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 Functional and Unit Cost Accountinjj^ 
 
 for Municipalities and Its 
 
 Application by the City 
 
 of New York 
 
 By FRANKLIN M. EARNED 
 
 Accountant, Bureau of Municipal Investigation and Statistics 
 Department of Finance, The City of New York 
 
 PRESENTED BY 
 
 WILLIAM A. PRENDERGAST 
 
 Comptroller 
 
 JUNE, 1916 
 
-, rt-' 
 
T^-7"/7 
 
 FUNCTIONAL AND UNIT COST ACCOUNTING FOR 
 
 MUNICIPALITIES AND ITS APPLICATION 
 
 BY THE CITY OF NEW YORK. 
 
 Paper read at the Eleventh Annual Convention of the National Association 
 of Comptrollers and Accounting Officers, held at Syracuse, N. Y., June 1, 1916. 
 
 By Franklin M. Harned^ 
 
 Accountant, Bureau of Municipal Investigation and Statistics, Depart- 
 ment OF Finance, The City of New York. 
 
 Most men think of cost accounting as something of a very complicated nature, 
 quite unintelligible to the average citizen. It will help me in what I am about to 
 say if you will consider municipal cost accounting as merely the following of 
 the assets of a city until they are finally disposed of. Some will go into roads, 
 some into buildings and into other works of a permanent nature. Other assets 
 will be expended for public service, such as protection to life and property, for 
 education, for the care of the poor, etc. It is comparatively easy to check the 
 cost of most construction work. Given the kind of building and its cubical con- 
 tents or the class of road and the number of miles, data can be had to give a fair 
 estimate of its cost. 
 
 As a rule, however, the greater part of municipal expenditure is for per- x 
 sonal service and for supplies and materials for which we have at the end of the 
 year no tangible assets — nothing upon which we can lay our hands. How to 
 measure such expenditures, how to make them produce the largest benefit per 
 dollar spent is our problem, for in practically all of our larger American cities 
 the tax-budget appropriations are increasing far more rapidly than is the popu- 
 lation or the property values. 
 
 Few of our cities are able to show more than the fact that in a certain year 
 they have raised so much money and spent so much money and have so much 
 left. The budgets of most of them are based upon the expenditures of the 
 preceding year, these amounts being increased in many instances by a more or 
 less generous percentage to provide for estimated additional requirements. 
 
 The defect here is the assumption that all the expenditures of the preceding 
 year were actually necessary and there is the further fault that the expenditures 
 for stores often vary widely from the amount actually consumed or made of 
 actual service. New York has been through this experience and, believe me, 
 it has been a costly one. How then shall we get away from it ? Obviously, the 
 mere conviction that something is wrong, that the expenses of government are 
 too high, does not help much. Just as obviously, before remedies can be intelli- 
 gently applied to excessive expenditures, some agency must point out the specific 
 
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expenditures at fault. This agency, some of us feel certain, is proper cost 
 accounting. It has been of great value to many industrial enterprises. Largely 
 because of their rapid growth and great size it is impossible for any one man, 
 without proper records and reports, intelligently to follow the activities of such 
 enterprises and to grasp readily defects in policy or in administration. Indus- 
 trial concerns by reason of competition and to maintain necessary credit or bor- 
 rowing power have been compelled to install cost accounts. Municipalities, largely 
 because they have practically a perpetual income in the way of taxes, have been 
 slower to adopt such methods. 
 
 From the municipal standpoint, the main purposes of cost accounting are : 
 
 1. To point out inefficient service and management and wastes in 
 materials and supplies. 
 
 2. To provide a standard cost of service and thus provide a check 
 on future costs. 
 
 3. To show whether it is costing more to manufacture an article 
 or to perform a service than it would cost to buy it. 
 
 The title of this paper speaks of functional and unit costs. We might treat 
 the maintenance of an entire city as a function of government, and we might 
 treat the maintenance of the departments of health and of street cleaning as sub- 
 functions of this main function. So, too, we might divide the activities of each 
 of these departments into various functions. These functions in the department 
 of street cleaning we might classify as the care and maintenance of stables, the 
 feeding of the horses, the sweeping of the streets, the collection of ashes and 
 rubbish and garbage, and the final disposition of them. ,If we divide the costs 
 of each of these functions by the number of work units performed, we arrive 
 at unit costs; for example, the total cost of collecting ashes divided by the num- 
 ber of cubic yards collected would give us the cost per cubic yard. 
 
 As to the use and value of unit costs, let us consider the maintenance and 
 care of stables. We might compare the unit costs of stable "A" in 1915 with 
 the unit costs of the same stable in 1914, or we might compare the unit costs 
 of stable " A " in 1915 with the costs of stable " B " in the same year. We will 
 assume that the respective costs of stable " A " and stable " B " differ widely 
 in 1915. We seek the reasons for these variations. One reason might be the 
 use of stable " A " to its full capacity ; of stable " B " to only part of its capacity. 
 Other reasons might be a difference in the cost of repairs, due perhaps to a 
 difference in the ages of the stables, or owing possibly to careless management, 
 or there might be too many mechanics to find work for; there might be more 
 hostlers or stablemen in one stable in proportion to the number of horses than 
 in the other stable; the number of foremen might also be disproportionate; the 
 cost of stable supplies might, too, differ very widely. 
 
 First we must satisfy ourselves as to what is a fair cost for each variety of 
 service, and then try to decrease it, or at least prevent it from increasing. 
 
 Another method of comparison is the matching up of the cost of the service 
 with the value of the articles to be conserved. The cost of the receipt and 
 storage and distribution of stores is oftentimes too great a percentage of the 
 
value of the stores. This may mean too many employees, too frequent deliveries, 
 too many storage points, or too small a quantity of stores at a certain point to 
 warrant the overhead expense in connection with them. The cost of repairs to the 
 value of the equipment repaired may also be so great a percentage as to indicate 
 that the equipment should have been replaced with new equipment. 
 
 The percentage of the cost of administration and supervision may also be 
 very excessive as compared with the cost of wages and materials entering directly 
 into the cost of service performed. Expenses other than direct expenses are very 
 apt to be overlooked when the cost of governmental and municipal work is com- 
 pared with the cost of that done by private concerns. I might mention two recent 
 instances of this kind. The Federal government proposed to build its own armor 
 plant, basing its action partly upon the assertion that whereas the Bethlehem 
 Steel Company charges $395 a ton for armor plate, the government can manu- 
 facture it for $263, a saving of $132 a ton. The Bethlehem Steel Company 
 says, however, that the figure estimated by the government makes no allowance 
 for administration and general expense, for insurance, taxes and depreciation of • 
 plant, or for interest on investment and working capital — that the government's 
 figure represents merely shop cost. It is also assumed that the government plant 
 will be run at full capacity, which is not usually the case with a private plant of 
 this nature. 
 
 The other instance I have in mind is the Cleveland, Ohio, municipal lighting 
 plant. The National Municipal Review states, April, 1916, that it is claimed 
 for this plant that for the first seven months of 1915 it showed a profit of $33,000. 
 The private company operating there contends, however, that in the municipal 
 accounts too little reserve has been set aside for depreciation, that not enough 
 has been charged for interest on investment, and that a sinking fund reserve 
 has been neglected. It asserts that if these expenses had been provided for the 
 result would have been not a profit of $33,000, but a loss of $81,000 in the period 
 mentioned. Assuming these figures are true, such a policy of governmental and 
 municipal service would be disastrous both to the private concerns affected and to 
 the taxpayers ; for it would tend to depreciate the value of the property of the 
 former and to create a continuous deficit to be met by the latter. Apply the 
 same overhead conditions to municipal repair shops, asphalt plants, etc., and I 
 am inclined to think that they, too, would in many cases be found anything but 
 profitable enterprises. 
 
 Now as to the requirements of a cost accounting system these things are 
 necessary : 
 
 1. A classification of the functions, the costs of which are to be \ 
 ascertained. ^^ 
 
 2. Time records which will show the specific service rendered and \, 
 the time actually spent upon it. "^ 
 
 3. Stores records which will show the quantity and value of stores ^ 
 disbursed for each function. 
 
 4. Records showing charges which are for neither personal service \ 
 nor stores, such as work done by contract, rent, light, heat and power. / 
 If we are to compare municipal costs with private costs, it is vital that we 
 
also consider interest on the city's investment, the loss of taxes, deprecia- 
 tion, etc. 
 
 5. Adequate statistics to arrive at unit costs — so many people fed, 
 
 / so much surface of street cleaned or repaired, so many cubic yards of 
 
 \ ashes removed, the value of the stores cared for or disbursed, the direct 
 
 cost of work performed, as a basis for reckoning the percentage of the cost 
 
 of supervision, etc. 
 
 Records of this sort have been set up in practically all of the larger depart- 
 ments of The City of New York and in many of the smaller ones and the exten- 
 sion of the work is still in progress. 
 
 An idea of the functional classification may be had from those applied to 
 the four hospitals of The City of New York included in the department known 
 as Bellevue and Allied Hospitals. 
 
 The function General Administration for all hospitals is divided into the 
 sub-functions — Executive, Audit and Accounts, Purchase of Supplies, and Engi- 
 neering Supervision. 
 
 The main classifications of the individual hospitals are: Administration, 
 Professional Care of Patients, Kitchens, Dining Rooms and Pantries, House- 
 keeping, Plant Service, Ambulance Service and Dispensary. 
 
 These classifications are further subdivided. I will give but one example, 
 Professional Care of Patients, the sub-classifications of which are: Admitting, 
 Wards and Operating. Convalescent Relief, Pharmacy, X-Ray Laboratory, Train- 
 ing School, Women Nurses ; Training School, Men Attendants ; Training School, 
 Midwives. And for each of these items is shown the cost of the personal service, 
 supplies, etc., applied to it. 
 
 The total cost of hospital service is divided by the total days' treatment to 
 secure the cost per patient per diem. The dispensary cost is reduced to a cost 
 per treatment. 
 
 Work of this nature is apt to meet with opposition in proportion to the 
 need of it. It is reported to have been said in one of the county offices that no 
 such accounting system was wanted there; the office would lose half its force. 
 Others think that to explain on a time record just what they did and how long it 
 took them to do it is beneath their dignity. Still others think they can get the 
 same results as can be had from the time records by arbitrarily assigning the time 
 of numerous employees to the various functions performed. Needless to say, 
 their records do not bear out their optimistic views. Some object, too, to the 
 additional office work the collecting of the costs and the necessary statistics will 
 entail, although this in no case should be great, and can, for the most part, be 
 done by mere clerks. 
 
 Some of the matters brought to our attention directly or indirectly by this 
 cost accounting are: 
 
 1. The need from the standpoint of economy of centralizing many 
 of our offices. We have for instance within our municipal borders five 
 complete county organizations, five highway bureaus, five sewer bureaus, 
 four park departments, three street cleaning organizations, and so on. 
 
Instead of having a central purchase bureau, practically every department 
 does its own buying. Many of the departments with considerable repairs 
 to make have one or more repair shops. Much of our accounting, too, 
 I regret to say, is duplicated. Just how much could be saved by consolidat- 
 ing these activities I cannot say. It would appear to be a great sum. 
 
 2. The revenues from two of our productive activities are barely 
 enough to carry them. In the Dock Department some of the docks were 
 leased too cheaply and there were unnecessary charges for maintenance 
 and operation. In connection with the water supply plant it was developed 
 that 50 per cent, of the gross revenues was derived from 26 per cent, 
 of the total water supply. This would indicate the advisability of extend- 
 ing the metering of water, now substantially confined to business houses, 
 to apartment houses and private residences. The better we can conserve 
 the water supply the longer can we defer seeking an ever-increasingly 
 expensive additional supply. As conditions are now, all the water wasted 
 in apartments and private houses by defective plumbing, by leaking fau- 
 cets, by the unnecessary flow to secure coolness in summer and to prevent 
 the freezing of pipes in winter, falls upon the city. Were each water 
 user compelled to bear the cost of his own carelessness or improvidence, 
 the result to the city would, I feel sure, be very pleasing. 
 
 3. The excessive overhead costs for supervision, engineering, ac- 
 counting, etc., have led to heavy reductions in force in several depart- 
 ments. Especially has this been the case where heavy reductions in con- 
 struction work were not followed by corresponding reductions in the 
 construction forces. 
 
 4. The excessive cost of repairs has led to the reduction of repair 
 shop forces. In one instance the cost of repairs to one piece of equip- 
 ment which cost originally $800 amounted in one year to over $1,300. 
 The mechanics simply had nothing else to do. 
 
 5. The cost of receiving, storing and disbursing stores was in many 
 instances too great. Some of these excessive costs have been reduced; 
 CTthers will be. 
 
 6. The unit costs of doing various work have been reduced because 
 comparison with other unit costs of similar nature showed them to be 
 too high. 
 
 7. Some of the work formerly done by city employees it is now 
 proposed to do by contract. 
 
 In conclusion I would say that in my opinion most municipalities would be 
 benefited by work of this nature, if it is tmdertaken at first in a simple and inex- 
 pensive way. A simple system can be extended later, if desirable, but one unduly 
 complicated should be avoided at the start. Let the results shown by the simple 
 system justify the amplification of it. 
 
 We have made a beginning only. Doubtless we shall remodel our classifi- 
 cations from time to time, and doubtless the analysis of new data put before us 
 from time to time will give us new viewpoints and lead us to further savings. 
 It should be borne in mind, however, that cost accounting can do no more than 
 
point out the weak spots. So far as the reports are delayed, so far as the 
 defects disclosed are uncorrected, so far will the monies expended on cost account- 
 ing be wasted. 
 
 If, however, you are really bent on economy, it will pay you to give this 
 subject earnest consideration. Unfortunately^ if you really need a cost account- 
 ing system you pay for it whether you install it or not. 
 
M. B. Brown Printing & Binding Co., 
 37-41 Chambers Street, N. Y. 
 
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