F - F a C I R U J a V y O l r

THE NAT IONAL 4684CIATIOrN OF COST ACCOUNTANTS

MWWL

No A. Co A.

Vol. XI, No. 12

BULLET_ IN

Feb ,5 1930D�

IN THREE SECTIONS

Section I

In

Budgeting and Forecastingin an Individual Company

This bullet in is publi shed semi-monthly by the Nat ionalAssociation of Cost Accountants, 1790 Broadway, NewYork, Subscrption price $15.00 per year. Entered atthe Post Office, New York, N. Y., as second class matterAugust 28, 1925, under the Act of March 3, 1879.

Budgeting and Forecastingin an Individual Company

By

JOSEPH H. BARBER,Assistant to President, Walworth Company,

Boston, Mass.

The National Association of Cost Account-ants does not stand sponsor for views expressedby the writers of articles issued as Publications.The object of the Official Publications of theAssociation is to place before the membersideas which it is hoped may prove interestingand suggestive. The articles will cover a widerange of subjects and present many differentviewpoints. I t is not intended that they shallreflect the particular ideas of any individualor group. Constructive comments on any ofthe Publications will be welcome.

Additional copies of this Publication may beobtained from the office of the secretary. Theprice to members is twenty-five cents per copyand to non - members seventy -five cents per copy.

r —

EDITORIAL DEPARTMENT NOTE

Many of our members are already checking the budgetfigures which they had worked out prior to the beginningof the year to cover some part or all of this year'soperations. Often times one of the reasons why a budgetdoes not check very closely with actual results as theytranspire is to be found in the fact that insufficientthought has been given to the subject of forecasting forthe industry in general in determining the probable salesof a particular company. Sometimes the necessary datato be used for such a forecast are very hard to get andhave to be worked up through the information arisingwithin one's own firm or from within firms whose prob-lems are similar in many respects.

The author of our paper this time is well -knownbecause of his writings on various management subjectsand his constructive work with his present employer.

He is a native New Englander being a graduate of theMechanic Arts High School of Boston. His additionaltraining was gained at the Lowell Institute and he hastaken work with the Masachusetts State ExtensionCourses, the Alexander Hamilton Institute and the GeorgeE. Roberts Course in Economics for Executives.

His first experience following his college training wasgained as Assistant Head Drafting Instructor at theMechanic Arts High School and he was later a teacherof drafting in the High School at Concord, N. H.

When he left the profession of teaching he went withthe Spray Engineering Company of Boston. After spend-ing several years in various types of engineering work hebecame a Mechanical Engineer with Stone and Webster.

During the war he was Purchasing Agent, ContractManager and Office Manager with the Harry M. Hope.Engineering Company and in 1921 became Assistant tothe President of the Walworth Company, which positionhe now holds. When he went with the Walworth Com-pany he worked with an industrial engineer in establish-ing a program of budgetary procedure and has sinceenlarged the scope of his company's budgetary activitiesby perfecting procedures for forecasting, production andinventory control, and market research.

He is the author of two books on the subject of budget-ing and economic control and of many articles dealingwith related subjects.

He is a member of a number of Management Associa-tions and is a frequent speaker at business conventionsand a lecturer at Universities near Boston. His paperwas presented before the Boston Chapter.

CO0PYI?ICHTSD BYNATIONAL ASSOCIATION OF

COST ACCOUNTANTSFEBRUARY 15, 1930

BUDGETING AND FORECASTING IN ANIN D IV I DU A L CO M PA NY

BUDGETING is a tool for administrative control. As such itmust be forged to suit the conditions of a particular job. Its

whole design will be accommodated to the profitable operation ofan individual company. The necessity for adapting the device toparticular needs is obvious when we review the individual case;yet it is by review of particular cases that we come to see moreclearly the sound principles that underlie the best practices. Atthe base of the whole budget plan is the sales estimate. And thecompleted work embraces stabilized production, an even load uponworks' facilities, calmly scheduled purchasing, leisurely negotiatedfinancing, a confident management and, most pleasing of all —yetthoroughly consistent — enhanced profits and better, steadier em-ployment. My present purpose will be to tell you how we havedeveloped our budgeting along these lines.

Our company manufactures valves and fittings of steel, iron andbrass to control and guide the flow of pipe line contents, such assteam, water, oil, gas and air, an alloy cast pipe, especially adaptedfor use where metal corrosion is a factor; and a line of pipe tools.The production may be divided into six major classifications:

i. Steel valves and fittings.a. Brass valves and fittings.3. Malleable iron fittings.4. Cast iron valves and fittings.5. Pipe Tools.6. Alloy cast pipe.

We distribute these products largely through jobbers to an in-dustrial market. In fact, this market distinction may color thesignificance of much that I shall say. We are not a consumergoods, but rather an industrial goods, industry. Our goods areused as supplies and accessories in the industrial field.' One dif-ference between consumer and industrial goods is that, in the caseof consumer goods, one does not know who the ultimate customeris. Color, form and style play a large role in the marketing ofsuch products. The sale of industrial goods, on the other hand,depends very little upon the style element. Need, rather than

741

N. A. C. A.Bulletin February15, 1930

style, determines their purchases. In this field, it is practical toknow who individual customers are, to rank their importance, tochart their location and to tabulate their needs. This is reflectedin many of our underlying policies. For instance, instead of ex-tensive distribution on every street corner, we think that we re-quire a policy of selective distribution under which we can ap-proach the known or potential users of our products through rep-resentative jobbers at all strategic points. And we may developadequate stocks, assorted according to their usual requirements.

Development of Budgeting Based Upon FundamentalsAs has been the case with many other enterprises, our company

expanded rapidly from 1915 onward. Executives became increas-ingly hard pressed in their operation of greatly varied activities.The natural control by personal contact and stimulation, which hadserved well enough under the earlier conditions, required supple-mentary devices under the newer conditions. Answering to theseneeds, there was a conscious development of organization, of ac-counts, of current information reporting, of financial budget esti-mating, of economic analysis and operating ratios, of departmentalcoordination, of forecasting, of pre- adjustment and control ofoperation, and, finally, of greater precision in anticipation and inexecution. We call the process budgeting. We confess that muchstill lies ahead for improvement but much has been done to pavethe way. It is sufficient now to suggest, that there is a backgroundof experience behind the incidents that will be related here.

Modern methods follow closely the development of modernmechanics. As a matter of fact, our annual, quarterly and monthlybudgets of sales, purchases, pay rolls, cash and inter -unit transac-tions, serve the purpose of the thermostat in our business. It isnot, however, of the automatic self - regulating type. Rather, it isof the continuous recording type, which provides a detail recorddesigned so that managers may "see how the business is going"and presented at timely intervals so as to direct a stimulating orrestraining influence at the exact point of the system where suchinfluence is needed.

Our plan of organization and the development of such a systemfulfills the requirements for budgetary control. Since at all pointsthe system is founded upon fundamentals, our budget will con=

742

February 15, 1930 N. A. C. A. Bulletin

Figure 1

BLANK INDUSTRIAL CORPORATIONAnywhere, U. S. A.

Oct, 1, 1929To Mr. Jobber Buyer, (Invoices

Anywhere, U. S. A. Rendered Monthly)

Quantity Description IOrdered Unit of Product Price Value

000 Feet 2 in. Galv. IronPipe $0.00 $ 00.00

00 Only 2 in. Galv. BeadedElbows 0.00 00.00

00 Lb. Palmetto Packing 0.00 00.000 Cans Graphite for Pipe

Joints 0.00 00.0000 Doz. Stillson Wrenches 0.00 00.00

$000.00

THE GREAT UNITED STATES INDUSTRIALCORPORATION

Everywhere, U. S. A.

Oct, 1, 1929To ASSOCIATED CONSUMERS (Invoices

Everywhere, U. S. A. Rendered Monthly)

Quantity DescriptionIOrdered Unit of Product Price Value

000,000,000 Bu. Corn $ 0.00 $ 00,000,0000,000,000 Tons Pig Iron 00.00 00,000,000

00,000,000 Bbls. Wheat -flour 0.00 00,000,00000,000,000 Prs. Shoes 0.00 000,000,000

000,000,000 Gals. Gasoline .00 000,000,000

$00,000,000,000

743

N. A. C. A. Bulletin February 15, 1930

tinue essential for control purposes, no matter how rapidly the com-pany may continue to grow. For the enlarged organization mustbe just as easy to comprehend as the original smaller one, and ithas been definitely proven that only through a simple and well de-fined organization, upon which can be placed absolute responsibilityfor the results established by proper accounting and statisticalrecords, can any budgetary procedure become effective.

Executive Significancecance of Accounting and Statistical Data.This policy of getting back to fundamentals is itself a basic

policy. At first, it may seem too elementary to say that our systemof budgeting and executive control traces all its elements back tothose found in a typical manufacturer's invoice. The invoicesimply records a good old- fashioned "trade" between the seller andthe buyer of a particular bill of goods. But let's analyze that in-voice. The upper section of Figure i illustrates very necessarydistinctions in kinds of business data. The invoice statement con-tains record of sale ( t ) from a typical industry, ( 2 ) to a particu-lar customer, (3) at a particular time, (4) of a bill of assortedgoods. The invoice itemizes that bill of goods as to (a) quantity,(b) price and (c) value. All these elements are separate and dis-tinct economic factors and they weave as continuous threadsthroughout the fabric of business. Product by product, more orless in quantity, can be sold at a lesser or higher price dependingupon the fixity or flexibility of the value that can be charged. Thefactory may produce a quantity; the sales department must sell itat a price adequate to yield profit; and the treasury must finance allthe value involved and finally collect the bill. Above all, the in-voice is directed to a definite customer, which implies all there isto be learned about who the customers are or should be.

The lower diagram in Figure i is an imaginary monthly invoiceof the sum total of "All Industry " —a "Monthly Control ChargeSheet ", if you please, of all the subordinate industries. Picturefor a single industry, a stack of all its month's invoices. Then, ifit were possible to add up all the quantity units ( reduced to somecommon denominator of, let us say, pounds), the total would bea quantitative measure of the activity of that particular industryfor that period of time. Against the resulting total "quantity" forthat industry, and under the heading "Description of Product ", the

744

February 15, 1930 N. A. C. A. Bul let in

Monthly Control Charge Sheet would carry but one item descrip-tive of that industry as a unit. In the price column would appearthe average price of all of the industry's product sold during themonth, and the extended value amount would represent for thatmonth that industry's charge against the purchasing power of theconsuming public.

Then if we carry this same procedure through all industry, list-ing each unit in order, we have an invoice statement of all indus-trial activity set up in a manner fairly comparable with that usedordinarily by the typical industry. In the scope covered by thesetwo diagrams we have suggested before us all the problems of ac-counting and statistical control in industry, both collectively andindividually. What share of total general business is logically dueus? How shall our own departments be led to cooperate so thatour individual company shall make, sell and finance its share atgreatest profit?

This sort of control is generally called budgeting. In gist,budgeting may be defined as the coordination of all activities ofthe business to produce and sell the right product at the right timewith minimum expense and maximum profit. In budget calcula-tions, it is necessary to begin figuring with an estimate of probablesales and set up other operating factors in harmony. Consequently,it is perhaps most logical to take up first the questions of marketanalysis and of forecasting sales volumes, thereafter discussingthe consequent coordination of production and expense, stimula-tion of executive decisions and enforcement of plans in action.Throughout the discussion, it may be kept in mind that budgetingis a co- operative interchange of intelligence and planning on thepart of all managers and executives in the business. The activitiesare especially scrutinized by an officer reporting directly to thePresident, but his influence is only in the nature of facilitating theinterchange of intelligence and of perfecting the plan finallyauthorized as the policy of operation.

The Place of Market Analysis in BudgetingThe first important element reflected on the figure i invoice form

is "the customer ". Individually, who is he? Where is he? Whatamount can he buy? And which of our various products will hebuy? Collectively, what customers make up our most important

745

N. A. C. A.Bulletin February 15, 1930

markets? What is their order of importance? What strategicpoints and what collective demands can be served by us and by ourproducts with greatest profit? Unless these questions be answeredfirst, how can we be sure any of our major efforts are properlydirected ?

Some facts along this line are little less than startling. Datamake it seem more often the rule than the exception that eightyper cent of the business is done on twenty per cent of the varietiesoffered, and that eighty per cent of the sales income results fromtwenty per cent of the customers sold. This generality has beensupported by so many typical cases coming to public attention thatit behooves us to ask ourselves whether we, too, are permitting alarge part of our own efforts to be scattered over barren fields.For instance, the industrial census shows 2o7foof all the estab-lishments employ 887Jo of the wage earners in industry and de-velop 927x' of the total product. A study of credit factors showsthat 8770' of the manufacturing industr ies in the U. S. A. havepoor credit ratings, while only 13ofo have good ratings. Never-theless, that "good" 137o' accounts for 92% of total business, and8o% of that "good" business is done in key centers or tradingareas. So it follows that good business is where good credit is andin the places easiest to reach.

These facts suggest the need which exists for concentratingsales effort to secure selected customers in order to assure distri-bution of product to the important industries in the logical trad-ing centers. It is logical for us to be represented by at least one,and possibly two, of the five best distributors in each trading area.We now know these particular customers by name, importanceand kinds of product purchased. They are graded, A. B. or C andare summarized for executives review according to kind as wellas by terr itory. The list of identified customers is compact andmanageable and accounts for 95fo of all profitable business.

This customer classification permits development of selectivepolicies accordingly. Executive force and strategy are directed to-ward the graded customers and withdrawn from all others notlisted. Salesmen's solicitation is intensified according to customergradings, and is restricted where the markets wear thin. Head-quarters and sales managers' inspection of sales analyses, progress

746

February 15,1930 N. A. C. A.Bulletin

reports and the like, is extended to details for important customersbut is bulked for all others. Naturally the lists are reviewed occa-sionally to assure re- listing of any name previously discarded.

When research is applied to distribution, we see there exists amost urgent necessity to concentrate effort where it will producethe highest returns. When this is the adopted policy in the field ofdistribution as well as elsewhere, then profitable business, ratherthan volume only, becomes the standard of business success. It isgradually being recognized that there are great opportunities forimproved efficiency to be found in every direction. If costs persalesman -hour, cost per call, cost per customer according to size,selling cost per kind of product, and the like, are analyzed as care-fully as are similar factors in the field of production, great stridesof progress are possible. Certainly, there can be no real basis forforecasting confident gains in forward business, at least until therehas been developed a definite knowledge of particular names andplaces that can be made to provide these desired gains.

Forecasting Economic Trends in Total BusinessAgain reflecting upon the significance of our invoice form, let

us contemplate the item "Oct. i, 1929~Invoices RenderedMonthly ". This entry marks the passage of time. In any givenmonth the volume of business done will be in large part determinedby the rising or falling trend of business at that given time. Thisdirects our attention toward the problem of business forecastingin order that the salesmen's "near to" estimates of forward salesby customers may be supplemented by more broadly derived esti-mates of the probable trends of aggregate business from all cus-tomers.

There is a normal level of consumption. If activity exceedsthat level temporarily, then a compensating deficit will alwaysfollow, because history shows a tendency for variations to equalize.In the individual company stability of operation is a desirable goal.Consequently, budgeting must take the tides of business into ac-count and reconcile the ideal of stable operations against the prac-tical necessity of adjusting the business to constantly varying con-ditions. When we ventured on our first research in this direction,we quickly discovered a dearth of available statistics suitable to thepurpose. Little monthly data were to be had, and such materials

747

- , --

N. A. C. A.Bulletin February 15, 1930

as were available were late in reaching us. While the productionof pig iron, the amount of lumber cut, and the output of a fewother basic industries could be known each month, it was thetrend of primary demand by which we had to judge our own status.The belated reports of laggardly production did not offer an ade-quate basis for guidance.. With considerable difficulty at the outset, we assumed the task

of compiling for ourselves a monthly record of ordering in thosebasic industries that paralleled our own and that consequently re-flected the same economic conditions to which we are subjected.Our effort was well rewarded, however, because the index whichwe finally developed matched our own past experience so well thatwe could be confident it would guide us safely in the future. Inthe first place, the completed index was timely, being in terms ofnew orders instead of relating to the subsequent activities of ship-ments or production. In the second place, its carefully selectedfactors were all relevant. And finally, its accuracy, proving theindex a dependable yardstick for our own business, made it pos-sible to figure how we ought to equalize our production against themeasured demand.

Figure z shows our completed index of demand for valves andfittings of all kinds in the whole United States. The same diagramaffords comparison of this index with the long recognized"barometer ", Pig Iron Production. Obviously, the Valve and Fit-tings Index changes its course considerably in advance of thecurve for Pig Iron, but, even so, the Valve Index purports toshow only the current trend of primary demand for our products;it does not predict that demand. Forecasts of demand must be de-rived by analysis of the component factors that make up the Valveand Fittings Index. Since we know the several elements of theIndex, we can pick it apart in a way we cannot analyze our owntotal order curve. We can study the separate economic elements,arrive at a separate conclusion for each, judge as to its probableeffect upon the total prospect and then estimate the net result ofall upon our own developing order trend. Thus, sales departmentestimates by customers may be checked in aggregate against thegeneral economic outlook to provide a reliable estimate of forwardbusiness upon which to base all other budget schemes.

748

February 15, 1930 N. A. C. A. Bulletin

p Q O14

o8 a°_o — d N O m w Y <0 0Q N

� _M�A17111111N � �� �jjjj,,„

� ►r n 0 � i ) 1 1 N 1 ! I

ZQ

V � d0

M A1 7 1 1 M1 ! � �

Q

( �� hYI1,V1�SdO1C I[ .

( �d

—

� — rvl� �S7tSV1I V

—S7SSVd

IYO11r 0Q �

, 1

+ 0 1 1 7 Y 1i lv AlMll iNl S9 S1 UA7 t l � �

Al)11N113Q �

W

" .

ac_

Y

x

vr~o

� — h.Op r]SSOr�

N

r —

xpZSW

° 4 gill�„v̀ � �raolr

j

U) Q

~ an A,jllulilQ

4 ' ' CO kD � o _+ s $ � G r cv O

749

(V

WxU

w

O

FIGURE 3SPRING PRODUCTION PROGRAM

BLANK WORKS

PAST DATA ESTIMATE

z i

( yv {O

ORDERS INVEN-TORY ORDERS INVENTORY PRODUCTION ORDERS

1927 1928d

Desired7/1/29

let k 2ndQuars.

l iF

72

A B C D E F G H J K L M N P Q R 8 T U W X Y Z

L +M +N Q—R P +S T =2 M +N +R +Y

014 322 442 424 371 393 008 479 252 484 451

PLANNING — 435 480 915 501 376 —125 790 395

350

480 405 1800 474SALES 400 480 880 501 400 —101 779 390

PROD. 375 450 825 501 376 —125 700 350

021 265 269 291 183 235 251 304 295 410 254

PLANNING — 375 360 735 308 350 + 42 777 390

460

375 360 1470 417SALES 350 380 730 308 350 +42 772 385

PROD. 420 408 828 308 440 +132 960 480

022 000 000 000 000 000 000 000 000 000 000

PLANNING — 000 000 000 000 000 +00 000 000

000

000 000 0000 000SALES 000 000 000 000 000 +00 000 000 — —

PROD. 000 000 000 000 000 +00 000 000 — —

031

_

000 000 000 000 000 000 000 000 000 000

PLANNING — 000 000 000 + 00 000 000 000 000 0000 000SALES 000

L : : 00� 0000

PROD. 000 000 000 +00 000 000 — —

zn

A

10wO

February 15, 1930 N. A. C. A. Bulletin

Coordinating Other Operations With Sales PlansWhen the sales budget and the probable assortment have been

estimated, it is but a step to translate these schedules into workquantities for various departments. Figure 3 shows how sales,estimates are converted into quarterly production allotments thatare in line with administrative standards relating to productionsequence. The data on the schedule usually include estimates oforders for a full twelve months ahead, and such lengthy estimatesserve as background material for fixing the production rate, eventhough the specific calculations in columns L to W relate to but asix -month span. Several interested executives enter their respec-tive estimates in columns L to U, but the committee's authoriza-tion entered in column W is not a complete calculation inasmuchas it may be affected freely by judgment. We attempt always togain constant adjustment to an averaged rate of production, oftenpreferring to finance increased stocks prior to an expected peak ofdemand, rather than to fire and rehire our trained workers. Withus, it is good business to aim for the economies of steady pro-duction.

In like manner, all other commitments are considered in theirrelationship to estimated sales, for it is the sales expectancy thatjustifies and necessitates each commitment. In final form, thebudget as set up indicates the resulting cash conditions and givesthe treasurer advance notice of probable money requirements. Forthese several purposes, conversion ratios are developed. For in-stance, it is known that a ton of iron valves will require definiteproportions of cast iron, brass and other metals. Hence, a com-modity purchase schedule can be made up and inventory controllimits developed. Similarly, factors are calculated to reveal thenumber of work -hours required to cast, machine, assemble and testvarious products. These production ratios will be on a per -tonbasis in order that the sales tonnage estimates may be translatedinto operating factors. Many of these standards are standards.local to individual departments of local units of the company andthe administrator simply needs to know that they exist and thatthey are kept up to date.

We may suggest the scope of activities reviewed in the budget

751

N. A. C. A. Bulletin February 15, 1930

Figure 4

Summary of 1929 Cost of Sales Calculation for Blank Works1929 Cost of Expected Change 1929 Cost of Sales

Sales Volumes in Unit Values Volumes at 1929Priced up atCaused by External Expected1928 Average Factor or or Planned

Unit Cost Values Planned For Unit Cost ValuesRaw Materia ls . . . . . . . . . . . . . . $1,088,000 Down 0.8% (a;) $1,080,000Direct Labor (Day Ra t e) . . . . 554,000 Down 5.0010 (b) 526,000Direct Labor (Piece Ra te) . . . 280,000 Down 1.3% (c) 276,000Indirect Payroll . . . . . . . . . . . . . 815,000 Down 2.0010 (d) 799,000 (d)Clerical and Supervision Pay-

roll . . . . . . . . . . . . . . . . . . . . . . . 275,000 Up 1.1010 (d) 278,000( d)Expense Materia ls and Fixed

Charges . . . . . . . . . . . . . . . . . . 462,000 Down 2.50/c (d) 450,000 (d)

T o t a l C os t o f S a l e s . . . . . . . . . . . $3,474,000 $3,409,000

Reduction in Total Cost of Sales Due to Improvement inUnit Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Down 1.9% (e)

( a ) Decrease allows for 2.01110 upward rise expected in general raw materialsprices, but also contemplates a $30,000 (or 2.8%) saving due to scrapand other material economies.

(b) Day -rate direct labor will be decreased in the same percentage as theplanned 1929 increase in output - per -man (promised by Manager ).

( c) Theoretically, the promised greater output - per -man would not effect anydecrease in unit payroll costs for wages paid per number of pieces ofoutput. Yet improving output results partly from management 's enter-prise in perfecting conditions surrounding unit jobs. This necessita tesand justifies resetting of piece rates to a llow for those changed con-ditions. The percentage decrease estimated here represents the unitcost reduction likely to result from such justifiable revision in piece

rates.

(d) Overhead payroll and expense estimates are synthetically built up bydepartments to total budgets for the several kinds of overhead. Thepercentages and amounts shown here are gotten from that detail ex-pense budget data . Any increase in overhead can be justifiable onlyif they lead to a realization of the savings calcula ted in the other i tems.

( e) Note that in spite of a 2.0010 increase in raw materials, prices allowedfor per footnote (a), the over -a ll costs are to be decreased 1.91/0. Thisprovides in advance for an assured increase in profits even if thisworks' finished products sales prices cannot be ingreased in line withthe rising trend of raw material prices.

752

February 15, 1930 N. A. C. A. Bulletin

by listing the schedules that are prepared for review by controllingexecutives. They cover such important subjects as:

i . Each merchandise unit's contemplated sales. (for the Vice -President in charge of Sales and for the President).

2. Each works' raw material purchases, in summarized groups,for the Vice - President in Charge of Production and for thePurchasing Agent).

3. Each merchandising unit's finished goods purchases, (for theVice - President in Charge of Sales).

4. Each unit's expense and payroll commitments, (for the Vice -Presidents in Charge of Sales and of Production and also forthe Treasurer).

5. Each collecting unit's cash receipts, (for the Credit Managerand for the Treasurer).

6 Each disbursing unit's cash payments, (for the Treasurer).7. Each operating unit's gross profit, (for the President and for

the Vice - Presidents in Charge of Production and of Sales).

Adjusting the Schedules to Assure Adequate Profits

It will be valuable to see in a graphic way how well we may ap-praise the trend of operations as they will eventually develop intoprofit. Figure 4 summarizes these various budgets from the "salesdollar" viewpoint. A complete sales dollar analysis would breakdown the ioo per cent total into proportionate divisions to indi-cate a certain number of cents allowable for each class of expendi-ture. Each class would include a homogenous lot of items which,as a group, would be likely to react to the same economic causes.Our unit costs are built up in this way, so it is possible to "priceup" the total estimated tonnage according to the several economicelements that are represented in that total.

The first column of Figure 4 shows these various economic ele-ments of the total cost of sales as if the conditions of 1928 were tobe duplicated. The second column with its explanatory footnotessummarizes the economic changes expected, and the final columnyields the total cost of 1929 sales. This total cost, together withcertain oi_.er expense and financial charges, is deducted from thatworks' over -all sales revenue and the balance remaining is the

works' net profit for the year.

753

N. A . C. A. Bulletin February 15, 1930

Executive review of such a summary might question the possi-bility of cutting the direct labor cost at the rate of five per cent.Actually, the past records reveal a continuing increase of effective-ness in the output per man. We have back of us a knowledge ofsome tangible benefits accruing from earlier attempts toward regu-larization of employment, maintenance of organization, consoli-dation of production lots, and development of management tech-nique. We know efficiency has improved. We have supportingrecords by individual departments and can make comparisons be-tween works. Actually, we should be "slipping" if we did not ex-pect that five per cent increase in 1929.

Finally, having derived an estimate of works sales, costs, ex-penses and net profits, we must ask, "What about the budgets cov-ering branch warehouse operations, salesmen's activities, regionalsupervision, central office accounting, financing and general ad-ministration ?" All of these variable activities must of necessitybe paid for out of whatever gross profit margin will exist betweenthe selling value and the cost to purchase from the factories. Thetides of external economic conditions are forever shifting. Theknottiest problem in all busines control, although often not so recog-nized, is how to squeeze all those operating expenses inside the.gross profit margin and leave an adequate net profit.

So step by step we carry our budget development from the orig-inal estimate to the master summary, each step serving as a definitechart to guide the executive through whose department it clears,until it reaches its "master" budget. For each separate operating'unit, there can then be observed upon a single line across the"master" budget, a summary of its condition as an individual'entity.

Checking Up and Enforcing the BudgetThe discussion should not be concluded without duly emphasiz-

ing the fact that budget's task is not yet completed when the admin-istrator has adjusted estimates here and there so as to figure a de-sired margin of earnings. An adjustment will mean nothing if theadministrator does not persuade the person responsible for execu-tion that the revised figure represents the only reasonable and ac-ceptable accomplishment. In other words, the mere changing offigures will not change results. Figures will point toward possible

754

v

Figure 5OVER -ALL E X P E N S E P E R F O R M A N C E VS . BU D G E T

Latest Actual— March, 1929. Latest Estimate —May, 1929

RemainingMarch Check -Up Year -to -date Summary Period Bala nce

1929OriginalMarch April May Indicated Fo r

Auditor 's Unit 's To Date Unit 's Uni ts May Budget Seven MonthlyActual Own Est Actual Own Est. Own Est. To Date Total Months Average

A B C D E F G H K

( C + D + E ) (G—F ) ( H =7)G R A N D T O T A L . . . . . .

T ota l Work s . . . . . . . . . . .Total Branches . . . . . . . . .Total DivisionTotal Subsidiaries . . . . . . .Total Gen. Office..

X W o r k s . . . . . . . . . . . . . . .Y W o r k s . . . . . . . . . . . . . . .Etc. . . . . . . . . . . . . . . . . . . . .

B r a n c h A . . . . . . . . . . . . . . .Branch B . . . . . . . . . . . . . . .Branch C . . . . . . . . . . . . . . . $13,700 $12,800 $39,500 $13,300 $13,900 $66,700 $150,000 $83,300 $11,900E t c . . . . . . . . . . . . . . . . . . . . .Etc.

21rocr

w

W0

z

P4h

t z

N. A . C. A. Bulletin February 15, 1930

economies but eventually specific plans must be developed forgaining those economies.

Then, finally, there is the all- important matter of the check -up.Actual performance must check against expected plans. If the oneis not coordinated with the other, then all of the estimating maycount for naught. It is the "carrying through" that counts. Aseach bit of actual performance data becomes available, it is com-pared with the expectancy. The administrator need concern him-self only with the divergencies. His time is economized but hemust still put forth definite effort, and serious study toward cor-recting the conditions that are not as anticipated. It, is importantto note here that this sort of "exception to the rule" analysis couldnot be made if there were not initial expectations against which tomake comparisons. But by having an original plan and by check-ing current operations against expectations, the administrator findshimself dealing with conditions as they arise and he avoids thehumiliating experience of holding frequent post- mortems.

By way of indicating the conclusive value of the check -upprocess, we may consider Figure 5. Annual budgets set up themonthly program initially. This initial schedule is constantly be-ing revised during the year, but in such a way as to afford a con-stant comparison with the original expectation. Thus, we get fre-quent "close -ups" of developing conditions. Just before the be-ginning of each month, unit managers furnish the planning sectionwith "close -up" estimates of many details inculding items of ex-pense. These estimates amount to a confirmation or revision ofthe original annual estimates. The close -up estimates representthe expected outcome of commitments made or being made, butit is not too late to make adjustments in many items.

Figure 5 shows our form of expense check -up report which iscontained upon a single page, yet covers all operating units withbroad perspective. The summary total is shown at the top of thesheet with sub - totals next, and finally groups of detail for indi-vidual units. When divergency in total is observed, it can be tracedto divergency in one or two sub - totals, and thence to the particularerring units, Columns A and B are first compared and then twofingers, moving in parallel, trace down Columns E and K. In thecase of Branch C exhibited here, columns A and B show that the

756

February 15, 1930 N. A. C. A. Bulletin

March actual expense was not well forecast by the low estimatemade at the month's opening. The tendency toward poor currentestimating is usually linked up with defective or lax management.So it is not surprising to find that column E forecasts increasedexpenses which are far out -of -line with the Column K figure indi-cating the average amount remaining from that branch's original1929 annual expense budget. Above the other performances morecasually reviewed, such an individual instance would stand outsharply enough to stimulate the necessary executive action.

In such practical ways, budgeting must ultimately be evaluatedagainst the forecasts. There must be a constant check -up of per-formance for two reasons. First, such a check -up is the primarystimulus toward perfection in forecasting; it is a case of constantlystudying in the School of Hard Knocks and never graduating.Second, the definite corrective measures that can be taken to com-pensate for the unexpected will confirm the value of all the pre-ceding research. These check -up investigations of past performancego hand in hand with estimates currently being made against thefuture. What is learned from the one process contributes towardperfection in the other.

Hence, we see that the budget is an administrator's device formeasuring those elements in his primary problems which will sub-ject themselves to quantitative measurement. By no means doesit secure any automatic control. The process is in reality simplya sort of machine, and no more can be gotten out of one end of themachine than is represented by the material and effort put in atthe other end of the machine. Moreover, many problems cannotbe brought within the scope of budgeting technique, and, therefore,the budget can be only one of several important instruments thataid in solving administrative problems.

In these days of high standards in jurisprudence, in medicineand engineering, in fact in each one of the exact sciences, the suc-cessful enterpriser must be equipped with a fund of hard -earnedknowledge and a chest of nicely designed instruments. So will theskilled administrator soon be required to display a record of ardu-ous research and an ability to handle a set of well- sharpened toolsbefore he can qualify for a master job. In the uppermost compart-ment of his kit, within easy reach, will be found a tool marked"Company Budget ". It will be well oiled and smoothly polished.

757

N. A. C. A. Bulletin February 15, 1930

SUGGESTED BIBLIOGRAPHY

N. A. C. A. Bulletin, Sec. I.

Vol. III, No. 8Vol. IV, No. 19Vol. V, No. 16Vol. VI, No. 3Vol. VI, No. 8Vol. VII, No. 2Vol. VII, No. 4Vol. VII, No. 9Vol. VII, No. 22Vol. VIII, No. 3Vol. VIII, No. 4Vol. IX, No. 4Vol. IX, No. 6Vol. IX, No. 21Vol. IX, No. 22Vol. X, No. 8Vol. XI, No. 5

N. A. C. A. Bulletin, Sec. II.

Vol. VII, No. 15, pp. 576 -579Vol. IX, No. 6, pp. 278 -283Vol. IX, No. 13, pp. 760 -768Vol. IX, No. 17, pp. 998 -1005

N. A. C. A. Year Book.

1922 —pp. 219 -2741923 —pp. 127 -1441924 —pp. 29 -521927 —pp. 235 -340

VsL VIIINo. 21— Materials in Standard Costs, William L. ChurchillNo. 22— Accounting for Capital Assets, K. C. RichmondNo. 24— "Do We Need Calendar Reform ?" By George Ewtman

VOL IXNo. 1— Measures of Business Efficiency, Clyde MorganNo. 2 —The Profit Element, James H. Rand, Jr.No. 5—An Adaptation of Mechanical Accounting Control, R. G. RegnerNo. 6— Budgeting Control and Standard Costs in the Newsprint Paper Industry,

G. Andrew WareNo. 10 —Forge Shop Production —Cost Accounting, Frank S. HatchNo. 11— Co- ordinating the Factory and General Accounting to Insure Prompt

Monthly Closing, John E. HornNo. 12—The Analysis and Distribution of Sales Distributional Costs, James H.

BarrettNo. 14 —Waste and Its Elimination, Paul E. Holden and William S. FordNo. 15.— Depreciation As Applied to Public Utilities, W. B. S. WinansNo. 17 —Public Utility Economics, Theodore J. GraysonNo. 1&— Unintentional Falsification of Accounts, Ernest F. DuBrulNo. 19— European Manufacturing Methods and Costs, Chas. E. BedauxNo. 20— Tanning and Leather Products Costs, F. E. BarthNo. 23— Foundry Costs, Albert E. GroverNo. 24— Depreciation Accounting in the Machine Tool Industry, Thomas B.

FrankVOL X

No. 3 — "New Technique in Selling and Administrative Cost Accounting,"Albert A. Rose

No. 4 —Keys to Internal Control of Costs, E. S. La RoseNo. 8 —Bank Credit and Budgetary Control, Michael H. Cahill and John P.

PutnamNo. 9—A Cost System for Shop and Foundry, W. G. RobinsonNo. 10— Allocation of Selling and Administrative Expenses to Units Sold, C. A.

RenardNo. 12— Accounting for Fixed Capital Expenditures, Melvin F. WagnerNo. 14— Problems to Textile Costs and Management, Clinton W. Bennett and

Ralph W. BumsteadNo. 15 -11-m- nixing Cost Findings, Charles ReitellNo. 16—How Group Time Standards Reduce Costs, J. H. MarksNo. 17— Retail Accounting, Charles Garties and A. E. OxenreiterNo. 18 —Motor Bus and Shipping Accounting, G. S. H. Casson and R. V. WinquistNo. 19—The Relation of Cost Accounting to Industrial Research, William S.

Wheeler, Jr., and Earl P. StevensonNo. 21— Accounting From the Management Viewpoint, Monard V. HayesNo. 22— Capital Facilities — Accounting Principles and Methods, Frederic W.

KilduffNo. 23 —Costs in Airplane Construction and Transportation, C. Roy KeysNo. 24—A Survey on the Effect of Departmental Consolidation on Cost —Office

and Factory, Arthur Van Vlissingen, Jr.VOL XI

No. 1 —The Depreciation Element in Burden Estimates, Professor John B.Canning.

No. 2— Accounting for Dairy Products, H. H. NeelNo. 3 —Cost Accounting for Distribution in Retail Grocery Stores, Wroe Alder-

sonNo. 4 —Fixed Property Records —Their Forms and Uses, A. L. PrickettNo. 5 —A Manual of Budget Preparation and Budgeting as Applied to Auto -No. 6 —The Manufacturer's Marketing Cost, E. Stewart FreemanNo. 7— Manufacturing Expense Analysis, Classification, and Distribution,

William A. UllrichNo. 8 —The Organization and Functioning of an Office, D. S. SmithNo. 9— Standard Costs in the Illuminating and Industrial Glass Industry, G. A.

RothrauffNo. 10— Rebuilding Antiquated Cost Systems and Punched Hole Accounting,

Henry R. Boston and Robert D. PettitNo. 11— Accounting for Fully Depreciated Assets, J. C. CasselNo. 12— Budgeting and Forecasting in an Individual Company, Joseph H. Barber

Cop ies of th e abo ve pu b lica t io n s which ar e not out of p r in t may be ob ta ined fr o m th e officeof th e sec re t a ry of th e As so cia tion , 1790 Bro ad way , New Yo rk City , a t t h e p r ice of 75 cen t sPer co p y