Cost Accounting in Mining

Cost Accounting in Mining

In the zeal for opening up new ore-bodies, or for extracting the ore from attractive bodies already opened up, we very often lose sight of the fact, that, after all, the operation of a mine is a business proposition, pure and simple, and, for the best working-results, should be treated upon a strict business basis. Of course, in every mine of consequence, a record is kept of expenditures and receipts, and such glittering generalities as “ gross receipts,” “ net receipts,” “ mining expenses,” and “ per cent, profit,” can be told to the cent; but does this record show economy of management, as compared either with the same record of other months, or with the record of other mines of the same class ? Moreover, if such a record shows that the cost of mining is high, does it in any way enable the manager to put his finger on the leakage ? Does it necessarily follow that a mine which makes a profit of, say, 40 per cent, on 25-dollar ore, is doing less economical mining than one which saves 60 per cent, on 80-dollar ore ? Of course the figures in the latter case look the more attractive; yet when it comes to the point of saving everything which can be saved, and of cutting down expenses to the lowest possible cost of operation, the former mine is doubtless on the firmer and more economical financial basis. But as to the relative merits of the system of mining in the two cases, nothing could be decided without a basis of detailed comparison ; if one system is more economical than the other, why is it so, and wherein does the advantage lie ?

This can be shown only by keeping accurately the cost of each mining operation. And no matter how dissimilar two mines may be in character and operation, yet there are a few general heads common to all mining operations. In the first place, it is necessary to break the ore from the solid ground; then it must be transported from the place where it is broken to the place of concentration (if any)—and this transportation generally includes two operations, underground tramming and hoisting; and, lastly, there is the cost of extracting the precious metal from the ore (and, generally, of transportation from the place of concentration to the place of extraction). In addition, there are accessory costs, such as timbering and pumping; and general costs, such as supervision, sampling and surveying; and such expenses as cannot be included in any one of the general heads above, yet are part of the cost of operation and should be apportioned among those heads. Then, too, there are the costs for exploration, and for equipment.cost_accounting

All expenses must be shown, not by themselves, but in regard to their direct effect upon the ore mined, and all can be shown in one way or another to be tributary to one of the general heads mentioned. For instance, it is a very interesting fact to know just how much it costs to run the boiler-room; yet the steam generated has no direct effect upon the ore, but only through the hoisting, compressing- and pumping-engines; so that it is much more essential to know the value of the steam used, respectively, to break the ore, to hoist it, and to keep the mine dry enough to work in.

To show its relative efficiency, each department should have an account kept, wherein it is charged with all the debits which make up the cost of its operation, and credited with its proper contribution toward the whole general result. In other words, a double entry system of book-keeping is desired, where each operation, such as breaking ore, tramming, hoisting, etc., has its debit and credit account.

There are many methods of keeping these accounts. The ordinary book-keeping method is too clumsy, being too laborious in operation, and defeating the very object for which it was intended, by exacting too much time and trouble on the part of the management in inspecting and studying the various accounts in their relations to each other. The card-system has many adherents, and it is certainly an excellent plan for keeping the individual accounts which go to make up the cost-keeping system; but it is open to the same objection, in not showing at a glance the relations of the accounts to each other, to the whole result, and to the average cost, so that any leakage may be readily discovered, located and properly remedied. And this is the need of the modern mine-manager.cost_accounting_001

This need has been met in the system now used by the Portland Gold Mining Co., Cripple Creek, Colo., which is applied in its simplest form—that is, the marketable product is only gold, which always has a market value of $20 per ounce. The mine is of large size, and there are numerous details to account for; therefore it is the purpose of this article to describe that system at some length, as being a typical and representative case. The figures shown herewith are those published in the company’s annual report for the year.

In brief, all the operating costs are represented upon one large sheet by co-ordinate methods; debits being figured along the line of abscissae, and credits along the line of ordinates. Thus, every figure is viewed in two relations: as a credit, and as a debit. It is a credit to the account heading the vertical column under which it falls, and a debit to the account in the horizontal column opposite. The horizontal columns, then, show how the expenses accrue, and the vertical columns show how they are expended. The accounts are divided into four main heads:

MILLING, PLANT AND DEVELOPMENT, STOPING, and DISTRIBUTED ACCOUNTS. The last-named does not figure by itself in the operating costs, and its totals are not to be included with the other total debits; but these amounts are distributed or charged out among the other three heads : that is, the accounts which do not bear directly upon mining ore are charged out to those accounts which do. Thus, for example, the total cost of running the boiler-room is distributed or credited to the various purposes for which steam is used, such as hoisting and compressing. In the hoisting account, for example (the third line of the distributed accounts, Form 1): the amount which hoisting is indebted to the boiler-room is added to other debits chargeable to that process, showing the total cost of hoisting; this, then, is charged out or credited under the head of STOPING to the account of hoisting ore, and under the head of DEVELOPMENT to the accounts of drifts, crosscuts, etc., on the basis of the tonnage hoisted from stopes, drifts, crosscuts, etc. Hence, all of the distributed accounts eventually find their way into the three main heads above,—accounts which bear directly upon mining the ore.

MILLING

Since the Portland mill is not situated near the mine, its accounts are kept separate, and, under “ MILLING,” we have only two items—“ total freight and treatment on ore sent to the Portland mill,” and “ total freight and treatment on ore shipped elsewhere.” These two items are kept separate in order to compare the cost of treatment at the company’s mill with that of custom-work.

PLANT AND DEVELOPMENT

Under this head, the former includes only new buildings or the installation of new machinery— whatever may be considered a permanent improvement—and the latter includes underground operations which are of the nature of permanent equipment, such as a new shaft to facilitate hoisting, a new drift to open up a vein or system of veins, or a cross-cut to explore virgin territory. DEVELOPMENT is considered to embrace only those operations which could be cut off without materially affecting the production of ore. Under this head we find the sub-heads which embrace the total cost of running drifts and cross-cuts, of raising and sinking shafts and winzes. Thus it appears that everything under the head of PLANT AND DEVELOPMENT is an asset. All other costs are charged to Sloping, as this is considered to include all ordinary running expenses. These two headings need no further comment here.

STOPING

This heading deserves further consideration to explain its sub-heads:

Breaking Ore: Under this term is included everything from drilling into the solid rock to delivering the ore into the chutes ready for the trammers. It embraces also the labor of the machine-drill men, hand-miners and muckers, the cost for running the machine-drills, the cost for explosives, etc.

Tramming: The cost of getting the ore from the chutes to the stations of the shafts, including repairs to tracks and tram- cars.

Hoisting: The cost of raising ore and waste to the surface, delivering the ore to the bins, and depositing the waste on the dump; includes the cost of running the hoisting-engines, labor of cagers and skip-tenders, repairs to the shaft and machinery, and surface-tramming and tram-tracks.

Timbering: The cost of both labor and material used in keeping the mine timbered.

Sorting and Loading: All expense of hand-concentration; the cost of tramming to the dump the waste picked from the ore, of loading the ore into the railroad-cars for shipment, and of keeping the ore-houses and bins in repair.

Pumping: The cost of keeping the mine dry, including repairs to both pumps and lines.

Lighting: Cost of electric lights and lines, and candles issued to the miners.

Assaying: Including cost of mine-sampling.

Surveying: Everything in the mine-engineering line.

Repairs: Only those charges for general wear and tear which are not directly chargeable to any of the above heads— such, for instance, as painting the shaft-house.

General Expense: Office accounts of both the Victor and the Colorado Springs offices; salaries of directors and officials, etc.

Insurance and Taxes: Amounts paid for insurance and taxes on all mining property.

Litigation: All legal expense connected with the mine.

Development Charged to Stoping: Costs of those pieces of exploration-work which produce ore in their progress.

The other items need no comment here.

The general cost-sheet is supplemented by two auxiliary cost-sheets : one for Stoping and one for Development (Forms 3 and 4). On one or the other of these is found the cost of operation in detail, as well as the production and progress, of each working place in the mine. These sheets are not entirely separate and distinct from the cost-sheet, but are interdependent each upon the other, as will be more clearly shown later.

The scope of the cost-sheet can be most clearly and satisfactorily explained by referring to an actual example; so reference will be made to the one for December (Form 1). This cost-sheet was published in the company’s annual report for that year.

DISTRIBUTED ACCOUNTS

Taking the first horizontal line,— the item of the boiler-room, we find this account indebted the sum of $99.56 to the machine-shop, $42.89 to the blacksmith-shop, $2.30 to the carpenter-shop, and also $464.92 to the supply-account, all of which represent labor and supplies used in repairing and maintaining the steam-lines, boilers and buildings, as well as the supplies, such as waste and oil, for operation; also to the pay-roll $1,073.25, the labor of the firemen; and to general office account $7.75, a voucher-account directly chargeable to making steam. Then we see the account of fuel debited with $5,063.10 by the general office, which sum represents vouchers covering the cost of the coal, delivered in the bins. This, then, appears as a lump sum charged to the boiler-room, showing as a debit to the boiler-room and a credit to the fuel account. Thus, summing up the debits of the boiler-room, the total cost of making steam appears to be $6,753.57.

The master mechanic’s report shows that the steam was consumed in the proportions given in Table I.

consumption-of-steam

The cost of making steam, $6,753.57, is then charged to the above accounts in the above proportions, and the boiler-room credited to that extent, as shown in Table II.

cost-of-steam

In Table II., the first three credit items are ready to be added in as they stand, to form the total operating-costs, since they bear directly upon the ore account; they are now disposed of, as far as the distributed accounts go. The other items remain in the distributed accounts, in turn forming debits of other accounts. The tabulation of other accounts is given in Table III.

cost-of-compressing

An examination of the credit account of the boiler-room, together with the other debit accounts, will show that all the boiler-room expense has now been distributed among the various operating costs. In like manner all of the distributed accounts eventually find their way into the operating accounts, and are there absorbed by the various items under that head.

The final result of the cost-sheet is now merely a question of cross-footing the various operating accounts, and balancing with the line called Total Cost of Mining. This gives, of course, the amounts in the total debits column, and summing these up gives the total cost of operating the mine.

The last three vertical columns of the cost-sheet speak for themselves; the figures are obtained merely by dividing the total debits by the tonnage gross, tonnage shipped, and ounces of fine gold produced. These figures, of course, are invaluable for showing the efficiency of the operations of mining, and may be said to be the pulse by which the condition of the mine may be felt at once. Of these three columns, the last should be the criterion, although the cost per ton shipped is more often referred to. But as the same gross result may be obtained by shipping a large tonnage of low-grade ore or a small tonnage of high-grade ore, yet the costs and profits will be vastly different in the two cases; so the cost of producing an ounce of fine gold, regardless of tonnage, is the real criterion. For, after all, the object of running a gold-mine is not to produce gold-ore so much as fine gold.

It will be noticed that on the cost-sheet shown herewith, there are really two cost-sheets in one, side by side; one for the current month, and one for the current year to date—in this case a period of six months, of which the current month is the last. This latter cost-sheet is kept side by side with the other, in order that the current month may be compared at a glance with the rest of that year preceding, and also that the results of a year’s run may be readily obtained. These figures are not worked out separately, but are carried forward from month to month.

The basis of the distribution into the heads of Stopes, Drifts, Cross-cuts, etc., is found in the auxiliary-sheets mentioned before. Thus the number of shifts worked with machine-drills to break ore is found from the stope-sheet to be 1,575 3/8, and the number required to run drifts shows on the development- sheet to be 260 7/8, for cross-cuts, 311½, for raises and winzes, 56, and for sinking, 70. This gives a total of 2,273¾ shifts. Then on the development-sheet it will be seen there were 130 shifts worked with large machines; and as these require just twice as much air as the small ones, 130 should be added to 2,273 ¾, giving an equivalent of 2,403 ¾ shifts. Now from the cost-sheet the total cost for running machine-drills appears to be $5,567.29, or $2.3166 per shift. This constant, multiplied by the number of shifts for each heading, gives the cost of machines for that place. And thus also for the other costs on the auxiliary sheets—the explosives and timber being charged out as used, and the other costs being apportioned pro rata according to production.

The results of the cost-sheet, such as the total cost of mining, cost of milling, per ounce and per ton, together with other items of general interest, are plotted into graphic curves. These form very interesting and instructive diagrams, one of which is shown in Fig. 1. The upper line represents the average value of the ore in dollars per ton shipped; the next line below shows the total cost of producing and marketing a ton of ore; the difference between it and the line above representing of course the net profits per ton. The second line is the sum of the two smooth lines below—the cost of mining, and the cost of treatment. In the same way the next broken line below, the total cost of producing an ounce of fine gold, is composed of the two costs represented in the lower broken lines—the cost of mining an ounce of gold, and of extracting that amount of the precious metal from the rock. The dotted line at the bottom represents the cost of mining a ton of crude rock. The figures forming the basis of these curves are taken from the cost-sheet.

It will be well to note that the general upward tendency of the costs during October, November and December is due to the installation of new and expensive machinery; while the downward tendency of the mining-costs in December is the beginning of the effect of this machinery. The upward movement of the treatment costs is on account of the higher grade of ore being treated.

At the mine the different sets of curves are shown in different colors of ink. Other diagrams also are kept, such as the cost and progress of development work, tonnage handled and shifts worked.diagram of operating cost

Comparison with the new cost-sheet form published herewith (form No. 2), which has recently supplanted the old form just explained, shows the new system differing from the old only in the greater amount of detail shown, especially in the distributed accounts; the principle of the system remains unchanged. By the addition of a number of lines to the distributed accounts, and corresponding vertical columns, detail can be shown to any extent desired. Greater detail is also obtained by the addition of the four vertical columns headed Shafts Nos. 1, 2, 3, and Lowell. These four columns balance by themselves with the total debits column, but are separate from the rest of the debits. The total debits column, then, is balanced in two different ways : with the four working-shafts, and with the rest of the cost-sheet. Take, for example, the hoisting account. The cost of the hoisting operation for each shaft can be ascertained with great accuracy, also the amount of repairs put upon each engine, thus showing at a glance the relative efficiency of each hoisting-plant. But in the total debits column only the grand total of all the hoisting expense is entered; this is distributed and charged out as before shown in the old cost-sheet. As the shafts, except the Lowell, are all connected underground, their mining-expenses cannot always be kept separate, but merge one into the other, and such items as breaking ore and tramming, which do not fall naturally into divisions by shafts, are charged out to the various shafts on the basis of the tonnage hoisted from each.

The addition of the account called “ Invoice ” will also be noticed. As such accounts as supplies, timber, explosives, and fuel are charged out as used and debited as bought, the debits and credits do not balance on the old cost-sheet; by charging this difference to the account of Invoice on the new form, the accounts balance, and the invoice account, carried forward from month to month, shows the amount of these articles in stock.

The two cost-sheets are both shown in this article, to illustrate how the same system of the co-ordinate method of cost-keeping may be made either general or particular. In the old form the system is a very general one, and could be condensed and generalized even further; while the second form goes into considerable detail, without departing in any essential respect from the main principle.

Such a system of cost-keeping may be objected to on the ground of involving too much “ red tape,” and therefore being too expensive in its operation. In reply it is maintained that any system which accomplishes its purpose in keeping accurate record of the cost of operating is cheap at any cost. But the present system is not nearly so cumbersome and expensive as it doubtless looks at first glance. It has now been kept up at the Portland office for nearly three years, with the employment of the same office-force as was employed for the same length of time previous to its installation.

To explain just how each one of the basic figures is obtained would be going into a great deal of unnecessary detail, a large part of which would be too local to be of general benefit, as the operation of this system is made to fit the material at hand, and is largely a product of growth. However, a sketch of the every-day labor, as practised at the Portland, may be instructive.

There are three general heads under which the entire cost of production may be grouped:—first, pay-roll; second, voucher-account, for supplies and all other expenses which appear on the cost-sheet under the head of “ General Office;” and third, freight and treatment charges. Theoretically, the sum of these three should be the total cost of operation, and on the new cost-sheet it actually is, when the invoice account is considered. The freight and treatment charge is taken in a lump sum directly from the ore-book, and requires no further comment here; thus the whole of the cost-sheet has its derivation in the distribution of the other two accounts, the pay-roll and the general office.

The distribution of the pay-roll is accomplished by each shift-boss or foreman making out a report of each day’s work upon a regular form (forms Nos. 5, 6, 7, 8, 9, 10 and 11) which shows the number of shifts or hours worked upon any particular job under his supervision. These reports are all handed in to the office at the close of the shift, and the next day are compiled. This then shows the daily cost of each piece of work—the cost of operating the machine-drills, the cost of tramming to the shaft, the labor-cost of timbering, or of putting up a new building. Then at the end of the month it is simply a matter of addition to get the labor-cost of each piece of work done, the total of all, of course, balancing with the total pay-roll. But the cost thus found is not yet ready to go into the cost-sheet as it stands—there are certain additions to be made to it. For instance, repairs to the machine-shop might necessitate the assistance of a carpenter; the cost of his services is then taken from the carpenter-shop account and charged to the machine-shop; but as it benefits the whole mechanical department, each charge in that department has to stand its share of it. And so, too, with the wages of supervision—this cannot be charged to any particular job, but must be apportioned among all the pieces of work under that supervision. The way these charges are apportioned appears in Table IV.

In- Table IV. the first column represents the actual labor-costs as taken directly from the daily reports. Then, grouped under the sub-heading “Distributed” are the items, general in nature, which must be distributed over these amounts to make the true costs. The second column shows the distribution, pro rata, of this amount. The figures in the third column are the sum of those in the first two, and are the amounts which are now to be entered directly upon the cost-sheet.

For example, the last line of the first division is the item $7.88 charged against the carpenter-shop. This charge, then, is placed directly against the carpenter-shop, and appears under the sub-heading “Distributed.” Then this $7.88, with other similar items, make the $199.08 which is to be distributed over the items forming the total of $1,502.39, or at the rate of about 13.25 per cent. Each amount in the second column is about that percentage of the corresponding figure in the first, and their sum forms the amounts in the third column, which then appear on the cost-sheet.

The distribution of the general office column of the cost-sheet comes from the voucher-record, upon which is kept a distribution of each account as it is vouchered. This form is not shown here, being merely a book similar to that generally used in connection with the voucher-system. These accounts have to be treated the same as those of the pay-roll, as just explained, before entering upon the cost-sheet. However, the supplies-, explosives-, and lumber- and timber-accounts are further distributed. No supplies are issued except upon written order to the store-keeper (form 12), signed by the foreman of the department, and stating the specific use of the article; this forms the basis of the storekeeper’s distribution of supplies issued.

distributed-cost-of-machine-shop

Explosives are issued by the powder-man only upon an ammunition-order from the machine-drill man, stating the heading where it is to be used (form 13). From these data the powder-man makes up his monthly report (form 14). The lumber and timber used are distributed by the carpenter-foreman, who keeps account of all the lumber used in repairs and construction about the surface, as well as the underground timbers. The latter account is still further subdivided by the head timber-man, to whom is reported daily the amount of lumber and timber used in each heading by each timber-man (form 15). This gives him data for his monthly timber-record (form 16). At the end of the month the columns are added and figured at a price sufficient to cover cost of framing and handling, as well as of purchase. The amount of fuel used is reported by the master mechanic, who weighs it as it is used under the boilers. The master mechanic also reports the distribution of the steam generated, based upon the horse-power of the engines consuming it.

The basis for the auxiliary sheets is the shift-bosses’ distribution-sheet (form 17), one of which is used for each stope, drift, cross-cut, etc., in the mine, and upon which the shift-boss enters the distribution of his shift. The tonnage from each place is obtained by counting the number of trammers’ tags (form 18) from that place, and multiplying by the car-constant (0.7 ton); these tags the trammers place upon the cars as they leave them at the stations, and the top-men remove them and turn them into the office. Of the other costs upon the auxiliary sheets, the explosives and lumber and timber are charged directly from the powder-man’s and head timber-man’s reports; the cost for machines is the debit against machine-drills on the cost-sheet, distributed on the basis of the number of drill-shifts worked; the other costs are taken from the cost-sheet and distributed on the basis of tonnage. The column for feet of progress on the development-sheet is filled in by the surveyor.

Upon the above, it will doubtless be commented that this throws a good deal of clerical work upon the shift-bosses and foremen—which is very true; but there is nothing complicated in what these men are asked to do—nothing that the man with average intelligence enough to be a good foreman cannot do in 20 or 30 minutes at the close of the shift. And this expenditure of time more than pays for itself in giving the foreman a line on his work—a review of the work of the day and a basis for the plans of the next. It is merely a question of devoting about that much time to it every day. By obtaining the co-operation of the foremen, the system is not nearly so expensive as may be imagined.

No progressive and business-like mine-operator will question the efficacy of keeping close watch upon his cost of production—of having some system which will show at a glance at regular intervals where a saving might be effected, and which will compare the efficiency of present working with past. The only question is as to how this can best be accomplished.

While it is not claimed that the system above described is the best that could be devised for all cases, yet it is claimed that it is the best for the conditions here at hand; and it is also claimed that the excellent showing made by the Portland mine in recent times is entirely due to close supervision guided by the cost-sheet.

The forms employed by the Portland Mining Company are given in full on the pages which follow. For the purpose of this publication, they have been much reduced in size, and provided with explanatory notes which do not appear upon the sheets used in the office. I trust that, thus presented, together with the preceding comments, they will enable mine-managers to estimate intelligently the value of the system, and the extent to which, with suitable modification to adapt it to local conditions, it may be employed with advantage.

In conclusion, I wish to disclaim credit for any originality in the system described, except in a few minor details, such as the graphical diagrams of the results. The credit for installing the cost-sheet at the Portland mine, and for working out its general ideas, belongs to Mr. J. R. Finlay, then manager; in this labor he was ably assisted by Mr. L. F. Curtis, the purchasing agent, who put the system upon a practical working- basis, and who has since modified it to suit the growing needs of the mine. To these gentlemen, together with Mr. F. M. Kurie, the present manager, I wish gratefully to acknowledge my indebtedness.

List of Forms

  1. General Cost-Sheet.
  2. General Cost-Sheet, with Distributed Accounts.
  3. Stope-Report.
  4. Development-Report.
  5. Shift-Report.
  6. Ore-House Report.
  7. Surface-Report.
  8. Carpenter-Shop Report.
  9. Distribution of Labor in Machinery Department.
  10. Blacksmith-Shop Report.
  11. Mechanical Department.
  12. Order on Storekeeper.
  13. Ammunition-Order.
  14. Powder-Man’s Report.
  15. Timber man’s Report.
  16. Timber-Report.
  17. Shift-Bosses’ Distribution-Sheet.
  18. Trammer’s Tag.

portland-gold-mining

portland-gold-mining-company

portland-gold-mining-co-general-cost-sheet

distributed-accounts

portland-gold-mining-co-general-cost-sheet-2

distributed-accounts-2

stope-report

development-report

shift-report

surface-report

distribution-of-labour-in-machinery-department

mechanical-department

ammunition-order

powder-man-report

timber-report

shift-bosses-distribution-list