SCHEDULE I.-Detailed statement of general expense-Continued EXPLANATORY COMMENTS WITH RESPECT TO FOOTNOTES REFERENCED ON EXHIBITS AND SCHEDULES OF REPORT 1. The cost of pallet tops and bottoms is considered a warehousing expense and accordingly has been excluded from paint manufacturing costs. 2. Provision for the Government's ultimate contribution to the retirement fund has been computed at the rate of 6% percent of total basic salaries and wages, overtime compensation having been excluded to the extent ascertainable, which rate has been established as currently appropriate based on the prevailing actuarial experience reported by the Civil Service Commission. 3. For the purpose of computing a provision for State of Virginia capital tax, taxable capital was necessarily limited to the estimated value of inventories on hand as at January 1, 1951, in view of the fact that other elements of taxable capital, if any, are not readily susceptible to determination under an appropriation-type system of accounting. The effective tax rate of 75 cents per $100 of valuation was utilized with respect thereto. 4. The constructive cost for fire insurance on machinery, equipment, and inventories was calculated by the application of a rate of $1.775 per $100 valuation, in accordance with the opinion obtained from a leading brokerage firm in the area, for application to a naval shipyard and its activities. Initial costs were accepted as insurable values for machinery and equipment, since it would appear that the accumulated depreciation thereon has largely offset increased replacement costs. Estimated cost, based on average inventories on hand, was used as the insurable value for determining the cost of insurance on inventories. 5. Provision for depreciation of the machinery and equipment utilized by the paint factory was computed in accordance with the rates set forth in Bureau of Internal Revenue Bulletin F (rev. 1-42) applied to the cost of the individual items concerned. Depreciation on other paint factory plant assets, as well as the total depreciable plant assets of the general and administrative and service departments of the shipyard, was determined by the application of a composite rate of 3% percent of cost, which rate is reported in the Accountant's Handbook, second edition, as being recommended for usage with respect to shipyards by the committee on depreciation of the Atlantic Coast Shipbuilders' Association. 6. Considered inapplicable to the paint factory in view of the fact that none of the services or functions represented thereby were availed of directly or indirectly in the operations incident to the manufacturing of paint. 7. Considered of doubtful propriety for inclusion in general expense allocable to paint factory operations, in view of the acceptance of commercial rates for fire insurance coverage for purposes of this report. In any event, the subject exclusion has little effect on the apportionment rate derived. 8. Excluded from general expense for reasons set forth in paragraph 15 of the report comments. 9. Allowance for military pay was derived from information contained on the monthly report of Directory of Officers, 5ND-NNSY-1040, and is comprised of those officers whose prime duties are related directly or indirectly to the operations of the paint factory. 10. Provision for real-estate taxes was computed at a rate of $2 per each $100 of assessed valuation. Since assessed valuation for real-estate tax purposes is based on 70 percent of 1940-41 market values, which are undeterminable in this instance, initial costs were accepted as assessed values for purposes of this report on the theory that the low cost of plant assets acquired prior to 1940 may be partially offset by the elimination of the 70-percent clause. 11. A rate of $1.008 per $100 valuation was utilized in computing a provision for fire insurance on buildings and improvements, based on information received from the source noted in note 4 above. To compensate for present increased building replacement costs, 158 percent of initial costs was considered to represent a reasonable insurable valuation. The application of this appreciation factor is supported by statistics compiled by E. H. Boeckh and Associates, nationally known appraisal engineers, and is indicative of the increase which has occurred in building costs since 1946. OAKLAND EXHIBIT 2A PAINT MANUFACTURING SHOP, MARE ISLAND NAVAL SHIPYARD, VALLEJO, CALIF.-REPORT ON COST STUDY OF OPERATIONS FOR THE PERIOD JANUARY 20 TO JUNE 19, 1951, INCLUSIVE The report on the cost study of paint manufacturing at the Mare Island Naval Shipyard, Vallejo, Calif., based on operations during the fiscal year ended June 30, 1951, was made by the Navy Cost Inspection Service to serve as a basis of study and comparison with commercial paint manufacturing. This study, together with a similar one made at the Norfolk Naval Shipyard, Portsmouth, Va., is being used by a selected committee of the National Security Industrial Association for the purpose of additional analysis and comparison of the cost of Navy paint manufacture with that of commercial manufacture. Summary of average unit costs of finished products manufactured Summary of total costs of finished products manufactured during the Exhibit A. Exhibit B. Exhibit C. Exhibit D and schodules 1 to 16. Reconciliation of production per plant output cost summaries (S and A Form 285b) with reconstructed production for the accounting period February 1 to June 30, 1951, inclusive. Production period Exhibit E and January 20 to June 19, 1951, inclusive---schedules 1 to 3. COMMENTS PURPOSE AND SCOPE OF STUDY 1. In accordance with the request of the Chief of the Bureau of Supplies and Accounts, the supervisory cost inspector, western area, has conducted a cost study of the operations of the paint manufacturing shop, Mare Island Naval Shipyard, Vallejo, Calif., for the purpose of determining the cost of manufacturing each of the various paint products, packaged ready for shipment. 2. The cost study covered the period January 20 to June 19, 1951, inclusive, and the costs developed by the supervisory cost inspector for the paint products manufactured during that period are summarized in exhibit A and detailed in the accompanying exhibits and schedules. COST CENTERS 3. To determine costs applicable to the various paint products, operations were segregated into the following cost centers: (a) Raw material handling and storage. (b) Mixing and milling: (1) Steel ball mills. (2) Pebble mills. (3) Special pebble mill. (4) Five-roller mills. (5) Three-roller mills. (6) Hyspeed mills. (7) Putty mills. (c) Rosin crushing and melting. (d) Cooking. (e) Cooling and storage (manufactured ingredients and finished products). (f) Mixing (products produced by mixing only). (g) Hot plastic paint milling, drumming, and weighing. (h) Canning and recanning. Operating costs were accumulated within these cost centers (see exhibit D and supporting schedules). By studies of statistical information maintained at the paint manufacturing shop, the supervisory cost inspector was able to determine the output of each cost center and the time the facilities thereof were utilized for each of the individual products. This information was used as a basis for the allocation of operating costs accumulated within each cost center to the individual products processed therein. 4. As will be noted, the supervisory cost inspector has not provided for the accumulation of costs incurred by the Government for the following operations: (a) Palletizing and strapping of finished paint products. (b) Industrial laboratories. The reasons for the nonconsideration of these costs are as follows: (a) Palletizing and strapping of finished paint products is not considered to be a manufacturing cost, but rather a storage and handling cost. Paint products purchased by the Department of the Navy are not required to be palletized and strapped by the vendors, and when received at the shipyard they are subjected to the same type of palletization as the paint products manufactured by the paint manufacturing shop. (b) Since the industrial laboratories perform analyses of and develop formulae for paint purchased from commercial sources as well as for Navy paint manufacturing shops, and no cost therefor is included in the cost of commercial paint purchased by the Government, the supervisory cost inspector has not included any individual laboratory costs in the operating costs of the paint manufacturing shop. DEVELOPMENT OF COST DATA 5. The costs developed are composed of (a) Costs payable from current naval appropriations. (b) Constructive costs not normally taken into account in determining costs of a Government operation. The costs payable from current naval appropriations, and production volume data set forth in exhibit E and accompanying schedules, were developed from fiscal records maintained at the Mare Island Naval Shipyard and from information furnished by cognizant personnel attached thereto. 6. Acquisition costs of materials incorporated in the individual formulas as set forth in exhibit C, were developed by reference to vendors' invoices and related contracts, adjusted for cash discounts and incoming freight charges where applicable. 7. Constructive costs include allowances for depreciation, property taxes, State of California franchise tax, insurance, the Government's contribution to the retirement fund, and the excess of utility costs occasioned by the difference in rates quoted by supplying utility companies for independent plants of a similar size and the rates used by the shipyard in billing its component activities. Attention is invited to exhibit D, schedule 16, wherein is contained a detailed elaboration of the constructive cost elements. 8. As set forth in footnote 11 to exhibit D, an allowance of 5 percent of total operating costs (costs payable from current naval appropriations and constructive costs, but excluding direct material costs) has been included, as a conservative measure, as general and administrative expenses. Elimination of this cost factor would result in a decrease in cost of finished paint products approximately as follows: Gallon units_ Pound units_ Per gallon $0.01076 . 00101 GENERAL COMMENTS 9. In the presentation of the cost findings the supervisory cost inspector has considered it appropriate to set forth on exhibit A the manufacturing costs apart from the direct material costs for the reason that direct material costs are subject to fluctuation within relatively short periods of time and allowance for any such fluctuation would, of necessity, have to be taken into consideration in comparisons of paint product costs. IN CONCLUSION 10. It is the opininon of the supervisory cost inspector that the accompanying exhibits and schedules present fairly the operating costs plus applicable construction costs of the paint manufacturing shop, Mare Island Naval Shipyard, Vallejo, Calif., during the period January 20 to June 19, 1951, inclusive. W. H. HOWLAND, Commander (SC) USN, Supervisory Cost Inspector, Western Area, OCTOBER 1, 1951. |