commercial business? Is it not practicable to devise some record which will indicate, in our accounts, the failure or success of individual departments to achieve economies? It should surely be possible to ascertain and record the results obtained by the introduction of new machinery, or the improvements in methods, in about the same way that private plants do.
To the writer the difference in conditions between governmental and private industrial plants is more apparent than real. In fact, it is believed that such an account can be set up, which, although not exactly similar to the commercial account of the same name, will yet be so nearly like it as to be, for all practical purposes, the same.
The profits and losses of a naval plant may be described as the differences between the actual costs of certain kinds of work or expenses and the anticipated costs. The clearest case is that of the difference between the cost to manufacture an article, and the price which must be set upon it after manufacture in order to conform to the ruling invoice value. This has been dwelt upon under the heading of "Manufacture in Navy Yards." If the plan of invoicing all manufactured articles at what is considered their value, be adopted, then, if it actually costs less than this value to produce the article, the difference may clearly be set down as a profit to the plant. If it costs more to manufacture than such invoice value, the difference should just as clearly be recorded as a loss.
By entering in our "Profit and Loss" account the figures thus pertaining to each article or class of articles manufactured, we would have a most valuable record of our plant's ability to successfully manufacture the articles concerned. At the same time attention would be immediately directed to those articles showing excessive loss, and either more economical means of production would have to be devised, or the manufacture of such articles discontinued.
The next class of entries to be considered are those arising from the differences between estimated costs of repairs and final costs, also between estimated and final costs of manufacturing special articles not having fixed invoice value. The two classes practically form one problem. Here the differences are not so absolute in their nature. The errors may be entirely due to mistakes in estimating. Nevertheless it would be of great value to get such errors so located as to indicate whether they are usually all one way or the other. The classification of these errors or differences by departments and shops would also be of great assistance in determining where indifferent estimating or excess costs arose. As stated under the head of "estimating" it is believed that much improvement is possible in that particular, and the bringing out into relief of the "high spots" would necessarily be the first step in the right direction. Certainly comparisons could be instituted between various yards as to their ability to work within their estimates for all classes of work, and the worst offenders could speedily be taught to profit by the methods of their more skilled brethren, which is after all one of the prime advantages of our industrial combination of different yards.
The question of depreciation in shops running below normal output was discussed under the head of "Depreciation in Naval Plants." The "Profit and Loss" account, by showing such a condition in succeeding monthly statements would lay stress upon it, and render it imperative to adopt curative methods either by securing additional work, or, if thought best, reducing the equipment of the shop to a proper basis. This question was also touched upon in the section relating to manufacturing.
The "shop expense" of the various shops, covering the items of expenditure necessary to maintain them in running condition (except replacements and renewals for which sufficient depreciation is allowed), is in naval practice usually fixed upon a basis of a percentage of the direct labor employed. At the end of each month this percentage of direct labor in any given shop will, of course, either be less than or exceed the actual running expenses of the shop. The differences should be carried to the "Profit and Loss" account for each shop concerned.
To recapitulate, the following should be some of the entries made in this account: (1) The under absorbed depreciation, if any, as described under that heading; (2) the under or over absorbed "shop" and "general" expense; (3) the difference between invoice value and actual manufacturing cost of articles manufactured; (4) the difference between invoice value and actual cost of articles repaired; (5) the difference between the estimated cost of work on ships and the actual cost; (6) the difference between the estimated cost of other classes of work and actual cost.
The entries made in this account under items (1) and (2) would indicate whether or not a shop were running continuously below normal output. Should this be found to be the case, it would then be evident that better oversight is needed in procuring work for that shop; or that its normal output has been rated too high, and should be reduced, in order that depreciation charges may be more fully absorbed; or that the shop has more facilities than is needed, and its equipment should be reduced.
Under item (3) the entries would indicate whether or not articles were being manufactured at a loss. If at a loss, the details of cost should be investigated, in order to ascertain whether or not the manufacture of the articles in question should be continued, taking into consideration the point made under "Manufacturing at Navy Yards" that it is often true economy to produce temporarily at a loss, rather than have the plant lie idle.
Under items (4), (5) and (6) would be shown the ability of the plant to work within its estimates. It would be of immense value, from the viewpoint of the Bureaus of the Department, to have each plant struggling to keep within its estimates, in order to prevent the showing up of errors, either of estimating or carrying out of work; and "Profit and Loss" account would fulfill this function admirably.
There would be many other items to be carried to this account, not possible to enumerate here. When finally made up each month, this account would show, in as much detail as may be desired, the final efficiency for that month. In no other way is it possible to justly criticize the work of a plant. No matter how efficiently the managers of a plant may think they have conducted it, unless they have some means of taking into account all the elements of expenditure, and to set off all losses suffered against all gains made, they cannot really know whether the net results have been good or bad. Mere opinions in regard to specific improvements inaugurated cannot be accepted until the whole story is known, and the details fully set forth. A standard to measure by is essential and the proposed "Profit and Loss" account will fulfill the requirement.
It is not assumed that such an account will be absolutely accurate, especially when first set up. But there is no question that, after experience has modified its essential elements, it will prove invaluable as an aid to intelligent dissection of the months' work.
This account, taken in conjunction with the plant "balance sheet" will tell the tale of plant efficiency (or non-efficiency) unerringly to those educated to its importance.
Having struck our balance at the end of the month in the "Profit and Loss" account, it must needs be disposed of. Under cur present appropriation system this can best be done by prorating the balance among the leading annual appropriations in accordance with the amount of direct labor applied for each Bureau concerned. If it is a loss, each of the appropriations referred to must contribute for the month more than its work cost. If a gain, such appropriations will pay less than the calculated value of its work.
If the one general appropriation system, as described herein, should be adopted, the loss or gain would affect its expenditures only, thus simplifying this particular problem. Specific appropriations should always be charged exactly what the work costs.
The above is not intended as more than a general description of the account and its workings. Being new, the details would necessarily develop after the plan was undertaken.
As already stated, the writer regards such an account as the key to any successful system of navy yard accounting. Without it, mere opinion only must be depended on to advance ideas of efficiency, and no proofs can be adduced to support such opinions which will bear close analysis.
The ideal condition of navy yard economy would be arrived at then the total net balance in the "Profit and Loss" account, in favor of the plant, exactly equaled the amount which was paid during the same period to the laboring force in the shape of leave, holiday and disability pay. This would be equivalent to an exact distribution of earnings in dividends, regarding the workmen as the only stockholders.
The General Accounts of the Plant
Having properly "Capitalized" our plants, the next step is to open and maintain books of record and accounts which will at all times show our financial standing. At present we do not really keep books at our navy yards, in the accepted sense. We merely record data in order to make reports to the Navy Department. This is true of Boston, New York, etc., where the new systems have been installed, as well as at the other yards, since the general books, although opened, have not been actually utilized, and the reports still continue.
What is needed most of all is decentralization from the Navy Department. All the elaborate reports now transmitted to the Bureaus should be discontinued, and each yard should be required to maintain a thoroughly up-to-date bookkeeping system of its own. Balance sheets, and certain detailed reports when required, would give the Bureaus all the needed information to keep in touch with the yard work. These balance sheets, combined into one grand statement at the end of the fiscal year would give the figures necessary to be transmitted to Congress. A vast waste of clerical labor would thus be avoided.
Under the heading of "Administrative Methods" the writer has indicated his views as to the duties of the inspectors. If those views were carried out, the great mass of figures transmitted monthly to the Bureaus would be unnecessary. The inspectors, being on the spot, could correct all those mistakes the occurrence of which the Bureaus now claim renders the detailed reports essential.
All exceptional points would, of course, be reported to the Bureaus, such as excessive costs of certain jobs, etc. To these the Bureaus could give that attention which is hardly possible when a mass of data, most of which needs no remark, has to be considered.
Besides all this, by decentralizing, and placing the responsibility for keeping affairs straight on the yards themselves, the officers at the yards would necessarily become more familiar with the effect of various kinds of expenditures which now once reported are soon forgotten. Thus a sort of watchful care on the part of those at the yard would be instituted, not now possible while the main responsibility rests on the Bureaus.
Appropriations
Under the heading of "The Difficulties in the Way of Economy" reference was made to the complicated appropriation system under which we obtain the funds necessary for carrying on car industrial work. Various recommendations have been made in the past for the simplification of this system, which, had they been adopted, would have improved matters a great deal. Nevertheless no plans which the writer has seen have in his opinion quite furnished a satisfactory solution of the difficult problem involved. It is not entirely a simplification or condensation of appropriations which is wanted, but rather a change in method quite outside these desirable attributes, to be utilized, however, in connection with them.
Our present appropriation system is, of course, the outgrowth of years. Old customs and ancient methods are mirrored in their verbiage, and there might perhaps be some sentimental and historical reasons to be urged in favor of perpetuating their quaint and picturesque turns of expression. But as a matter of practical administration it is unwise to continue this time-worn custom.
Our appropriations, so far as they affect our industrial operations, are (1) specific appropriations, and (2) annual appropriations. The specific appropriations are those granted for some definite purpose such as the amounts allowed for various public works, and the increase of the navy appropriations. The amounts so authorized are usually expendable exactly within the terms of the law, and cause little or no difficulty. The discussion which follows will not relate to them at all, or only to a slight extent.
The leading annual appropriations are those under which the greater part of our industrial work is done. They are "Construction and Repair," "Steam Machinery," "Ordnance and Ordnance Stores," "Equipment of Vessels," "Maintenance Yards and Docks" and "Repairs and Preservation at Navy Yards." Whenever one of the appropriations named is referred to, the ideal year to which it pertains is appended, since each of these appropriations is available only for the purpose of the year for which it is granted.
All of these annual appropriations (except one), specify in detail some of the purposes which they are intended to cover, and at the same time each has one or more general clauses which enable it to be used for almost any purpose, or at least for any purpose which common sense would prescribe as properly within the purview of the Bureau which has cognizance over it. Thus "Construction and Repair" has the following: "…general care, increase and protection of the navy in the line of construction and repair." Steam machinery has "For completion, repairing and preservation of machinery and boilers of naval vessels, including cost of new boilers;…"
"Ordnance and Ordnance Stores" has "For providing, producing, preserving and handling ordnance material;…" Then comes "Equipment of Vessels," which, after mentioning several things, has "…and for the purchase of all other articles of equipment at home and abroad, and for the payment of labor in equipping vessels and manufacture of equipment articles in the several navy yards." If the word "other" were eliminated, none of the articles need have been mentioned. "Maintenance Yards and Docks" states at once that it is "For general maintenance of yards and docks…" and then proceeds to state what those maintenance charges are. The one exception is "Repairs and Preservations at Navy Yards," which has no explanatory data, and is therefore to be taken at face value.
Until recently, as is well known, there were at each navy yard five working departments, representing five Bureaus of the Navy Department. The appropriations just named were utilized by the Bureaus concerned to carry on the larger part of their activities in the various yards, the Bureau of Yards and Docks having two (last named). It will be readily seen that the general clauses of these appropriations actually cover their intents and the addition of other language, not prohibitory in any sense, but merely in further description of the characteristic expenditures to be charged against them, do not in any way limit their functions. That is to say, the words "such as" are always to be understood as preceding the detailed list of objects named. Such has always been the tacit understanding of the Navy Department, although not always directly expressed. In pursuance of this construction, each working department in the navy yards used the funds of the general annual appropriation allotted to it for all necessary purposes, whether specifically mentioned by the appropriation or not, the general clause always being fallen back on when required. This led to a curious arrangement, or understanding, which was never fully analyzed by those concerned. The Department of Yards and Docks, expending the two appropriations which, by their terms, covered the ordinary maintenance and repair items of the yard, was usually furnished with insufficient funds for that purpose, owing to the fact that the amounts appropriated were too small. Consequently the money of those appropriations was restricted, as far as possible, though not entirely, to the items actually mentioned under "Maintenance Yards and Docks," the general clause not being drawn upon. But there was not even enough money for the items specifically named, taking the entire yard in consideration. Consequently the other appropriations "helped out" to a large extent, in the payment of running expenses, which their general clauses made entirely practicable, the aid of each being confined, however, to its own particular department.
This method worked well enough as long as the five separate departments continued in existence. But when the yards were reorganized, combining these departments into one, and finally into two, trouble was experienced. The several appropriations in many instances provide for the same class of expenditures. As long as the old departmental boundaries existed, each appropriation was drawn upon for expenditures within its own department, and there was not apt to be a question as to which appropriation should meet any general expense capable of being met by all. It was settled by the department in which the expense arose. But with the removal of these departmental boundaries, that convenient method of arranging the matter disappeared. Compromise was resorted to, and the introduction of new cost accounting methods providing for a prorating of expenses among 'he appropriations, aided towards a partial solution of the problem. This latter element, however, brought new difficulties to be contended with. The aim of a cost accounting system being to ascertain as nearly as practicable the true cost of production, it was, of course, desirable to include in such cost all those expenses commonly classed as "overhead" or "indirect." The two yards and docks appropriations are by their very nature of this overhead character, so far as they pertain to the industrial yard. Here we have a difficulty which renders the obtaining of true costs quite complex. On one hand is an appropriation which provides for the producing of a certain article, the cost of which, properly calculated, includes a fair proportion of the overhead charges of the establishment producing it. At the same time we have another appropriation which provides for the payment of a part of the overhead charges. If such part of the overhead charges is paid by the second appropriation, the article produced necessarily has its cost only partly charged to the first appropriation, and the second appropriation pays the balance. These two appropriations together pay for an article which one appropriation only was intended to be expended for.
The truth of the matter is that separate appropriations for the upkeep (maintenance and repair) of an industrial plant are confusing and unnecessary. Such expenditures are properly a part of the cost of production chargeable to the appropriations specified by law to bear the costs of production—meaning, by production, repairs to ships, as well as manufacture of articles. Maintenance appropriations are, of course, necessary for the military section of the yard, but they should be confined to that section.
From the foregoing it must be evident that the system of specifying in extreme detail just what a general appropriation is to be used for, and then throwing in one or two clauses which permit the use of the appropriation for any expenditure coming under the purview of the Bureau concerned, has its objections. No actual restriction is placed upon the use of the appropriation, but a lot of useless verbiage is included which sometimes leads to difficulties, as when two or more appropriations specify the same thing, not infrequently the case. Thus " Construction and Repair," " Steam Machinery," and " Equipment of Vessels " all authorize the purchase of machine tools. " Ordnance and Ordnance Stores " does not, yet the last named appropriation has frequently purchased machine tools under its general clause. Since the consolidation of departments in yards it is often an embarrassing question to decide which of these appropriations shall pay for a needed tool.
Perhaps the best example of this wrong system is found in the restrictions placed in each of the leading general annual appropriations relative to employment of clerical and drafting force. Each mentions a limiting amount which may be used for that purpose, the proviso having been first inserted when there were the separate working departments for each appropriation, at which time the limitations were inserted to prevent the employment of undue clerical and drafting forces in those departments. At present, however, the clerical and drafting forces are distributed without regard to those appropriations, conditions having absolutely changed. The result is that there is no more reason for paying any individual from one appropriation than from another. Consequently the limiting amounts are in effect lumped, a new appointee going to the appropriation which has the most money available for that purpose.
A simple proviso in one appropriation limiting the total amount to be employed in navy yards for clerical and drafting force would be much more business like.
In any event it is clear that appropriations which meet the conditions of a five-department yard will not be suitable for a two department yard.
In place of these general appropriations the following is recommended, the amount being based on the current appropriations.
Repairs and Maintenance, Navy, 1911
Labor, material and incidental expenses necessary for repairing and maintaining naval vessels of all kinds, and for the manufacture or purchase of all supplies and equipage not otherwise specifically provided for, and to offset depreciation of naval industrial plants, twenty-five million dollars.
Then would follow such restrictive legislation as Congress now inserts in the leading annual appropriations. The above appropriation would take the place of—
Ordnance and Ordnance Stores $5,425,000.00
Repairs, Ordnance 30,000.00
Miscellaneous, Ordnance 9,000.00
Equipment of Vessels 3,843,300.00
Contingent Equipment 100,000.00
Construction and Repair 8.979.144.00
Seam Machinery 6.256,000.00
Handling Stores (deducted from Provisions, Navy) 447,556.00
$25,000,000.00
The estimates on which this appropriation should be based are shown in the following section of this essay. Separately should come the following appropriation:
Maintenance Military Yards
Maintenance, repairs, and preservation of the military portions of navy yards and stations, and all necessary appurtenances, two millions and twenty thousand dollars. .
This is made up of:
Maintenance Yards and Docks $1,290,000.00
Contingent Yards and Docks 30,000.00
Repairs and Preservation at Navy Yards 705,000.00
$2,020,000.00
Let us examine into the effect of this system of appropriating.
In the first place, every expenditure now possible under the separate appropriations of either group would be possible under the consolidated appropriations substituted. Considering the first group only, it will be seen that all the varied language of the separate appropriations (which it is not deemed necessary to quote) does not make the situation any clearer as to what the money is to be used for than does the language of the consolidated appropriations. It is impossible to give an idea of the scope of an appropriation by naming a few more or less insignificant items. The fact that the money is to be used for certain distinct purposes, clearly specified, is all that can be expected or desired.
What disadvantage would there be to the separate Bureaus in having their leading annual appropriations consolidated as shown? It will doubtless be claimed that the Bureaus would be at a loss to determine their authority over the available money, and hence could not proceed securely in the prosecution of their work. The answer to this is that the total amount of such an appropriation would, of course, be based primarily on the estimates submitted by the Bureaus, and that after final action by Congress it would be perfectly plain to just what extent each estimate had been amended, and therefore each Bureau could start the fiscal year with an allotment of the general appropriation based on its approved estimates. As the year proceeded, however, it would become apparent (as it always does) that some estimates were over, and some below the actual needs. Adjustments of allotments would then result. The working Bureaus, drawing from a common fund, would be brought in closer touch with each other. Furthermore, all those questions concerning the point as to where charges to one Bureau's appropriation end and those to another Bureau's appropriation commence would be practically done away with. Inside a turret, for example, work may be going on at present chargeable to "Construction and Repair," "Ordnance," and "Steam Machinery." It becomes a nice point sometimes to rate the charges correctly. If it were merely a question of whose allotment was concerned the question would be much simplified. A system of give and take, or a readjustment of allotments, would settle the difficulty.
Each Bureau would still maintain its authority over certain classes of work, just as at present. If necessary, the scope of each Bureau's authority could be made a matter of permanent law, instead of embodying it largely in the annual appropriation acts, as is now done. That would be a much better plan.
Is the one appropriation any looser, that is, more capable of improper use, than the separate ones? Not at all. Quite the contrary would be the case.
It should be especially noted that actual economy would result from the adoption of the plan proposed.
It frequently happens that deficiency appropriations are necessary to assist certain annual appropriations. At the same time other appropriations were close to, but within the mark. Had these appropriations merely been separate heads or estimates of the one grand appropriation, the excess of some would have been compensated for by holding up expenditures under others, and thus no deficiency appropriations would be called for. The writer has a fairly intimate knowledge of the conditions governing the control of naval appropriations, and he feels safe in saying that sometimes amounts are expended because the money is available which would not have been used for the same purposes could the money have been utilized to assist other appropriations. The result has been, however, that extra amounts have had to be called for to assist the exhausted appropriations, while, as stated, the money under the appropriations with a surplus was expended also.
The above argument only pertains to those appropriations which are of the same nature, and capable of being welded into one general appropriation as shown. It applies in no sense to specific appropriations, such as those for public works, increase of the navy, etc. These are properly segregated, being for separate and distinct purposes.
The main advantage, the overshadowing one in fact, is that such a general appropriation would permit of accurate accounting, particularly as regards cost accounts, which the present method renders extremely difficult. In fact, it has prevented the adoption of a business like, true cost accounting system. This has already been explained. To exemplify it further, note the condition which exists every day in navy yard work. Say that repairs to a vessel's boilers are underway, authorized by the Bureau of Steam Engineering. Certain hull work is required in connection with these repairs. Since such work is chargeable to the construction and repair appropriation, that Bureau's approval must be obtained before it is undertaken. When approved, a separate job order must be opened for this "assisting job," as it comes under a separate appropriation to that of the main job. Consequently the full cost of the work (even as calculated under our present defective system) is never found in one place. Usually the cost of the "assisting jobs" are lost sight of, unless they happen to be great in amount.
With the one common appropriation for such work, the above would not be the case. The job opened for the repair of the boilers would be charged with the cost of all the work done in connection with it, the hull department and the machinery department of the yard each doing the necessary work coming under its jurisdiction. The total cost would be charged to the Bureau of Steam Engineering's allotment, since it is that Bureau which authorized and supervised the work. It is difficult to convey accurately the difficulties which now arise from the necessity of keeping separate each Bureau's appropriation for general work. It is safe to say that fully half the accounting force is occupied with that problem.
The appropriation for the "Maintenance of Military Yards" needs no special explanation. The main thing is to get it separated from the industrial appropriations.
Estimates for the General Appropriation
The estimates to be submitted by the Bureaus concerned, on which the general appropriation recommended is to be based, should be in about the form shown in the following table:
Estimates Submitted | |||||
Title charged | Bureau of | Total | |||
Ordnance | Equipment | Cons. & Rep. | St. Eng. | ||
D | $641,000 | $1,200,000 | $5,600,000 | $3,700,000 | $11,141,000 |
N | 140,000 | 190,000 | 125,000 | 20,000 | 475,000 |
O | 93,000 | 50,000 | 60,000 | 30,000 | 233,000 |
P | 60,000 | 70,000 | 160,000 | 55,000 | 345,000 |
Leave, etc. | 140,000 | 105,000 | 435,000 | 250,000 | 930,000 |
V | 286,000 | 285,000 | 600,000 | 400,000 | 1,571,000 |
B, C, and Y | 406,000 | 2,000,000 | 2,300,000 | 1,945,000 | 10,305,000 |
| $5,420,000 | $3,900,000 | $9,280,000 | $6,400,000 | $25,000,000 |
D = Repairs to vessels and machinery.
N = Tests and experiments.
O = Stores placed aboard naval militia ships.
P = Repairs to equipage aboard ships.
V = Incidental expenses, including unabsorbed depreciation and other unabsorbed expenses.
B = Equipage issued to ships.
Y = supplies issued to ships.
C = Miscellaneous expenses of commission of ships.
Here we have each Bureau's estimates separately stated, and then combined into one grand estimate for each item. This supplants the estimates now rendered independently by each Bureau, for its general appropriation.
The item for "Handling Stores" which, as has been shown, is now included in "Provisions Navy" is distributed, in the above table, to the estimates of the Bureaus mentioned.
Included in the estimates under each item are the "Indirect Charges" which should properly form part of the cost of work to be done. A separate estimate of these charges should also be submitted, although no extra appropriation should be made therefore, since they are to be absorbed into the cost of work done under the general and under the specific appropriations. The general appropriation, however, carries an item of a little over $1,500,000—see Title V—to which the unabsorbed expenses (this has been explained) should be charged. This item, being largely due to undesirable fluctuations in volume of work, may be expected to increase each year, as more accurate planning of work is instituted.
The estimated "Indirect Charges" for the industrial yards of the current fiscal year would have been, under this system, similar to the following:
Estimated Indirect Charges
Maintenance of:
Grounds $180,000
Buildings 400.000
Yard Appliances 170,000
Yard Craft 300,000
Dry Docks 100,000
Fire Apparatus 20,000
Telegraph, Telephone, Etc 60,000
Vehicles and Live Stock 100,000
Power Plant 700,000
Machinery Plant 500,000
Office Force 1,800,000
Water 100,000
Hand Tools 300,000
Handling Stores 500,000
Miscellaneous 1,000,000
Depreciation 1,200,000
Total $7,430,000
These figures are, of course, very rough, and are merely intended to give a general idea of the method of preparation. Only after one or two years of accurate accounting could they be expected to approximate the facts. Sufficient data does not exist at present to properly prepare these figures.
The above list of expenses would be made up by combining the figures from each industrial yard.
All of the above figures should be submitted to Congress in connection with the proposed general appropriation act. The following year the actual figures, side by side with the estimates previously made, should be laid before the committees, together with such explanations of the differences as may be pertinent. This closely follows the British system of reporting expenditures.
Some Remarks Concerning Administrative Methods
Concerning the method of administering industrial navy yards, especially as between the one-department and the two-department systems, this article has very little to do. As elsewhere expressed, the writer's opinion is that this question is of far less importance than is that of providing a thorough and satisfactory system of financial control, based upon logical appropriations, and built up into a business like structure, self-centered and self-contained. An industrial navy yard is made up of units consisting of shops. The grouping of these shops into one, or two divisions is simply a question of administrative expediency, to be settled in accordance with the beliefs of those who have the power to enforce their opinions. Either plan will work, and work well, provided the right men are in charge, and, as before stated, a sound financial policy is in operation. Lacking one or both of these requirements, either plan will fail, ultimately.
The object of this essay being confined almost entirely to the financial end of this problem, little need be introduced regarding the personal element. There are one or two points, however, which must he touched upon.
The main effort of a navy yard plant should, of course, be directed to producing efficient results in all departments, rather than in perfecting one section at the expense of another. Thus entire cohesion and thorough understanding, a pulling together of all parts is necessary. In the present two-department organization there is bound to be a certain tendency for each department to endeavor to excel the other, without much regard to the common good. And this without any real desire to injure or retard the other, but entirely through a lack of coordination. While the commandant is the general manager, so far as directing the work to be undertaken, etc., the business of the two departments is run very nearly independently. This is more true of some yards than of others, but is applicable in some degree to them all. What is wanted, therefore, is a business manager, to coordinate the business affairs of the two departments. This officer should not be concerned with the actual carrying out of work in the shops of either department, but should be occupied solely with such questions as issuing one series of job orders when work is authorized, instead of having them issued in two series, as at present; collecting estimates from the two departments, and combining them into one statement, instead of having separate estimates go to the Department; following the progress of work in the two departments, with a view to preventing one waiting on the other, before king able to go ahead with its own, a situation not infrequently wising in ship repairs. In general this officer's business would k to assist the yard to run smoothly as a whole, and thus increase l[s efficiency. He would have no duties in connection with the military side of the yard, his function being purely industrial. Such an officer could be a member of either of the three corps most interested in industrial work, the line, the construction, or the pay corps. It would, perhaps, be valuable to have at one yard a line officer, at another a constructor, and at a third a paymaster, to fill this office. In the course of time results would show which was the most suited to the work. It would be necessary, of course, to adopt a thorough going financial system, along similar lines to those suggested herein, before any useful results could be obtained from such a competition.
The managers of the hull and machinery divisions occupy positions which it is believed should in some respects be more clearly defined. These officers, as stated by the regulations, are not the representatives of any Bureau. Nevertheless the tendency still persists to regard the manager of the hull division as the representative of the Bureau of Construction and Repair, and the manager of the machinery division as that of the Bureau of Steam Engineering. This leads to a pulling apart of the two divisions, which is fatal to efficiency. As has been stated, a business manager would aid in lessening this difficulty. It cannot be fully eradicated, however, until it is realized that the efficiency of the yard, its ability to show a profit rather than a loss, is the main consideration, and that the two divisions should have no direct affiliations with the Bureaus. The Bureaus are, in a sense, the customers of the yard. It is their money which is being spent, and their ships which are being repaired and equipped. The relations between the Bureaus and the yard representatives should be somewhat similar to those of the Bureaus and representatives of private plants. They could never be the same, or near the same. But it would be advantageous, for purely business reasons, to simulate these conditions as far as possible. The managers themselves, therefore, representing, as they do, the plant, and not the Bureaus, should have very little voice in the character and extent of contemplated repairs to ships to be undertaken at their yards. These officers, being human, are very likely to be influenced, when recommending repairs, by the fact that certain shops need work, etc. Further, all are familiar with the complaints of officers aboard ship that the yard officers are too much inclined to do things their own way, without giving due weight to the opinions and wishes of those who have to operate the ships and apparatus installed aboard them. While such complaints are often without warrant, it happens that they are sometimes well founded. But if it were understood that the kind of work, and its extent, was to be settled by the captains and officers on one hand, and the Bureau representatives (the inspectors, of whom more later on) on the other, the managers being called in for advice whenever necessary, but having no voice in the decision, it is believed that tings would work much more smoothly. Then, the contemplated work having been decided upon, let the managers take hold and pot it through, according to the specifications given them. In other words, do exactly as would be done were the ship being repaired at a private plant. The officers of the ship and the inspectors following the work closely.
The inspectors, should, it is believed, be in very close touch with the Bureaus. In fact, each Bureau should have an inspector or inspectors) to act as eyes and ears for it at the yard. Many details which are now sent for consideration of the Bureaus could just as well be settled by their representatives, the inspectors, on the spot. All elaborate and detailed reports of costs, etc., would then be unnecessary. In fact, the allotments of funds should be made through the inspectors, who would then be in a position, and would be required, to watch expenditures carefully. The accounting officer, by keeping the inspectors posted as regards the condition of allotments, would enable them to watch the interests of their Bureau carefully, much better than is now done with the Bureaus depending upon monthly reports for that purpose. The above presupposes the disassociation of the managers themselves from the Bureaus, which is regarded as absolutely essential, since a man cannot serve two masters, that is, the yard and the Bureaus.
The advantages of the method outlined above are too numerous to mention. The writer believes that the placing of the inspectors on the basis of directly representing the Bureaus and eliminating the managers from that position would do more than anything else towards the practical realization of efficiency, after the correct financial methods have been installed.
The Workman’s Point of View
A discussion of navy yard conditions which overlooks the point of view of the mechanics and laborers, whose work forms the most important element of the yard's efficiency, would be incomplete. And yet this is a phase of the subject which usually receives very little attention from those interested in navy yard economy.
In industrial affairs there is always going on a quiet but intense struggle between the forces of labor and the forces of capital invested in industry. The normal tendency is to keep the wages of labor just above the bare cost of subsistence, the laborer struggling to raise them as much above such cost as possible, and capital striving to depress them a near as may be to equality with it.
Without going into a discussion of the reasons for this condition of affairs, it may be pointed out that the situation of the navy yard employee is usually a shade better than that of his fellow in private plants, since the efforts of capital, as represented by the government, are here very much relaxed. In fact it is possible to treat the whole subject of the relations between employer and employed in a much more humanitarian way, in the government industrial service, than economic conditions permit in the outside commercial struggle.
The most serious factor which confronts the navy yard employee is the reduction of numbers made every now and then, on account of lack of work. This renders his position insecure, and makes it necessary for him to take protective measures. These usually consist in (1) the use of political influence, if possible, to retain his position when work is slack; (2) the use of the same influence to provide work for the yard, in order that his employment may continue; and (3) the extension of each job as long as possible, for the same reason. The first and third methods result in direct economic loss to the yard. The second, while not injuring the yard, is bad for the government itself, since no work not actually needed should be done.
As long as conditions exist as they are at present, with quantity of work fluctuating constantly, the yard workman will be continually insecure in his position, and will of necessity take the measures referred to, for his own protection. Hence the need for equalizing the demand for labor by the introduction of a well-designed manufacturing program, to offset the unavoidable unevenness of repair work. If the yard administration does its part well in the solution of the general problem, it is believed that the workman can be relied upon to do his.
Assume, for illustration, that a fairly constant demand for labor in all departments has been instituted, through the manufacturing of articles for naval use during periods of low demand for repair work (see " Manufacturing in Navy Yard"). The yard workman, feeling more certain of permanent employment, can now be approached with the following arguments: (1) Each yard, being in competition with other yards, should endeavor to excel in efficiency and economy; (2) to so excel it is necessary for every individual to do his best; (3) by reason of excelling, the yard may expect a more constant supply of work, since the Department will have work done at that yard which does it best and cheapest; (4) by establishing a record for turning out manufactured articles cheaply, a greater volume of such work can be obtained; (5) inefficiency and extravagance will act automatically to check the supply of work, and to cause wide fluctuations in volume of work. By impressing these ideas on the working force, it is believed that great advances in the direction of economy can be made. There is no question of the intelligence of the American workman, and he can see his advantage as quickly as any man. This has been proved by the success of the methods instituted by leading shop organizers throughout the country.
Mr. F. W. Taylor, in an address before the American Society of Mechanical Engineers, in June, 1903, stated, in reference to his work in making time studies that "he has over and over again seen the fact demonstrated that workmen of all classes are not only working, but glad to give up all ideas of soldiering, and devote all of their energies to turning out the maximum work possible, providing they are sure of a permanent suitable reward." Time studies, meaning accurate recording of the time necessary tor average good men to perform certain operations, with scientific premium rates of pay based thereon, form subjects which lack of space would prohibit going into here. They are mentioned, however, as indicating the road along which we must travel in order to achieve true economy. Briefly, it may be stated with perfect safety that there is no field in which the ideas of Mr. Taylor, Mr. Emerson, and other exponents of this school of economic engineering may be better applied than in our own navy yard plants. The subject is somewhat aside from the main objects of this essay, which are intended to relate mainly to the general Uncial conduct of navy yards.
It is necessary to imbue the workmen with a spirit of pride in we advancement of the yard towards efficiency. This done, harmonious action can be expected in all shops. On the other hand, no yard can be successful which has a body of dissatisfied employees working against the real interest of the plant. Foremen and leading men are particularly susceptible of increasing efficiency due to proper treatment on the part of managers.
Conclusion
The writer has endeavored to make it clear that economy in navy yards can be generally introduced only by the installation of a thorough system of accounts which will cover absolutely all classes of expenditures, throw into relief the major extravagances, and block off or circumscribe the channels through which money flows in such a way that no part may escape into that indefinite region lying between "Military Expenses" and "Cost of Production." Every cent must go into one or the other, and be clearly tagged with its character.
It is, of course, possible to produce economies without reference to such an accounting system. As a matter of fact, an accounting system does not of itself produce any economies at all. It merely points out where the loss is going on, in order that better methods may be instituted. But the attempt to produce economy without the use of proper accounts is bound to be unsatisfactory. First because attention is confined only to obvious extravagances, which may be cured without realization of the effect on other parts of the plant. Second, because it is never easy, and sometimes impossible, to prove that better methods effect a saving. Third, because the efforts of a few reformers only are utilized on certain specific details.
On the other hand, economic results are obtained more easily after the introduction of good accounting methods. First, because extravagancies are shown up all along the line at the same time, and the changes in methods in one place are instantly felt in all other places affected. Second, the proof of economy produced is found in the resultant figures, which take account of everything. Third, because all departments of the plant have their extravagances brought home to them at the same time, and all minds are using their inventive faculties to better the results in local sections.
For the above reasons the writer considers that the most crying need in our navy yards at present is for sound accounting methods. These in effect, the modern shop planning systems, the time studies, the betterment of methods and the actual production of economies can go forward with full assurance of proof being available, step by step, that they are good. In the course of time there is every reason to believe that naval plants, instead of being at the bottom of the ladder of industrial efficiency, may be at the top, and serve as models for private plants to pattern by.