University of California College of Agriculture Agricultural iCxperiraent Sta.tion Berkeley, California CREAMERY OPERATING EFFICIENCY IN CALIFORNIA Part I General Introduction Part II Utilization of Labor and Labor Costs by J. M. Tinley, F. H. Abbott, 0. M. Reed, and J. B. Schneider June, 1935 Contribution of the Giannini Foundation of Agricultural Economics Mimeographed Report No. 41 branch; of the ^ PKi^FACE This is the first of several mimeographed reports on a study of creamery operating efficiency in California a study designed to analyz,e both quanti- tatively and qualitatively: (l) the factors affecting the utilization by indi- vidui.-l plants or creameries of plant and personnel as reflected in physical inputs of labor and power, and costs per unit of product manufactured; (2) the relation between the capacity of all the plants or creameries operating in a particular area and supplies of raw materials (milk and cream) available in that area; and (3) the extent to which hauling routes of creameries operating in a given area overlap and the effect of this on hauling costs ^.nd returns to patrons. The first group of problems connected with physiccl and cost inputs per unit of output (costs per unit of product manufactured or handled) mry be termed problems of intern: 1 plant efficiency . They are related to efficiency of manage- ment, plant layout or organization, price of cost factors, utilizption of capacity of individual plants, and the combination of several enterprises, such cs manu- facture of butter and by-products (casein, skim-milk powder, or dry buttermilk) within one pl?:nt or under a single management. The second and third groups of problems, connected with the relation between the combined capacity of all plants operating in an area and supplies of raw materia-ls availF.ble in that area, a.nd with the extent of overlapping or duplication of hauling in an c„rea, may be termed problems of external , environmental , industry efficiency . jiixternal plant efficiency, while it undoubtedly has an important bearing on problems of internal plant efficiency, is related more closely to costs not usually entering into end reflected in the accounting records of individur 1 plants; they are related to returns on the combined investment in all plents operating in an area ...nd returns to patrons for raw materit Is. It is conceivable that the internal operations of some plants in an area may be conducted with the greatest efficiency and economy ,r.nd yet the capacity, and capital investment in plant facilities of all plants operating in an area may be greatly in excess of what would be required to handle adequately the supplies of rfw matcrirls available. Similarly there may bo a great derl of overlapping and duplication of hauling routes arising out of causes over which plant managers individually may have little or no control. In the past, consider: ble attention has been given in a number of indus- tries to studies of internrl plrnt efficiency, these often a,ppearing under the name of scientific management. Problems of external or environmentc 1 plant efficiency h:ve not received nearly the sam^.- a.ttention in this country, rlthough in iurope th^-y ha.ve assumed a position of considerable importf.nce under the generi. 1 heading of "ratione. lizat ion • of industry." Studies of external, environmental, or industry efficiency will probably become increasingly import- ant in this country. V;/hile overcxpa.nsion : nd hence overca pitalization of plants within r.n area and of c".ll plcmts v;ithin an industry is by no means a new phenomenon and the extent of overCc pitalization and overexppnsion may have been exaggerf'.ted , the problems of external plant or industrial efficiency are never- theless of v^ry great importance espocirlly during a time of economic stress, when even small economies of operation may be the deciding factor between solvency and financial embarrassment. Capital is invested in a plant in a-nticipation that the operrtion of 2. that plc.nt mo.y result, cftcr current operating costs h- ve boon met, in a profit or return on the invested Cc.pitc.l. Furthermore, : 11 the op^rr-tors of plants within an areo or in an industry hope for a profit or return on their invest- ment. However, the extent to which profits or returns on capitf 1 invested in individual plants is realized, is affected by the extent to which the combined cap-: city f. nd capitf. lization of : 11 plrnts in a particular r rer or industry are coordinated with supply of tvail-ble rr w mrterirls or volume of finished pro- duct thr.t cr.n be disposed of to consumers. To the extent thet plant crpacity and C'- piti lization re in excess of the volume of raw supplies avrilrble or the potential utilization of the finished product, returns on invested c pital to individu' J plf^.nt op^^r/.tors, or even to .'11 op'-rc tors, mr y be reduced below the level that th^ ctpital could have e-.rned in other industries. On the other hand, returns on invested capital mr.y be miinteined, but : t the expense of lower wages to (.mployi^es, or lower returns to producers of rr.w materi':ls. This approach to a study of industry efficiency would be concerned only incidentally with the potential overcapitalization of an industry inherent in the formation of holding compimies ind orgies of speculation. This respect of overcapitalize tion, while closely relrted to and influencing over expansion of cap-:. city in an area or industry, is so important r.s to constitute a seprrr.te and distinct field of study. Socially the capital invested in excessive capacity becomes a loss un- less it CL.n be moved to another r.rea or modified to meet requirements in another industry, Vvhile the problem has not been rdequately explored r.s yet, periodic overexpansion of capacity r.nd capi tp.lization in t. large number of industries mey have an important bearing upon • nd may be r contributory cnuse to periodic business recessions. Studies of environmental plrnt or industry efficiency, while involved r.nd difficult, will throw much-needed light on the rer^sons for overexpansion of plr.nt capacity within rn area or within r.n industry, the effect upon earnings, wr.ges of employees, prices of raw mi tori' Is, r nd operc^ting practices of pi: nts individually ; nd collectively, rnd perhaps r t the same time suggest remedial measures for avoiding i. repetition of such occurrences in the future. It is hoped that this study of ere mery operv'ting efficiency in Cr li- fornia, while primarily designed to aid ere- mery m-.nrgers individually ^nd collectively to effect economies in creamery organization ^nd operation, may at the sf m^ time be r contribution to knowledge of the economics of industry efficiency generally. Another import: nt economic and accounting problem wrs involved in this study, namely th".t of main and by-product interrelr^ tions . The primrry activity of crermeries is to manufacture butter. Yet ere: merits in mr nuf acturing butter from whole milk or cre.._m received from pr trons utomr tic-illy produce buttermilk or skim milk or both. These residu. 1 products cm be disposed of in severe 1 ways. They cr'n be returned to farners or disposed of as waste, in which cr.se they have no economic value to the creamery rnd their disposal may even enU il some expense. On the other hrnd, the skim milk m-y be processed into skim- milk powder, cottage cheese, -nd casein, rnd the buttermilk into dry milk powder, r.nd, s such, become by-products to the main enterprise, butter production. This method of handling skim milk rnd buttermilk involves some rdditionrl expenses of operation for plant . nd equip'jjent, power, and labor. It would rpperr to be a matter of great importance to cr e-ainery managers to know what additional ex- penses are involved in manufacturing the by-product or by-products and to whot .• j.i.'. : ■ 3. extent, if ';ny, the.net revenue of the creamery is effected. Many systems of cost allocation fc_il to shed any light on this problem of main and by-product interrelation. This study was conraenced in Ur rch, 1931. Other University duties i-.nd special demands upon the tL:ie of the r. uthors in connection vv/ith the operations of the Agriculturrl Adjustment Administrr t ion caused un^void-"ble delays in the collection and tabul: tion of dtt:. nd the public: tion of r. report on this study. Pf rts of this Gtudy have been completed, ^ nd it hi s been decided thc-.t in vievv of the unavoidaole deli. ys thrt have alre'-:ciy occurred, it would be preferc-ble to publish these parts irp-rnediately rr.ther than to defer public'-tion until all prrtG of the study have been completed. The present report is divided into tv/o parts. Port I, entitled "General Introduction to the Study," presents the problems involved in a study of this type, source and nc.ture of the dtt.:- collected, accounting problems involved, r.nd .• ,n enumeration of factors that zii.j influence the efficiency of operation of business enterprises such as creameries. Pr rt II, entitled "Utilization of Labor r.nd L;.bor Costs," derls in consider, ble det; il with the factors responsible for differences in the hours of labor and labor costs per unit of butter and of casein, skim-milk powder, and dry butterjiilk, the three main by-products manufactured in creameries whose primary function is the .manufacture of butter. Later mimeographed reports on which v/ork is in progress will deal with (l) the problem of efficiency in the collection and hauling of milk as exempli- fiea by a study of creamery hauling routes, distance traveled, and volume of milK carried in two important dairy sections of Colifornia; (2) the relation between the combined capacity of all the crea.''!ories operating in Humboldt County and the supply of milk and milk fat available in that territory, to- gether with an analysis of the reasons for the expansion of capacity and the effect thereof upon operating costs and returns to producer patrons; and (3) a study of the economic interrelations involved in the ha.ndling of main a.nd by-products within a given plant. The latter part of the study will be m^uch along thu linc'S of Part II of the present mi.moographed report e.zcept that it will present a detailed analysis, for three or four crea-eries only, of all operating-cost factors., including, in addition to labor costs, the cost, per unit of product manufe ctur ed , of heat and powur , supplies, depreciation, insur- ance, etc., and the effect upon net earnings end profits of handling tv;o or more products in one plant. The collection, tabulation, end interpretation of the data assembled in this study were complicated by two factors: first, the condition of account- ing records of the creameries, and second, the fc;.ct thit, for reasons explained later, so few creameries were included in this study. Because of these f.^cts it was difficult to advance with any degree of exactness rofsons for varirtions in cost factors (^specially labor costs) for manufacturing the by-products -- casein, skim-m.ilk powder, and dry butter milk. The data collected on these by- products are induced at th- end of Part II of this mimeographed report, partly because thoy are necessary as a complement to the analysis on hours of labor and lE.bor costs per unit of ma^nuf ? cturing butter, and partly beer use , inadequate and unsatisfactory as they a^re, they do perm.it of som.e generalizations as to the rela^tions involved in handling severe' 1 products in a single plr.nt. The authors trust, hov^/ever, thrt th;. problem of crea.mery operating efficiency vyill nave been sufficiently ei-qilored and enough conclusive factual It: I:' 4. mtcrial pr-sentcid to indicrto to creacn^ry rnnnr gkjrs possibilities for the i nprove- ..aent of their internal plant operatiuns and to enable those connected with the butter.naking industry to develop programs designed to put that industry on a more efficient footing. The value of the t/pe of inforjiation which the authors have attempted to gather and present should indicate to creamery managers the benefit that v^ould arise from the adoption by crec.meries of a simple and uniform system of account- ing and especially of a uniform system of cost allocation that would reflect more accurately than any of the systems now in use the true economic relations existing between the main product (butter) and by-products (casein, skim milk, dry buttermilk, or other by-products), A uniform system of accounting would enable individual creamery managers to make more accurate comparisons of operations of one year with those of another for the purpose of eliminating uneconomic practices and methods of operation. The existence of such a uniform accounting system would, moreover, finable some agency to gather annually, along standard lines, dcita from all creameries for the purpose of developing stand- ards of efficiency. These standards of efficiency would be of value to indi- vidual creamery managers in improving their internal operations and at the same time form a basis for any broad industry policies. Digitized by the Internet Archive in 2014 https://archive.org/details/creameryoperatin41 tini 5. CREAMERY OPERATING EFFICIENCY IN CALIFORNIA J. Tinley^F. H. Abocttj^O. M. Raedjv^and J. B. SchneiderxS/ PART I. GENERAL INTRODUCTION TO STUDY Reasons for tho Study .-- Tht Giannini Foundetion cf Agricultural Economics and the Division of Dairy Industry of thu College of Agriculture were requested In March, 1931, by numerous creamery operators in the state of Californie to undertake a study of crec.;.nery operating efficiency. Several important changes had taken place in the methods of organization and operation of crc;':meries in California since the end of the World War. These chc.nges involved some import- ant internal accounting and economic problenis, the full significance of v/hich was imperfectly appreciated by creamery operators prior to 1930. The generally high levels of prices of manufactured dairy products enabled crecm-;ries to pr.y satisfactory prices to dairymen for their milk and cream and at the some time ei.rn satisfactory returns on their invested capitr.l. The drastic decline in the prices of manufactured dairy products between 1929 and 1930, however, made it extremely importi. nt for individual ere: mery operc tors to give greater atten- tion than before to the efficient internal organizc.ticn and operation of their plants. The conditions have brought into prominence certc in accounting end economic problems which are involved in conducting under one business undertak- ing several ; ctivities involving main product rnd by-product or side-line interrelations. It WLS hoped thet this study v/ould throvi^ some light on the problems Vi/hich have arisen in operating creameries under the conditions that had developed in Californie r nd also c id creamery operators in developing a uniform system of accounting, which wuuld more accurately reflect the economic interrelations of the various creamery operations. Data on the econor.ics of creamery oper&tion were also needed for teach- ing purposes by the Division of Dairy Industry at Davis. 'Ahile there were available at the time numerous studies on creamery ef f iciency ,\5/these dealt in the main with creameries operating in other states which receive only cream from patrons and do no by-product processing. Scope of the Study .-- The 1S30 Annu&l Statistical Report of California Dairy Products issued by the Bureau of Dairy Control, State Department of Agri- culture, listed 143 creameries in thu stato of California, A large nur-ber of NXAss^ciate Agricultural Economist in the Experiment Station and Associate Agricultural Economist on the Giannini Foundation. >,^^Associate in Dairy Industry, University Farm, Davis. N^^Research Assistant on the Giannini Foundation. >^^Extension Specialist in Agricultural Economics and associate on the Giannini Foundation. N^'^One of the ..icst coGprehensive cf these v/as that mads by Black and Guthrie. Economic aspects of croarjery organization. Minnesota Agr. Exp. Sta. Tcch. Bui. 26: 1-111. 1924. 6. these plants, hovi'&ver, were locatbd in cities and Vi/ere distributing market □ilk and crea:!}, although a few city plants also manufactured butter. A few country crea.::!erioS also were .mainly interested in assembling of crea;:i for city distri- bution as rjarket crean, although •est of then also manufactured butter. Thirty- seven croaceries in the state j^nufc. ctured sone 56.5 n-illion pounds of butter in 1930, or ov-r 75 per C'-nt of thj total buttw.r producd in the state thot year, hn additional IC ./:illicn pounds, or over 13 p^r cent of the total state production, was u.anufac tared in plants located in the larger cities. The report also disclosed the fact that ;.;:ost of the country creaneries manufactur- ing butter also .manufactured one or ,:iore by-products such as casein, cottage cheese, skin-milk pcv/der, or buttermilk powder. k nunber of cree^neries in different parts of the state were visited in 1931, for the purpose of making a preliminary survey of their organization and operating .lo thods and of ascertaining vyhat accounting rec ords were Gvailnble, and also to secure the cooperation of cert, in cref'.^ory ■TiBni'igers who had not perticipf.ted in theoriginal request for the study. This survey shov/ed thot the records of several of the crea-ieries were in such shf.pe that they could not be used in this study, few of the creL.r>eries were locotod in isolP.ted parts of the str.te and c-nsid^raticns of tir;ie and funds iiade it inprrctica.l to in- clude thoi.-.. It was , further:".^ r- , decided t^^ confine the study to crcr leries whose Jiiain function was the =^ianufc..cture of butter and which received not less than 75 per cent of their gross revenue fror. the sale of butter. This excluded all city plants mainly engaged in the distrioution of .jilk and crea.n end also all country cr i^'ooerics whose ..lain function was to supply city plants with .T.arket crea.:i, although both .;f these types of plants also ;)roduced sone butter. Several changes in the ov/nership of cref. neries and in their accounting practices during the year 1930 r.ade it iupractics 1 to use the records of creaoieries f^.r that year as a basis for the study. The study Vv'as therefore based upon operations of crea."ories during the calendar year 1931.\/^ This necessitated deferring the active collection of datr till late in 1 ; 32 in order to unable crea neries to ccoplete their annual f inanci. 1 stato",-;nts for that year. During 193^^ and the early part cf 1933, records wore obt: ined from twenty-throe cr ci.;:]ories . Thro>. of these croa jories were lr..ter excluded from the study because th>. r'-;Cords obtained from tlrni::. were ina.dequate. Even for the reme.ining cre...::eri>-s detailed data, could not be obtained on all phases of the study. Collection of Data .-- an elaborate and detailed tentative schedule for data desired in t.he study vyas drawn up in 1931. It was intended that the sched- ule be compieted for each creamery visited. The preliminary survey, however, showed that the records of most creameries were not sufficiently detailed and concise to permit of reduction to schedule form. The schedule was, therefore, not used. Lach creamc^ry 'jvas requested to submit a balance sheet as at the end of 1931 and an operating statement for the year 1931. In addition the follow- ing data were obtained wherever possible: most creamorics the fiscal year corresponded with the calendar year. In the fevi/ creameries in vyhich the fiscal year did not correspond with the calendar year the data on the fiscal year's operations wore used, because little change had taken place in the volume of raw materials handled and the price of cost factors during the months not in the calendar year 1931 and the months included in thot year. 7. 1. DGtdil-3d description of buildings , machinery , and aquipment, including date of erection or installation, original cost, and depreciation to the end of the year 1931. 2. Number of pounds milk and croam and milk-fat content thereof, received from patrons monthly during 1931. 3. The: monthly volui^e of r.ilk fat churned, sold as market cream, and unaccounted for. 4. The volume of skim milk sent to by-product departments monthly, fed to hogs, or othervyise disposed of or unaccounted for. 5. Pounds of butter produced and sold monthly at retail and wholesale; price and value of sales per month; and the percentage of overrun monthly. 6. Pounds of skim-milk pov/der, casein, and dry buttermilk produced and sold monthly; proccwds of sales monthly. 7. iside lines handled — volume, value, and expenses entailed.v^ 8. Detailed analysis of each expense account. 9. Number of employees, hours vvorked, duties performed, and v/ages paid. 10. r^s detailed a description as possible of tho territory from which milk and cream supplies were obtained, the number of trucks operated or number of contract haulers, volume of milk hauled monthly, mileage covered by each trucK, and cost of gctsoiine, oil, repairs, etc. Information on the earlier methods of creamt^ry organization and opera- tion in the state of California was obtained from cr'^amery cp-.^rators, officials of the State Department of Agriculture Bureau af Dairy Control, and from sev- ■ eral other p^r.^ons wno have been closely connected with the dairy industry in California. Condition of Recprds .-- The collection of da^ta from creameries was rendered extremely difficult because many creameries had inadequate data on certain aspects of their operations; because there were m;?ny different pro- cedures for alloccting costs betvyeen main products and by-products and between functions; and because there were mtny different methods of determining depreciation. Several of th-j crea'-iieries included in the study wore branches of a sta.te-wide organization, and while their data on internal plant operations were detailed and complete, it v;as extremely difficult to segregate data on proceeds of sales of various products by the individual plants; for these were ^The term "side line" as used in this report embraces a) all commodities purchased by a creamery for resale as an accommoda- ticn to patrons and employees, for exa.'.iple, gasoline and oil, tires, livestock feed, agricultural implements and machinery, and also cheese and evaporated milk purchased wholesale from other dairy factories, and b) Cream, skim milk, and buttermilk sold locally to patrons or retail customers. Such sales are usually intermittent and are made as an accomaioda- tion. combined in the head office with the total sales of all plants. Several of the creameries made no attempt to prorate expenses between products. While they segregated proceeds of sales of . the various products, all costs were grouped together under the various cost classifications such as wages, fuel and power, office salaries, ta-xation, etc. Most of the larger creameries, however, allocated costs between products and between functions (receiving, separation, churning, cutting, and wrapping)* The practices with regard to cost allocation varied between creameries and even in the same creamery from time to time. The methods most commonly used were to prorate indirect expenses on a labor-time, space-used, value, or volume basis, or a combination of two or more of these. Creamery operators consider that each product or department must stand on its own merits, and bear a "fair and equitable" share of oil the direct and indirect expenses of operation. With this objective there can be no disagreement, but the question arises whether the division of a creamery into several separate and watertight departments, to which costs are allocated on a purely arbitrary basis, accomplishes this purpose. Such methods of account- ing, furthermore, do not furnish data that give a basis for determining and evaluating the economic interrelations of the various enterprises conducted within a single business unit; they fail to give adequate and reliable informa- tion as to the extent to which the various departments, all of which supplement each other to a considerable extent in the utilization of management, person- nel, and raw materials, contribute to the net income of the business as a whole. Almost as varied as the methods of prorating costs are the methods of determining depreciation. Many creameries charge a blanket rate of depre- ciation, 8 per cent, 10 per cent, or some other percentage of the cost of all fixed assets to each year's operations. On the other hand, some creameries have widely varying rates for different items of fixed assets, the rates bearing some relation to the lifetime of each type of equipment. Not only do methods of determining depreciation vary between plants, but they vary in the same plant from year to year. In years of low returns a low rate of depreciation is charged in years of high returns, a high rate. In a few creameries depreciation on fixed ti£)sets is charged to the various products on a basis of the gross income from each product; in other cases, on a basis of the value of plant and equipment used for each product. Thus what may appear to be at first sight a real difference in depreciation costs betv/een plants, may resolve itself merely into a difference of accounting procedure. Characteristics of Creamery Organization in California Reasons for Change in Creamery Orgonization . Prior to 1920, although a fev; creameries in California were receiving whole milk from producers, by far the greatest number were receiving milk fat from producers in the form of cream, the skim milk being retained on the farm. Most creameries manufactured butter only and sold the buttermilk to farmers or disposed of it in some way. During the years 1920 to 1930, however, all creameries situated in the denser dairy production regions of the state changed over from a gathered-cream to a gathered- whole-milk basis, the milk being scpa,rated at the creamery and there converted into by-products. By 1930 relatively few creameries, situated in less dense dairy sections, largely mountainous or semiarid, were still receiving milk fat from producers in the form of cream. Some of the creameries which had changed over to a gathered-whole-milk basis were receiving some milk fat in the form of cream, mainly from producers situated in outlying territory. 9. This change in the method of orgc.niz.c.tion end operr.tion of creameries in CuLifornia was the outcome of numerous factors. Perhaps the most important of these was the fact that dairying, in co-nmon with other types of farming in California, was becoming more specialized. Dairymen came to rely upon their herds as the main, and in a great many cases, as the only source of income. Large numbers of farmers had and still have herds in excess of fifty cows. As during this period of change improved breeding and feeding practices were resulting in a substantial increase of production per cow, farmers found it increasingly difficult to utilize the large volumes of skim milk on their farms. Most dairy farms in California were not equipped with the facilities for producing grain, v;hioh v/culd be necessrry in raiding 'r'ogs and other live- stock to which the s'^i-r. milk could be fed. There was lnu3 a continuous and increasing pressu^'o on c.vt.e.L.-'.-vies to devise a r.eans which would provide a market for the augm-encea voluiics of skin milk. During the years following the World War there was a considerable in- crease in the demand fo." tl.ie oy- products manufactured from skim milk. Because supplies were inadequate to meet this inr.reesed demand, prices of casein, skim- milk powder, and other s.i'i'j-mii 1: by-products inci'eased s.ppr eDiab?.y .. These very favorable prices, together with the iucrcasjd density of supply of milk, encouraged creameries to undertake the installation of equipment to handle skim milk. Another factor leading to the change in creamery operation was compet- ition for supplies between manufacturing and market-milk areas. Many of the more important dcairy regions in California were .ad.ia.^.jat to cities. As the populations of these centers grew, it became necessary for the'i;. to encroach for supplies upon territories in which milk fat was pir^odjjed for manufacturing purposes. As prociuCc;rs verc finding it more and moi c >:lifficult to dispose of their surplus skin milk, they tended to seek an outlet for "ch^ir milk as market milk. In ordvi' to meet this competition with market -m: Ik centers and to maintain their supplies of milk fat, creameries had to provide an outlet for skim milk to their producjr patrons. As the c •.-eameri es nearer to the population centers equipped themselves to hanc.le whole milk, they ir turn tended to draw increased supplies from dairy regions more di-^tantly located from the large citi-;s. Creamo^ries in these ref-;^'ions v/ere sc^cn fo^'ced, in order to maintain their su;>plies, similarly to install •.■;.achir cry to handle skim milk. In this m.anner tne installation of by-product manufacturing facilities spread to creameries located in all dairy regions except those situated in isol-ated mountainous and semiarid country. The erection of evaporated-milk plants in various parts of the country had an effect similer to that of increased com- petition with market-milk sheds. Severol technological developm'c;nts facilitated this conversion of creameries from a gathered-cream to a gathered-whole-milk basis. Many import- ant improvements had taken place since 1910 in the macliinury and methods used in the manufacture of casein and skir:-milk powder, resulting in decreased operating expenses and a higher quality of finished product. Furtherm.ore , the improvements in roads and in size and speed of trucks made it possible to undert8.ke more frequent and rcpid collections from far^s which are necessary if the quality of milk is to be prevented from, deteriorating. The change of creameries from, a gather ed-cre;.r- to a gathered-whole-milk 10. basis involved so::c v.iry i.,]portE.nt cho.ngas in the internal end externr;.l organi- zation of cr^crrcrics . Tho volu:ie of ravj product coning into the plr.nt for processing w: s incrocsed rcpidly. Many crocnerics handling froi.n 1,500 to 2,000 cans of crtar: daily had to equip thQ.'-sclves within loss than a Donth to handle ten tijjos that voluzie of whole r.iilk. This involved not only installrtion of separating and by-product processing :x..chincry but a very 'atorial incrcese in the nu.nbii^r and size of truckc, Vvhcreas crca;:! had been gr.thcred only two and three tirjes a v/eek fron C'Ch producer, v^^hole ailk had to be gathered drily and during the aonths of peak production twice daily. As a general rule creameries were unable to erect nev/ buildings. The existing building facilities were either modified or additions erected to accommodate the new operations. In consequence, many creameries were crowded for space and equipment was poorly arranged. The grca^tly increased volume of raw product handled 8.nd the new processing undertaken involved a material in- crease in personnel, not only for internal plant operation but also for the collection and hauling of milk. There is reason to believe that becfiuse of crowding and poor arro-nt^ument of equipment the increase in labor personnel was for most creameries somewhat grea.ter and the utilization of that personnel some- what less efiicient than would have been the case if entirely new buildings could have been constructed. The same was tru>- to a considerable extent in the utilization of power and fuel. The manufi cturing of such by-products as skim-milk powder and casein involved the application of heat. In most creameries the boiler a.nd other power facilities required for the production of butter proved inadequate r nd addition- al power machinery had to be installed. In many instances the combined old a,nd additional powur machinery was loss efficient than if entirely new machinery had been installed. Furthermore, the poor internal arrangement of plants prob- ably occasioned less efficient utilization of that power machinery. This change would se^m to have involved many complicated questions of management, cost allocation, and price policy. Various accounting devices and different methods of cost allocation were developed in different creameries in an effort to determine the extent to which the expanded activities in- fluenced creamery operating costs and for the purpose of determining what price could be paid for the skim milk. Not only did cost-allocation methods differ between cretim^riea, but individurl crvnamerics not infrequently changed their allocation practices in an effort to bring about improvement of methods or to meet chringes in the prices of finished products. All this of course involved difficulties in determining what prices could be p;;.id from time to time to producers for their skim milk. In some parts of the country producers were paid two prices -- one for milk frt a.nd the other for skim milk. Most of the creameries, however, continued to pur- chase milk on a single milk-fat price basis, which included an ;.llowance (unstipulated) for skim milk. Types of Business Organize tion . The creameries in California may be ■ v^One creamery changed the basis of cost allocation three times in one year in order to show the milk-powder department with a.n oper.' ting profit. These changes Were mrde because of a drastic decline in the price of milk powder in th^t y^ar. 11. classified under four headings as regards ownership and control: (l) coopera- tive associations affiliated with a central cooperative selling agency which handles all sales, other than local sales, but which exercises little or no control over the internal opercitions and policies of affiliated local cream- eries; (2) independent cooperative associations which maintain full control over their local sales and their sales in the larger central markets; (3) independent private corporations which handle sales in the same way as the independent cooperative associations; (4) branch plants of state-wide or nation-wide line corporations. In this type of creamery, the main or regional offices maintain close supervision over the internal organization and policies of the branch plants and also handle all sales in the larger markets for their locals. Of the twenty creameries included in this study nine were cooperative associations affiliated with a central cooperative selling agency; three were independent cooperatives; four independent private corporations; and four branches of a line company. Size of Creameries .-- Only one creamery out of the twenty included in this study produced less than 500,000 pounds of butter annually; four produced from 500,000 to 1,000,000 pounds, ten from 1,000,000 to 2,000,000, a.nd five in excess of 2,000,000, three being in excess of 4,000,000 pounds (table l). The average production of butter for the twenty creaineries was 1,987,000 pounds. In addition many of these creameries manufacture one or more by-products and handle one or more side lines. TABLE 1 Creameries Classified According to Output of Butter Pounds of butter Number of creameries 0 — 500,000 1 500,000 -- 1,000,000 4 1,000,000 — 1,500,000 6 1,500,000 -~ 2,000,000 4 2,000,000 — 2,500,000 a 2,500,000 — 3,000,000 4,000,000 5,000,000 1 5,000,000 6,000,000 6,000,000 -- 7 ,000,000 1 7,000,000 — 8,000,000 1 12. It is interesting to contrast the output of butter cf croamGries in Cali- fornia with tho output of butter of creamories in Minnesota. In a study made in 1921 of* creamery organization in Minnesota the avvjrtage output of butter of eighty-eight creameries was only 233,304 pounds, the average of the twelve largest being only 541,543 pounds. The smallest creamery included in this study cf California creai^eries had a volurn.; nearly as great as that of the average of the largest creameries included in the Minnesota study. Each of the tvjo largest crcaTieries in California had an output greater than the com- . bined output of the twelve largest creamv.ries included in the Minnesota study. v Nearly all the creameries in California also produced one or more by-products. The smaller number of creameries operating in Californic and the diversity of products handled make a study of creamery operating efficiency much more com- plicated than in states like Minnesota , where butter alone is manufactured in a large number of small plants. Products Manufactured and Handled, (table 2) « — Creameries in Cali- fornia produce a wide rc nge of finished products and hr.ndle their residual products (skin milk and buttermilk) on :':any different b-. ses. Four cf the creaiiieries included in this study produced butter only, but two of them received whole milk from patrons and sold their skim milk or buttermilk or both under c private contractual arrange -nent to bro.nches of a large line cor- poration manufacturing dairy by-products. One crer..:iory manufactured no less than four by-products, three cree.iieries produced two by-products, and nine only one by-product. Included among the fatter is one crea-r-jry that produced smell qup.ntities of cottage cheese but sold the bulk of its skim milk in the same manner as the two creameries above mentioned to a bri.nch cf a line cor- poration manufacturing dairy by-products. Casein was manufactured by seven creameries, skim-milk powder by six, and dried buttermilk by four. Four creameries manufactured some cottage cheese; two. ice crt^am; one, cheese; and three fed part of their skim milk or buttermilk to hogs. Three of the creameries manufactured both casein and milk pov/der and two of these produced dried buttermilk as well. In addition one of the creameries manufactured, as a separate enterprise, largo quantities of evaporated milk. Several of the creameries operated two or more separate subplants as part of the main enterprise. A wide range of side lines was handled by some of the cretmeries, large- ly as an accommodation to patrons. Howev r, v/ith the exception of one cream- ery, which operated a general store and garage, the side lines contributed in only a very insignificant degree to gross revenue and were handled with little or no additional expanse to the creamery, a few creameries sold some skim milk and buttermilk to patrons and cream to :iark.;t-cr ean distributors. Sales of skim milk and buttermdlk usually constituted only a very smll part of the total skim milk and buttermilk available, and their effect on gross revenue and costs of operation was insignif icp.nt. For a few of the crcsameries, hovjevcr , sales of cr^am constituted a considerable part of the gross revenue, and, Vw'hile the higher sales vr lu^ of market crc^am undoubtedly tended to increase net revenue, the larger quantities of milk fat sold as crea!" reduced the volu ie available for processing into butter and hence may have tended to increase unit costs of .manufacturing butter. v/Black, J, D. , and E. S. Guthrie, iiiconomdc aspects of creamery organiza- ation. Minnesota Agr. Exp. Sta. Tech. Bui. 26:1-111. Table 21, p. 43. 1934. 13. w c • H • H CO CO CM CO CD CD So I e CD ctS -P 0) -p A' 6 -p ;3 Cr rH CD -H e 6 cd (D -p cs5 • H ■H ^ ^. 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As was explained earlier in this report, a wide variety of accounting prac- tices and especially of cost-allocation methods Vi'aE found to exist a'-aong creameries operating in the state of Calif orniei. If a study of this natur.;, involving a comparison of the operations of a number of separate business units, v.'as to be of any value, it v/cs essential not only that a uniform method be adopted for extracting such data as were available from the records of individual creameries , but also that e uniform method of cost r llocation be applied to tae operations of all creameries. It WcS even more important that the method of cost allocation employed should reflect, as nearly as possible, an accurate picture of the economic and operating relations between the Vctrious activities carried on v/ithin a single business enterprise; for example, the extent to which the handling of certain products increases total expenses of production and net revenue or profits. V;ith these aims in mind and in view of the f8.ct that all creameries included in this study derive over 75 per cent of their gross income from the sale of butter and handle by-products and side lines mainly for the purpose of malting more effective utilization of personnel, plant, and raw products, it was considered that what may be termed the additional- cost method of cost allocation would be the most logical one to employ. Under this method butter would be a.ssessed with all costs which would be incurred if butter alone were manuf £;.ctured. By-products and side lines v/ould bear only such additional expenses as are directly a.ttributable to their production and sale.s^;^^ This method of cost alloc:. tion, the thooreticrd significance of v^^hich is readily £ipprecicted by economist, has severe,! r:dvantagcs over other f nd more arbitrary methods. It places stress upon the unity of each creamery as a business enterprise, while at the sa.me time preserving comparisons, within certain broad limits, of efficiency in the handling of each particular com- modity. For example, comparisons can be made of the relative efficiencies of the various plants in producing butter; in producing casein between plants producing this by-product; and in producing skim-milk pov/der between cream- eries producing this by-product. The additional-cost method seems to conform more logically to the calculations a plant operator would probably make before deciding to under- take to handle (or discontinue handling) a by-product. He v/ould attenpt to ascertain the cost of additional equipmc^nt, labor, and other operating expenses necessary for processing and selling the by-product, c^nd also the probable trend of prices for that by-product. If the estimated proceeds of sales of the by-product exceeded the estimated additiona.l costs of product- ion and sale, then the plant operator would feel justified in undertaking the manufacture of the by-product. Moreover, after the production of the by-product has been undertaken, the individual creamery, by analyzing pro- ceeds of sale of the by-product and additional expenses incurred, Vv0.11 have 1 6/ ■x/ Tinley, J. M. A method of prorating costs between main products and by-products. Jour, Fc;rra Econ, p. 353-4. April, 193fhich operated a general store and garage on behalf of members, the labor costs involved in the operation of this could be segregated from other costs. Since most of the creameries produced butter alone or butter and only one by-product and since the larger creameries handling two or more by-products were sufficiently departmentalized, there were no complications in the allo- cation of factory labor costs between by-products. In the case of overhead and administrative costs, the estimate of the manager as to portion of his salary and the salaries of office force chargeable to the various by-products had to be accepted. In a few creameries in which the manager considered that he received some additional remuneration for the responsibility connected with the handling of a by-product, a portion of the manager's salary was charged to the by-product. In all other cases the whole of the manager's salary was charged to butter. As a general rule some additional clerical labor was required if whole milk instead of cream was received from patrons. Whole milk is received at least once e. day, as compared with cream receipts of two or three times a week. The manager's estiimte of the additional clerical labor and wages necessary and the portions thereof chargeable to the various by-products were accepted. It was decided to exclude from this section a consideration of hours^^ of labor and labor costs connected with the collection and hauling of milk.v/^ iX'This will be dealt with in a later report. 33. Most creameries purchase their milk feX in the form of whole milk or cream, f.o.b. the plant. The distribution of hauling labor costs presents a special problem. While some creameries operate trucks for collecting and hauling milk, many of them have their hauling done under contracts with private truck opera- tors. Labor costs of the private truck operators were not available for this study. Creameries that undertake to collect and haul their patrons' milk usually segregate such costs from their other operating costs. The hauling costs are usually, though not necessarily, covered by a deduction for hauling made from the f.o.b. prices paid to patrons. For these reasons, v/hile the efficiency of hauling has an important bearing upon the net farm prices re- ceived by farmers for their milk, they do not directly influence the efficiency of creamery operations. Allocation of Costs by Functions .-- Having obtained the general allo- cation of costs between main products and by-products, the next step was a further breakdown of such costs as between functions. In the larger cream- eries, where tasks were highly specialized, this presented little difficulty. For the smaller creameries it was necessary to make a careful analysis, with the manager's assistance, of the time spent by each employee on different tasks, and the amount of each employee's sal&ry to be charged to such tasks. This presented some difficulties, because the tasks perfornEd by individual employees may be changed from time to time. Furthermore, ell tasks performed by a single employee do not require the same amount of skill and do not in- volve the same amount of responsibility. Labor costs could thus not be allo- cated to functions on the same basis as hours of labor. Another difficulty was the allocation of the manager's salary. In the larger creameries the manager of necessity has to confine his time to the activities usually associated with management; decisions on policy; super- vision of departmental managers, plant , or department superintendents; attend- ing board meetings, etc. In the smaller creameries the mancger in addition to such activities also frequently performs the function of soliciting patron- age and may work on repairing, churning, and any other task as well. It is well-nigh impossible in such cases to segregate the manager's time between functions and to evaluate the cost of the time used in performing each func- tion. For those reasons the whole of each manager's salary, other than that allocated to the by-products, is charged to management. Although allocation of labor costs to products on a time-spent basis may not be economically sound, such allocation of labor costs to individual functions is justified, because, in the case of the smaller creameries, it was necessary for each employee to perform several tasks in handling a par- ticular product, each employee's wages being determined by the responsibility and skill involved in the combined tasks. This was necessary, moreover, to make possible a comparison of hours of labor and labor costs as between small creameries and the more highly specialized larger creameries. Hours of labor and labor costs per unit of butter manufactured were grouped under nine headings: management and soliciting , office, receiving, pasteurizing, engineering and repairing, general, cutting and wrapping, and local selling. Management and soliciting includes the hours per unit and salaries per unit of the manager and solicitors or field men who contact patrons or prospective patrons. Soliciting was included with management in order that comparisons might be made between the larger creameries, which employ special solicitors, and the smaller creameries, where soliciting is i 1 " ■ ' 34. done by the manager. Office labor includes all labor of the office force. Receiving labor includes the labor of receiving, weighing, testing, and can washing; pasteurizing and churning labor includes the labor of pasteurizing and churning milk. Repairing labor has been included with engineering labor because the mechanic attending the boiler and power plant frequently performs some of the incidental repair work in a plant. Under the heading "general labor" was included the labor of employees used for tasks which do not fall under any of the other headings or the labor of employees whose duties were so varied that segregation by tasks would have been a mere guess. Hours of labor and labor costs of the above functions are related directly to the total volume of butter manufactured. Two functions, cutting and wrapping, and local selling, were, however, treated somewhat differently. Hours of labor and labor costs for churning and wrapping are related to the volume of butter actually cut and wrapped, the proportion of total production cut and wrapped varying in each plant. Similarly , local selling (delivery man and salesman) hours of labor and costs are related to local sales. The pro- portion of total output of butter sold locally varies considerably from plant to plant, although data as to volume of butter sold locally were not avail- able for most plants. Selling labor and costs in the larger central markets were not included in this study, first, beco.use such data were not available, and, second, because proceeds of sales of butter in central markets are shown net at the plant, central-markets selling costs and freight being deducted. In table 5 are shown for each creamery by functions the total hours of labor per 1,000 pounds of butter manufactured. Under column 8 arc shown total hours of labor less hours per unit for cutting and wrapping and local selling hours of labor. The hours of labor for these two functions have been deducted from total hours of labor for the reasons stated in the previous para- graph; that is, in order to show more clearly the relation between volume manufactured and functions.! hours of labor. Cutting and wrapping hours of labor will be analyzed in a later table on the basis of the actur! volume cut and wrapped. In table 6 total and functional labor costs are treated similarly to hours of labor. Variation in Total Hours of Labor . — Total hours of labor (including cutting and wrapping and local selling) range from a lov; of 13,22 hours per unit for creamery P to 42.69 hours per unit for creamery T. Four creameries have total hours of labor between 10 and 20; ten between 20 and 30; five be- tween 30 and 40; and one over 40. Total hours of labor per unit excluding cutting and wrapping and local selling vary from a low of 11.39 for creamery R to 33.40 for creamery F. The hours of labor per unit in the most efficient creamery are thus only about one- third as large as those in the least efficient creamery. Four creameries have hours of labor between 10 and 15; seven between 15 and 20; four between 20 and 25; and five over 25 (table 5 ). Variation in Total Labor Costs .-- Total labor costs per unit vary some- what less than do total hours of labor. Creamery R has the lowest unit labor costs, $8.71, and T the highest, $20.10. 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O 13 o a' -p p pi o o 05 54 rH 05 (sJBXXop) aoq^x jo q.soo ^TUfi 48. it is not possible to more specific. Thtj dp.ta do not le;.d to the definite conclusion th&t expansion of output beyond 4,000,000 pounds of butter annually would necessarily be attended by an increase in hours of labor and labor costs per unit. The three creameries included in this study with volume in excess of 4,000,000 pounds of butter annually were originally organized to receive gathered cream and to produce butter only. Furthermore, when originally organized, their production of butter was substantially below their present volume. The increose in the voiuaie of output, together with the introduction of by-products manufacture, has resulted in some congestion in their buildings and plant facilities, or in their ho,ving to operate one or more branches with attendant duplication of personnel, plant, and machinery. If the larger pl&nts could be entirely reconstructed, improvement in layout might result in a substantial reduction of hours of labor and labor costs per unit for their present volumes. Large volume is commonly assumed to make possible the introduction of efficient labor-saving machinery and so result in a reduction of labor costs. This study, however, indicates that this reduction v/as not forthcoming in the three largest plants. Creameries with a large output of butter annually usually draw their supplies of raw materials (milk and cream) from a wide territory. As the size of the supply area increases, unit costs of collection and hauling tend to in- crease. From the standpoint of the joint interests of patrons and creameries, an increase in the supply area of a creamery with attendant higher hauling costs would appear to be justified economically only if unit costs of manage- ment, office, and internal plant operation (including fuel, power, depreci- ation, etc, ) are decreased at a greater rate than the increase in unit haul- ing costs. This was not the case for the three largest creameries included in this study in regard to labor costs alone. The data in the preceding tables and charts include only unit hours of labor and labor costs of manage- ment, office, and internal plant operation and do not include hours of labor and labor costs for hauling. It is possible, though not probable, that while the unit operating costs of the three larger creameries are somewhat higher than those fcr some of the medium-sized creameries, they may not have expanded their volume beyond the point of highest profit combination. While this aspect of the problem has not yet been analyzed, preliminary calculations based upon net op Pirating revenue do not indico.te that the larger creameries have been able to earn higher returns to patrons for milk and cream than the medium-sized creameries. These facts seem to indicate that there is no economic advantage either to the individual creameries or to their producer-patrons in increasing their size beyond an output of 4,000,000 pounds of butter annually. Possibly the ^y^lt might be argued that the relatively higher hours of labor and costs per unit for manufacturing and handling butter are due to faultiness in allo- cating hours of labor and costs between the main product and the by-products. It will be shown later (pp, 76-81) that creameries with a larger output of butter do not have appreciably lower hours of labor and labor costs of manu- facturing by-products. point of optimum efficiency would be an even lower figure. Some decrease in the volume of output of the larger creameries would probably result in bene- fit in the form of increased returns on invested capital or in higher returns to their patrons. It is not improbable that the expansion of volume of out- put of the larger creameries beyond the point of optimum efficiency may have prevented other creameries in the same territory from expanding their volume to the point of optimum efficiency. If this is the case^ a reduction in the volume of output of the overexpanded creameries, if accompanied by a corres- ponding increase in the volume of output of the smaller creameries in the sase territory, would tend to reduce the unit operating costs of all cream- eries, including the larger creameries themselves. Unit hauling costs would also tend to be lowered, especially if in the quest for larger volume many of the creameries have extended their hauling routes into territories v/hich might more logically be served by other and better located creamer ies.>^;>^ There does not appear to be any justification for the erection of new cream- erics in any of the territories covered in this study, for most of the small and medium-sized creameries are operating well below what would appear to be ■the point, or rather the range, of optimum efficiency. Such an adjustment of volume between existing creameries within a given territory would have to be gradual if the larger plants are to avoid losses arising from nonutilization of machinery and equipment already in- stalled. The larger plants might make the transition by not replacing out- worn machinery and equipment and the smaller plemts by gradually increasing their volume, adding additional machinery and equipment if and when needed. The adjustment of volume and plant capacity to the most efficient size might be facilitated in some areas by shifting equipment and machinery from the larger to the smaller plants. Effect of Volume on Functional Hours of Labor and Costs . — Figures 2 and 3 indicate that hours of labor and labor costs per unit for management and soliciting decline rapidly with an increase in volume up to about 2,000,000 pounds of butter annually and more gradually thereafter as volume of output is increased. In other words, salaries of both managers and solicitors do not increase in proportion to volume. Hours and costs of office labor per unit decline with an increase in volume up to about 4,000,000 pounds, after which they increase appreciably. The reason for this increase beyond 4,000,000 pounds is difficult to under- stand, unless the larger creameries are obliged to install more elaborate systems of bookkeeping than are necessary for creameries with a somewhat lower volume. Another possible reason is that the increcsed number of records necessary for individual patrons results in some confusion and loss of time in tracing entries. The five creameries with an output of less than 1,000,000 pounds of butter a year had 2.4 office employees per million pounds of butter; the cres-msries with volume between 1,000,000 and 2,000,000 pounds averaged 1,6 office employees per million pounds of butter; the three cream- eries with between 2,000,000 and 5,000,000 pounds averaged 1,5 office employ- ees per million pounds; and the two largest creameries about 2,2 per million pounds. 22/ v/This point will be more fully covered in a later release dealing with hauling. /[ ; . .. 50. Hours of laoor and labor costs per unit for receiving decline with increase in volu^ne of output per creamery up to about 2,000,000 pounds and beyond that point tend to increase aome\what, possibly owing to greater con- gestion in the larger plants or to increase in the number of subplents operated in conjunction with the main plant. Hours of labor per unit for pasteurizing tend to decrease rapidly with an increase in volume of output per creemery up to 2,000,000 pounds and somewhat less rapidly for creameries ha.ving an output in eyjcess of 2,000,000 pounds. The decrease is maintained even for the larger creameries. Pasteurizing labor costs per unit show a similar downwo.rd trend with increase in volume, although the decrease: up to 2,000,000 pounds is not so mas-ked and the decrease beyond that point somewhat more pronounced than for hours of labor. Hours of labor nnd labor costs per unit for churning decline rapidly v/ith increase in volume of output up to 2,000,000 pounds annually. Scyond 2,000,000 hours of labor for churning shov/ a definite increase, but labor costs remain practically constant regardless of increase of volume of output. The stability of labor costs per unit beyond 2,000,000 pounds in contrast to an increase in unit hours of labor is probably due to the fact that helpers to the buttermaker in the larger creameries are not paid as high wages as the chief butterma.kcr . Hours of labor for engineering and repairing decline appreciably up to about 4,000,000 and increase somewhat for the two larger crearjcries. Labor costs for engineering and repairing decline slowly up to 2,000,000 pounds, from which point unit costs increase, although very gradually. The relatively moderate increase in unit costs in contrast to a more rapid increase in hours of labor is probably due to the fact that assistant engineers are paid at a lov;er rate than the chief engineers. Hours of labor per unit for general Icbor increase gradually with in- creasing volume. Labor costs per unit, however, increase up to about 1,500,000 pounds, from which point labor costs gradually decline with increase in volurje. The decline in unit cos ts in contrast to an increase in unit hours is probably due to the fact that the larger cr'.;ameries employ low-wage night watchmen a,nd other lov^-paid general assistants* Although the volume of butter manufactured annually is one of the most important factors influencing hours of labor and labor costs per unit of individual creameries, other factors besides volume of output apparently have a bearing on hours of labor and labor costs. The functional and total curves for hours of labor and labor costs per unit represent the general trend for all creameries. The position of nine of the creameries is very close to the general curve for tot&J hours and total costs. The positions of the other creameries, however, conform only approximately to these curves. Evidently other factors are responsible for the deviations of their positions from the general curves. Seasonal Variation of Output .-- Total hours of labor and labor costs for each creamery hav:j been subdivided on a monthly basis in tables 12 and 13. For some of the creameries there is a very marked variation between months in total hours of labor and total labor costs per unit, whereas for •> • H 03 ur -p o a CC «H CO :i Pi •H ■p OS •P Pi 6 -P o 13 O -P ■P •H *\ :3 r-H •H o O rH !>< r-H m CD w w r— 1 o ?i OS o O O o o c o I-H a er -P p- •H m ur 1— ) o ctf -p o hX) CD C3 ^ CD t-. > O O CD o -p o o -p p. CD rH CD p; C3 Pm C3 CD fx. 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Hours of labor per unit for creamery Q varied from 5 7.83 in January to only 11»27 in June, the corresponding figures for labor costs being $38.98 and $8*25. In other words, hours of labor and labor costs were about five times higher in January than in June. In the ca.se of creamery B, however, hours of labor per unit varied from a high of 20.81 hours in July to a low of 17.60 hours in November, the corres- ponding figures for labor costs being $11,46 and $9,96. Hours of labor and labor costs per unit were thus only about one -seventh higher in July than in November. Furthermore, months of highest and lowest labor costs per unit varied considerably as between creameries. For twelve creameries the months of highest labor costs per unit were January or February; for six creameries the months of highest labor costs were between August and October. For eleven creameries the lowest Is/bor costs per unit were in May, for five creameries in March, for the remaining four, in June, July, September, and December, respectively. E^vidently monthly hours of labor and labor costs per unit are influenced greatly by the seasonal variation of output of butter, which in turn is de- pendent upon seasonal variation of production of milk fat. The more extreme monthly variations in total hours of labor and total labor costs per unit are found in the case of creameries situated in regions subju;ct to u/ide seasonal variations of milk-fat production. Creameries A, C. D, I, 0, and R are situated in the cost regions. The creameries B, J, E, N, F, G, T, and K, in v/hich seasonal variation of costs is least, are situated in the interior valleys, where seasonal production of milk fat is more uniform. The striking inverse relation between seasonal variation of production and labor costs per unit is shown in figure 4 for two creameries, one of v/hich has a high and the other a very low seasonal variation of production. The extreme seasonal variations in total hours of labor and total labor costs per unit are due largely to the fact that creameries do not find it possible to reduce their labor personnel in proportion to the decline in volume of supplies of raw products (milk or cream)* The manager, office force, butter maker, and many other employees have to be kept on no matter how much volume declines seasonally, A few creameries are able to lay off some of their less important help during the months when output is lew, but even such labor cannot be too greatly curtailed. Many creameries keep their regular labor f a* ce employed during periods of slack production by undertaking general overhauling cf equipment and repairing and painting of buildings. Although most of the functions showed seasonal variations for hours of labor similar to those for total hours and costs per unit, a few functions - displayed noticeable differences (tables 14, 15, 16, 17, 18, and 19). Some of the creameries have no costs for certain functions during seme months of the year. For example creamery F had no hours of labor for pasteurizing and labor costs for the m'^nths August, November, and December, the regular employee being laid off and his work performed by other members of the labor force.vx^ Creamery E shows a much greater degree of seasonal variation for engineering and repairing labor than for any of the other functions. Creamery R shows a s^Data were not available relative to the time spent by these other employees in pasteurizing. 54. Relation between Output of Butter and Labor Cost per Unit Fig, 4. — Monthly labor costs per unit for individual creameries vary inversely with monthly output of butter. Creameries with a wide seasonal variation of butter production have a wide variation in monthly labor costs per unit. > ''t V V \ 55. Relation between Output of Butter and Labor Cost per Unit o JF MA M JJASOND Fig. 4a.--- Monthly labor costs per unit vary inversely with monthly output of butter. 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A somewhat better picture of the degree of seasonal varia.ticn of total hours of labor and total labor costs per unit can be obtained by expressing these monthly data as a percenxage of the yearly average hours of labor and Isbor costs per unit. These are shown in tables 20 and 21. The degree of variation between the lowest and highest monthly indexes of hours of labor and labor costs per unit for each creamery is shown in the last columns of these tables. The extent of variation for hours of labor is somewhat less than for labor costs. For seven creameries there were less than 50 points variation between the lowest and highest indexes for hours of labor; four had between 50 and 100 points; tv;o between 100 and 150; four between 150 and 200; and three over 200 points. The corresponding figures for the indexes of labor costs are six, five, two, one, and six. In an attempt to correlate the effect of seasonal variation of output v;ith total hours of labor and total labor costs per unit of individual cream- eries, the creameries v/ere divided into three groups. The first group v/as coo]posed of creameries having an output of less than 1,000,000 pounds of butter a year, the second group between 1,000,000 and 1,500,000 pounds, and the third group betwe^^n 1,500,000 and 2,500,000 pounds. There were five creameries in the first group, six in the second, and six in the third. All the creameries in the first group (the smaller creameries) had a relatively low degree of seasonal variation — approximately equal for all five cream- eries. In the second group five creameries had a high degree of seasonal variation of labor costs (l5C points and over between highest and lowest months), ?.nd one a lov; degree of va.riation (just over 50 points). The latter creamery ranked fifth as regards labor costs (ranked from low to high for the group). In the third group two creameries had a variation of over 200 points between high and low monthly indexes of labor costs per unit, one between 100 and 150, and three less than 70. Ranking cretmerios in this group on the basis of total annual labor costs per unit, the two creameries with the highest variotion in the monthly indexes were found to rank first and second; the creamery with the lowest variation ranked last. In table 22 are shown for each function the degree of variation between the highest end lowest month- ly indexes. It would thus appear that very little, if any, of the variation in the total annual Icbor costs betv;een the creameries included in this study can be explained on the basis of seasonal variation of output. This does not imply that seasonal variation of output has no beoring upon total annual labor costs per unit (and also on hours of labor). It is an important factor, but too few creameries were included in this study to bring out the relation clearly, especially as other factors had a more important bearing on the rnnut.l unit labor costs of the creameries actually included. It is evident, however, that the croi.meries with a high degree of variation of output could very materially reduce their annual labor costs per unit if they could obt: in a more uniform source of supply . ^^4/ other items of costs besides If.bor would tend ^y^Seasonal van .tion of raw supplies is due, however, to factors over which creameries and even their patrons have little or no control. 63. •H -P o hO R •H 1 — 1 o CO W •p *^ K 4-" o rP J-< rH 03 o CO OJ 0) C/0 Degree of variation from lowest to highest month s CO rH O U J IX) LI J CO CO f 3 OJ LO Hi to to 1— I c» to rHCOCX! rHrH rHCJrHi— 1 Average for vear ooocoooooooooooooooo oooooooooooooooooooo 1 — li — It — li — li — li — li — li — li — li — li — li — li — li — li — li — li — li — li — Ir-H C o -J- \>- ^ COLOCNaCni-Or-HCOCNJrHOLX:»COrH'^LOt- 1 rHrHr— Ir— IrHrH rHi—irHr-H • > O c\!(^acoa)^-o•5C^a^^-•^t^t-^Ol^oc^Jf^^-lOr^^HO■i OCDt>-a>aJCOO'3C\!O^OOrHCVJOO-c^)a5cnrH(TJco'^co^-rHO rH rHrH rHrHi— 1 rHrH Sept . O^CnCJlrHsiHCVICJjCOOOJtOOOrHrHa^UiCOrHy:) CNJCt>-t^a)005l>-tr-003i-icr500^^«i->i>-(^jrH CvirH rHi— IrHrHi— IrHOJ i— IrH Aug, •xiH(Xi[>-(J)rHa5C--tOCDCi;OO^COCX300iOI>-CT!tO 0 0!>-LOOCOCr5tOCDCJ^O^rHCOCT)COO"j5ijy300i OJi— 1 r— 1 (-H rH rHrH rH July LO Cj^ t — 1 to CTb rr^ tr^ m f'>^ rr^ 0,7 10 r*/^ r>i~i rr^ rHCC0L0 0-5Ot-crju:)cr)Oc--c0CT)t0t0L0CDOCT) rH rH r-H r-{ i—t r~t June ■>^a^Cr5C-O^CnrHLOC>-LOC\3LO<^':iHC\3CMCDC^rH Loo^uoLO(X)o■5c^-^-LOcniO■iC^^-CT>^-•^';^^LOcor^ rH May ■C0CV!rH[:^(X)t>-C0U^C>-CJ20:iC0sflfHL0O '^o^'^OiOO^^cDajc^t-coLotO'st'iijcoo rH 1 — 1 rH rH Apr . tOLOtOrHC^JcOOs^^u-i•v^^tfJs}^C^J[^-c2JO^^^-■^^f\J %tia)i/3u:)0<3^rHLOLoa^ocococou;)tocOLO(X)(j5 rH rH rH 9 OC\iCC>t>-rH(j5U3rH'^COtDUOCO^LOCO^C\JCOcO LoaiO^LoocnaiLQcjicocoooi'^cOrHCTicocr- rH rH rH rH rH Feb. C\iOr^^H^-COO^CDsi^<£>'^}^«>OC^^OC£)^^LQ«^^^rd^ CDOiLOt— 1 — iC\)C\JCDtOOCI)i — lrH( — itO'sHO'OCJl OS C\JC\JrHrHrH OJrHrHrHrHrH C\2C\i Jan. '^t^^o^-^Dt^-C-^(X)<£>^OCMc»CDr^c^vIO■^CDOCT) C--OC\2Ur2tOCOrHCOOCVlrHrHrHC\i[>-l>-rHrHa20 rHCVOJrHrHrH OJrHrHrHrHrH CNJOJ rH Creamery <5pqOQW(jHC5!T.lMK^!a:iJg^Op-,C(s;cOEH CO -P o > -p IH o OS 0) -p CD rC -p • H 05 o Id CD CO 05 CO rH •H 05 > 05 05 +^ 05 13 O 0) -P 05 o x:! CO CO 05 Q W) •H -P -P O •H W ;3 i-H -P O K o W •\ >^ K) ■P o uo o •H rH o rH (U a 00 CM rH W •p CS •H O m O EH rH X3 05 -P 05 O W) S=l •H •H ■»(• 0$ o •H -P 05 • H OS 6$ o CO eS lX3r-^^-^0[^-o>totoc^JLr3HrHrHi-HfHrHrHfH Dec. "^jHLOCO >-00OO'*00tOrH0^rHC>-CnC0CT5tOCO t-o^cD 1 coc--a5a)^HO^o<^20Ja>t-co■^^^ooo 1 rHrHrHf— 1 r— IrHrHrH • o a5CT5C^(A}CT)a>CT3tOt-OCTJrHOaCT>OtOrHCl3«-trH rH rH rH i— IrH <— Ir-tr-H rHrH Oct. fH rH rH rH rH rH rH i — I Sept. COO^-si-tOOC\J"?J-aiOOCOCOCT}OOrHO^OO^tOCDC>-CVli-l OJrH rHfHrH rHrHrHCM rHrH Aug. (^JLOr^^cooa3a^t-c^l«:JcvcM';^^^o•^^H^-o^cr)^^- 1— iOt>-(XjLfic75a5,-)CDcr>oootr2i-ooao CVJ rH rH (H rH OO rH July a:)C0CO-4<^y3C~-C0l«'^00lX3^OCT)COC£)rHCO'^CO CO'^u;)a5cr3^-cr>u:30>cx)l^-cx)CT5^0I^ou:)LoocT5 rH rH rH rH rH June rHO0:iCV!rH-5i-COrHt>-C0 LOOLOLOCOa300t>-LOO^a3C~-C>-CT)CDtO"«^lU:iCOrH >-. o5 rHCnUO-^^ILOOCOtctl'^tOCOrHCOCOCDOC^JOOtOrH '^CT)^^^N^^C^^OCT)^«^i^a5ai^-C-C0l-0^0^'=;f^C0O rH (—1 Apr . i pHtDtOOrHOJa^COO'^^tC)tOODCVJC^05t:J<-a3>^rHtD(MrHa5C30LOCO '^O^OiLOOO^O^'^CJOCOOOCCTlLOCOOCOOOO rH rH i-H I-H tH Feb. rHCOrHC\3OCO00C0'^Cy)C--<;i10^Ot0-<^C0tOrHi-l tDOt-COCOCOtOCOOrHrHCMrHCOCD /H 0) o OS 0) 6 -p CD -P •H 05 o m 05 0) rH rP c5 (H •H 05 OS OS -P cd o o •H t3 •H W 03 Q i t ■ 65 TABLE 22 Degree of Variation between Highest and Lowest Monthly Labor Costs per Unit Creamery Total labor costs Man ace — ment and solicit- inc Office Pasteur— izine' Churning Engineer- 1 ne" and recairs A 215 215 216 216 215 216 217 B 18 25 18 35 46 33 25 C 226 241 241 241 241 242 236 D 238 275 245 236 244 321 E 56 56 54 55 67 55 101 F •55 42 65 44 70 59 42 G - 61 59 59 58 60 75 59 H 141 188 157 196 179 147 192 I 260 280 361 222 207 211 228 J 37 46 42 65 68 46 78 K 29 32 28 87 27 29 85 L 53 51 51 59 57 102 102 M 53 59 52 53 53 60 63 N 42 47 47 44 47 47 17 0 145 159 154 142 156 118 167 P 206 185 237 223 224 192 208 Q 181 190 188 198 192 212 200 R 225 279 271 51 282 282 S 41 49 38 51 39 41 38 T 37 40 41 40 48 76 41 , - ■ ■ '\ 66. to vary in much the same proportion as labor costs, the crec^meries with a wide monthly variation of output must operate at a considerable loss during the months of low output, the loss being offset by profits during the months of high output. Utilisation of Plant Capacity . — Data on the percentage of cape. city utilized during each of the months of the year were unfortunately not avail- able from all the creameries included ih this study. A detailed study of the effect upon operating costs of the degree to which capacity is utilized will appear in a later release for creameries located in Humboldt County. Utilization of Plant and Personnel . — Several of the creameries included in this study appeared to bo greatly overcrowded. Overcrowding is most appar- ent in some of the larger creameries, which have greatly increased their out- put of butter and have undertaiccin to handle one or more by-products , since their buildings were first erected. This has resulted in poor and congested internal arrrangement of machinery or the maintenance of subplants v;here milk is separated, the cream being sent to the main pl£;nt and the skim milk manu- factured into by-products. In either case, overcrowding or maintenance of subplants involves employment of a greater labor force and. hence greater hours of labor and labor costs per unit than if such crecmorios were constructed originally to handle their present volume of butter and by-products or if the creameries were handling a volume more nearly correlated to the original plant capacity. A few of the crcFimories , on the other hand, appeared to have a great deal of unnecessary building space and some idle equipment. Equipment and departments were Vi/idely scattered. Some of these creameries were originally constructed to handle (and at one time handled) a larger volume of raw product than they did in 1931. The existence of much unused space and equipment requires additional labor to keep the buildings and machinery in repair and sanitary. More e:iiployees are necessary also to attend to the scattered machinery than if the plant and machinery were more compact. Creameries conforming to tlx- conditions above described had somewhat higher total hours of labor and total labor costs per unit than creameries which had a better internal plant arrangement. It is significant that one of the creameries, v/hose hours of labor j.nd labor costs per unit fell below the curves shov/n in figures 2 and 3, w; s only recently constructed. Machinery and equipment wer>^ v;eil located and the buildings were compact and yet not overcrowded . Some of the variation in hours of labor aiid labor costs per unit (total and functional) an undoubtedly be expl-dned by internal organization and utilization of plant and personnel. Such relr.tion, however, can only be explf:-ined in a general way bec.'uise the small number of creameries included in the study mdces impossible a more objective measurement of the correlation between plc.nt ind personnel utilizrtion vnd costs without disclosing the identity of individuc.l plants. Location of Plant s.-- The effect of location of plants on efficiency of utilization of labor ^-s evidenced by hours of Irbor and labor costs per unit, appears to be more indirect than direct. Location of plrnts is of course related to supplies of milk and cream available throughout the year and through this relation to seasonal variation in hours of labor and labor costs. With one exception there appears to be little direct relation to hours of labor and labor costs per unit. Probably, how- ever, location will have an important bearing upon other types of costs. Hauling costs would be influenced by density of supply of milk and cream; and fuel and power costs by the type and cost of fuel and power available in the different localities. In the case of only one creamery which has very low engineer- ing cost is there evidence that location influences hours of labor and labor costs. A branch of a line company manufacturing by-products supplies all heat rnd pov/er required for the operation of the local creamery, thereby absorbing the engineering labor cost. Payment for this service is made indirectly through a special contractual arrangement connected with the disposal of skim milk. If allow- ance could be made for this engineering service, the total hours of labor and total labor costs per unit of this creamery would probably approach more nearly to the curve of total hours of la.bor and total la-bor costs per unit shown in figures 2 and 3. However, the hours of labor and labor costs of this creamery would probably still be somewhat below the curve, for it has an additional location 8-dvantage. Its patrons are highly concentrated and are fairly large producers. This tends to reduce office and management and solicit- ing costs. Variation in Wages Paid and Quality of Service Rendered . - - Part of the variation in labor costs between creameries is prob- ably due to differences in the levels of wage scales and to differences in the quality of service rendered by the employees themselves. The average composite wage or composite labor cost for all types of employees (management and soliciting, office and plant labor) paid by all creameries in 1931 was 61,5 cents an houn* a ined by dividing the sum of total labor costs per unit for all creameries in column 8 of table 6 by the sum of the total hours of labor for all creameries shown in column 8 of table 5. Average wages for the various functions are similarly obtained by dividing the sum of the unit labor costs under each functional heading by the sum of the hours of labor per unit under each functional heading. This method has the disadvantage that it tends to give unduu weight to hours of labor or labor costs of creameries v/hich depart radically from the general level for all creameries. This method, rough as it is, does, however, assist in explaining the deviation of the position of a fovj creameries from the curves shown in figures 2 and 3. average wage or labor cost for manrgement and soliciting labor is 4^1.10 c.n hour; for office labor, 75 c^nts; for receiving labor, 50 cents; for pasteur- izing labor, 67 cents; for churning labor, 60 cents; for engineering and re- pairing labor, 55 cents; and for general labor, 48 cents. If all creameries p£-id £1 uniform composite wage or had a uniform composite labor cost per hour, and if all employees rendered the same average quality of service, the rela- tion between total hours of labor and total labor costs per unit would be represented by the line XY in the upper part of figure 5. The relation between hours of labor and labor costs per unit for the various functions would be represented by the lines XY in the lower part of figure 5 and in figures 6 and 7. The total labor costs per unit and functional labor costs per unit of all creameries would fall on these lines if all cresiaeries paid uniform total v/ages and uniform wages to employees performing the various functions and all laborers rendered the same quality of service » Total hours of labor per unit are plotted against total labor costs for each creamery and are represented by the dots and creamery letter in the upper part of figure 5. The same v/as done for hours of labor and labor costs per unit for the various functions in the lower part of figure 5 and in fig- ures 6 and 7. It will be seen that, while the labor costs (total and by functions) of most of the creameries fall on or near to the lines XY, costs for a few creameries fall above or belov; these lines. The position of cream- eries in order of efficiency or labor costs per unit run from left to right. It is significant that the positions of most of the more efficient creameries at the left of the figures are somewlTat above the lines XY, and the less efficient creameries to the right of the figures are somewhat below the lines XY. It cannot be concluded with any degree of definiteness whether the position of creameries above the lines is due to greater efficiency of empl::y- ees or to somev/hat higher than average wages paid. Similarly the position of creameries below the lines XY may be due to somewhat lower than average wages or to lower than average quality of service. In the case of the less efficient creameries, the deviation of the position of creameries below the line XY is probably due to the fact that these creameries have too small a volume to keep the employees (and especially the manager) efficiently fully employed. The employees themselves may be very e f f icient , but in relation to the lov/ volume of butter produced, their experience and ability may be insufficiently utilized. Many of these employees could handle greatly in- creased volumes of butter without additional compensation and without any decrease in quality of service rendered. This conclusion is greatly strengthened if attention is directed to variations in the position of creameries shown under the heading manr.gement and soliciting. ' Most of the va,riaticn in the position of creameries from the line XY in the upper part of figure 5 dealing with total hours of Irbor and total labor costs per unit appears to be due to variations in the positions of creameries under the function; of management and soliciting and to a lesser extent under the function of office. The creameries F, E, M, and T are all below the line XY under the function of management ?nd soliciting. There is no reason to doubt the capability of the managers of these four creameries; it is thus safe to conclude that these managers are not employed to nearly their maximum efficiency because of the low volume of butter pro- duced by these creameries. In the case of one or two of the crea.meries whose position under management and soliciting is above the line XY, the managers are paid salaries somewhat higher than managers of other creameries 69. Effect of Variations in V/ages Paid and Quality of Service Rendered on Labor Costs per Unit Total (excluding cutting and wrapping and local selling) Labor costs per unit (dollars ) 20 - 18 16 14 12 10 • c ■M Q 'T E • D . >^»N .A J 0' ■K •F 10 12 14 16 18 20 22 24 26 28 30 32 34 Hours of labor per unit Labor costs per unit (dollars) 5 - 4 - 3 - 2 - 1 - Management and soliciting >Q G H .B .P.J .D E •T C. • R X 0 1 2 3 4 5 Hours of labor per unit Fig. 5, — If all creameries paid the same average wage and employees rendered a uniform average quality of service, the relation between hours of labor^and labor costs would be represented by the lines XY. Deviations in the position of individual creameries from these lines indicaxe payment of higher or lower wages or quality of service rendered higher or lower than that of the average for all creameries. ■v.; ■•■'^ .-'il 'v;.;;;:;- 70. Effect of Variations in Wages Paid and Quality of Service Rendered on Labor Costs per Unit o 5 - 4- 3- 2- 1 R Office .G P J' ♦L 'B ' 0 M 0 1 2 5 4 5 Hours of labor per unit 10 11 12 +3 •H n ■P o o 3- 2- Receiving I S.* j^- M ^ Y E D .A H 0 12 3 Hours of labor per unit o 1- Pasteurizing 1— •K S — - » • B J F 0 12 3 Hours of labor per unit Fig. 6.-r- Much of the deviation in the position of individual creameries from the line XY in the upper part of figure 5 can be explained by deviations from the average under the functions management and soliciting and office. Deviations above or below the line XY may be due to higher or lower than average wages. Deviations to the left or right of the line XY may be due to higher or lower than average quality of service. 71. Effect of Variations in Vi/ages Paid and Quolity of Service Rtindered on Labor Costs per Unit Labor costs per unit (dollars) Churning 4 31- 2 1 J P ^ » K *C ,rj. F 0 1 Hours of labor per unit Labor costs per unit (dollars ) 4r 2 - Engineering and Repairing X- I T P G ,L '^^r- " 'TP • T -Cj e 1 2 Hours of labor per unit Labor costs per unit (dollars) 2 r General ^ C E D • • •K 0 1 Hours of labor per unit Fig, 7.— The position of creameries under the headings churning, engineering and repairing, and general conforms fairly closely to the lines XY. 72. producing a comparable volume of butter. Under office labor the position of creameries T and C lies well above the line XY, and that of creamery F below. The explanation in the case of the latter creamery is probably the same as that advanced for management and soliciting in the preceding paragraph. The data are inadequate to explain whether the position of the crea.meries T and C above the line is due: to more than average efficiency of the office employees of those creameries or to higher than average wage rates or both. For the other f'onctions the position of crecmeries with one or two exceptions lies close to the lines XY. Creamery A lies well below the line XY under the function of receiving and well above under the function of churning. These deviations are probable due to incorrect ; lloca-tion of hours of labor or labor costs under these two functions. The function receiving has probably been charged with too low a proportion of labor costs in rela- tion to hours of labor, and the fumtion churning overcharged in relation to hours of la.bor. This analysis indicates that the level of wages paid by creameries for la.bor employed on various functions and especially miincgement and solicit- ing labor, or the efficiency of employees in relation to volume is important in explaining the variation in labor hours and Icbor costs between cream.eries. The data a.re inadequate to explain for r-ny particular crermery which factor departures from the a.verage level of v/ages, or averr.ge level of efficiency is the more important, although in the crse of ere' mories with relatively low volume, inefficient utilize tion of the time of the man.'^ger seems the more logical explanation. Struc tural or B u siness Organization .-- Because of the small number of creameries included in this study, it is very difficult to present in object- ive form the effect of the type of business organization upon hours of labor and labor costs per unit, without disclosing the identity of individual cream- eries. Three of the cream;;:;ries having an output of butter of less than 1,000,000 pounds a year are local corporations; one is a coopera.tive a.sso- ciation affiliated with a central selling organization; and one the branch of a line corporation. The latter has the highest total hours of la.bor and labor costs per unit; the cooperative association comes next, followed by the three local corporations. One of the six creameries having a volume between 1,000,000 and 1,500,000 pounds of butter a year is an independent local cooperative asso- ciation; tv;o are local cooperative a.ssociat ions affiliated with a. central selling agency; and three are branches of a line compr'.ny. The ranking of creameries in this group in regard to both total hours of la.bor and labor costs per unit is first and second, two cooperative associr. tions affiliated with a central selling agency; third, a branch of a line company; foijrth,the independent cooperative creamery; fifth and sixth, two branches of a line company . Of the six creameries having an output between 1,500,000 and 2,500,000 pounds of butter a year, one was an independent cooperative association and five were local cooperative associations affiliated with a central selling agency. The independent cooperative creamery had the lowest hours of labor 73. and labor costs per unit, followed closely by one of the affiliated cooperative associations, with the remaining affiliated associations having somewhat higher hours of labor and labor costs per unit. Two of the three creameries having an output of over 4,000,000 pounds of butter were cooperative associations affiliated with a centra.l selling agency and the third W8.s an independent local cooperative association. The latter had somewhat lower hours of labor and labor costs per unit than the two other creameries. If attention is confined to creameries with an output below 1,500,000 pounds of butter a ye&r, branches of line companies are found to heave the highest total hours of labor and total labor costs per unit in the tv/o groups. There is no significant difference between independent and cooperative asso- ciations affiliated with a central selling agencj. The independent local corporations have the lowest hours of le.bor and labor costs in the first group. The higher total hours of labor and labor costs per unit of the branches of the line company are almost entirely due to high offiae costs. All four branches of the line company hrd elaborate end detailed systems of accounting and kept detailed plant records. Many of these data were requred by the hep.d office for the purpose of regulating the activities of its whole system of plants and its selling department. Similar records were not required by the central selling cooperative agency from its varioLB affiliated local cooperative associations. A part at least of the office costs of the branches of the line company should probably be assessed as a cost against the head office. If this were done, much of the difference between the total hours of labor and total labor costs between branches of line companies and creameries with other business structures vyould disappear. Moreover, a detailed and efficient cost-accounting system, while it may entail high office labor costs, gives the plant manager a comprehensive and up-to-date picture of the operations of his plant, which may result in material economies in the use of plemt labor, fuel and pov/er, supplies, and equipment. It is necessary a.gain to stress the fact that this analysis deals only with hours of labor and labor costs and not with the total costs of manufac- turing butter. Nor do these data throw any light on the prices that a cream- ery can pay its patrons. These prices are determined by the prices at which finished products are sold and the total costs per pound of butter; labor costs are only one part, although the most important part, of these total costs. Conceivably many creameries with high labor costs produce a superior product for which they get a higher-than-average price; or they may be able to effect economies in other pha,ses of their operation (for example, in the purchases of supplies or cost of fuel) which to a certain extent tend to offset higher labor costs per unit.^^ Quality of Raw Product and Finished Product . — While the quality of the raw product (milk and cream) and the quality of the finished product vX^An attempt will be made to present data on total costs and total returns in a later release. 74. (butter) undoubtedly are affected by and affect hours of labor and labor costs per unit, the rtilation between quality and hours of labor and la.bor costs could not be traced because very few crcamc;ries have adequate data on the quality of milk and cream received from patrons and the quality of butter produced. Vvork of the manager and field men among patrons v/ould tend to increase unit costs of operation, but this would tend to be offset by somev/hat higher returns on a better finished product. Similarly the employment of efficient and skilled buttermakers and pasteurizing leibor increases unit hours of labor and labor costs, v;hich in turn would tend to be offset by higher prices for better-finished products. Met sureraent of the interrelation of these factors would tend to account for some of the variation in hours of labor and costs per unit betv;een cream- eries, but in the absence of data on quality, such measurement is not feas- ible. Combination of Enterprises .-- The effect of a combination of enter- prises within one plant or under one management on total hours of labor and total labor costs per unit is likely to be more indirect than direct. A manager who is able to take care of one or more complementary or supplementary activities without employment of additional labor is thereby enabled to make better use of plant and personnel — provided, however, these additional acti- vities do not impair efficiency in hs^ndling the main product. The contribution of such additional activities to the efficiency of the plant will be apparent in net returns rather than in costs per unit. Most of the creamer ies w hich allocate labor costs to by-products and side lines on the basis of the time spent on these products claim that the handling of the by-products aids in reducing labor costs of manufacturing the main product. Actually, however, they do not reduce labor costs because such costs would bo incurred even if the by-products and side lines were not handled, What really happens is that the total revenue of the creamery is increased by more efficient utilization of labor personnel. Hours of Labor and Labor Costs of Manufacturing By-Products Some variation between creameries in regard to hours of labor and labor costs per 1,000 pounds of butter manufactured may be due to the fact that the nEthod of additional cost allocation as applied in this study tends to place too heavy an hour-of -labor and labor-cost burden on the main product, butter, in the case of some creameries, and too light a burden in the case of other creameries. The tendency for hours of labor and labor costs per unit of butter to rise for crcamt:;ries with an annual output of over 4^000,000 pounds of butter may be due to this factor. However, if this is the case, then hours of labor ;:.nd labor costs per unit of by-product manufactured should be considerably lower thon those for tht; smaller creameries. t^The relation of by-products to the general utiliza.tion of labor and labor costs will be dealt with in greater detrill in a subsequent part of this study. 75. The method of additional cost allocation, in spite of its many theoret- ical and practical advantages, presents many difficulties when applied in an experimental manner, as in this study. The method is nevy to most creamery managers, v;ho in the past have given little thought to main and by-product interrelations. Thus a wide margin of error may have entereo. in the various managers' estimates of personnel necessary for handling butter alone and the additional personnel necessary for handling by-products. The problem of making valid comparisons between croameries is further complicated by tho fact that such a wide variety of by-products is produced by the creameries included in this study and that so few creomeries produce any one product. Only seven of the twenty croemcries produced casein, six skim-milk powder, and four dry buttermilk. A fev/ crecmerics also produce small quantities, mostly for local trade, of cottage cheese, cheese, and ice cream, and a few creameries feed part of their skim milk and buttermilk to hogs. Because of the small number of creameries producing the latter group of by-products, the oixtremcly wide range in volumes produced £ nd differences in quality and methods of production, an attempt to make hour-of -l::;.bor and labor-cost comparisons Wc,s considered impractical. By-product Q-nalysis will therefore be confined to crsein, skim-milk powder, f.nd dry buttermilk. One of the four creameries processing skim milk and buttermilk produced an animal feed in v/hich both t he skim milk rnd butter- milk were mixed. In the case of r.nother of these creameries, date on pro- duction of skim-milk powder ,:nd dried buttermilk were grouped together in the records, ;.nd it v/r.s found impossible to segregate the volume of each by-product produced without a great de;..l of labor and time. In viev; of these f(acts , skim-milk e nd buttermilk production anfi hours of Inbor and labor costs were combined in each of the four creameries . Thus two separate analyses of by-products hours of Itabor and labor costs per unit will be ma.de one for casein and one for dry milk (skim-milk powder and dry buttermilk com- bined). Another factor which ccG:plicates comparisons between crep:ierics is the fact that for the smaller creameries especially no segregrtion of hours of labor and labor costs by functions cculd be 7iade. The production of casein or skim-milk powder necessitated the employmGnt of only one or two additional persons in the by-product department. V.'hat other v/ork was necessary in hand- ling the by-products was performed by other employees whose time was thus more efficiently utilized. As a result a breakdown of hours of labor and labor costs was possible for only a few of the creameries. In addition some of the employees necessary for handling one by-product also used somi of their time in handling some oth^r by-product or side line, and segregation of an indi- vidual's time between by-products and side lines was therefore not possible ^This is not an entirely defensible procedure because production of skim-milk powder may conceivably entail higher labor costs per unit tha.n production of dry buttermHk or vice versa. However, this procedure was the only practical one in view of the conditions stated and will permit of certain general comparisons. 76i in all instances. These difficulties are not inherent in and therefore disadvantages of the method of additional-cost allocation. They arise because of inadequacy of acGouuting data, kept by crec-meries or because creameries either make no attempt to segregate L.nd allocate costs or allocate them on a basis not readily transposable to the method of ci.ddit ional-cost allocation. If all creameries adopted an efficient uniform system of accounting, the use of the additional -cos t method of allocating expenses would be greatly facilitated and- comparisons between creameries would be more reliable. Casein . — Viith these qualifications in mind, it will be noted that hours of labor for manufacturing 1,000 pounds of casein vary from 21,89 hours in the case of creamery 1 to 40.03 hours in the case of creamery 2.29^ Four creameries have hours of labor of less than 26 hours per unit and three in excess of that fi^iure (table 23). La.bor costs per unit do not vary nearly as much as hours of labor, labor costs varying from :|)10.18 for creamery 1 to $18,47 for creamery 2. Tvi/o creameries had labor costs per unit between 9IO.OO and flS.OO; four be- tween $12.00 and $16.00, and one in excess of $16.00 (table 24). There is very little clear relation between volume of casein produced annually and hours of labor and labor costs per unit. If anything, hours of labor and labor costs per unit (based on data for only seven creameries) tend to increase with increase in volume. The average total labor costs of the three creameries with the lowest output of casein (less than 500,000 pounds annually) was only ^IS.SO per unit, whereas the average for the three cream- eries with the highest output (in excess of 700,000 pounds annually) was about $15.00 per unit. Two of the creaLiOries with lov/ output of casein had low unit labor costs; the third, relatively high la.bor costs; the latter h.ad an output only about half that of the two others. Three of the cr e.-- '..oer ies with high output of ca.sein had high labor costs; the fourth, relatively lov/ labor costs. It is interesting to note in this connection tha.t the order of cream- eries in regard to volume of output of casein is not the same as tha-t for out- put of butter. One of the tv/o croc merles with the largest output of butter (in excess of 6,500,000 pounds a.nnuaily) ranlced only fourth as regards volume of output of casein. The other creamery with volume of butter in excess of 6,500,000 pounds a.nnually had the largest output of casein, but its volume of casein was only 1 bout twice as great as that of the creamery with the next highest output, wherea.s its output of butter v/as nearly four times as great. This difference in the relative position as regards output of casein in con- trs^st to that for butter is due to the fact that the larger creameries process their skim milk into both casein and skim-milk powder, whereas the smaller creameries produce either the one or the other by-product. The three cream- eries with an output of casein of less than 500,000 pounds annually, however, also had the lowest output of butter -- less than 1,500,000 pounds a,nnually, Creameries are designated by numbers in order to prevent their identity from being disclosed. 77. TABLE 23 Casein: Total Hours of Labor* Per Thousand Pounds of Casein Manufactured by Functions and by Creameries Creamery number Management Office Manufac- turing Receiving Engineer- ing General Total* 1 21. as 21.89 2 1.48 2.40 17.67 13. 32 t 5.16 40,03 3 18.11 11. let 3.35 2.47 t 35.09 4 0.50 15.74 6.50 22.74 5 3.49 27.08 7.09 37. 66 6 25.47 25.47 7 25.93 25.93 * Excluding hauling. t Separating included in creamery 2, and separating and can v^ashing in creamery 3. t Night watchman. TABLE 24 Casein: Total Labor Costs* Per Thousand Pounds of Casein Manufactured by Functions and by Creameries Creamery number Management Office Manufac- turing Receiving Engineer- ing General Total* 1 $10.18 $10.18 8 ^^1.23 $1.18 7.65 i{)5.97 t ?j.2.46 18.49 3 7.96 5.02 t 1.45 $1.08f 15.51 4 0.84 7.29 2.96 11.09 5 1.43 10.58 3.15 15.16 6 15.46 15.46 7 12.09 12.09 * Excluding hauling, t Separating included in creamery 2, and separating and can washing in creamery 3. t Night watchman. 1 78. whereas the three creameries with an output of 700,000 pounds and over of casein had a production of butter of about 2,000,000 and over and thus included the medium-sized and large creameries. While because of the small number of creameries producing casein, no very definite conclusion can be drawn as to the reasons for variation in hours of labor and labor costs per unit between creameries, observation of the opera- tions of creameries and the data collected in this study would seem to indicate that the smaller creameries are able to handle casein with very little labor in addition to what would be required to handle butter only. Thus by producing casein as well as butter, they are able to make more effective use of the labor personnel that would be necessary to handle butter alone. As none of the time used in producing casein by employees whose services are necessary for the production of butter is charged to casein, the handling of casein in the smaller plants involves very little additional labor cost. In the medium-sized and especially the larger plants, however, where a greater degree of specialization by functions and departments is likely to exist, the time of the labor force in the butter department will tend to be fully occupied in producing butter alone and a special force will be required to handle casein, involving somewhat higher charges for handling casein. As a relatively large amount of hand labor is involved in the processing of casein, the effect of increased volume on unit operating costs is not likely to be as pronounced as in the case of butter production. Possibly, however,* the higher unit labor costs for casein in the larger plants as compared with the smaller plants are to a considerable degree offset by lower costs per unit in the larger plants for equipment, power, etc. 59^ Some of the variation in hours of labor and labor costs per unit bo-' tween creameries may possibly be due to incorrect allocation by creamery managers of labor personnel between products. Part of the varietion may also be explained by differences in the methods of processing casein, involving different machinery and equipment, employed by the various creameries. Because of the paucity of data, no fuller analysis of the effect of other factors upon hours of labor and unit operating costs of individual cretimeries is possible. Dry-Milk Powder . — Six creameries manufactured skim-milk pov;der or dry buttermilk or both in 1931. Three of these creameries also manufactured casein. Hours of labor per 1,000 pounds of dry-milk powder varied from 13,42 hours for creamery 14 to 33.72 hours for creamery 15 (table 25). Labor costs per unit varied from $6.18 for creamery 14 to $16.27 for crea.mery 10 ^3^(table 26) As in the case of casein, there does not appear to be any very clear relation between volume of skim-milk powder and dry buttermilk manufa^ctured and hours of labor and labor costs per unit; what little relation there is indicates that hours of labor and labor costs per unit tend to decline with volume, although this tendency is not marked. One of the two creameries with the smallest output had costs per unit over 50 per cent greater than the other. The same was true of the two creameries with the largest output. Furthermore, 3^An attempt will be made to explore this relation somewhat more fully in a later report. ^1/The creamery code numbers appearing in this section are not the same as those in the casein section, in order to prevent the identity of plants from being disclosed. .'■ -t. . CM pq EH (U 1 o 6 CO <;-^ o CO o Ph Tj w ;3 o 0) a< ■X- o OS o to O OS -P o 1— I •H 6 CO 03 (1) • H ^. 0) o Pi OS w Pi o • H ■P o -P PQ TO c5 1 — 1 CD LO o CM u:) CM 05 CO LO CO 4J) • « V « o o CO LO CO E-i CNJ t— 1 1—1 r— 1 CO Pi •H N • H LO LO 1 1 1 1 1 ;3 • 1 1 1 t 1 d) o 4J W OS Ph 1—4 03 CD rH <;_, CD 1 CM LO 1 1—1 CD • 1 • 1 • r— t o © JL, • H CD CM CM (D Tj c CM CD CO 1 CO (D • H • * • • 1 • f1 q5 o5 CO CO o o • H P-< 1-H }_, fuO P! • H -P l^O t- ;> t3 CS O O LO 1 •H r! • • • • 1 • i U to rH CM CO LO 1—1 rH r— 1 rH (D 1 o P! • H rH ;3 05 P^ • H TO ^3 iH O -1 CD 0) V o CO o M c pj o 05 ^5 O EH CD P. ■X- Kl -P W o o 5h O ,^ erf 03 -P o rH CO P w 0.1 •H ai g 05 , 05 w c o pi CD ^1 ■H •P o 05 rH U (1) 4J -P P3 CD lO CO CO f — 1 h — \U 4 , J t t Oj * * -P o r\\ o 1 — 1 , 1 Eh cu) N CO .r^ 1 1 1 fi 1 J-l 1 1 1 1 1 7i o -P rH CO rH o CO o CD rH rH C5 * i« . HH rH C* J p PI 05 CD O •H to CO C\] 1 B HH * 1 0 1 1 HH o rH -p p^ 0) CD G to 1 rH 1 1 1 f uJJ 1 1 1 1 1 o5 o o5 CD CD CO rH (M CO LO csS 6 rH rH rH rH P! o W) PJ •H rH 05 p; •H 13 pi rH O I i i i ( 81. one of the two creameries with the. smallest output had costs somewhat lower than those of one of the tv;o creameries v/ith the highest output of pov/der. Undoubtedly some of the variation in hours of lo,bor and labor costs per unit between creameries is due to the type or types of machinery employed by individual creameries to process dry milk powder. Some of these processes require more hand labor than others. It does not follow necessarily that processes involving low labor costs per unit are more efficient than other processes. The lower labor costs per unit may be more than offset by high costs per unit for equipment (depreciation, upkeep, and interest on invest- ment) and for fuel and power. Because of the small number of creameries manufacturing dry milk powder and the difference in processing methods, no further analysis of the reasons for differences in hours of labor and labor costs per unit between creameries is possible at this time. Combined Comparison Involving Main and By-Products Owing to the small number of creameries included in this study and especially the small number handling by-products, comparisons as to effi- ciency in producing butter and by-products must of necessity be tentative. One or two broad generalizations may, however, be drawn from the data thus far presented. In the first place, the analysis of butter manufacturing showed that hours of labor and labor costs per unit tended to decline rapidly with increase in volume of output of butter by creameries up to about 2,500,000 pounds annually. Between this figure and 4,000,000 pounds no data were available. The hours of labor and labor costs per unit tended to increase somewhat beyond an output of 4,000,000 pounds annually. The analysis of hours of labor and labor costs of manufacturing the by-products casein and dry milk powder does not indicate that the larger creameries are able to produce these by-products at appreciably lower labor costs per unit than the smaller creameries. In other words, the somewhat higher labor costs of handling butter for the creameries with an annual output in excess of 4,000,000 pounds of butter a year as compared with creameries vath a volume between 1,500,000 and 2,500,000 pounds do not appear to be offset by materially low labor costs per unit in handling by-products. Furthermore, the manufacture of skim-milk by-products, associated with the receipt of milk fat in the fonn of v/hole milk rather than cream, results in higher hauling costs, a large part of which should be charged against the by-products. Hauling costs per hundred pounds of milk are probably sons what higher for the larger than for the smaller creameries, because of the sone what more extensive area from which the larger creameries obtain their supplies of milk and cream, involving longer average hauls. V/hile hauling costs are not reflected in the internal efficiency of operation of plants, they do have an important bearing upon the returns that are paid to patrons for milk and cream and will be dealt with in a later study. No attempt was made to compare labor costs per unit for creameries manufacturing butter and by-products with those manufacturing butter alone. 82. This comparison would prove of little value because of the small number of creameries that would fall in each size group and because so many factors besides combination of enterprises influence labor costs per unit. In addition to the broad general conclusion relt:.tive to the relation between volume and liibor costs per unit, one other broad and yet more definite conclusion can be arrived at. The difficulties encountered in this study in obtaining reliable and readily usable data on the physical and accounting operations of creameries, and the importance of a more exact knov/ledge to creamery managers, individually and collectively, of the factors influencing creamery operating efficiency, do point to the paramount need for a sound, uniform system of accounting for creameries. This study will have accom- plished an important purpose if it succeeds in bringing home to those in the dairy industry the importance to the industry as a whole of a sound system of accounting and if this knowledge can be consummated into the adoption of such a system.