| I New York State College of Agriculture At Cornell University Dthaca, N.Y. Library Cornell University Library HF 5686.C8J5 ounting; principles and pi mann Cost ACCOUNTING PRINCIPLES AND PRACTICE By J. P. JORDAN Member Society of Industrial Engineers; Member American Society of Mechanical Engineers; Member National Associa- tion of Cost Accountants; Lecturer in Factory Organization in School of Commerce, New York University As To ‘TECHNICAL PROCEDURE And GOULD L. HARRIS, A.M. Lecturer in Cost Accounting and Instructor in Management, School of Commerce, New York University; Member American Association of University Instructors in Accounting As To PRESENTATION w NEW YORK THE RONALD PRESS COMPANY 1921 Copyright, 1920, by THe Ronatp Press CoMPANy All Rights Reserved PREFACE Hardly any other feattire of industrial procedure has been so necessary, yet so slow in developing, as cost accounting— so rich in possibilities of usefulness for the management of a _ business, yet so widely considered for many years as a doubt- fully necessary evil. In view of the elaborate detail required for adequate study of cost, and of the fact that most cost installations have had the final objective merely of fixing selling prices, the aversion of careful managers to the expense involved can be fully under- stood and largely justified. The credit for slowly but surely forcing the issue of cost accounting belongs chiefly to the accounting profession. Fail- ure to prepare financial statements oftener than once a year has long been recognized by accountants as in every way risky and unbusinesslike. Continual driving for the objective of analytical costs, in the effort to obtain a reliable basis for proper selling prices, has largely been responsible for the development of methods of assembling costs which have now become live and valuable mediums of managerial control. In working out these results, however, the contribution of the engineer, with his mechanically practical mind, has been an indispensable factor. Largely through the work of the engineer methods of control have been devised which not only facilitate the final aim of accurate knowledge of cost of prod- uct but render nearly every step in the cost-finding process a dependable support to those responsible for the operating activities of the plant. When a properly functioning organiza- tion has the support of the data thus obtained, the beneficial results in the profit and loss account are a natural consequence. 11 ee PREFACE The course of development of cost accounting—that is to say—has made it evident that to succeed at this work a man needs training along both accounting and practical lines. The engineer or practical shop man must master the principles of accounting in order to insure accuracy. Similarly, the ac- countant must be fortified with sufficient practical and mechanical knowledge and experience to know what he is dealing with, if his analysis of cost records is to command the sympathy and support of foremen or to be accepted by the management as a useful managerial instrument. In the industrial world of today the number of men thus broadly equipped is by no means large. It is a source of great satisfaction that the universities are so generally turning their attention to cost accounting and allied subjects which mean so much to the economic welfare of the nation. In preparing this text for students of cost accounting in universities and elsewhere, one principal aim has been to keep always in the foreground this close relation between account- ing and management. The authors have sought not to com- pile an encyclopaedic handbook of the subject, but to outline in coherent and closely knit order, the essential steps in cost procedure for industrial enterprises of whatever character. To this end the material is so arranged as to present first in Chapters I to XXVI the entire technique of cost accounting in unbroken sequence. Matters involving what may be termed the philosophy of the subject, which demanded for cléar com- prehension a full perspective of the flow of procedure, are taken up later, in Chapters XXVII to XXXVII. While it may be advantageous in certain cases to take up some of these points in conjunction with the technical chapters, it has been deemed wise not to complicate too much what may be the student’s first approach to cost accounting by interweaving the two types of subject matter. PREFACE v As a special aid in visualizing the entire flow of cost pro- cedure, a chart definitely outlining the successive steps in the procedure has been prepared. This chart should be studied in conjunction with every technical chapter. In this connec- tion also the forms and records necessary to take care of the successive steps in procedure are outlined in Chapter V, “Mechanism of Cost Control.” As the student begins the study of each technical chapter he should turn back to this index chapter, as it might be called, and study the portion which bears on the chapter under consideration. In connection with the preparation of this volume the * authors desire to express their appreciation of the courtesy of C. E. Knoeppel and Company, Inc., in making available the valuable technical material in their files. The authors are specifically indebted to Professor F. H. Elwell, of the University of Wisconsin, for the use in the Appendix of the C. P. A. problems collected by him. Mr. Jordan wishes also to acknowledge here his indebted- ness to Mr. William J. Gunnell, C. P. A., of Buffalo, New York, whose thorough instruction in accounting methods, dur- ing an association of many years ago, has led to the develop- ment of many of the ideas of this book. Joun P. Jorpan Goutp L. Harris New York City, September 1, 1920 CONTENTS CHAPTER . PAGE I Wuat Cost AccountTine Is we Relation of Cost Accounting to General Accounting Insufficiency of General Accounting “Selling” a Cost System Objections Made to Cost Systems—1. Uniqueness of Business 2. Opposition of Managers and Workers 3. Cost of Installation and Operation 4. System Unnecessary Assistance from Agencies in Overcoming Objections Advantages of a Cost System—1. Accurate Unit Costs 2. Aids All Departments 3. Waste Eliminated 4. A Basis for Fixing Selling Prices 5. A Basis for Standardizing Costs Two Business Fundamentals 6. An Aid in Preparing Statements and Tax Returns 7. The Basis for Comparing Periodical Costs and Profits 8. An Aid in Formulating Policies g. Carrying Out Policies II Cost ComPponENTS . . . . 6. 2 2 ew ee) OQ Concepts of “Cost” Non-Technical Concepts of Cost Technical Concepts of Cost Definition of Cost Classification of Costs Direct and Indirect Costs Necessity of Controlling Costs Relation of Terms: Expense, Burden, Overhead Determining the Selling Price Philosophy as an Aid to Technique III EsrasprisHinc THE Basis or Cost .... . 28 Necessity for Proper Bases Grey Iron Foundry Industry Wood Box Industry Pipe-Rolling Industry Rubber Tire Industry Building Up the Basic Plan of Costs vil Vill CONTENTS CHAPTER PaGE IV Meruops or Controtuinc Cost Recorps . . . 38 Definition of Control Accounts Classification of Control Accounts Accounts Controlling Burden and Expense Standing Order Code for Analysis Accounts Controlling Assets and Liabilities Use of Control Accounts Progress of Data Through Control Accounts V Mecuanism oF Cost CoNnTROL . Sy Need of Mechanism Orders Voucher Payable Register or Purchase Journal Distribution Columns of the Voucher Register Analysis of Voucher Register Closing the Voucher Register Importance of the Voucher Register Expense Ledger Account Requisitioning Non-Receivable Items Advantages of This Method Forms for Handling Details of Control Forms of Original Control Forms Used to Record the Flow of Material Forms Used in Accounting for Labor Accumulations for Journal Entries ‘Direct Cost Sheets Monthly Statements VI DeEpARTMENTALIZATION . . eo be “BA The Need of Departmentalization Matters to be Considered in Departmentalization Assignment of Responsibility Nature of Operations Location of Operations Subsidiary Departmentalization Classes of Departments Producing Departments Service Departments Departments Partly for Production and Partly for Service Planning a Cost System Secret of Correct Costing VIL Orpers anp Sympols . . . . 1... O71 Function of a System of Orders Insufficiency of Oral Orders Advantages of Written Orders Classes of Orders Costs Chargeable to Production and Expense Orders CONTENTS ix CHAPTER PAGE Charging by Means of a Code Requisites of a Code Advantages of a Code SAMPLE CopE oF ORDERS How the Code Is Used Poe Order Code for Individual and Assembled arts Standing Expense Order Code 1. Plant Expense Code 2. Office Expense Code VIII PurcHase AND Receivinc Recorps . . . . 95 Importance of Purchase and Receiving Records Nature of Purchases Mechanism of Purchasing and Receiving 1. Request for Purchase 2. Purchase’ Order 3. Receipt of Material Record 4. Purchasing Department Shipping Order 5. Purchasing Department Debit and Credit Memos 6. Receiving Report 7. Record of Purchases 8. Distribution Stamp for Invoices Other Forms Purchases of Material for Stock Items of Material Necessary for Purposes of Repair Services of Various Natures Advertising, etc. Miscellaneous Purchases Importance of Accounting at Source Receiving Material Inspection of Incoming Material IX TRANSPORTATION CHARGES . . . . . . . « 113 Problems Connected with Transportation Charges Incoming Transportation 1. Purchased Goods 2. Goods Returned by Customers 3. Samples, etc. 4. Goods Refused or Condemned 5. Receipts of Miscellaneous Nature Outgoing Transportation 6. Shipments of Sales 7. Shipments of Returned Purchased Goods 8. Shipments of Samples 9. Shipments of Miscellaneous Nature Accounting for Transportation 1. Charges to be Deducted from Payment of Invoices x CHAPTER CONTENTS PAGE 2. Charges to be Added to Invoices 3. Charges to be Absorbed in Cost of Goods 4. Charges on Delivery of Sales 5. Charges of Expense Nature X Srock Recorp ACCOUNTING . ... . . . I26 Organization of the Stores Department Use of Stock Records Accounting Theory of Stock Records Names for Stock Records Stock Record Forms Sections of a Modern Stock Record Sheet . Heading . Requirements Columns . Appropriated Columns . Ordered Columns . Received Columns . Issued Columns . Adjustment Columns Material Requisitions Accounting for Scrap Parts Material Credit Slips Simple Stock Record NST OWR WD XI RecorpInG THE CONSUMPTION OF MATERIAL . . 141 Scope of Chapter Value - Specifications—1. Definite Knowledge of Ma- teria 2. Facilitation of Control, Costing, etc. 3. Facilitation of Standardization 4. Saving of Clerical Work Methods of Recording the Consumption of Material Predetermination Method The Findings Account Use of Predetermined Figures in Charging Rivets Method Used in Box Factory Methods Used by Chair Manufacturers Safeguarding of Predetermined Material Costs Tag Method Use of Graduated Containers and Tote Boxes Importance of Accuracy of Original Data XII Meruops of Pricinc REQUISITIONS . . . . . ISI Where Prices Should Appear Person Responsible for Pricing Material Components of Material Costs Methods of, Determining Prices Using Original Prices of the Oldest Stock on Hand CONTENTS xi CHAPTER PAGE Basing Costs on Market Prices at Time of Con- sumption Average Price Method Using Original Prices of the Highest Priced Stock Pricing Prepared Material Pricing Work in Process and Finished Product XIII Minimum, Maximum, AND Quantity To OrpER . 158 Importance of Maxiinum and Minimum Quantities Need of Correlation Among Departments Methods of Calculating Stock Limits Calculating Minimum and Maximum Determining the Amount to Order Concurrent Calculation of Minimum and Maximum Calculating Finished Product Minimum and Maximum Necessity for Use of Maximum and Minimum XIV How to Take Inventory . . . . «© « © ~ 165 Importance of a Correct Inventory Old Method of Taking Inventory New Method of Taking Inventory 1. Inventory Instructions (a) Inventory Dates (b) Personnel of the Inventory Committee (c) Articles to be Taken (d) Special Preparations 2. Counting and Weighing the Inventory 3. Listing the Inventory 4. Pricing the Manufacturing Inventory 5-7. Final Steps in Taking Inventory XV Accountine ror Lasor—In THE PLANT . . . . 179 Chapters in Which Labor is Discussed Objectives of Labor Accounting Chief Forms Used in Labor Accounting Weekly In-and-Out Clock Cards Duties of the Dispatch Clerk Time Cards Time Cards for Direct Labor Bonus or Premium Report Card Inspection Time Cards for Indirect Work Recording Special Cases 1. Recording Time of Loaneé Workers 2. Other Department Standing Order Accounting 3. Short Operations Checking Labor Cards Extension of Cards Xi CONTENTS .CHAPTER PAGE XVI AccountTinGc FoR Lasor on Pay-Rotts . . 202 The Triple Use of Pay-Rolls Condition of Time Cards on Delivery to Pay-Roll Department Arrangement of Pay-Roll Sheets Details Shown on Pay-Roll Sheet 1. Transfer 2. Direct 3. Indirect 4. O. D. Standing Orders 5. Total Closing the Pay-Rolls Splitting Pay-Rolls at Close of Month Pay-Roll Totals Analyzing Pay-Roll Records Result of the Foregoing Distribution Work Performed by One Department for Another Loaned Workers Other Department Standing Order Labor Final Filling of Both the Labor Transfer and O. D. S. O. Cards XVII CatcuLaTIon AND APPLICATION OF DEPARTMENTAL BurpEN RaTes . . . ee eee . 217 Burden Subject to Scientific Calculation and Control Evolution of Burden Distribution—1. Fixed Per- centage Method 2. Blanket Rate Method 3. Departmental Burden Rate Method Bases for Distributing Overhead to Expense Accounts Distributing Expenses to Departmental Burden Ac- counts Predetermining Standard Departmental Burden Rates Theory and Practice of Burden Calculation and Ap- plication 1. Direct-Labor Hours Basis 2. Direct-Labor Cost Basis 3. Machine-Hour Basis Application of Departmental Burden Rates Departmental Balances Revision of Departmental Burden Rates XVIII Distrizution or Expense Accounts . . . . 229 Discussion of Expense Accounts Trucking Expense Steam Expense Electric Power Compressed Air Rent Taxes CHAPTER CONTENTS xill PAGE Depreciation Fire Insurance Liability and Compensation Insurance Telephone Drafting Department Stores Expense Accounts General Expenses XIX PREPARATION OF JouRNAL ENTRIES . . . . . 239 Importance of Journal Entries Voucher Register Cash Disbursements arid Receipts Sales Records Labor Distribution Distribution of Material on Requisitions Distribution of Expense Ledger Charges Closing Expense Accounts Burden Accounts Prepaid Items Completed Production Orders Finished Stock In General Regarding Journal Entries XX Itiustrative LepcEr AccouNnTs AND JouRNAL EN- TRIES «3 8 6 © 8 eon Scope of the Chapter . General Ledger Accounts for Average Foundry Journal Entries NO on - XXI Expense anp BurpEN STATEMENTS . 282 General Nature of Expense and Burden Statements Distinction Between Expense and Burden Accounts The Great Value of Detail Fallacy of High Cost of Detail Proving of All Statements Structure of Statements Preparing Skeleton Statements Preparing Data Footing and Entering Data Entry of Journal Entry Data Completion of Skeleton Working Sheets Proving the Working Sheets with Controls Completing the Statements Sequence of Compilation of Expense and Burden Statements Comparison of Indirect Costs—1. Expense Accounts 2. Departmental Burdens Proper Presentation Indispensable xiv CONTENTS CHAPTER PAGE XXII FinanctaL STaTEMENTS . . . . . - - + 298 Value of Finaricial Statements Nature of Statements 1. Balance Sheet 2. Profit and Loss Statement Financial Section, of Profit and Loss Statement 3. Burden Statements 4. Expense Accounts Reading the Statements Possibilities of Careful Study of Statements XXIII Use or Cost Reports By FoREMEN . . . 318 Arguments for Publicity of Costs Importance for Cost Figures to Foremen Burden Statements for Foremen and Department Heads Use of the Burden Statements Use of Burden Statements Becomes a Game Watching Direct-Labor Cost Watching Direct-Material Cost XXIV Prevaittnc Types or Cost SysfeMS . . . . 327 Selecting the Type of System—Importance of the Base Types of Systems Classified 1. Job Cost Method 2. Class Cost Method 3. Operation Cost Method 4. Process Cost Method Choice of a Cost Method Combinations of Various Types of Cost Systems Stocking Points Forwarding Slip Job Order Cost Sheets Foundry Individual Piece and Class Cost Sheets Operation Cost Sheets Process Cost Sheets XXV_ By-Propucr Costs . . ae ie. ae 3 344 Problem of By-Product Accounting First Method of By-Product Accounting Objections to First Method Second Method of By-Product Accounting Objections to First and Second Methods Third Method of By-Product Accounting Calculating Material Costs of By-Products Superiority of Third Method XXVI Derective Work Losses . . «381 The Ever-Present Result of Carelessness Inspection CHAPTER CONTENTS XV PAGE Methods of Guarding Against Defective Work Various Kinds of Defective Work Losses Judgment to be Used in Connection with Salvaging Charges for Defective Losses Analysis of Causes of Defective Work Use of Defective Loss Information in Cost Sheets Defective Loss as Burden vs. Direct Cost XXVII Tue INsTaLtaTIon oF a Cost SYSTEM . 360 The General Problem Initial Propaganda Fundamental Foundation Work Establishing Controls 1. Material Control 2. Labor Control 3. Accounts Control Nature of Control Accounts The Flow of Control Installing Control! Accounts Subsidiary Factory Ledger In General Regarding Installation XXVIII Toot Recorps . . Bl dy aia: JAP ge aL ey AZE Function of Toolroom Department Organization of Toolroom Department Classifying and Symbolizing Tools Small Tools Double Tool-Check System Denominational Checks Tool List Single Tool-Check System XXIX Apvantaces or Stock ReEcorps . . . . . . 376 Stock Records an Aid to Entire Busiriess Savings Effected by Proper Ordering Production Aided by Listing Requirements Deliveries Facilitated by Appropriation of Stock Steady Production Aided by Prompt Ordering and Urging Savings by Keeping Deliveries Within Contract Limits Detection of Improper Accounting for Receipts Consumption Records of Material Aid Economical Buying Elimination of Wasteful “Help-Yourselves” Methods Bidding on Contracts Expedited Ready Knowledge of Balances on Hand Fire Loss Adjusted Equitably Reduction of Obsolete Stock Compilation of Monthly Financial Statements Xvi CHAPTER CONTENTS PAGE Advantages of Stock Record Sheet Illustrated 1. Running Total Columns 2. Requirements and Ordered Columns 3. Appropriated Columns 4. Received Columns 5. Issued Columns Relation Between Columns of a Stock Record Sheet Advantages of Carrying Money Values on Stock Records XXX Uwnper- anp Over-Assorsep Burdens . . . . 389 Past Treatment Annual Burden Rates Monthly Statements of Actual Burdens Necessity for Standard Rates Standard Rates—Duration Control of Burdens Older Theories—Machine-Rate Control . Church’s Theory of Accounting for Idle Machines Modern Theory—Under- and Over-Absorbed Burdens The Future of Cost Accounting XXXII Recutation oF IpLtE Equipment DeELays . 402 Delays of Equipment Treating Causes of Delays at the Source Accounting for Idle Time Action Required to Correct Causes of Delays Causes of Idle Machines and Equipment 1. No Operator 2. No Material 3. No Orders 4. Machine Breakdown or Under Repairs 5. No Power 6. Awaiting Set-Up . Waiting for Tools Awaiting Instructions 7 8. Idle Machine Report XXXII ApvaNnTAGES AND DISADVANTAGES OF DIFFERENT MeEtTHops oF APPLYING BuRDEN ek s 418 Theories of Applying Burden Methods Actually Used Advantages of Direct-Labor Hours Method Disadvantages of Direct-Labor Hours Method Advantages of Direct-Labor Cost Method Disadvantages of Direct-Labor Cost Method Advantages of Machine-Rate Method Disadvantages of Old-Style Machine-Rate Methods CONTENTS xvii CHAPTER PAGE XXXIII Interest on INVESTED CAPITAL AS A MANUFACTUR- inc Cost. . 428 Importance of the Interest Problem Objects of Cost Accounting Economic Cost and Business Cost The “Use” Theory Depreciation Does Not Include Interest Charges Fixed Assets and All Assets Methods Net Investment Method Disposition of Interest Entries Commercial Objections to Including Interest in Cost Interest Reserve Account and Interest Income Account Method Interest Included in Statistical Statements Pure Interest Rate Rate at Which Money Can Be Borrowed Rate That Will Attract Capital to the Industry Relation of Interest to Business Policies Motives for Including Interest in Cost Legal Cases eur For and Against Inclusion of Interest in ‘ost XXXIV Mecuanicat Devices as Arps To Cost ACCOUNTING 444 Need of Mechanical Devices Classes of Mechanical Devices 1. Calculating Machines—Method of Operation Minimizing Errors Uses of Calculating Machines Use of Reciprocals 2. In and Out Time-Recorders Job Time-Recorders Pay-Roll Machines 3. Electric Sorting and Tabulating Machines 4. Bookkeeping and Cost Accounting Machines XXXV_ GrapHic Propuction CoNnTROL 45 The Problem of Direct Cost Fundamentals of Graphic Production Control Additional Fundamental Requirements Mechanism of Graphic Production Control Control Boards Dispatch Boards Use of the Control Board in Planning Recording the Progress of Work Use of Progress Information Effect of Graphic Production Control on Costs ou XXXVI ReEtation oF Cost AccouNTING TO MANAGEMENT . 467 Need of Co-ordination Strategic Position of the Cost Department CONTENTS XViii CHAPTER PaGE Conduct of Cost Department Employees Responsibility of Cost Department’s Head Relation Between Cost Man and Executives Importance of Cost Men’s Position XXXVII Recent Developments or Cost AccoUNTING . . 473 Movement for Uniform Cost Systems Meaning of Term “Uniform Cost System” Uniform Costs Not Secured by Uniform Methods Origin of Uniform Methods of Cost-Finding Adopting the Uniform System : Advantages of Uniform Methods of Cost-Finding National Association of Cost Accountants Appenpix—C, P. A. Cost AccounTING PropLems. . . . . 481 FORMS FoRM PacE 1. Vouchers Payable Register . . . . . 2. . ww. 48 2. Expense Debit a 3 CAS ia OP. gas Monae ARE cd ewes 1250 3. Voucher . . we of Py degree eA CS oat, 57 4. Production Order 3 A Leyes) Lge) fea 1 « «2 93,94 5. Identification and Move ee ay ok Ge) capce A ia a ce ae aS 6. Request for Purchase . . . . . .. .. 1. es we es GF 7. Purchase Order. is ooo be eR OR a a 198 8. Receipt of Material Record ; ar eee ~ oe» 99 9g. Purchasing Department Shipping ‘Order a ele. a . . IOI 10. Purchasing Department Debit Memo e eiirlt pia 2 102 11. Receiving Report . . . % wih nwa fe ie . . 103 12. Record of Purchases . . . . Bo eo ate sin Oe te Re a TOK 13. Invoice Stamp . . .....~. rE Bo fee! Leal te eed os 106 14. Stock Record Sheet . . . . 2. . . ew we eee 130 15. Material Requisition . . . 8 Be we ee we 85 16. Scrap Ticket . . . . oo eB pm Be Oe ee SO 17. Material Credit Slip . 2 4 woot og ae oe OR GP 3s 18. Stock Record Card . . LS eng arn Be cae Me ERO 19. Inventory Tag for Material ‘and Supplies Satie We wee Ih ce (a ze 20. Inventory Tag for Work in Process . . . . oe Jae a EF 21. Inventory Sheet for Material and Supplies . . . .. . 2 H9S 22. Inventory Sheet for Work in Process . . . . .. . . 175 23. Weekly In-and-Out Card . ‘ Hf! GA Os é 182 24. Direct-Labor Time Card . . ........ 185, 188- 190 25. Bonus or Premium Report Card . . . . . . 192 26. Indirect-Labor Time Card ee eee ee ee eS a (071 27. Overtime Report . Sh vide eR dem> Sigey i ihm es 198 28. Late and Absent Report a ee weed? wom ts 199 29. Pay-Roll Sheet. Siclete. @ ch of : ; 203 30. Labor Transfer Record ioe he : : . 213 31. O. D. S. O. Transfer Record . 215 32. Chart Showing Flow of Costs in and out of Expense and Burden Accounts , . . 286 33. Expense and Burden Account Collating Sheet eR Re 287 34. Comparative Monthly Burden Statement. : < w + 12 320 35. Forwarding Slip. Br ak den Brace. Gh Lseta pee Gk 336 30. Individual Part Cost Sheet Seley Sy Oy Hs Ga wile aad? rere? ESBS 37. Assembly Cost Sheet . oo hea tote ate te dele elem, Cae 88S 38. Comparative Cost Sheet . a! Sgt Me? L880 39. Foundry Individual Piece and Class Cost Sheet : s » * «+ 340 40. Production and Cost Record ‘ “ 8 342 41. Foundry Scrap Report ed oy ee oe ee SO 42. Idle Machine Card . . . BeBe a Kee “Ay GE) A ses . 405 43. Idle Machine Report . . . . . 2... ee we eee G8 xIx xx FORMS ForM Pace 44. Requisition for Material Card Used with a Punching, Sorting, and Tabulating Machine : Bin Gacnneo nine heen oe 451 45. Labor Card Used with a “Punching, Sorting, and Tabulating Machine . taste el + + 452 Graphic Illustration of Flow of Cost Procedure. . . . Insert COST ACCOUNTING PRINCIPLES AND PRACTICE CHAPTER I WHAT COST ACCOUNTING IS Relation of Cost Accounting to General Accounting The purpose of cost accounting, a branch of general or commercial accounting, is to provide detailed information as to the separate components of cost which have entered into a product. General accounting shows merely the total profit or loss of the business as a whole; cost accounting shows the profit or loss on each unit, whether the unit be the job, con- tract, line of product, operating department, or process. It is “accounting for units” that differentiates cost accounting from general accounting. In a plant with a cost system, however, cost accounting and general accounting are carried on concurrently. A close rela- tion exists between general records and cost records. In fact, the two classes of records in a modern cost system are “tied up,” or unified, by the use of controlling accounts, such as Raw Material, Work in Process, Finished Product, and those used for the analysis of expenses. Theoretically, any type of accounting which discloses the result of the operations of the various divisions of a business, such as the system used in department stores or the system used on farms, might be called cost accounting. In common usage, however, the term “cost accounting” is applied only to that type of accounting which deals with the costs of the oper- ations of an institution producing a line of product, and so the principles of cost accounting discussed in this book are explained and illustrated in their application to manufacturing rather than to merchandising concerns. Manufacturing firms most sorely need the details of cost, 3 4 COST ACCOUNTING Insufficiency of General Accounting With a good system of general accounting, the manufac- turer can ascertain at the close of each fiscal period the amount of his total profit or loss. If the books show a profit, he may be satisfied even though it is small. If, however, a loss has been suffered, the books may not be in such detail as to enable him to ascertain the cause or the way to prevent future losses. Unless prices in the trade are rising, the remedy of increasing his selling price is not open to him, as he must meet the competition of fellow-manufacturers. In order to determine whether or not he can continue to manu- facture his various articles profitably, he must have a system which will show the costs and profits of his different products. A general accounting system will not do this; a cost system will. With a cost system the manufacturer can concentrate his efforts on manufacturing and selling the more profitable lines, and at the same time be able to reduce his costs through the knowledge given by the detailed figures. General figures may be misleading. A concern as a whole may be making satisfactory profits, yet some departments may have to carry the losses of others. If a good system is installed, such conditions will be disclosed. A manufac- turer, to be sure, may maintain some departments at a loss, simply because of their advertising value. He should do so, however, with his eyes open. Such a policy can be controlled intelligently only when actual costs are known. “Selling” a Cost System The demand for the services of the cost accountant comes primarily from the progressive manufacturer who knows that his plant’s progress can be accelerated by substituting a cost system for a general accounting system, or by improving the existing cost system. The special opportunity of the cost accountant concerns itself, however, with the manufacturers WHAT COST ACCOUNTING IS 5 who have not seen the light. There are still a vast number of manufacturers who have not yet realized that a general accounting system has serious limitations. Many more look upon a cost system as a mere salvaging device. If the cost accountant can make clear to these men the justification for cost accounting—can “sell” the idea—the possible growth of his business is very great. If the cost accountant has to “sell” a cost system, how- ever, he must be able to answer satisfactorily the objections raised by the manufacturer and be able to explain convinc- ingly the numerous advantages of a worth-while cost system. Since the manufacturer’s objections to a cost system must be overcome before he can fully appreciate its advantages, his common objections are here discussed first. Objections Made to Cost Systems—1. Uniqueness of Business Many manufacturers object to a cost system on the grounds of the peculiarity of their businesses. They feel that even though a system is adequate for competitors it will not apply to their own unique concerns. In fact, this feeling may even cause the manufacturer to believe that no system what- ever could be devised to furnish him with accurate costs. This feeling is mistaken, as, while it is true that each busi- ness has its distinctive peculiarities, these are often exagger- ated in the minds of the owners. Uniqueness itself does not preclude the possibility of designing a satisfactory system of accounts. Ideal cost systems, it is true, cannot be installed readily in all firms. The difficulties in installation may be owing to numerous technical operations, or they may be owing merely to opposition on the part of the management and workers, which sometimes cannot be entirely overcome. Nevertheless, while this opposition may be discouraging, it should not pre- vent the installation of practical features which would improve 6 COST ACCOUNTING the existing system. In certain circumstances it is good policy to install only the most important at first, and to extend their application and add new ones as the co-operation of managers and workmen is gained. Trade association conventions, and the dissemination of cost information through the medium of the collecting, com- piling, and distributing agencies of such associations, have changed the feelings of many proprietors that their concerns are unique and unadapted to cost systems. Many manufac- turers have come to realize that the “other fellow’s” problems are much like their own. z. Opposition of Managers and Workers The fact that in many cases managers, foremen, and workers are opposed to a cost system is frequently put forth as an argument for its rejection. It is true that internal oppo- sition, rather than the character of the system itself, or the inability of the cost accountant, has caused the discontinuance of many cost systems. For this reason, the antipathy of all persons concerned must be overcome. The desire of every cost accountant, therefore, should be to gain the good-will and co-operation of the management and workers before at- tempting to’put in a system. So important does one repu- table cost accountant regard mutual understanding, that he absolutely refuses to install a cost system unless he is given permission beforehand to include interest on invested capital in the manufacturing costs. All known differences of opinion should be ironed out before installation begins. Indeed, suc- cessful cost accountants attribute a large part of their success to their knowledge of the human factor. 3. Cost of Installation and Operation Another common objection to a cost system is that the red tape involved makes the installation and operation of a WHAT COST ACCOUNTING IS 7 cost system too expensive. The term “red tape” is relative. What is needless formality in one concern may be essential in another. The mere statement that a cost system has too much red tape, without further explanation, is not a valid objection. Red tape, when actually found, is misapplied, or too much, system. The complexity of a system is no guarantee of its accuracy. For example, one factory for a long time charged Advertising and credited Stable Garage Expense for adver- tising placed on automobiles. The question of installing a cost system should receive the same sort of consideration as any other question which bears on factory efficiency. Do the advantages of the cost system outweigh its disadvantages? While the expenses of installing and operating a cost system are treated as expense items in the profit and loss statement, the benefits derived from such outlays continue year after year. In reality, therefore, a cost system is an investment rather than an expense. A cost system, however, like any other investment, should be used intelligently if it is to be a source of profit. It is only a diagnosis of business ills— not a cure for them. 4. System Unnecessary Another objection that a manufacturer will frequently make to a cost system is that he is in such close touch with his business that he does not need a system. He may state with a good deal of pride that he has made money and does not need any newfangled notions involving additional ex- pense for clerical hire. Inertia, too, is a powerful factor in his reasoning. An inherent reluctance to adopt new methods is too prevalent. This unwillingness brings to mind the story of a moun- taineer who followed his father’s custom of placing a stone in one end of his grain sack in order to balance it on his 8 COST ACCOUNTING saddle before starting to the mill. A tourist suggested that the stone be left out and the grain distributed equally in both ends of his sack. The mountaineer replied emphatically, “What was good enough for Dad is good enough for me.” The “business graveyard” is full of concerns whose manag- ers had similar feelings. A cost system should be accepted or rejected on its merits. Expensive ones have been discarded before they have been given a fair trial. Cost accountants are not infallible and their work is not always of a high grade. As a result, cost systems have been junked because they were inherently faulty, or because they have been improperly operated, even though practicable. 2 Assistance from Agencies in Overcoming Objections A convincing selling talk is easier to make today than a decade ago, because opposition to cost systems has been de- creased by the campaign of education conducted by numerous agencies, such as trade associations, the National Association of Manufacturers, the Federal Trade Commission, the Na- tional Association of Cost Accountants, and others. These agencies are disseminating information which has disclosed the value of a cost system to many who were formerly igno- rant of its advantages. Nevertheless, despite the good work of such agencies, too many manufacturers are still unaware of the value of a cost system. The cost accountant should be able to state forcefully what its advantages are. Advantages of a Cost System—1z. Accurate Unit Costs One of the most important advantages of a good cost system is that it shows accurate unit and total costs. A pro- gressive manufacturer wants to know the costs of his indi- vidual units of product. Total costs alone do not satisfy ; neither do average costs for the business as a whole. An WHAT COST ACCOUNTING IS 9 actual case will illustrate this point. Two manufacturers, A and B, produced several grades of soil pipe. The former kept only average unit costs for all products. The latter recorded separately the exact unit costs of his different prod- ucts. At the close of a fiscal period A’s profits were dis- appointing because his gross sales had been large. An analysis of his sales showed that most of the increase was in one line. | ©] o E || o a be of oD 8 8S a 3 z ~~ Qo a © Form 3. Voucher (face and reverse). (Size, 8% x 11.) 58 COST ACCOUNTING 10. Voucher Register. Vouchers are entered in this book for permanent record and for accumulating the distribution data. 11. Stock Record. This subsidiary analytical record of material control accounts shows quantities and values of all transactions in connection with each individual item of stock. (See Chapter X.) Forms Used to Record the Flow of Material After incoming materials are entered on stock records, a great deal of care is necessary to keep track of them, owing to the varied nature of their movements. To facilitate a strict accounting, the following forms have been devised: 1. Material Requisitions. Stock requisitions are made out on this form. Either a production or a standing expense order is charged. (See Chapter X.) 2. Material Credit Slip. When excess or unused material is returned to stock the slip is filled out so that the account to which the original requisition was charged may be credited. » (See Chapter X.) 3. Scrap Tickets. This ticket is used to account for spoiled or otherwise useless material. (See Chapter X.) 4. Inspector's Report. The inspector certifies as to qual- ity and quantity of materials on this form. 5. Identification and Move Card. The routing of mate- rials through the various operations is indicated on this card which accompanies the material through the various proc- esses. (See Chapter VII.) 6. Salvage Tag. Tags are used to identify defective pieces and to specify the work required to salvage. The standing order to be charged should also be given. 7. Forwarding Slip. All lots of goods when sent by one department to another—or to stores—should be accompanied by a forwarding slip. (See Chapter XXIV.) MECHANISM OF COST CONTROL 59 8. Expense Debit Slip. Direct charges to standing ex- pense orders are entered upon the slip, as explained earlier in this chapter. g. Inventory Tags for Physical Inventories. One of these tags is for material and supplies, and one for work in process, and are used in the taking of actual physical inventories. (See Chapter XIV.) 10. Inventory Sheets for Physical Inventories. One of these sheets is for material, supplies, and finished stock, and another is for work in process. These sheets are used for the recording of information from the inventory tags. (See Chapter XIV.) Forms Used in Accounting for Labor All the forms used in accounting for labor are listed and briefly described below. In Chapters XV and XVI full ex- planation of these forms and their application to other cost records is given. 1. In-and-Out Clock Card. Reported Date. Grows Walght . Tare Weight... Net Weight ..,... Date Received. csr I : ee PURCHASE PART OR PATTERN NO. STYLE OF [STORED] 0! ED ORDER No | DESCRIPTION OF MATERIAL OR DIMENSIONS packina | WEIGHT | QUANTITY |VIGectiony BIN Quantities checked by ... cliscctl eT ithiataka eed ets seated Cheoker SMLRECORS. Quantities approved by... Quality epproved by.. ...{napeotor ¥ Form 11. Receiving Report. (Size, 81% x 7%.) cases this is of utmost importance on account of the delay of vendors in issuing credit memos—in some cases many weeks elapse before the credit memos are returned. In the meantime, however, the debit memo issued by the purchasing department is put through the records in regular form, a copy being sent to the vendor. 104 COST ACCOUNTING These purchasing department debit and credit memos may be used for other purposes, such as the adjustment of selling prices one way or the other. The principal use of the credit memo is in adjusting prices when some error has been made in the original invoice. Occasionally also the credit memo is used in the case of overshipment by a vendor when the mate- rial is acceptable. HOLDEN MANUFACTURING CO. BOSTON, MASS. ReEcoRD OF PURCHASES NOY Mant AND ADDRESS Form 12. Record of Purchases. (Size, 8 x 5.) With both of these forms, great care must be taken to fill in full data, particularly the accounting references, in order to facilitate the complete accounting procedure of the com- pany. 6. Receiving Report Form 11, which is self-explanatory, is a simple type of receiving report. PURCHASE AND RECEIVING RECORDS 105 7. Record of Purchases It is usually best for the purchasing department to maintain a card or book record (Form 12) to show the data in connec- tion with the purchasing of all items of sufficient importance to be recorded. Nearly every up-to-date concern maintains some record of this sort in order to furnish full knowledge of what has been done before in relation to each item and as a guide in current purchases. This form is of particuar use in connection with items whose source of supply is more or less restricted and as to which it is necessary to know exactly with whom to deal in connection with the purchase. For much of the material handled by a manufacturing in- stitution, the stock record (Form 14, page 130) will be found of great value in connection with, or in place of, the record of purchases. This applies particularly to staple articles, such as bolts, nuts, nails, and steel, purchased from vendors whose names are not of great importance, and to all supplies which have to be drawn from many sources. 8. Distribution Stamp for Invoices Figure 13 shows a form of rubber stamp which may be used in connection with the approval and distribution of invoices. It is especially important that all the information shown on this stamp should be given for each invoice. While the stamp is quite large, there is really nothing on it which can be dispensed with. Other Forms There are many other forms which might be shown in connection with the discussion of the work of the purchasing department. In fact, those here shown represent the smallest number with which a purchasing department can operate accurately. It is, of course, necessary for a purchasing depart- 106 COST ACCOUNTING HOLDEN MANUFACTURING Co. BOSTON, MASS. Peuse Orper No. Terms Fe't CHARGES Mat'L.REc'’D - Date Rec.ReRm No, Prices OK. By Ext’p O.K. By PcHse ORDER BY ero} Srocr Recorp BY Exe. Ler. ev ACcount AMT, i | | Form 13. Invoice Stamp. (Size, 21%4 x 3%.) ment to maintain follow-up files for incoming material, quo- tation files for the various materials required, and many other detailed records which are important, but which have no direct bearing on the subject of this book. ORIGIN OF PURCHASES The origin of purchases has a close bearing on all the pro- cedure which follows. To take up some items in detail will give an idea of how such matters should be handled. Purchases of Material for Stock In the case of the material covered by stock records, the request for purchase is made out by the stock record clerk. PURCHASE AND RECEIVING RECORDS 107 Therefore, raw materials, supplies, and in some institutions certain materials purchased from the outside for use in as- semblies and for direct shipment, which are in stock, should be covered by stock records. Before making out the request for purchase, the stock record clerk carefully considers the maximum and minimum limits discussed in Chapter XIII. In addition to these factors, the requirements columns of the stock record sheet show when it is necessary to order material and the quantities needed. The request for material must receive the approval of the general storekeeper and perhaps of some other official. It is then passed on to the purchasing department for action. The purchasing department returns a copy of the purchasing order to the stock record department, so that an entry may be made on the stock record sheet of the date of order, the purchase order number, and the quantity ordered. Each stock record sheet should show the material inven- tory account which covers the material to be ordered, and the number of that account must be placed on the request for purchase. Items of Material Necessary for Purposes of Repair In many instances purchases are made of repair parts which are never carried in stock, nor is it desirable to carry them. Such is the case, for instance, when a piece of material drops into a machine, strips the gears, and necessitates a spe- cial order for parts which under ordinary circumstances would never need replacement. In all such cases the request for pur- chase should originate with the master mechanic and should have the approval of the general superintendent. A full explanation must be given on the request for pur- chase of the use to which the material is to be put, not only as a matter of record but also to assist the receiving depart- ment in quickly disposing of the material when it is received. 108 COST ACCOUNTING Another important point is that of settling the account to which this material will be charged. Material of this nature should not be charged to an inventory account; instead it should be charged direct to the standing expense order affected by the purchase. On each request for purchase of this nature the entry for charging the account should give the standing expense order covering repairs on the particular piece of equip- ment for which the material is desired. The accounting de- partment should. enter this invoice as a debit against the ex- pense ledger account, and make out an expense debit slip chargeable to the standing order number (see Chapter V). Too much stress cannot be laid on the importance of set- tling at the time of the purchase the destination of a repair charge, as purchases of this nature have probably caused more trouble in cost accounting than any other class. If the procedure here outlined is followed, it is not difficult to account properly for all the incoming material, so far as the records are concerned. In addition, the receiving clerk is given in- formation which will enable him to deliver immediately these repair parts to the master mechanic’s department in order to get the crippled equipment into operation. Services of Various Natures In a manufacturing institution of any size there is a con- stant aeed for outside services. Structural workers, boiler- makers, special mechanics, various contractors, etc., are called upon to perform work of specialized nature or to undertake work which the organization of the plant is not able to handle. The request for a purchase of this nature originates with the master mechanic, except in such cases as when the ac- counting department sends for auditors, or the general super- intendent for consulting engineers, etc. Regardless of who makes out a request for purchase, exactly the same explana- tions should be given as required for special material purchased PURCHASE AND RECEIVING RECORDS 109 for repairs. In fact, the procedure is almost identical—par- ticularly in respect to giving the exact charge to be made for the services performed. The only difference which enters into the procedure is that services of this nature are naturally not received in the receiving room, but are certified to by the one who is in touch with the service performed and who is in position to make affidavit that full value was received. Advertising, etc. It is quite rare that the purchasing department arranges for such matters as advertising and other publicity features of the selling department. In cases where such contracts are arranged, the department or official arranging the obligation should, upon conclusion of the agreement, fill out a request for purchase, giving all data and particularly the account to be charged, in order that the purchasing department may cover the obligation with a proper confirming order. In many cases this confirming order is made out purely for the purpose of record, the original of the purchasing order not being sent to the one in whose favor drawn. These orders are sometimes known as “dummy orders,” and are placed on record merely to make sure that the invoices are properly O K’d when they come in—a step which is absolutely necessary. Miscellaneous Purchases In nearly every manufacturing plant many miscellaneous deals are consummated, such as telephone contracts, telegraph arrangements, power contracts, etc., which may or may not be handled by the purchasing department. These purchases are in the same class as advertising, etc., and should be handled in identically the same way. In such cases it should be under- stood that a request for purchase is to be made out immediately upon the consummation of any arrangement. 110 COST ACCOUNTING Importance of Accounting at Source Repeated mention has been made of the importance of settling the accounting at the origin of each purchase. Ii the account to which each purchase is to be charged is decided upon at the source, and the account number placed on the request for purchase, the account number can be en- tered on each purchase order. It then becomes possible by automatic means to place this information on each invoice as it is received and approved. This is the simplest and most approved procedure. The receiving clerks know exactly what to do with the material when it is received, to what stock- room it should be sent, or, in the case of charges to standing orders, to what department it should be delivered. This method has its bearing also on the handling of the invoices in the stock record division and in the cost department. Failure to decide at the source upon the account to which a purchase should finally be charged has been the cause of more work and lost time than any other one point in connec- tion with the handling of cost records, and therefore it is urged that this point be given the most careful attention by anyone who may be attempting the installation of cost records. Receiving Material Much discussion has been given in the past to the methods of receiving material upon its arrival at the plant. The dis- cussion has been principally in connection with whether or not a copy of the purchase order with quantities and all data should be given to the receiving clerk or whether the receiving department should report what is received without any guide. In deciding this particular point the size of the plant and the nature of the organization must be taken into consideration. The proximity of the purchasing to the receiving department has a large bearing upon the question. PURCHASE AND RECEIVING RECORDS IIl For example, if the plant in question is a very large one, the position of the receiving clerk becomes of such impor- tance that there is no question but that he should be furnished with a copy of every purchasing order with full information thereon. Moreover, in such a case the receiving clerk has none of the actual checking and counting to do, and accordingly will not be influenced through his knowledge of the quantities or prices which may appear on the purchase order. Unquestionably, those who actually open and check the packages should be working on a blind basis in order that they will give a proper report of the nature and count of the material. If the individual opening packages has before him a list of what is supposed to be in the package, with the quan- tities specified, he is liable to be more or less influenced by the information which he holds. If the plant is so small that the man who actually opens the goods is the receiving clerk, he should certainly not have a copy of the purchasing order with quantities thereon. If, on the other hand, the plant is of sufficient size to maintain a number of checkers, it is apparent that as the receiving clerk himself is elevated above the point of being influenced by the count, and in fact becomes the intermediary to verify the accomplishment of the actual counters or check- ers, he should be given the records in order to be sure that a proper count is made of the incoming material. He can detail his subordinates to open and count the material, giving ' a blind report thereon. He can then check this report with what was supposed to have been received, and act accord- ingly. Inspection of Incoming Material Another very important feature of the receiving end of the business is the verification of the quality of the material re- ceived. Sometimes material is opened and counted by receiv- II2 COST ACCOUNTING ing clerks and then passed on to the inspection department, where it is again taken from the packages and inspected for quality. It is then necessary for the inspection department to count the goods again in order to give a complete record of the number of good and defective pieces received in the ship- ment. It seems needless to have two separate and distinct counting operations when they might just as well be com- bined into one, particularly when it has been proved that it can be accomplished without confusion. The receiving clerk should therefore be given full jurisdiction over all the men who are actually doing the work, but the method of inspec- tion and the equipment to be used during inspection should be entirely under the functional control of the inspection de- partment. The standards of quality should be set and super- vised by the inspection department, the receiving department being furnished with all necessary drawings, gauges, etc., in order that proper inspection may be made. This method of operating is economical, in that it saves space and has the effect of effectually speeding up the work of disposing of incoming material. CHAPTER IX TRANSPORTATION CHARGES Problems Connected with Transportation Charges There is probably no other part of the cost accountant’s work regarding which there is so much question as the hand- ling of freight, express, postage, and all other forms of trans- portation charges. In many concerns the practice has been very erroneously followed of charging all incoming freight to a factory expense account and of charging outgoing freight as a sales expense, for no other reason than the assumption that material coming in is used in manufacture and material going out is sold. The problem of the correct distribution of transportation charges is most important; a full and satisfac- tory solution must be found if the business is to show cost figures which are at all accurate. The fact that the material enters the plant is no proof whatever that all incoming transportation charges are a fac- tory expense, as will be explained later. Further than this, even supposing that all the incoming charges were to apply to material which was to be used in manufacture, the ratio of transportation charges on some material to the price paid to the vendor for the material might be two to one, whereas with some other material the transportation charges might be only one-twentieth of the price paid to the vendor for the material. This fact alone will show that for any industrial institution to throw all incoming transportation charges into an expense account is a procedure that is almost ridiculous. The situation is similar as regards outgoing transporta- tion charges. While some of them may have to do with sales, others may be for raw material returned as defective, or for 113 114 COST ACCOUNTING many other items which have nothing whatever to do with sales expense. This chapter deals with the various types of transportation charges. In order to exhibit all these types in compact form, the various kinds of transportation charges commonly used have been listed below. This tabulation is followed by a detailed discussion of each kind of charge. Incoming Transportation Incoming transportation charges are incurred on the fol- lowing classes of goods: 1. Purchased goods. 2. Goods returned by customers. 3. Samples, etc., not covered by a purchase order; this case sometimes occurs though it is bad practice. 4. Goods refused or condemned. 5. Receipts of miscellaneous nature. 1. Purchased Goods F.0.b. Works of Purchaser. The charges are either pre- paid by the shipper, or paid by the purchaser and deducted when settlement is made for the goods. In such cases the straight invoice value is the correct cost of the goods. F.0.b. Works of Vendor—Freight Allowed. The account- ing of the charges is identical with that for “f.o.b. works of purchaser,’ but the traffic department has the responsibility of pushing all claims for damage with transportation com- panies, as by the terms the goods belong to the purchaser immediately upon shipment. F.0.b. Works of Vendor. The company pays all charges, in addition to the invoiced price of the goods. This means that in entering the cost of the materials in question on the price books or stock records, the cost will be the invoice price plus the freight charges. TRANSPORTATION CHARGES 115 2. Goods Returned by Customers Goods Returned on Account Error. The charges are en- tered either against a special expense account to show the exact cost of such errors, or against “Miscellaneous Expense Freight.” The situation is somewhat the same as in the case of “goods returned on account error,” except that in foundries and like institutions the charges should in all cases be entered against the expense account for “Returned Castings Loss.” Goods Returned—Miscellaneous. Many times goods are returned when ordered in error by customers. Charges on goods returned for this or similar reasons should be recovered from customers when possible, but when for selling or other reasons it is thought best to absorb the charges, they may be charged to Miscellaneous Expense Freight. 3. Samples, etc. Theoretically there shotild be no incoming materials other than as specified under other headings, but usually there are isolated instances of samples, etc., coming in which are not covered by purchase orders. In all such cases the transporta- tion charges should be charged to the expense account receiv- ing the benefit. 4. Goods Refused or Condemned Great care should be taken that all transportation charges on goods refused because of error, or because condemned, are charged to the shippers. In any case of the fault of the company, or of doubt, when the company finally has to pay charges, the charge should be made, not to the material accounts, but to Miscellaneous Expense Freight. 5. Receipts of Miscellaneous Nature There are quite often receipts of various materials not otherwise specified. These may consist of traveling men’s 116 COST ACCOUNTING equipment, exhibits returned from conventions, transfers be- tween offices and plant, and many other items. In all cases of this nature, either a specially designated Miscellaneous Expense Freight account, or some other expense account, should be charged with cost of transportation. For example, suppose an exhibit is returned from a convention. The freight charges on this should be charged either to an expense heading under selling expense called “Convention Ex- pense,” or an account called ‘Selling Miscellaneous Expense Freight.” The main point to bear in mind is that it is of no use to throw all charges into one account, but that it is far more valu- able to charge all such transportation cost to the expense account which receives the benefit, and which should be in- creased by the cost of such transportation. (See also 7.) ° Outgoing Transportation Transportation on outgoing goods covers: 6. Shipments of sales. 7. Shipments of returned purchased goods. 8. Shipments of samples. 9. Shipments of miscellaneous nature. 6. Shipments of Sales F.0.b. Works of Purchaser. In this case either charges may be prepaid or shipment may be made collect, allowance being made for the freight when the customer pays the invoice. F.0.b. Works of Seller. In this case the usual procedure is the prepayment of charges to any prepay stations on rail- roads or express lines and the payment of parcel post charges. F.o.b. Works of Seller—Freight Allowed. This case is treated like that of “shipment f.o.b. works of purchaser,” except that the customer has full responsibility for goods im- mediately on shipment. TRANSPORTATION CHARGES 117 7. Shipments of Returned Purchased Goods Goods Refused or Condemned. See case (4). Outgoing charges are treated like incoming. Goods Returned Account Buyer's Error. The charge should be made to Miscellaneous Expense Freight. 8. Shipments of Samples In most cases of shipments of samples the charges should be made to “Miscellaneous Expense” of the selling depart- ment. This does not always hold, however, as in the case of the purchasing department sending out samples of material for duplication. In such instances the charge should be made to Miscellaneous Expense Freight. 9. Shipments of Miscellaneous Nature There are many shipments of miscellaneous nature the transportation charges of which should be charged against various expense accounts. For instance, the charges for a bundle of advertising material sent out by express should go to “Advertising Miscellaneous Expense.” In the case of a typewriter shipped for repairs, the charges should go to “Of- fice Sundry Expense,” etc. (See [5].) Accounting for Transportation Before applying specifically the directions just outlined for handling freight of various kinds, it is necessary to dis- cuss briefly the actual ledger accounts which are affected by the various charges, with a description comprehensive enough to permit of clearly outlining the procedure which should be followed in connection with each class of charges. Almost every control account of any importance in the ledger may at some time or other be charged with some form of trans- portation. This is especially true in the case of material in- ventory accounts and expense accounts. 118 COST ACCOUNTING Transportation charges consist of five main divisions, as follows: 1. Charges to be deducted from payment of invoices, covering freight charges of any nature which are paid by the purchaser of material, etc., but are to be deducted from the settlement for the goods in ac- cordance with the terms of the purchase. 2. Charges to be added to invoice, consisting of what- ever may be expended in prepayment of outgoing shipments, by freight, express, postage, etc., which is to be added to the invoices for the outgoing goods. 3. Charges to be absorbed in cost of goods, including payment on incoming goods, which have to be added to the invoice cost of the goods in order to deter- mine the real cost delivered at the plant. 4. Charges on delivery of sales, covering transportation charges which have been included in the sales price of goods shipped to customers. These charges are not to be added to the invoice. . Charges of an expense nature, covering a multitude of cases, both incoming and outgoing, in which the transportation paid is a direct charge to some one of many expense accounts; these expense accounts may be of any nature, perhaps bearing the name of transportation charges, perhaps appearing in one of the expense accounts as shown in the standing order code. wn To make clear the handling of the charges in these vari- ous types of accounts, each class will be taken up separately with reference to the tabulated statement of the various kinds of transportation charges. TRANSPORTATION CHARGES 119 1. Charges to be Deducted from Payment of Invoices The charges to be deducted from payment of invoices are of a troublesome nature so far as the accounts are concerned, because of the danger of paying a large volume of incoming freights and failing to deduct the payment from the settlement of the invoices for the goods on which the charges were paid. If accuracy is to be assured, it is necessary to create a holding account for such charges in order to maintain an adequate check and insure that all deductions are properly made. In this connection it will be well to refer to Form 13 (page 106), the rubber distribution stamp placed on all in- voices at the time they are received. This form, which is self- explanatory, should be constantly borne in mind in the descrip- tion which follows. Freight bills often have to be passed through and paid a long time before the invoices for the goods arrive. With all freight bills the following method should be used: A ledger account should be established called ‘Freight to be Deducted.” This account should be charged with incoming freight which is to be deducted from the vendors’ invoices, and credited with all deductions made in the cash disburse- ments book in settlement of these invoices. A subsidiary book should be kept in which should be entered the detail of each debit made to the Freight to be Deducted account—one item to a line, with space alongside each detail entry to permit of a corresponding detail entry made from the cash disbursements book at the time this freight is deducted in settlements. This procedure, although detailed, has proved many times to be a most profitable feature, bringing about a saving far in excess of the extra cost. When the freight bill comes to the purchasing department for accounting, it is identified as to the purchase order to which it applies. If the goods were pur- chased “f.o.b. works of purchaser,” the freight bill is 120 COST ACCOUNTING charged to the Freight to be Deducted account, that fact being so noted on the bill. The name of the vendor is writ- ten alongside the rubber stamp. This freight is then entered in the record of material received on the purchase order (see Form 7), and when the invoice is received the terms and the amount of freight paid are filled in on the rubber stamp. This gives the accounting department the full details so that when the settlement is made for invoices of this nature, the proper deductions may be made. It can now be readily seen that on the subsidiary record of the items in connection with the Freight to be Deducted ac- count, the debit entries which have no credit against them are shown very clearly, and it is possible to make sure that all freight payments of this nature are recovered from the vendors. In actual practice, this account proves useful in taking care of the transportation charges involved when purchase terms are “f.o.b. works of purchaser’ and “f.o.b. works of vendor— freight allowed” (see page 114). 2. Charges to be Added to Invoices Up to the time when parcel post became so popular, a:most the same question was involved in connection with items of transportation paid on outgoing shipments, when the charges were to be added to the invoice, as in the case of freight to be deducted. In lines of business in which heavy transporta- tion charges are paid on outgoing shipments, a method similar to that in the case of freight to be deducted should be used. The method of handling is almost identical with the exception of the fact that the credits to the account—called “Freight to be Added” account—come through the medium of the sales journal, rather than the cash disbursements book. The parcel post, however, is now so largely used that in many plants almost every shipment involves the payment of TRANSPORTATION CHARGES 121 parcel post charges, with the further complication of adding these charges to the invoice. To carry out the detail as speci- fied for the Freight to be Added account would be altogether too great. In such a case it would be advantageous to create a ledger account called “Outgoing Parcel Post” account, without keep- ing the detail of each charge in any subsidiary record. The de- tail should, however, be provided for by small charge slips, or by some method of noting this information on the shipping order, in order that the invoice department may receive the information necessary to bill the customer properly. In enter- ing the sales the amount of parcel post paid out should be credited to the Outgoing Parcel Post account. When shipments are made to the purchaser without pre- payment of transportation charges, the deductions for such charges, when the terms of sale prices cover delivery to works of purchaser, should be made through the cash receipts book and should be treated as if the amount had been added to the invoice. The comments in this section apply to shipments “‘f.o.b. works of seller” and “‘f.o.b. works of seller—freight allowed” (see page 116). 3. Charges to be Absorbed in Cost of Goods In all cases when purchases are made with the transporta- tion terms “‘f.o.b. works of vendor,” this means that one of two methods prevails: 1. The charges have been prepaid by the shipper and added to the invoice. : 2. The receiving company pays the freight charges. In the first case the accounting is quite simple, as the entire invoice is charged to the account shown by the purchase order, thereby indicating the freight or other kind of trans- 122 COST ACCOUNTING portation bills involved, the total being used in computing the unit cost of the material. In the second case the invoice comes in simply billing the goods, and there is in addition a bill for the transportation charges entirely separate from the invoice. In this case the transportation bill is charged to the same account to which the material is charged, the amount of freight being shown on the invoice in the rubber stamp. The result is that the stock record department must combine the invoice cost and the trans- portation cost, and compute therefrom the unit price to be used in charging out the material, which thus represents the cost of the material delivered at the plant. This covers goods purchased “f.o.b. works of vendor” (see page 114). 4. Charges on Delivery of Sales Probably there are more errors made in the entry of trans- portation charges paid out on the delivery of sales to cus- tomers than in any other item in connection with transporta- tion charges. It is unfortunately the custom in many industrial institu- tions to treat the delivery cost of sales as a selling expense. This is entirely erroneous. The cost of delivering goods to purchasers is one which may vary from the cost of trucking the goods next door to paying the transportation charges for delivering the goods across the continent. Every argument is in favor of treating the delivery cost of sales as an item which will appear in the profit and loss statement as a deduction from the sales, the resulting figure being the exact amount received for goods at the plant of the shipper. The objection may be urged that the price for many goods is fixed, and the selling price of the goods must be the same in all localities—at least for a district bounded by the Atlantic TRANSPORTATION CHARGES 123 Coast and the Mississippi River. Within this district, how- ever, the actual transportation charges will vary greatly. The majority of industrial institutions have a fixed price for large territories, and for those plants the amount of de- livery cost is of extreme importance. It should be clear that including delivery charges in the selling expense, or any other expense, creates a cost to be added to the manufacturing cost, which may result in a loss of near-by business. If a company were in competition with another company whose operations did not extend very far from the locality in which the plants were operating, and the manufacturing costs were identical, the company whose operations extended into a large area would lose all local business because of having the selling expense loaded with the cost of long-range trans- portation. The result would inevitably be a falling off in the near-by trade with an increase in the long-distance trade, inasmuch as the selling prices would be too high near-by and too low for far-away points. The argument that the prices must be made lower on the far-away points is a fallacy, in that this policy contemplates taking additional selling value from near-by points to make possible the lower price for far-away points. Manifestly, that cannot continue very long. If a manufacturing institution on the Atlantic seaboard wishes to maintain sales across the con- tinent and yet hold the sales of near-by points, it can do so only because the intrinsic value of the product together with proximity to raw materials, giving it an advantage over west- ern manufacturers, allows it to sell at a price which will absorb the freight charges. In other words, time is bound to demon- strate that selling prices at distant points cannot be maintained at the expense of near-by sales. The procedure in this case is to create for each selling account a companion account to hold the cost of delivery of such sales. This account should be called “Freight Out on 124 COST ACCOUNTING Sales” prefixed by the title of the particular sales account to which it belongs. It would be charged with all freights con- nected with the delivery of sales, whether prepaid or whether deducted by the customer in settling for the goods. In the latter case the entry would come through the cash receipts book. In any event, the transportation charges connected with the delivery of sales should be a direct deduction from the gross sales through the medium of the Freight Out on Sales account, and in no cases should be treated as a selling account. This provides for shipment “f.o.b. works of purchaser” (see page 116). 5. Charges of Expense Nature Charges of an expense nature are very inclusive, embrac- ing all the items in the tabulated statement of freight charges not already discussed. It is best not to try to specify in absolute detail every type of charge, since the tabulated statement (pages 114-117) gives a sufficient clue to the various entries of incoming and outgoing transactions involving transportation charges. The point to observe is that very particular attention should be paid to the distribution of the transportation charges which affect the various expense accounts. If that is done, the prob- lem is merely one of determining carefully which accounts should rightfully be penalized with the charge. A few instances will illustrate the consideration which should be given to the individual case in order to find the line of least resistance and discontinue bunching freight charges into one or two large accounts that give no clue as to their analytical nature. A machine tool may break down and have to be returned to the works of the maker for repair. The charge for trans- porting this machine back and forth is as much a cost of the TRANSPORTATION CHARGES 125 repairs to this machine as the actual invoice which is late: issued by the company making the repairs. These charges accordingly should be made to the standing order number covering the repairs of this machine. A company may have branch offices necessitating the ship- ping of samples or supplies of various natures. Most cer- tainly the transportation charges on this material should be charged to the branch office expense if an accurate line is to be kept on the cost of operating the branch. Material which a company may have shipped out and which the customer rejects as defective is returned. The charges for transporting this material to the customer—which he will probably bill back—together with the cost of getting the material back to its starting point, should most certainly be charged to the account which holds the cost of defective material. The transportation charges on samples shipped to cus- tomers are undeniably chargeable either to a “Samples” ac- count or a “Miscellaneous Expense’’ account of the selling department. Illustrations without number could be given to bring out the fact that there is every argument against bunching trans- portation charges into one big account, or into two accounts, such as “Incoming Transportation” and “Outgoing Trans. portation.” Such bunching of freights results from a failure properly to analyze the costs of the business and such laxity’ sheuld be corrected. CHAPTER X STOCK RECORD ACCOUNTING Organization of the Stores Department After material and product have been received and re- corded in the receiving room, and the proper reports have been sent to the departments entitled to receive them, the material is turned over to the storeroom to which it is consigned. The storeroom should be properly arranged with bins or spaces to take systematic care of the material, and should be well equipped with pans, racks, drawers, bins, boxes, etc., ac- cording to the most approved storeroom practice. While the organization of the storeroom will naturally depend on the size and nature of the general organization, certain features should be kept in mind in considering the plac- ing of the stores organization in the general organization. Every plant, if of sufficient size, should have a general storekeeper or material supervisor, who has jurisdiction over all storerooms. Each individual storeroom should be in charge of a storekeeper who has entire control of all necessary assistants in the storeroom. Clerical work in the storeroom should be reduced to the absolute min- imum, and should consist only of such work as is neces- sary to follow out the rules in connection with the reporting of receipts and disposition of the material in the storeroom, and of all detail in connection with the requisitions or bills of ma- terial which act as vouchers for the material which is issued from the storeroom. In plants where a comprehensive method of production control is in effect, the control of the storeroom should be vested in the production control department, as the control 126 STOCK RECORD ACCOUNTING 127 of:all material movements is one of the most important func- tions of production control. Where there is no production control department, the jurisdiction of the storerooms would best be vested in the general superintendent. He is the official particularly interested ih what scheduling and produc- tion takes place and, therefore, should have control of the movements of material which so vitally affect the efficiency of the production department. Finally, the storerooms should not be under the control of the purchasing department. Purchasing is an art by itself, and the purchasing agent should have no interest in the de- tails involved in the storing and issuing of material. Such details only detract his attention from the markets. As a general practice, the stock records should not be under the jurisdiction of the storekeeper, as it is easy to see that the records of the material on hand are a constant check on the operations of the stores force. Use of Stock Records Stock records should be used for raw materials, supplies, individual parts, semi-finished parts, subassemblies, major as- semblies, and finished product. It is impossible to cost product if individual parts and assemblies are not accounted for by stock records, because the parts for assemblies may be taken from a mass of parts in a department, the costs of which may vary materially but which nevertheless are not indicated on stock records. Yet in many plants, unfortunately, individual parts and subassemblies are left to accumulate on work benches and on the floors in operating departments instead of being put in storerooms until they are requisitioned for assemblies. Accounting Theory of Stock Records The use of stock records is the practical application of the personalistic theory of accounts, which, it might be remarked, 128 COST ACCOUNTING is the distinguishing characteristic of triple and quadruple systems of bookkeeping, known also as logismography and statmography respectively. This theory, in brief, is that certain persons in the employ of a concern are responsible for the assets in their possession. These persons are charged with the quantity and value of assets placed in their care and credited for releases thereof. Thus the storekeeper is held accountable for the materials and supplies under his control. Stock record sheets kept by the stock record clerk furnish the means of checking the activities of the storekeeper, if the former is not under the supervision of the latter. Names for Stock Records A variety of terms synonymous with the term “‘stock rec- ord” are in use, namely: stores record; balance of stores record; book, running, going, continuous, or perpetual inven- tory; stock card; and stock record sheet. The latter term is ‘coming into vogue more and more. Stock Record Forms Four different kinds of records are used in accounting for stock, namely: 1. Bound books 2. Visible index 3. Stock cards 4. Stock record sheets Bound books for stock records are obsolete. The visible index would be the preferable kind of record in accounting for stock if all the data needed could be readily seen. Stock cards are probably used more than any other class of records, but are being supplanted more and more by stock record sheets with linen-backed separating sheets, this method permitting greater speed and permanency. STOCK RECORD ACCOUNTING 12g Sections of a Modern Stock Record Sheet A knowledge of the accounting theory of stock-recording aids in understanding the technique of keeping the records. After the general theory is understood, however, the general technique may best be understood by studying separately the operations involved in keeping each section of the stock rec- ords. The following parts of the stock record sheet (Form > 14) will be considered in turn: Heading Requirements columns Appropriated columns Ordered columns Received columns Issued columns Adjustment columns ON Gt de Go No = This stock record sheet is inclusive enough to fit all pos- sible needs of a firm. If a given firm does not wish all the data provided for, the columnarization, etc., can easily be revised. It is usually easier to reduce than to enlarge a stock record sheet. The form here shown eliminates the need for a balance column by providing running total columns. Most stock records, however, still show a balance column. 1. Heading The heading of a stock sheet may show: I. The name of the item (material, individual part, or assembly ). . The kind of material in the item. . The size, type, and symbol of the item. . The cubic space block is filled out whenever material, etc., is shipped on the basis of cubic feet, or when cubic feet should be known in order to provide suffi- cient storage space. bdo pw COST ACCOUNTING 130 aad || leon aanssi e dvds DIENT dAL Se els (rr x ZI ‘8zIg) qunowy |} 214g jf} [eyo, | way QaAta9ay aauad4o ‘jays Prosoy YoISG PI Woy GaLwiddOuddY SINAWSaINDSa ‘139 OL ‘AIddNS 40 3IMNOS WdlINtid ‘ON ANNODIV aauindad SW ‘BLVY ONILYAANOD ‘ya 1M a wos O3SH- A i ONIN “NYND UVaA Wows JaVW 3ZIS-GIYINOAY “LAVIN Mva Nid STaHS NOILI3S WoOOasNd01S: WIMSLVW 30 GNI LASHS GYODSe WIOLS “SSVI ‘NOLSOS 09 ONIANLOVSANVW NAdIOH WALI JO 3WVN IO. Il. 12. 13. 14. 15. STOCK RECORD ACCOUNTING 131 The name of the stockroom where the item is stored and its location (section, shelf, bin) therein. The size and kind of raw material required for the item, if it is an individual part or an assembly, etc. The name and weight of a unit of the item, whether the pound, gallon, barrel, foot, yard, or piece. The unit of purchase is not always the unit of con- sumption. For example, steel is bought by the pound but may be used by the foot. In order to get the consumption unit, a “converting rate” is applied to the unit of purchase. The ‘““Made From” memo indicates the kind of mate- rial from which a finished or semifinished part, etc., was made. The “Used For” item shows the kind of product into which the item of material or finished part goes. In the year and quantity blocks the consumption of material, etc., is shown by years. The account number is the number of the material controlling account for the item of stock indicated on the sheet. The time required to get an item after a purchase order is placed is shown. The principal source of supply is noted, if most of the purchases of the item are made in one place. This is apt to be more common in the case of spe- cialties than staples. Not all sources of supply are entered on the sheet. ‘ The monthly quantities of the item required, as in- dicated by the production schedule prepared by the control or planning department, are entered in the “Required” table. The maximum and minimum quantities by months are shown, if the consumption of material varies. 132 COST ACCOUNTING 2. Requirements Columns The quantity of each class of raw material or finished parts needed for production or sale is entered in the requirements column. The quantities appear in the item column. Each item required is added to preceding requirements and the sum is extended to the total column, which is a column of running totals. The requirements are ascertained by the stock record clerk from the control or planning department. 3. Appropriated Columns The appropriated—or reserve—columns show the quanti- ties of material and parts, etc., which are set aside for certain orders that are given priority over other orders. An illustration which shows how the appropriated cal- umns are used is as follows: APPROPRIATED Item For Order No. - Total Total Quantity 200 | 400 400 400 150 il’ 300 300 700 200 1 600 200 goo 150 | goo 600 1,500 300 \ 700 700 2,200 200 ! 1,000 400 2,600 Appropriations of stock for order number 200 are made on three separate dates before the total amount of 1,000 units is appropriated, as shown in the requirements columns. When the total requirement for the order is appropriated, the entry in the requirements column opposite order number 200 is checked with the last entry in the appropriated column. 4. Ordered Columns The ordered columns show purchase order dates and num- bers, detailed quantities ordered, and cumulative totals. STOCK RECORD ACCOUNTING 133 5. Received Columns In all cases entries are made in this column from receiving reports which accompany the stock into the storerooms. The prices are recorded later when invoices arrive. Stock records should be kept up to date and should not be held up because of non-arrival of invoices. The “price” is the cost of each unit of each quantity re- ceived. This unit cost should include inward transportation charges like freight, express, cartage, parcels post, etc. If an invoice covers more than one class of material, the transpor- tation charges in connection therewith should be distributed to the various stock records concerned, in proportion to the re- spective “rough invoice” costs of the classes of material re- ceived or to the weight of the material. In extreme cases inward charges are treated as an overhead item. This is not good practice, however, because it does not produce accurate costs. In cases where the stock record sheet shows the move- ments of parts and assemblies, the price would be their unit manufacturing cost up to the time of storage. The received section has a running total column. 6. Issued Columns The issued section is the credit part of a stock record. Entries are made in the issued columns from material requisi- tions and shipping orders. The latter are used when the fin- ished product accounted for by the stock record is sold. The former cover materials, parts, etc., issued to operating de- partments. 7. Adjustment Columns Physical inventories often differ from book inventories. The latter, strange as the fact might appear, are usually more accurate than the physical inventories. The causes of differ- ences are manifold, some of them being errors and omissions 134 COST ACCOUNTING in recording, waste, shrinkage, change in moisture content, inaccurate weighing, measuring, and counting, etc. Differ- ences should be run down, if possible, and corrected or ad- justed as the case may be. Sometimes a stock record sheet carries an adjustment column with two subcolumns captioned “Over Credit’? and “Under Credit,” respectively. This column is used to adjust clerical errors and discrepancies between book and physical inventories. There is no especial need of providing for the column since adjustments can just as well be made directly in the other columns affected. If adjustments are numerous, however, a special record, termed “inventory adjustment sheet,” is sometimes provided. Total adjustments are recorded in the journal so that the material controlling account, stock record sheets, and physical inventories may be kept in agreement. Adjustments are debited or credited, as the case may be, to an Inventory Adjustment account or Over, Short, and Damage account ; and credited or debited, correspondingly, to the material inventory controlling accounts. After the details are adjusted on the various stock record sheets, the controlling accounts will “tie up” with the subsidiary records—the stock record sheets. Material Requisitions Materials, parts, etc., requisitioned from storerooms are originally recorded on material requisitions prepared in dupli- cate and signed by foremen, or by the planning or control department, or by some other originating authority, according to the organization of the plant. A sample form of material requisition is shown in Form 15. The originating authority fills out the main body of the requisition up to the “Stop Here’ space, and also the “Charge”’ and “For” spaces on the bottom part of the form. Opposite STOCK RECORD ACCOUNTING 135 “Charge” is written the code order number to which the requisition is chargeable, and opposite “For” the use to be made of the material. The originating authority retains for his records the duplicate copies of requisitions in date sequence. The original requisition is presented to the storekeeper in charge of the storeroom where the desired material is located. The storekeeper fills the requisition and writes the name of HOLDEN, MANUFACTURING ca. Requisition for Material 4 ; Which fs in Stock Dat isis caspecseccissseccsnvertan FR ents scveecsdcaust setyat 2 SIZE or QUANTITY | qUMBER DESCRIPTIOP WEIGHT price AMQUAT Charge. For Filled frOmM@ inci eect ee ate ication jetteis, — WUNGd bY is oes i cree Ent. Stock Book by. Ext’d by Dist. by. Signed Form 15. Material Requisition. (Size, 6 x 4.) the storeroom and his initials in the “Filled from” and “Filled by” spaces, respectively. The storekeeper should keep a loose-leaf book indexed with the names of the persons who have the authority to pre- pare requisitions and should absolutely refuse to honor a requisition unless it is properly filled out and signed by a person who has the authority to sign. Neither should a requisi- tion be honored if it calls for the issuance of more than one class of material. No requisition should carry or charge more than one order. 136 COST ACCOUNTING The stock record clerk enters each requisition in the issued columns of the proper stock record sheet, and prices each item. In no case should the stock record clerk make these ex- tensions. A comptometer operator now makes the extension of prices and amounts after the “Stop Here” space, and initials the requisition on the “Extended by” line. HOLDEN MANUFACTURING CO. BOSTON, MASS. SCRAP TICKET Date ORE NO iy Piece No. NO. PIECES DESCRIPTION MATERIAL WEIGHT CREDIT Condition of Piece. Reason for Returned to Rec’d by d App’ Signed Form 16. Scrap Ticket. (Size, 6 x 4.) The original requisitions are forwarded to the cost de- partment, where the material credits and work in process debits are accumulated, as explained in Chapter XIX. Each requisi- tion is initialed by the clerk who makes the distribution. All requisitions are then filed under their proper order numbers. Accounting for Scrap Parts. In the manufacture of any article there is always present the necessity of accounting for units of material which are spoiled and which have to be accounted for. For this purpose a scrap ticket (Form 16) may be put in general use in any : STOCK RECORD ACCOUNTING 137 industry. The methods of using the form, however, may differ according to the circumstances. It is to be noted that the scrap ticket calls for the order and piece number, and is designed so that only one kind of piece shall appear on one ticket. The quantity of the same kind of pieces of scrap will appear under the heading “Number of Pieces,’ followed by its description, kind of material, and weight. On the lower part of the ticket a line is provided for a notation of the exact condition of the piece—that is, a descrip- tion of the extent to which the piece was manufactured. When the operations are well defined, a notation of the last operation performed is sufficient. If operations are not well defined, it is necessary to indicate what has been done to the piece. The reason for scrapping the piece is then entered and notation made as to what point the material was delivered. The person who receives the material initials the line marked “Received by.” The accounting in connection with scrap material consists of two phases, which explains the number of lines left under the debit and credit headings. The cost of the piece, up to the time of scrapping, should be found from the records, and an entry made in the credit column whereby work in process material, labor, and over- head will receive credit up to the point where the material was spoiled. The total of these three costs will be entered under debit against whatever account is designated to receive the cost of the spoiled work pending decision as to either reclamation or final scrapping. As most of these cases indicate that the material is to be scrapped, a further entry will be made show- ing the debit to Scrap account for the scrap value of the piece, and credit to the account which was debited with the full cost value of the spoiled work. 138 COST ACCOUNTING This completes the entries in connection with the trans- action, and a recapitulation of all the scrap tickets for the month will give the figure for the journal entry, the details of which are shown on each ticket. It may be well to mention at this point that when a piece is issued for assembly and found defective at the time it is to be used, it should be returned to the storeroom in exchange for a new piece. The storekeeper will then make out all the HOLDEN MANUFACTURING CO. BOSTON, MASS. MATERIAL CREDIT SLIP SIZE quatiy | \umaea DESCRIPTION WEIGHT PRICE AMOUNT Stop Here Credit For Returned fo Rent ssisjsssccssnsiccasestnmostanomtriousartincinins Received by Lae ir ch ics yin ni Ent, Stock Book Dy ..ccesscrsscrenecneon EXtended DY. cniscccsseseseee Distributed by......-.......... IBA estes eae abc dara tas Ateneo, Form 17. Material Credit Slip. (Size, 6 x 4.) scrap tickets in connection with such material. Under this method the responsibility is centralized, rather than scattered throughout the assembly department. Scrap tickets for indi- vidual parts should be made out, as to original data, by the inspectors and approved by the chief inspector. Material Credit Slips Material returned to the storeroom for any reason is first recorded on a material credit slip (see Form 17). The ac- STOCK RECORD ACCOUNTING 139 count or order number which was formerly charged with the material requisitioned and which is now to be credited, is entered on the credit line. The name of the storeroom and of the storekeeper in charge are written on the next line. The rest of the procedure with reference to the form is self- explanatory in view of the description of the handling of a material requisition. In short, the material credit slip reverses the accounting made when a material requisition is filled. Data on material credit slips are entered in the received columns of the stock record sheets. HOLDEN MANUFACTURING CO. BOSTON, MASE, Location ORDERED DATE RECEIVED DELIVERED BALANCE ate QUANTITY OUE QUANTITY RATE, AMOUNT RATE, AMOURT QUANTITY RATE AMOUNT Form 18. Stock Record Card. (Size, 8 x 5.) In addition to showing the balance on hand almost as well as the balance column, running total columns give the up-to- date accumulation of amounts used for any period. As a result a large saving is made in the clerical work involved in keeping the stock records. Simple Stock Record Form 18 shows a stock record of simpler design. This record is kept in the same general way as the stock record sheet just described. The only columns in this record which are not a part of the modern stock record are the due and balance columns. The due column shows amounts not de- livered on purchase orders placed. The balance columns pro- vide for the differences between receipts and requisitions. 140 COST ACCOUNTING Running total columns have to a large extent taken the place of the balance columns in modern stock record sheets. The use of this form is not recommended, as it does not carry the essential information required. CHAPTER XI RECORDING THE CONSUMPTION OF MATERIAL Scope of Chapter Before taking up this chapter, the reader should review the mechanism of the original control, use, and movement of material as outlined in Chapter V, so as to get a bird’s-eye view again of the use and movements of material and the forms and records necessary to record and control the move- ments. Reference was made in that index chapter to the chapters in which the forms and records affecting material control and costs are treated. In the present chapter no atten- tion will be given to forms, The subject matter dealt with is: 1. The value of specifications of product in recording the the consumption of material. 2. The methods of recording the consumption of ma- terial. Value of Specifications—1. Definite Knowledge of Material A specification of preduct is a typewritten or blueprint sheet, prepared usually by the engineering department, and showing the kind and amount of material which enters a given product. For example, specifications are drawn up to show the material that enters individual parts, the parts that enter sub- assemblies, and the subassemblies that enter major or final assemblies. Specifications of any nature should be standard in nature, definitely prescribed, and carefully preserved for reference. One principal advantage of specifications in connection with the recording of the consumption of material is that the 141 142 COST ACCOUNTING material necessary for the manufacture of the product is defi- nitely known. 2. Facilitation of Control, Costing, etc. The purchase, control, scheduling, and costing of material cannot be done accurately unless the specifications are com- plete. As a matter of fact, specifications really become the basis of all operations. In order to be serviceable, the speci- fication numbers of the components of each material item or part should be entered on the heading of the stock record sheet covering the item or part. Conversely, the specification number of the item into which each kind of material, indi- vidual part, and subassembly enters, should also be indicated on stock records covering these components. Thus a cross- index is provided for cost and production purposes. 3. Facilitation of Standardization Furthermore, specifications lead to a standardization of operations because they show just what material and parts are necessary to make the product. One desirable result of standardization of operations is that costs of different runs of the same item and different items themselves can be intelli- gently compared. If a firm has the option of using different processes for the manufacture of the same item, or the option of using dif- ferent parts or subassemblies in the manufacture of a product, its management can decide intelligently which process, parts, and subassemblies to use. In other words, specifications pro- vide the basis for carrying out the principle of economic se- lection or substitution. 4. Saving of Clerical Work Another principal advantage of specifications lies in the saving of clerical work. Since specification sheets show the RECORDING THE CONSUMPTION OF MATERIAL 143 kind and amount of material and parts required for the manu- facture of product, no need exists for writing out on requisi- tions long lists of material and parts that enter the product. This work is eliminated by simply recording on the requisition a notation, such as ‘‘100 sets of Specification No. 300.” Con- sequently, the work of recording and handling materials, parts, and subassemblies on the part of the stock record clerk, oper- ating, production control, and cost departments, is greatly reduced. Methods of Recording the Consumption of Material The consumption of material is ordinarily recorded by use of material requisitions, as explained in Chapter X. The consumption of certain materials, however, is recorded by what might be called the “predetermining method,” although this method often involves the use of material requisitions also. Another method of accounting for the consumption of material is sometimes known as the “tag method.” Tags, however, may be used as requisitions. For this reason the tag method may be regarded simply as a specified feature of the requisition method. Predetermination Method Specifications enable short cuts to be taken in recording consumption by the use of the predetermination method. This is especially useful where the quantity consumed on any one order is small, or when the exact count or measurement of the material at the time of its consumption is difficult. In cases of this kind the amount of material which enters the product is ascertained by exhaustive tests of “runs” of prod- uct. The results of these tests, which show the average con- sumption of material and the cost thereof, are recorded on specifications which form the basis for future charging of material consumed. This method is of course not employed 144 COST ACCOUNTING for all the classes of material used in a given plant, but is frequently employed to record the use of: Glue in any industry. Nails in any industry. Ink in the printing industry. Certain material in a shoe industry. Rivets in a boiler-shop. Lumber in certain cases. ONO EN To illustrate, the procedure used in recording the consump- tion of glue is as follows: Suppose a run of 100 chairs in a chair manufacturing plant is put through the necessary oper- ations. The glue pot, as well as its contents, is weighed before work on the run is started. The total cost of the glue is charged to the run. The run is credited with the cost of the glue left in the pot when work on the run is completed. From the data recorded in connection with this particular run, a standard weight and cost of the glue used per 100 chairs, per chair, or whatever the unit is, plus a small percentage to cover a possible error, could be used as a basis in charging future orders of chairs manufactured. The results of tests are preserved on specification sheets. The entries to controlling accounts for the consumption of glue are handled in the following manner: The glue is drawn from the general stock or storeroom and is charged to a Shop Glue account, Chair Materials account, or some other account which has a caption to indicate its true nature. This account should be regarded as one of the work in pro- cess material accounts rather than a stock account. The Findings Account In the shoe industry—for another illustration—purchases of certain material are charged to a Findings account. The kind and amount of findings which enter a given unit of prod- RECORDING THE CONSUMPTION OF MATERIAL 145 uct are ascertained from test runs. These figures are used in the future charging of findings consumed. The consumption of such material, therefore, is not charged to production orders by material requisitions or expense debit slips. Large batches of findings, however, may be issued to productive de- partments upon receipt of requisitions in the storeroom. Predetermined figures used in charging orders are credited to the Findings account. The accuracy of predetermined costs is checked up at the end of the fiscal period by comparing the physical inventory of findings with the balance in the Findings account. If a difference exists, it is proof that the estimate was over or under, as the case may be. The difference is cleared through a material adjustment account. Use of Predetermined Figures in Charging Rivets Still another illustration may be found in accounting for rivets in a boiler-shop. The amount of rivets used on an order is not positively known in advance of operations on an order. The quantity used on past orders, however, is ascertained by tests which include a certain percentage to cover burnt rivets. This quantity is entered on a specification sheet which is re- ferred to thereafter in deciding the amount of rivets to be issued from stock. This amount also serves as a basis for the charge to be made for rivets consumed on orders, Method Used in Box Factory Another case is that of the use of lumber, when the ulti- mate quality and quantity to be consumed is unknown at the ‘time the lumber is put in process. The use of lumber in a boxshop where, say, four grades of boxes are being manu- factured from one kind of lumber, will serve as an illustration. The lumber which is used for the manufacture of boxes of the first grade must be entirely without knots; the second grade must have not more than two knots per unit; the third 146 COST ACCOUNTING grade not more than four knots; and the fourth grade may have any number of knots above four. In cutting the lum- ber the sawyer keeps in mind this classification of grades. He sets his gauges on his saw and then cuts as much of the first grade as he can. If while cutting he comes to a stretch of lumber that has two knots in it, he does not treat these knots as waste but cuts the full side of lumber which is serv- iceable in the manufacture of the second grade of boxes. He follows the same general practice in cutting lumber for the third and fourth grades of boxes. By so doing there is little waste, so far as knots are concerned. In order to get specifications for, the boxes to be made, test runs are put through. The quantity and cost of each unit of each class of boxes made is indicated on the specifications which are referred to in costing future orders put through the technical processes. A sample specification might read as follows: “The cost of the first grade of boxes should be charged on the basis of the cost of lumber (free of knots), plus the cost of the normal waste in using the first grade of lumber.”’ The specifications for the other grades of lumber would be worded in the same general way. Methods Used by Chair Manufacturers In the case of a plant manufacturing chairs, the. actual lumber used would be charged to a Chair Lumber account. This account would be credited with the standard charges for lumber consumption based on predetermined tests, and Work in Process Material accounts would be charged. Any differ- ence in this Chair Lumber account would be passed through a Material Adjustment account. The amount of the adjustment would give the management a line on whether the use of pre- determined figures resulted in overcharging or undercharging the orders of chairs, and would indicate the necessity of chang- ing the standards used. RECORDING THE CONSUMPTION OF MATERIAL 147 The following method is used by many chair manufac- turers. The lumber—raw material—is scaled as it is piled, and the average measurement of ‘‘courses” per pile is deter- mined. Stock records are kept for each pile and for lumber delivered to cut-off saws from kilns. In some cases the exact measurements of lumber requisi- tioned to the factory are kept in detail on the stock records. The values of such lumber are the average prices per foot delivered to the planers. Chair manufacturers in some cases set standard values on the various parts of lumber in the rough sizes, which cor- respond somewhat to prices paid for dimension lumber. Natu- rally, the larger and more valuable pieces would be priced at a higher rate per foot than smaller and less valuable pieces. With these standards as a basis, the value of the product at the kiln is calculated and charged to shop lumber accounts and credited to the lumber accounts charged at the time of pur- chase. The shop lumber accounts are credited at the time that Work in Process Material accounts, burden accounts, and the various jobs are debited for lumber which goes into the manufacture of chairs. Safeguarding of Predetermined Material Costs In all the suggestions given herewith, in connection with the use of predetermined or standard material costs, in cases where actual measurement of the materials used is very dif- ficult, there should be provided a specific means of checking the results. This is easily accomplished by having a shop account to cover material drawn from the main storeroom, which mate- rial will be requisitioned in bulk and used on the various items of work in accordance with the necessities. The credits to this Shop Material account will come from the requisitions which represent the use of same at the pre- 148 COST ACCOUNTING determined rates, which credits should not go to the main storeroom account, as this account has already been credited with the bulk withdrawals. It will easily be seen that by following this method the balance in this account should at all times represent the exact amount of material on hand in the shop unused, which per- mits a check-up at any time in order to verify the fact as to whether or not the predetermined rates are correct. Tag Method Another feature in connection with recording the consump- tion of material in certain cases is the use of tags, by means of which much clerical work is saved and the accuracy of the records is increased. This method is followed when the quality, weight, etc., of the material which is not in stand- ardized packages—calendered rubber in rolls, for example— can be identified by tags put on at the time the weight is ascer- tained. Tags can be used as requisitions if so desired. Tags are also used in the paper manufacturing industry to account for the consumption of pulp. With the exception of a class of raw material known as “fillers,” all pulp purchased in uniform-sized bags is weighed upon receipt. A tag is attached to each unit of pulp showing the date of receipt, class of material, vendor’s name, lot number, and wet weight of material when received. The wet weight is not necessarily the weight of the material when it enters the product, because pulp loses weight during storage. This new weight is figured after a dry test and is known as the “dry weight.” Further- more, the wet weights of two units of purchase of equal quan- tity will not be identical when received because of different percentages of moisture content. This variation of moisture content calls for considerable care in recording the consump- tion of pulp, as the natural drying of the material causes a difference in the basic weight used. RECORDING THE CONSUMPTION OF MATERIAL 149 Until the pulp reaches the machine known as the beater, however, no great difficulty is experienced in accounting for its costs. As the pulp is consumed, the tags for each unit are detached and sent to the cost department. Only the dry weight as shown by the tags is used in charging the product and in crediting the pulp accounts. The losses in weight of the pulp are sometimes treated as direct charges to Profit and Loss. This is not a good method, however. To arrive at standard costs, the cost of the loss in weight should be ab- sorbed in the cost which shows the dry weight of the pulp con- sumed. Tags are used also by furriers and by lumber manufac- turers in accounting for certain classes of material. Use of Graduated Containers and Tote Boxes Storerooms and equipment may be so arranged that the shelves and containers used in storing hold multiples of count or weight. In many plants, fire clay, sand, and coal are stored in wooden or concrete bins which have marks on the sides to designate quantities therein. With this arrangement the physical inventory can be taken quickly by leveling the ma- terial in the bins and then noting the markers which graphically show the amounts on hand. This layout is a distinct advan- tage in the counting and recording of material. It is easy to determine the quantity in bins and other containers at the beginning of a cost period, the quantity put in bins during the period, and the quantity on hand in the bins at the end of the period. In handling stores another feature which can be employed in many manufacturing plants, is to have tote boxes which contain specified quantities of material. As the contents of tote boxes are automatically known, and as the quantities consumed can be easily determined, the verification of the stock records is facilitated. 150 COST ACCOUNTING Importance of Accuracy of Original Data This whole chapter is intended to convey to the reader the enormous importance of very specific attention to the col- lecting and handling of the data from the shop in respect to the consumption of material. The various suggestions made are not intended to be any complete guide in handling any particular proposition, but are expected to assist the reader in giving a clue as to what procedures may be taken to safeguard and simplify the original data. It has been a very unfortunate custom in the past to fol- low the rule that where it seems a little difficult to account for material, to immediately consign this material to the over- head. This is a situation which must not exist if accurate costs are to be found, principally on account of the fact that if glue used in chairs happened to be hard to account for, it would be manifestly unfair to charge this into the overhead, and thereby swell the burden cost on some articles of furniture which used no glue at all. With the suggestions given in this chapter, anyone should be perfectly capable to work out the disposition of all material which enters into a product by means of tests, in order to eliminate entirely the entries in burden which will only tend to clutter up burdens with costs which should by no means be included. It is, therefore, a matter not only of accuracy as to the accounting and recording of original data, but also of accuracy as far as confining direct materials and labor to the direct charges, and such confinement is really easier than has been thought by many in the past, providing intelligent measures are taken to work out standard charges along the lines sug- gested in this chapter. CHAPTER XII METHODS OF PRICING REQUISITIONS Where Prices Should Appear The requisition price for each class of stock should be clearly marked in some convenient place. It may appear on the heading of each stock record sheet or stock card, or in columns adjacent to the transactions, as explained in Chap- ter X. Prices are sometimes calculated on the basis of open- ing inventories and current transactions of receipts and requisi- tions for the cost period. Pricing requisitions from a sepa- rate price record, however, involves double work. This can be avoided by recording values as well as quantities on stock record sheets or stock cards. Person Responsible for Pricing Material When material requisitions are filled by the storekeeper, they are turned over to the stock record clerk for entry and pricing, provided the stock record sheets are designed to show both quantities and values of materials. No pricing is done by the stock record clerk, however, if stock record sheets con- tain columns for quantities only. In this case the requisitions are priced by the cost clerk. Components of Material Costs The basis for costing requisitions should include inward charges like freight, express, and cartage, in addition to the invoice cost of materials. These inward charges are some- times erroneously treated as an item of manufacturing over- head. Stores expense, however, should be treated as a com- ponent of factory overhead. In an ordinary manufacturing 151 152 COST ACCOUNTING concern too much clerical work is involved in distributing stores expense over individual material requisitions. Methods of Determining Prices Problems of deciding who shall do the pricing and what shall be regarded as the cost of the material, do not present so many difficulties, however, as the problem of determining the actual cost of each unit requisitioned. Regardless of the method of pricing, the total material costs of the business as a whole for the year are substantially the same during normal times. The total material costs for each cost period during the year, however, and for each individual job, may be somewhat different under the various methods. If the prices of material were always the same during a given period, uniformity in pricing requisitions would be the rule because all methods would produce the same results. The original price method, therefore, would be universally used, since it would be the only natural one to use. In the following pages the technique of the various methods and their advantages: and disadvantages are discussed. Using Original Prices of the Oldest Stock on Hand The method of using original prices in costing requisitions is the best method for materials that are purchased other than staples, such as pig iron and scrap in a foundry. No great difficulty is experienced in operating this method. When the original prices of the oldest stock on hand are used, it simply means that the prices of the stock first purchased are used first on requisitions, then the prices of the second lot pur- chased, and so on. This method is illustrated by the table on page 153. In pricing, it is sometimes necessary to use two prices when the filling of the requisition exhausts all of the units pur- chased at one price and includes part of another lot bought at a METHODS OF PRICING REQUISITIONS 153 different price, as in the case of the January 5 transaction shown. RECEIPTS REQUISITIONS Date | Quantity Price | Value Date | Quantity | Price | Value Jan. 1 100 $1.20 | $120.00 || Jan. 2 50 $1.20 | $60.00 a 200 1.40 280.00 “4 40 1.20 48.00 oo 8 10 1.20 12.00 70 1.40 98.00 Requisitions of bulk material, such as lumber, and requisi- tions of semifinished parts, are priced at original cost when it is practicable to keep costs by lots. The original cost method is particularly applicable when the prices of such materials fluctuate violently. Some contend that if it is desired to ascer- tain real costs and real profits, it is the only accurate method. Another advantage of the original price method is that it keeps obsolete stock from accumulating, since stock is used in the order purchased. Moreover, a company “plays safe” when it makes a con- tract on the basis of material costs “at the time,” as these may change before work is started on the contract. If the price of material rises before the contract is commenced, the company has “covered,” i.e., has insured a supply at a price that will enable it to make a profit. This is a more conservative method of buying materials than the method of gambling on the way the price will move. It is true that if the price drops after material is contracted for, the company loses the difference in the prices, but it would also lose if material were not con- tracted for and the price rose before the job were started. A manufacturer should be a manufacturer in fact as well as in name, and not a gambler. There are times, however, when the trend of the market is well known, and purchasing may be postponed until material is actually needed. 154 COST ACCOUNTING Basing Costs on Market Prices at Time of Consumption Materials consumed are not always requisitioned at cost prices. The North Carolina Pine Association published the following statement in its Manual of Cost Reporting: ‘Some mills make large advance purchases of supplies; when same are consumed the charges should be based on market value, otherwise such costs would not parallel those of the mills pur- chasing as needs demanded.”” This method helps to establish uniform methods of cost-finding in the lumber business and is in harmony with the principle of basing costs on market con- ditions. The foregoing method is employed also in the iron and steel and similar industries. Suppose that pig iron is purchased under a contract for $25 per ton, and that the price for pig iron during a given month, as quoted in the Iron Age, is $30 per ton. As pig iron contracted for is bought, purchases are debited at $25 per ton. This method of pricing necessitates the use of an intermediate material profit and loss account known as the Pig Iron Adjustment account. This account is charged and the Pig Iron account is credited at the average actual contract price of pig iron. The Melt account (work in process account) is debited and the Pig Iron Adjustment account is credited at the Jron Age price of pig iron for the month. The balance of the adjustment account is’closed into the current Profit and Loss account. Average Price Method The best method for costing requisitions of staples, like pig iron, scrap iron, fuel, lumber, etc., is to use average, mean, or “base” prices. More clerical work, however, is involved by the use of this method because every change in the price of material bought necessitates the calculation of a new average requisition price. Mistakes, therefore, are apt to occur unless great care is exercised in running stock record sheets. The METHODS OF PRICING REQUISITIONS 155 technique of the average price method is indicated by the fol- lowing table: RECEIPTS | REQUISITIONS Date | Quantity | Price | Value | Date | Quantity | Price | Value Jan, 1 100 $1.00 | $100.00 || Jan. 2 30 $1.00 | $30.00 aes 110 1.20 132.00 Po Bh 50 1.12 56.00 i 120 1.40 168.00 ee AB, 100 1.25 125.00 Bar steel is sometimes requisitioned by the average price method. At the end of each month the withdrawals of stock (both weight and cost) are subtracted from the sum of the inventory at the beginning of the period and the purchases for the period (both weight and cost). The difference in weight is divided into the difference in cost and the average price per unit of weight is ascertained and used during the suc- ceeding month. This method may be used in connection with materials where the requisitions for them must be priced imme- diately and currently for the month. There are many cases, however, where this rule should not be used, as it is necessary to price the material at the average cost for the month in which it is used instead of the average value of what is left at the close of the month, as described above. An illustration of this would occur in a foundry where pig iron, scrap, coke, etc., are charged in on the basis of what was consumed through the month and at the average cost for the current month. In this case, the material received during the current month is added to the inventory at the beginning of the month as to weight and total amount of money, the totals of which are divided to arrive at the average cost for the month. The amount used during this month is then priced at this average. After being deducted from the previous total 156 COST ACCOUNTING mentioned, the inventory at the end of the current month will stand at this average unit price. This procedure should be used in all cases where costs of this nature are figured by the month, as it gives the actual average for the month instead of using the average unit cost of what was on hand at the beginning of the month. It is not generally believed, however, that the average price method should be followed in requisitioning finished parts. The advocates of this method point out that finished parts should be requisitioned out in the order made and at original cost because this method more truthfully reflects actual costs. Whatever method is adopted by the cost accountant for general use, it is clear that when material is bought for some specific job or contract it is better to use the actual price rather than the average price of similar material bought for other jobs. Using Original Prices of the Highest Priced Stock Another method of pricing requisitions is to use the origi- nal cost of the highest priced stock. The main reason for using this method is one of precaution—to protect the con- cern against a decrease in the market value of material. It is, therefore, considered a conservative method. It may not be, however, if the highest price of materials is used in figuring bids on contracts. If business is lost because bids are too high, the method may defeat its own purpose. (See Chapter XI for explanation of the profit and loss adjustment used in con- nection with this method.) Pricing Prepared Material Material manufactured in the plant—often termed “pre- pared material”—should of course be charged with all manu- facturing costs and requisitioned at that price. This method METHODS OF PRICING REQUISITIONS 157 has been discussed in Chapter XI, where the statement was made that dry weights of pulp, rather than wet weights, serve as a basis in costing pulp in a paper industry. Pricing Work in Process and Finished Product Work in process when converted into either finished parts or finished product is charged with manufacturing costs in- curred during conversion. Finished parts are requisitioned for assemblies at these prices and sales of finished product are priced at manufacturing cost. When finished product is bought, the purchase price is used in costing the sales of fin- ished product. CHAPTER XIII MINIMUM, MAXIMUM, AND QUANTITY TO ORDER Importance of Maximum and Minimum Quantities No problem of stores organization and control is more important than the establishment of economical maximum and minimum quantities to be carried in stock, because severe losses occur if proper lower and upper limits to stock are not set. Insufficient stores slow up operations and necessitate a revision of production control plans. Orders cannot be filled on time and as a result many are canceled. This discourages salesmen because of lost sales and commissions. Buyers be- come skeptical of the ability of the manufacturer to complete deliveries according to contract. Laborers are forced to be idle and cannot earn average wages; consequently they be- come disgruntled, lose faith in the management, and may quit because of dissatisfaction with coriditions. On the other hand, failure to observe the maximum limits may be just as uneconomical as failure to keep enough stock on hand. If quantities in excess of maximum requirements are on hand, too much capital is tied up in stock, with the result that carrying charges for stock, such as interest, rent, storage, insurance, and taxes, are needlessly high. Furthermore, ex- cessive stock encourages waste. Careful attention to maxi- mum limits materially reduces the amount of stock carried. There are cases where stock has been decreased as much as 50% by fixing reasonable maximum limits. Thus the turn- over of stock is increased. It is just as important to keep stock moving rapidly in manufacturing enterprises as in mer- chandising establishments, 158 MINIMUM, MAXIMUM, QUANTITY TO ORDER 159 Need of Correlation among Departments Keeping stock within established limits depends to a great extent on close correlation among the stores, purchasing, plan- ning—sometimes called control—and production departments. Before the beginning of each season, the production manager, with the help of the planning department, prepares a schedule of the materials which he expects to need during the coming season. It is the function of the storekeeper and purchasing agent to provide materials according to scheduled require- inents. Methods of Calculating Stock Limits Another function of the storekeeper is to calculate stock limits or minima and maxima. In his calculation he may either resort to the use of formulas or may weigh different factors which affect stock without regard to any formulas. The minimum and maximum figures should appear on the heading of stock record sheets. When the consumption of material fluctuates from month to month, it is advisable to show the maximum and minimum figures for each month in a section especially provided for that purpose. In no case should stock limits be regarded as immutable. They are sim- ply sign posts which serve as guides to economical purchasing. If material needs change, stock limits should be changed accordingly. The minimum quantity for each class of stock may be physically separated from the rest in each receptacle by means of a red cardboard, bag, tape, or box according to the nature of the stock. Such a marker indicates when the minimum is reached. The minimum should not be sold or requisitioned until all of the other material in the receptacle has been sold or issued, thereby creating a real and useful physical control. This method can seldom be used, however, as it usually in- volves too much effort. 160 COST ACCOUNTING Calculating Minimum and Maximum Inasmuch as formulas in the last analysis are somewhat arbitrary, they are not discussed here. When used, their main function is to serve as a check against the judgment of the storekeeper. No storekeeper should feel bound to use for- mulas religiously, if his judgment dictates that corrections to them should be made before he establishes minimum and max- imum limits. Some of the factors to consider in fixing minimum and maximum under either the formula or the non-formula method are as follows. No attempt has been made to arrange these factors in the order of their importance. 1. The average consumption of material per unit of time. (This unit is usually a month or fraction thereof.) 2. The present and future needs for material, ‘as indi- cated by the production schedule. 3. The time required to procure material when called for. This is probably the most important factor considered in fixing the minimum. It involves: (a) The time required for placing purchase orders after receipt of purchase requisitions. (b) The time needed by dealers to get stock ready for shipment after receipt of purchase orders. (c) The time needed for stock to reach the place of consumption. This includes not merely the time in transit, but also the time the stock takes to pass through the receiving room, the storeroom, and the factory. (d) A certain amount of time allowed as a safety factor to cover unforeseen delays in obtain- ing materials. 4. The maximum amount of material that a single pro- duction order might require. MINIMUM, MAXIMUM, QUANTITY TO ORDER 161 Determining the Amount to Order A distinction is made in some industries today, between “maximum limit”? and “amount to order.” The “maximum limit” is an estimate of the largest amount of material that the company will need under the existing production schedule. The “amount to order’ is the amount of material which should be ordered when the minimum is reached. The factors which affect the calculation of the amount to order are: 1. The cost in dollars without considering the “set-up” or “getting ready” expense, or the carrying charges. 2. The set-up expense, which includes the cost of get- ting materials and tools ready to begin work on the order, and the cost of handling the order in the office and factory. Just the clerical expense inci- dent to the handling of each order often averages as high as $1. The available storage space for material. 4. The movement of material; the greater the movement, the larger the quantity economically manufactured on one set-up of a machine. , The quantity of material on order. The amount of material that can be bought econom- ically. 7. The financial strength and credit of the concern. o ON The last factor is closely related to the matter of specula- tion. A firm may buy up a large quantity of materials if it has ample funds, hoping to save a tidy sum in case prices rise. During the World War when the general level of prices was rising, financing of inventories was more of an investment than a speculative proposition. In other words, the risk of a drop in prices was almost negligible, owing to the circum- stances then existing. 162 COST ACCOUNTING The two figures—maximum, and amount to order—allow the purchasing agent considerable leeway in regulating his buying. In some cases it is more economical to place orders for large purchases on account of price considerations. In other cases, savings cannot be effected by exceeding the max- imum. Concurrent Calculation of Minimum and Maximum In the mind of the reader may arise the question as to the need for the concurrent calculation of minimum and max- imum limits. The answer is that consumption of material fluctuates, particularly in businesses of a seasonable nature. Minimum and maximum quantities should vary accordingly. If it were possible to replace material as soon as requisitioned with an equivalent amount, only minimum quantities would be considered. Lack of universal dependence on set minimum and maxi- mum in purchasing is due to three primary reasons: 1. Absence of stock records. 2. Failure to appreciate the value of minimum and maximum. 3. Belief in the superiority of a substitute method. The case of a large public utility in New York City will serve to illustrate the last reason. This firm does not depend on set limits as regulators of stock purchases. Its stores organ- ization is so efficient that active stock (stock that has moved) is physically inventoried every three days and checked with related book inventories. The classes of stock handled num- ber several thousands. The storekeeper frequently scruti- nizes stock record sheets and notes particularly the balance on hand for each class of stock. He is always kept informed of the stock needs of the factory, and is thereby able to judge whether existing stock balances are sufficient. The manage- MINIMUM, MAXIMUM, QUANTITY TO ORDER 163 ment believes that this system enables the storekeeper to keep in closer touch with his stock and to buy “right” than would a system which was dependent on minimum and max- imum figures on each stock record sheet. This method, how- ever, is largely a relic of old individualistic procedure, and has the result of depreciating the organized methods which are by far the safest and most to be desired. It is mentioned here to simply contrast such procedure with the accurate and automatic methods which should be followed. Another reason for not using maximum limits might be mentioned. During the World War most firms did not worry about exceeding maximum limits because of the material short- age. Their concern was only with minimum amounts. Calculating Finished Product Minimum and Maximum Finished product minimum and maximum amounts appear in headings of finished product stock cards. The calculation of these amounts depends upon: 1. The present and expected volume of customers’ orders for different parts of the season, which figures are estimated on the basis of past sales. 2. The time element: (a) The time required to get materials to produc- tive departments. (b) The time required to manufacture the product. Necessity for Use of Maximum and Minimum The general trend of industrial procedure at the present time is that of specializing functions. This tendency finds no greater expression than in the regulation of materials of all kinds by stock records. Probably the greatest use of the stock record is that it is an absolute guarantee of keeping up the proper quantities of 164 COST ACCOUNTING raw materials, supplies, and finished parts necessary for assem- bly and shipping. In the accomplishment of this object, the data in connec- tion with the minimum amount in particular, are of the utmost importance, as it is only on the stock records that the long vision into the future is obtained, as the result of the posting of the requirements from the incoming orders and the sched- ules of manufacture. Probably more lapses in production occur from the alto- gether too prevalent excuse of no material on hand to work with, and probably no other single feature has so great a bearing on the cure of these lapses as the intelligent setting of proper minimum amounts, coupled with the intelligent use of same by the stock record division. In this connection, it is assumed that the minimum has been properly set with due consideration to time of trans- portation, which varies according to the season of the year, and to all other contributing factors which have been described in this chapter. In other words, the use of the minimum in particular in conjunction with stock records, which are kept up to date. fulfills the necessary function which no other record can pos- sibly perform. In comparison with the minimum and its proper use, the maximum is of far less importance, as this is more of a pre- ventive against excess freight charges and against unduly large purchases which would swell the inventories of the com- pany to too great an extent. CHAPTER XIV HOW TO TAKE INVENTORY Importance of a Correct Inventory The advantage of the perpetual inventory in preparing monthly financial statements is discussed in Chapter XXIN. Even when the perpetual inventory is kept, however, phys- ical inventories should also be taken. The routine work in- volved can be distributed throughout the whole year, a few items being counted, weighed, or measured at a time and com- pared with the perpetual inventory. If discrepancies between the two are found, they should be corrected through the inven- tory adjustment account by a journal entry. The balance in the inventory adjustment account should be carried directly to the Profit and Loss account. Sometimes a debit balance in the inventory adjustment account has been treated as a part of the manufacturing overhead. This treat- ment, however, is not good practice for the reason that no part of the factory organization may have been responsible for the discrepancies. If the perpetual inventory is not maintained, a physical in- ventory of assets, such as material, supplies, work in process, finished parts, finished product, etc., should be taken at the end of the fiscal period. Financial statements can then be com- piled which reflect the real financial status of the concern, and the changes that have taken place in the financial status during the fiscal period. A physical inventory, therefore, is the cor- nerstone of the accounting department. It is one of the most vital parts of the business compass which enables the propri- etor to steer the correct course leading to the harbor of profits. 165 166 COST ACCOUNTING Old Method of Taking Inventory Until recently, the taking of inventory in most plants was dreaded. The feeling about it was similar to that experienced by a person who has a distasteful dose of medicine to take— the sooner it is over, the better. As a result, inventories were taken hastily, and a large part of the routine work was carried out without any prearranged plans. Consequently much of the inventory had to be taken again, which lengthened the period and increased expenses. New Method of Taking Inventory The new method, known as the “duplicate tag method,” of taking inventory, is supplanting the old method in progressive plants. Under the duplicate tag method, detailed preparations are made long before the date set for starting the inventory, with much the same care that an army general plans his attack. Each employee who will participate in the work is assigned a definite task and is informed as to whom he should consult in case he should need advice. The steps under the new method might be outlined as follows: Issuance of inventory instructions. Counting, weighing, etc., the inventory. Listing the inventory. Pricing the manufacturing inventory. Calculating and extending the inventory. Checking the inventory. Comparing the inventory. MAP wD 1. Inventory Instructions The best plan is to issue the inventory instructions in the form of typewritten sheets or a booklet. They should be dis- tributed long enough before the date of starting the inventory to permit a thorough study of their contents. Schools of in- HOW TO TAKE INVENTORY 167 structions in inventory methods are established in some plants for the benefit of those who will take inventory. Unfortunately most instructions are loosely arranged. This fault can be overcome by grouping instructions for each department separately after the general instructions for all de- partments are set forth. The general instructions usually pertain to the following: (a) The length of the inventory period. (b) The personnel of the inventory committee. (c) The articles to be taken. (d) Special preparations. (a) Inventory Dates The length of the inventory period depends on the size of the plant—perhaps only a day or two, perhaps two weeks or more. In large factories most of the departments cease their activities during this period. In some small plants inventory can be taken without stopping all work, but even in such cases the routine could be expedited if there were a complete cessa- tion of operations, (b) Personnel of the Inventory Committee The managers and departments heads are on the inventory committee. The committee is assisted by each superintendent and foreman; by tag-writers who make out inventory tags and list items thereon; and by workers who handle, count, and weigh, etc., the articles to be taken. Sometimes the accounting department supervises the taking of the inventory. In this chapter, the final authority, whether it be the inventory com- mittee or the accounting department, is referred to as the “supervising authority.’ A chart showing how the plant is organized for taking inventory is sometimes prepared, and always proves of great assistance. 168 COST ACCOUNTING (c) Articles to be Taken The names, definitions, and locations of the broad classes of articles to be taken, such as raw materials, supplies, ma- chinery and equipment, furniture and fixtures, work in proc- ess, finished parts, finished products, etc., are mentioned in the inventory instructions. This broad classification of items is usually the balance sheet classification of assets. (d) Special Preparations The heads of departments are instructed to make certain preparations and to furnish the supervising authority with a list of the names and clock numbers of the clerks and laborers needed in order to take inventory in their respective depart- ments. In order to expedite inventorying, various depart- ments are assigned definite tasks as enumerated below. Inspection Department. The inspection department is in- structed to clean and inspect goods in the inspection cribs and work in process. This department also makes a list of de- fective material capable of correction through repairs. Salvage Department. The salvage department is directed to prepare a list of all obsolete and scrap material. This material is sent to scrap storehouses if it cannot be corrected. Later the scrap is disposed of by the purchasing department with the aid of the inspection department. If scrap can be corrected, it is retained in the salvage department until inven- tory is completed. Then it is transported to the proper depart- ment for correction with a “corrective work order’’ attached. The salvage department moves goods sold but unshipped, for which shipping orders have been prepared, to storage places provided. Production Departments. The production departments are instructed to clean up all spoiled, defective, or scrap goods; to sort and bring together all like job numbers; to put all articles in proper receptacles; and to send scrap to the salvage HOW TO TAKE INVENTORY 169 department. In short, the production departments make a general “house-cleaning.” Production departments should minimize requests for materials during the days which imme- diately precede the beginning of the inventory period, and should bring all work in process so far as possible to the same stage of completion. Storeroom Department. The storeroom department is ordered to clean up, to sort and stack its material, and to place all articles in proper receptacles, marked so as to be readily identified. Scrap and obsolete material is weeded out and sent to the salvage department. Deliveries from storeroom to factory should cease or slow down several days prior to inventorying. Purchasing Department. The purchasing department is instructed to draw up a list of unfilled purchase orders and contracts, arranged according to part numbers or names of material, as of the closing date of the inventory period, say December 31. All purchase invoices in dispute are promptly adjusted with vendors and sent to the accounting department before December 31. Invoices passed for payment prior to December 31 are recorded on the books, and goods covered thereby are considered as a part of the inventory even though not yet received. If sellers’ invoices have not come in, memo- randum invoices are made out by the purchasing department and sent to the accounting department for goods received prior to the beginning date of the inventory period, say December 29. All invoices which have been received from goods still in transit should be segregated and listed separately. These may or may not be taken into consideration, but it is sometimes good practice to do so, as goods shipped f.o.b. seller’s works are, according to law, the property of the buyer when in transit. The purchasing department requests outside concerns which have in their possession certain materials, tools, pat- terns, etc., belonging to the company which is making the in- 170 COST ACCOUNTING ventory, to submit sworn statements covering such articles. It also requests them to furnish a list of the above assets which they may have shipped back to the company a certain number of days prior to December 31. The purchasing department is urged to minimize the amount of material received during the inventory period. One way to help in this respect is to slow up delivery by ordering goods to be sent by freight which ordi- narily are carried by express. Receiving Department. The receiving department is directed to clear its floors of all goods received up to the time of starting inventory. Receiving records covering such goods are to be completed and quickly forwarded to the accounting department. Goods received after inventory has started are sometimes kept in the receiving room but are not included in the inventory. This is bad practice, as all dates must neces- sarily show as of the month which is included in the records. This of course applies only to goods actually received before final inventory date. General Accounting Department. The general accounting department is instructed to obtain a list for the sales depart- ment of goods billed but unshipped prior to December 31, so that these goods will not be included in the final inventory. The goods may be inventoried, but the figures are subtracted from the “total” inventory to give the amount of the inventory to be used in preparing statements, etc. If the general accounting department supervises the taking of inventory, it will have charge of all the tags and inventory sheets. Acting in this capacity, it will charge the tag-writers with the tags and sheets as issued and credit them with returns. The fact that tags are serially numbered helps the general accounting department to keep its records straight. When inventory has been taken, tags are returned to this depart- ment. Then they are checked by serial numbers and are sent to the cost accounting department. HOW TO TAKE INVENTORY 171 Cost Accounting Department. The tags which the cost department receives from the general accounting department are sorted by classes. From these tags inventory sheets are prepared. The cost accounting department is instructed to charge all manufacturing costs incurred before December 31 to the vari- ous classes of orders. It must see that price records are up to date so that goods may be priced correctly. The cost account- ing department or the inventory committee is ordered to price, to calculate and extend, to check, and to compare the inven- tory. Co-operation of Departments. The inspection, salvage, and production departments—in fact all departments—are in- structed to co-operate prior to the inventory period for the purpose of minimizing the obsolete and defective material which cannot be corrected. 2. Counting and Weighing the Inventory Before inventory starts, instructions are issued and studied. Each employee knows what he is to do. When the signal is given to begin, the workers in the charge of foremen or de- partment heads commence to count, weigh, measure, or size inventory items. Goods should be counted, weighed, etc., twice before the tags are filled out. 3. Listing the Inventory The results of counting, weighing, etc., are recorded in in- delible pencil on the tags by clerks known as tag-writers. These tags are procured from the supervising authority. When obtained each contains a serial number only. The tags for material are made in duplicate with per- forated stubs and with wires for attachment to the material. As soon as a lot or section of material is inventoried, one tag is attached by the tag-writer to the lot or section, the other 172 COST ACCOUNTING tag is sent to the supervising authority. If a receptacle is empty, a tag marked “empty” is placed therein. Every tag is accounted for. None should be lost, destroyed, nor borrowed. HOLDEN MANUFACTURING CO. BOSTON MASS. Counrrers Tao; No. No. (or Size) MATERIAL & SuPPLIES Cousrrers Tae No. No. (or oF First Count Macs By INS IN, IN TOTAL Form 19. Inventory Tag for Material and Supplies (face and reverse). (Size, 3% x 7.) Spoiled tags should be marked “‘void” and sent to the super- vising authority. Sample forms of inventory tags are shown in Forms 19 and 20. Most of the data on the tags is self-explanatory. Form 19 is an inventory tag used in taking the inventory of material HOW TO TAKE INVENTORY 173 and supplies. The inventory tag for finished material has the same arrangement. Form 20 is an inventory tag for work in process. It re- quires a slight explanation. Assuming that the standard oper- HOLDEN MANUFACTURING CO. BOSTON, MASS. Inventory CouNTERSTAG No. Work IN PRocESS Iwvewrory Counters Tae No ——_________ oF Cour. MATERIAL Unit Cost} Vawue Counters TAG No. Deer. ——___—-. Locaarion Mave out Form 20. Inventory Tag for Work in Process. Size, 34%4x7.) ations on the work in process which is being inventoried are known, it is sufficient to enter in the designated space only the number and name of the last operation. This shows the con- dition of the work in process. If the sequence of operations is not known, however, it is necessary to count the number of 174 COST ACCOUNTING pieces of work in process completed under each operation and to show in detail the operations completed on each piece. In the “Condition” or ‘Last Operation’’ space, is written information as to whether the goods are new, old, or usable. It is the practice sometimes to assign one or more engineers to special departments so that materials may be accurately de- scribed and last operations properly designated. If engineers are not assigned, tag-writers should possess sufficient infor- mation to fill out tags properly. The “Unit of Count” may be the pound, the barrel, piece, etc. Metal tags rather than paper tags are attached to machinery and equipment, to fur- niture and fixtures, and to assemblies. As soon as inventory is completed in each department, the supervising authority is notified. Representatives of the supervising authority visit the department to see if everything has been inventoried. If so, tag-writers and others who have been working there are released and are assigned, if necessary, to other departments. The next step in inventorying is to pull —or detach—the original tags. No tags are pulled without the order of the supervising authority. After the tags have been pulled in a department, regular operations may be re- sumed, provided they do not interfere with work in other departments. Tags pulled are sent to the supervising author- ity and compared with duplicate tags. If the tags do not agree, a recount of the material represented by the tag is ordered, if the discrepancy is large enough to warrant a re- count. Someone other than the person who took the original inventory makes the recount. After the tags have been pulled, they are sorted according to the balance sheet classification of assets. The tags not only show quantities but also unit and total prices. In such cases the data on tags are entered on inventory sheets (Forms 21 and 22) which are in the charge of the supervising authority. After sheets are filled out they are sorted according to numer- 175 HOW TO TAKE INVENTORY (‘II X I ‘azISg) “ssad01g Ul YOM OF YoY AOJUaAUT “zz WOT tina SuNUINSS. [ee Er ee Bo || sunowy | gen | Suu on WYN ON LuWd | ON U3GYO | ON DVL Naauna woevt AVINaLV a0 papug Poied SS3O0U%d NI MYOM eq ———— on oBeg ASOLNSANI TVOISAHdD “SSWW ‘NOLSOS 00 ONISNLOVINNVW N3G10H CILX HI zig) ‘sayddng pue [edajzeyy OF yayS AqowsAU, “Ie Wid0y —T — ~— unowy | ‘uen unowy | ueni ‘i i te aE on Of innowy |-Nwno|] anawa | Linn | FR aN sa oN 41d | Nwnd | ON SVL JONaYassIG 43DGI1 HOLS ALNNOD AVDISAHE Papug Poway AW IRIS3LVW —— en Beg AMOLNZANI WWOISAHd ‘SSYW ‘NO1SO@ 03 DNISNLOVANNVW NAG T1OH 176 COST ACCOUNTING ical sequence, are checked as to completeness, and are then re-sorted according to the balance sheet classification of assets. That is, all raw material items appear in one batch of sheets, work in process in another, and so on. The complete inven- tory is then recapitulated on summary sheets, consecutively numbered—one sheet showing the totals of each asset. 4. Pricing the Manufacturing Inventory The pricing of the manufacturing or work in process in- ventory must necessarily be effected through the current cost records. Every order representing the work in process has its time cards and requisitions filed in the work in process files, and if a physical inventory is taken, the notations on the physical inventory as to operations completed should agree with the information given by the cost files as to number of pieces completed under each operation, which also gives the cost of same. The requisitions in like manner should also account for the direct material cost and what is on the floors in process, thereby taking care of this feature. In adding up the time cards in the files and extending these totals on the inventory sheets representing the work in process, the extensions of the burden at the standard rates for each department will furnish the total of the work in process burden. With these three items of work in process cost ascer- tained from both the physical count and the current cost files, it is then an easy matter to arrive at the totals and thereby check the controlling accounts in the ledger. These costs are always carried at what is shown in the work in process files, it being absolutely impossible to alter them to agree with any market conditions, as any change would be altogether impossible to accomplish. HOW TO TAKE INVENTORY 177 Use of Records in Pricing. Raw material may be priced from stock record sheets, purchasing department records, ac- counting department records, market quotations, or by the engineering department or the works engineer. Some persons hold that work in process is difficult to in- ventory. If material requisitions and time tickets have been properly filed behind orders in the standing order files, or posted to cost sheets, the calculation of work in process values is simply one of arithmetic. In some plants, cost sheets are not filled out until orders are completed, in which event the order files rather than cost sheets must be resorted to in figuring work in process inventories. This is the preferable practice. Under process systems the stage of completion of work in process is ascertained, the total cost of each process is ascertained, and the total cost of all processes is calculated. Work in process cannot be so easily figured under an estimating system. Finished parts and finished products are priced from indi- vidual part cost sheets, assembly cost sheets, estimated records. or stock record sheets. All of the above inventories should be priced at manu- facturing cost. Selling and administrative overhead should not be capitalized in work in process, finished parts, and fin- ished product inventories. : 5-7. Final Steps in Taking Inventory The supervising authority has charge of calculating, ex- tending, checking, and comparing the inventory. Much of the detailed work is facilitated by the use of various mechanical devices. All calculations on inventory sheets should be made twice, and the extensions and figuring checked. Form 21 is an inventory sheet for the physical inventory of material and supplies. The same form is used for finished material or product. Form 22 is an inventory sheet for the 178 COST ACCOUNTING physical inventory of work in process. Two copies are made for each inventory sheet. The copies remain together until the inventory is priced. They are then separated and given to two separate clerks who extend the values without any con- nection one with another. The sheets are then brought to- gether and the extensions compared, a method which will immediately expose any differences in extension requiring cor- rection. After the totals of the sheets which represent the material covered by each controlling account are ascertained, the con- trolling accounts may be verified and whatever adjustments are necessary can be made. The inventory sheets are then separated and made up into books, one copy being filed away as a permanent record, and a copy used for current purposes in connection with stock records, etc, CHAPTER XV ACCOUNTING FOR LABOR—IN THE PLANT Chapters in Which Labor Is Discussed Accounting for labor is discussed in Chapters XVI, XIX, and XXI, as well as in this chapter. The present chapter has to do with the detailed accounting for labor in the plant by the dispatch clerk. The next chapter deals with the accounting for labor in the pay-roll office where summarization of labor costs are made. Chapter XXI on expense and burden statements treats of the compilation and presentation of indirect labor, as well as other burden items. Indirect labor is referred to briefly in this chapter, however, because the original records for indirect labor are made on time cards. In order to differentiate clearly between the duties of the dispatch and the pay-roll clerk, the broad steps in accounting for labor might be outlined as follows: 1. Recording: (a) Regular cases (b) Special cases 2. Checking and extending 3. Summarizing The first two of these steps—recording and checking—are in the hands of the dispatch clerk, and are therefore discussed in this chapter. Under special cases come the recording of the time of loaned workers, of work on other department standing orders, and of labor costs on short operations. As summariz- ing is in charge of the pay-roll clerk, it is taken up in the fol- lowing chapter, as well as in Chapter XXI. 179 180 COST ACCOUNTING Objectives of Labor Accounting Accounting for labor in the plant, pay-roll office, and in connection with burden costs, has four main objectives: 1. To ascertain the amount of wages due each worker so that pay-rolls can be prepared. 2. To show the labor costs by units—whether they be jobs, contracts, classes of products, or departments, processes, etc.—so that proper direct-labor costs can be entered on cost sheets. 3. To provide data for figuring burden. 4. To provide data through the foregoing procedure so that proper control of labor may be maintained. Chief Forms Used in Labor Accounting It will be useful to enumerate here the chief forms used in order to reach these objectives, together with a brief explana- tory comment of their functions. These forms are: 1. Weekly In-and-Out Card. A clock card (Form 23) is assigned to each worker in order that he may record thereon .. the time when he arrives in the plant and leaves it—in other words the in-and-out time. The function of this card is the same in every plant, although its form may vary slightly. 2. Time Card. Time cards (Forms 24 and 26) vary ac- cording to the kind of labor information desired and the sys- tem of wage payment in use in the plant—regular daywork, piecework, or premium or bonus. As a matter of fact, the accounting for labor on time cards and other labor records probably depends more upon the system of wage payment than upon any other factor. Certain special cases that arise in ac- counting for labor will be discussed in this chapter along with the regular procedure of labor accounting. 3. Late and Absent and Overtime Reports. Ifa worker is present during the full working day his in-and-out card and ACCOUNTING FOR LABOR—IN THE PLANT 181 time cards will show this fact. If he is late or absent, or if he works overtime, this fact is entered on a late and absent, or an overtime report (Form 28 or Form 27), as the case may be. 4. Pay-Roll Sheet. The pay-roll sheet (Form 29, Chap- ter XVI) assembles the pay of each man from the time cards representing the detail of work performed, and supplies the basis for the journal entry for the distribution of pay-rolls. (See Chapter XIX. ) 5. Labor Transfer Record. The labor transfer record (Form 30, Chapter XVI) is used te record the time and cost of workers temporarily loaned by one department to another. (See Chapter XVI.) 6. O.D.S.O. Transfer Record. The O.D.S.O. trans- fer record (Form 31, Chapter XVI) is used to record the de- tails of work on other department standing orders. (See Chapter XVI.) Weekly In-and-Out Clock Cards The weekly in-and-out clock card shows the time the worker enters and leaves the plant each day. The difference between the two figures for each day is the time when he is supposed to be in the plant. This figure is checked up with the time reported on the time cards. Inasmuch as the time cards show the time worked as well as the cost of the labor performed by each worker, it can be ascertained whether or not he was idle during any of the time that he was in the plant. Still another use is made of in-and-out cards, namely, to aid the pay-roll department in locating differences in the pay-roll. Duties of the Dispatch Clerk Dispatch clerks—a term which is being used more and more in place of “time clerk’’—see that the workers stamp in- and-out cards properly. Each week these clerks forward the in-and-out cards, after they have been properly stamped, to 182 COST ACCOUNTING the pay-roll department to be filed consecutively by workers’ numbers. The in-and-out cards do not show the actual time and cost of work done, nor do they show the workers’ idle time. The detailed accounting for labor in the plant does not HOLDEN MANUFACTURING CO. BOSTON, MASS. Week: Bending v.:sssnocssasscueossseseseorssereronsteesnsshanss Te No. Name “MORNING AFTERNOON EVENING 3 2 mw | our w | our | wm | our Form 23. Weekly In-and-Out Card. (Size, 3% x 5%.) really begin until the time cards are filled out. This work should be done by the dispatch clerk. If workers are per- mitted to fill out time cards, a part of their productive time is lost. Furthermore, they may lose the cards or get them so dirty that they are illegible. ACCOUNTING FOR LABOR—IN THE PLANT 183 Before taking up in detail the preparation of time cards, the various duties of the dispatch clerk, in so far as his duties in connection with timekeeping are concerned, may be outlined as follows: I, Oyen 10. To account for all working hours of employees in their departments. . To enter on time cards the time when operations are commenced by workers. To place the card in a rack under the proper working place number. To remove the card from the rack when the job is finished. To enter the quitting time. To calculate on the cards the elapsed time. To turn in for each worker enough cards to represent the entire time he was present. These time cards are checked with the late and absent, and overtime reports for the purpose of noting any deviation from the standard number of working hours. . To stamp night and overtime on cards for night work and overtime. To enter the quantity of work accomplished as called for in each case. To enter all idle machine time on idle machine cards as specified. (See Chapter XXXI.) Time Cards There are two principal kinds of time cards—one for direct or productive work (Form 24a) and another for in- direct work (Form 26). The direct-labor card is used to record labor which is chargeable to a production order; the indirect card is used to " record labor chargeable to a standing order. 184 COST ACCOUNTING All time cards are similar in a general way, though they differ as to detail. Time Cards for Direct Labor The same form of direct-labor card is used for all direct, that is to say, productive work whether it be done under the regular daywork, piecework, or premium or bonus system of wage payment—the regular daywork card being different from the piecework, bonus or premium card in color only. A recapitulation card—called the bonus and premium report—is used in conjunction with the direct-labor card under the pre- mium or bonus system. The daywork system is not as common as formerly, owing to the adoption of piece, premium, bonus, and other special methods of wage payment. In the opinion of some good observers, it may be remarked, the pendulum is moving back- ward toward the daywork system, but the reasons for this do not fall within the province of this volume. The following is a detailed description of the data on the time cards for direct work (see Form 24a). The circled fig- ures appearing upon the card have been inserted merely for the purpose of identifying the columns referred to in the follow- ing discussion. 1. Worker’s Number. The worker’s time-clock card number. 2. Date. Stamped with date stamp. 3. Department Number. The number of the department on whose pay-roll the worker belongs. 4. Order Number. This is secured from the production order or the standing order code. 5. Machine Number, The number of the machine which the em- ployee is operating. 6. Operation Number. The identifying number of the operation being performed. 7. Operations. The total number of operations which are to be performed on the material. ’ 8. To. The next operation to be performed on the piece. 185 ACCOUNTING FOR LABOR—IN THE PLANT *£[WO OOD UL SI9q}O 9Y} WOT} Butsayip sursjsXs 9894} JO yea JapuN pasn sw10f 9y} ‘YusuAed a8eM jo wi9jsXs snuoq Jo uIntutazd <0 ‘qiomaoaid ‘yioMAep Ie[NZai 94} Japun auop aq # Jayzoyss ‘YOM sarjonpoid ‘Aes 0} st Jey} ‘aip Burpsosai 10} pasm cl wi10} siqy, CMHEX SZ ‘azIg) “paeg dU], Joqey poug (e) ‘bz wi0og @ | @ @| © ; ; 3 ! LG : @ “ON 4829 3/941) ON pie) ISH 427 1240] | Sje4O) 1 i uoljessdo OL sussdo, ae ! @) : 1@) q : Kuug'pses seq eq Joy pouseq : ' ! 1 ONY voretado cal 7 i ' { i : \ Ge) ' “D°D Ym payoaud | i ' ; ' ®, Sei 1} BUnyeuBig guojdadsu ' 1 ! ! 1 u ye + Y ‘ ( 1 ' @; ‘ oq of aouejeg i ' ' ' 63) i T 41p2u9 sunoy : ' WD ' ; : aouejeg \se7 i 1 t 14JOM JO UOI{disosag ' ' ON 49P40, @: 7 - i OT @iya @ @ | © ‘ J2PUO US AyiyUeNH | ‘Pog Ssy yy “Poug JH 'PIS] S4]{Joqey poon AYO adxy, sse9 ‘on 3daq ‘| sao] QT] 4803 soge7 — Jsunoy s0qe7 See sadaig | Aysq Sq] adAy se on Jado] “onusew ON J2pUQ, "ON SuayJoM| “ON ydag {| fk PLL | | | | | Weed fs Ph lf Lt | | -t | 3) a en ES eo N rs rm = Ss C) oo | a Hed] [aisla] lalla! [sislel leleicl [slelal lelslal [slslal lalslal lalslal [aisle lalsial lalela O OLS “ON SJ244OM . x oe SSVW 'NOLSO@ MYOM BAILONGOYd O09 ONINLOVANNVAW N3QIOH yO4 devo SIHL ASN 186 COST ACCOUNTING g. Class. The class of goods being made, as shown by the product code. 10, Type. The type of goods being made, as shown by the product code. 11. Description of Work. A description of the goods being made. 12. Operation. The name of the operation being performed by the worker. 13. Defective. The number of pieces spoiled during the operation. 14. Good. The number of good pieces finished during the operation. 15. Totals. The sum of (13). 16. Totals. The sum of (14) 17. Labor Hours. See description of (32) “factor.” 18. Total Labor Hours. See description of (32) “factor.” 19. Standard Hourly Production. The standard rate per hour for this operation. 20. Actual Hourly Production. The actual rate per hour accom- plished. 21. Machine Hours. Total number of machine hours. 22. Hours Credit. Number of good pieces divided by standard hourly rate of production. 23. Checked With Clock Card. A distinguishing check mark or the initials of the dispatch clerk who checks the labor card with the in-and-out clock card is entered in this space. 24. Rate. The rate of pay. 25. Cost. The labor cost which is the rate, piece or day (24), multi- plied by the total number of good pieces made (16) if piece work, or the number of hours (18) if day work. 26. Quantity on Order. The total quantity of the particular product ordered. 27. Last Balance. The balance of the order left after the previous quantities made have been subtracted from the quantity on order (26). 28. Balance To Do. The quantity of the order which is still un- finished which is obtained by subtracting the total good (14) and defective (15) pieces from the last balance (27). 29. Inspector’s Signature 30. Earned For Day. Total earnings for day is extended on last card for day only. 31. Card Number. Each worker’s cards are numbered consecutively using 1 for the first card in the morning, 2 for the second card, etc. A circle is placed around the last card number. Cards are numbered consecutively for workers who have more than one card for a day’s work, in order to insure the receipt of cards for the entire day. ACCOUNTING FOR LABOR—IN THE PLANT 187 32. Factor. The use of all time cards except the bonus card involves a somewhat special feature known as the calculation of factors. The factor is the term given to the number of machines a worker operates. It is shown on the horizontal scale across the top of the card. By reference to the three cards (Forms 24b, c, and d) the method of calculating factors can be understood. Em- ployee No. 526 started work at 7 a. M. on three machines, each of which is represented by one of the cards. At Io A. M., ma- chine No. 950 stops because of a breakdown. The hours that machines are idle are reported on idle machine cards. The worker continues to operate the other two machines, Nos. 951 and 952. From 7 a.m. to 10 A.M., therefore, worker No. 526 has operated three machines. Hence, his factor for that period is 3, that is, the same as the number of machines he was running. The factor is indicated on the three cards by draw- ing heavy vertical lines at 7 A.M. and Io a.M. respectively, and writing the figure 3 between the lines. The difference in time as shown by the number of hours between vertical lines is 3. This figure is divided by the factor for that period, which is also 3, and the result is the labor hours—1—to be entered in space (17) (labor hours) on each card. While worker No. 526 continues to operate two machines his factor is 2. He resumes operations on machine No. 950 on the same produc- tion order at 3 o’clock and consequently his factor again be- comes 3. Heavy vertical lines are drawn at 3 o’clock on all of the cards. On the cards shown in Forms 24c and d, 2 (the factor) is written between the 10 o’clock and 3 o’clock lines. The period represented by the difference in hours between the lines is 4, as one hour is taken off for lunch. This is divided by the factor 2 and the result—1—is the number of labor hours to be entered in column (17) on the second line on Forms 24c and d. Suppose that worker No. 526 quits at 6 o’clock. From 3 to 6 o’clock he has been operating three machines. His factor COST ACCOUNTING 188 Japs. IF ON SSOXON (YE x BL ‘271S) ‘g10JOVY JO ISP) SVOIPUT OF UI Paty prep MEL 10qeT pasq (q) ‘be wiog i i { : { Z 4 t ‘ON pre) 1 uoiesadd $u,sadQ ; 1 uolyesadoQ, OGb 9° Yim paysaud een 9 pay ' : \ ON 49PI0, 1 ‘ Ayyuend | Pod S4H HPS SHH poop, ssetD on_3daq Pooy sadaiq "82d SSe|9 | ON ON WDE “ON JOPsQ StoyJoM| ON ' 1 4se] / ysony Jo Uol4dis9saq 1 i SSVW ‘NOLSOd YYaOM BAILLONGOdd OD ONIANLOVANNVAN N3d 10H wO4 duvo SIHL ASN 189 CYEX SL ‘azIS) *s10}OeT FO IS BCSIPUT O} Ul PaT[ly Pre ou], Joqey youd (9) “bz w1075 a 1 ot ‘on $827 apy ON pse) fri qe SjeyoL ' . ' 1 1 ' 1 uoiyesadg i su,sadQ, ‘ 1 ‘ON! UoyesadQ ['Gb t_ON YeW 2°D UyM paypauy Ol ‘SUH 0 pourjeg se] Hpasd { o ' 1 ‘Psd JH 'PIS| SIH poon sadaig say ’ 4 4 ‘ 1 ' ' ' ' ' ‘ Uo! 4dia39saq ‘ON JapsQ JOM ‘on ydaq ON Ayyueng] posg Sy SJH J2pso 4807) soqe] 2 ON yey ON J2P4Q ON Sde4JOM ayeq VS ‘ON S,JO4sOM, ‘SSWW ‘NOLSO@ WYOM BAILONGOMd OD ONISNLOVANNVW N3G1OH yO4 Gaevo SIHL ASN ACCOUNTING FOR LABOR—IN THE PLANT CHER HEL ‘org) “ss0jeT JO OS aCOPUT OF UE PATE PIED auNL soqeT wend (P) Ve wed . , ' 1 , e i : ! ped 1 ' i uoiyes2d su,sedo uo1e4s3d0, ON WEN 4se] ' z yyOM uolydisosag ' ‘ : ' f ' . ' 42pi Ud AyyuenD| par SIH un'Pis | 4H : ton ¥daq 480. Poon savalg "SIg “ON YOR, “ON JOPsO, ON S.19}4I0M ‘ON COST ACCOUNTING _ JEG ON SJ23 10) ‘SSW ‘NOLSOA YYOM BAILONGOYd OD ONINNLOVINNVW N3d 10H YyOs GAVD SIHL JSN . 190 ACCOUNTING FOR LABOR—IN THE PLANT Ig! for that period is 3. The labor hours are 3-3, or 1, and are entered in column (17) on each of the cards. The next step is to calculate the labor hours on each card which are entered in space (18). These hours are 2, 4, and 4, respectively. The elapsed machine hours as shown by the cards are 6, 10, and 10 hours respectively. These figures are entered in space (21) on each card. When the factor does not divide evenly into the elapsed hours (as 14% hours divided by the factor), arbitrarily divide the time into even 15-minute periods. Bonus or Premium Report Card The method of accounting for labor under the bonus or premium method of wage payment involves the use of regular time cards and the bonus or premium report card (Form 25), which is a recapitulation card of the bonus or premium earned by the worker. These cards are made out in duplicate. The original bonus report or premium card is given to the worker soi that he himself can check up the calculations of bonuses and premiums made by the office, and the duplicate is forwarded with the product to the inspector of the product, and later the cards are forwarded to the pay-roll department. It should be clearly kept in mind that the bonus or premium reports do not obviate the need of regular time cards. On the bonus or premium report are entered the basis of payment made to the worker, the date, time, and pieces made. The bonus is calculated as follows: The number of pieces re- quired per hour is multiplied by the number of hours worked during the period. The result is subtracted from the number of pieces made to find the number of pieces on which a bonus is earned. The bonus rate is multiplied by this number to find the bonus earned. A glance at the bonus or premium report card (Form 25) will make this clear. On December 1 and 2 the employee whose card is shown worked 4 and 6 hours re- a COST ACCOUNTING 192 CYEX BL ‘ozIg) ="preg yoday umnmusig Jo snuog “Sz w10g uonetedQ PPPOE GF P| PIMWYD CYC) ogH | O/ ole | 9 t-zl O$! fl I = tl yIoM Jo uoNdrsaq tUy/ | Jo sp10994y and 0 5 6 odkL SSBID oo g |e” os 4a "0 pousis powieg snuog poop | "Ad Opell sodatd “on “03d0) SiO 3809 poor sa0a1g addy | SSEID JON “sedQ “ON 42p2Q, “ON 8,10410M [ON 349q Ce eee ise esi ste a eed | +20 ZO° wna AWYVN S.YSHYOM “ON 8,40410M, “SSVW ‘NOLSOS ONIGNS GOlvad ‘OD SDNISNLOVWANNVW NAC 1OH wet OFS ANAWLYvdad Ly¥Oday¥ WNIWSYd YO SN LN3WAVd 4O SISVS iy ACCOUNTING FOR LABOR—IN THE PLANT 193 spectively, which means that he had to produce more than 400 pieces (40 Xx 10) in order to earn a bonus. The record shows that he actually made 450 pieces during that period. As 2 cents is paid for each piece on which a bonus is allowed the worker earned a bonus of $1. The bonus is then entered on the card and is added either to the regular pay-roll or to a special bonus pay-roll. Inspection The time cards for direct labor discussed in this chapter call for entries of good and bad pieces. As it is frequently impossible to inspect the product in time, however, it is often necessary to record the number of pieces completed, whether good or bad, and to have a separate inspection report follow later. Time Cards for Indirect Work Another important feature of labor accounting occurs in connection with indirect work. It will be remembered that time cards for direct work are chargeable to production orders. Time cards for indirect work (Form 26) are chargeable to standing orders. Cards for indirect work are filled out as follows: . Worker’s Number. The worker’s time-clock card number. . Date. Stamped with date stamp. . Department Number. The worker’s home department number. . Order Number. The standing code order number outlined on the order which accompanies the work or from the standing order code. Labor Hours. The time spent on the work. . Rate. The worker’s rate per hour. Labor Cost. The time spent, times the rate per hour. Description of Work Done. The description should be complete, e.g., “Repairing machine 50.” . Complete. A check mark is placed here if work is complete. Incomplete. Checked here if work is incomplete. PWN PN AN ow CYUEX SEL ‘9zIS) “psed ou, JogeyT Pealpuy ‘gz WI0Oy COST ACCOUNTING 194 | @ : [2 puen $88 2219 “ON Pued : 1 4809 1oqe) OD i | @ Ayo puen se] Aeq yoy wie \ ayey @ ! t 4 ‘StH oqe] ! Hl t @ | , @ 942|dwodu} : : @ “ON 49PIQ ® @ ayajdo BU0g YOM JO _LOYdi49S9q i O ‘ON dag ole 4805 Joge] Pe ON JOPUO “ON Suayzom| oN 4daq LI | [| | ee es z[heeops| {ttt t | Owl lea fafa alae ee al” : NOs diVd AWIL NVW acl dos OS1V Shores SSWW ‘NOLSOB SNOM JOJid_GNVY_YaOM Ava 09 ONISNLOVANNVYW NSQTIOH LOZAIGNI YO GSVO SIH 3Sn ACCOUNTING FOR LABOR—IN THE PLANT 195 11. Earnings for Day. Extension of total earnings for day to be on last card for day only. 12, Card Number. Worker’s cards are numbered consecutively. A circle is placed around the last number. Recording Special Cases It will be remembered that the steps mentioned in account- ing for labor were: 1. Recording: (a) Regular cases (b) Special cases 2. Checking and extending 3. Summarizing The rest of the chapter will be devoted to a discussion of the special cases of labor accounting and the checking of labor cards. Special features are: 1. Recording the time of loaned workers. 2. Accounting for work on other department standing orders. 3. Accounting for labor costs on short operations. 1. Recording Time of Loaned Workers The first special case in connection with accounting for labor occurs in the recording of the time of loaned workers. When a worker is on a certain pay-roll and is loaned to another department for temporary service, and when no bur- den charge is involved, it is of course impracticable to change the worker’s number. In such cases, accordingly, the follow- ing very serviceable method is used. The dispatch clerk of the home department makes out two cards for the loaned worker, entering thereon the worker’s number, the date, and the time he reported for work at the beginning of the day. Both cards are then stamped diago- 196 COST ACCOUNTING nally in the description of work space, “Transfer to Depart- ment Number ..... ” The dispatch clerk fills in the number of the department to which the man is transferred. One card is placed in the worker’s space on his home dispatch board as a memo, and the other card is given to the worker to turn over to the dispatch clerk of the department to which he is loaned. The dispatch clerk of the department borrowing the man fills in all other information as if the worker were one of his own men. He makes out any additional cards necessary to cover the man’s time for the period, stamping all other cards the same as the first. At the close of the day—or upon return of the worker to his home department—the dispatch clerk sends the cards back by the worker, who reports back to his home dispatch clerk. These cards are then forwarded to the pay-roll office like all other cards. The memo card held by the home dispatch clerk is destroyed—or used again after erasure of entries. The further special procedure in connection with the transfer is explained later in Chapters XVI and XIX. 2. Other Department Standing Order Accounting The second special case in accounting for labor occurs in connection with charges made by one department to any other department in a plant where the burden of the originating department must be incorporated in the charge. While the filling out of the card is identical with any other entry of indirect labor, the card must be specially stamped in order to insure proper handling in the subsequent operations in connection with the pay-rolls. These cards are accordingly marked with a rubber stamp “O. D.S.O.” in large letters. They should be stamped diagonally across the description of work so that they may be quickly and easily detected in the pay-roll department. Other than this, the entries on the cards ACCOUNTING FOR LABOR—IN THE PLANT 197 are the same as in all other cases, the only difference being in any one department when the standing order number will be for some department other than the one performing the work. The special handling of these cards is described in Chapters XVI and XIX in connection with the pay-roll distribution. 3. Short Operations The third and last special case in accounting for labor has to do with recording the labor costs of short operations. Many manufacturing operations are of such short duration that it is impracticable to charge the direct labor involved to production order numbers through time cards. Hence, these operations are known as “short” operations and code numbers are pro- vided for them. An illustration of this may be cited in hardening taps. Many sizes are handled together—and each size may be on a separate order. To separate the time on each size and order is impracticable. Therefore all hardening time is charged to a code order or account called “Hardening.” It is necessary, however, to enter the actual cost of hard- ening each of various sizes of taps on the cost sheets. These costs may be estimated as follows: The cost of hardening each of six or eight sizes is determined by means of tests the results of which are then plotted on a chart. A curve drawn through these points will indicate the approximate cost of hardening intermediate sizes. The standard costs thus de- rived should be used on all cost sheets and the code order or Hardening account credited with like amounts. The total of standard costs entered on the cost sheets during a given period should approximate the total amounts charged against short operations during the period. If a discrepancy exists, adjust- ments should be made and the standard cost should be revised. Although the time of short operations is not kept, a list of all products, their production order numbers, and quanti- 198 COST ACCOUNTING ties, should be kept under each operation, so that the orders to which standard short-operation costs are applicable may be known. Standard costs should be listed or shown graphically in some way. They remain fixed unless changed conditions affect the amount of standard costs, in which case the standards HOLDEN MANUFACTURING CO. BOSTON, MASS. OVERTIME REPORT DEPARTMENT DATE. WORKERS’ NAME TIME 1N TIME OUT TOTAL NO. overtime] Form 27. Overtime Report. (Size, 5x 734.) should be revised. It should be clearly kept in mind that short operation accounts are not a cure-all for everything; these ac- counts should be minimized and used as infrequently as pos- sible. Checking Labor Cards The second principal step in accounting for labor consists of checking the labor cards. The time cards for each day are checked the following morning. Each dispatch clerk must see ACCOUNTING FOR LABOR—IN THE PLANT 199 that the time cards for all workers in his department are checked. In order to do this properly he must be provided with a list of the numbers of the workers in his department and must prepare overtime reports (Form 27) and late and absent reports (Form 28). For exceptions to the regular hours of employment the procedure is as follows: HOLDEN MANUFACTURING CO. BOSTON, MASS. LATE AND ABSENT REPORT DEPARTMENT. DATE. WORKERS’ NAME MORNING _| AFTERNOON TOTAL NO. IN OUT IN OUT TIME ABSENT SIGNED Form 28. Late and Absent Report. (Size, 5x 734.) Shortly after the whistle blows in the morning, and after the lunch-hour, each dispatch clerk takes the cards left in the “out” rack and keeps them in his dispatch booth. Any worker who is late reports to the dispatch booth for his time card and the dispatch clerk fills out on the late and absent report the worker’s number and name, and the rest of the data called for on the report—which is self-explanatory. Absent time is re- corded in the same general way from the cards of absent 200 COST ACCOUNTING workers and during the day for all workers who leave the plant before the regular quitting time. From the passes issued for overtime the dispatch clerks prepare the overtime reports, which are also virtually self- explanatory. For all workers who are present for the full day’s work, the time on the time cards must total the regular hours—-8, 9, or 10, as the case may be. After time cards are checked by dispatch clerks for full labor hours as well as for full machine hours, they are placed in numerical sequence and are then for- warded to the pay-roll office. Extension of Cards The next step in accounting for labor is the extension of time cards. In different plants there will always be found a difference of opinion as to who should have charge of the file of day and piece rates, in order to accomplish the proper rating of the cards. In some cases the files of such rates are in the shops, and in other cases in one of the office departments, usu- ally the pay-roll department. It is probably best to have the rating of the time cards as to rates per hour and piece rates confined to the office, if possible, in order that the information as to day rates, in particular, shall not be a matter of com- mon knowledge. Irrespective of where it is decided that this work shall be done, after the contributing data have been entered on the cards the next natural operation is to have them rated and extended. This is purely a matter of referring to the day rate files in the case of straight daywork and in bonus or premium system based on daywork, and to the piece- work files in cases where the work is performed in this manner. The extensions on the cards should be made clearly and dis- tinctly, and in all cases checked by someone else in order to in- sure absolute accuracy. After the cards have been rated and extended they are passed on to the pay-roll department, the ACCOUNTING FOR LABOR—IN THE PLANT 201 detail procedure of which is described in the following chapter. The third principal step in accounting for labor is the sum- marization of labor costs. Summarizations are made on pay- roll sheets and on expense and burden statements. The first of these records is discussed in the next chapter, the last two in Chapter XXI. CHAPTER XVI ACCOUNTING FOR LABOR ON PAY-ROLLS The Triple Use of Pay-Rolls In connection with a detailed cost system, the pay-rolls are used for the following purposes: 1. To compute the worker's pay. 2. To effect certain controls. 3. To record on the pay-roll the number of pieces pro- duced by each worker on direct operations. This is sometimes carried to the point of having entries of piece or bonus in separate columns from that of day- work in the direct-labor section. It is not always best to try to accomplish too much with any one record, and therefore it is advisable to disregard the third function—that of analyzing the various kinds of work and quantities produced. Moreover, pay-rolls have to be made up on schedule time and too much detail is likely to hold back the work. A knowledge of how the worker’s pay is computed and how the controls are effected may best be gained by a detailed study of the pay-roll sheet (Form 29), °* Condition of Time Cards on Delivery to Pay-Roll Department Before the pay-roll sheet is taken up, however, it might be well to insert a word about the condition of the time cards when they reach the pay-roll department. By turning over these cards in orderly and proper shape, the dispatch clerk can help the pay-roll department greatly. It is very important, for instance, that the time cards be delivered to the pay-roll department with all cards representing 202 203 ACCOUNTING FOR LABOR ON PAY-ROLLS CAB x C1 ‘azig) ‘weys yoy-Aegq “6c uwloy aSUVHD ‘ON dis “aia LASHS T10a-AVd * ‘SSWW ‘NOLSOG, 09 ONINNLOVSNNYW N3GIOH 3iva SWYN ‘1d30 204 COST ACCOUNTING the day’s work of each man. The cards for each man should also be in their numerical sequence, it being remembered that when a man uses more than one card per day the various cards representing his day’s work are serially numbered. It is natural that the cards should be in order, as the last move made by the dispatch clerk or time clerk should be to verify the fact that a man’s entire time is represented by the time cards—after they have been checked with the late and absent reports and the overtime reports. The cards should also be in sequence according to the worker’s check number, as this is the condition in which they should be handled in the dispatch booth in the shop. Arrangement of Pay-Roll Sheets The pay-roll sheets should be in binders and should be made ready for the entries of a pay period before the entry of the pay-roll is started. This means that the full data at the top of each pay-roll sheet should be filled in, including the depart- ment name, the name of the worker, his day rate, his check number, and the pay-roll period. If the sheets are prepared ahead of time’ from the list of check numbers last known to be employed in the department, a great deal of time will be saved in the current work of entry. In some places it has been found of advantage to have the pay-roll sheets loose during the posting period, as the sheets will then lie perfectly flat for entry. If this method is used, however, great care must be taken to see that none of the sheets become separated from the file, Details Shown on Pay-Roll Sheet The first column on the pay-roll sheet is the date column, in which it is necessary to enter only the day of the month, as the period date at the top gives the other information desired. The column headed “Slip Number” is for the purpose of ACCOUNTING FOR LABOR ON PAY-ROLLS 205 entering the serial number of the slips for the worker when more than one time card is required to represent his work. In this connection it is to be remembered that the serial number on the last card representing the day’s work should be enclosed in a circle. This automatically shows the pay-roll clerk that all the cards for each worker are in hand. The column headed “Charge” is for the entry of the order number covering the work accounted for by the time card. This may be either a standing order number or a production order number. The nature of this order number regulates the entry of the time in the columns which follow.’ There are five main blocks of columns across the sheet. The first four of these are of extreme importance, as they become the basis of the controls for each subsequent move- ment of labor through the medium of journal entries. Each has a very specific use, and too strict attention cannot be paid to mastering and understanding fully the uses to which they are put. The blocks are herewith described in regular order: 1. Transfer The procedure in connection with labor which is loaned by one department to another has previously been described. When one department loans a man for some hours or days to another department, the time of loaning is usually not suff- cient to warrant changing his check number, and therefore the method described in the previous chapter is used to obviate the mix-ups which might otherwise arise. When the pay-roll clerk of the department recording the pay of a man who has been loaned to another department finds a card stamped “Transferred to Department A,” he should enter this card under the transfer heading. This entry has the effect of registering the man’s time for pay on his own pay- roll, and at the same time providing the entry in a column ready for use in connection with the labor transfer record. 206 COST ACCOUNTING 2. Direct A card whereon the order number shown is that of a pro- ductive order of the home department, should be entered in this block. It will be noted that there are two main columns shown in this block, as well as the two succeeding blocks, one headed ““Amount,” and the other headed “‘Piecework.”’ The object of this distinction is to separate day and piecework in order that the pay-rolls may automatically show how much of the direct labor is operating under daywork as against any special inducement method other than daywork. It might be noted here that the straight-time earnings under bonus work or any other kind of premium work should be also entered in the piecework column, this heading being used for any kind of work other than straight daywork. 3. Indirect The indirect block is arranged exactly as the direct block. Entries to be made therein are confined to work performed by anyone in the department on any standing order number of the department. In other words, no work must be included which is done by the department on the standing order num- ber of any other department or any general department. The entries must be confined wholly to work on the standing orders of the department of which the worker whose pay-roll sheet is being prepared is a member. 4. O. D. Standing Orders “O. D. Standing Orders” means in full “Other Depart- ment Standing Orders,” and is designed to cover the entry of any work performed by the department of which this employee is a member, on the standing order of any other department in ‘the plant. The work entered in the O.D.S.O. columns is of the same nature as that entered in the direct column, so far as the ACCOUNTING FOR LABOR ON PAY-ROLLS 207 originating department is concerned, and must be considered in conjunction with the direct in finding the basic figure for the burden rate. An instance of this might occur in case a grinding depart- ment ground some tools for another department. To them this work is the same as work done for an outsider, and the depart- ment receiving the benefit should pay not only the direct- labor cost but also the burden in connection therewith. It is, therefore, exceedingly important to be certain that every entry made in the O.D.S.O. columns is for the work on other depart- ment standing orders. In this connection it may be thought that many times a department might do work which would not carry overhead as against another department. In cases of this sort the entry should be carried out under the transfer scheme rather than through the O.D.S.O. scheme. 5. Total The entries in the Total column consist simply of the total time and amount, and show the total earnings for each day, as well as the total time for each day. In this connection, it might be brought out that even though the time cards are sup- posed to have been verified by the dispatch clerk as to the total elapsed time for each day, the clock cards are brought to the pay-roll department at the close of the week for a final check against the time as shown daily on each man’s pay-roll sheet, to doubly safeguard the accuracy of the pay records. Closing the Pay-Rolls As each day of each man’s time has been entered, the total time and amount has been brought out to the total column. At the close of the pay period the entire sheet is footed verti- cally in all its columns, and cross-footed to agree with the vertical footing of the total column. This makes an absolute 208 COST ACCOUNTING check on the accuracy of the time and money entries and is a valuable feature in connection with the technique of pay-roll accounting. If bonus or premium systems are in effect, it is then in order to enter at the bottom of the pay-roll sheet the bonus or premium which is due each man, in case there is no special bonus or premium pay-roll sheet provided therefor. Deduc- tions from the pay-roll which may be necessary on account of subscriptions, rent, liberty bond payments, or many other pur- poses, should then be entered. Aiver these additions and de- ductions have been made, the net amount of pay for the man can be computed, and the pay envelope made out accordingly. Splitting Pay-Rolls at Close of Month Many times when the pay-roll period is one week, the end of the month comes in the middle of a week. In such cases it is necessary to enter the cards of the last working day of the month and to rule footing lines after the entries of this day. The entries for the remaining days of the week are then made, and after all the entries are in for the last day of the week, another subfooting line is ruled in. It is then necessary first to add the sheets down to the first subfooting, and then the balance of the days of the week down to the second subfooting —each section separately. The two subfootings must then be added to arrive at the total for the week. The use of these subfooted totals will be explained later in this chapter. Pay-Roll Totals The next operation is to arrive at the total of the pay-roll for each department. The procedure consists merely of add- ing the total time and amount of money for each block, whereby is shown the total for transfer, direct labor, indirect labor, O.D. standing orders, as well as the total pay-roll. Note that the totals are to be in both time and money. ACCOUNTING FOR LABOR ON PAY-ROLLS 209 | This total must be arrived at for each individual pay period, but in addition to this a monthly total will be made up by recapitulation as follows. The last subtotal of a split pay-roll at the beginning of the month starts the recapitulation for the month. The full pay-rolls during the course of the month are then taken, and to them is added the first part of the split pay-roll at the end of the month. This gives the exact total of the pay-roll during the current month, which then becomes the basis of the journal entries to effect the controls referred to in other chapters. In this connection it should be stated that the total of the full week’s pay-roll is the amount for which the pay-roll check is drawn and which credits cash and charges the pay-roll ac- count. It will be seen by this that the credits which are made to the Pay-roll accounts because of transfers to the various control accounts are in advance of the payment of the last pay- roll, which in turn explains the reason for there always being in the balance sheet an accrued pay-roll in the liability section. Only the actual pay-roll of the month being figured is needed for control purposes. Analyzing Pay-Roll Records After obtaining the totals for each department of the headings as shown on the pay-roll sheets for the entire month, the journal entry is prepared, crediting the actual pay-roll fig- ures for the month to the pay-roll accounts, and charging the various control accounts involved. In compiling this journal entry, all burden accounts for the various departments are grouped together in the order of the departments as they appear in the standing order code— all expense accounts in their order, and the Work in Process Labor account for each department in the same order as the burden accounts. Two other accounts will be shown in the 210 COST ACCOUNTING debit side of this entry, namely, an account called “Transfer” account, and one called “O.D.S.O. Clearance” account. The method, then, of filling out the journal entry is to take each department’s total of the various blocks as described, and enter it against the corresponding heading in the journal entry. Two exceptions to this are in the case of the Trans- fer account and the O.D.S.O. Clearance account, where it is necessary to recapitulate the debits to these accounts from all departments, combining them into one grand debit for each of these accounts. Thus the total for each department of the direct block is entered opposite the work in process labor title for this depart- ment in the journal entry. The total of the indirect block is entered opposite the items showing debit to the burden account for this department. The total of the transfer for this depart- ment is combined with the total transfers of all other depart- ments and entered opposite Transfer account in the journal entry. The O.D.S.O. block is handled in the same way. The credits of this journal entry are the total of the total block for each department, which entry would be made against the credit item of the Pay-roll account for each department. Result of the Foregoing Distribution It may be now easily seen that the journal entry as above described will debit the various control accounts which have been described in other chapters. (See Chapter XIX for the procedure which governs the crediting out of these costs in connection with the burden statements. ) Work Performed by One Department for Another At all times the cost man has been confronted by the knotty problem of how to dispose of time when men are loaned to another department for a longer or shorter period, or when work is performed in a department for another de- ACCOUNTING FOR LABOR ON PAY-ROLLS 211 partment on which the burden of the originating department should be charged. It should be constantly borne in mind that the pay-rolls of each operating department must be maintained intact, or there will never be any known basis of the total direct-labor cost or labor hours on which to establish the control of the work in process labor or compute the burden. Nor will there be any accurate control of the indirect labor, unless the pay-rolls accu- rately represent what has transpired in connection with the men who are listed for each particular department. There have been many ways of solving these problems, one favorite way, in the case of a loaned man, being to give the man a new check number.in the department to which he was loaned. This has resulted, and might at any time result in his being paid double, as the two check numbers would automati- cally mean that he would have two pay envelopes. A method is here presented for safeguarding the records without issuing a new check number. While perhaps appear- ing complicated on first consideration, it is quite simple when thoroughly understood. Loaned Workers The procedure under this method, so far as it relates to the shop end, is described in detail in Chapter XV under the heading “Recording Time of Loaned Workers.” From that description it will be seen that when a man is loaned from one department to another, his card, stamped with “Transferred to Department Number ....” is entered on his home pay-roll. All cards of this nature are entered on the regular pay-roll sheet for this man under the block heading “Transfer.” After the pay-roll entries for each day are made and proved up, the cards stamped with the transfer stamp are thrown out. They are then sorted according to the department to whom the workers were loaned. They are next footed for 212 COST ACCOUNTING each department which received the benefit of the loaned labor, and the total for each department is entered on the labor trans- fer record (Form 30) in the column headed “From” for the department which received the benefit of the work. Each of these entries will show the department which loaned the labor as well as the amount of money involved in the loan. The department making the loan receives an entry for the total of all the labor loaned out for the day on its own labor transfer record sheet under the heading “To.” The entry on this record is a single amount. No entry is necessary under the subtitle “Department,” unless it should be desired to enter all the details. It will be noted that by this method of entry, the total for the month under the heading “To” on each labor transfer record, should exactly equal the total of the transfer block on the pay-roll sheet for the same department. . At the close of the month all figures on the labor transfer records are footed for each department, and a journal entry prepared as follows: The debits are the total of the columns headed “From” on the transfer record of each department, and are entered in the journal as a debit to the Burden account of the department on whose sheet it appears. The credit is ‘the total of all the transfer sheets of the figures under the heading “To,” there being but one credit to the journal entry, namely, to the Transfer account, as explained in Chapter XIX. This credit should exactly equal the debit received from the pay-roll journal entry. Other Department Standing Order Labor The problem in connection with the other department standing order labor is far more difficult and one which not only involves the labor expended by one, department on the standing orders of another department, but in addition the burden on this labor. The handling of this class of charges, 213 ACCOUNTING FOR LABOR ON PAY-ROLLS CILX %4Q ‘9z1§) ‘psoosay Jaysuery soqey ‘of wi0q LNNOWY | “1d30 ANNOWYV |°1d30 ANNOWYV ‘Ld30// LNNONY “1d30 LNNOWY | * ANNONWV | *. aiva oL wous OL wows OL woud idaq qguoose YS4SASNVYUL Yoav ‘SSVW ‘Noisog 09 DNISNLOVANNVW N3GI10OH 214 COST ACCOUNTING however, is accomplished in somewhat the same manner as in the labor transfers. The procedure is as follows: As in the case of the loaned workers, the cards charging other department standing orders, which are stamped with the rubber stamp in large letters “O.D.S.O.,” are thrown out, after the pay-roll has been com- pleted for the day and proved up. These cards are then ex- tended with the proper burden for the department, and a super machine rate, if such exists. These extensions are made on each card with red pencil in the lower right-hand corner under the heading “Circle Last Number.” The cards are next sorted by the departments as charged, in exactly the same manner as the loaned labor cards were handled. The cards for each department are then totaled for the total labor charge and also for the total burden charge, as shown by the red figures. The total for each department is entered on the O.D.S.O. transfer record (Form 31) in exactly the same way as in the case of the loaned labor in the columns headed ‘From,’ with the exception that in addition to the labor amount there is entered also the total of the burden charge. The total of all the departments to be charged by the originating department is found and entered on the O.D.S.O. transfer record of the originating department under the head- ing “To,” showing the labor and the burden separately. At the close of the month a journal entry is prepared in practically the same manner as in the case of the labor trans- fers as follows: The total of the “From” columns for each department, including both labor and burden, is the debit to the Burden account of the department shown at the head of the record. This applies equally to each department and the result is a debit to each burden or expense account involved in the plant. ACCOUNTING FOR LABOR ON PAY-ROLLS 215 The credit side of this original entry, however, is radically different from that in connection with the labor transfer. The total of all the labor under the heading “To” is found and combined into one figure which is shown in the journal entry as accredit to the Other Department Standing Order Clearance account. This figure should be absolutely identical with the debit in the journal entry, which clears the pay-roll accounts and is made up from the pay-roll sheets, leaving this account with no balance. HOLDEN MANUFACTURING CO, BOSTON, MASS. 0.0.5.0. TRANSFER RECORD Dept. Date as Labor | Burden ||Dept.| Labor | Burden Dept.| Labor | Burden Burden Form 31. O.D.S.O. Transfer Record. (Size, 8'4x 11.) The balance of the credit entry, however, consists of a credit to each departmental Work in Process Burden account, provided that an account of this nature has been set up for each department. If there is but one Work in Process Burden account for the entire plant, the credit naturally consists of only the one entry to this account. This completes the journal entry, and has effected the transfer of the work done by the various departments for the other departments of the plant. 216 COST ACCOUNTING Final Filing of Both the Labor Transfer and O.D.S.O. Cards Each day, after the entries have been made on the labor transfer record and the O.D.S.O. record, the cards in the transaction are filed under the standing order numbers as shown on the cards. It will be noted that these order num- bers are all for departments other than the department where the men who performed the work belong, but as the money value has been transferred from the originating department to the departments which received thé benefit of the work, it is now possible to file the cards under the standing orders where they belong. As a matter of record, no further thought is to be given to these cards, excepting to foot them into the various burden and expense accounts wherever they are found. It may be repeated that the journal entries effecting this transfer reduce the labor costs of the originating departments to the amounts actually used by themselves on their own standing orders, and increase the cortrol accounts of all other departments by the amount of labor and burden involved in the work which was done for them by departments other than their own. CHAPTER XVII CALCULATION AND APPLICATION OF DEPARTMENTAL BURDEN RATES Burden Subject to Scientific Calculation and Control No feature of cost accounting is more difficult than burden distribution. Burden has been the least understood and has received the least attention of all cost items, because of the wide-spread impression of its extremely elusive nature. In reality burden presents very great possibilities for saving. No longer is it regarded as a bugaboo in progressive plants. It can be calculated with a surprising degree of accuracy and can be scientifically controlled through the medium of depart- mental burden rates together with expense accounts and departmental burden accounts. A brief survey of the more important steps in the evolution of burden distribution will make it easier to understand the superiority of the depart- mental burden rate method. Evolution of Burden Distribution—1. Fixed Percentage Method What was probably the first method of distributing bur- den—known as the fixed percentage method—was arbitrary and for that reason inaccurate. Under this plan manufac- turing cost was ascertained by simply adding, usually to the prime cost, a fixed percentage to cover manufacturing burden. To manufacturing cost was added another fixed percentage to cover selling and administrative burden. The addition to this cost figure of further percentages to represent profit, fur- nished the figures employed for the arbitrary fixing of selling prices. 217 218 COST ACCOUNTING Prices so fixed were satisfactory because competition was not so keen as it is today, because profits thus figured were deemed sufficient, and because income and excess profits tax laws had not literally forced manufacturers to realize the need of more accurate costs. Today the situation has changed and slipshod methods of cost accounting are not tolerated in pro- gressive plants. But the evolution of accurate burden distribu- tion has been gradual. 2. Blanket Rate Method The next step after the fixed percentage method was the use of blanket rates. This method increased the accuracy of burden incidence. At the beginning of each fiscal period, blanket rates were calculated for the period, based on either total direct-labor costs or total direct-labor hours for the whole plant during a past period or a future period. Ma- terial costs, prime costs, and machine hours were also used, occasionally, as burden bases. In other words, the rates were based on past figures or estimated figures. The blanket burden rate for each factory was calculated by dividing either the total direct-labor costs or total direct-labor hours on all jobs into the total manufacturing burden for all jobs. This blanket rate was then applied to either the direct-labor cost or direct- labor hours of each individual job according to the burden basis selected, in order to ascertain the burden cost of the job. If in a given case the estimates for total manufacturing burden and total direct labor costs were $50,000 and $100,000 respectively, the blanket rate or burden ratio would be 50%. This rate would be applied during the ensuing period to the labor cost of each job. Suppose a job had the following prime cost: Direct material $1,000; direct labor $3,000. Its burden cost would have been $1,500 ($3,000 X .50). The sum of this burden cost ($1,500) and prime cost ($4,000) equaled the manufacturing cost of the job ($5,500). CALCULATING AND APPLICATION OF BURDEN 21g Both fixed percentages and blanket rates were open to serious objection. Neither method considered differences among productive departments with respect to equipment, labor hours, machine hours, labor costs, etc., which caused burden to vary for each department. Both methods ignored the fact that departments were the only natural units for the calculation and application of burden. Fixed percentages and blanket rates are being supplanted more and more by depart- mental burden rates. 3. Departmental Burden Rate Method The next step in the evolution of burden distribution was the use of departmental burden rates. This method is gen- erally regarded today as the best method of applying burden to praduct. The steps involved in the calculation and applica- tion of departmental burden rates and in the preparation of expense and burden statements may be summarized as follows: 1. Selecting equitable bases for the distribution of over- head to expense and burden accounts. 2. Current charging, through monthly journal entries, of actual burden incurred to expense and burden ac- count. 3. Current closing, through monthly journal entries, of primary expense accounts into secondary expense accounts, which in turn are closed into departmental burden accounts, one departmental burden account being kept for each productive department. 4. Predetermining standard departmental burden rates. Preparing monthly expense and burden statements. (See Chapter I for relation of terms: “expense,” “burden,” and “overhead.’’) 6. Applying standard departmental burden rates which charge Work in Process Burden accounts and credit Burden Credit accounts. The detailed charges for ut 220 COST ACCOUNTING applied burden are entered on individual part cost sheets or assembly cost sheets as the case may be. 7. Transferring the burden balance of each productive department—which is the overabsorbed or under- absorbed burden—to the Profit and Loss account. 8. Recording the net result of this summary account in the current Profit and Loss account as a deduction from or addition to the gross profit—as the case may be—before net manufacturing profit is ascertained. g. Preparing statements which show monthly compari- sons of burden. 10. Revising departmental burden rates when standard burden rates are no longer applicable to current conditions. Bases for Distributing Overhead to Expense Accounts The selection of equitable bases for the distribution of overhead expense and burden accounts is discussed in Chap- ter XVIII. Expense and burden items may come directly from the voucher register through the expense debit slips, or through time cards and material requisitions. (For detailed account- ing in connection with recording of expense, see Chapter V; see also the chart “Graphic Ilustration of Flow of Cost Pro- cedure.’’) i Distributing Expenses to Departmental Burden Accounts After the journal entries distributing all labor through the pay-rolls, material through the requisitions, and expense items through the medium of the expense ledger and expense debit slips, have been completed, and the time slips, requisitions, and expense debit slips are properly filed under the proper stand- ing order numbers, the making up of the various expense and burden accounts may proceed. CALCULATING AND APPLICATION OF BURDEN 221 First of all, the class of expense accounts, such as Electric Power, Steam, Trucking, etc., which charge not only the oper- ating burden accounts, but other expense accounts, such as General Office, Dining-Room Expense, etc., must be made up and distributed to the respective accounts on the bases ex- plained in Chapter XVIII. After these primary expense accounts are closed out, all other expense accounts will then be closed and distributed to the operating burden accounts. All manufacturing overhead, therefore, must ultimately be collected in departmental burden accounts for productive —direct—departments. This cannot be done properly unless the most equitable basis for the distribution of current ex- penses incurred are selected. The use of the word “equitable” with little or no explanation has been a glaring shortcoming of much of our cost literature. The basis and methods of distrib- uting burdens are discussed somewhat in detail in Chapter XVIII. Predetermining Standard Departmental Burden Rates Before discussing the application of burden rates, the cal- culation of burden rates should be considered. The survey of a plant made by the cost accountant prior to the installation of a cost system may disclose the fact that the plant is not depart- mentalized, or that it is not departmentalized as well as it might be. If such a condition exists, proper departmentaliza- tion must naturally precede the calculation and application of burden rates, because burden rates are predetermined by de- partments. The survey may bring to light that a proper divi- sion of expense accounts does not exist and that equitable bases for distributing expenses are not used. These unsatisfactory conditions must also be corrected before burden can be scien- tifically applied and controlled. If proper departmental burden rates are not in use when the installation of the cost system 222 COST ACCOUNTING begins, then rates should be based either on past standard burden or on current burden during a period of sufficient duration to indicate what the standard burden should be. Burden rates, therefore, are averaged, predetermined, or esti- mated in advance of a fiscal period, and are then applied during current periods. Burden rates should be standard or normal, ie., they should be based on burden costs which occur when production is standard or normal. To determine standard or normal production, particularly in a seasonal business, is not always an easy matter, because it varies in different industries and in different plants in the same industry. According to some authorities, standard production occurs when the plant is run- ning 80% to 90% of its capacity. This is a serviceable figure. It is obviously unfair to use burden rates based on a single month’s actual burden unless such burden is typical of the whole year, which is seldom the case. For example, the repairs made to an open-hearth furnace in a steel plant may be unusually high one month and very low the next. It would be unfair, and hence inaccurate, to charge the product of the first month with a high burden rate and the product of the second month with a low burden rate; neither rate would be standard. Furthermore, proper selling prices cannot be fixed without standard burden rates. The price, no doubt, would be too high or too low. The use of a standard or average rate, however, is equitable for both estimating and cost pur- poses. After the standard burden for a producing department has been ascertained, it is divided by some base, such as normal direct-labor hours, normal machine hours, or normal direct- labor cost—whichever basis best fits the conditions—in order to arrive at the predetermined burden rate for the department under consideration. Note that this rate is predetermined. If actual rates were used, product completed before the end of CALCULATING AND APPLICATION OF BURDEN 223 the period could not be costed until the close of the period. Thus, one desideratum of cost accounting, namely, prompt compilation and presentation, would be lost if actual rather than predetermined burden rates were used. Theory and Practice of Burden Calculation and Application The general theory underlying the calculation of depart- mental burden rates is that a proportional relationship exists between the burden of each department and some basis. The major problem, therefore, is to select the basis best suited to existing conditions. The same basis is not necessarily used for all departments. The most satisfactory bases for the cal- culation of departmental burden rates are: 1. Direct-labor hours 2. Direct-labor cost 3. Machine hours Other bases, such as prime cost, sold-hour plan, overhead day, and list percentage plan, are either obsolete or of limited use. Reference should be made to the discussion in Chapter XXXII of the advantages and disadvantages of the various methods of applying burden. In the following paragraphs only a brief reference will be made to the nature of the method of applying burden. 1. Direct-Labor Hours Basis The direct-labor hours method is somewhat similar to the direct-labor cost method, except for the fact that the hours of labor applied become the basis for the application of the burden, rather than the amount paid for the hours. When this method is used, time must be carefully kept on all oper- ations, no matter what the basis of payment may be, and an absolute total of all direct hours applied on productive orders 224 COST ACCOUNTING must be found and used in computing the rate per hour of the burden of the department. The amount of burden to be applied to each order will be the number of direct-labor hours charged to the order, multiplied by the standard rate per hour as pre- determined for use in each department. 2. Direct-Labor Cost Basis Under the direct-labor cost basis, burden is applied to the product by means of a percentage on the direct-labor cost. This is done as follows: The total cost of labor applied to productive work is assembled. At the same time the total burden for the department is assembled. The latter figure divided by the former gives the percentage of burden to be applied to each individual order on the basis of the direct- labor cost which is known. This percentage is predetermined and is known as the standard burden rate. Actual burden and actual burden percentages are ascertained so that they can be compared with predetermined burden. Any great differences necessitate a revision of the predetermined rate. 3. Machine-Hour Basis The method of using machine hours as the basis for appli- cation of burden cost has been developed in many cases into such.a complicated procedure, that the effect has been detri- mental to the progress of the science of cost-keeping. The machine-hour method is based on the theory that a portion of manufacturing burden should be applied to the work performed, on the basis of the time which each unit of production requires of the machines which are necessary to produce the goods. As to the justice of this contention there can be no question, and in the majority of manufacturing institutions this truth must be taken into account if the costs found are to be at all correct, and are to be regarded as safe for actual use. CALCULATING AND APPLICATION OF BURDEN 225 On the other hand, to take all the manufacturing burden of the department into consideration on the basis of distribution through machine hours is not only erroneous, but is productive of an enormous amount of detail which succeeds only in be- clouding the cast records from the point both of accuracy and of convenience for the management. Supervision, timekeep- ing, transportation of material around the shop, inspection, and many more of the items which make up a regular manu- facturing burden, have really no relation whatever to the machine-hour basis. It would seem, therefore, to be going too far from the lines of sensible procedure to try to establish items in the machine cost which really have no purpose therein. As a usual thing the items which are really involved in a machine rate are: 1. Depreciation on the machine unit. 2. Maintenance of the machine unit. 3. Power to operate the unit. In many cases it is considered necessary to establish the fourth unit of interest on investment in the machine. This, however, is not advocated in this book, and certainly should never be done unless interest on investment is applied throughout all other operations of the business, as well as on a few exceptional machine units. Some other items may be included, such as insurance, etc., but these other items are usually so small that they really have no bearing on the eventual result. It is, therefore, advocated that the machine-hour rates be confined to the items which really have a large bearing on the additional cost to be charged against production for the use of the machine units involved, and that the balance of the burden be handled throtigh the use of the productive-hour rate as a general burden charge for the department. (See Chap- ter XXXII.) 226 COST ACCOUNTING The technique of determining a machine rate is not diffi- cult; it is simply a matter of determining at the start the amounts to be allowed for proper depreciation, maintenance, and power, and then dividing this by, say, 80% of the total possible hours to establish the predetermined rate. Each month thereafter the actual depreciation, maintenance, and power will be known, and this should be divided by the hours which the machines actually run to arrive at a regular monthly figure as to the cost per hour for operating the machine. These figures will be compared monthly and will be a constant check qn the standard rate being used. Application of Departmental Burden Rates After standard burden rates are predetermined for each producing department, they are applied to each productive order during the current cost period. The number of direct- labor hours, or machine hours, or the direct-labor cost—which- ever basis is used—of all the jobs in each producing depart- ment are multiplied by the departmental burden rates to give the applied or “earned” burden. The total of these applied burden figures is credited to departmental Burden Credit accounts and charged to Work in Process Burden accounts. It should be stated at this point that two burden accounts for each productive department should be opened, although it is not always done. One account, known as “Department No. 1 Burden” account, shows the burden charges; the other, known as “Department No. 1 Burden Credit” account (see Chapter XXI), shows the burden applied through the medium of the departmental burden rate at the time when a Work in Process Burden account is charged for the same amount. A question may arise as to the reason for using a Burden Credit account for each departmental burden account instead of crediting the latter itself with applied burden. The best reason is that the use of Burden Credit accounts insures CALCULATING AND APPLICATION OF BURDEN 227 the accumulation of totals throughout the year, thereby facilitating the prompt preparation of statements. If, after charging the Work in Process Burden account the depart- mental Burden account should be credited with the applied burden of the department, only a net balance for the month would remain in the latter account. After the repetition of this process monthly throughout the year, the preparation of a progressive statement for the year would be troublesome. If applied burden were credited to departmental burden accounts, extensive analysis of these accounts would be re- quired before the firm could ascertain how actual burden and applied burden were running month by month. Ex- amples of both accounts and necessary adjustments appear in Chapter XXI. The detail burden charges are applied to the costs of individual jobs on individual part cost sheets and assembly cost sheets. That is to say, the direct- labor hours, or machine hours, or direct-labor cost (whichever burden basis is used) applicable to a given job is multiplied by the departmental burden rate to give the burden cost of the job. Departmental Balances Each departmental burden account is charged with the actual burden of the productive department concerned. The companion Burden Credit account is credited with burden applied at the standard rate for the department. Actual bur- den and applied burden are entered in the burden statement for the department concerned. Any difference between the actual and applied burden is entered in the burden statement and also in the profit and loss statement. Revision of Departmental Burden Rates By use of departmental Burden accounts and Burden Credit accounts, actual burden can be readily compared with 228 COST ACCOUNTING applied burden. Any differences will be small if care is ob- served in setting standard departmental burden rates. A plant, for example, with an actual burden of $2,000,000 had a total of only $12,000 under-absorbed for the year. In other words, the undistributed burden for the year was only 3/5 of 1%, which shows what can be done with scientific control of burden. If plant burden balances are large and liable to continue so, the burden rates should be revised to fit the changed condi- tions. Otherwise current costs will be inaccurate. Burden balances may be due, among other things, to changes in the volume of production or in burden costs, or to idle machinery and equipment. (See Chapters XXX and XXX1I.) CHAPTER XVIII DISTRIBUTION OF EXPENSE ACCOUNTS Discussion of Expense Accounts In the history of cost accounting there has been a great divergence of both opinion and practice regarding the distribu- tion of certain originating expenses, and a good deal of in- accuracy. When two different methods are used for identi- cally the same distribution, one must be right and one must be wrong. The reader’s attention is directed to certain under- lying arguments which may be applied to the problem of the distribution of initial expenses. Probably because the majority of manufacturing institu- tions, at least up to two or three years ago, distributed their indirect cost on the basis of direct-labor cost, a misconception arose as to the distribution of certain expenses of a business other than those of the actual operating department—whose burden cost, of course, should be accurately found. Some of the expenses referred to will be found in any plant of average size. For instance, a plant will probably have a general superintendent in whose office will be an assist- ant general superintendent, two or three stenographers, and half a dozen clerks for various general purpose work. The plant may have also a cost department of, say, fifteen or twenty people who are keeping the costs, both direct and in- direct, of the entire plant. In addition there will probably be a pay-roll department employing ten or fifteen persons who compile the pay-rolls for the entire plant. In the past, all of this expense was thrown into one gen- eral account. That is still the practice in probably the ma- jority of plants. In occasional cases there might be an 229 230 COST ACCOUNTING account for each division as specified above, but the procedure of distributing the expense to the operating Burden accounts would be the same. That procedure in the majority of cases consisted of prorating this general expense to the operating burdens on the basis of the direct-labor cost or the direct-labor hours of each department—a method which can be proved to be entirely inaccurate and unreasonable. It is, of course, easy and simple, but no more so than the correct way. Probably the only reason that could be urged for this method of distribution is the mental effect of the fact that after the expense has reached the operating burdens it is applied in the cost sheets on the direct-labor cost or the direct- labor hour. The reasoning here involved, however, is entirely wrong. The general superintendent’s office, the cost depart- ment, the pay-roll department, and all other such general departments, are concerned exactly as much with the indirect labor as with the direct. It takes just as much, if not more effort on the part of the general superintendent to regulate the indirect as the direct workers. Likewise, it is just as much work to account for the wages and cost of the indirect workers as for the direct workers. Therefore, the splitting up of this expense among the operating burdens on the basis of direct- labor cost or hours alone is entirely wrong. Department A, for example, may require eighty direct workers with only twenty indirect workers. Department B may be just the re- verse, namely, a department in which the direct workers required are only twenty as against eighty indirect. A diverg- ence as wide as that has been known to exist in many plants. If the general expense accounts were distributed on the basis of the direct labor alone, department A would be charged four times as much for the general expense as would depart- ment B, and yet each department had the same number of men, all of whom had to be supervised and watched over by the general superintendent, accounted for by the pay-roll de- DISTRIBUTION OF EXPENSE ACCOUNTS 231 partment, the cost kept by the cost department, and so on through whatever divisions are in like relation. It should be quite evident, therefore, that the proper basis of distribution of those expense accounts should be on the basis of the total labor hours or total labor cost of each depart- ment. This brings out very forcefully the fact brought out in other chapters, that too much attention cannot be given to the problem of properly departmentalizing the indirect operations whereby an absolutely and perfectly correct distribution of all thesé expenses may be made to the various burden accounts. The problem connected with what might be called “super expense” accounts is entirely different from that involved in the burden accounts which are used directly in figuring the productive costs. (See Chapter XXXII.) For this reason this chapter is set aside for descriptions of a few of the expense accounts, set forth in sufficient detail to illustrate what must be done, and to give enough clues as to the proper procedure to enable anyone to work out individual problems in his own plant. Trucking Expense The trucking expense of a company is made up of charges for labor, the cost of gasoline, oil, etc., or of horses, the cost of repairs of the truck equipment and of the building which houses them, together with depreciation and other fixed charges which may apply. It is easier to get the total cost than to distribute it and to establish a basic unit whereby the efficiency with which the trucking is handled may be checked. In many institutions the nature of the trucking is such that a tonnage basis is best. This applies particularly to some plants in large cities where all material is trucked to the plant, and the finished product away from the plant. 232 COST ACCOUNTING In other plants it is better to work on the basis of the trucking hour, that is, the actual number of hours of trucking performed. If this plan is followed, the trucks should be divided into classes, and the trucking hours found for each class. The point to be brought out, however, is that some cost basis should be established, both to show the quality of work performed and also to distribute the trucking expense to the departments affected. Steam Expense This particular expense is quite difficult to control on the basis of unit of performance, unless a company goes to the expense of installing flow meters in order to know not only what is produced, but how the steam produced is distributed among the various departments. When steam is a very large cost, however, some steps should be taken to provide a basis for knowing production and distribution, even to the extent of installing flow meters; otherwise the consumption of steam as charged to various departments can only be estimated. Moreover, estimates give no check as to whether or not the amount of money spent on coal, etc., is justified. Electric Power Plants which produce their own power naturally measure the amount of power produced, together with metered con- sumption of the various departments using the power, for a power plant today is so quickly out of date that means must be provided for a constant check on the cost per kilowatt hour, and also the amount consumed by the various depart- ments as shown by actual measurement. In order to arrive at the basis of distribution, it is, of course, possible to go through the various departments and count the number of lamps, mo- tors, etc., but such estimates are entirely inaccurate as the rated horse-power of a motor and the size of lamps must be taken DISTRIBUTION OF EXPENSE ACCOUNTS 233 into consideration, with an estimate of the reasonable time the lamps and motors operate, to arrive at a figure which is at all usable. On this basis of estimated consumption there is no check whatever on the waste which may be made of power, and the cost may be distributed to the various departments with the most careless inaccuracy. Compressed Air The increased use of compressed air in connection with the operation of machines affords possibilities of enormous wastes unless some steps are taken to control its production and con- sumption. Steam leaks can be seen—like water leaks. Air, however, can leak without any check whatever. Very large sums of money may be wasted without anything to indicate that the air is leaking at perhaps every joint in the line. Many plants have used compressed air with such prodigal abandon that the compressed air expense amounts to large figures before it is realized. For this reason it is urged that those responsible for the costs use every endeavor to check up the consumption and use of this commodity in those plants where it has become of general use. Rent In those plants operating on a rental basis a number of things have to be taken into consideration in prorating the rent to the various departments. The square-foot basis is not sufficient, as for instance, in a foundry the building may be high and equal to four or five floors of the machine-shop sec- tion of the same plant. In fact, no specified rule can be laid down for the distribution of rent, since the proportionate value of the space used by the various departments is a matter of judgment. It is suggested, however, that when a com- pany rents a plant they request from the owners a detailed 234 COST ACCOUNTING valuation of the various buildings. This, in many cases, would give a line on the valuation of various buildings and would be of assistance in prorating the rental as between a foundry building, machine-shop, or forgeshop. The latter would be higher than a machine-shop, but possibly not as high as a foundry. Unfortunately the cubic foot does not entirely solve the problem, as naturally a foundry with a high roof does not cost as much as an equivalent height of building with three stories. On the other hand, it is fairly easy to take these things into consideration and prorate to the various departments the value of the space which they use. Without doubt, aside from buildings, such as foundries, forgeshops, etc., it is perfectly allowable to use the square foot arrangement for the normal shop of one floor in height. Taxes In cases where plants are owned by the operators the distribution of taxes is somewhat along the same lines as rent, and is so closely allied that the comments made under Rent may very well apply to this heading, as far as buildings are concerned. Taxes on personal property should be distributed on the basis of the value of the equipment involved in the com- plement of each operating department. Depreciation In a large measure the principles governing the distribution of depreciation, so far as buildings and plant facilities are con- cerned, are somewhat similar to the principles involved in dis- tributing rent and taxes. The distribution of depreciation, however, is a far more important matter in that the largest consideration of depreciation is centered in the equipment used by each department, which in many cases may be very expensive. DISTRIBUTION OF EXPENSE ACCOUNTS 235 Yet in a plant which has its appraisal of buildings and par- ticularly of machine equipment, the problem is not difficult, as it then becomes a matter of fixing the depreciation on each unit and assembling therefrom the total depreciation for the depart- ment. This depreciation will, of course, be divided between buildings and equipment as the principles involved in each are separate. Many pieces of equipment will have perhaps a depreciation of 25% because of their special nature, either as to delicacy of construction or because they quickly become obsolete. Other pieces of equipment may be subject to a depreciation of only 5%, as in the case of standard lathes and other machine tools which, with proper care, will be as good—as regards design— twenty years from now as at present. The depreciation of buildings, therefore, should be on the basis of value of building used by each department, and depre- ciation on machine tools and equipment on the basis of the actual circumstances as stated above. In all cases it is best to use what is called the ‘“‘streight-line” method for recording depreciation—namely, a regular amount per month rather than a diminishing charge. Fire Insurance This item should be distributed on the basis of the valua- tions made for insurance purposes. This basis is largely parallel to that which is used for depreciation of buildings and equipment. This would apply particularly in instances where the insurance rate is high. In cases where plants are running under factory mutuals and have a very low rate of insurance, it sometimes does not pay to try to distribute the fire insurance on the basis of equip- ment, because of the fact that the insurance is a blanket propo- sition and the total expense for such insurance each year is very small indeed. In many cases of this sort the amount is 236 COST ACCOUNTING so small that the fire insurance is included in a general ex- pense account and distributed with other items on the basis of total labor. It should be understood, however, that this is only in cases where the insurance cost is very small. Liability and Compensation Insurance Unlike any other kind of insurance, liability and com- pensation insurance depends entirely on the amount of pay- roll paid out and also upon the classes of labor, as specified by the insurance policy. In this instance therefore—particularly inasmuch as this very distribution must be made for the auditor of the insurance company—the most simple and accu- rate method is to classify the pay-rolls of each department each month as specified by the insurance policy and ascertain the actual insurance which will have to be paid for each depart- ment. With this classification, accurate figures of liability and compensation insurance expense can be obtained. It will also save a tremendous amount of work in classifying the pay-rolls at the end of the year, in order to satisfy the requirements for premium payment. Telephone In most large institutions the telephone service involves a great deal of equipment, such as switchboards, extension in- struments, special gongs, and other appliances. It has been found best to take all regular monthly charges for switchboard rental, extensions, etc., into one controlling account. This account is distributed monthly through the journal as follows: The total cost of the telephone expense for switch- board, extensions, trunk lines, etc., is divided by the number of instruments actually connected with the board in the plant in order to establish a flat rate per instrument, including all regu- lar monthly expenses. To determine the amount to be charged DISTRIBUTION OF EXPENSE ACCOUNTS 237 to each department the rate should be multiplied by the num- ber of phones used by the department. Long-distance and toll charges should not be included in this computation but should be charged to the departments for whose benefit the calls were made. Such calls affect prin- cipally the sales department and the purchasing department. Drafting Department Many problems arise in properly distributing the expense of a drafting department. For instance, owing to the varied nature of its work, the draftsmen sketch drawings for esti- mates for the sales department, make drawings for new equip- ment in the plant, make sketches for repair parts for the plant, sketch new building layouts, etc. All that can be said within the space allotted here is that a method of time reporting should be installed in the drafting- room along the lines of the method used in a producing depart- ment. In other words, job numbers should be assigned to special work done by the draftsmen, and standing order num- bers to regular routine work. Those expenses of the department of a general nature which make up the overhead can be charged to the sales depart- ment, to new equipment, and all other points, on the basis of the time reported as shown on the records of work performed by the draftsmen. Stores Expense Accounts In dealing with the various stores expense accounts, it may be found that one stores item may be entirely for the benefit of one particular department, another for the benefit of two departments, and another for the benefit of many departments. This must be taken into consideration when working up a distribution of the expense accounts of the various stores and of the general stores. 238 COST ACCOUNTING For instance, if it is thought best to have a complete store unit for some particular department, this expense naturally should be charged to that department. At the same time this department may also share in the expense of a general store- room as it is served by the general as well as its own store- room. About the only basis for distributing stores charges is on the basis of total number of men in the departments served. This has exceptions in some plants where special storing facili- ties are provided for very valuable and special goods or for specially hazardous articles. The man basis, however, is as a usual thing, about the only practical one to use. General Expenses It is urged that the title “ General Expenses” be avoided and that the general expenses of the plant be split up into segre- gated expense accounts, such as Purchasing Department, Pay- roll Department, Cost Department, Statistical Department, General Superintendent’s Office, Industrial Relations, Dining- Room Expense, House Publication Expense, and any other accounts which will quickly answer the question as to where the money in the general expense has gone. In all the expense accounts enumerated above, it has been found best, as a general rule, to distribute same to the various operating burden accounts on the basis of the total number of men, the total labor hours, or the total labor value for each department. CHAPTER XIx PREPARATION OF JOURNAL ENTRIES Importance of Journal Entries Making journal entries is a most important part of the cost procedure leading to the monthly profit and loss account. After the various individual sections of the work are com- pleted, the results of such work must be collected on summary sheets and cross-entries must be made to transfer the amounts involved in each operation from one set of controls to another. The following brief outline will make clear the steps in the progress of cost figures. All purchase costs incurred must go through a voucher register as the book of original entry. That is, all purchases of labor, material, or any other item must go through the voucher register and be distributed thence to the specified con- trol accounts. All labor, after being first charged to certain pay-roll accounts, is distributed to other accounts through the medium of the pay-roll analysis, backed up by time cards. All purchases of material are distributed as follows: 1. That which goes into stock and is subject to requisition, is charged to certain material inventory accounts, which in turn are analyzed by the stock records. 2. That which goes direct into expense accounts will be charged in the voucher register to the Expense Ledger account, which in turn is further analyzed and distributed to the vari- ous expense accounts by use of expense debit slips. 3. Miscellaneous expense items covering many kinds of intangible amounts paid for services, such as Legal Service and Mechanical Service, and many other items which are 239 240 COST ACCOUNTING chargeable to expense accounts will also be charged to the expense ledger and distributed through the medium of the expense debit slip as in (2). 4. Certain items, such as Insurance, Taxes, etc., which are prepaid in considerable volume, should be charged to so-called “Prepaid” accounts subject to monthly distribution through the medium of standard journal entries. 8. Certain items, such as interest, and other items which are chargeable direct to certain expense accounts, but which are not of sufficient volume to warrant a column, are posted directly from the voucher register, rather than run through the Expense Ledger account. Such items are properly admin- istration items which it is not desirable to put through the cost department. 6. In addition to the foregoing, journal entries are made to distribute the sales which have been entered on the sales records. Voucher Register The voucher register is the largest distributing medium in the set of accounts, even though in late years the number of columns has been cut down and the use of subsidiary dis- tribution sheets developed in order to reduce the size of the main book (see Chapter V). It is allowable to post the entries from the voucher regis- ter in one of the two following ways: 1. After ascertaining the subanalyses, such as the pay-roll and material accounts specified in Chapter V, such analyses may be copied into the voucher register, thereby showing a complete analysis on the last page of the monthly record to be distributed. If desirable, the posting to the general ledger can be made direct from these figures. 2. Instead of copying the detailed analysis on the last page of the month’s entries in the voucher register, this detail may PREPARATION OF JOURNAL ENTRIES 241 be copied in the general journal and posted to the ledger from that point. The journal entry method is preferable—even though it involves a little more work—because it concentrates in the gen- eral journal all the distributions of the various books of origi- nal entry. Cash Disbursements and Receipts The same may be said of the cash disbursement totals for the month as was said in relation to the voucher register. The journal entry should be made in the general journal and the postings made from there. ‘ There should be very few entries from this book, as the burden of distribution should be placed on the voucher reg- ister. The comments made as to cash disbursements apply equally to cash receipts. Sales Records There are many ways of recording the sales of a company, and the procedure relative to journal entries for sales depends very materially on the method used for recording sales. In many industrial lines it is best to have a regular sales ledger in which each sale is entered and distributed according to the sales accounts. The sales ledger should contain proper columns with provisions for postings for transportation, etc., and with a column for the cost of the sale. In the majority of industrial institutions today, however, the volume of sales is usually too large to permit of this method of treatment. Instead, a numerical file of one or more copies of each invoice is assembled in binder as the sales record. This method is made possible by the use of adding machines upon which total sales under the various sales divi- sions, together with all items of postage, freight, etc., which 242 COST ACCOUNTING enter in, can be easily figured. Sales for the month are then distributed from a set of adding machine strips or sheets. In all cases, what is known as a “top sheet” is prepared which gives the total sales as represented by the sheets in the binder, together with the total prepaid postage, freight, etc., involved in the billings. In some cases postings are made direct from these top sheets to the general ledger accounts, but it is best, as with other books of original entry, to copy this entry into the general journal and from there to the general ledger. Labor Distribution From the voucher register, distribution of moneys paid out for labor is made to a pay-roll account for each depart- ment. These accounts constitute what is known as the origi- nal pay-roll and are subject to analysis through the medium of the pay-rolls in order to establish the controls needed for the operation of monthly profit and loss accounts. The analysis of the pay-roll is discussed in Chapter XVI. Here, therefore, it is necessary only to point out that after the analysis of the pay-roll of each department for each month is completed, a journal entry must be prepared, crediting the Pay-roll account with the total pay-roll for the given month and debiting the control accounts which are affected by the distribution as found by the pay-roll analysis and as explained in Chapter XVI. It is best not to make an individual journal entry for each department, but instead to make one large journal entry for all the labor distribution, crediting all the pay-roll accounts and debiting the control accounts which cover the Work in Process Labor, the various expense ac- counts, the various burden accounts, the “Other Department Standing Order Clearance’ account, and the “Transfer” ac- count. The data for these entries is easily obtained if dis- tribution of the pay-rolls is carried out. PREPARATION OF JOURNAL ENTRIES 243 Distribution of Material on Requisitions The preparation of data for journal entries in connection with material is on a different basis from that in connection with labor. It must be remembered that ‘the basic distribution to the various control accounts of all material drawn from stock- rooms on requisition must be made before these requisitions are filed under the accounts to which they are charged. There- fore it is important that the procedure here outlined be car- ried out. After the material requisition slips have been received from the storerooms with all data properly filled in, and have been entered on the stock records so as to show the price and the number or name of the ledger account which holds the value of the material issued, the cost department proceeds as follows: 1. All requisitions are sorted daily according to the con- trolling inventory accounts which hold the value of the material used. 2. After sorting, the requisitions are footed and the total amount to be credited to each material inventory account is found. 3. These totals are then entered on an accumulation sheet which is simply a columnar-ruled analysis paper with the name of an inventory account at the head of each column. 4. Each requisition is then stamped with a rubber stamp “Credit Footing.” 5. The requisitions are then sorted again into piles which represent the control accounts to which they are charged, namely, the various expense accounts, bur- den accounts, and Work in Process Material ac- counts. 244 COST ACCOUNTING 6. After sorting, they are footed in order to ascertain the total debit to each of these controlling accounts and entered on another accumulation sheet whereon is a column headed with each expense, burden, or work in process account. 7. After these footings have been made each requisition will then be stamped with a rubber stamp “Debit Footing.” These two accumulation sheets representing the credit and debit entries should at all times be exactly balanced and should be kept continually under this proof. With these steps completed, the requisitions.are filed under their proper order numbers to permit constant closing of pro- duction orders and to be ready for the closing of the expense and burden statements at the end of the month. The preparation of the journal entry then becomes a mat- ter simply of taking the column totals from the credit and debit accumulation sheets. This transfers from the material accounts to the expense, burden, and work in process accounts the materials drawn out on requisition and leaves a true bal- ance of the value of material on hand in each material inven- tory account. Distribution of Expense Ledger Charges The use of the Expense Ledger account and the expense debit slip has been discussed already in Chapter V. It is necessary, however, to compile the figures carefully and to journalize the expense charges properly, if proper controls are to be maintained. The expense debit slips are made out daily according to the charges to the expense ledger. Before filing the slips under their order numbers—which it must be remembered are only the expense or burden standing orders—an accumulation must be made as in the case of the material requisitions. The PREPARATION OF JOURNAL ENTRIES 245 difference is that in this case there is only a single credit—to the Expense Ledger account. In order to prove up daily, the accounting department should furnish the cost department with the totals for the day which are covered by the expense debit slips turned over to the cost department. The procedure is as follows: 1. Upon receipt of the expense debit slips, the cost de- partment sorts them according to the controlling expense and burden accounts, and finds the total chargeable to each of these accounts. 2. These totals will be entered on an accumulation sheet similar to that used for requisitions where each con- trol account has its accumulation column. One col- umn of this sheet may be used as the credit column, in which will be entered the daily total as given by the accounting department, representing the total charge made daily to the Expense Ledger account. This sheet must be kept in balance daily as in the case of the material requisition distribution. 3. After this footing is completed, the debit slips will be stamped with a rubber stamp “Debit Footing” and the slips filed under the order numbers to which they are charged. At the close of the month it is, therefore, a simple mat- ter to prepare the journal entry debiting the various expense and burden accounts and crediting the Expense Ledger ac- count. It will be noted that the credit to the Expense Ledger account should exactly clear this account of all charges made to it during the month. That consummates in an orderly and accurate manner the direct charging of expense items which in the past has been a source of numberless errors in the han- dling of cost records. 246 COST ACCOUNTING Closing Expense Accounts As has been explained in other chapters, the closing of expege accounts is accomplished through the medium of journal entries after all the charges which belong to each ex- pense account have been collected in the place where they belong. The initial expense accounts, such as Power, Steam, Trucking, etc., should be figured completely and journal entries made on the basis of the distribution which has been decided upon, charging another set of expense accounts affected, such as General Superintendent’s Office, Industrial Relations, and the Engineering Department, and the various burden ac- counts. After this distribution has been decided upon, the preparation of the journal entries is a very simple matter— charges being made to expense and department burden ac- counts and credits to the controlling accounts which hold the expenses being distributed. After the initial expense accounts mentioned above have been distributed, and on the basis explained in Chapter XVIII, the next set of expense accounts as mentioned above is closed. These accounts, being then complete as to their costs, will themselves be distributed on the proper basis and a journal entry made out for each one, debiting the burden accounts. In these cases the credit for each account will be to its own control and the debits to whatever burden accounts receive a portion of its charges. When this is complete all the initial and secondary expense accounts have been entirely wiped out and journalized to the operating burden accounts. Burden Accounts In the case of the burden accounts, no journal credits are made to the burden accounts proper excepting at the end of a year. This set of accounts is the final showing of all the in- PREPARATION OF JOURNAL ENTRIES 247 direct costs of the plant, which are applied to theprouuct’ on’ the basis of standard rates predetermined at the eginning of the period. Fide kee. On the other hand, it is necessary to journalize. thecamount of burden which is to be applied to productive orders; os two", reasons : wad owe 1. To constitute an account which will control the amount of burden at standard rates which is applied to productive orders. 2. To constitute an account which shall be used in the balance sheet as the inventory value of the burden on uncompleted orders in the shop. Therefore for each burden account there should be pro- vided an account called the “Burden Credit” account, as ex- plained in Chapters XVII and XXI. If the Burden account were credited, all control for state- ment purposes would be lost, and a continuous comparison of burdens throughout the year would be impossible. Therefore the credits to each operating burden account should be placed in the Burden Credit account, in order to leave the Burden account free for adjustments only and to accumulate each month the actual burden incurred as the year goes on. This applies equally to the Burden Credit account, which should receive credit each month for the applied burden at the standard rate. In order to prepare the journal entries for each month, the basic figures to be used in this journal entry are ascertained from the pay-roll distribution. As explained in Chapter XVI, the pay-rolls give us the total labor hours applied to the pro- ductive orders in each department; or, in case the labor value is used, they will give us the total value applied to these orders. The same applies to machine rates if the whole de- partment is on machine time, and if not, the machine hours 248 COST ACCOUNTING will come from subsidiary records obtained from the time cards as the basis of the machine time applying to orders. In either case, the total of the base for which burden is applied for the entire month in question is first ascertained. Then a credit journal entry is prepared for each burden ac- count, which will be the total number of base unit hours—or whatever is used—times the standard rate used for computing the burden. This gives the total credit for the month for burden applied to the production orders. It is best to prepare one large journal entry wherein all departments are combined, showing a debit to each Work in Process Burden account and a credit to each Burden Credit account, as explained above. The difference between the Burden Credit and the Burden account is not actually journalized until the end of the year, but in making up the profit and loss statements during the year this balance is shown on the burden statements and is carried to the profit and loss statement in order to compare the statement of profit and loss for each month. If the num- ber of departments should be too great to carry all of these balances to the profit and loss statement, an intermediate col- lection may be made of all these balances on a separate state- ment called “Plant Balances.” In this case, only the net result of all the Burden accounts is carried to the profit and loss statement, showing the final results as to over- or under- absorbed burden for the operating departments. Prepaid Items It has been mentioned that in the distribution of the voucher register certain items, such as fire insurance, taxes, depreciation, etc., are charged to the prepaid accounts, sub- ject to standard journal entries each month. In each of these cases there should be a standard monthly entry for each item, subject to variations according to the change of basic conditions. For instance, depreciation is fig- PREPARATION OF JOURNAL ENTRIES 249 ured as suggested in Chapter XVIII; the amount to be dis- tributed to each department is figured as suggested in Chap- ter XVIII; and each department is charged with its share of depreciation each month in this standard manner—excepting when equipment may be added or subtracted or the space of a department increased or decreased. The same applies to taxes and other accounts of like nature. In all of these cases, preparing the journal entry is very simple, the same entry being made month after month except- ing when changes as above mentioned become necessary. Completed Production Orders The preceding journal entries have brought the accounts controlling operations into three main accounts, as follows: 1. Work in Process Labor 2. Work in Process Material 3. Work in Process Burden If at all possible it is unquestionably best to have one of each of the above work in process accounts for each operating department, although in many cases this involves too much detail, and in other cases is impossible. In this connection it may be stated that the names of the work in process accounts given above are subject to considerable broadening when it becomes necessary to have special kinds of work in process accounts in order to control clearly and concisely the oper- ations of the plant. As production orders are completed, the accounts belong- ing to the three above-mentioned main classifications receive credit for the cost of the orders which are completed, and the various other accounts are debited as hereafter described. The adoption of the best method of handling the detail work will aid greatly in accumulating the figures upon which journal entries are based. For instance, if a sales book is 250 COST ACCOUNTING used in which each sale is entered, columns may be provided to represent the cost of the sale, together with the work in process accounts which would receive credit for the cost. This, however, occurs in very few cases as it is usually better to work by a different method. Probably in the majority of cases, work which is completed in the shop is charged daily to a Finished Stock account, and in such cases it is necessary to do one of two things. 1. To maintain an accumulation sheet for all completed orders, which sheet will show the work in process accounts to be credited and the various finished stock accounts to be debited, as well as the sales cost accounts to be charged if the debit of cost is to be made direct to cost of sales. 2. To file a duplicate of each cost sheet and at the end of the month recapitulate, by the use of electric or manual adding machines, the credits and debits in- volved. As stated before, it is usually best to pass all completed orders through a finished stock account as this greatly simpli- fies all work in connection therewith. It is, therefore, recom- mended that an accumulation sheet of completed orders be maintained for each operating department. Then as the cost sheets are completed each day, either for individual or assembled parts, they should be footed for credits to the proper work in process accounts of the department and also for debits to whatever finished stock account is to be charged with the material. As this accumulation sheet will be carried on for the month and must be kept in balance, the making of the journal entry crediting the control accounts and debiting the cost accounts is simply a matter of copying the totals as shown by the sheet. It should be remembered, however, that the accumulation sheet must be kept in balance. PREPARATION OF JOURNAL ENTRIES 251 It often happens that a department does a great deal of work which never goes into a stockroom. In such cases the work should be charged out immediately upon completion. This can be handled on an accumulation sheet for completed orders, provided there be added to the debit side of the accumulation sheet columns representing the cost of sales accounts which will hold the cost of the goods which have been charged out. Great care must be taken in this respect, however, as con- fusion is very easy. Goods which are supposed to be charged out direct find their way through a storeroom and become mixed in with that material which must be extended with its proper cost for credit to the finshed stock account when shipped. Finished Stock In probably the great majority of manufacturing institu- tions material is manufactured and passed through the stage of finished stock. The debits to the finished stock accounts come through the journal entries just described. To arrive at the journal entries necessary to credit the finished stock and charge the various cost of sales accounts, the finished stock record-keeper must be provided with a copy of the shipping order or of the invoice to account for the fin- ished stock, to use as the medium for pricing the cost of the sale. Whether a copy of the shipping order or a copy of the in- voice covering the shipment is used, depends largely on the system in effect in each particular plant. In any event, it must be a document which permits of quick action in supplying a record to the finished stock record-keeper in order that he may quickly credit out and price the stock. When journal entries are prepared in this case, the docu- ment representing the shipment is priced at its proper cost and recapitulated daily on an accumulation sheet. ‘This sheet will 252 COST ACCOUNTING show the various cost of sales accounts which hold the cost of the sales made, there being a cost of sales account for each sales account. There will be as many debit columns on the sheet as there are sales accounts and as many finished stock columns as there are finished stock accounts. As in other cases, this accumulation sheet must be kept in balance. The making up of the journal entries is then simply a matter of taking the totals from the accumulation sheet and crediting the finished stock accounts and debiting the cost of sales accounts. In General Regarding Journal Entries It cannot be impressed too strongly that the accuracy of cost records depends entirely on the proper transfer of figures as the work progresses from one stage to another. With the careful journalizing of all steps, based on the data which come from accurately working shop conditions, it is entirely feasible to maintain through the control accounts a monthly profit and loss statement and balance sheet which are even more accurate than those based on an annual inventory. The whole procedure is based on the recording of all cost items, such as labor, material, etc., as they are incurred rather than waiting to see what is left at the end of the year after the money has been paid out—as was the case under the old methods of compiling annual profit and loss statements. No industrial institution can live today without a close check on all of its operations, and it should be evident to any- one who will carefully study the progressive steps outlined in this chapter that, with the care which should be given to every operation in an industrial plant, figures can be produced which will be of incalculable benefit to the management. Warning is given, however, that the proper journalizing of the principal steps must be carried out strictly, in order to establish proof of all figures used in the compilation and statement of costs. PREPARATION OF JOURNAL ENTRIES 253 The slightest relaxation in accuracy will probably result in erroneous figures which cannot but prove disastrous. On the other hand, continuous figures showing every month exactly how work is progressing may save the company from disaster. If it should enter on a dangerous road it will not have to wait till a year passes before discovering the fact. CHAPTER XX ILLUSTRATIVE LEDGER ACCOUNTS AND JOURNAL ENTRIES Scope of the Chapter To specify general ledger control accounts and journal entries to fit every case is, of course, impossible. On the other hand, the fundamental principles underlying the estab- lishment of control accounts and the making of journal entries each month are practically the same in all lines of industry. This chapter presents a set of general ledger accounts for an average foundry, followed by the usual journal entries which would be involved in handling the cost records. No space is taken up with illustrating the journal entries from the general books of entry, as this matter should be entirely familiar to everyone reading this volume. The schedule of ledger accounts shown herein, and also the schedule of journal entries which follow the ledger ac- counts, are taken from the “Standard Foundry Cost System,” published by the American Foundrymen’s Association. General Ledger Accounts for Average Foundry The schedule of general ledger accounts in the following pages is such as would be required to reflect the details of an average foundry. Subaccounts or additional accounts should be added to represent classes of transactions special to any particular foundry. The schedule and definitions are merely illustrative of the principles involved. The accounts appear under the following groups which are in the sequence required for presentation on the balance 254 ACCOUNTS AND JOURNAL ENTRIES 255 sheet and profit and loss statement, which sequence is impor- tant in order to facilitate the work of preparing the statements. Current assets. Inventory assets. Fixed assets. Deferred assets. Intangible assets. Current liabilities. Fixed liabilities. Reserves. Capital liabilities. Surplus and profit and loss accounts. . Financial profit and loss accounts. . Operating expense accounts. 13. Sundry general ledger accounts. SO MIAME HH ee) bOooH The following detailed accounts are suggested for the general ledger. These may be amplified as much as desired, or as the business demands. 1—Current Assets: 1—Cash in bank (an account for each bank). 2—Petty cash. 3—Notes receivable. 4—Accounts receivable. 5—Bonds and other investments. 2—Inventory Assets: 1—Melting stock metals. 2—General stores (or as many as desired). 3—Finished castings. 4—Work in process. 3—lixed Assets: 1—Machinery and equipment. 2—Real estate and buildings. 4—Deferred Assets: 1—Unexpired insurance. 2—Unexpired taxes. 3—Prepaid interest. 256 COST ACCOUNTING 5—Intangible Assets: 1—Patents. 2—Good-will. 6—Current Liabilities: 1—Notes payable. 2—Accounts payable. 3—Accrued pay-roll. 4—Accrued taxes. 5—Accrued commission. 6—Accrued interest. 7—Fixed Liabilities: 1—Bonds payable. 2—Mortgages payable. 8—Reserves: 1—Reserve for depreciation on machinery and equipment. 2—Reserve for depreciation on buildings. 3—Reserve for bad debts. o—Capital Liabilities: 1—Capital stock—preferred. 2—Capital stock—common. 10o—Surplus and Profit and Loss Accounts: 1—Surplus. 2—Income and excess profits account. 3—Dividends—preferred stock. 4—Dividends—common stock. 5—Profit and loss. * 6—Adjustment account. 7—Castings sales. 8—Cost of castings sales. o—Miscellaneous sales. 10—Cost of Miscellaneous sales. 11—Freight out on sales. 12—Administrative expense. 13—Selling expense 11—Financial Profit and Loss Accounts: 1—Interest received. 2—Discount taken. 3—Interest paid. 4—Discount given. s5—Interest or dividends on investments, 12—Operating Expense Accounts: 1—Cost of melt. 2—Cost of melt credits. 3—Molding burden—direct labor. ACCOUNTS AND JOURNAL ENTRIES 257 4—Molding burden—direct labor credits. 5—Molding burden—machine hour. 6—Molding burden—machine hour credits. 7—Molding sand cost. 8—Molding sand cost credits. g—Flask cost. 10—Flask cost credits. 11—Coremaking burden—direct labor. 12—Coremaking burden—direct labor credits. 13—Coremaking burden—machine hour. 14—Coremaking burden—machine hour credits. 13—Finishing cost. 16—Finishing cost credits. 17—Annealing cost. ' 18—Annealing cost credits. 19—Power, heat, and light expense. 20—Pattern-shop expense. 21—General expense. 22—Expense ledger. 13—Sundry General Ledger Accounts 1—CURRENT ASSETS (1-1)—Cash in Bank: Debits— (1) Open the account with the amount of cash in bank; (2) Total amount of cash deposited during the month. Credits— (1) Total amount of checks issued during the month. Balance— Represents the value of cash in bank at end of month. Should be reconciled with the bank’s statement to determine outstanding checks and uncredited deposits. (1-2)—Petty Cash: Debits— (1) With the value of checks drawn to create or to increase the amount of cash on hand to cover petty expenses for a short period. Credits— (1) With any decrease in the amount on hand. Balance— Represents the amount set aside for petty cash disbursements, (1-3)—Notes Receivable: Debits— (1) Open the account with the face value of promissory notes. 258 COST ACCOUNTING (2) Notes and acceptances received ; (3) Notes renewed. Credits— (1) Payments on notes receivable and acceptances; (2) All notes and acceptances sold or otherwise disposed of; (3) All notes renewed. Balance— Represents the value of all notes receivable and acceptances on hand. (1-4)—Accounts Receivable: Debits— (1) Open the account with the total of individual customers’ ac- counts in the accounts receivable ledger ; (2) The total charges to customers as represented by postings on sales register. Credits— (1) Total payments received from customers, whether cash, notes or acceptances; (2) Allowances to customers, including cash discount; in other words, the gross settlements with customers. Balance— Represents the net amount due from customers. (1-5)—Bonds and Other Investments: Debits— (1) Open the account with the market value of stocks and bonds on hand; (2) Market value of other investments ; (3) Cash value of life insurance policies, etc.; (4) Cost of all stocks, bonds and other investments purchased. Credits— (1) Cost of stocks, bonds and other investments sold at value carried (any sales of securities at other than the value car- ried will necessitate entry of the profit or loss to an account representing profit and loss on sales of investment securities). Balance— Represents the cost value of stocks, bonds, and other investments owned by the company. 2—INVENTORY ASSETS (2-1)—Melting Stock—Metals: Debits— (1) Open the account with the cost value of all melting stock or metals on hand; (2) All purchases of melting stock metals; ACCOUNTS AND JOURNAL ENTRIES 259 (3) Transportation charges on incoming melting stock metals (distributable according to corresponding invoices) ; (4) Charges for unloading in the case of a long-term supply; (5) Returns to stores of melting stock from melting department. Credits— (1) All withdrawals of melting stock metals as represented by monthly summary of metals used; (2) All melting stock returned to vendors. Balance— Represents the value of melting stock metals on hand; should agree with the aggregate of the individual stock ledger sheets or cards. Note:—The following subdivisions may be maintained: 1. Pig iron. 2. Purchased scrap. 3. Foundry scrap. 4. Ferromanganese. 5. Ferrosilicon. 6. Other melting stock as required. (2-2) —General Stores: Debits— (1) Open the account with the value of all general stores mate- rial (i.e., other than melting stock metals) on hand; (2) Purchases of additional material ; (3) Transportation charges on incoming general stores material (distributable according to corresponding invoices) ; (4) Returns to stock of general stores material. Credits— (1) Withdrawals of general stores material from stock as rep- resented by monthly summary of materials used; (2) Material returned to vendors. Balance— Represents the book value of general stores material on hand; should agree with the aggregate of the individual stock ledger sheets or cards. (2-3)—Finished Castings: Debits— (3) Open the account with the physical value of all finished castings on hand; (2) Deliveries of finished castings as represented by the sum- mary of closed production orders—at cost; (3) Returns of good material from customers. Credits— (1) Material shipped during the period. 260 COST ACCOUNTING Balance— Represents the cost value of finished goods on hand. (2-4)—Work in Process: Debits— (1) Open the account with the cost of goods in process; (2) With the total amount of molding productive labor and coremaking productive labor as represented by the sum- mary of time cards on pay-rolls; (3) With cost of melt for the month at predetermined rate; (4) With proper portion of following expense accounts at pre- determined fates: : Molding burden—direct labor, Molding burden—machine hour, Molding sand cost, Flask cost, Coremaking burden—direct labor, Coremaking burdén—machine hour, Finishing cost, Annealing cost; (5) With cost of castings returned by customers (if finished castings account is not carried). Credits— (1) Cost of castings shipped, if finished castings account is not carried, otherwise with cost of finished castings delivered to finished castings stores; (2) Scrap value of bad castings and sprues returned to melting metals stock; ’ (3) Losses due to defective work or other errors in service distributable to the departmental expense involved. Balance— Represents the cost of finished castings on hand and in process (if finished castings accounts is not carried), otherwise of castings in process. TO ho Ao oe + 3—FIXED ASSETS (3-1)—Machinery and Equipment: (3-2)—Real Estate and Buildings: Debits— (1) Open the accounts with the first cost or replacement value of all permanent plant investment represented by the respective accounts ; (2) ‘All expenditures for permanent additions. Credits— (1) Value of fixed assets sold or otherwise disposed of. ° ACCOUNTS AND JOURNAL ENTRIES 261 Balance— Represents the book value of fixed assets against which as off- setting accounts are the respective reserves for depreciation. 4—DEFERRED ASSETS (4-1)—Prepaid Insurance: Debits— (1) Open the account with the amount of unexpired insurance premiums ; (2) Subsequent insurance premiums. Credits— (1) Periodical charge equivalent to pro rata insurance cost for period; (2) All refunds and cancellations. Balance— Represents unexpired insurance premiums. (4-2)—Prepaid Taxes (If prepaid. See 6-4): Debits— (1) Open the account with total of unexpired taxes paid in ad- vance ; (2) Subsequent taxes paid in advance. Credits— (1) Amount equivalent to one-twelfth the annual tax to effect liquidation of monthly charge to taxes in the various expense groups. Balance— Represents taxes paid in advance. (4-3)—Prepaid Interest (Sce 6-6): Debits— (1) Open with balance of prepaid interest; (2) All subsequent prepaid interest. Credits— (1) With monthly proportions of interest accrued as to the items entered in this account as prepaid. Balance— Inventory of unused prepaid interest. 5—INTANGIBLE ASSETS (5-1) —Patents: Debits— (1) Open the account with the estimated value of patents owned; (2) Cost of acquiring subsequent patents including all incidental expenses. 262 COST ACCOUNTING Credits— (1) Pro rata amount equivalent to one-twelfth the annual charge for the extinguishment of patents. (If so treated.) Balance— Represents the book value of patents owned. (5-2) —Good-Will: Debits— With value of good-will. Credits— With any depreciation of good-will. Balance— Net value of good-will as carried. 6—CURRENT LIABILITIES (6-1)—Notes Payable: Debits— (1) Payments reducing the notes payable. Credits— (1) Open the account with the value of all outstanding notes payable ; (2) All subsequent notes issued. Balance— Represents the amount owed by the company on notes payable. (6-2)—Accounts Payable: Debits— (1) Payments of accounts payable; (2) With all contra charges to vendors’ accounts; (3) Value of material returned to vendors for credit; (4) With amount of notes given vendors; (5) With all trade or cash discounts allowed by vendors and earned. Credits— (1) Open the account with the total of vendors’ or purchase creditors’ accounts ; (2) Total credits to accounts payable on the purchase journal. Balance— Represents the net amount owed to creditors on open account. (6-3)—Accrued Pay-Roll: Debits— (1) Amount of wage and salary payments made during the period as represented by cash book entries; (2) With amounts paid as bonus. Credits— (1) Amount of wages, salaries and bonus earned. ACCOUNTS AND JOURNAL ENTRIES 263 Balance— Represents pay-roll amounts accrued but unpaid. (6-4)—Accrued Taxes (If accrued. See 4-2): Debits— (1) Actual payment of taxes. Credits— (1) Monthly amount charged to operating expense. Balance— Represents accrued amounts of taxes accumulated but not yet due. (6-5)—Accrued Commissions: Debits— (1) Commissions actually paid agents or sales representatives. Credits— (1) All accrued commissions on sales billed (or orders taken) during the period, charging selling expenses. Balance— Represents commissions accrued but not paid. (6-6)—Accrued Interest (See 4-3): Debits— (1) With interest paid as to items entered herein as accrued. Credits— (1) Open the account with the amount of accrued interest unpaid ; (2) With amounts accrued monthly on items if interest is accruing. Balance— Represents accrued interest on items payable accumulated but not yet paid. 7—FIXED LIABILITIES (7-1)—Bonds Payable: Debits— (1) Payments reducing bonds payable. Credits— (1) Open with balance of all outstanding bonds; (2) With all subsequent issues. Balance— Represents outstanding bonded indebtedness. (7-2)—Mortgages Payable: Debits— (1) Payments reducing the principal of mortgages payable. Credits— (1) Open the account with the amount due on mortgages. 264 COST ACCOUNTING (2) Mortgages subsequently issued. Balance— Represents the total amount owing on mortgages payable. 8—RESERVES (8-1)—Reserve for Depreciation on Machinery and Equipment (8-2)—Reserve for Depreciation on Buildings: Debits— (1) With that portion of the cost which has been depreciated of anything replaced or sold. Credits— : (1) Open the account with the amount of reserve allowed for depreciation ; (2) Depreciation charge to departmental or general expenses equivalent to a pro rata amount of the annual depreciation charge. Balance— Represents the allowance for depreciation of permanent plant investments and maintained as offsetting accounts to the respec- tive fixed asset accounts. Note:—If the present net book value (first cost less deprecia- tion amount) cannot be determined for any particular article re- placed, the first cost should be credited to the fixed asset account and charged to the corresponding reserve for depreciation. If, however, the article replaced is sold or otherwise disposed of at a scrap value, the first cost should be credited to the fixed asset account and first cost less scrap or exchange value should be charged to the corresponding reserve for depreciation. The scrap value should, of course, be charged to the purchaser. (8-3)—Reserve for Bad Debts: Debits— (1) With value of accounts receivable considered uncollectible, crediting the individual customers’ accounts so written off. Credits— (1) Open the account with an amount considered sufficient to cover all losses on accounts considered uncollectible ; (2) Amount based on a percentage of sales billed to provide for losses on amounts charged during the period. Balance— Represents allowance reserved for losses on accounts receivable. o—CAPITAL LIABILITIES (9-1)—Capital Stock—Preferred Issued ACCOUNTS AND JOURNAL ENTRIES 265 3 (9-2)—Capital Stock—Comunon Issued: Debits— (1) With par value of stock returned to or acquired by company. Credits— (1) With the par value of stock outstanding. Balance— Represents the par value of issued capital stock outstanding, preferred and common, respectively. 10o—SURPLUS AND PROFIT AND LOSS ACCOUNTS (10-1)—Surplus : Debits— (1) With the amount of dividends at annual closing; (2) With amount transferred from profit and loss (if loss) at annual closing period. Credits— (1) Open the account with the amount of undivided profits; (2) With profits made during the current year transferred from profit and loss at annual closing. Balance— Represents undivided profits, if a credit; Represents deficit, if a debit. Note:—Make no entries to surplus account except at annual closing time. (10-2)—Income and Excess Profits Tax Account: Debits— With amount of income and excess profits tax paid. Credits— With any necessary adjustments. Balance— Represents amount of income and excess profits taxes paid. (10-3) —Dividends—Preferred Stock: Debits— (1) With the amount of dividends paid. Credits— (1) With debit to surplus at close of year. Balance— Represents dividends paid. (10-4)—Dividends—Common Stock: Debits— (1) With the amount of dividends paid. Credits— (1) With debit to surplus at close of year. 266 COST ACCOUNTING Balance— Represents dividends paid. (10-5)—Profit and Loss At Annual Closing Time: Debits— (1) With debit balance of cost of castings sales; (2) With debit balance of cost of miscellaneous sales; (3) With debit balance of freight out on sales; (4) With debit balance of administrative expenses ; (5) With debit balance of selling expenses; (6) With debit balance of interest paid; (7) With debit balance of discount given; (8) With net amount of plant balances (Operating expense ac- counts Nos. 12-1 to 12-18 inclusive) if such amounts are debit balances ; (9) With debit balance of adjustment account. At Annual Closing Times: Credits— (1) With credit balances of castings sales billed; (2) With credit balance of miscellaneous sales; (3) With credit balance of interest received ; (4) With credit balance of discount taken; (5) With credit balance of interest on investments ; (6) With net amount of plant balances (Operating expense ac- counts 12-1 to 12-18 inclusive) if such amounts are credit balances ; (7) With credit balance of adjustment account. Balance— Represents net profit or loss resulting from transactions of the period accumulated. (10-6)—Adjustment Account: Debits— (1) With any determinable decrease in any particular account not traceable to some other account; (2) With necessary adjustments of any nature. Credits— (1) At closing periods with any determinable increase in any particular account not traceable to some other account; (2) With necessary adjustments of any nature. Balance— Represents adjustments necessarily made. (10-7)—Castings Sales: Debits— (1) With the billed amount of castings returned by customers ; ACCOUNTS AND JOURNAL ENTRIES 267 (2) With allowances to customers as represented by credit mem- oranda if a sale reduction; (3) With credit balance, transferring to profit and loss at annual closing time. Credits— (1) Total castings sales billed during the month as represented by the sales register, charging accounts receivable. Balance— Represents net sales billed. (10-8)—Cost of Casting Sales: Debits— (1) Cost value of all material shipped as represented by the sum- mary of daily reports of shipments. Credits— (1) Cost of material returned by customers during the period; (2) With the debit balance at the end of closing periods charg- ing profit and loss. Balance— Represents net factory cost of shipments. (10-9)—Miscellaneous Sales: Debits— (1) With value at sale price of any returned sales. Credits— (1) With sale value of any nature other than castings sales. Balance— Value of miscellaneous sales. (10-10)—Cost of Miscellaneous Sales: Debits— (1) With cost of above sales. Credits— (1) With cost of any returned sales. Balance— Net cost of miscellaneous sales. (10-11)—Freight Out On Sales: Debits— (1) With all payments of transportation of any nature for delivery of goods to customers. Credits— (1) With necessary adjustments. Balance— Net cost of delivering sales to customers. (10-12) —Administrative Expenses: Debits— (1) With all charges for administrative expenses. 268 COST ACCOUNTING \ Credits— (1) With debit balance at closing periods charging profit and loss. Balance— Represented aggregate of administrative expenses. (10-13)—Selling Expenses: Debits— (1) With the aggregate of charges to all expense accounts classi- fied as selling expenses. Credits— (1) With debit balance at closing periods charging profit and loss. Balance— Represented aggregate of selling expenses. 11—FINANCIAL PROFIT AND LOSS ACCOUNTS (11-1)—Interest Received: Debits— (1) With necessary adjustments. Credits— (1) With all interest received for balances or overdue accounts. Balance— Net interest received. (11-2)—Discount Taken: Debits— (1) With credit balance, transferring to profit and loss. Credits— (1) With all cash discounts earned; does not include trade discounts. Balance— Represents cash discounts earned. (11-3)—Interest Paid: Debits— (1) At closing periods with the amount of interest accrued for the month on items payable, crediting accrued interest or prepaid interest. Credits— (1) With debit balance, transferring to profit and loss. Balance— Represents amount of interest actually incurred. Note:—If interest is prepaid, the payment should be charged to prepaid interest (Acct. 4-3). The amount should be liquidated in monthly amounts to apportion the charge equitably over the periods involved. (See Account 6-6.) ACCOUNTS AND JOURNAL ENTRIES 269 (11-4)—Discount Given: Debits— (1) Cash discounts allowed customers—does not include trade discounts. Credits— (1) With debit balance, transferring to profit and loss. Balance— Represents cash discounts allowed. (11-5)—Interest or Dividends on Investments: Debits— (1) With necessary adjustments. Credits— (1) With interest or dividends received on investments. This should be treated as separate from regular commercial interest. Balance— : Net results of regular income from outside investments. 12—OPERATING EXPENSES Explanatory Note: Accounts 12-1 to 12-18 inclusive cover the actual operating accounts; i.e, those that appear in the actual cost sheet, either by pound, percentage, or hour. If reference is made to the skeleton statements, it will be noted that “Total to Date” is used, both in the body of the statement and in the comparative monthly statement. It is quite evident, there- fore, that if there were but one account for each burden and cost statement, which was credited with the transfer at predetermined rates to work in process, there would be no easy way of securing the “To date” figures. In order to make this easy, two ledger accounts are maintained for each expense or burden account. One, bearing simply the name of the account, is for debits only, except where a credit is necessary to adjust or correct the debits. The other, bearing the account name followed by “Credits,” is for credits only of the transfers to work in process, except when a debit may be necessary to adjust or cor- rect the credits. The result is an accumulating figure for each kind of account. This provides, from the general ledger trial balance, the figures to use in the statements of “Total to Date’—the monthly figures com- ing from the footings for the month’s transactions, which must balance with the entries for the month in the ledger account con- trolling each expense account. . 270 COST ACCOUNTING It is quickly seen, therefore, that the difference between the “debit” and “credit” account for each expense account is the over- or under-absorbed expense, and will and must agree with the monthly statements. Accounts 12-19 to 12-22 inclusive need but a single account as they are to be entirely closed out each month. They are simply col- lective accounts serving as mediums to split down these expenses to the actual operating accounts. kok RK kK KOR (12-1)—Cost of Melt: Debits— (1) Melting stock metals used (requisitions) ; (2) Labor (time cards) ; (3) Miscellaneous materials (requisitions) ; (4) Charges direct from purchase register (expense ledger charge slips) ; (5) Apportioned charges. Credits— (1) Adjustments of debits only. (12-2)—Cost of Melt—Credits: Debits— (1) Adjustments of credits only. Credits— (1) Value of metal poured at the standard predetermined rate. (12-3)—Molding Burden—Direct Labor: Debits— (1) Labor (time cards) ; (2) Materials (requisitions) ; (3) Charges direct from purchase journal (expense ledger charge slips) ; (4) Apportioned charges. Credits— (1) Adjustments of debits only. (12-4)—Molding Burden—Direct Labor—Credits: Debits— (1) Adjustment of credits only. Credits— (1) Amount equal to molding direct labor times the standard rate. (12-5)—Molding Burden—Machine Hour: Debits— (1) Labor (time cards) ; (2) Materials (requisitions) ; (3) Charges direct from purchase ‘ouinal. (expense ledger charge slips) ; ACCOUNTS AND JOURNAL ENTRIES 271 (4) Apportioned charges. Credits— (1) Adjustment of debits only. (12-6)—Molding Burden—Machine Hour—Credits: Debits— (1) Adjustments of credits only. Credits— (1) Amount equal to actual machine hours used times the stand- ard rate per hour. (12-7)—Molding Sand Cost (If used): Debits— (1) Labor (time tickets) ; (2) Materials (requisitions) ; (3) Charges direct from purchase journal (expense ledger charge slips). Credits— (1) Adjustments of debits only. (12-8)—Molding Sand Cost—Credits (If used): Debits— (1) Adjustments of credits only. Credits— (1) Amount equal to total metal poured times the standard rate per pound. (12-9)—Flask Cost (If used): Debits— (1) Labor (time tickets) ; (2) Materials (requisitions) ; (3) Charges direct from purchase journal (expense ledger charge slips) ; (4) With total monthly charges in pattern-shop expense accounts Nos. 704 and 705 (by transfer). Credits— (1) Adjustments of debits only. (12-10)—Flask Cost—Credits (If used): Debits— (1) Adjustments of credits only. Credits— (1) Amount equal to total good castings times the standard rate per pound. (12-11)—Coremaking Burden—Direct Labor: Debits— (1) Labor (time tickets) ; (2) Material (requisitions) ; 272 COST ACCOUNTING (3) Charges direct from purchase journal (expense ledger charge slips) ; (4) Apportioned charges. Credits— (1) Adjustments of debits only. (12-12)—Coremaking Burden—Direct Labor—Credits: Debits— (1) Adjustments of credits only. Credits— (1) Amount equal to coremaking direct labor times the standard rate. : (12-13)—Coremaking Burden—Machine Hour: Debits— (1) Labor (time tickets) ; (2) Material (requisitions) ; (3) Charges direct from purchase journal (expense ledger charge slips) ; (4) Apportioned charges. Credits— (1) Adjustments of debits only. (12-14)—Coremaking Burden—Machine Hour—Credits: Debits— (1) Adjustments of credits only. Credits— (1) Amount equal to actual machine hours used times the stand- ard rate per hour. (12-15)—Finishing Cost: Debits— (1) Labor (direct and indirect unless in large plants) (time tickets) ; (2) Material (requisitions) ; (3) Charges from purchase journal (expense ledger charge slips) ; (4) Apportioned charges. Credits— (1) Adjustments of debits only. (12-16)—Finishing Cost—Credits: Debits— (1) Adjustments of credits only. Credits— (1) Amount equal to molding and core direct labor times the stand- ard rate. (12-17)—Annealing Cost: Debits— (1) Labor (time tickets) ; ACCOUNTS AND JOURNAL ENTRIES 273 (2) Material (requisitions) ; (3) Charges direct from purchase journal (expense ledger charge slips) ; (4) Apportioned charges. Credits— (1) Adjustments of debits only. (12-18)—Annealing Cost—Credits: Debits— (1) Adjustments of credits only. Credits— (1) Amount equal to total good castings times the standard rate. (12-19)—Power, Light and Heat Expense: Debits— (1) Labor (time cards) ; (2) Material (requisitions) ; (3) Charges direct from purchase journal (expense ledger charge slips) ; (4) Apportioned charges. Credits— (1) With total net balance at the close of each month distributed to the various operating accounts as explained elsewhere. Balance— There should be no balance. (12-20)—Pattern-Shop Expense: Debits— (1) Labor (time tickets) ; (2) Materials (requisitions) ; (3) Charges direct from purchase journal (expense ledger charge slips) ; (4) Apportioned charges. Credits— (1) With amount which charges the molding burden—direct labor ; (2) With amount which charges the coremaking burden—direct labor; (3) With amounts which charge the flask cost; (4) With amount of residue as directed. Balance— There should be no balance. Note:—If the pattern-shop is operated as a producing depart- ment, and not solely as a co-operating department, the accounting should be changed to correspond to the condition, and provision should be made for: 1—Pattern production orders; 274 COST ACCOUNTING 2—Pattern productive labor; 3—Pattern-shop expense account; 4—Pattern work in process material. The cost compilation must be changed accordingly. (12-21)—General Expense: Debits— (1) Labor (time tickets) ; (2) Material (requisitions) ; (3) Charges direct from purchase journal (expense ledger debit slips) ; (4) Apportioned charges. Credits— (1) With total net balance at end of each month distributed on the prescribed basis to each operating account. Balance— There should be no balance. (12-22)—Esxpense Ledger Account: Debits— (1) At end of each month, with the total of charges made direct to operating accounts, which charges are represented by expense ledger charge slips. Credits— (1) With the total of expense ledger charge slips charging the various operating accounts. Balance— If any balance exists, it is in error, and the charge slips in the files for month should be checked back to the purchase journal. 13—SUNDRY GENERAL LEDGER ACCOUNTS In this section of the ledger are located all sundry accounts with firms and individuals, irrespective of whether their balance is debit or credit. There are always a number of accounts of so gen- eral a nature that they only properly belong in this section. When making up a statement, the accounts classify themselves according to their balances into two classes: General ledger accounts receivable ; General ledger accounts payable. They will be so entered in the statements immediately under the accounts receivable, and accounts payable respectively. Journal Entries ‘ The following sequence of journalizing should be followed in order to distribute the various details into the cost of pro- ACCOUNTS AND JOURNAL ENTRIES 275 duction and reflect the condition properly on the general ledger : HM boo L. SO ON ANA WD H Pay-roll. Materials and supplies. Liability insurance. Depreciation. Taxes. Fire insurance. Power, heat, and light. Pattern-shop expenses. . General expenses. Departmental expenses. . Reversing foundry scrap. Finished castings. Shipments. The following pages illustrate the details of the journal entries required : 1. PAY-ROLL: Debit— Work in process (direct labor). Cost of melt (conversion labor). Molding burden—direct labor. Molding burden—machine hour. Molding sand cost. Flask cost. Coremaking burden—direct labor. Coremaking burden—machine hour. Finishing cost. Annealing cost. Pattern-shop expenses. Power, heat, and light expenses. General expenses. Credit— Accrued pay-roll. Purpose— To distribute labor charges for the current month to the accounts receiving benefits. 276 2. COST ACCOUNTING Source— Direct labor charges are taken from the molding and coremak- ing pay-roll sheets and should equal the total of all direct labor daily time tickets filed under production order numbers or class numbers for the same period. Indirect labor charges to cost and burden accounts are obtained from the compilation of indirect-labor daily time tickets, filed under the various expense account numbers. . . . The values thus accumulated by summarizing the labor tickets must agree with the total of the pay-roll for the same period. MATERIALS AND SUPPLIES: Debit— Cost of melt (Melting and conversion materials). Molding burden—direct labor. Molding burden—machine hour. Molding sand cost. Flask cost. Coremaking burden—direct labor. Coremaking burden—machine hour. Finishing Cost. Annealing Cost. Pattern-shop expenses. Power, heat, and light expenses. General expenses. Credit— Melting Stock—metals : 1. Pig iron. 2. Purchased scrap. 3. Foundry scrap. 4. Ferromanganese. 5. Ferrosilicon. General stores. Any other controlling material accounts. Expense ledger. Purpose— To distribute material requisitions and expense ledger charges for the current month. Source— These charges are derived from a monthly summary of cupola or furnace reports, material requisitions, and expense ledger charge slips, representing materials consumed or purchases made during the current month distributed to the cost and burden accounts. ACCOUNTS AND JOURNAL ENTRIES 277 3. LIABILITY INSURANCE: Debit— Cost of melt. Molding burden—direct labor. Molding burden—machine hour. Coremaking burden—direct labor. Coremaking burden—machine hour. Finishing Cost. Annealing Cost. Pattern-shop expenses. Power, heat, and light expenses. General expenses. Credit— Unexpired insurance. Purpose— To distribute pro rata amount of liability insurance premiums to the current month. Source— This distribution is based on an estimated monthly amount suff- cient to absorb the yearly total of liability insurance premiums. The prorating is based on the actual rate of the wages paid in each of the above accounts. 4. DEPRECIATION: Debit— Cost of melt. Molding burden—direct labor. Molding burden—machine hour. Coremaking burden—direct labor. Coremaking burden—machine hour. Finishing Cost. Annealing Cost. Pattern-shop expenses. Power, heat, and light expenses. General expenses. Credit— Reserve for plant depreciation (As many Reserve Ac- counts as desired) Purpose— To distribute the pro rata amount of annual depreciation charge to the current month. Source— - One-twelfth of the annual depreciation charge distributed to the various departments, based on the investment in each department. 278 COST ACCOUNTING 5. TAXES: Debit— Cost of melt. Molding burden. Coremaking burden. Finishing Cost. Annealing Cost. Pattern-shop expenses. Power, heat, and light expenses. General expenses. (In small plants this may all go to General Expense.) Credit— Accrued taxes, Purpose— To distribute the pro rata amount of estimated accrued taxes to the current month. Source— One-twelfth of the estimated amount of yearly taxes distrib- uted to the various departments based on the taxable property ' in each department. 6. FIRE INSURANCE: Debit— General expense. Credit— Unexpired insurance. Purpose— To distribute the pro rata amount of fire insurance premiums to the current month. Source— One-twelfth of the annual amount of fire insurance premiums. 7. POWER, HEAT, AND LIGHT: Debit— Cost of melt. Molding burden—direct labor. Molding burden—machine hour. Coremaking burden—direct labor. Coremaking burden—machine hour. Finishing Cost. Annealing Cost. Pattern-shop expenses. General expenses. Credit— Power, heat, and light expenses. ACCOUNTS AND JOURNAL ENTRIES 279 Purpose— To distribute power, heat and light expense of the current month. Source— The total of expenses summarized under power, heat, and light expenses. 8. PATTERN-SHOP EXPENSES: Debit— Molding burden. Coremaking burden. Credit— Pattern-shop expenses. Purpose— To distribute pattern-shop expenses of the current month. Source— The total of expenses summarized under pattern-shop ex- penses.... 9. GENERAL EXPENSES: Debit— Cost of melt. Molding burden. Coremaking burden. Finishing Cost. Annealing Cost. Credit— General expenses. Purpose— To distribute the general expenses of the current month. Source— The total of expenses summarized under general expenses. The basis of distribution is the total monthly labor cost in each of the above departments. 10. DEPARTMENTAL EXPENSES: Debit— Work in process. Credit— Cost of melt (credit account). Molding burden—direct labor (credit account). Molding burden—machine hour (credit account). Molding and sand cost (credit account). Flask cost (credit account). 280 Il, 12, 13. COST ACCOUNTING Coremaking burden—direct labor (credit account). Coremaking burden—machine hour (credit account). Finishing cost (credit account). Annealing cost (credit account). Purpose— To transfer departmental burden and costs at their standard rate for the current month to work in process. Note:—Each account will have a net debit or credit balance which should be shown each month on the profit and loss state- ment. Actual closing of these departmental burden and cost accounts will not be made until the end of the year, when they will be closed into profit and loss. Throughout the year the debit and credit postings to these departmental burden and cost accounts will be accumulative totals for trial balance and checking purposes. FOUNDRY SCRAP: Debit— Foundry scrap— Credit— Work in Process. Purpose— To reverse the scrap value of bad castings and sprues accumu- lated during the current month. Source— The total scrap value of bad castings and sprues as represented by monthly summary of inspectors’ rejection reports, showing weights of bad castings and sprues by classes or order numbers, FINISHED CASTINGS: Debit— Finished castings (if account is used). Credit— Work in process. Purpose— To transfer from work in process to finished castings account value of finished product delivered to finished castings stores. Source— Summary of delivery tickets or scale reports representing the delivery of finished castings to stock. SHIPMENTS: Debit— Cost of castings sales. ACCOUNTS AND JOURNAL ENTRIES ; 281 Credit— Work in process, or Finished castings (if that account is used). Purpose— To cover the cost of castings shipped during current month. Source— Summary cost value applied on memoranda of shipments made during the current month. CHAPTER XxI EXPENSE AND BURDEN STATEMENTS General Nature of Expense and Burden Statements After all the items chargeable to each expense and burden account are properly taken care of under each of these ac- counts, the next step is to assemble all the figures under their proper order numbers, or their designation, in order to arrive at the total cost of each account, and thereby reach the point of assembling the expense and burden statements. In order to derive real benefits from such figures, the mat- ter of compiling the figures in usable shape becomes one of the greatest importance. Many industrial institutions, though they assemble thousands of figures, neglect to do more than file the figures in obscure places, making no real managerial use of them. The greatest attention should be paid, therefore, to the collating of such figures into neat, attractive, and com- prehensive statements which not only are correct and properly reflect the conditions as they exist, but are so presented that it is a pleasure for anyone to study them. By so doing one becomes very deeply interested in accomplishing reforms based on the figures shown. The great importance of establishing the basis of costs, and also the great need for and benefits to be accrued from the proper departmentalization of the plant, have been taken up in detail in other chapters. The present chapter deals with the matter of expense and burden statements, a matter which if not properly handled will entirely nullify all efforts to produce useful results from assembling indirect costs. In other words, the culmination of all that has been outlined is reached in the effectiveness with 282 EXPENSE AND BURDEN STATEMENTS 283 which the elusive indirect costs can be set down in the expense and burden statements. Distinction between Expense and Burden Accounts As has been explained elsewhere, indirect costs are treated in two main classes: 1. Expenses, which are, after collection, distributed to other expense accounts or to burden accounts. 2. Burdens, which are the final collection of all indirect costs of each operating department, and which ap- pear in the actual cost sheets of goods produced. Expenses which are finally distributed both to other ex- pense accounts and to burden accounts as well are exemplified by Steam Expense, Electric Power Expense, Compressed Air Expense, and Trucking Expense. Examples of expenses which may receive charges from other expense accounts before being distributed to the burden accounts are: General Superintendent’s Office Expense, Cost Department Expense, Pay-Roll Department Expense, Gen- eral Stores Expense. Burden accounts are those departmental accounts which are necessary to show accurately the indirect cost of each de- partment in order to effect a true application of these costs to the product. The Great Value of Detail It is in the presentation of the various expense and burden accounts that the great value of detail is realized. By this is meant good, wholesome, analytical detail which is designed to answer automatically all questions before they are asked. A short time ago a case was noted in which five expense order numbers were used. In one department, four of these numbers which specified certain operations showed a total 284 COST ACCOUNTING altogether of about $1,200, whereas the fifth order number, entitled “Miscellaneous,” had over $12,000 against it. A statement of this sort is valueless. Within reason, the standing order code should be suffi- ciently detailed as to analysis of cost to make the statements tell a complete story. If fifty orders are necessary to do this —have fifty. A statement of lump sums is a wasted statement and had better not be compiled. Fallacy of High Cost of Detail Many managers, and lesser lights as well, rebel at a well- analyzed standing order code, saying that the work is so great and the cost of keeping the records is so high that it is im- practicable. This is a most unfortunate mistake. It must be that such judgment is expressed in ignorance of true cir- cumstances, and through an entire lack of real study of the subject. A little reasoning will clear up this point. A standing order code is prepared, and a comprehensive and well-detailed dissection of all expenses and burdens is made. This is quite a task, but it needs to be done only once. The code is then printed in book form and becomes permanent. Putting the code number for the work performed on the time card covering the work involves simply the very slight time necessary to refer to the code book, to make sure of the right order number. This in itself is soon a matter of memory. When filing the cards in cost files it is practically as easy to file fifty numbers as ten. Footing the time cards for entry on statements takes a little more work—but only that of clearing the adding ma- chine fifty times instead of ten and putting down the totals. This comes, moreover, but once a month. The truth is, the fear of having too much detail is entirely without ground, and a careful investigation would soon prove that a detailed analy- sis of indirect cost is a valuable asset. EXPENSE AND BURDEN STATEMENTS 285 Proving of All Statements Before going on with the technique of making up state- ments, it is important to emphasize strongly the absolute neces- sity of proving all steps performed. This can be done with the aid of controlling accounts. It will be remembered that a controlling account must be set up in the ledger for each expense and burden account. Debits to these accounts are distributed through the journal from the following originating sources: 1. Labor, from a recapitulation of time cards. 2. Material, from a recapitulation of requisitions. 3. Expense, direct from voucher register, a recapitula- tion of expense debit slips. 4. Miscellaneous apportioned charges from standard monthly entries and other expense distribution. As all plant expense accounts are credited out in full each month, the control account of each plant expense is used merely as a collecting and proving account so far as the ledger is concerned, and does not appear on the trial balance. A semigraphic illustration of the flow of entries into and out of the expense and burden ledger accounts is shown in Form 32. The burden control accounts are never credited during the year except for correction, the credits for burden applied in costs being credited to a parallel “Burden Credit’ account. (See Chapter XVII.) This is done in order to allow the bur- den accounts—both debit and credit—to accumulate, thereby giving a control for statement purposes which otherwise would be impossible. Structure of Statements In general, all expense and burden statements include three main features: COST ACCOUNTING 285 sjunosdy useping pue asuedxq jo yno pue ur s}909 JO MO, Burmoys Wey ‘zl wI0Y ‘ssOT pue yyo1g ) ‘3 paliaed st sjunosoe jgep pue Ypeid uaping ay} uaaM} oq «= Sulurewia1 = aouRTeg ‘sayei1 piepurys ye sgof yenjoe 0} peljdde uaping Sunipess Arjua yeuinof : Qunos -o8 }Ipaid uaping jo asn hq) Sjunos9p uapang 404 ‘sjunosoe Uaping 10 syunoove asuadxa I3y}0 0} ujuou yore juNnowe ajoym Sulynqiiysip Asjus jeuimofl L isqunojap asuadxy 407 —SLIGaad SLNNODIY uaoCa] Naaung anv ASNIGX A Sold} -ua [euinof prepuejs 1910 Aqyua yeuinof uoremaidaq Aqjua jeusnofl ao.ueinsu] SLIgdaas— Aq} -ua yeusmof Jospay asuedxy Aqua [euinol [ersoyeypy Axjyua yeusmof sz0qeT EXPENSE AND BURDEN STATEMENTS 287 I. A section showing details of all charges to the account. 2. A section showing disposition of the cost: (a) In the case of expense accounts, this is a com- plete distribution to other expense accounts and to burden accounts. (b) In the case of burdens, this is the amount ap- plied to costs at standard rates. 3. A section showing comparative unit and average costs. By this it will be seen that these three main sections give: 1. The cost, and what makes it up. 2. The disposition of this cost: (a) How distributed and to what other accounts. (b) How each month’s burden runs in relation to the standard rate, and for the period to date. 3. A comparison of results in tabular form. Preparing Skeleton Statements At odd times during a month, the skeleton statements may be prepared for use after the month closes. These skeleton HOLDEN MANUFACTURING CO. BOSTON, MASS. EXPENSE AND BURDEN ACCOUNT COLLATING SHEET Month of. Name of Account 0.D.S.0. Expense Total Total Order No. Own Labor}! Charges || Rea — [pebit Slips} "4! |/Last Monthl| To Date aaa | Lod | Form 32. Exp:n.« and Burden Account Collating Sheet. (Size, 8% x 11.) 288 COST ACCOUNTING statements are as follows: (1) the form of statement as it is to be presented (shown on pages 295 and 296) ; (2) the work- ing sheets for assembling the figures to be entered on the regu- lar statements (shown in Form 33). These sheets should be prepared, so far as possible, before the end of the month in order to speed up the work when the month closes. This will include headings, account numbers (and names on the regular statements), and 1. On the regular statements, the figures for the previ- ous month. 2. On the working sheets, the total to and including the previous month. Preparing Data After all time cards, requisitions, and expense debit slips are properly filed, the first step in preparing the statements is to sort all data under each order number. 1. Time cards should be sorted into: (a) Cards which account for ‘‘own labor,” ie., work done by men belonging to the depart- ment being accounted for, and where no bur- den of another department is involved. (b) Cards which account for work done by other departments and where the burden of the other department is charged. 2. Requisitions and expense debit slips should be sorted so that they may be added separately. Footing and Entering Data With all details ready, the next step is the accumulation and entry of the various order number totals on the skeleton or collating sheets. The procedure is the same whether the work is done by manual labor or on electric adding machines. EXPENSE AND BURDEN STATEMENTS 289 1. The time cards of “Own Labor,” representing the work done by any department on its own standing orders, is footed for each order and entered under this heading on the skeleton sheet. 2. The time cards stamped “O.D.S.O.,” representing work done for one department by other departments, and which are extended not only with the labor cost of the work performed but also with the amount of burden thereon, will be footed to show the total for each order of both the labor and burden cost. (See Chapter XVI.) These totals will be entered in the column headed “O.D.S.O. Charges.” 3. The totals of all requisitions for each order are accumu- lated and entered on the skeleton sheet under “Requisitions.” 4. The totals of all expense debit slips for each order are accumulated and entered under “Expense Debit Slips.” The foregoing complete all entries which come through the mediums mentioned. Entry of Journal Entry Data All apportioned expenses come through the medium of journal entries. While the main posting of the journal entries is, of course, to the control accounts in the ledger, a short-cut is here possible by also posting the same entries direct to the skeleton sheets. This saves a special journal debit form which otherwise would be necessary. In making the entries of the journal entry data in con- nection with the apportioned expenses, the only columns on the collating sheet to be used will be the last three columns, namely, total, total for last month, and total to date. The names of the various expenses will be written on the sheet starting with the order number column and writing over the next column. This may appear rather unbusinesslike, but as the greatest use of the form is for the information as called for by the headings, and as the various statements for the ex- 290 COST ACCOUNTING pense accounts vary so much in size, it is about the only eco- nomical way to use the form. Completion of Skeleton Working Sheets When all data have been entered, all entries opposite each order number are cross-footed and the totals entered under the heading “Total.” This gives the total cost of each stand- ing order for the month. The next step is to add the total for the month for each order to the “Total for the Last Month,” thereby arriving at the ‘Total to Date” for each order. When cross-footing is complete, the vertical footings are entered on the collating sheet. The various section totals are cross-footed, and as they must agree with the total of the cross-footed items, it will be noted that the sheet is self-checking so far as the work upon it is concerned. The expense accounts closed out monthly will of course have no total to date. Proving the Working Sheets with Controls It is noted that both the total cost for the month and the total cost to date for each account have been found. The total cost to date must agree with the balance of the ledger control account for each burden account, and each monthly expense account will of course agree with the ledger control for the month. If all work has been done correctly, each expense and bur- den account will come out exactly right. But unfortunately errors happen, and it is the use to which the controls may be put in finding these errors that justifies the apparently extra work of establishing controls. The checking out by sections is as follows: 1. The total “Own Labor” for each account must equal this total found in the summary of the pay-rolls. EXPENSE AND BURDEN STATEMENTS 291 2. The total of the O.D.S.O. charges must equal the total of the debits to the control account, according to the journal entry of same described in Chapter XIX. 3. The total of requisitions for each account must equal the total.debit for the same account on the accumu- lation sheets for the requisition journal entry. 4. The total of expense debits for each account must in like manner equal the corresponding total debit on the accumulation sheets for the expense debit slips journal entry. 5. The postings under “Apportioned Expenses” may be checked directly against the journal. If the foregoing rules are kept in mind, the errors can usually be located and a little detailed checking will straighten it out. Completing the Statements With the skeleton sheet proved up and correct, the making up of the actual statements is an easy task. The first move is to copy the current month and total to date into the proper columns on the statement. After this has been done, two things remain: 1. On expense statements, to work out the distribution. 2. On burden statements, to ascertain the total basic units applied to production orders, which are either: (a) Direct-labor hours (b) Direct-labor cost (c) Machine hours As these two points have been dealt with elsewhere, it is necessary to state here only that after the data have been secured and the journal entries prepared, the distribution of the expense accounts and the burden credits are entered on the statements as illustrated. 292 COST ACCOUNTING Sequence of Compilation of Expense and Burden Statements Naturally, as explained in other sections, not all expense and burden accounts can be closed at once. Expense accounts, such as Steam, Electric Power, Trucking, etc., must close out first, their distributing journal entries being made, and posting made to other expense controls before they are closed. Then the second set of expense accounts are closed out, and so on until the entire indirect cost is concentrated in the final set of accounts known as burden accounts, or in a few accounts such as the Melting Cost account in foundries, where the cost is on a pound basis. This final set of accounts is that whose cost, represented by a standard, appears in the actual cost sheets of the goods produced. Comparison of Indirect Costs—1. Expense Accounts There remains to be discussed the comparisons of the in- direct costs which are designed to give a direct and true line on the results of the work. It has been brought out before that in every possible case each expense account should be so designed as to give some line—for comparative purposes—on the efficiency of each segregated group. If no check of this sort is maintained, the great advantage of keeping the indirect costs is lost, as a vol- ume of figures without any resulting unit comparison is of no use from a managerial standpoint. The nature of the expense accounts depends largely on the plant which is installing the cost methods, but careful thought will bring about a grouping of expense accounts which will accomplish the desired end. Nearly every plant, for instance, has a Trucking or Team- ing Expense account, and from the nature of the business it can be decided whether or not a section unit can be kept in one of two ways: hours of actual trucking, or tonnage trucked. Then, if the cost of trucking is kept, there can be a very usable and valuable unit cost ascertained on one or the other unit. EXPENSE AND BURDEN STATEMENTS 293 A great many plants generate at least a portion of their own power. Even where the power is purchased, more or less equipment is always required to transform and distribute it. Thus a knowledge of unit cost is desirable. The cost per kilo- watt hour can be accurately determined, if a meter is installed to show the total number of kilowatt hours generated or pur- chased and transformed. If a plant» wishes to go to the expense, almost the same procedure can be followed in the case of steam by the use of flow meters. Unit costs can thereby be arrived at which will give a decided check on the production of steam. The majority of expense accounts belonging to the second set—those which are to be distributed entirely to the burden accounts—are preferably compared on the basis of the total hours spent under the jurisdiction of the department for which the account stands. The second choice of a basis of com- parison is the total pay-roll in dollars. This may be illustrated in the case of a Pay-roll Department Expense account where the cost of operating the department is almost in direct ratio to the number of hours of work or value of the hours which the clerical department has to account for. This would apply equally to the cost department, the general superintendent’s office, etc. By all means, care should be taken to avoid an error which is largely prevalent today, namely, of regarding the cost of such departments as being distributable and comparable on the basis of the direct-labor hours or cost of the operating de- partments. This is entirely wrong, the reason being that a pay- roll department or a cost department or the general super- intendent’s office is just as deeply involved with the handling of indirect labor as it is with direct labor. Therefore, the cost of these departments should be distributed to the operating departments preferably on the basis of the total labor hours both direct and indirect. 204 COST ACCOUNTING 2. Departmental Burdens The basis for comparison to be used for the operating burdens will depend entirely on the method chosen. as being the best or most available for cost purposes. By this is meant that the burdens will be applied and used in the costs on the basis of either direct-labor hours, direct-labor cost, or ma- chine hours. Regardless of what method is chosen, there should be for each expense and burden account some com- parative table (on the basis of what has been previously ex- plained) in order that a true measure may be obtained of the efficiency of each division of the indirect cost. These com- parisons will be set up along the lines of the table on page 297. This table shows a comparison for some months back of the burden accounts and also of the Trucking Expense account illustrated on page 297. It will be noted that this table shows: 1. The expense for each month and the total to date. 2. The number of basic units for each month with the total to date. 3. The cost per unit for the month and the average per unit to date. Through the medium of these comparative tables, con- stant watch can be kept as to whether or not a standard is being adhered to. If the standard is not adhered to, and the tables do not show the reason for the divergence, a study can be made of the full records to ascertain whether or not the difference is of a nature to warrant the changing of a standard. This applies particularly to the burden accounts. In the case of the expense accounts, the comparative tables will give a true line as to whether or not the ratio of each indirect division, such as the cost department, production de- partment, general superintendent’s office, etc., is being main- tained as it should be. EXPENSE AND BURDEN STATEMENTS 295 HoLpEN MANUFACTURING COMPANY (AA) MacuINE BurpDEN AccouNT, JUNE, 1920 Jan. 1 to Month of | Month of June 30, June, May, 1920 1920 1920 Burden Labor: MS-1 Foremen and Assistants................. $ 1,887.80 | $ 307.37 | $ 336.22 2 Storekeepers and Timekeepers 1,522.10 240.90 252.69 3 General Labor......... II.05 I.10 2.05 4 Cleaning and Sweeping... . a 719.84 103.91 104.61 § Oiling Shafting. (2. ccc cee cence eee eed 98.40 14.27 14.85 6 Work on Account Shop Error ssid 7 Shipping Expense.... ........... sks 149.98 25.79 21.43 8 Inventory Expense................-.... 192.92 $ 4,582.09 | $ 693.34 | $ 731.85 Maintenance: ——— MS-31 Machinery $ 1,303.38 | $ 244.71 | $ 166.73 BS DOGS say cua cvevivs ios weed steunsactod 1,941.07 278.78 168.88 33 Dies, Jigs, and Templates. . é 117.42 3.39 9.73 34 Electrical Apparatus................... 143.67 33.55 3.23 3S ‘Belting: 225.124 ¢suhs eta ceece 5 ace Ube 190.44 25.48 19.71 36) Fixtures ng seca Gs tps se oe eae 9 108.85 +49 22.20 37 Other Equipment..................... 98.40 any 13.42 $ 3,903.23 | $ 586.57 | $ 403.90 Sundry Expense Material: er ed IMIS= 5 - Drills cccacceeitead g Gea oed oan Swe yenee 4 $ 145.96 | $ 635 |S 61.72 52 Small Purch. Tools not otherwise specified 146.99 47.61 12.49 S33) Wights 20.46 Acauc saves the taleeddnee be a 112.52 < 26.38 54. Oils and, Waste.....02usase0% ces aves 129.01 21.35 21.04 s5 Miscellaneous...................- Bara 421.18 66.18 54.71 $ 955.66} $ 149.49 | $ 177.24 Total Purely Departmental................] $ 9,440.98 | $1,429.40 | $1,312.99 Apportioned Expenses: —_|—_—_. }| —————_. Prop. of Expense Acct. ‘‘A’’...... a 4 a a $ 2,256.15 | $ 447.60 | $ 400.13 PAD ie wd ates ot s 2,143.37 324.57 323.10 « © Gen. Stores Expense........ eee 175.37 28.67 28.19 a “ Trucking Expense.......... ba 406.88 56.14 75.01 “ © Liability: Insurance. oc. osc wees see 708.79 106.45 115.22 Power, Light, and Heat wee yet s 2,395.39 311.70 297.27 Miscellaneous Expense...... 120,25 12.43 17.54 Depreciation ck 551.64 91.94 91.94 Bonus hacierca case gan ness tila maa anne once ait 2,763.48 |. 421.28 521.81 $11,521.32 | $1,800.78 | $1,870.21 $20,962.30 | $3,230.18 | $3,183.20 Less—Reclaimed Scrap..........--.00.2 eee eee $ 1,632.35 | $ 54.80] $ 867.60 $19,329.95 | $3,175.38 | $2,315.60 100% on Prod. Labor Carried to Work in Process BurdenvAect x ier atusiuasc eG Sinus @ ake oy teres $22,608.62 | $3,354.79 | $3,660 55 Balance carried to Mach. Profit and Loss Acct...| $ 3,278.67 | $ 179.41 |'$1,344.95 2096 COST ACCOUNTING (WW) HoLpEN MANUFACTURING COMPANY TRUCKING EXPENSE, JUNE, 1920 Jan. 1 to Month Month of June 30, June, May, 1920 1920 1920 Trucking Expense: G-1o1 Electric Truck Labor... .| $ 2,090.54 | $ 323.36 | $ 365.90 102. Maint. of or Supplies for Electric Trucks....... 3,010.50 123.94 503.34 103 Gasoline Truck Labor... . 1,477.24 136.49 285.64 104 Maint. of or Supplies for Gasoline Trucks....... 2,052.27 548.31 468 . 37 105 Teaming............... 1,497.19 243.66 260.22 106 Miscellaneous........... 62.63 -40 3.07 $10,190.37 | $1,376.16 | $1,886.54 Apportioned Charges: Depreciation..............00005 $ 513.00] $ 85.50|$ 85.50 Electric Power............. (QQ) 333-06 47.64 43.96 Liability Insurance.............. 86.01 11.08 15.70 $ 932.07 | $ 144.22 | $ 145.16 Total Expense............-.000. $11,122.44 | $1,520.38 | $2,031.70 DIsTRIBUTION For MontTH Depts tose ss Shaken (X) 55.24% $ 839.86 DEE Peet Ae seats (HH) 29.81 453.22 Rin hd sacmnahites Meo (JJ) 2.50 38.01 Give Recvea ne a aee & (KK) 5.60 85.14 1B es estudio ae (NN) Ohta ace aets (OO) 2.59 39.38 Dos vista wien xia (MM) 3.88 58.99 Bee deuadids Ghawswians (PP) 38 5.78 $1,520. 38 EXPENSE AND BURDEN STATEMENTS 297 CoMPARATIVE TABLES MacHINE-SHOP, PERCENTAGE OF BURDEN PRODUCTIVE LABOR BURDEN % OF BURDEN Month For Mo. Total For Mo. Total For Mo. Average Jan., 1920.| $4,699.47 | $ 4,690.47 | $3,249.91 | $ 3,249.91 | 60.15% | 69.15% Feb. “ .| 4,214.05 8,913.52 | 3,279.70 6,529.61 | 77.83 73.25 Mar. 3,150.26 12,063.78 3,697.00 10,226.61 | 117.36 84.77 Apr. . 3,529.50 15,593.28 3,612.36 13,838.97 | 102.35 88.75 May oe 3,660.55 19,253.83 2,315.60 16,154.57 63.26 83.90 june “ .| 3,354.79 22,608.62 3,175.38 19,329.95 | 94.65 85.50 TRUCKING Costs PER Hour Cost TRUCKING Hours Cost PER Hour Month For Mo. Total For Mo. Total For Mo. | Average Jan., 1920. $1,198.20 $1,198.20 1,200 1,200 $ .998 $ .998 Feb. - 1,246.30 2,444.50 1,210 2,410 1.03 1.014 Mar. Oe 1,226.15 3,670.65 1,208 3,618 1.015 1.014 Apr. e 1,204.03 4,874.68 1,212 4,830 -993 1.009 May f 1,190.10 6,064.78 1,230 6,060 -967 1.001 June * 1,194.00 7,258.78 1,236 7,296) .966 .995 Proper Presentation Indispensable The fact should be emphasized again that it is wholly use- less to spend the money to collect a mass of figures and fail to display them in presentable and useful form. The ultimate presentation of any figures whatever in connection with an industrial institution is the final and actual test as to the real value of all the endeavor which has been made. A great many people think that it is unnecessary to spend money for neatly typewritten statements. They are much inclined to use pencil memoranda and rough sheets of figures which should never be dignified by the name of statements. The truth is, too much attention can hardly be paid to the neatness and clearness of the presentation of any figures which may be assembled for managerial or other purposes. CHAPTER XXII FINANCIAL STATEMENTS Value of Financial Statements The ultimate object of any manufacturing institution is to make money. The measure of every operation is its value in assisting to attain the ultimate object. In the past, executives of manufacturing plants paid a pre- ponderance of attention to those details which have largely to do with the actual manufacture of the product. This led many managers to give subordinates too much leeway in the pur- chase of the machinery and. equipment directly used in the producing of goods, and as a result too little consideration was given to the contributing features which have an essential bear- ing on the effective operation of the equipment. It was then found out that the actual mechanical operations of production were largely hampered if they were not properly served by the contributing operations of storing and supplying of material to be used in the manufacture. This caused more attention to be paid to all matters of storage and facilities for delivering the various raw materials and supplies to the scene of action. As time has gone on, it has come to be realized that still other matters required additional attention, in fact, that there must be a tightening up of all procedures which have to do with the management of not only materials, but men. All this has brought about a perfecting of methods of control through the medium of records, the necessity of whick is apparent to anyone who desires to manage a business on the basis of actual knowledge, not guesswork. This perfecting of records has not only extended to matters connected with the handling of materials in the plant, the scheduling of produc- 298 FINANCIAL STATEMENTS 299 tion, and the like, but has become most important in the ac- counting of costs—particularly as the recent increases in wages have made it necessary to be absolutely sure as to how far anyone can go with safety and still manufacture goods at a profit. Therefore, the importance of financial statements from a managerial standpoint can readily be seen. Nature of Statements Statements for managerial purposes must be complete. This does not mean that they should be voluminous—a man- ager should not be obliged to wade through a large volume of figures to find out what he wishes to know. But it does mean that the statements which are presented to the manager shall be in such condition that he will be able to find the answer to almost every question without having to ask for special figures. In other places in this volume, emphasis has been laid on the necessity of monthly statements. The methods set forth have been designed to enable anyone to work up accurate state- ments of profit and loss, verified by the control accounts in the ledger. The manager needs to have presented to him only a résumé of these statements in order to enable him to perform intelligently his duties as manager. This résumé should be assembled in approximately the following order. 1. Balance Sheet The balance sheet will show the assets and liabilities in exactly the same form as they are usually shown once per year. The figures for this statement are obtained from the trial balance of the various control accounts. The balance sheet shows also the profit for the month and for the year to date, which profit verifies the Profit and Loss account. In connection with each balance sheet there should be shown subsidiary statements or schedules giving information 300 COST ACCOUNTING in regard to various items which appear on the balance sheet, for example: 1. Schedules of general ledger accounts receivable, mean- ing other than customers’ accounts receivable. 2. Schedule of bills receivable, meaning notes receivable. 3. Schedule of raw material inventory balances, there being only one figure put in the statement represent- ing the total. 4. Schedule of work in process account balances. Sched- ules (3) and (4) may.be combined into one state- ment. Schedule of plant investment accounts. Schedule of prepaid accounts. Schedule of bills payable, meaning notes payable. . Schedule of general ledger accounts payable, meaning accounts other than those of creditors. g. Schedule of reserve accounts. 10. Detail of surplus account. CON, Aw The above schedules are given merely for illustrative pur- poses. In small businesses the items themselves may all appear in the balance sheet, but in larger institutions it is better, when making up a balance sheet, to cover the detail with only one item, in order to present a balance sheet in one-sheet form. It is always desirable to present a balance sheet on a single sheet of paper, if possible, and to have the explanatory sched- ules in their proper order on other sheets. When this method is followed, it is always best to follow each item on the bal- ance sheet with a reference figure or letter, designating the subsidiary schedule, and to head each schedule with its ref- erence figure. It is usually best to assemble two kinds of balance sheets, one of them designed for presentation to banks, and a com- parative form which is of great value to the manager. The FINANCIAL STATEMENTS 301 form for bank use is illustrated on page 311, and the com- parative form for managerial use on page 312. It will be noted in the statement on page 312 that two col- umns of increase and decrease are shown, one being the in- crease or decrease over the end of the previous year, and the other over the previous month. These comparisons are de- cidedly advantageous, as they bring out constantly the increase or decrease in all such vital items as inventories which, from a managerial standpoint, are exceedingly important. The financial end of the business is most decidedly inter- ested in the fluctuation of inventories, which results often in very stringent action to curb the amount of money tied up in them. That in turn results in pressure to liquidate raw ma- terial inventories and to take special measures to decrease the amount of work in process in the plant and turn it into money. 2. Profit and Loss Statement The profit and loss statement is shown in condensed form on page 314. Here again, the device of subsidiary statements is used, in order to reduce the size of the profit and loss state- ment. In smaller enterprises it is possible to put all detail in the profit and loss statement itself, but it is usually found best to confine the main profit and loss statement to the head- ings as shown in this illustration, relying on the subsidiary schedules to give greater detail if desired. In connection with the illustration shown, the following schedules may be re- quired for further analysis of items shown in the profit and loss statement : Schedule of Sales Results. Nearly every industrial insti- tution finds it advantageous to have more than one sales ac- count. For instance, an agricultural implement manufacturer may find it of advantage to have a Tractor Sales account, a Tractor Repairs Sales account, a Cultivator Sales account, a Cultivator Repairs Sales account, and so on, with proper analy- 302 COST ACCOUNTING ses of the sales. In connection with each Sales account there are always two other accounts—Freight Out on Sales and Cost of Sales. Therefore, a subsidiary statement of sales would have for each Sales account a statement of the gross sales, and a statement of the freight paid on delivery of such sales de- ducted from the gross sales, which leaves the net value of each sales division. There would be shown also the cost of sales, which means the figured cost of the article shipped, covering material, labor, and factory overhead at standard rates. This would then leave the net result of each particular sales division, permitting the figuring of the percentage of profit in each case. The net results of all the individual sales accounts would equal, in total, the accumulated figure shown in the profit and loss statement for each item of sales, freight out on sales, sales cost, and gross profit. Schedule of Plant Balances. In any institution where the number of operating departments is quite large, and where it is not an advantage to carry into the plant balance section of the profit and loss statement the balance of over- or under- absorbed burden of each department, it is an advantage to have a subsidiary statement called “‘Plant Balances” on which these over- or under-absorbed balances are shown after each depart- ment has been given credit for the actual burden applied to costs. The net result as shown by this statement is either a de- duction from or an addition to the gross profit shown under the sales headings. That gives in the profit and loss statement, after this deduction or addition has been made, the net manu- facturing profit on the goods sold. Schedule of Administrative Expense, and Schedule of Sell- ing Expense. As these two headings require the same com- ment on account of being largely of the same nature, they are here grouped together. FINANCIAL STATEMENTS 303 It is hardly ever advisable to have statements of adminis- trative and selling expenses made up in the cost department proper. For this reason they are used directly in the profit and loss statement and may be put in the statement itself, or may be cared for by subsidiary statements with simply one item in the profit and loss statement for each. In the case of the particular system here described these two subsidiary statements are made up of the charges to the standing order codes provided for each of these divisions, to- gether with any general charges which may come through other expense accounts. Financial Section of Profit and Loss Statement In the financial section of the profit and loss statement appear the following headings: Discount Taken Interest Received Dividends Received Discount Given Interest Paid PROD It may be well to discuss briefly some points in connection with these accounts, particularly in connection with the fact that they should always be shown separate in the profit and loss statement, and not included either as a debit or credit to any expense account which is included in the cost of goods. 1. Discount Taken. In many manufacturing plants the discount taken on purchases has been deducted from the in- voice price of the material and. the material entered on the stock records at the discounted value. This is believed to be bad practice. The discount referred to, it should be remembered, is merely the cash discount taken on account of paying bills promptly. It is not to be confused with trade discounts which 304 COST ACCOUNTING are involved in actually adjusting the price at which the ma- terial is bought in the first place. The cash discount is purely a financial transaction. The reduction of the cost of the prod- uct is made possible merely because the company is in such a prosperous condition that they have cash enough to discount their bills. The cash discount, accordingly, should be a direct credit to the Profit and Loss account in the financial section as an added profit to the company on account of being able to pay bills promptly. 2. Interest Received. Interest received is also a straight profit derived from good financial management, and may be received as a result either of open accounts or of large bank balances or loans. Interest should not be credited to any- thing other than the straight Profit and Loss account. It usually acts as an offset to transactions which affect the Profit and Loss account in the opposite way as explained later. 3. Dividends Received. Many times a manufacturing plant is successful to the point where it is possible to invest money in the stock of another company from which dividends are received. Such dividends most certainly constitute a straight profit and loss item, being a financial profit which accrues from the fortunate situation of being able to make the investments. 4. Discount Given. The cash discount allowed customers who pay their bills on a cash or short-term basis is unfortu- nately often included in the selling expense section. It is argued by many that the cash discount is a deduction from the price at which the goods were sold and therefore should be debited as an expense, entering into the final cost of the goods through the medium of the selling expense. While it is, of course, important to safeguard the affairs of any company by crowding into the cost all possible items, the true theory here is that the selling expense should not be burdened with this cost. In fact, a selling department which is jealous of its costs most certainly has reason to object to FINANCIAL STATEMENTS 305 this item being put in as a part of the expense incurred in selling goods. Whether the account is paid in a week or 10 days or net 30 days, is indeed a matter of no interest to the selling department. In fact, in such a case a selling depart- ment would be quite justified, with customers of good credit, in recommending them to pay in 30 days, so that the selling cost should not be burdened with the cash discounts which might be taken. Discount given should certainly be a debit to the Profit and Loss account in the financial section. The discount is merely an inducement offered by the financial department of the busi- ness to obtain quick money returns on sales made, and thereby be enabled to make a much faster turnover of the company’s working capital. 5. Interest Paid. The disposition of interest in the general accounts has been much debated. While a company will have entries in both the Interest Received and the Interest Paid accounts, the entries appear in volume in only one of the two accounts. If a company is prosperous, the preponderant entries will be in the Interest Received account; on the other hand, if the company is not well fixed financially, and is there- fore obliged to borrow from banks to a considerable extent, the natural result will be a preponderance of entries in the Interest Paid account. Interest received is rarely credited either to any administra- tive expense account or to any other account except as a straight profit and loss item. That being the case, why should interest paid be included in the administrative expense? Interest paid is largely brought about by the fact that a company has not sufficient capital to take care of its financial obligations properly. On the other hand, the usual reason for borrowing money is that a company does not care to in- crease its capital stock, as it is figured that money can be bor- rowed at 6%, and that a manufacturing profit of, say 15% 306 COST ACCOUNTING or 20%, can be produced, leaving a net additional profit of from 9% to 14% to go into dividends for the existing stock- holders, instead of dividing this additional profit with the additional stockholders who would participate if the capital were increased to obviate the necessity of borrowing the money. It would seem quite proper, accordingly, to class interest on borrowed money as a reduction of dividends, this being the actual result as outlined above. The suggestion has been made that placing the interest paid in the administrative expense will permit the recovery of the interest as part of the cost before the selling price is set. This is a very fine plan in theory and perhaps in some cases works all right, but not in the case of two plants manufactur- ing identically the same product, by identically the same proc- ess, and with approximately the same grade of organization. One of these plants has no need of borrowing money, whereas the other is undercapitalized and is obliged to bor- row a good deal. Their manufacturing costs up to the admin- istrative expenses may be regarded—for the sake of a highly competitive illustration—as the same. The result, therefore, is that the company with plenty of capital has an administra- tive expense lower by the amount of the interest which the other company is obliged to pay and which is added to its administrative expenses. Each company sets its selling price on the basis of a percentage added to their total cost, which immediately places the selling price of the company which is short of cap- ital at a figure somewhat higher than the other company. Only one result occurs, namely, that the company with the higher price loses the business, and the fine theory in regard to the recovery of the interest vanishes in the cold fact of lack of orders. A company with large bank loans may attempt to put its interest into its costs and may temporarily succeed. A time FINANCIAL STATEMENTS 307 arises, however, when the banker suggests that the lines of credit are too large and that an issue of preferred stock should be put on the market. This is done. The result is that the very same interest which was paid on the bank loans is now paid as dividends on preferred stock and the administrative expense is immediately relieved of the charge which it has been standing for the interest on the borrowed capital. Is this illustration alone not sufficient to convince one of the fact that interest on bank loans are really in the line of a deduction from dividends? The main point, however, is that it is a real and serious fallacy to believe that the inclusion of interest on loans in the administrative expense is a means of recovering this interest as against competitors who sell goods without such a charge in their costs. To include the interest in the cost is in reality dangerous in the extreme as affecting the volume of business. While it may not be noticed in any particular cases, the com- pany is actually put into sharp competition with companies who are not subject to such a volume of interest on borrowed capital. Therefore, it seems beyond question that interest paid on bank loans should be a direct profit and loss item and should not be included in any way in the cost of the goods. 3. Burden Statements Next following the profit and loss statement, with its sub- sidiary statements, should follow the burden statements in the order of the departments as specified in the standing order code. (See Chapter VII.) An illustration of a burden state- ment is shown on page 315. The number of these statements will depend entirely on the number of departments which re- quire a statement of their burden. Each statement will be numbered or lettered at the top with its designating number or letter, which is its identifying ref- erence in the plant balances statement, the net result of which 308 COST ACCOUNTING is shown in the profit and loss statement under the heading “Plant Balances.” These identifying letters are also used in the distributions made in the expense accounts which follow. Each burden statement is made up of the three main sec- tions, namely: burden labor, maintenance and supplies, and apportioned expenses. In the burden statement shown on page 315, the large group of burden known as ‘“‘Maintenance and Supplies” is shown under two headings: ‘Maintenance’ and “Sundry Expense Material.” Under the apportioned ex- penses, each item is followed by a reference to the expense statement whence it comes, to enable quick reference. The over- and under-absorbed balances of each burden account will have the reference letter showing the statement to which this balance was carried in the Profit and Loss. 4. Expense Accounts Immediately following the burden accounts will be the various expense accounts arranged in the same sequence in which they appear in the standing order code—as illustrated on page 310. In these accounts, there are two main sections, the first being the charges made directly to the account, and the second being the apportioned charges. Here again, the index letters will be used to show the origin of certain charges which are made to the accounts and the accounts which are charged by the distribution of the expense accounts. Reading the Statements Consider the position of a manager receiving a set of statements for the month. It is natural, first of all, to look at the profits in the bal- ance sheet to see how much money was made during the month. It is assumed that this profit was either larger or FINANCIAL STATEMENTS 309 smaller than anticipated—on the basis that a manager is usually either surprised or disappointed. At the same time the manager has been quite concerned over the amount which it has been necessary to borrow from banks, and therefore wishes to find out why the bank account is so small. He therefore first glances at the raw material and manu- factured stock inventory in the balance sheet and discovers that it has gone up very materially during the month. He then turns back to the statement which shows the detail of inventories and discovers that the steel stock took a decided jump of, say, over $60,000. He immediately rings for the purchasing agent and re- ceives the explanation that a lot of old stock orders had been received and paid for during the month. He also learns that in the meantime certain orders for spot delivery had been placed to keep the plant going, and that.this material was in reality surplus stock which was largely unnecessary. It then becomes a purely executive matter not only to decide what to do about this particular material, but to survey the conditions of other outstanding orders, in order to curb the amount of material coming in if the financial conditions of the concern so demand. He then gives attention to the fact that the profit is smaller than was anticipated. Turning to the profit and loss statement (page 314) for an explanation, he sees that the shipments have been normal and that apparently the percentage of profits at standard rates of burden is satisfactory. But in looking at the plant balance he finds a heavy penalty in underabsorbed overhead which leads him to turn to the subsidiary statement of plant balances for an explanation. Here he finds that in four or five of the most important departments there is a very large amount of underabsorbed burden which accounts, to a considerable extent, for the penalty in the profit and loss account. 310 COST ACCOUNTING He therefore turns back to the burden accounts of these particular departments and he finds that the actual expenses of the departments were on a normal basis, but that the pro- ductive hours of work accomplished during the month were very low—in fact much lower than the preceding month. He now has located the cause of the losses, but this, of course, is as far as the financial statements can go. He therefore calls for the general superintendent to ex- plain the conditions, who in turn calls for the manager of the industrial relations department to account for the heavy decrease in productive hours. It is learned that in one de- partment the foreman has not treated the men very well and as a result he has had a very heavy turnover. He also learns that in another department the help has been largely made up of a certain nationality who have become very independent and have during the month availed them- selves of many holidays on account of events of special inter- est to their people. In other departments he finds other features of labor con- ditions which may or may not account for the heavy short- age in the productive hours applied in the plant. He is in a position, therefore, to expect action on the part of the industrial relations department and of the general super- intendent, perhaps by changing the foreman in the department where the men cannot get along, and by taking steps to sprinkle in different nationalities in the department where there was a large concentration of one element, in order to stabilize conditions there. In turning back to the expense accounts, the manager also notes that the Electric Power account has increased to a very considerable degree during the last month. He then remembers that the power company has been able to secure a large increase in rates. He realizes that the result in his expense account is such an increase as to make it appar- FINANCIAL STATEMENTS 311 HoLpen MANUFACTURING COMPANY (A) CONDENSED BALANCE SHEET, JANUARY 31, 1920 Assets Current Assets: Cash on Hand and in Banks..................00- $0000.00 Bills Receivable... 0.0.0... cee ee eens 000.00 Accounts Receivable—Customers..............-. 000.00 Accounts Receivable—General Ledger......... (D) 00.00 Liberty Bonds.................. (E) $ 0000.00 E Other Bonds.-.................. (E) 0000.00 0000.00 $ 0000.00 Merchandise Assets: Raw Material and Manufactured Stock........ (F) $ 000.00 ‘Material in Process........................-(F) 000.00 0000.00 Plant Assets: Machinery and Equipment...................... $ 000.00 Real Estate and Buildings....................... 000.00 0000.00 Miscellaneous Assets: Prepaid Itemssy s04 sige sess ansgee se seers Ooh Fea Be $ 000.00 Other Investments...................02000-5 (E) 0000.00 Good-Will cic ieseacsa ced oad iaesr gen cee da eay ee 0000.00 0000.00 TO talASSetS 2 seis cease Ga eis Se BY Re eae ceeds $00000.00 Liabilities Current Liabilities: Bills Payables vsti sce ges veh sees eee savas eee $0000.00 Vouchers: Payable ccs succccaweecdeawee kere cees 000.00 Accounts Payable—General Ledger........... (G) 00.00 Accrued Pay-Rolli since ska gus deaouey sas saws as 00.00 Accrued Miscellaneous.................00 000s 00.00 $ 0000.00 Reserves ie diss. cv unin oo wees haa Mewes 4 Hind wae s lortab eee eeregae (H) 0000.60 Capital Stock: Capital Stock, Common.................-.. 000s $0000.00 Capital Stock, Preferred..............0...000005 0000.00 0000.00 Surplus, January I, 1920....... 0... e eee e eee ee $0000.00 Less: Income and Profits Tax, 1919...... $ 0000.00 Dividends, Common.............. 0000.00 Dividends, Preferred............. 0000.00 Adjustment Account........... (I) 000.00 0000.00 $0000.00 Plus: Profits to January 1, 1920......... $ 000.00 Profits of January, 1920........ (C) 0.00 0000.00 coco .co Total Liabilitiess:<4¥% eae ie heh Ba 2 ees BORER Ree hea $eccco.0o 00° 0000¢ 00° O0000¢ | 00° C0000 | CO’ 00000E jt sjassy [FOL 00°000 ¢ 00° 00000¢ | 00'0000 ¢ | 00°0000 ¢ 00°00000 | 00°0000 00'0000. fret e tt e tt teteees TILM-poory 00°00000 | 00°0000 00° 0000 (en EE S}USUI}SOAUT I9TIO 00°000 ¢ 00‘ oo000g | 00'0000 ¢ | 0O'0000 g J suia}] prederg © ISJOSSY SNOSUTTSISIP[ 00°000 ¢ 00 o00000¢ | 00°0000 ¢ | 000000 ¢ 00°00000 | 00°0000 00°0000, feu ssplg pue o7e1Sq [POY 00°000 ¢ 00° 00000¢ | 00°0000 ¢ | 000000 ¢ | T quourdinby pue Arouryoeyy isqjassy JUeTg S 00°000 ¢ 00° 00000¢ | 00°0000 ¢ | 000000 ¢ fa 00° 000 00° 0000 00° 000 00° 000 Cy er ees ssod0Ig Ul [elI9ze][ Zz 00°000 ¢ 00°00000 ¢} 00°0000 ¢ | 00°0000 ¢ |(4) FO0IS P,Pe], IA pue [ewoyep Mey =. isjessy sSIPUBYOIEy[ a 00°000 ¢ 00° o0000¢ | 00°0000 ¢ | 00°0000 ¢ < 00° 000 00° 000 oo'000,) §=(q) Ts spuog 10410 ba 00°000 00° 0000 00° 0000 00° 0000 ‘‘spuog Ajieqrvy n 00°000 00° 000 00° 000 00° 000 (CQ) Jaspe] ‘uan—s[qeateooy = s}UNODDy & 00° 000 00° 0000 00° 0000 00°0000, =|" **” sIOUIOJSNO—oj{qeAIsoayY sjuNODOW 00°000 ¢ 00° 000 00° 000 COOOO: | |S eres BIQeATsNaY STITT 00000 ¢ 00°0000 ¢ | 00°0000 ¢ | 00 0000 ¢ Jt syuvg Ul pue puey uo ysed isjessy qUueLND asva.10eq asvatouy oz61 ‘1€ A[n[joz61 ‘oe aun [/6161'1€ -99q “AIq@—oseetaq | “yjq—eseeioeq | . : pey—estetouy | pey—eseerouy OW SLL OWN S821 ns PEL. ‘IX WSC] ‘OW ISP] JO pug Jo pug jo pug SASS Ss oe ie) oz61 ‘If AINf ‘LAGHS FONVIVG GALLVAVANOD (gq) ANVdUWOd ONTENLOVENNVI, NAGTORL 313 FINANCIAL STATEMENTS 00‘ 0000¢ 00° 00000¢ | 00° 00000¢ | 00° 00000$ Je Sor}Tpiqery [ejyoy, 00'00 ¢ 00'0000 ¢ | 00°00000¢ | 00’ O00000¢ |° °°” oz61 ‘1¢ A[nf{ Jo se snjding 00'000 ¢ 00°0000 ¢ | 00'00000¢ | 00° COCD0g 00°00 00000 00° 0000 000000 (CO) Sore sr oz61 ‘Ainf Jo syyorg 00°000 ¢ 00°0000 ¢ | 00° 00000¢ | 00° O0000¢ |°-* **YAUOUT yUaLIMD 4sI 04 S}YOIg :snig 00° 0000¢ 00° 00000¢ | 00'O0000g Jot suotjonpaq ssey sntding 00°000 ¢ 00°0000 ¢ | 00°0000 ¢ | 00'0000 ¢ 00°000 ¢ | 00°000 00° 000 (Doc yunoooy Jusuysn{py 00° 000 00° 0000 00°0000, ft periejeig ‘spuapraiq 00°000 ¢ 0o°0000, fe wOUIUIOZ ‘spueprlAIq: 00°0000 ¢ | 00°0000 ¢ |" 6161 ‘xe syyoIg pue ewooU. ~—: sso’T 00°0000 ¢ | 00°0000 ¢ ttt oz61 ‘1 Arenuef ‘snjding 00° 00000¢ | 00° 00000¢ | 00‘ o00000¢ 00° 0000 00° 0000 00° 0000 ‘*paneyeig ‘901g yeydea 00°0000 ¢ | 00°0000 ¢ | 00°0000 ¢ |* ‘uOWUIOD ‘y903g Teydedg :y003g [e}IdeED 00°000 ¢ 00° 0000 ¢ | 00°0000 ¢ | CO'O000 ¢g (A) Tt SaATaSoY 00 ‘0000¢ 00°0000 ¢ | 00° 00000¢ | 00°0000 ¢ 00°00 00° 000 00°00 OOOO; | freer eter se res SNOdUETIOSTJT Pantooy 00°000 ¢ 00-0000 00° 000 00°;000) =f er Toy-Aeg paenioy 00°00 00° 0000 00° 000 00° 000 (9) -s98peT [e1ouen—ae[qeseg “spoy 00° 000 00 ‘00000 00° 0000 00 * 0000 BREE ae MAE BIAS AS eG AS aqedeg siayono, 00°000 ¢ 00° o0000¢ | 00°0000 ¢ | 00'0000 ¢ fs aqedeg Sitg Hsorqery uermn) aseaivacT aseaINUy oz61 ‘1¢ An[joz61‘o€ aun[|6161 ‘1£0aq “Mq—eseeiooq | yYq—eseeisq | , : ; pey—eseeiouy | poy—esvoiouy ey dag ae ee os “IK seq “OI ASP] jo pug Jo pug Jo pug SOUVIQDYT 00" 00000¢ | 0000000 ¢ | 00°00000 ¢ | 00°O0D000 ¢ (YW) oz61 ‘Arenuef ‘yyolg JN 00°00000¢ | 00'0000 ¢ | 00°0000 ¢ | 000000 ¢ 00° 00000¢ | 00°0000 00° 0000 OOFOG00. PP et etree mig mee sae s asuodxy a7eIsq [Bay 00 ‘ooo000¢ 00°0000 ¢ | 00'0000 ¢ | CO'0000 gp tt ** *@uOOUT 9784Sq [Pay rayeysy [ebay 00° oo000g | 00°00000 ¢ | 0O'C0000 ¢ | CO’O0000 ¢ [Te yenueury pue “Bag “urupy ‘ys0D “S}T aaoqe yWolg 00 o0000g | 00°00000 ¢ | 00°0000 ¢ | 00'00000 ¢ 00°00000 | 00°0000 00° 0000 DOF 0000 ee eee eee eS pled 4selo}Uuy wo 00°00000 | 00°0000 00° 0000 OOOGOO® — [eer esr tetee arcmin marron arte UaATZ) JUNOOSIC, z 0000000 00° 0000 GOO" GO00 [ERP E RR rE eR ae Peateoay SpuaprAiq ft 00°00000¢ 00° 00000 00° 0000 OO OOOG 4:8 ae ee Pearce yY 4S9190}UT a 00°o0000¢ | 00°00000 ¢ | 0070000 ¢ | CO'0000 ¢ [Tt uayey yUNOOSIC, = :pTeroueury oO 00° O0000¢ | 00° 000000¢ | 00*O00000¢ | 00‘ O00000¢ |'S]Jag pue “UUpPY ‘ys0_D “BI eAoge yYyoIg Oo < 00° 00000¢ | 00'000000¢ | 00°000000¢ | 00° OCO0000¢g a 00 * 0000 00° 00000 00° 00000 00 ‘00000 CIND ty wee oe keg asuedxg Surya 6 00°0000 ¢ | 00°00000 ¢ | 00°00000 ¢ | 00° C0000 ¢ (JT) dxq earzvel}stulWpy oO :2ul]jag pue sAT}eI]SIUIWIpy 00°*00000¢ | 00° 000000¢ | 00*000000¢g | 00: O00000¢ | Tt: WoIg Surmnjoejnueyy JON 00° 0000 00" 00000 00°00000 00° 00000 SPE eee rere soourleg juelg 00° 00000¢ | 00° O000000¢ | 00‘ OO00000¢ | OO’ CODD0OG Js yYOIg ssoin) 00°00000 00000000 00° 000000 007000000 |(f) jSODZ saTeg TeyoL, 00° 00000¢ | 00° 000000¢ | 00° O00000¢ | CO OO0D0D0D0G Jo Ts SeTes ON 00°00000 | 00°000000 | 00°000000 | 00000000 |(f) saTeg UO NO Ws 00° 00000¢ | 00°000000¢ | 00° OO00000¢ | CO COOD00¢ |([) UT soTeg [ejOL, asveleqd | esvaiouy | 6161 “oaq | oz61 “uef jayeq o} [e}OL, a ~” (9) oz6I ‘AYVANV[ JO HINOJT ‘SSO GNV LIdOUd TVYANAD ANVdWOd ONINALOVAANVI, NAATOPY FINANCIAL STATEMENTS Hoitpen MANUFACTURING COMPANY Macuine Burpen Account, JUNE, 1920 315 (AA) —= = Jan. 1 to Month of | Month of June 30, June, May, 1920 1920 1920 Burden Labor: M&1 Foremen and Assistants ............-.- $ 0000.00 | $ 000.00 | $ 000.00 2 Storekeepers and Timckeepers 0000.00 000.00 000.00 3 General Labor.......... 00,00 0.00 0.00 4 Cleaning and Sweeping... 000.00 000.00 000.00 § Oiling Shafting.............. os 00.00 00.00 00,00 6 Work on Account Shop Error. As 7 Shipping Expense..................0065 000.00 00.00 00.00 8 Inventory Expense 000.00 $ 0000.00 $ 000.00 $ 000.00 Maintenance: SS MS-31 Machinery.............000000 a abe eae $ 0000.00 $ 00¢c.99 $ 000.00 32 “Woolsis ii:5 waunsanaeayads wxaind dare « F 0000.00 000.00 000.00 33 Dies, Jigs, and Templates. . 1a% 000.00 0.00 0.00 34 Electrical Apparatus. ..... isis 000.00 00,00 0.00 35 Belting................ 000.00 00.00 00.00 36 «©6Fixtures. sig: weer as 000.00 00 00.00 37. Other Equipment. ANE yiayegra ateciag a eaaa eS 00,00 .00 00.00 $0000.00 | $ 000.00 | $ 000.00 Sundry Expense Material: ss | SS MS-s1 Drills... 2.2... 62 cee ee eee $ 000.00 $ 00.00 $ 00.00 52 Small Purch. Tools not otherwise specified 000.00 00.00 00.00 53 Lights. , sent a aba ear aye HAM peace 000.00 00.00 54 Oils and “Waste . en 000.00 00.00 00.00 5S Miscellaneous.............ceceeee cree 000.00 00.00 00.00 ¥ 000.00 | $ 000.00 | $ 000.00 Total Purely Departmental..... seeeeeeesss| $ 0000.00 $0000.00 | $0000.00 Apportioned Expenses: SSS = | Prop. of Expense Acct. “A” $ 0000.00 | $ 000.00 | $ 000.00 o epE 0000.00 000,00 000.00 *« —* Gen. Stores Expense 000.00 00.00 00.00 “ Trucking Expense........ 000.00 00.00 00.00 = “ Liability Insurance.................--. 000.00 000.00 000.00 Power, Light, and Heat...... 0000.00 000.00 000.00 Miscellaneous Expense. . 000.00 00.00 00,00 Depreciation......... nes 000.00 00.00 00.00 Ons isp ccesecs evar seer nouies scans evete enh ood Blank anal iteDans 0000.00 000.00 000.00 $00000.00 | $0000.00 | $0000.00 $00000.00 | $0000.00 | $0000.00 Less—Reclaimed Scrap. ............-2--0.0-0005 $ 0000.00 $ 00.00 $ 000.00 $00000.00 $0000.00 $0000.00 100% on Prod. Labor carried to Work in Process Burden Acct 6.0... ec ce ccc cceeseer ene cenn en $00000.00 | $0000.00°| $0000.00 Balance carried to Mach. Profit and Loss Acct....| $ 0000.00 | $ 000.co | $0000.00 316 COST ACCOUNTING (ww) HoLtpeEN MANUFACTURING COMPANY TRUCKING EXPENSE, JUNE, 1920 Jan. 1 to Month | Month of June 30, June, May, 1920 1920 1920 Trucking Expense: G-1o1 Electric Truck Labor....... $ 0000.00 | $ 000.00 | $ 000.00 102. Maint. of or Supplies for Elec- trie Trucks... ac.esacece. 0000.00 000.00 000.00 103 Gasoline Truck Labor....... 0000. 00 000.00 | 000.00 104 Maint. of or Supplies for Gas- f oline Trucks............. 0000.00 000.00 000.00 105 “Teaming. ec. inne e cutee sa 0000.00 000.00 000.00 106 Miscellaneous.............. 00.00 .00 0.00 $00000.00 | $0000.00 | $0000.00 Apportioned Charges: Depreciation.............0...20055 $ 000.00 | $ 00.00 | $ 00.00 Electric Power..............4. (QQ) 000.00 00.00 00.00 Liability Insurance..............-.. 00.00 00.00 00.00 $ 000.00 | $ 000.00 } $ 000.00 Total Expense,,............ ,..| $00000.00 | $0000.00 | $0000.00 DISTRIBUTION For MONTH Dept. 1 tose eea.. (X) 00.00% $ 000.00 Di ido pote the ct ...(HH) 00.00 000.00 Boe ye cuahe aes BEES (JJ) 0.00 00.00 AG, Adee tintarennes ach fs (KK) 0.00 00.00 lie daiedye Rea ee (NN) Gus antwiacsannees (OO) 0.00 00.00 oF Kectih Wee intel eer he (MM) _ 0.00 00.00 Soin ca temangies (PP) .00 0.00 $0000.00 FINANCIAL STATEMENTS 317 ent that the company may well consider the installation of their own auxiliary power plant to take the peak loads, in- stead of being obliged to pay a large service charge for power which sometimes is not used. Possibilities of Careful Study of Statements Limitations of space in this volume prohibit the further analyses of the countless managerial uses which may be made of statements put up in the form specified in this chapter. It would require a volume nearly as large as this discussion of cost methods in general, to cover satisfactorily all the uses of a thorough reading of a proper set of statements. Above all things, a manager should remember that a com- prehensive set of statements can be used by him for a most positive regulation of all conditions. Every manager must remember that it is up to him to perfect himself absolutely in the knowledge of how statements are prepared and how to read them, and that if he should so prepare himself, he is in a position to read the efficiency of every responsible official and department in his institution. CHAPTER XXIII USE OF COST REPORTS BY FOREMEN Arguments for Publicity of Costs A well-known firm of industrial engineers has repeatedly made the statement that 80% of the blame in the case of non- production lies with the management, meaning that only 20% of the fault can be in any way attributed to the workers. This failure on the part of the management extends into many branches of the industrial institution, covering not only failure to provide the means of actually producing the goods, including all manner of devices and equipment for facilitating the movement of goods, but also failure to furnish the fore- men and assistants with the proper backing in the matter of records showing what they are accomplishing. Probably in the great majority of manufacturing insti- tutions today, figures by the thousand are compiled and safely Salted away in files where no one makes sufficient use of them to warrant their compilation. In fact, it is quite a prevalent habit for plants to consider that cost figures which have been compiled are purely of a confidential nature, and therefore must not be known by anyone who is interested. This is one of the most fatal mistakes that can be made. Its consequence is that no steps whatever are taken to give superintendents and foremen a real knowledge of what is going on, which will prompt them to better the existing conditions. Importance of Cost Figures to Foremen The objection is often urged that all such figures are con- fidential; that if they are released for more or less general knowledge, the figures will leak to someone outside of the 318 USE OF COST REPORTS BY FOREMEN 319 plant, and as a result some competitor may learn something about the business which otherwise he would not know. As a matter of fact, the figures in respect to the various expenses incurred by the several departments of the business are peculiar to that business alone. Even if they were known by someone else, the chances are very much against their being of any particular use. Even within one industry the internal workings of individual concerns are so different that figures pertaining to any one department are absolutely valueless to an outsider. The conclusion seems clear that withholding from operating superintendents and foremen the figures which would mean so much to them if available in comprehensive and usable form, is plain failure on the part of the management. It is most strongly urged, accordingly, that all possible use be made of cost figures, even to the point of preparing special statements on special forms for the various superintendents and foremen in order that they may know exactly what they are accomplishing. Burden Statements for Foremen and Department Heads The head of each operating department should be provided each month with a copy of the statement of his burden for the past month. Form 34 illustrates a form for such a state- ment. It will be noted that this form provides for the figures for six months, together with the average of the previous six months. It is not sufficient to supply a man with the figures for a single month. The great value of figures lies in making possible the comparison of present and past. This form enables the recipient to get the true measure of how each item which makes up the burden is running as compared with past experience, both as to money and as to the ratio of each item to the basis used for the application of burden. CHL xe ‘az1g) ‘yuowaye}g veping A[yIWOW eaperedwoy ‘be WOT N39 Yad LN32 Yad LNnonY iN3D uad LN3D Nad LNNOWY NAD Yad N32 Yad INNOWY 2NaD Yad N39 Yad ANNONY BOVvuaAV HLNOW aOVuRAV HLNOW BDVuaAV aDvUuaAV "wOV1a NI MOHS Sa9VLNS9uad Gasvayoaa 5 SNIGNZ SHLNOW XIS ¥O3 ‘aay NI MOHS SA9V1N39uad GASVAYONI - SN3qGuNg ATHLNO a : ‘ 2 SSVW ‘NOLSOG ‘OOD oO oO aa H Ww Oo oO AN] Yad LN3D Yad INNOWY N32 43d LNaD Yad LNNOWY SHLNOW XIS. LINNODDY Seouoe aDVUSAV HINOW 4YOd BOvVYaAV HLNOW 4Od biol SOVESAY ONIGNVLS Isnonv—Advauaas AINF—AUVANVE ‘JWIL SHL WIV G3HOLVM 38 1sMW GNV dN SN Siva NazquNs "NMOG LNO ONY HOLvM ‘ATESLI dO SUVS SAIVL ATSAILVEVINOD YOEVT SALLINAGONS O% ONIN SHL 61 LNANLUVSO HOVS NI NaGUNd JO SOVINZOUZd SHE 10 Nos|IuVd WOD ‘AGUNG Jo 3DVINADWad SAAD ORWT BAILINGOUd Ad GEGIAIG NAGUNG | oO N 7 MNLOIVANNVN N3qd10H USE OF COST REPORTS BY FOREMEN 321 The form is quite simple and practically explains itself, so that only a slight description is necessary. The first two columns provide for the standing order numbers and the name of the account, or the work covered by each order. This is followed by the column in which is entered the average of the p-evious six months. With the exception of their month headings, the next six blocks are absolutely identical, the amount of money for each standing order for each month, and the per cent of each item to the direct-labor cost being entered in each block. The form shown illustrates the use of the percentage on the direct-labor cost basis rather than on the direct-labor hour basis. If the direct-labor hour basis is used, this heading would read “per hour” instead of ‘‘per cent.” The third column in each block shows the average per cent from the beginning of the six months’ period for each item. In entering figures on the form, all percentages which are higher than the figure for the same item for the previous month are entered in red. In other words, if an item showed $300 last month and $320 this month, the $320 would be entered in red. If it should have happened that the direct labor had also increased and the percentage of this item for the month had decreased, the percentage would be entered in black. Ii, however, the percentage had increased, as well as the amount of money, the percentage would be entered in red. By means of this device attention is directed graphically to all figures which are increasing, which make it far easier to detect the matters in the report which need attention. The amount of money can easily increase and yet the result be satisfactory. This, however, will be plainly indicated by the percentage or the cost per hour, whichever is used. It is perfectly natural for a business which is increasing to have larger sums of money spent for each item, but so long as the ratio of this expenditure and the direct or productive work 322 COST ACCOUNTING which it is serving stays the same or diminishes, the depart- ment is running in a way which is to be commended. Use of the Burden Statements If a careful study is made of the comparative burden re- port just described, it may easily be seen what far-reaching benefits will accrue from its use. The one thing never to lose sight of is that any expense or burden account is made up of small units. Proper regulation of these small units, constant watching of everything that contributes to each of them, and constant vigilance in keeping down the expenditures for every one will decrease the burden cost of the business to an extent which will indeed be surprising. To give merely one illustration, in the majority of indus- trial plants, the mechanical work is under the jurisdiction of a master mechanic. The various repair men are detailed from one department to another as their services are needed. These men being under the jurisdiction of the mas- ter mechanic are, unfortunately, regarded by the foremen of the various operating departments as being of no particular interest to them. This feeling can be entirely eliminated if the foremen are provided with the statement of their monthly expenses on Form 34, where they can see the amount of money with which they are charged for maintenance of equip- ment in their department. An instance of this was noted in a large plant where a foreman, on receiving his first statement of his burden expense for the previous month, was instantly struck with the size of the charges to his department for the repairs of certain equip- ment. He came to the cost office and protested that the repair men spent most of their time sitting around and talking and that the actual repair work only took a few hours. The net result, however, was that this foreman realized in a way that he never did before that, while the men con- USE OF COST REPORTS BY FOREMEN 323 nected with the master mechanic’s staff were detailed to his department, they were in reality his own men, since he had to pay the bills for the time they were there. It is needless to say that thereafter he paid just as much attention to any out- side men who were in his department as he did to the men directly on his pay-roll, knowing that he had to pay the bills in his burden account for all the time so spent. Use of Burden Statements Becomes a Game The remark has been made in many plants, after the fore- men have been given regular comparative statements of their monthly burdens, that the operation of their departments was like playing a game. By this they meant that they looked for- ward to receiving these statements with almost as much inter- est and anticipation as in watching the score-board at a base- ball or football game. Many foremen have expressed the opinion that it was even more interesting than any game of amusement could possibly be. In one instance which came under observation, a number of men collaborated in the designing of a variable speed drive for emery wheels, the purpose of which was to keep the speed at the circumference of the emery wheel identically the same as the wheel wore down. After the installation of the ma- chines it was a constant pleasure to see the expense for emery wheels decrease. Far greater efficiency could be obtained from the wheels through keeping them up to speed, and they could be worn to a much smaller diameter by increasing the speed as they wore down. The net result was a decrease in the emery wheel expense of over 80%, an item which amounted to many tens of thousands of dollars to this depart- ment in a year’s time. Every item making up the burden is subject to treatment of the same nature. A careful study of the circumstances in connection with each one will easily develop some method of 324 COST ACCOUNTING reducing cost, and as a result of the various schemes worked out the monthly statement does in reality become a score-board to record the result of the industrial game which is being played. Watching Direct-Labor Cost Keeping track of the direct cost is different from keeping track of the indirect cost. To determine how the direct cost is best watched, depends very largely on whether or not the manufacturing plant is running under a method of production control. When a method of production control is followed, and the various direct operations are carefully scheduled at stand- ard rates, the natural way of controlling the direct operations is to keep in constant touch with performance as shown by the control methods. Each operation on each piece, whatever the line of industry, should be subject to some approved stand- ard of speed—a certain number of pieces per hour or per day, as may be best. With this method it is necessary—and fair enough—to wait until an order is completed before knowing exactly how that order is running in comparison to the speed estimated for it, on the basis of past experience. The superintendents and foremen should, however, be given the advantage of seeing the actual cost sheets on each completed order, so that they may see exactly how successful their department has been in producing the work assigned. Even without being able to watch the progress of the work as it goes on, there is a psy- chological effect produced by looking at the completed cost sheet, whereon the final result is shown as a result of the actual circumstances which prevailed during the run. In any business doing a large amount of rapid work, the detailed cost of each run should be entered on a comparative cost sheet, as illustrated in Form 38. This comparison will USE OF COST REPORTS BY FOREMEN 325 show, side by side, the unit time and cost for each operation and for each period where this particular unit has been in use. Fluctuations in direct cost are the net result of different workers who may run the same machine or perform the same operation. A very careful study should be made as to the resulting cost as shown on the comparative sheet. Many times this comparison will bring out possibilities of eliminating the more serious fluctuations—and perhaps reducing time and cost—through careful examination and revision of operating methods. Watching Direct-Material Cost The direct-material cost will also show on the cost sheet of the completed goods, and here again attention should be paid to maintaining the standard cost. Among the most fre- quent reasons for diverging from the standard cost are: 1. Inability to secure the standard material. 2. Increase in cost of the standard material. 3. Large spoilages of material. 4. Waste on account of using wrong size of material. It often occurs in making some product that too expensive material of a given size is used. This may be the fault of the operating department which has chosen the wrong material, or it may be the fault of general business conditions which make it impossible to obtain the right kind of material. In either event, the foreman should know exactly what has hap- pened, so that in the future he can choose more wisely, if the fault is his own, or can see that the purchasing department supplies him with the proper kind of material. As for all the other faults—spoilage, etc.—it is entirely the duty of the foreman to eliminate to the greatest possible extent such causes as tend to increase the cost of the product in his department. It should be evident, however, that no fore- 326 COST ACCOUNTING man can properly or intelligently act in the best manner unless he is thoroughly posted in respect to what goes on. For this reason it is urged that superintendents and foremen be given constant access to the cost records in order that they may be fully posted in respect to all that happens. CHAPTER XXIV PREVAILING TYPES OF COST SYSTEMS Selecting the Type of System—Importance of the Base In Chapter III, the necessity was pointed out of establish- ing the basis for figuring costs before any move was made in planning the methods to be followed—the extreme importance, that is to say, of establishing first of all the various points which must prevail in guiding the compilation of figures, in order to produce in a given case the most usable set of costs when the final objective is reached. It is indeed exasperating to have a cost system supposedly in full swing, and then find out that the figures are so bunched together that they do not give the details which are requisite if costs are to be used to the utmost limit. Types of Systems Classified The type of cost system under which a plant or department is operated may be identified according to the preponderance of one or another kind of base. The different types of cost systems are in reality very few, and it might be said that there is hardly any industrial plant which is really using any one method. In the majority of cases, perhaps, the systems employed make use of all the types here mentioned. The prevailing types are: 1. Job cost method 2. Class cost method 3. Operation cost method 4. Process cost method 327 328 COST ACCOUNTING 1. Job Cost Method When all the various items of cost are charged up to the particular order embracing a specific quantity of a specific unit, the method is known as the “job cost method.” By this method any kind of labor or other direct cost is charged to a particular order number and all the charges against a particular order number constitute the cost of the order when it is figured up. An illustration of this method would be an order for a shaft ina machine-shop. The forging for the shaft is received from another plant and is drawn from the stockroom on requisition, this order being charged with the number of pieces involved. All the machine operations, such as cutting off, turning, and key-seating, are charged against this particular order number on completion of the order. The figuring of the total cost of the order would involve computing the time and cost of each operation, the burden, and the material cost. Dividing this total by the total number of pieces produced gives the cost for producing each unit of the material called for by the order. 2. Class Cost Method In many lines of manufacture it is possible to save much detail by disregarding individual order numbers, and instead of compiling the labor directly for these order numbers, group- ing all order numbers—so far as the material they represent permits of such combination—into one large statement of costs. A very clear example of this may be noted in a foundry. It is often the case that articles up to one pound in weight constitute a convenient class. The cost of all castings pro- duced within this range of weight are accordingly bunched into one cost sheet, thereby saving the necessity of making out an individual cost sheet for each separate casting. Further PREVAILING TYPES OF COST SYSTEMS 329 classes are made up, covering castings from one to two pounds, from two to five, or from five to ten, and so on. In addition to the weight distinction, of course, these classes may be sub- divided, for greater accuracy, into perhaps three subclasses, designated as A, B, and C, which vary according to the classi- fied difficulty of coring and moulding. Some foundries have a total of fifty classes only to which all material, labor, and burden are charged, necessitating but fifty cost sheets per month. The cost of any particular casting is determined by the class to which it belongs. It might be stated, however, that in nearly every foundry using class costs, the moulding and core-making item for each casting is reported separately, so that in case of doubt it is possible at any time to compute the cost of any individual casting. The regular costing, however, is confined to the. classes. 3. Operation Cost Method The type of costs known as “operation costs” are in the main quite different from class costs. The operation type of cost-figuring deals principally with the computing of the cost of a certain operation in plants where this operation is com- mon to a large amount of product. In the manufacture of storage batteries, for example, the cost of forming is in direct ratio to the square inches of sur- face formed. One forming row may consist of many different kinds of plates, but the electrical energy used is in direct ratio to the square inches of plate exposed. Therefore, the cost of current, of setting and taking out the rows, and all other costs, are kept for each run, and a tally is prepared of the square inches of plate surface formed. These records are kept in continuous form so as to provide a monthly cost per square inch for the formation of plates, which cost is used both for estimating and for actual costing. 330 COST ACCOUNTING In a planing-mill, the rip saws may best be regulated if the cost of this operation is kept, figuring it on the basis of lineal feet of work performed. In a hat business, the operation of sewing in sweatbands is an operation that is the same for any hat made. This cost may best be figured accordingly on the basis of the single hat as a unit. 4. Process Cost Method In many lines of work, particularly in industries of the chemical type, the process method of cost prevails. The production of a chemical plant is almost entirely of the process nature; many of the steps which might be regarded as operations are not clearly enough defined to permit each operation to be checked at its conclusion. For instance, in a phenol plant the first operation, strictly speaking, is sulphating the benzol. The resulting product of ‘this operation, however, is blown over at once to the lime vats, from here through the filters, and so on through every oper- ation until it reaches the drum dryer, where the production reaches a measurable point in the shape of the salt. There- fore the operations, from the start to the taking of the dry salt from the drum dryer, have to be treated as one process, and as no costs can be found on the individual operation through lack of the proper basis for figuring, the result is a process cost including all the operations thus far. The process of manufacture of phenol continues in somewhat the same way, until the phenol itself results from the final oper- ation of distillation. The process cost, therefore, may be defined as a combina- tion of operation costs, usually brought about by the inability to arrive at any basic weight or measure for gauging the inter- mediate operations involved, thereby making possible costs br groups of operations only. PREVAILING TYPES OF COST SYSTEMS 331 Choice of a Cost Method It is always advisable to settle on some standard type of cost system to be installed in a plant—so far as the choice is possible. This is sometimes a most difficult task. The oper- ation and process are often used extensively in the same plant, largely because they are so nearly alike, the process method being really a composite operation method. In making a survey of a plant for the purpose of deciding upon the best type of system, it is necessary to investigate very carefully the equipment of the plant and the methods actually used in producing the goods. In many plants will be found automatic machines known as “single-purpose machines” for performing certain oper- ations which cover a very short range. As these operations are highly specialized and largely automatic, it is easy to see that the operation method should be used in figuring their cost. The term operation need not be limited to work on one kind of material only, provided it is possible to figure the cost per stroke, per lineal inch, per piece, etc. An example of this appears in the case of the punch press. This machine runs at a constant speed, and the most usable cost record that can be assembled for this operation is on the basis of the number of strokes per hour productively employed. The record of strokes gives a direct line on the efficiency with which the machine is being operated. The case would be the same with any class of machine which maintains a steady stroke per minute. In a boiler-shop, the cost of shearing is often figured on the basis of the lineal feet sheared per hour. This number varies, of course, according to the size of the material handled, but in the main it gives a very good basis for controlling the efficiency with which the machine runs. It also gives a very accurate line on the cost, as the number of lineal feet sheared per hour will come much nearer to a standard than would the 332 COST ACCOUNTING size or shape of the pieces being sheared, even though the shapes cause a variance in lineal costs. On the other hand, with many kinds of material the oper- ations on one kind bear no relation whatever to those on another kind, although they may be somewhat of the same nature. Many pieces of material may undergo operations of identically the same nature, and yet, while each operation may be performed on the same machine, there will be no relation between them. Manifestly, then, this class of material would come solely under the job cost type of cost-figuring. About the only relief which can be obtained in applying the job cost system is the employment of the class cost, which of course has its limitations. Class costs may be employed only in cases in which the several operations are similar, as illustrated in the case of the foundry. If the equipment in any plant manufacturing small tools, such as taps, dies, drills, etc., were absolutely standardized, there would be the possibility of creating a number of sizes within a certain range, in which the labor and overhead cost would be the same for each class. Great care, however, must be taken to make certain that the equipment is such that the resulting cost of making the product is standard. When dif- ferent equipment is used even the same operations result in different costs. Combinations of Various Types of Cost Systems In most plants, as has been stated, it is necessary to em- ploy to some extent at least two of the types of cost systems, namely: the job cost, and the operation cost systems. Fre- quently a third type must be employed also—the process cost —and in the case of a foundry probably a fourth type—class cost—as well. In plants manufacturing such products as rubber, textiles, or paper, and in rolling-mills, etc., it is of the utmost advan- PREVAILING TYPES OF COST SYSTEMS 333 tage to use the operation cost method, as the comparisons which it constantly presents reveal the efficiency with which the equipment is being used. At the same time, excepting in plants where the product is sold just as it comes from an individual operation, assembly costs usually necessitate some use also of the job cost system. This may be especially noted in tire-manufacturing, where after the individual operations have been performed the final operation of building the tire is purely an assembly proposi- tion. Even in this case, however, the several operations of building and finishing the tire may be segregated, thereby carrying the entire process through on the operation basis. The highly specialized operations in connection with the manufacture of clothing have put this industry into the class of operation costs, although in this case some combination with the job cost system is often necessary. Machine-shops almost invariably use the job order type of cost work, combining with it the operation cost system to some extent. A candy plant generally uses the system of operation costs. Even the packing, though it might be construed as assembly, can be treated as an operation. A power plant uses the process type of cost system, and in a manufacturing plant many of the indirect operations involv- ing steam, electric power, compressed air, etc., may be treated somewhat similarly. Stocking Points Whatever type of cost system is used, careful thought must be given as to where individual and assembled parts should be stocked. To attain the best results, individual parts which enter into assemblies must be actually placed in a finished parts stockroom. This is necessary for two reasons: (1) to con- 334 COST ACCOUNTING trol the recording of the completion of the parts; and (2) to control the parts after being completed, with sufficient sup- porting data on the stock records to regulate properly the material for assemblies or shipment purposes. A great many plants have attempted a method of “theo- retical stocking,” regarding parts as theoretically going into stock at the conclusion of certain operations, the idea being that it is useless work actually to transport the parts to a stockroom. The reasoning is fallacious. Actual stocking of the parts is of the utmost importance for accounting purposes as explained above. Furthermore, it is the only way to use floor space eco- nomically, for material can be placed on shelves and stacked up, perhaps ten or twelve layers deep, instead of in a single layer when left on the floor or stacked on benches in the operating department. The floors and benches of an oper- ating department should not be a storage place nor a place in which to accumulate material awaiting a different kind of procedure, such as assembly. This applies equally to the sub- assemblies as they are produced. In the automobile industry, for example, it applies to the carburetors, generators, and other small units which eventually enter into the final assembly of the complete automobile. All such assemblies should be stocked in a stockroom subject to requisition, and should be issued only on specifications of further assemblies. Accurate specifications of product as to assemblies are entirely impos- sible of accomplishment in actual practice unless the material is properly stocked. It is economy in every way to put this material in stock. Theoretical stocking might be followed provided every part which goes into an assembly came through at exactly the same time and reached the assembly floor in company with its companion parts. In actual practice, however, this is never the case. Under the very best of methods, parts will straggle PREVAILING TYPES OF COST SYSTEMS 335 along, although with production control they come very much closer together than when there is no accurate method of scheduling work. It is sometimes difficult to decide just when the product should be stocked. The time to do this is usually after the completion of an order authorizing a particular phase of the work, that is, when a diffierent stage of production is reached. In Chapter III it was explained that in the manufacture of pipe the finishing operations were entirely the same up to the time the crop ends were cut off, but that at this point the lengths of the same kind must be considered as going into stock, thence to be issued on the various orders for different kinds of threads and finish. In this case it is, of course, im- possible actually to place the pipe in stock. There are a few similar exceptions to the rule of physically stocking material, but they are confined entirely to product which is of enormous volume. Asa matter of fact, work on such material is usually a continuous flow proposition of like parts, and so is not com- plicated by the multitudinous details of many parts, such as _are manufactured in a machine-shop, for example. In any event great care must be taken to keep constantly in mind the necessity of stock record control. Forwarding Slip In connection with the matter of stocking material, and also that of delivering material from one department to another, when the operations are continuous, a forwarding slip (Form 35) is an absolute necessity. This form is simply a record of forwarding from one department to another or to a stockroom, with a description of the material and the signature of the person receiving the material. The form is used in triplicate; the original copy, which may be salmon in color, goes with the goods; the duplicate 336 COST ACCOUNTING copy, which may be yellow, goes direct to the stock record department, where it is held until the original comes in prop- erly receipted as a check on the receiving of same; the tripli- cate, usually a white tissue copy, remains in the hands of the person who forwarded the goods. HOLDEN MANUFACTURING CO. BOSTON, MASS. FORWARDING SLIP From Date Order No. Description Sent to. C#RReecceriveed bby. Form 35. Forwarding Slip. (Size, 6x 4.) Job Order Cost Sheets Forms 36 and 37 show two cost sheets commonly used with the job order cost system. Form 36 shows a cost sheet used for individual parts. In this case the information desired concerns the operations required to make the parts with a minimum of data, usually not more than one line regarding the material cost. Form 37, on the other hand, shows the cost sheet for assembled parts. In this case the information regarding ma- terial takes up the bulk of the sheet, while the labor operations are of léss account. PREVAILING TYPES OF COST SYSTEMS HOLDEN MANUFACTURING CO. BOSTON, MASS. . COST SHEET Name of Articce OrnoegrR No. Descerietion Parr®r No. Sze 337 Tota | Tota. | Cost 2 Lasor & BurRDEN MATERIAL Cost Fart No.| Spac Descriptiosw History AL MATERIAL Pract Cost & Seruna TOTAL COST Form 36. Individual Part Cost Sheet. (Size, 9/2 x 12.) ER 338 COST ACCOUNTING HOLDEN. MANUFACTURING CO. BOSTON, MASS. ASSEMBLY COST SHEET TOTAL PART NO. NAME AND DESCRIPTION OF PART eieces. ¥ SUMMARY DATE quantity LABOR AND MATERIAL ar Form 37. Assembly Cost Sheet. (Size, 8% x11.) PREVAILING TYPES OF COST SYSTEMS 339 These forms sufficiently explain themselves, though atten- tion may be called to the fact that in Form 36 provision is made for the direct-labor hours and direct-labor cost as well as for the machine hours, with spaces for both the regular burden and the machine burden. Form 38 shows a comparative cost sheet on which is to be entered the information in connection with all the runs HOLDEN MANUFACTURING CO. S8OSTON, MASS. Comparative Cost SHEET NAME OF PIECE. cLass. TPE. size. QRDER No. OPERATIONS | care stant OATE COMPLETE QUAN. @TAAT Quan. Compete No.} NAME eoeT ea | costes. | coarea | costes. | costea. | costea |coutca |icosteca | cost ca TOTAL LAGOR AND BUADEN EACH MATERIAL EACH TOTAL FACTORY Form 38. Comparative Cost Sheet. (Size, 81% x 11.) made on any one particular individual part. It should be noted that there are nine columns on each sheet, which will give the comparison, operation by operation, of nine separate runs. It should also be noted that the information called for is the cost each, which is obtained from the last column of the cost sheet shown in Form 36. The use of this sheet will give the variations in the cost of running each operation on each piece and is of the greatest value in showing the actual cost of production. This sheet is the one which foremen should be invited to inspect at regular 340 COST ACCOUNTING HOLDEN MANUFACTURING CO. BOSTON, MASS. CASTING Cost SHEET Name of Castin. PatTeERN For. No. Castincs. SHor Oncer No, WEIGHT Each ———_—_____ Cust. Oroee No.__WeIGHT Serve —___ WHeeRe Account Tota Mocoiwwe MoL.oeR HeLtPeR Cost INISHING Cost NG Dir.Lasoe & Core Ore. Lasor) x ING Gooo Castincs. Les. )x Sano Cost] (Tota, Metar Poorso Les, Deas Cost Goon Castinas tas. =) xx TOTAL PLANT COST Cexetuoine Equipment) Aoministrative & Seiuina %o To ENT Cost ISTORY || MetHoD of MoLoING Mov. Mace. No, Form 39. Foundry Individual Piece and Class Cost Sheet. (Size, 81% x 11.) PREVAILING TYPES OF COST SYSTEMS 341 intervals for all the product which comes under their particular control. Foundry Individual Piece and Class Cost Sheets Form 39 illustrates a cost sheet to be used for figuring the cost of individual castings. It may also be used for figuring the cost of classes of castings, as the method of figuring is identically the same. In this cost sheet the total metal poured is first entered, with credit given for the bad castings and sprue at scrap price, which leaves the net cost of the metal used in the casting or class. Next follow the details in regard to the moulding and core-making labor, together with their burden and any ma- chine time and machine rates which may be employed on the job. Next comes the finishing cost by percentage on the moulding and core labor, together with the annealing cost at a price per pound. The sheet is by no means intended to be represented as fitting all cases, but simply illustrates a cost sheet as used for a medium-sized foundry for both individual patterns and classes. Operation Cost Sheets In compiling costs under the operation method, it is neces- sary to pay particular attention to two very distinct phases: 1. Setting up a code of operations, the cost of which are to be kept. 2. Providing a sheet for recapitulating the quantities per- formed each day under each operation. How these two items are taken care of is shown in Form 40, a production and cost record of tubes. One of these sheets is used for each size of tube. The total production for each day is entered on this sheet. The total of the labor charged up against each operation code 342 COST ACCOUNTING HOLDEN MANUFACTURING CO. BOSTON, MASS TUBES PRODUCTION & COST RECORD Description Total OPERATION Form 40. Production and Cost Record. (Size, 8% x 11.) PREVAILING TYPES OF COST SYSTEMS 343 number as shown under operation is ascertained from the time cards at the close of the month and entered under the heading “Total Labor Cost.” It is then a matter of routine to fill in the cost per 100 tubes. The burden applicable to all operations in this department is entered below the total cost, thus arriv- ing at the total labor and burden cost of each size of tube for the month. The material cost is entered on the bottom of the sheet, together with the credits for rubber scrap. As a result of the previous calculations, the net material and total manufac- turing cost is shown. Process Cost Sheets No illustration of the pracess cost sheet is shown, because it is almost exactly the same as an operation cost sheet, differ- ing only in the titles on the sheet. Each operation would be a process in itself, the total of the entire list completing a major process which brings the material up to a point where it is measurable for cost purposes. CHAPTER XXV BY-PRODUCT COSTS Problem of By-Product Accounting A part of the accounting under a process system has to do with the accounting for the costs of by-products. By-products arise chiefly in the continuous process industries of analytical or synthetical nature, rather than in the assembling industries. They present one of the most perplexing problems in cost accounting. Main products and by-products are often called “joint products” to indicate that the production factors of an enterprise are jointly required in their manufacture. By-prod- ucts are also called “secondary,” “additional,” ‘minor,’ or “residual” products. Main products and by-products travel together through the shop up to a certain stage in the manufacturing processes, when a separation occurs. The difficulty in accounting for by- products lies in apportioning costs between the two classes of products up to the time the latter break off or are divorced from the former. Subsequent to the separation no great trouble is experienced in recording the costs of either type. Three methods of accounting for by-products are discussed in the following pages—designated for want of better names —first, second, and third. First Method of By-Product Accounting The first method—the common method—of by-product accounting is to record only the sales and return sales of by-products, For these two classes of information one account or several accounts may be kept, depending on the variety of by-products sold and the extent to which the management 344 BY-PRODUCT COSTS 345 wants to go in obtaining data for analysis. The difference between sales and returned sales, that is, the net sales, is closed into the “Other Income” or ‘‘Miscellaneous Income” section and not into the “Manufacturing” section of the profit and loss statement. Objections to First Method Several objections are raised against this method: 1. The accounts do not reveal the separate costs of the main products and the by-products. As a matter of fact, no attempt is made to calculate or even esti- mate the manufacturing costs of by-products. These costs are buried in the accounts which show the manufacturing costs of the main products. 2. The selling and administrative expenses necessary to dispose of the by-products and main products are not segregated. 3. In the absence alike of the manufacturing and the selling and administrative costs, it is absolutely im- possible to separate the losses or profits on by- products. In consequence of these deficiencies, the costs are not known, selling prices cannot be fixed intelligently, and manu- facturing policies cannot be based on facts. Nevertheless, it may be the only practicable method for many plants, par- ticularly small ones, where the separation of the costs of the main products from the costs of the by-products involves too much clerical work, or where no clearly defined basis of sepa- ration appears, Second Method of By-Product Accounting The second method of accounting for by-products is similar to the first except for the following feature: The ex- 346 COST ACCOUNTING penses incurred in making by-products salable after they have been split off from the main product and the expenses of sell- ing them, are either debited directly against by-product sales accounts or entered in separate preparation and selling expense accounts. Neither of these two methods of by-product ac- counting shows the manufacturing costs of the by-products prior to the time they separate from the main products. The only advantage of the second method over the first method, therefore, is that it records certain expenses—selling and marketing—which are applicable to by-products. Objections to First and Second Methods Two very marked objections to both the first and second methods of by-product accounting in certain cases are that in the first place no physical inventories of by-products are taken; in the second place no stock record sheets are kept for by- products. This failure to observe two fundamentals of cost accounting precludes the possibility of even approximating by-product costs. Still another objection is that entries for by-products are not recorded when they are produced, but only when they are sold. Hence a true cost history of by-products does not exist. The facts noted above show that these methods are con- ducive to loose and faulty accounting and the perpetration of fraud. Since adequate records for by-products are often not maintained, not only workers but also executives have sold by- products and have appropriated the proceeds for their own personal use. Furthermore, with inadequate accounting, no reductions in the manufacturing costs of main products are shown by the records. Yet, as a matter of fact, the manufacture and sale of by-products does decrease the costs of the main products, and from a strictly honest standpoint should be so regarded in figuring the cost of the main product. BY-PRODUCT COSTS 347 Third Method of By-Product Accounting: The chief point of the third method of accounting for by-products, which is in marked contrast with the first two methods, is that the costs of the main products and by-products are kept in separate accounts. The same feature applies also to the sales. This third method has many variations but this principle runs through them all. The third method of accounting for by-products is as fol- lows: Arbitrary values are assigned to by-products when separated from main products. It will be remembered that under the first two methods the costs of the main products and by-products were combined. Such combination defies analysis. In probably the majority of cases it is impossible to calculate precisely the costs of by-products. Even under the third method, arbitrary values must often be assigned to by-products. As a rule, these values are regarded as only the material costs of by-products. They may be regarded as the manu- facturing costs, however, if the by-products require no further manufacturing treatment before sale. This material cost is not regarded as the final cost of the by-products unless they are purchased in the shipping-rooms of the factory. In that case, obviously no selling and marketing charges are incurred. Before adopting the third method, however, two chief fac- tors should be considered, namely: (1) the amount of accu- racy possible, consistent with logic and without hair-splitting over detailed costs; and (2) the value of by-products, par- ticularly, as compared with the value of main products. Calculating Material Costs of By-Products Where the third method of by-product accounting is used, the material costs of by-products may be ascertained, with varying precision, in several ways: i. The material cost can be accurately calculated if the firm can buy the material for the main products and by-prod- 348 COST ACCOUNTING ucts separately—supposing it so desires. If the manufacturer of the by-product does not buy the material, its cost in the plant may be regarded as the difference between the selling price and the approximate profit. 2. Arbitrary values can be assigned to residuals—by-prod- ucts—extracted from the main products, if the extracted re- siduals have.a market value. Any part of a profit that might have been made if the residual were manufactured independ- ently and not extracted, is not included in the cost of the residual. 3. The arbitrary values used, instead of being market values, may be those which are apportioned between the main products and by-products when the two classes of products are capable of comparison by a common standard such as the number of British thermal units. Such a comparison may be made, for instance, in plants which carbonize coal in order to get coke, the gas obtained being regarded as a by-product; or in factories where gas is the main product and coke is the by-product. Since the values of both products in these two cases are large, serious attempts should be made to approxi- mate the values of each class of product in order to be able to fix proper selling prices. 4. If the value of material in by-products cannot be closely determined by any one of the three methods described above, it can be estimated by the procedure known as “working back- wards.” In order to understand this method, refer to the following figuring sheet. The material, labor, and burden costs up to the time the by-product splits off from the main product are first recorded. Then the value of the by-product at the time it is divorced from the main product is calculated. This value is deducted from the cost of the main product up to the splitting off point, in order to ascertain the net cost of the main product. The subsequent costs of both the main products and the by-prod- BY-PRODUCT COSTS 349 ucts can then be readily calculated in order to arrive at final and unit costs. Cost of Main Product up to Splitting Off Point: MACS ial esi step da mise cobs t arcbdlatcucndebi Gann we ew wee $10,000.00 THADOP waeacinn ad eAdua Maeeuragegaanierd Laaneemees 8,000.00 Biinden: Ate ditt cinta teen Se amnntaaene aaa 6,000.00 Less Value of By-Product per By-Product Statement ‘shown below seevdveiexss shecdeeeediwseeaweer yet ehw caverns Net Cost of Main Product..........ccccceecec eee eeeteeenes Subsequent Cost of Main Product: Value: at split: off poitites sus ctrcwdvawinn sings ve eeastemanns Materialy 2. ous a02ceneenawisen Goad oe oetwaedoue $1,000.00 Tabor cs 5h exe cee asce ooshWae ad tee Ov ees 1,200.00 BUT ert i csig dds pacar awn risenicuicandoon Daddee Fes RR Baeds 800.00 Final Cost: of (Main: Product «wicca ccgieie eaccdiaannanminsoiecaien Unit Cost of Main Product (300 units)..............00008 Cost of By-Products: Selling: Pricé aecs..n eyes. aekacemeacseewsnerasa vex eeenneees Profit 10% of Selling Price..............00.ceee $ 600.00 Administrative and Selling Expenses 3% of Sell- ANE PRICE g aniive Sa arinnactamcn tn manadate liaise axeesenupate 180.00 Less Material, Labor, and Burden Cost from time of split off Value at time of split off to be credited to cost of main PROGUCE ai cas.e-oac actus ane mna neawAad MW waa e we tanec setrenyS Subsequent Cost of By-Product: Valué at split off point sieceseececcawareengaceears cesses Material si cccceacees eee et canns cduccetereee reed $ 400.00 TEA OE 505 hd nage WH loveece auch oaea uta eestor ence oles 500.00 Burden takes 6.220 coinaeden op Naeiat dane eeeans am 100.00 Final ‘Cost: ‘o£ BysProduct....csssceinsiaesieecangies 60s eielelseiers Unit Cost of By-Product (100 units) ..........ceeeee eee eae $24,000.00 4,220.00 $19,780.00 $19,780.00 3,000.00 $22,780.00 $ 75.93 $ 6,060.00 780.00 $ 5,220.00 1,000.00 $ 4,220.00 $ 4,220.00 1,000.00 350 COST ACCOUNTING Superiority of Third Method The following are some of the objections to the third method of accounting for by-products: 1. In some cases it is impracticable because of the clerical work involved. 2. Some manufacturers take the attitude that the costs of the main product are not affected by the costs of the by-products. 3. Some manufacturers are reluctant to show on their books any decreases in the manufacturing costs of main products owing to production of by-products. They fear that the dissemination of costs through financial statements made public may lead customers to demand lower prices for main products. Notwithstanding these objections to the third method, they are in most cases untenable because the third method involves the calculation ‘of separate costs of by-products and main products which is not done under the first and second methods. As manufacturers come to realize the need of more accu- rate costs, they will adopt the third method. ' CHAPTER XXVI DEFECTIVE WORK LOSSES The Ever-Present Result of Carelessness One serious drain upon profits is defective work. The losses which result therefrom are largely due to carelessness, although not always owing to carelessness for which someone can be held directly responsible. Theoretically, if all materials were absolutely perfect, if they were handled in exactly the way they should be, and if all work in connection with them was done in exactly the man- ner it should be done, the results would be perfect. In actual experience, however, the transformation of any combination of raw materials into a finished product is never so perfect but that some defects are to be found. Castings, for example, will have blowholes and other de- fects, and even though not detected at the foundry, these de- fects seriously affect the working of the metal in the machines during the machining operations. Sand dug from the ground may seem to be in as perfect condition as is thought possible, and yet when used in the mould in the foundry, it develops that the best conditions of venting are not present, and the castings blow as a result of gas pressure. As the condition of the material worked upon has a large bearing on the result of the operation, losses sustained from such imperfections of ma- terial are naturally not chargeable to the operator performing that particular operation, because the condition of the material worked on is entirely beyond his control. On the other hand, in probably the majority of cases, de- fective work is largely due to carelessness of some kind on the part of the operator, Particularly is this so when wrong cuts 351 age COST ACCOUNTING are made, and when the completed work does not agree with the blue-print. And yet again, far too often verbal directions are given by foremen. In the majority of cases when this is done, it is unfair to hold the worker responsible for mistakes in the machining. In such cases the responsibility for the defective work rests entirely with the management. Inspection Cost records have brought out the industrial importance of maintaining in any manufacturing plant an adequate system of inspection. One of the first results of such a system is the detection of laxity in supplying workers with proper blue- prints, or with proper tools to work with. Inspection is also important in that it leads to the study of the means of cor- recting errors which are being made. Moreover, inspection enables the management to anticipate the possibility of defec- tive work through the experience gained in going over what has been done and in learning from what quarters errors may be expected and the reasons therefor. It is not enough to wait until material has been completed and is ready for shipment, but inspection must start almost at the initial operation in order that all succeeding operations may be safeguarded. Intermittent checks during the various processes will prevent the work from going wrong in the first place, with the result that the final inspection becomes more a matter of routine than of finding anything defective. Methods of Guarding Against Defective Work Wherever possible—and it is possible with regard to the majority of manufactured products—gauges and other in- struments should be provided for trying out the work, not only as an aid to the inspection department, but also for the use of the operators. It is not safe to assume that an oper- DEFECTIVE WORK LOSSES 353 ator at some high-speed point of production will rely on meas- urement, unless the measurement is made by a fixed instru- ment and no judgment or brainwork is involved. In this connection too much stress cannot be laid on the operating results which should follow the exhibits of cost figures, particularly in fortifying all workers and inspectors with proper instruments for minimizing erroneous sizes, and thus preventing defective work, Various Kinds of Defective Work Losses Defective work losses may be grouped, in the main, as follows: 1. Cost of labor and overhead required to salvage defec-- tive work. 2. Loss of the unused part of salvaged material. 3. Labor and burden entirely lost when material has to be scrapped. 4. Loss of the difference between original and scrap value of material. 5. Loss of profit due to extra time taken on machines in salvaging material when other new material should have been produced for sale. 6. Loss of profit on material which has to be scrapped. The last two items, it is true, are never computed in the cost records; nevertheless the loss occurs, as other material could have been made and sold at a profit, if the machines had not been engaged with salvaged material. Judgment to be Used in Connection with Salvaging In many industries, more labor is put into salvaging ma- terial than is warranted by the loss which would be incurred if the material were scrapped in the first place. Particularly is this the fact in the metal industries of all kinds since the 354 COST ACCOUNTING developing of the expensive art of electric and oxy-acetylene welding. This comment applies, it is true, more to the salvag- ing of new material, than to the welding of older material which when accidentally broken frequently affords possibili- ties of large saving. But in the production of new material, particularly in operations which are highly specialized, great care must be taken to determine closely the dividing line between a profit- able salvaging operation and one whose cost would amount to more than if the piece were entirely scrapped. This problem is a difficult one to solve in the steel-casting industry, where it has become possible to fill in defective spots by means. of up- to-date welding apparatus. As welding, however, is so expen- sive, even though the work turned out is of a wonderful nature, it becomes a question as to how much of it can be profitably done. Another feature in connection with this or any other sal- vaging operation is the fact that the possibility of saving the material eases up to a considerable extent the conscience of those responsible for the operations in the first place, with the result that increased carelessness is apt to occur. This tend- ency can be checked by penalizing either the department or the original operators who produce the defective work with the cost of salvaging the work. It is admitted, however, that inas- much as costs cannot be determined without difficulty, per- haps this method cannot be carried out in many places. In any event, a great deal of study should be given to the question of salvaging, in order that decisions regarding it may be based on economy rather than on simply the idea of saving a particular piece of material, regardless of costs. Charges for Defective Losses As intimated in the previous section, it is always a good plan to charge the department responsible for defective work, DEFECTIVE WORK LOSSES 355 either with the cost of salvaging the work or with the losses incurred if the material is scrapped. If in a rubber plant, for example, the milled compound furnished to the calenders or the tube department is defective, it seems just and fair that the milling department should stand the cost of the losses incurred by the department using the defective material. The management of the department pro- ducing this material should most certainly have a continual reminder of the results of the defective work turned out by such department. And in a cost system where all such details are accounted for, every department should stand not only its own cost for defective work, but also that a portion of the cost of any other departments occasioned by errors which it has made. As the excellence of cost-keeping increases, more and more attention is paid to matters of this nature in order that the real efficiency of each operating department may be known. Analysis of Causes of Defective Work One of the most important steps in connection with the handling of defective work losses is that of analyzing and cor- recting the causes of the defective work. A sample of such analysis is shown in Form 41—a foundry scrap report used in a grey iron foundry. It will be noted that this report gives a true history of each day’s pouring, both as to the number of castings poured and as to the causes of defective work. This form is shown simply to illustrate the use of analy- tical statements of defective work. Some form of this nature can be applied in connection with almost every manufacturing operation. In textile industries, for instance, it is easy to prepare a form upon which reasons for defective work may be entered, and to have an analysis sheet showing all defects. A similar analysis as to defective work can be made in industries concerned with the manufacture of wood, rubber, metals— 356 COST ACCOUNTING Good Total Weight tal rap ight eds Buysed yoeq 34s s3uysed poorn JIQUIDN [BIOL sdunsep desog 42quInN [2301 *OSTIAL pajaq a10D | woys psnog ung ‘si 4ulys, 3OUS PIOD uaqo1g Date of Cast Company's Discount MOl_ Plow Pues 12M “OSTA, 3105 ‘ON wig pasiey edo MASS. paszes BOSTON, FOUNDRY SCRAP REPORT Moulder’s Discount ays ysnig painog saquinn’ AepoL Burpueig yeT HOLDEN MANUFACTURING CO. anog OL 30L AEpoL april saqunNn snoiaig ABq durpueig Pattern Number Order Number Moulders Number (Size, 11 x 8%.) Foundry Scrap Report. Form 41. DEFECTIVE WORK LOSSES 357 indeed in almost any industry. It is, however, of little use to have analytical statements unless particular and careful use is made of them. Statements of this nature show very clearly what might be called “epidemics” in a plant. It very often happens that a certain class of defects will sweep through-a plant and require very stringent action to stop its course. If defects are standardized into a code and analyzed, the means of prevent- ing these epidemics will be discovered. Use of Defective Loss Information in Cost Sheets With any method of costs in which a classified statement of defects is furnished with each run, it is advantageous to incorporate a statement of these defects in the cost sheet. The statement of defects will not always have an exact value attached to each item, but it will help to explain variation between runs of like material. In almost any industry, the cost of like material produced at different times varies to a considerable extent, and when the material is made on a piece- work basis, it is quite difficult to explain this variance unless some automatic means is provided for doing so. If it were possible, the value of defective work might be taken from a production order cost and transferred to the burden accounts to which it belongs. As an actual fact, how- ever, it often happens that the entire cost of an order is charged up, and divided by the number of good pieces pro- duced. In all such cases it is of the utmost advantage to have the statement of defective pieces and the causes therefor appended to or made a part of the cost sheet. Defective Loss as Burden vs. Direct Cost There has been much argument as to whether or not the cost of defective work should be allowed to remain under a productive order number in a job order cost system, or 358 COST ACCOUNTING whether the value of the defective work should be credited to this order and charged in the burden. If the job under consideration is such that there is little likelihood of its ever being done again, the position that the cost of defective work should be allowed to remain against this particular job is well taken, the argument being that some record should be made of the fact that the work is risky and dangerous and should not be accepted again without due consideration. Work of this nature frequently arises in job- bing factories, machine-shops, foundries, etc. On the other hand, in'a manufacturing plant where the run of work is continuous and where the matter of defective losses may be regulated with care, it is probably best to assem- ble all defective work in the departmental burden accounts of those responsible for the work, in order to spread the over- head throughout the business. To back up the argument as to special orders, the foundry may again be taken as an example. An order is received for 2,000 castings which are very difficult to manufacture. The casting is heavily cored, is difficult to mould, and has thin sections adjoining heavy sections. The estimator appreciates the fact that it is a risky casting and the job is taken on the basis of an allowance for, say, 25% or 50% loss. The price, it should be remembered, is given after such a loss has been fig- ured in the estimate. When the run is completed, however, it is found that the loss has amounted to nearly 75%, because of the heavy shrinkage and the heavy discount for cracks caused by the junction of the light and heavy sections. In cases of this sort each individual run must be con- sidered on its own merits, and most certainly the heavy loss from defective work in the instance cited should not be charged into any burden account to be considered in the figur- ing of the costs of castings where a normal loss of 5% or 6% would prevail. Beyond question, in any industrial plant which DEFECTIVE WORK LOSSES 359 is making a product on a special-order basis of this nature, no matter whether it is a foundry, woodworking plant, or any plant, the defective work in such cases should be allowed to remain as a cost against the particular order, and not spread in any general overhead. On the other hand, in plants where regular work of repeat nature is the rule and a close study can be made of all defective losses, and where such defective losses are more often the result of causes which have nothing whatever to do with the nature of the material, it would seem more fair and equitable to concentrate stich losses as are incurred in the burden ac- counts of the departments which caused the loss. This applies particularly, as stated above, in those indus- tries where such losses are occasioned more by changes in personnel, by carelessness, and by the various other causes which are linked up with plant conditions, than with any special features in connection with the work which is being produced. CHAPTER XXVII THE INSTALLATION OF A COST SYSTEM The General Problem The installation of a cost system in any industry what- ever is a problem, the extent of which is little realized, but which at the same time is comparatively easy if approached in the right way. Satisfactory installation can be accom- plished only after a most careful survey of all conditions, and after a careful planning out of all the steps which are necessary to bring about the best results. While, however, these steps naturally differ in different places, the fundamental principles underlying the whole are practically the same. Success is largely a question of personnel, meaning by this that, as with any other undertaking of magnitude, it is necessary to have everyone understand fully the intent of what is proceeding, and to be lined up to render whole-hearted and conscientious assistance. The matter of installing a cost system is no single-handed affair. It may be that some one brain may direct and co- ordinate the movements, and may outline the steps which are to be taken. But, unless everyone in the organization is in full sympathy and aids in every possible way, there is very little hope of ever attaining the desired result. It therefore is best to prepare the way by straightforward propaganda as to exactly the meaning of the movement to install the methods of keeping costs. Initial Propaganda The initial propaganda should convince everyone in the or- ganization that a cost system is designed to assist and con- 360 THE INSTALLATION OF A COST SYSTEM 361 struct, rather than to criticize and destroy. Everyone should be convinced that no move should be made without.there being the means to reflect the results of the moves in figures, for the personal efficiency of each department head and subordi- nate is crippled unless these persons are supplied with the means of knowing what accomplishment they make from month to month in the conduct of the duties with which they are charged. It therefore is of the greatest importance to accomplish this through well-planned propaganda. To line up in this way every man in the organization on the side of the desire for costs is of the utmost importance, and if properly man- aged is easy. Once it is done, the installation of the cost methods will become a matter of simply carrying out details and overcoming what physical obstacles may be encountered from step to step. Fundamental Foundation Work It is useless to expect to build up a system of costs without obeying certain laws as to fundamentals. The detail of these fundamentals will not be discussed in this chapter, but refer- ence will be made to other chapters as the discussion of the work of installation of a cost system progresses. In Chapter III the matter of establishing the basis of cost was discussed. In Chapter VI the matter of departmentaliza- tion was discussed. These two chapters have an all-important bearing on the problems of installing a cost system; without the strictest attention to what is there brought out, a cost system will invariably fall down, as it must have the most effective and complete foundation. It therefore is necessary to decide on the proper depart- mentalization of the business along the lines indicated in Chap- ter VI. This departmentalization is designed to carry out responsibilites and té take into consideration the location of 362 COST ACCOUNTING departments, both from a physical and a cost-keeping stand- point, and the nature of operations. The next step is the matter of establishing the basis of cost. This means not only the basis for the productive costs, but also the establishment of every possible basis of finding a unit cost for purposes of comparison in regulating the indirect or service departments of the company. Establishing Controls When the matter of departmentalization and the basis of cost has been disposed of, the task of starting the work in the plant must be faced. It is useless to attempt to keep costs in any institution whatever unless there is an absolute control of all contributing factors which have to be considered in the costs. This means that there must be: 1. Material control—all material must be in stockrooms under the control not only of stock-keepers but also of stock records. 2. Labor control—there must be a competent timekeep- ing staff backed up with clocks for verifying the “ and “out’’ movements of employees to safeguard the pay-rolls. 3. Accounts control—there must be established on the general ledger of the company a comprehensive set of control accounts to set up a backing for the cost records. This also means that the books of account must be so designed as to take care of the control accounts in the ledger. A detailed discussion of the above three points follows: 1. Material Control Product Control. There are a number of things entering into the matter of material control which are of the utmost THE INSTALLATION OF A COST SYSTEM 362 importance. The first is that of the control of the product as relates to the specification of parts which are manufactured. These specifications should be in full detail and should show first all the products as sold to the trade. The specifications should show all assembled parts and all the individual and minor assembled parts which enter into the full assembly. Likewise the minor assemblies should have their own lists of individual parts which enter into their construction. There should be on record the proper raw materials neces- sary to produce the individual parts, which will be used as a standard by the cost department to check the charges for mate- rial made against the orders of producing departments. The above specification should be prepared in regular form with copies in the cost department, the stock record department, and the operating departments. It is almost useless to expect ever to obtain actual costs unless there is an accurately established list to work by in assembling the figures when they come from the shop. Physical Control. With the knowledge of what is to be made, the next step is to be absolutely certain that the materials are under control from the time they are issued on requisition. This means that all materials must be safely stowed away in stockrooms under the care of a competent stock-keeper. That should be the practice in any up-to-date manufacturing insti- tution, whether operating a full set of costs or not. It is folly to have materials strewn around the plant in every kind of place; such conditions invite waste, spoilage, and pilfering. To expect to figure costs with any degree of accuracy without having the material under proper stockroom control, is out of the question. The first real step is to make sure that all material is under such physical control that every movement in and out is safeguarded so far as can be, in order to provide the proper records of consumption of material with which to figure the costs. 364 COST ACCOUNTING 2. Labor Control The contro} o1 labor is somewhat along the same lines as the physical control of material. Unless the management can have an absolute knowledge of the basic time spent by all employees in the plant, followed up by a detailed knowl- edge of just what they did while in the plant, it is useless to expect any costs. It is therefore necessary to provide “in” and “out” clocks—as described in Chapter XV—to establish by the employees’ own records the length of time that is spent at work. These methods are generally known and need no discussion here. The next step, however, is of greater importance, as accu- rate accounting for the time spent by each employee in the plant involves a large amount of detail. In the past it has been more or less the custom to have employees keep their own time, handing in their conception of what they have been doing. This is most unsatisfactory and unsafe, as well as actually expensive, as compared to the method of having timekeepers to attend to all this detail. In any plant it will be found that the time spent by workers in making out their time cards will amount to at least 15 minutes per day. These workers should be producing goods instead of making out time cards. It is plain economy to have this work performed by timekeepers thoroughly trained in the re- quirements. As a general rule one timekeeper should take care of 100 workers. The economy which is effected appears from the fact that this would represent on an average of 1,500 minutes of workers’ time. As the average time worked on shifts is now coming to be eight hours, the time used by the one time- keeper, looking after about 100 workers, is only 480 minutes, as against 1,500 minutes when time is kept by workers. In addition to this, the timekeeper knows exactly what to do and makes out the time cards in a legible and orderly way. THE INSTALLATION OF A COST SYSTEM 365 If workers keep their own time, it is necessary to instruct each of the 100 persons as to what to do, and moreover, the majority of the cards received from workers are so illegible that the errors alone cost more to correct than the timekeeping would cost in the first place. Finally, the timekeeper can also be of immense assistance to the foremen in each operating department. This feature alone justifies the employment of timekeepers under any cost method. It is therefore urged that anyone installing a new cost sys- tem have no hesitation about using timekeepers instead of having the time cards turned in by the workers. 3. Accounts Control There is little use in attempting to operate a complete con- trol of costs without the backing of a comprehensive set of control accounts in the general ledger. One of the worst fea- tures of past attempts in cost work has been the attempt to figure costs on the basis merely of memos, without having an absolute check on each step and without tying up the costs with the general books. The full machinery of controlling costs, whereby the cost records are brought through to the final con- clusion of the monthly profit and loss account, is not so compli- cated as many people believe. The operation is that of natural sequence, and the careful recapitulating of the various steps into the necessary journal entries take but little extra work. The vaiue of the check on every step of the work is far beyond the cost involved in the work necessary to maintain the check. Briefly sketching the main steps involved in cost-keeping may be of value at this point. It must be remembered that this. description is very brief, and does not attempt to cover each individual item by any means. First of all, we have the original books of entry, which consist—speaking roughly—of the voucher register, wherein 366 COST ACCOUNTING the entire load of initial distributon should be concentrated, the cash disbursements book, the cash receipts book, the sales register, and the general journal. Nature of Control Accounts Control accounts consist in reality of only two classes: I. Asset and Liability Accounts. These accounts include such accounts for assets as the cash and bank accounts, ac- counts receivable, material, and work in process inventory accounts, plant investment accounts, miscellaneous invest- ments, prepaid items, etc. For liabilities there are such ac- counts as the bills and vouchers payable, accrued wages, reserves, bonds and mortgages, capital stock, etc. Accounts of this class have balances at the end of each month. That enables a balance sheet to be prepared, which in itself is a complete statement and which serves as a check on the Profit and Loss account. 2. Profit and Loss Accounts. In the old days of account- ing there was but one account called Profit and Loss. To this was charged all merchandise used, labor, expense, etc. As the need of analysis developed, this account has come to be known as the account which represents the results of many analytical accounts known by special names. This chapter will therefore deal with the analytical ac- counts, although it must be remembered that all accounts other than those used in the balance sheet are in reality divisions of the Profit and Loss account. (a) Sales Accounts. Whereas by old methods the sales were credited to the Merchandise account, it is now necessary to have many different sales accounts. This is for the purpose of analyzing the sales of a company to show in the records the results of the various branches of a business. In order to analyze these sales properly, it is necessary to have a companion account called “Cost of Sales” account, THE INSTALLATION OF A COST SYSTEM 367 to which is charged the manufacturing cost of the goods sold at standard rates of burden. Another companion account for each sales account should be the “Freight Out on Sales,” which represents the cost of delivering the goods in case such sales are delivered to the purchaser. (b) Expense Accounts. An expense account must be set up for each expense as decided on in the plant. This would mean a set of accounts for such items as Trucking, Cost De- partment, Pay-Roll Department, Electric Power, etc., as dis- cussed in other chapters. The control accounts for all this class of expense are used simply as collecting accounts to which are charged through the cost journal entries the various items of labor, materials, etc., the total of which is charged out immediately to the operating burden accounts. The final trial balance would therefore not show any balance against these accounts, as they are charged and credited almost simultaneously. (c) Burden Accounts and Burden Credit Accounts. As has been explained in other chapters, there will be a burden account for each operating department, and a companion ac- count to hold the credits of the burden actually applied in the costs. These accounts will show an accumulated balance for an entire year, being closed out only at the end of a year into the Profit and Loss account. The Flow of Control The arguments to be used in establishing the foregoing accounts may now be briefly described. The initial purchases flow either into the inventory ac- counts, the pay-roll accounts, or various expense accounts. Through the medium of requisitions and time cards, the items of material and labor flow out of the inventory and pay-roll accounts, and are charged to the expense accounts, 368 COST ACCOUNTING or to the work in process accounts—which are themselves inventory accounts but of a different class from the ordinary stock material accounts. The various expense accounts as figured for the month are closed into the burden accounts. The Burden Credit accounts receive credit for the burden applied at the standard rate, which is charged to the Work in Process Burden accounts. This brings the bulk of the burden into the line of inventory, coupling up with the Work in Process Material and Work in Process Labor accounts. The orders which are completed are credited to these three work in process accounts and debited to cost of sales direct, or to finished stock accounts, in the case of material which is to be held for future sale. This leaves a true balance in the work in process accounts which may be used in the balance sheet. In making out the profit and loss, therefore, there are the sales accounts together with their manufacturing and delivery cost; there are the balances of unabsorbed burden which are carried to Profit and Loss; there are the administrative and selling expenses; and finally the profit or loss for the month is determined. Installing Control Accounts It is clear that there must be installed a comprehensive set of control accounts in order to have the check which is neces- sary to insure accuracy of all figures presented. There will usually be more or less opposition to the installing of what is considered so large a number of control accounts in the gen- eral ledger, but this opposition must be overcome if the costs are to be assembled in a safe and dependable manner. There- fore, the one installing the cost work should insist that the control accounts be established, as without them there will. be a constant danger of inaccuracies which might result in very THE INSTALLATION OF A COST SYSTEM 369 disastrous decisions affecting the policies of the company, an inevitable result of unproved costs. Subsidiary Factory Ledger It may be well to mention at this point that in many cases there has been installed a subsidiary factory ledger in order to obviate the necessity of having the detailed control accounts in the general ledger. While this is allowable and perfectly possible of accom- plishment, it has always seemed a quite unnecessary procedure, and one involving extra work. To maintain a subsidiary fac- tory ledger means that there must be in the general ledger a number of main control accounts to give a trial balance which is worth anything at all. This means that all the moves in connection with the factory ledger must be regulated in ac- cordance with the controls which are maintained in the general ledger, all of which largely entails extra work. The usual objection to having the basis of all the control accounts in the general ledger is the inability of the accountant controlling the general ledger to understand the moves in connection with the factory accounts. As a result of this, every conceivable objection is brought up to the maintenance of the control account in the general ledger. Three courses are open to the one installing a cost system, namely: to in- stall the subsidiary ledger, to educate the bookkeeper, or to get a new bookkeeper who can understand what is wanted and how to carry it out. It is recommended by all means to have all the control accounts in one ledger whenever possible. That is the cleanest and surest way to reach the desired results. In General Regarding Installation As a final word in connection with the installing of a cost system, the fact may be brought out again that the greatest 370 COST ACCOUNTING care must be taken to have the foundation solid, particularly with reference to all the points which have been brought out in this chapter, and most especially in connection with the initial propaganda preparing the way. It is most deplorable to know of cases where action has been taken by industrial institutions on supposedly accurate cost figures which turned out in reality to be mere wild esti- mates. The life of an industrial institution depends on actual and trustworthy figures which reflect the operations per- formed. It is therefore not too much to say that any failure to safeguard these figures is plain industrial folly. Compromises and lines of least resistance have no places in dealing with matters of such importance as the figures of cost and profit and loss. A building erected on other than solid foundations is short-lived and dangerous. It is, however, no more dangerous than is a cost system built on other than trustworthy foundations. The parallel between the two is close. A building on an insecure foundation might stand for a time and might fool whoever was involved with its construction. But when abnormal times arrive, the strain is too great and the structure will tumble. This is exactly the case with costs, and too much insistence cannot be placed on the importance of preparing the solid foundations on which to build the structure of records on which so much depends. CHAPTER XXVIII TOOL RECORDS Function of Toolroom Department The function of the toolroom department is to supply workmen with the tools, appliances, and fixtures best suited to their individual needs. This equipment should be kept in excellent condition by proper grinding and shaping, otherwise work will consume more than the allotted time, and inferior workmanship will result. Moreover, slow or faulty produc- tion is invariably reflected in reduced sales orders. Because tools are cash in another form, they should not be scattered promiscuously throughout the plant; those not in use should be stored in a toolroom kept under lock and key. Organization of Toolroom Department The toolroom should be under the jurisdiction of a tool supervisor, whose duty it is to issue tools only upon receipt of an authorized requisition or tool check. He inspects tools upon their return, and issues instructions for their repair. A modern plant has a tool design department, a toolroom, and a tool crib. The latter is simply a storage place; the first designs, and the second makes most of the tools used. Other tools are manufactured in the blacksmith shop or are pur- chased. Classifying and Symbolizing Tools A plant requires a variety of tools. Some are durable and hence serviceable for work on many jobs; some are val- uable only as scrap after they are used ona single job. Others, though durable, are intended for a special purpose only. The 371 372 COST ACCOUNTING life of tools and the use to which they are to be put, there- fore, conditions their accounting treatment. Symbols and classification facilitate the accounting for tools. Tools should be classified according to the purposes for which they are to be used. On each tool and its receptacle is etched, engraved, or stamped a symbol. Tool lists, tool orders, and tool requisitions and tool checks carry the symbol. The classification of tools adopted is listed in a tool classifica- tion book. The tool classification book may take the form of loose- leaf sheets or blue-print sheets. The first sheet is an index which shows a general classification of tools. The subsequent sheets show the detailed classification. This book has two distinct advantages: it expedites the location of tools when symbols are forgotten but names and sizes are remembered, and it simplifies the symbolizing of a new tool not yet clas- sified. Small Tools Small tools—those not attached to machines or equipment —when bought or made are charged to tool inventory or stores accounts. When small tools are requisitioned, they are charged to subsidiary stores accounts or to maintenance ex- pense accounts depending on their disposition. If tools are replaced when worn out, reserves for depreciation of tools need not be set up. Depreciation of used tools which are still serviceable is provided for by inventorying tools at a more or less arbitrary figure—say two-thirds of their original cost—at the start of a new cost period. Thereafter all re- placements will be charged to expense, and any distinct addi- tions to the equipment of tools will be charged to the tool inventory account at cost. Stock record sheets are kept in a subsidiary ledger for the detail entries affecting tools which are in stock. TOOL RECORDS 373 Double Tool-Check System The best method of safeguarding tools is called the “double tool-check system.” This system requires the use of two different kinds of checks—round and square—both of which should be made of some durable material, such as brass or aluminum. The round checks bearing the employee’s pay-roll number can be exchanged for tools. Each employee is given a set of these checks for which he is held responsible. The square checks are stamped with the names, and some- times with the sizes and numbers or symbols, of the various tools. For example, a check for a reamer may be stamped “g/16” reamer. These square checks are hung on hooks in front of the drawer or compartment in which the tools are stored. In the toolroom there is a tool-check board about five feet square, provided with hooks over which each man’s number is stamped. When a tool is issued to an employee, the square check is transferred to the tool-check board under the em- ployee’s number, and the workman’s round check is hung on the hook in front of the drawer or compartment from which the tool is taken. Under this system the tool-check board shows at any time the number and names of the tools each employee has out ; and the round checks on the tool drawers or compartments show to whom the tools were issued. When the workman returns a tool, the square check is removed from the man’s number and hung on the hook of the compartment to which the tool is returned. The employee’s check hanging in front of the tool compartment is then returned to the employee. Thus a double check against each man’s number for tools issued is always provided. Suppose an employee returns five of six tools charged against him. He should be notified at once of the outstanding tool still charged against him. Take the case of a man who has lost one of his checks, upon which some 374 COST ACCOUNTING other man has received a tool. When the loss is reported, a small red check is hung upon the tool-check board under the man’s number. Suppose later the finder of the lost check attempts to use it in exchange for a tool. When the toolroom- keeper starts to hang the square check representing the tool on the board, the red check thereon reminds him that a check has been lost. Or suppose a tool has been issued on a lost check before the loss is known. The return of the tool later will lead to the detection of the loss when the toolroom-keeper starts to remove the square checks from the man’s number and sees the red check. Under a modification of this system, tools and checks are returned to the toolroom at the close of each day rather than at the time of completion of jobs which require tools. This system enables the toolroom-keeper to check daily the issu- ances of tools.* Since each tool is accounted for by either a check or the tool itself, the keeping of a physical inventory of tools is sim- plified. The sum of the number of tools in the toolroom and the number of checks on pegs outside tool drawers should equal the number of tools that should be on hand. Such checking should be done daily so as to insure the detection of any differences. Denominational Checks Denominational checks, which bear a series of numbers rather than a single number, are sometimes given to em- ployees when a quantity of tools of the same size and symbol are issued to one employee. In such cases their use simplifies the procedure of issuing tools. Denominational checks are usually of a different size and shape from the “regular” checks. 1This plan is used at the University of Illinois under a system worked out by G. H. Radebaugh and J. A. DeTurk. See their article, entitled “Tool Supply Room,” in Factory Magazine, December, 1916. TOOL RECORDS 375 Tool List Tools are not always issued to individual workmen per- sonally. Instead they are issued upon presentation of a tool list. A tool list is prepared by the planning department (when one exists) for each job in advance of operations. The list shows the number of the job, the machine number, the class or symbol of tools, and the number needed for the job. The list is sent to the toolroom. The required tools are placed in a tool-box and taken by a messenger to the workman who is to use them. This procedure conserves the productive time of workers and prevents many delays due to lack of tools. Single Tool-Check System The double tool-check system has supplanted the single tool-check system in modern plants. Yet from a historical viewpoint the latter system is interesting. It worked as fol- lows: Each employee was presented with a set of checks stamped with his pay-roll or time-clock number. The check, presented to the toolroom-keeper by the workman who de- sired a tool, was hung on a hook outside the receptacle from which the desired tool had been taken. Although tools were issued to employees only against their checks, the system afforded no means of ascertaining the exact number of tools in the possession of each workman. This information could only be obtained by taking a physical inventory. The single tool-check system, therefore, did not furnish a proper control of tools. CHAPTER XXIX ADVANTAGES OF STOCK RECORDS Stock Records an Aid to Entire Business The stock record is the keystone of the material cost rec- ords. It aids especially the purchasing, storeroom, production, and cost departments. With a knowledge of requirements, orders, balances on hand, past consumption, minimum and maximum quantities, purchasing can be carried on intelligently. With stock records the storekeeper can properly account for materials, parts, etc., under his supervision. Production can be controlled, through a knowledge of requirements, orders, and balances on hand, etc. Material costs can be controlled if stock records are maintained, because such records provide the means of showing quantities and values requisitioned for in- dividual orders, etc. Furthermore, they show balances on hand which can be compared with physical inventories. The advantages of stock records cannot be fully appre- ciated until after a knowledge of the technique of stock record accounting has been gained. The advantages set forth in the following pages, therefore, should be studied in conjunction with the main sections of the modern stock record sheet dis- cussed in Chapter X. Savings Effected by Proper Ordering If purchases are kept within the maximum and minimum limits recorded on stock record sheets, too much capital is not tied up in stock, with the accompanying excessive storage, in- terest, and insurance charges. Nor do delays in production ensue because of lack of materials. Close and persistent examination of purchase orders, purchases, deliveries, requisi- 376 ADVANTAGES OF STOCK RECORDS 377 tions, and stock balances, together with a careful graphical study of price movements of material, is of inestimable service in preventing these unfortunate and expensive conditions. The amount of material to be ordered when the balance of stock approaches the minimum is known as the “quantity to order.” The “quantity to order” is taking the place of the “maximum quantity” in many factories. The figures in the “Year,” “Quantty,” and “Time Required to Get” sections of the heading of the stock record sheets aid greatly in calculating the minimum, maximum, and quantity to order. Knowledge of the time required to get materials after placing an order also aids the production control department in scheduling the work of the operating departments. Production Aided by Listing Requirements If the plant has detailed specifications of the product which show the material and parts necessary for its manufacture, the stock record clerk can intelligently fill out the “Require- ments” columns. Unfortunately, however, relatively few con- cerns have exact specifications regarding their product, opera- tions, and machines. Without them neither proper planning nor accurate accounting for costs is possible. Lack of proper specifications is one of the most frequent reasons for the failure of cost systems. With a knowledge of the material require- ments for parts and products, however, necessary materials, etc., can be provided in advance of actual needs, and thus pro- duction is facilitated. Deliveries Facilitated by Appropriation of Stock If materials and parts are appropriated for production orders according to their priority, the product can be made and delivered to customers on time, provided no unforeseen delays occur. The production departments, therefore, are vitally interested in appropriations. The purchasing depart- 378 COST ACCOUNTING ment, unlike the production departments, is not interested in the appropriation of stock, since its chief function is to order the proper material to supply requirements. Steady Production Aided by Prompt Ordering and Urging Not only must the quantities of material ordered be suffi- cient, but deliveries from vendors must be kept ahead of con- sumption needs. It often becomes necessary for the buyer to send an urger or inquiry to the seller. Prompt urging is in- deed as important as prompt ordering. It should be done in a spirit which recognizes that tardy deliveries are often due to forces beyond the control of the shipper. The need for urging may arise from the inability of the seller to ship accord- ing to schedule; or from the fact that the buyer consumes material quicker than he anticipated because of wasteful use of stores or the filling of rush orders. Nevertheless, if material is not received on time, production will slacken or stop. Lack of sufficient supplies causes manufacturing losses which, although often unnoticed or ignored, are probably greater than any other losses with respect to stores. A slowing-up or stoppage in operations prevents the filling of orders according to contract. That results in cancellation of orders, and that in turn in- creases unit manufacturing costs, since the overhead has to be apportioned over reduced sales. Savings by Keeping Deliveries Within Contract Limits Stock records facilitate checking receipts of stock against purchase orders, special contracts, etc. Material may be spe- cially contracted for, long before delivery. If prices rise dur- ing the delivery period, vendors may be tempted to charge the buyer the new market price before all deliveries have been made on the old contract, trusting to the buyer’s forgetting that the old contract has not been completely filled. On the other hand, if the market price has fallen prior to the comple- ADVANTAGES OF STOCK RECORDS 379 tion of deliveries on special contracts, the vendor may try to overrun contract requirements, trusting that the buyer will continue to pay the former market price. When a concern is purchasing regularly from a given firm, it is especially pos- sible for such malpractice to occur. The way to prevent it is to scrutinize very carefully special contracts and the deliveries applicable thereto, as shown by the stock records. Detection of Improper Accounting for Receipts By means of stock records, amounts received are recorded for all classes of stock. This facilitates the detection of im- proper accounting for receipts. Dishonest receiving clerks, in collusion with drivers of delivery wagons, sometimes receipt drivers’ bills but permit some drivers to keep and sell certain material, later on dividing with them the proceeds from the sale. The purchaser, in the belief that he has received all material ordered, settles for invoices in full. Such misappro- priation has been discovered when stock records have been checked periodically with physical inventories. Consumption Records of Material Aid Economical Buying Stock record sheets show requisitions of each class of stock and also indicate the destination of material, whether to job numbers, contract numbers, departments, ete. Such con- sumption data are serviceable to the management in estimating future requirements of stock and facilitating economical ordering. Elimination of Wasteful ‘““Help-Yourselves” Methods Furthermore, a system of stock records eliminates the wastes from promiscuous access to stock. If everybody has free access to stock which is not under lock and key, the natural result is that foremen and workers, because of self-interest and departmental interest, accumulate reserves of stock near 380 COST ACCOUNTING their work places. That causes an inequitable distribution of stock throughout the plant and hinders efficient production. Such departments will have material in excess of require- ments; other departments will not have enough. Stock records provide the medium for discovering abnor- mal consumption of stores due to such “help-yourselves” methods. For example, a certain plant was located on the bank of a river. Its workers had for years been throwing spoiled product into the river. As workmen could procure stock at will, unusual consumption of material had never been detected. During a drought the river almost dried up and the large quantities of spoilage were discovered. The discovery so astounded the management that it installed a perpetual in- ventory immediately. A stock record reduces spoilage, scrap, . and waste losses because it registers unusual consumption, and because it makes for orderliness, always the foe of waste. Bidding on Contracts Expedited With respect to material costs, the going inventory expe- dites bidding on contracts. Several years ago two concerns— A and B—received a request to bid on a contract. The former kept stock records as a part of its accurate cost system; the latter did not have a good cost system. Within a few hours after the receipt of the offer to bid, A was able to quote a price on the contract because it estimated the costs thereof by reference to past costs—consumption of material, etc. On the other hand, the manager of the B concern had his office force scurrying excitedly around the plant, picking up piecemeal costs here and there. Several days elapsed before B could estimate his costs and furnish a bid. Because of superior in- formation which expedited prompt bidding, A landed the con- tract. Concerns of the A type usually secure the lion’s share of business, particularly on rush orders. ‘The stock record, therefore, is a valuable adjunct to the estimating department. ADVANTAGES OF STOCK RECORDS 381 Ready Knowledge of Balances on Hand As mentioned before, the running total columns of a mod- ern stock record sheet eliminate the need of a balance on hand column. The balances on hand, however, can be quickly determined by subtracting requisitions from receipts. With a knowledge of the quantity and cost of materials, etc., on hand, the designing department can intelligently design new work called for by production orders. Purchasing and pro- duction, likewise, are materially benefited by information of available balances of parts, materials, supplies, sub-assem- blies, etc. Fire Loss Adjusted Equitably One of the most important advantages of the perpetual in- ventory is that it facilitates an equitable settlement with insur- ance adjusters in case of fire loss. Adjusters naturally try to keep settlement amounts as low as is consistent with good business policy. But some adjusters have opinions with re- spect to stock records that are difficult to understand. A cer- tain adjuster, for example, who is supposed to be an eminent authority on loss adjustments, contends that a stock record is not advantageous in settling fire losses. He admits that insur- ance adjusters after a fire are under the necessity of receiving an inventory prepared by an appraisal company for what it may be worth, just as they would receive any other evidence submitted for their consideration; and furthermore, that the inventories prepared by such a company are in excellent form and in very minute detail, prepared very conscientiously, and as near correct as it is possible to make them, since the prop- erty owner desires exact truth wth respect to his property both for loss and for coinsurance purposes. He urges, however, that as values are subject to fluctuation—it has been violent in the past four years—an inventory made one year may not be of much value the next year. This adjuster, looking at the 382 COST ACCOUNTING matter of the value of stock records through company glasses clouded with company bias, fails to get the manufacturer’s viewpoint. Accountants do not agree with all the views of this au- thority. They contend particularly that in any event a stock record makes possible a more equitable settlement than could otherwise be had, since comparisons between past perpetual inventories and past physical inventories can be made. If the comparisons disclose substantial agreement between.these two classes of inventories, the adjuster should be willing to con- sider the book inventory at the time of the fire loss as indica- tive of the physical inventory burned up. To be sure, the book inventory carried at cost prices may not represent market prices at the time of the fire loss. Even so, book records are indis- pensable evidence of losses in respect to quantities and values. In fact, book inventories are usually more correct than phys- ical inventories. This view is not enough appreciated. A professor of cost accounting was addressing a Lumber Dealers’ Association on the value of stock records in time of fire loss. Many of his hearers kept no stock records. During the ad- dress one of the manufacturers present received a telegram saying that his lumber yard had been completely destroyed by fire. The telegram was made known to the audience. The dramatic incident lent vivid color to the weight of the pro- fessor’s statements. Reduction of Obsolete Stock Since the stock record shows the dates on which supplies were received, the age thereof can be determined. If the store- keeper keeps in close touch with the market, he can ascertain whether or not his old stock is obsolete or obsolescent. Such stock should be disposed of in some way, because it is more or less of a dead loss. Accumulations of ‘‘shop-worn” stock de- crease the stores turnover, which in turn decreases the profits. ADVANTAGES OF STOCK RECORDS 383 Compilation of Monthly Financial Statements When stores records are maintained, financial statements can be compiled frequently—every month if desired—without the necessity of taking a physical inventory in the different storerooms and departments. It is true that the values of the book and physical inventories may not be the same, but the former are more likely to be correct. Asa result, the financial statements prepared monthly upon the basis of book inven- tories are very accurate. A monthly physical inventory of all the stock is not practicable because of the labor entailed and the time lost in production due to the partial or whole shut- down of the concern. Advantages of Stock Record Sheet Illustrated Special points in connection with the modern stock record sheet as shown in Chapter X, Form 14, may be mentioned as follows: Running totals Requirements and ordered Appropriated Received Issued WP wh 1. Running Total Columns By many tests made during the actual operation of stock records, it has been proved that the number of times a bal- ance is actually used is very small in comparison with the number of times it was computed. It has also been proved that an enormous amount of extra work is involved in the use of the balance method in answering questions of the pur- chasing, production, sales, and other departments with refer- ence to the quantities used in given periods. The reason for this extra work has been the necessity of adding the full detail of the entries for the period desired. 384 COST ACCOUNTING By the use of the running total method, figures desired can be quickly obtained through subtraction. For example, the balance on hand can be quickly determined by simply sub- tracting the total requisitions in the running total column from the total receipts in the running total column. Further- more, the running total method increases the accuracy of the stock records because it involves mostly addition and little subtraction. Balances of materials on hand, determined by the balance method, disclose only a net result. Balances arrived at by the running total method not only disclose that infor- mation but also enable questions as to quantity to date for any period to be instantly answered. Stock record clerks should watch every item of material, noting the length of time it has been in stock, how quickly it moves, etc. Whether or not stock records are a constant and useful source of cost data, depends largely upon the stock record clerks. 2. Requirements and Ordered Columns Because of the close relation between the required columns and the ordered columns of the stock record, they are here discussed together. The recapitulation of the requirements of material parts, etc., needed for the product that is to be manufactured is entered in the requirements columns. This information is obtained from schedules, shipping orders, and breakdowns of assemblies. The requirements are compared with the quanti- ties ordered, as shown in the ordered columns, in order to ascertain whether or not requirements are being covered by either production or purchase orders—production orders in the case of manufactured parts, purchase orders if material and parts are bought. In some cases only the actual or net requirements are entered. In other cases the minimum of material to be carried ADVANTAGES OF STOCK RECORDS 385 is recorded and added to the net requirements. This obviates an error which might otherwise arise through mentally adding the minimums to the requirements. When the minimum is entered in the requirements col- umns, total of the ordered columns must always equal the total of the requirements columns. If this practice is not followed, however, the minimum must always be mentally added to the total in the requirements columns so that the quantity required can be compared with the quantity ordered. 3. Appropriated Columns The quantity of material which it has been decided to use for machine schedules, assemblies, and shipments, is entered in the appropriated or reserve columns. Thus production con- trol and the scheduling of shipments are facilitated. The ap- propriated columns are arranged in such a way that a running total of the appropriations on each order, as well as the grand running total of appropriations on all orders, may be kept. 4. Received Columns There is little to be said about the received column, for the data entered in it are self-explanatory. As orders are re- ceived in full, the entries in the ordered columns should be checked off. In this way the management can ascertain whether the quantities which have been ordered to cover re- quirements have been received. The amount column must be filled out because the invoice cost and transportation charges of material are often entered separately. The unit price, which includes both the invoice cost and the transportation charges, is then recorded. 5. Issued Columns It has been found of little value to have the stock record clerk stop to extend the amount in the issued amount column, 386 COST ACCOUNTING or to make the entry after the extension has been made by a comptometer operator. In fact, on some stock record sheets the issued amount column has been omitted. It is sufficient to enter the price, as that affords enough information to enable all of the material received at one price to be properly cleared when entries are being made for requi- sitions. Relation Between Columns of a Stock Record Sheet In general, the relation between the different columns of stock record sheets may be summarized as follows: . “Requirements” less “Appropriations” equals the bal- ance of materials or parts, etc., not scheduled. 2. “Requirements” less “Ordered” indicates whether re- quirements are covered.’ 3. “Requirements” less ‘“‘Received” shows how far behind the plant is in getting material and parts needed for requirements, either from the outside or from manufacture. 4. “Requirements” less “Issued” shows requirements not issued from stock. 5. “Appropriated’” must never be greater than “Re- ceived.” 6. “Appropriated” less ‘Issued’ equals balance of ap- propriated material not issued. 7. “Ordered” minus “Received” equals amount due on orders, either purchase or production. 8. “Ordered”? must exceed “Requirements” by the amount of the minimum. g. “Received”’ less “Issued” equals balance on hand. load Advantage of Carrying Money Values on Stock Records Money values of all purchased raw materials, purchased supply material, all individual parts, sub or minor assemblies, ADVANTAGES OF STOCK RECORDS 387 and full assemblies—where the product is manufactured in standardized and segregated lots—should appear on stock rec- ords. There are a number of reasons for this procedure. 1. It is the only way to price out correctly material used. (See Chapter XII.) The safest and easiest method of pricing out material is by actual lots. It gives inventory balances that are correct and enables correct financial statements to be compiled. In cases where material is bought on more than one contract and is consumed in large quantities, it may be priced at average cost. 2. It saves clerical work. The stock record clerk should price each requisition, passing it on to the comptometer opera- tor for extension, and then it should be forwarded to the cost department. If values were not carried on stock records, it would be necessary to enter the quantity of each requisition on the stock records, to send it to some other clerk for pricing, and then to still another for computing and cost work. Furthermore, pricing should be done by the stock record clerk, since the stock record is the only record showing when each lot of material is exhausted. To prove this, consider the case of a price book kept in the purchasing department containing, for example, the following data: March 1, 500 pieces, $2.00 each........ $1,000.00 “25, 1,000 S 2:25 canes 2,250.00 June 15, 2,000 a 72 | i ee 4,700.00 These were spot purchases made at different prices. The material is used in odd quantities, some of it being consumed as late as July and August. In this case what price should the purchasing department use—$2, $2.25, or $2.35? If the purchasing department cannot price material in such a way as to allow accurate detailed costs to be kept, neither will the controlling accounts for material and supplies be accurate. If, on the other hand, the stock record clerk prices requisitions, 388 COST ACCOUNTING the items thereon can be easily identified, thereby insuring accurate pricing. To have pricing done by some department other than the stock record department is not desirable. Requisitions are not in shape for proper accounting of the material consumed. (See Chapters XI and XII.) On the other hand, each stock record sheet kept for each class of material shows the name or num- ber of the controlling account for that material. The stock record clerk marks the controlling account number or name on each requisition before it is entered on an accumulation sheet and then filed in the cost department. Thus proper credits can be made to material control accounts. An ideal perpetual inventory system involves a constant and systematic checking of items in order that the plant will not have to shut down for inventory. A cycle of checking for each control account should be completed at least once a year. When the cycle is completed and the individual stock record sheets show that each item has been verified, the dates on which the balances of the different accounts are to be struck are selected. The balance of each item must always be priced properly. This means that if the balance is larger than the last lot in and the previous lot price is different from the last, the bal- ance will be priced at the last lot price to the extent of the lot, and the rest of the balance will be priced at the previous cost. CHAPTER XXX UNDER- AND OVER-ABSORBED BURDENS Past Treatment In the first stages of cost accounting attention was confined practically to the direct-material and direct-labor cost. To these two items, constituting prime cost, was added a blanket percentage to cover the overhead. Up to twenty years ago this method was widely prevalent, and even today some indus- trial plants are still struggling along with costs compiled in this way. In those early years no one had any real knowledge of the meaning of overhead, or any conception of its enormous importance from an economical standpoint. In fact, over- head was for many years regarded as a great mystery—a sort of secret word which would emanate once every twelve months, after a secret conclave behind closed doors in the treasurer's office. Even today, it is repeatedly found that while men have had experience in keeping direct labor and material costs, as to the overhead they have merely applied percentages handed down to them by the appointed powers of the business, who had the sole hand in setting such percentages. As time went on and competition developed, it came to be recognized that the very elusive indirect expenses of a manu- facturing plant constituted a factor which had to be taken into careful consideration. Then came the development of “cards of accounts,’ a device which was really along the right lines. It was intended to give an analysis of the indirect cost which, if properly kept, would prove of some value. Still later, when it became recognized that any general percentage of overhead was erroneous and that a finer dis- 389 390 COST ACCOUNTING tinction was necessary in order to arrive at a cost which would more closely represent the true conditions, the indirect ex- penses were divided up into segregated accounts and extended into the various departments of the business. It is now recognized that there are hardly any two depart- ments in a manufacturing institution which should operate under the same rate of burden. This, therefore, has brought us to the stage of departmental rate of burden—the most modern and accurate method known. Annual Burden Rates Nevertheless, even though it is now acknowledged that departmental burden rates are necessary, only a small minority of manufacturing institutions assemble their actual burdens oftener than once a year. While manufacturing plants are quite fairly analyzing the various items which make up the burdens, they allow this tabulation to cover the space of an entire year, keeping the same purely from an accounting stand- point. Their sole purpose is to determine a new rate for each department to be used during the following year. There has been a general failure to realize that the figur- ing of actual burden every month has a value far and above that of purely an accounting function, namely, that of estab- lishing a control of all the indirect expenses as they are in- curred. In other words, from a managerial standpoint, the old method of compiling annual figures is absolutely valueless. It is much to be regretted that a greater percentage of manu- facturers have not come to realize the managerial advantages of having monthly statements of the various burdens in place of the annual statement. Monthly Statements of Actual Burdens It has been distinctly proved that a very close rein can be kept on the indirect costs of a manufacturing plant by UNDER- AND OVER-ABSORBED BURDENS 391 the compilation of monthly burden statements, on the assump- tion that these burdens are computed on carefully prepared monthly orders, usually called ‘standing orders.” These orders are so prepared that the various groups, which make up the indirect costs, are clearly defined in a manner to be definitely usable. This particularly applies to the expense accounts which represent service activities—Elec- tric Power, Trucking, etc.—and which are at the close of each month distributed to the various departmental burden accounts and combined with the indirect costs which are charged directly to the departmental codes. In this way, live and accurate statements of the various items which make up each depart- mental burden can be assembled and presented each month. By comparative statements, the executive organization is thereby placed in a position to handle these costs as a regular managerial function, and cannot fail to effect reductions if the proper study and research is made. Necessity for Standard Rates On the other hand, actual burden which is entered in the burden statements cannot be used in costing current work in process or in estimating selling prices, because actual bur- den is not known until the end of each month. Product must be costed and selling prices fixed during the month—indeed, selling prices are often set long before the product is made. Accordingly, in calculating the burden to be applied to current work in process, predetermined rates are used, generally based on the average monthly figures for the past year. These rates are called “standard.” Moreover, burdens should be based on normal conditions, taking into consideration not merely the average of burdens but also the normal productive capacity of the plant. Every manufacturing institution has its high and low marks of pro- duction. As a result, with respect to normal burdens, a period 392 COST ACCOUNTING of high production will furnish such a large figure as a basis for distributing the burdens that the rate per direct-hour or direct-labor cost decreases to a considerable extent. On the other hand, periods of depression will produce a very high rate per direct-labor hour or per direct-labor cost. If such extreme rates are used, disaster is certain when the product is sold. Work taken on the basis of the low burden rate caused by abnormally high production will result in enormous losses if produced by the plant during normal or low productive times. Work figured on the basis of the high burden rates caused by low production will never be secured, because of the high prices which would naturally be asked. Unfortunately, many manufacturing institutions attempt to price their estimates of selling prices and to assemble their actual costs on the basis of the actual burdens for the month in which the work is estimated on or performed—or at least for no more than the last two or three months’ average. This method cannot be used in any plant or group of plants with any safety whatever. Even those plants which manufacture a steady stream of product throughout the year are subject to variations as between summer and winter, which precludes any possibility of using burden figures in this manner. The matter of repairs to equipment would alone furnish sufficient argument to disprove the notion that any collection of figures covering a short period can be safely used. The greater amount of all necessary repairs for an entire year may be concentrated, by chance, in any one or two months during the year. This is particularly true in all lines of industry in which heating furnaces are used—foundries, forges, rolling mills, and the like. An attempt to do business on the basis of actual burdens is thus fair neither to the producer nor buyer. The only fair basis is to figure all estimates and applied costs with a pre- determined rate of burden for each department, basing this UNDER- AND OVER-ABSORBED BURDENS 393 rate on an average of monthly figures for a period sufficiently long to indicate how actual burdens have been running. Standard Rates—Duration Departmental burden rates should be adjusted on such a standard basis—or what might be termed a long average basis —covering a sufficient time to represent properly the indirect cost of the plant in a level figure which is used in estimating and cost figuring. The standard burden rate, predetermined in this way, is used for a certain period or cycle of the business—a period sufficiently long to embrace all seasonable features. In the usual manufacturing plant this cycle is one year. The reason is that one year in a seasonable business would cover the busy and the dull seasons, as well as the winter and summer. This period, therefore, has come to be quite generally regarded as the proper cycle on which to adjust a standard rate of burden. In some lines of work, indeed, it is necessary to allow for expenses which come in a cycle of from two to five years. An illustration of this might be cited in certain rolling mill oper- ations in which heating furnaces are expected to operate any- where from two to five years. It is necessary to take into consideration, when adjusting the rate of a department which employs equipment of this nature, the amount of money in- volved in the major repairs or rebuilding which must be done in the long periods and which must be prorated throughout the time intervening. Such long periods are an exception, how- ever, and as a general rule a cycle of one year will cover the great bulk of both major and minor repairs. Control of Burdens After standard burden rates have been determined, the next natural step is to provide the means of controlling the actual burden of each operating department through depart- 304 COST ACCOUNTING mental burden statements, as a result of which the greatest profit may be obtained from the figuring of costs. There is entered on each burden statement the burden ap- plied to productive orders at the standard rate for the depart- ment concerned. If in a particular month the product is running low, the natural result is a balance in the burden account for each department which is not absorbed into the actual costs by the use of the standard rate. On the other hand, if the month should happen to be one of high production, there is entered in the burden account an amount of burden applied to actual costs in excess of the actual burden expended during the month. Asa result the actual burden accounts become, in a sense, reserve accounts; in good months the actual burden is overabsorbed by the standard burden, and in the lean months this overabsorption is reduced by the underabsorbed burden which remains on account of the lack of product going through. Theoretically, if the business runs as expected, operating burden accounts should balance at the close of the fiscal period. In other words, there would be in such cases no under- or over-absorbed burdens. Older Theories—Machine-Rate Control The effort to handle in greater detail the indirect costs of a business and to distribute them more carefully among the productive orders, led some years ago to the devising of more or less detailed methods, in some cases much overdetailed. The machine rate method of distribution offers an example. This method has many merits, but on the whole it must be admitted to have been abused, particularly in view of the enormous detail to which it has led. It is essential, of course, to apply certain costs on the basis of machine hours (see Chap- ter XXXII). But the attempt to dispose of the entire body of indirect costs in that way, by means of voluminous distribu- UNDER- AND OVER-ABSORBED BURDENS 395 tions on the basis of floor space and other considerations, has proved altogether too elaborate and expensive to use. More- over, it has proved too inaccurate. In developing these machine rates, the problem of dispos- ing of the unused machine time and its value led to many discussions. The problem was especially acute with those systems in which almost the entire overhead was supposed to be distributed through the medium of the machine hour. To dispose of the unused time which inevitably occurs was bound to be a serious matter, with any system which attempted to figure the costs on the basis of 100% of maximum time, rather than on the basis of normal productive capacity—say, from 80% to 90%. Under the old theories the entire cost of burden, or the entire cost as expressed in machine rates, was used—or rather the attempt was made to use it—in figuring the cost of prod- uct. These theories have been long ago proved to be ruinous to a business. To use the actual cost of the overhead during dull times is almost certain to prohibit the securing of any new business. To include the many hours lost through idle equipment when the machine rate was used, or the entire burden when the plant was running at, say, 50% capacity is an absolute impossibility. Even if it were not an impos- sibility, it would be an absolute injustice to the purchasers of goods to expect them to pay for expenses which in no sense could be considered in proportion to the value of the goods purchased. Church’s Theory of Accounting for Idle Machines The unfairness of the old doctrine with respect to idle machines and equipment was modified somewhat by A. H. Church in his books on “The Proper Distribution of Expense Burden” and “Production Factors.’’ He said, in substance, that idle time overhead should be charged to manufacturing « 306 COST ACCOUNTING costs through the medium of a supplementary rate, in con- junction with the use of the fixed machine rate for normal or standard manufacturing overhead; and that the supple- mentary rate served as a sort of barometer of factory effi- ciency. He believed, therefore, that an increase in the sup- plementary rate disproportionate to the increase in the fixed machine rate indicated a decrease in factory efficiency, and vice versa. The chief merit of Church’s theory was that it focused attention on idle machine and equipment costs, which had formerly not been shown in separate accounts. But his theory, according to some good cost accountants, is erroneous, in that it led to charging the costs of idle machines to manufacturing costs in cases in which the factory management was not re- sponsible for machines being idle. Such charging made it extremely difficult to compare normal costs which were not separated from unusual costs, for the costs of idle machines were included along with the normal overhead in the manu- facturing costs. This combination, by uniting two independ- ent variables, made comparison of overhead costs and total manufacturing costs practically worthless. Costs appeared high when production slackened, and low when it increased. As the production pendulum swung back and forth during busy and dull seasons, the cost records failed to provide an accurate basis for proper management. The deficiency of cost records under this method was particularly felt when costs were at their highest and lowest points. The system failed the manufacturer entirely when most sorely needed. Suppose a manufacturer’s costs appeared high by the method of accounting under discussion. He might increase his selling price, but that would decrease his orders and put tighter brakes on his production; instead of solving his problem, he accentuated it, this being the only possible * result from the method used. UNDER- AND OVER-ABSORBED BURDENS 397 Nor did the trouble end here. In periods of curtailed production, both under the old method and under Church's method of accounting for the costs of idle machines, unit costs increased because the fixed overhead continued and was distributed over a lesser number of units. Such a condition frequently influenced manufacturers to buy a product for resale when the purchase price was seemingly lower than the price for which they could manufacture and sell it. Further- more, the firm’s costs for all products under the erroneous treatment of the costs of idle machines might be greater than the selling prices of its competitors. If the above policy were not a good one for a single product, how could it be a good one for all products? If carried to its logical conclusion, it would result in a factory changing from a manufacturing to a buying concern. If manufacturers realized that not all the cost of idle machines is a manufacturing cost, that a portion is a general charge against the profits, and that the factory should not be regarded as a “cost samaritan,” so to speak, for the selling and administrative department or the burden as a whole, they would make a suitable provision for the cost of idle machines and would not formulate illogical policies. As a matter of fact, intelligent policies are more needed by some firms than funds. Modern Theory—Under- and Over-Absorbed Burdens The fact that outside business conditions have a vital bear- ing on the running hours of machinery and equipment re- ceived little attention up to within comparatively recent times. When, however, the fallacy and limitation of Church's theory became apparent, a new theory for the handling of under- and over-absorbed burden was practiced by C. H. Scovell in the spring of 1911 and was stated in an address before the National Association of Machine Tool Builders on October 398 COST ACCOUNTING 22, 1913.1 This theory is that ‘‘only a part of the total bur- den is chargeable to the manufacturing cost of the product made during periods of curtailed production, the part charge- able being the same percentage of the total burden, as the cur- tailed production is of the standard production.” For example, suppose the normal production is 10,000 units, and the normal factory overhead is $5,000. A bad season occurs and the production falls to 5,000 units, or 50% below normal; the burden chargeable to the 5,000 units would be 50% of $5,000, or $2,500. The rest of the burden might be charged direct to the Profit and Loss account. This theory has been ably supported by the late H. S. Gantt and others. The theory was stated by Mr. Gantt in a paper entitled “The Relation between Production and Costs” presented at the spring meeting of the American Society of Mechanica] Engi- neers, June, 1915, although presaged in a paper entitled ““Meas- uring Efficiency,” delivered at the annual meeting of the same society in December, 1914. According to Walter N. Polakov, formerly associated with Mr. Gantt, the theory was practiced by the Gantt Company as early as 1908. A necessary feature for carrying out the theory is to decide just what is normal or standard production. A definition of standard production, however, has already been given. The modern theory of accounting for over- and under- absorbed burdens was in use even earlier. The idea of stand- ard burden, with the over- and under-absorbed balances car- ried monthly to the profit and loss statement, was a principle used as early as 1906 by William J. Gunnell, certified public accountant, of Buffalo, New York, and J. P. Jordan, then associated with him. The statement on page 400 shows the form of the actual statement now in Mr. Jordan’s files, of the machine shop of the Waterous Engine Works Company, of Brantford, On- 1See C. H. Scovell, “Cost Accounting and Burden Application,” page 71, footnote 2. UNDER- AND OVER-ABSORBED BURDENS 399 tario, for the month of June, 1907, at the bottom of which are shown the comparative figures of the actual burdens back to and including November, 1906. It is interesting, moreover, to note that two years later, C. E. Knoeppel, who at the time knew nothing of Mr. Jordan or Mr. Gunnell, installed almost identically the same method in the plant of the Struthers Wells Company, of Warren, Pennsylvania. The Loss and Gain account of this company reproduced on page 401 shows the unabsorbed burden carried to the Loss and Gain account, after the burden has been cred- ited with the amount applied to actual costs at standard rates. As evidencing the great improvement which has been made in the presentation of cost records, it is instructive to note that both of these statements, while illustrating the point in question as to the use of standard rates and the carrying to Profit and Loss of the under- and over-absorbed balances, are from the point of view of modern practice somewhat crude, and of course no longer to be used as patterns. Refer- ence should be made to Chapter XXI for the present struc- ture of burden statements. The Future of Cost Accounting The developments outlined in this chapter represent the results of a consistent demand, on the part of those responsible for the manufacturing operations, for actual and usable figures to act as a guide. This demand compelled the preparation of statements of indirect costs so grouped as to make tangible what had pre- viously been regarded as intangible. In this the influence of the engineer has contributed increasingly. In the future of cost accounting the close co-operation of the accountant and the engineer will unquestionably lead to improvements and refinements as notable and far-reaching as those related in this chapter. 400 COST ACCOUNTING Waterous EncinE Works CoMPaNny Burpen AccouNT—MAIN SHOP—JUNE 30, 1907 To June 30, | To May 31, | Month of 1907 1907 June, 1907 Direct Manufacturing Expenses: Changes Loss...........-.000005- $ 000.00 | $ 000.00 | $ 0.00 Repairs and Replacements......... 0000.00 0000.00 000.00 Sundry Expense.................. 0000.00 000.00 00.00 Painting Machinery............... 000.00 000.00 00.00 Burden Labor..............-...-. 00000.00 0000.00 | 0000.00 Labor Adjustment................ 000.00 000.00 00.00 Spoilage Loss..............-..00. 000.00 000.00 00.00 Power, Light, and Heat........... 0000.00 0000.00 000.00 Buel; (Rorge)... iei wesc ces ses se aan 0000. 00 0000.00 000.00 Insurance and Taxes.............. 0000 .00 0000 .00 000.00 Insp. Lumber, and Machinery...... 000.00 000 .00 Bonus Labor............-....666- 000 .00 000 .00 00.00 $o00000.00 | $00000.00 | $0000.00 Proportion of General Expenses: Engineering Salaries.......... 80%] $ 0000.00 | $ 0000.00 | $ 000.00 Engineering Supplies.......... 80% 000.00 000 .00 0.00 Stable Expense............... 80% 000 .00 000.00 00.00 Factory Salaries.............. 80%| 0000.00 0000 . 00 000.00 Storekeepers ................ 80% 000.00 000.00 00.00 Watchman. os cncesaieraa ants 4 80% 000.00 000 .00 00.00 General Labor................ 80%] 0000.00 0009 . 00 000.00 General Repairs.............. 80% 000.00 000 .00 00.00 SHIPPING sissies aie king eae eave des 80%| 0000.00 0000.00 000.00 Receiving.............00 cee 80% 000 .00 000.00 00.00 Mfg. Sundry Expense......... 80% 000 .00 000.00 0.00 CATA RES fae sine chee en ees 80% 00.00 00.00 Car Demurrage........-...... 80% 00.00 00.00 Preightse: ostsum ecshe nde ewe eta 80% 000.00 000.00 0.00 DUty wench eck nek sha wh os DEREEE 80% 000.00 00.00 0.00 $00000.00 | $00000.00 | $0000.00 Credit: 70% on Productive Labor. ae $00000.00 | $00000.00 | $0000.00 Overcharge credited to Profit and LOSS 5.4 no duae ced ieee omy tdaaces $ 0000.00 | $ 0000.00 | $ 000.00 PERCENTAGES OF BURDEN BY MONTHS Average to Date 72.73% 71.22 67.95 68.13 Month © Percentage 72.73% 69.58 62.43 68 64.63 69.88 66. 81 62.39 67.41 67.69 67.56 66.92 UNDER- AND OVER-ABSORBED BURDENS 4ol STRUTHERS WELLS COMPANY Loss anp Gain Account, APRIL, 1909 Debits Boiler Shop Burden Profit and Loss... ..........0 0 ccc eee eens $1,931.16 Machine Shop Burden Profit and Loss..............-.....0000 2,127.02 Balance: Gain: for Mos cs. suing aus pease medalioses anaes 2,797.97 $6 856.15 Credits Former Profitiand, Loss iss. coute wien cde leew ia arte caats wae emanations $ 263.07 Boiler Shop Income Account... 00... . cece cece ee eee eee eee 3,903.52 Debits Oil Bole? Salese inscccncaraabiges memennaneeanas $ 304.92 Credits Mackay’s Boiler Shop Sales..................... $3,483.32 New York Boiler Shop Sales..................... 76.64 Boiler Shop General... 0.0.0.0... 0. cece eee 648.48 $4,208.44 Machine Shop Income Account... ....... 0.0.0... c cee e eee eee 2,111.72 Credits Crawford’s G. E. Sales........... 0000 e cece eee $1,134.95 Gee Sales yccce chhaw sande Camas aaa role cena 664.18 Machine Shop General.............. 0.000000 00 86.60 New York Bngineinics wp cigeaanwinarnnmsraraanaagcy 2.68 Oil Engines, «sir ce ne cx veer ater panne dR 175.61 Pittsburgh G: Biss csscpaguncisiewssadaweradenes 47.70 $2,111.72 Foundry Income Accounts 5 iiacacetis ata saree pean ew eda eee 557-84 $6 856.15 CHAPTER XXXI REGULATION OF IDLE EQUIPMENT DELAYS Delays of Equipment The large investment in the machinery and equipment of an industrial plant necessitates getting the utmost use out of this equipment. Proper planning of production and regu- lation of plant activities so as to secure this result constitute one of the greatest problems in industrial management. A well-known firm of industrial engineers recently stated that the average efficiency of equipment which they have found in plants when beginning their services has been about 50 per cent. This seems a ridiculously small percentage, but careful investigation reveals a multitude of causes which re- sult in equipment standing idle and thereby losing the profits which otherwise would be made. The concern quoted above makes the further statement that 80 per cent of the causes of idleness of equipment are the fault of the management. When the causes of idle equipment are analyzed, this also may be seen to be entirely possible. Accountants and engineers have devised almost every con- ceivable kind of scheme to bring about a greater use of all the facilities of industrial plants. Many of these schemes, however, have failed to reach the root of the trouble at the time the trouble is occurring. They have generally relied upon weekly and monthly re- ports of the use of equipment—reducing the value of delays to a money basis—and upon elaborate statements prepared therefrom of the money lost in idle equipment. The money loss has then been carried into the burden accounts, thereby loading these accounts with the results of inefficient manage- 402 REGULATION OF IDLE EQUIPMENT DELAYS 493 ment, to the point sometimes of producing costs which would absolutely prohibit the securing of new work on account of high prices. Practically every plan of reducing idle equipment to a money basis resolves itself into a post mortem proposition which does absolutely no good. Treating Causes of Delays at the Source The principal objective to be secured in connection with delays in the use of equipment is to stop the delays. This seems a simple statement, but it means a great deal. If action is taken at the time delays occur, most of the causes of delay can be readily corrected. This discussion concerns particularly what is known as “standard equipment,” that class of equipment which would be busy all the time, provided the plant management kept the operating departments fully supplied with proper mate- rials, operators, tools, etc. The so-called single-purpose ma- chines are in a class by themselves. With those the problem is one of the sales departments keeping the plant supplied with the particular kind of orders required to keep the special equipment going full speed. It is true that there is another class of single-purpose machines whose operation even for only an hour or two per day makes them well worth the money they cost, because of their high speed and the great savings they effect. Such machines, however, as they are of a highly special nature and relatively very few, are hardly to be considered in the problem of idle time. The chief question is how to deal with the causes of delays at the source. If a machine breaks down, the management should not have to wait till the end of the week to learn that the machine broke down and was idle for two days. The breakdown should be a matter of record 15 minutes after it happens, in order that all the facilities of the control de- 404 COST ACCOUNTING partment may be exerted to get the repairs made at the earliest possible moment, thereby reducing the idle time which would result if the repairs were allowed to drag. Accounting for Idle Time As explained in Chapter XV, the dispatch clerks have the duty of recording not only the time spent by men on par- ticular jobs, but also the time of idle equipment, using a special card somewhat resembling a time card. Such a card, applying particularly to machine-shops, is shown in Form 42. The card is of a different color from the time cards, prefer- ably pink or red, in order that when displayed in the dispatch board it will indicate graphically the number of pieces of idle equipment covered by the dispatch board. The entries are simple, consisting of only the department and machine number and the time idle. The rest of the information is recorded by simply inserting a cross showing the cause of idleness and also whether or not the piece of equipment is a regular or a single-purpose machine. On the dispatch board a clip is. provided for each working place, that is for each individual piece of machine equipment. At all times, at the clip representing each machine, there will be either a direct worker’s card, indicating that the equipment is working, or a pink card, indicating that this piece of equip- ment is idle. Action Required to Correct Causes of Delays The action required in connection with delays in the use of equipment may be considered under two heads: 1. Anticipative action to prevent the occurrence of delays. 2. Action to be taken while the delays exist. Preventing delays is by far the more important task. On the thoroughness of such prevention depends the correction 405 REGULATION OF IDLE EQUIPMENT DELAYS CHE x S&L ‘azIS) ‘preg ourypey a[py ‘ch w0q 6/6/6:6:6:6 616:6:6 g|sieisicie g]eie'8 : sielay eae : t NOILONYLSNI ONILIVMY NMOQNV3YE ANIHOVA "UNd "ONIS uvinoay dyaizizi2i2 Alaigiz 9}9]9:9,9:9 9|9:9!9 3 3 cisis gis S gjcicisg $1001 YOd ONILIVM SuaqQYO ON Ssai:suceu plelvipivir vlviviv ees sic eles 9 z e & eee e e € e e df 139 ONILIVMY WINSLYW ON ‘ON ANIHOWW elzjziziziz Zjziziz aft vitit Levee o L 1d Gestoad snd = os.) | “ON OUrY 0 ale 0:00 olooo YaMOd ON YOLVYSdO ON iswuaRasS je Ee ” is 5 5 e x a | | l4 oe RSlal 1s a] jelSlay leiSlal jajSie) leSla] felsjay lejslal laisls ‘ON 8.209204 “ssv-w ‘NoLsog SSNIHOVW 310! DNILYOd3Y HOS auyO SIHL 36 ‘0D _DNIALOVANNYW NAGIOH 406 COST ACCOUNTING of most of the losses from idle equipment. It is the function of a production control department to watch and regulate all movements, and thus catch these dangerous and costly delays to equipment at their source. That method is far superior to any possible method of post mortem accounting for value of lost time, which various machine rate and departmental cost systems try so hard to provide. The old saying, “Locking the stable door after the horse is stolen,” fits this situation closely. It is of little value to know how much the loss has been in comparison with the steps taken to prevent the loss before it occurred. Causes of Idle Machines and Equipment The principal causes of idle machines and equipment, as indicated on the card shown in Form 42, are: No operator. No material. No orders. . Machine breakdown or under repairs. No power. Awaiting set-up. Waiting for tools. Awaiting instructions. ON ANRODe 1. No Operator The responsibility for keeping up the supply of operators is primarily within the duties of the employment department. That department has the task of securing and distributing the working forces so that all pieces of equipment shall be kept going full speed, so far as the man power is concerned. It is essential, however, for the employment department to keep in very close touch with the operating foremen for two reasons: (1) to be sure that the operating foremen are using the employees in a way to keep them at work and not cause REGULATION OF IDLE EQUIPMENT DELAYS 407 them to quit or stay away from the job; and (2) to overcome the natural conditions of labor shortage which applies to some departments in greater measure than to others. The production control department also has an important function in this connection. It was specified in Chapter XV that a late and absent report should be made up each morning. A copy of this report should be sent to the production control department, thus enabling that department immediately to ascertain what equipment is idle from the cause of no operator. A check should be made at once of the schedules on the equipment which may appear to be idle from the cause of no operator, and no time should be lost in getting into commu- nication with the employment department to learn what relief can be obtained there. If no men can be provided through this particular channel, the schedules throughout the shop or in this department and also other departments should be con- sulted to find some point where operators can be secured to man the idle equipment. In normal times, and even in abnor- mal times, a great deal can be accomplished in this way, pre- venting the loss of production which otherwise would result. 2. No Material Lack of material operates in many ways to delay the equipment, chiefly by— 1, Failure within the department to have the material for a job at the machine at the time the operator is ready to start. 2. Failure of the storeroom to fill a requisition in time to permit delivery to the machine when the material is needed. 3. Failure of the purchasing department to get necessary material to the stockroom to permit delivery at the time the job is ready to be started. 408 COSY ACCOUNTING It is of extreme importance that material required for the performance of any operation shall be ready at the machine when the previous job is completed. Failure in this point re- sults in many delays, all of which could be eliminated by the production control department. Failure within the department to have the material on the spot when a job is to be started, is purely a breakdown in carrying out the internal transportation procedure which is under the full responsibility of the production control depart- ment. The dispatch clerks have entire jurisdiction over all movements of the material. As they know that a machine will need material for a job at a certain time, it is clearly their duty to see that such material is delivered to the machine in time. Delay from this cause, accordingly, is a delay which should never occur. Failure of the storeroom to fill a requisition for the raw material or the parts required for an assembly order is in a similar way directly the fault of the production control de- partment through the dispatch clerk. The movement of the raw material from the storeroom is also under the entire juris- diction of the production control department. This delay also should never occur if the organized procedure is strictly car- ried out. Failure of the purchasing department to get material into the plant in time for use is a different matter from the two preceding cases. Nevertheless, except for abnormal condi- tions, even this delay may be traced back to the stock record division of the production control department. If the data in connection with all the raw material have been adequately taken into consideration, if sufficient time has been allowed for the process of issuing the purchase orders, for making the shipment, and for the transit of the material, there should ’ be no delays in connection with the receipt of purchased material. REGULATION OF IDLE EQUIPMENT DELAYS 409 The matter requires close co-operation between the pur- chasing department and the production control department, but in the last analysis the main responsibility lies with the production control department. Of course, failure to receive raw material in time does not always result in idle equipment, as a change in schedule may be made which keeps the equipment running full. On the other hand, in specialized plants the results are often dis- astrous, particularly, for example, in automobile plants, where whole rows of regular machines are set aside purely for per- forming certain operations on particular pieces of material. Another illustration may be found in any high-speed manu- facturing industry—the manufacture of rubber tires, for em- ample—where a slip in keeping enough cotton fabric ahead will cripple the entire flow of product and possibly shut down the entire plant. It must always be borne in mind that the function of the purchasing department is to purchase. It is the responsibility of the production control department, how- ever, to see that material is purchased in sufficient time and in sufficient quantity. If this duty is carried out to the letter, the delays due to non-receipt of raw material can be avoided. 3. No Orders Lack of orders may be owing to either of two reasons: 1. Failure of the plant order department to issue pro- duction orders in time to provide the work for the machines. 2. Failure of the sales department to supply the factory with sales orders which are necessary to keep certain kinds of equipment busy. The first one should be entirely eliminated. It is a matter either of neglect or of overloading on the part of the depart- ment issuing the production orders. The production sched- 410 COST ACCOUNTING ules show clearly the work ahead and any failure to issue pro- duction orders considerably in advance of the time the work is required for the machines is a neglect which is practically inexcusable. Yet that very thing happens in many cases, with results that are disastrous to perhaps more than one piece of equip- ment. The absolute removal of this cause for delay should be a matter of most strenuous action by some responsible execu- tive. Failure of the sales department to supply the factory with orders is a cause of delay which is subject to considerable debate. It should be said, however, that a production control department which is properly on the job can anticipate short- age of work, and thereby cause action to be taken by the sales department. Otherwise the sales department may know noth- ing of the fact that certain lines of work are running low. A good illustration may be seen in a jobbing foundry where special jarring machines may have been installed to take care of work of various sizes. It may be that this par- ticular foundry will do work ranging from small castings in snap flasks to castings weighing two or three tons, which can be made on the large jarring machine equipment which has been installed. The same thing is true of jobbing machine- shops or of any other kind of shop where there is liability of a shortage in various kinds of work. The production control department, as the only depart- ment which has the information as to the exact tonnage ahead, has undeniably the duty of notifying the sales department of the shortage of orders for particular classes of work. If this function is properly performed, in the great majority of cases the sales department can easily secure the orders to keep all classes of equipment going at full speed. The second reason for delay from lack of sales orders applies most particularly to special or single-purpose machines. REGULATION OF IDLE EQUIPMENT DELAYS 411 It should be given most particular attention by the sales de- partment. Very often the sales department is responsible for installing such machines, agreeing to keep them busy if the investment is made. 4. Machine Breakdown or Under Repairs The breakdown of machines, which occasions a large per- centage of the lost time in the use of equipment, can be reduced to a minimum by proper management. A very effective means is the installation of anticipative inspection, applying the prin- ciple of a “Stitch in time saves nine.” The fact is, with probably the majority of breakdowns, that if proper inspection of the machinery had been carried out, the weakness which finally resulted in the breakdown could have been eliminated before becoming a serious factor. Speedy attention should be given to each case of breakdown, to get the machine going at the earliest possible moment. This is a function of the control department, which should follow up the repair depart- ment actively and see that all possible speed is used in getting the machine back into production. Many of the breakdowns occur through breaks of belting, a cause of delay which in nearly every case is absolutely in- excusable. Any mechanic can tell by the looks of a belt whether it is nearing the point of breakdown. A long delay may be easily avoided by having a new belt cut and put into place during the time the plant is not operating. Inspection of motors should be made daily, particularly in plants where individual motor drives are used, and also when the group plan of drive is used, where the breakdown of a motor is a very serious consequence. It seems almost unneces- sary to prescribe this action, but in many plants this inspection is not made and the resulting losses from idle equipment are very heavy. Care in cleaning motors saves many dollars in repairs. 412 COST ACCOUNTING Line shafting should be subject to constant inspection both as to its line-up and as to the matter of constant oiling and care. The pulleys on the line shaft are constantly loosening and need unremitting attention. The more intricate the machine, the greater the necessity of constant inspection. This applies particularly to such ma- chines as may be found in foundries, grinding departments, and other department where there is a great deal of dust and a liability to burn out bearings and tie up the machines in other ways. A matter especially to be considered with regard to inspec- tion is that very often, when a break occurs, the damage done is greatly in excess of what it would have been if the weak point itself had been repaired before the serious break took place. A broken belt has been known to fly through the air and land in the gears of another machine, causing another breakdown and a loss from broken equipment many times the value of the belt which caused the trouble. To this must be added the loss in production occasioned by the breakdown of both machines. Constant surveillance by foremen prevents many break- downs. Foremen can require material to be properly piled and small tools to be properly taken care of while lying on the vari- ous machine tools, and thus run no risk of causing expensive accidents. Foremen, assistant foremen, and inspectors can earn their salaries many times over by co-operating with machine inspectors in watching all conditions which have to do with causing breakdowns and tying up equipment. When a machine does break down, the production con- trol department should follow up the repair depart- ment to have repairs made and get the machine back into service as quickly as possible. In the case of a breakdown this work has to be done during working hours. All other repairs, however, the production control department should REGULATION OF IDLE EQUIPMENT DELAYS 413 have performed during the regular hours of shut-down rather than during the regular working hours so as to keep the equip- ment in operation. 5. No Power Delays due to “no power” are usually caused by break- downs in the power house in cases where power is generated within the plant. Lack of power may cause a stoppage of work in case of a breakdown or burning out of the motor driving either an individual machine or a group of machines. This cause of idle equipment can be obviated in the majority of cases by the anticipative inspection of electric motors. In case of delays from this cause when the power is gen- erated by the company itself, the power department must be followed up, so that the supply of power may be reinstated at the earliest possible moment. In the case of failure of power brought in from the outside, it is always necessary to ascertain at once from the distributing station the cause of the failure. It may be that the distributing station knows nothing about the failure of power until notified by the consumer, 6. Awaiting Set-Up Delays from failure to have machines set up in time for jobs may arise from either : 1. Failure of the operating department to have a suffi- cient number of set-up men. 2. Failure of the production control department to sched- ule work so that the set-up of machines is well dis- tributed, in order to avoid peak loads on the staff of set-up men which ordinarily is sufficient to handle the necessary work. The first cause must be eliminated by the operating depart- ment itself, which should maintain a sufficient corps of set-up 414 COST ACCOUNTING men. As to the second cause, the control department must so plan the work that undue bunching of set-ups is avoided. A well-organized production control department is fortified _ with the records of set-up time required for each and every job which is to be put into work. Ifa control board is used, this set-up time appears graphically, and therefore is easily noted. This department is also fully aware of the number of set-up men available in each department. It is entirely the fault of the production control department if a number of jobs which require the services of the set-up men are delib- erately scheduled to start at the same time. Neglect of plan- ning, indeed, is usually the largest factor in connection with the delays which occur on this account. Strenuous executive intervention is sometimes needed to overcome this cause. 7. Waiting for Tools Delay is caused very often by men having to wait for tools, usually because of the failure of the control department properly to plan and carry out the preliminaries in connection with each job to be performed. It is a duty of the control department to safeguard against delays by seeing that all tools including jigs, etc., are ready ahead of the time for starting each job, and that they are delivered duly to the machine. In the majority of manufacturing institutions the runs of work are sufficient to justify proper tooling. Even in a job- bing-shop where jigs may not be used, it was long ago demon- strated that the regular cutting tools should be ground in the toolroom and kept in readiness. In the production of many pieces of product it is absolutely necessary to have complete and intricate jigs. The responsibility for supplying jigs rests between the operating department concerned and the production control department. The former must report any breakage or spoil- REGULATION OF IDLE EQUIPMENT DELAYS 415 age in tools being used on a job, in order that the latter may have the break repaired before the job is again scheduled. Special tools damaged in the operating departments should not be returned to the toolroom until they are repaired. In foundries, patterns which are damaged during the progress of a job are often returned to the pattern vault without being put into proper shape for the next job. Patterns are often damaged while in storage. Hence, it is essential for the pro- duction control department to check up the tools, etc., suffi- ciently ahead of the requirements in order to be sure that everything is ready to start the work on jobs. 8. Awaiting Instructions In some instances it is necessary to give the operator defi- nite instructions in connection with the work to be performed. The instruction may consist of explaining blue-prints or mak- ing clear other details. It is definitely the duty of the oper- ating foremen to be on hand to give the proper instructions at the time the material is delivered to the machine ready for the start of work. The dispatch clerk, moreover, representing the production control department, who is aware of the fact that instructions have to be issued, should make it his par- ticular duty to give the foremen advance notice that this job is about to be started, thereby assuring attention to instructions and elimination of any delay. Idle Machine Report To aid in the careful watching and analysis of delays, an idle machine report is illustrated in Form 43. This form, it will be noted, gives a statement of the number of hours each individual piece of equipment is idle; the number of hours it should have run, based on the standard hours of the shop; the number of overtime hours run; and the per cent of the total idle time to the standard hours and also to the total hours COST ACCOUNTING 416 CAQ XII ‘azig) 9 ‘woday auryse ap “fh w40y Melon | aivmy | aivav|aivav| on [MIYe24 | on aWioL uvin53y || sunon SRDVLNE0URd 6YNOH A1al SUNOH ONINNNY Beyer 60 NIN aod 7 ‘ Ra ES ee ee 1HOdgaY ANIHOVW A710) ‘SSVW ‘NOLSOBS 0D ONISNLOIVANNVAW NAGTOH suaaHnN BNIHOVA REGULATION OF IDLE EQUIPMENT DELAYS 417 actually run, a valuable record from the managerial stand- point. This report reflects every week the running conditions of the equipment and shows up both successes and failures of the effort to eliminate idle time of equipment. Perhaps, as a matter of record, the same report should be shown for a com- plete month. The point needs to be reiterated that the elimination of the causes of idle time is of far greater value than merely holding post mortems. CHAPTER XXXII ADVANTAGES AND DISADVANTAGES OF DIFFERENT METHODS OF APPLYING BURDEN Theories of Applying Burden In this discussion, the distribution of such expense accounts as power, steam, etc., to other expense accounts and to the actual manufacturing burden accounts should not be con- fused with the actual application of the burdens to the cost of the articles actually manufactured for sale. Moreover, this discussion naturally does not deal with costs which are in the nature of process or operation costs, but only with manufacturing burden which can be distributed to units under a job cost system only through the means of some basic vehicle, such as labor hours. The original theories which underlie aj/ methods of appli- cation of manufacturing burden to costs are quite clear. Theoretically, the proportion of supervision cost to be assumed by any unit varies according to the length of time the oper- ator was supervised. The same theory holds true in regard to timekeeping costs. So also do the costs of rental and heat, and the cost of power used in driving the machine, enter into the cost of the unit in proportion to the time each of these factors is involved in its production. The same may be said of the depreciation of all facilities, either building or equipment. Theoretically—and quite actu- ally so in general—the length of time worked is the measure of the service necessary to keep the worker supplied with ma- terial and relieved of completed material, of keeping the work- ing place clean, of oiling the shafting, and so on through 418 DIFFERENT METHODS OF APPLYING BURDEN 419 almost all the burden items which are necessary to keep the direct workers busy. The applied hour, therefore, is without question the most theoretically accurate basis for the application of burden to costs. Of course, there are some items of burden, such as idle time or general labor, which cannot be reconciled to this or any other reasonable method of distribution. These items are few, however, and not of sufficient volume to amount to much in any event. Methods Actually Used Actual practice in the application of manufacturing bur- den has developed more or less along the lines of least resist- ance. The three principal methods discussed in this chapter, with brief preliminary comments thereon, are as follows: 1. Direct-Labor Hours Method. This is without doubt the most accurate, especially when used in combination with a “super-rate’ covering machine expense. 2. Direct-Labor Cost Method. This is a substitute for the direct-labor hours method. The value of the direct labor is used instead of the measure of time applied. It can prob- ably be shown that in every case where this method is used it was adopted because it is cheaper to operate than the direct- labor hours method. The latter necessitates keeping an accu- rate account of applied time, which is not the case in a piece-work plant. Under the direct-labor cost method, how- ever, the great advantage of knowing elapsed time for sched- ule and planning purposes is entirely lost. 3. Machine-Rate Method. When machines are a promi- nent factor in production, it naturally follows that it is neces- sary to take into consideration the time and costs of machine use. But to make the machine hour the basis of all kinds of charges is much overdone and useless, even to the point of being obscure and inaccurate. 420 COST ACCOUNTING Advantages of Direct-Labor Hours Method The basis of applying burden according to the direct-labor hours method is ¢#me—the number of direct-labor hours con- sumed in producing a certain quantity of one unit, in one operation. As stated above, this is beyond a doubt the most accurate method of applying burden. The attitude of the cost accountant toward accuracy depends to a large extent upon his reasons for distributing burden. If he looks upon the application of burden as a purely accounting necessity, he is not apt to be influenced largely by a desire for accuracy, and will probably use the most convenient method available. If, on the other hand, the cost records are to be used as a means of increasing production, accuracy is obviously one of the most important attributes of any method. Supposing, for example, a plant runs under a piecework system, it is, of course, easy to use the method of applying burden on the basis of value of the applied work. But what becomes of the element of time as between fast and slow workers? If costs are really to be cut down and production increased, the costs should always show the elapsed time for each and every operation. If this is done, and if the hours applied are kept, the results will convince anyone that the direct-labor hours method is of the greatest advantage, both from an accounting standpoint, and even more from a managerial standpoint. The following is an illustration of an advantage of the use of the direct-labor hours basis for the application of bur- den. Two men on like work and using like equipment are working at the same base rate under a bonus plan. One man is a hustler and turns out 20% more work than his neighbor, receiving for this a bonus of 20% on his pay. This obviously indicates that the good worker works 20% less time than the other on the same number of pieces. Therefore, he uses 20% DIFFERENT METHODS OF APPLYING BURDEN 421 less supervision, timekeeping, heat, light, etc., as all or the majority of burden items are directly in proportion to time. By the direct-labor hours method, the burden is charged to the job in proportion to the time. If the direct-labor cost were used, the cost of the pieces made by the man who made the bonus would be flagrantly penalized by the burden on the bonus earned, while the slow man would carry less burden as he earned no bonus. The great advantage of bonus methods is that more prod- uct is obtained from the same burden; therefore, unless the direct-labor hours method of burden application is used, the whole object of the bonus is defeated so far as the costs are concerned. Disadvantages of Direct-Labor Hours Method The disadvantages of the direct-labor hours plan are small when compared to its advantages. One of the disadvantages frequently mentioned is that the time, as well as the costs, of jobs must be calculated. This double calculation, so it is said, involves extra clerical work. But if workers are paid under a system other than the piece-rate system, the time spent by em- ployees must be figured in detail in order to determine wages. Where piecework prevails, extra time for calculation is re- quired, but after the great value of this knowledge is realized, the ‘‘disadvantage” disappears. Another alleged disadvantage is the tendency of depart- ment heads and foremen to reduce the time required for the manufacture of work to an unreasonable degree. The con- tention with respect to this disadvantage is as follows: Inas- much as the burden is proportioned to time, a saving in time will consequently reduce the overhead charged to orders. Hence, the time element may be overemphasized, with the result that the quality of product deteriorates unless it is care- fully inspected, the wear and tear on equipment increases, and 422 COST ACCOUNTING the health of the workers may even be impaired. Department heads and foremen may ask for the purchase of time-saving ~ and labor-saving machines without considering fully the in- creased capital and running costs of the machine which may offset the savings in time and labor. In other words, not enough attention is given in such cases to the operation of the economic principle of selection or substitution. This is all a fallacy, as the speeding up of work is the great goal of today; and under real control is, and will be, the great secret of success. Advantages of Direct-Labor Cost Method Despite all the criticism and disadvantages of the direct- labor cost method, also termed ‘“‘productive-labor cost method’ and “percentage on wages method,’’ it is still the most com- mon method of applying manufacturing burden. Its popu- larity is due to simplicity and convenience. A blanket rate for the whole factory, or rates for each department, may be computed. The latter method is the only accurate one. In either case the ratio of total burden (plant or department) to direct-labor cost (plant or department) is ascertained. The ratio is then applied to the direct-labor costs of individual units in order to determine the overhead charge- able to the -units. The direct-labor cost plan has other advantages. When labor charges are about equal in amount for each worker and the amount produced by each worker is about the same, the plan may be fairly satisfactory. Such uniformity occurs if goods are manufactured in large quantities—‘‘mass” produc- tion—and are uniform in character. This uniformity is pres- ent where process methods of production are used. Hence, each unit of output requires about the same amount of labor time and labor cost in the technical processes. Because of these uniform conditions, either direct-labor cost or direct- DIFFERENT METHODS OF APPLYING BURDEN 423 labor hours will prove a satisfactory basis for applying over- head. On the other hand, though uniform conditions may pre- vail in a single department, they seldom exist throughout an entire factory. The direct-labor cost method, therefore, is of limited use. Rarely is it the best method for a whole plant. About all that may be really said as to the real advantages of the direct-labor cost method of applying burden is that in plants where piece rates prevail, and when in such instances the elapsed time on jobs is not an absolute necessity to get the direct-labor cost, a small saving in clerical expense is made by its use. But if the reader will carefully study the arguments for the direct-labor hours method and the need for some recognition of machine rates, it is difficult to conceive of much that may be said as to the advantages of this method. Disadvantages of Direct-Labor Cost Method It has been shown that the greater part of all indirect ex- penses are really increased or diminished according to the time it takes to do the jobs, as well as according to the num- ber of jobs completed. The severest criticism, therefore, of the direct-labor cost method is the fact that it is not based on time but on cost. Inasmuch as time is the most important factor which affects burden, any burden method based on factors other than time is inherently faulty. But the dominant weakness of the direct-labor cost method*is too often over- looked because of its simplicity and convenience. If the uniform conditions mentioned on page 422 are not present, the direct-labor cost plan is disadvantageous. The following tabulation will serve to illustrate the point: Assume that a considerable difference exists between the rates of pay of two workers, A and B—A gets 80 cents per hour, and B, 4o cents per hour—and that each can complete a given job in 5 424 COST ACCOUNTING hours. Assume further, that the departmental burden rate is 50% based on direct-labor cost, and that each of the jobs con- sumes material costing $1. A Matefial) 2 dicace-cacuei area Added ann basadace aecn tee $1.00 Labor (9:80:05) aciie agenda eal adhoc 4.00 Burden (504 of $4). .¢00 60 ccc cmeee aruda 2.00 Total manufacturing cost............--- $7.00 B Matetial® < csp ddoadancwsnaedanineds edddaeeks $1.00 Labor ($:40) 05) ) canis gue oa an chen oie ennae ag ee 2,00 Burden (50% of $2)........ 2. cece eee eee 1.00 Total manufacturing cost............... $4.00 The example discloses that A’s product is charged with twice the overhead that is charged to B’s product. This is obviously wrong, as A is a better man, more experienced, and therefore requires less supervision. Even though this were not true, what is the justification of charging twice the bur- den against A’s job, when exactly the same elapsed time was spent by both, using the same value of burden in both cases? Advantages of Machine-Rate Method The deficiencies of the direct-labor cost plan are strikingly apparent when brought into contrast with machine-rate plans, or a combination of machine-rate and labor-hours plan. Under all methods of distributing overhead, with the exception of certain machine-rate plans, overhead rates are calculated for whole plants or single departments, and not for individual machines or groups of machines. If one stops for a minute to consider the intricacy and complexity of technical processes in a modern plant, he is struck with the idea that homogeneous operations are limited to small areas. Machines and equip- DIFFERENT METHODS OF APPLYING BURDEN 425 ment are vastly different and each machine affords a natural rather than an artificial unit for the incidence of burden. Ma- chine rates, therefore, should be used in distributing part of the burden where production is dependent primarily on ma- chines. Machine rates are computed in advance of actual incurrence of overhead charges. The total estimated overhead charges for an ensuing fiscal period are distributed over differ- ent work places (production centers, which may be work benches, machines, groups of like machines, or assembly spaces) according to different bases. The total charge for each work place is then divided by the estimated number of hours that the work place will operate during the period. Thus, the factors involved in the use of machine rates are predetermined, and subsequently actual conditions are compared with estimates. The plant may not run during all of the estimated period. But burden items proportional to time accrue anyway. Such charges are known as “un- absorbed burden.” The best development of machine rates is very simple, and consists of what may be termed a “super-rate’”’ to cover ma- chine expense. This method allows all the burden of a depart- ment, other than three items mentioned below, to be handled through the regular burden account, and be applied to the cost of machined work on the basis of direct-labor hours. A. special super-rate, however, is set up on either indi- vidual machine units or groups of approximately like ma- chines, either from actual design of machines or from the standpoint that they are of about the same nature from a cost standpoint. A rate for each machine or group is set up, based on these three cost factors: 1. Depreciation 2. Power to operate 3. Maintenance 426 COST ACCOUNTING The great advantages of this method of having the regular general burden and a super-rate for machines are: simplicity, accuracy, and flexibility. Imagine a machine or pair of machines threading pipe in a tube works. Some sizes require three men in the gang and others four. The work can even be done in a pinch with two men. By this method we get the following: Case I1—3 Men 1 man § hrs. at $.75 per hr. ....... eee ee cee eee $3.75 BY Eee ROOF es Oe, Sadie Mn tede cantar Saag 3.00 Be EB ME AO cL MEO Nat hatha ae 4 anes etree 2.50 Direct labor TS ASy tase ase seeeees esa es wss Raa aes et $ 9.25 General burden “ “ at $.80 per hr. ............ 0.0. c eee 12.00 Machine rate Be LOO NY ices i shauare oie auer sag ane de 7.50 $28.75 Case 2—4 Men i man § hrs. at $.75 per hr. .......... eee eee eee $3.75 TET ey See eed Se ROOY > oo) tata tada le tieen alan dats ieaeai ny 3.00 Be RE EES EG On NY EE ater tnt bec game ine Re hae 2.50 oe Ee ASS SE REO SP BSS 1a ocak cae stn acim eet 2.50 Direct labor 20 ShiSi-a: de aooy §39aId € ee elere eje € eleje cle € ere cle cf cle cj/e eee zr 9821 ‘ 1 a Zelz Zlziz ae z Biele el2 @ ez ee viz ease z Sanesae apiece LA Pe ee Be a ee Td et age men lawn ne | oe ee = | -- — — - I |e - —] - - -- \-—--]------4--—--]| ---------+ 0 010 0/0!0 0/0 0 o!olo of 0 010 o|o 0 O10 ofo000 E eSuseq Sandzx | Poon sadatg | sado "ON Wed “ON 19P19 “ON Pakofduy "ON waduO M9079 3.Lva "Lda ALIWNS NHor SWYN "ON 33A01dWI3 aati 02/ST/OT as ‘SSVI ‘NO1SO8 OStI OD ONISNLOVSNNVYW N3GI0H MECHANICAL DEVICES 453 Tabulating machines are used in connection with the fol- lowing: Material ordered and received Material requisitioned Distribution of material charges Pay-roll costs Distribution of labor charges Distribution of burden Departmental production Amount of defective work and scrap Costs—by departments, jobs, etc. Causes of idle time . Labor efficiency Analysis of sales and cost of sales by products, depart- ments, districts, and customers OPO. 0 SS -ONGT BG) N Se oO 4 The use of mechanical devices enables the cost accountant to present accurate and complete cost data in usable form to executives and subordinates. Inasmuch as these data are furnished promptly costs can be controlled at their source. 4. Bookkeeping and Cost Accounting Machines The modern bookkeeping and billing machines are a com- bination of the typewriter and the adding machine; they add and subtract and also write, in one and the same operation. When the adding mechanism is disconnected, the machine may be used for ordinary typewriting. The ledger posting machine posts original entries to either a loose-leaf or a bound-book ledger, and makes customers’ monthly statements at one operation. By the use of this ma- chine each ledger account is kept in perpetual balance, and the totals of debit and credit postings for successive days are accumulated—which furnishes instant proof of the accuracy of the postings. Thus the machine performs one operation 454 COST ACCOUNTING where two were formerly required of a clerk, and saves con- siderable time in the process. Total of the postings made each day to subsidiary ledgers are also secured for posting to con- trolling accounts. Cost accounting machines cross-compute and add simul- taneously cost data in all vertical columns in a tabulation. They post data to the ledger and a proof sheet in one oper- ation, The following tabulation is an example of the work done by a cost accounting machine: Percentage of Departmental Cost to the Total Cost Depts Anca we ee cas derailer eeen eee $ 135.72 8.05% Bi Boils edge aidals dus: Sica Guna aney Gea eS 267.56 15.87 Cunadianntels caezue dela ea nes Sai 236.75 14.04 T5555 Loli geno Se aoe puke dares ree petide a 13.57 80 Hes hes pleased eines hicedaens macho dee cate o 897.53 53.22 Pic sian Sern oe teeter ew omsaaagas 135.26 8.02 $1,686.39 100.00 % Showing Distribution of Total Burden of $13.56 to 3 Departments According to Predetermined Departmental Burden Rates Dept). Acisrivsaced sancelex et pcinsed $13.56 25% $3.39 B bare niyo ae Gaon lates Seana 35 4.75 5 Co sen Sarre Wicca deter tae 40 5-42 $13.56 CHAPTER XXXV GRAPHIC PRODUCTION CONTROL The Problem of Direct Cost Having the direct costs compiled for a job after it is com- pleted is well worth the effort and expense, as in no other way can the direct costs of the operating departments be available for study and future action. On the other hand, post mortem figures of direct costs are of little value for the purpose of regulating the work to the greatest degree while it is going on. A very satisfactory method of regulating work as it is being done, however, is graphic production control. Under this method of control, a study is made of preceding operations on work, new methods are devised to better the per- formance, and steps are taken to ascertain whether the desired improvements in operations are being realized. Graphic pro- duction control, therefore, as will be explained, is distinctly superior to so-called “‘predetermined” cost systems. Many of those systems involve the reducing of all costs to a standard monetary basis which includes not only the burdens, but also the direct-labor and direct-material costs. Under such pre- determined cost systems, however, the management must wait till the end of a certain period before knowing whether or not a given department has completed the direct operations at or near the standard or predetermined cost. Thus while systems of predetermined costs give simply a post mortem control, graphic production control regulates current work. Fundamentals of Graphic Production Control’ Practically all fundamental requirements for the conduct of graphic production control are identical with those for cost 455 456 COST ACCOUNTING control. The principal points must be regulated in identically the same way, namely: 1. Materials must be under absolute control in stock- rooms. 2. Material stocks must be accounted for by stock rec- ords. There must be complete specifications of product. » 4. In connection with the specifications of product there must be complete specifications of the equipment to be used in connection with the various oper- ations. 5. Labor records must be handled and safeguarded as in the case of cost control. 6. Dispatching in the shop, which is analogous to time- keeping under cost control, must be organized. oo In other words, if a plant is to be organized for the con- trol of either cost or production, the same fundamental re- quirements hold in both cases. Practically no additional cost, therefore, is involved in maintaining a method of graphic production control, if the plant is being organzed for costs; and vice versa, if a plant is being organized for production control, no additional expense is involved in completing the full measure of cost control. Additional Fundamental Requirements In operating a system of graphic production control, the specifications of the product must be more detailed than in the case of cost control alone. As a matter of fact, however, a cost system when operated in conjunction with a system of graphic production control becomes more valuable than if operated alone. In addition to the specifications of the product and the parts which make it up, the operation of graphic production GRAPHIC PRODUCTION CONTROL 457 control requires that each individual piece be analyzed as to the operations necessary for producing it. In connection with each operation there must be specified the best machine on which this operation can be performed, and at least one alter- nate or next best which may have to be used if the best ma- chine is already scheduled. Also there must be, as a matter of permanent record, the best tools to use for each operation, with full detail as to the location and quantity of the tools on hand. This not only applies to the actual cutting tools themselves, but also involves the record of what jigs or other fixtures are on hand for performing each particular operation. There is further required, although this particular feature should be present in a cost system as well, the rate per hour at which each operation on each piece should be performed. This is known as the “standard hourly production.” This term means the number of pieces which can be produced per hour for each operation including assembly. This rate per hour may be a decimal figure in case it hap- pens to be less than 1. In the majority of cases, however, the rate is very liable to run into a whole figure and a decimal, as for instance, 9.7 pieces per hour. Mechanism of Graphic Production Control In addition to the stock records, specifications of product, records of tools, etc., and the rates per hour of production, there is also required for the operation of graphic production control, a control board for scheduling or planning. The con- trol board is placed usually at some central point convenient to the sets of dispatch boards located in the various departments. Control Boards The control boards may be conveniently arranged to show on each face about fifty operating units or working places, 458 COST ACCOUNTING vertically. These working places may be machines, groups of machines, assembly benches, or individuals. Such a board is wide enough to show about thirty days of work in all, across the face of the board horizontally. At the sides are shown the designations of the working places, the lettering being about 114 in. in height. Across the top are arranged the dates which identify the 30 days shown on the board, each identifying space taking up about 2 in. Across the bottom and in exact registry with the top of the board there is another row of designating cards which identify each of the above dates as to the day of the week. Attached to the top and bottom date and day lines are two runners, between which are stretched two silk cords which traverse the face of the control board vertically, and which indicate at a glance the day desired to observe on each work- ing place. At the left and right edges are located pockets for use in depositing cards as they are sorted out for entry on the board, and also for cards which have been taken from the board and are ready to be sent to the dispatch stations. The side pockets on the left are also used for depositing cards describing the working place for each horizontal line, giving thereon full data as to the capacity of the working place and full descrip- tion of each piece of equipment represented. The control board may be designed to use, as a scheduling medium, a cardboard strip which fits into grooves, or the board may consist of metal pockets in which are deposited the actual time cards. On the left-hand end of the card are shown the number of hours to be worked at standard rates. If the boards consist of pockets and time cards are used, a control strip is deposited in the pocket back of the card on which is recorded the progress of work, when the work has been performed by the shop, thereby giving a current and usable record. GRAPHIC PRODUCTION CONTROL 459 Dispatch Boards After the work in the shops has been planned on the con- trol boards and the time cards have been sent to the shop, the next step is the arranging of the cards in the dispatch board. Dispatch boards are of two kinds. One is a central dis- patch board for the department. The board may be split into one or two sections if used in large departments, where from 50 to 200 operating units may be handled from one station. Dispatch boards of the other kind consist of individual boards placed at working places. The individual boards are used in foundries or in other departments where it is important to have on the time card certain directions as to the conduct of the job which is being performed. The object of the dispatch board system is to have in the department the time cards already made out for the working places. The cards representing these places are arranged in the dispatch boards in the sequence of the jobs as they are to be done. This is most important, as in the majority of oper- ating departments, there is a considerable percentage of more or less short-run work, in which from two to ten or twelve jobs are done each day at one working place. It is the duty of the dispatch clerk in each department to— 1. See that the proper tools for each operation are de- livered to the working place before the previous job has been finished. 2. See that the material to be worked on at each work- ing place is delivered to the job before the previous job is finished. 3. See that completed work is taken away from each working place, and sent to the proper material sta- tion for the next operation. 460 COST ACCOUNTING 4. See that the exact time spent on each operation is properly recorded on the time. cards. 5. Check up all time cards to see that they agree in total for the day’s work for each worker. 6. Record the idle time of each working place on an idle machine card. It will be readily seen from the above that the dispatcher asstimes a very important position in connection with the operating organization. He is in a position to be of the utmost assistance to the foremen, in that he carries the full responsi- bility for keeping equipment busy, and for bringing to the attention of the foremen lapses in connection with anything which is not going as it should. Moreover, as each time card which comes to the dispatcher shows the standard hourly rate which should be accomplished on each job, the dispatcher is in a position to have a constant check on the progress of the work. In connection with the dispatch boards it is well to note that the board itself becomes a very valuable graphic illustra- tion of the condition of the shop, and thus a powerful influence in accomplishing the best results in getting out work and in keeping all pieces of equipment running to full capacity. This is facilitated by the use of different colors for the various cards. Productive work, for instance, is indicated by white or cream-color cards; indirect or standing order work by green cards; idle machines by light red or pink cards. In many cases the productive work is represented in two colors, one representing bonus or piece work, and the other straight daywork. The display of the different colored cards shows instantly the prevailing conditions in connection with each working place in the shop. The effectiveness of the system may be noted, for example. in connection with idle machines. The idle machine cards, GRAPHIC PRODUCTION CONTROL 461 according to the above scheme, are in pink. It is striking indeed to look at a board where perhaps 25% of the cards displayed are pink, showing that one-quarter of the machines in the shop are idle. It may be remarked that the.most posi- tive action is usually taken to get these machines into oper- ation. All the various causes of idle machines are looked into —as, for instance, no operator; down for repairs; no work; no tools to work with; and all the other causes which result in machines being idle. Use of the Control Board in Planning It has been noted already that there are standard records of the time required for each operation on each piece as ex- pressed in the standard hourly production. All necessary data are, therefore, available for scheduling the various pieces as it becomes necessary to start them into manufacture. As each piece comes up for scheduling it has already been ascertained whether or not the raw material for it is ready in the stockroom. This is accomplished by means of a requisi- tion made out by the control department at the time the order was received, which is then passed through the stock record department, and marked as to whether or not the material is on hand. The control board operator then takes the list of operations to be performed on the piece, goes through the various work- ing places to see whether or not the “coast is clear” for the succeeding operation, making due allowance for being certain that one operation will be complete in time to transfer the material to the next operation, and schedules his work accord- ingly. As stated previously, where the time cards are used as the actual schedule, these cards have already been made out in advance, or are made out at this time after it is known at just what time in the day the first card will be scheduled on 462 COST ACCOUNTING the board. After it has been determined just when the job is to be scheduled, the cards are dropped into the boards in the pocket which represents the working place being scheduled, sufficient cards being deposited to take up on the board the allotted number of hours which the particular job will fill. This procedure is carried out at each working place until each piece is properly scheduled. It is thus possible to schedule every job with positive knowledge as to just when the piece can be completed. That in turn makes it possible to plan work in the shop so as to bring pieces required for any assembly operation to the stock- rooms in time to protect the assembly, without having to store many pieces for an undue length of time. This procedure places the control department in a position to make intelligent promises for shipment—a matter of the utmost importance to the selling department. To do that means establishing an enviable reputation with the trade. Sometimes, of course, because of lack of operators, break- downs, and the like, changes have to be made in the scheduling. That, however, will occur under any circumstances. The advantage of graphic control is that these changes can be made with absolute intelligence and with full knowledge of the consequences which come from the failure of the mechan- ical department or the personnel department to keep up the supply of men and machines necessary to perform the work. Another fact of importance is that with schedules pre- sented in this graphic form, it is usually possible to take the less important part of the work off the schedule. Freeing the machines or working places for more important work helps to maintain the schedules which are vitally necessary. Recording the Progress of Work The chief benefit of the system of graphic control—in connection with the subject of cost accounting—is that it GRAPHIC PRODUCTION CONTROL 463 records the progress of work at the time it is going on. The tasks scheduled ahead for the working places are marked up on the control strip in green, indicating the number of standard hours of work which lie ahead. The actual accomplishment made by each working place is recorded on the control strip in black—the marking covering the green line—indicating, similarly, the standard hours of work accomplished. It is to be noted here that the actual time of accomplishment is never recorded on the control strip, the language of the lines being that of standard hourly produc- tion only. To illustrate this point, the schedule of a simple case may be briefly followed through. A certain piece to be manufactured requires two oper- ations. Operation 1 is known to proceed at the standard rate of 10 per hour. The number of pieces to be made is 100. It has been ascertained that the raw material for the 100 pieces is in stock. The number of working hours is 8 per day. The time required at the standard rate of 10 per hour to perform the first operation is 10 hours. Therefore, there are 10 hours of work ahead and 1o hours of material at the standard rate to supply this operation. On a time card is entered all the neces- sary information as to order number, working place, etc. The time card shows also the graphic scale of 8 hours divided into “ spaces of either half an hour or one hour. The graphic scale is filled in with a green mark for the full 8 hours. Ona second time card 2 hours in green are filled in, which makes the two cards account for 10 hours. Operation 2, at the rate of 2 per hour, will take 50 hours of work to perform as scheduled, and will require seven time cards—six full cards of 8 hours each, with 2 hours on a seventh card. The proper data as to order number, working place, etc., must be duly filled in, together with all other data called for on the card. 464 COST ACCOUNTING The cards for operation 1 are then inserted in the slot at the time when the work is scheduled and the cards for oper- ation 2 are arranged in the slot which holds the cards for its particular working place, the first card of the string of 50 hours being placed at least 2 hours after the start of opera- tion I. As the work progresses on operation 1, the reports from the dispatch station come in every hour or two as to the num- ber of pieces completed. If the report comes in that 20 pieces are completed, this number of pieces at the standard rate of to per hour on operation 1 indicates that 2 hours’ work has been finished. We then fill in on the control strip, which is in the board in place of the time cards which have been sent to the shop, a black line covering the space of two hours. At the same time a second entry is made, but this time on operation 2. This entry will be in green on the time cards which are in the slot of operation 2, and will be for 20 pieces divided by the standard hourly rate of 2, which gives us 10 hours. We therefore fill in the graphic scale on the time cards to hours from the start of the job, which shows us plainly and distinctly that this operation has material ready for use for 10 hours of work. Use of Progress Information The plumb lines stretched down the board indicate exactly what is going on in connection with each working place. By this means it is known exactly what is going on as each job progresses, and thereby all jobs which are lagging can be bolstered up. According to the description in the previous section, if every job is running true to schedule the black line at the close of every day will come up to the plumb line which shows the end of that particular day’s work. If the black line is back of the plumb line, it will indicate that this job is not progress- GRAPHIC PRODUCTION CONTROL 465 ing according to schedule, and vice versa if the black line is ahead of the plumb line, it will indicate that the job is running faster than schedule. By this means foreman or superintend- ent is enabled to see on the control board exactly what jobs are not keeping up with the speed which the records show should be accomplished. The causes of jobs not coming up to speed are many. The operator may be slow; on some particular day there may be no operator; the machine may break down; or the job may be delayed because the cutting tools were not ready. For all of these cases, special markers are provided to indicate on each job the cause of delay. Thus the scheme of graphic production control, which is of course only very briefly described in this chapter, is de- signed to show, almost hourly, exactly how each piece of work is progressing in the shop. Moreover, the information is given in such graphic form that the foreman or superintendent can tell at a glance not only on what jobs trouble is occurring, but the nature of the trou- ble. As a result, those responsible for operation can see in- stantly what problems require special attention, without having to spend time in investigation and figuring. Effect of Graphic Production Control on Costs It may be quite readily seen that a close rein kept on the operation, through the medium of graphic production control, is designed to control direct cost at its source. As has been previously stated, it is indeed of the utmost importance and value to have a cost sheet which shows exactly the result of each operation as to its cost. At the same time it must be admitted by everyone that a cost sheet showing the cost of a job after it is completed, is of no assistance when it comes to the actual performance of the work on the job, as the figures are good for comparative purposes only. 406 COST ACCOUNTING Graphic production control, therefore, is a means of having a constant knowledge of exactly how the work is progressing at the time it is going on, and places the operating head in a position to change men, get machines repaired, get tools ready, and otherwise safeguard the continuous operation of machines. The net result of graphic production control is, that 1f it can keep productive operations up to full speed, the direct-labor cost will take care of itself. It will mean that all the data on file in the cost office will be applied to a very practical and profitable use at the time when the work is actually going on. Graphic production control is a natural accomplishment to go hand in hand with cost work. It has been brought out that the fundamental requirements for both cost and production control are identical. Cost work which is not broadened to produce practical and tangible results in the reduction of costs is a failure, and the natural outcome of cost work should, therefore, be extended to the absolute control of all operations as they are performed in the shop. CHAPTER XXXVI RELATION OF COST ACCOUNTING TO MANAGEMENT Need of Co-ordination There has long been a feeling that a sharp distinction exists between the plant organization and the executive management. Particularly in cases where the executive management is segregated from the plant, either in a distant city or in an- other part of the city, this has been apparent. It is natural enough for this feeling to exist, as there comes to be more or less competition between the operating departments and the office departments. Too often, however, there have resulted most unfortunate and regrettable relations between the so- called plant and office. That is the worst possible condition that can exist in a manufacturing institution, where, in order that the greatest benefits may be reached by both the plant and the executive management, full co-ordination and co-oper- ation must prevail. The cost department of a manufacturing institution is sometimes connected closely with the executive end, and in other cases still more closely connected with the operating end. Just as sure as there is a closer affiliation with one than with the other, just so sure this lamentable misunderstanding is bound to develop. As a matter of fact, need of entire co-ordination between the executive management and the management of the oper- ating departments cannot be emphasized too strongly. It is only when the executives are fully alive to all the problems of the operating department, particularly those which the oper- ating department has to contend with every day, that they are 467 468 COST ACCOUNTING in the best position to perform the service which they, in their managerial capacity, are bound to perform. Likewise, those in charge of the operating end should be more closely in touch with the problems of the executive end, in order that they may intelligently handle their own work. The logical department of the plant to effect this co-ordina- tion is the cost department. That department has at command all figures in connection with all operations, and should be thoroughly in touch with all the circumstances which bring about the results set forth in the cost statements. Strategic Position of the Cost Department The cost department is in the best position strategically of any department in the plant to effect co-ordination and bring about reforms and improvements which may mean the success or failure of the company. It is ina position to know in money value the efficiency of each operating department, and to know in the same way the efficiency of nearly every superintendent and foreman. It is thus in possession of more valuable in- formation than any other routine department of the organiza- tion. All members of the cost department, therefore, should keep in mind constantly that they carry a responsibility which is indeed very great and very grave. The information which they possess is confidential, except for those who are entitled to receive it. The use of the information is far-reaching with respect to the management as well as to the departments affected. Conduct of Cost Department Employees All members of the cost department must bear in mind that because of their unique position great care must be taken as to their conduct in connection both with executive managers and with those responsible for operation. The work of the depart- RELATION OF COSTS TO MANAGEMENT 469 ment must be conducted along dignified and absolutely un- biased lines. In many cases, cost department men have been known to discuss results of one department with someone con- nected with another department, and in a manner more like gossip than necessary business discussion. Such conduct is most unfortunate; it is an abuse of privilege. Every member of the department must be most careful to use such informa- tion as he possesses only in a manner that makes for assistance and co-operation—never for personal criticism or condem- nation. Responsibility of Cost Department’s Head The head of the cost department has the greatest respon- sibility in connection with not only the conduct of the depart- ment and the excellence of the cost figures secured, but also with the use of the knowledge collected by the cost department, in furthering the co-ordination between the executive manage- ment and the operating departments. Like all others in the department, the department head is possessed of confidential information which must be used only in proper ways. He will be consulted by the executive man- agement in connection with many problems which arise, and in- his answers he must always hold to absolute straightforward- ness and accuracy. He must be of a firm and yet considerate nature. He must have no likes and dislikes so far as person- alities are concerned—as it will be difficult if not impossible for him to construe correctly the figures relating to the depart- ments in charge of persons whom he dislikes. He must at all times maintain a position of co-operation, and must use every endeavor to cull from successful depart- ments the points which may be used in bringing up a depart- ment not so successful. In this connection, an instance may be related of the head of the cost department in a large manufacturing institution. 470 COST ACCOUNTING A visitor was sitting in the office of a department head when the head of the cost department walked into the room. There was a smile on the face of the cost man, but in about two minutes a battle royal was on between the two men. After the cost man had left the office, the department head remarked that he had very little use for the cost man. He went on to say that every time the cost man came into his office with a smile on, he knew that his department was in trouble— that it seemed almost a diabolical pleasure for the cost man to be able to come into his office with bad news. On the con- trary, whenever the cost man came into the office with a long face, he knew that his department must have turned out some good results. That is exactly the wrong way for a cost man to conduct himself. His own efficiency is absolutely crippled by having a man in the plant feel in this manner towards him, as he can expect no assistance or co-operation in any way when such a feeling is in existence. When he goes into an operating office he should feel just as he would feel if he were in charge of the operations. Only when he has this feeling towards operations in the plant can he expect to make the proper headway in the work with which he is charged. Relation Between Cost Man and Executives In dealing with executives, the cost man must be guarded in everything he says, not evasive by any means, but abso- lutely fair and free from bias in any opinions expressed as a result of the figures produced. This does not mean that he is to act as a shield for anyone who is not producing the right results in any particular department, but he must be absolutely certain of his knowledge of all conditions before either bring- ing up any bad situation for action, or expressing—even on request—any opinion in regard to a condition. RELATION OF COSTS TO MANAGEMENT 471 A cost man is in somewhat the position of a judge. The evidence consists of the data collected by his department in relation to conditions affecting the various departments in- volved in the plant. He is called in by the executive manage- ment, and very often what he says may swing one way or the other any proposition which is up for consideration. When he is certain of his ground he must take a decided stand and stick to it. But his attitude must be entirely fair and unbiased ; he must eliminate all personal feelings and he must continually confine himself to the evidence. By the evidence is meant here the actual results accomplished by the department, or rather the procedure which is in question—not mere opinion. The cost man is often called into conferences with the executives to assist in deciding as to new departments, new equipment, or the like. Here again, he should make it an invariable rule to confine his evidence to scientific facts, deduced from the past experiences of the business, and to eliminate personal opinions based on anything else. He should be very careful, also, as to what he calls to the special attention of the executive management. He should always be sure that he understands all the underlying circum- stances in connection with the figures. The figures alone, even when apparently unfavorable, do not always prove that a given department is at fault. For instance, when the rate per hour or the percentage on labor of the operating burden goes up, it may be found that the trouble is not due to the operating departments, but to the failure of the industrial relations de- parment to supply the necessary workers. Countless other illustrations may be given. For the cost man to be in a thor- oughly tenable position in respect to various problems which continually arise is a most responsible and difficult task. In any event, the principal point regarding the relations of the cost man to the executive is that he must be absolutely square. If this is the fact his own sound sense will lead him 472 COST ACCOUNTING into very careful investigation of any matter before he influ- ences the judgment of the executive one way or the other. Importance of Cost Men’s Position To repeat—the head of the cost department and all mem- bers of the department are in a most important situation in connection with the operation of an industrial plant. Whether the department rises to a rank of trust.and importance, or its work remains in the class of clerical routine, depends wholly upon the mental attitude of the department head towards his duties. Unfortunately, many men who have entered the field of cost accounting have, by their own actions, relegated them- selves to positions of simply high-class clerks. They have made out of the cost department no more than a figuring ma- chine for assembling routine items—a position without dignity or standing. No other department in an industrial organization has greater possibilities than the cost department. Its opportuni- ties are unlimited. Those who are in a position to know the operations in such intimate detail are bound to become—unless they neglect their own opportunities—a power in the organiza- tion. It lies wholly with the cost department as to whether it remains a routine department or becomes a powerful branch of the business. It rests almost wholly with the head of the cost department as to whether he becomes a big man in the organi- zation, or whether he is content to remain in a mediocre rou- tine position. But it should be borne in mind at all times that the guiding features in all cost accounting work should be honesty, fairness, and straghtforwardness. CHAPTER XXXVII RECENT DEVELOPMENTS OF COST ACCOUNTING Movement for Uniform Cost Systems The movement for the adoption of so-called uniform cost systems has been greatly accelerated within the last decade by the Federal Trade Commission, the National Association of Manufacturers, the American Foundrymen’s Association, and by other trade associations." The Federal Trade Com- mission is entitled to unstinted praise for its efforts along this line. The commission has published three accounting pam- phlets: “A System of Accounts for Manufacturers,” “A Sys- tem of Accounts for Retailers,” and ““Uniform Contract Costs —Definitions and Methods.” Meaning of Term “Uniform Cost System” The term “uniform cost system’’ is often misunderstood as implying that all the features of the system selected—even the minutest details—are used uniformly by all concerns which adopt it. This is an erroneous impression. A better term for a uniform cost system is “uniform methods of cost- finding,”’ which implies, correctly, that the system for a given industry is modified, if necessary, to meet the individual needs of each manufacturer in the industry who uses it. Still another term for a uniform cost system is “standard uniform cost-finding system.’ The United Typothetae and Franklin Club of America (printers) originally chose this name for their cost system. They changed it later to “standard cost- finding system.” 1 See also in this connection E. A. Hurley's ‘‘The Awakening of American Business,” for a discussion of the universal needs of better cost systems. 473. A774, COST ACCOUNTING The early system of the Steel Foundries’ Society of Amer- ica was called “uniform methods of cost-finding for steel foundries” ; the system of the American Foundrymen’s Asso- ciation, the “standard foundry cost system”; that of the Na- tional Association of Ice Industries, “uniform cost accounting system.” The system of the Cover Paper Manufacturers’ Association is called the “report of the committee on costs.” Uniform Costs Not Secured by Uniform Methods The use of uniform methods of cost-finding does not give uniform costs with regard to amounts, because the respective organization and efficiency of the different manufacturers in a given industry vary materially. Despite the apparent sound- ness of this last statement, a few economists believe that there is something sinister in the motives which prompt the use of uniform methods of cost-finding, particularly with respect to the inclusion of interest on invested capital as a manufacturing cost. These economists contend that price- fixing, which is prohibited by the Sherman Anti-Trust Law and the Clayton Act, is practically accomplished by the adop- tion of uniform methods of cost-finding. Their views, how- ever, are not widely shared. It may be admitted that the use of uniform cost systems tends to stabilize prices in a given industry and to eliminate ruinous competition based on an inaccurate knowledge of costs, but this is an economic desider- atum, not an evil. There are few indeed who are so bold as to say that manufacturers adopt uniform cost systems for the purpose of evading existing statutes. Origin of Uniform Methods of Cost-Finding The origin of uniform methods of cost-finding has not been similar in the various industries. The customary method is for the manufacturers’ association of a given in- dustry to appoint a committee or commission on costs which DEVELOPMENTS OF COST ACCOUNTING 475 is given full power to devise a system. Sometimes the presi- dent of the association appoints the committee or commission. The system referred to above which was adopted by printers was the result of the co-operative effort of printers in the United States and Canada. It stands as a testimonial to the value of organization. It was based on a set of fun- damental principles adopted by five International Cost Con- gresses held by the American Printers’ Cost Committee, and it was sanctioned by the Federal Trade Commission, as were many other uniform cost systems. Later, the system was indorsed by the United Typothetae and Franklin Clubs of America, by the district and state Cost Congresses, by local Ben Franklin clubs and Typothetae, various Master Printers’ organizations, and by the Federation of Master Printers of the United Kingdom, Great Britain, and Ireland. The origin of this system is commented on in detail because of the fact that probably more agencies were interested in its adoption than in any other uniform cost system thus far adopted. During the World War, the movement for the adoption of uniform methods was given additional impetus. A num- ber of such systems were devised at the request of the War Industries Board. War service committees of industries which manufactured products essential to the successful prose- cution of the war were notified by this board of the intention of the government to fix prices on certain staple commodi- ties. In order to do this in an impartial manner for all mem- bers of a trade, it was deemed necessary to develop a uniform cost system for the whole trade. The committee or commission on costs for an industry is usually composed of a group of auditors of the leading firms in that industry located in different parts of the country. This feature makes the group representative. If the matter of uniform systems is left to the members of the trade individ- ually, little progress will be made, for the reason that most 476 COST ACCOUNTING manufacturers believe that it is the “other fellow’ who is not correctly figuring his costs. In the preparation of its system, the committee or com- mission either sends out a questionnaire to the members of the association, or talks with their accountants or auditors, or studies their records. Sometimes the system is finally perfected by an accounting firm, to eliminate the possible charge of bias that might be made if it were devised only by those representing the enterprises concerned. Adopting the Uniform System The companies whose auditors draft the system are usually the first to install it, for the reason that their auditors are progressive and are selected for the task mainly because of their forward-looking characteristics. Some systems have been tried out in a few industries before being finally per- fected and generally adopted. In some instances the systems have been adopted entire by firms just starting in business, while firms already in existence have at first adopted them only in part. Sometimes not one industry alone, but allied industries, have adopted the same system for their mutual advantage. It is claimed for some systems that they are elastic enough to fit all conditions, and concerns of all sizes. This claim is hardly justified, since individual conditions usually warrant the modification of the uniform cost system to meet local and peculiar conditions. Even in drafting the system, a dis- similarity of individual cases is provided for by devising two cost systems. This was done by the lime industry. One system is intended for the small operator who has only two or three manufacturing processes; the other for the large operator who has more operating processes. But some sys- tems—such as the one used by the printers’ plants—can be used by both small and large plants. DEVELOPMENTS OF -COST ACCOUNTING 477 Some uniform cost systems are so simple that they can be installed and operated by bookkeepers and accountants in the regular employ of the firms which adopt the systems. Others are more complex and can be successfully installed and nursed along only by outside cost accountants. According to Nicholson and Rohrbach’s ‘‘Cost Account- ing,” in devising uniform cost systems four main factors are considered, which are accomplished so far as is feasible. These factors are, they say: 1. Uniform classification of products. 2. Uniform classification of departments. A suggested broad classification consists of productive, non-pro- ductive, and miscellaneous departments. 3. Uniform classification of cost items. 4. Uniform treatment of cost items. Advantages of Uniform Methods of Cost-Finding The World War, as much as any other one cause, brought manufacturers to a sharp realization of the advantages of uniform cost-finding. Although the war is over and govern- mental restrictions on many businesses have been removed, cost systems are even more valuable for the reconstruction period. In addition to the advantages of uniform cost methods already mentioned in Chapter I, the following— even wider in scope—are receiving today increasing attention: t. Manufacturers at their association meetings can speak a- common cost language in talking of their problems. They know what items should be included in cost, and hence will realize the necessity for including all costs. 2. Manufacturers have a growing sense of the duty they owe not only to themselves but.also to their fellow-manufac- turers and to the public at large. This quickened sense of duty has been partly due to the program of “unfair trade 478 COST ACCOUNTING practice” established by the Federal Trade Commission. Un- fair trade practices cannot always be traced to a desire for monopoly or a desire to extort unfair prices from the public in defiance of the Sherman Anti-Trust Law and the Clayton Law; they are due often to ignorance of costs. 3. Prices can be set intelligently. The need for a cost system is well stated by Jason Rogers, publisher of The New York Globe, who says that advertising rates, as commonly set, represent what we think we can get rather than what we should insist on as a necessity of continuing solvent. The fixing of selling prices which are too low because based on inaccurate costs, is not only detrimental to a given concern, but may confuse or destroy the concern’s competitors and hence work havoc for the whole industry, for allied in- dustries, and for the general consuming public. 4. By fixing selling prices based on accurate costs, con- cerns take a long step in insuring the buying public that they are paying fair and reasonable prices. According to the “Uni- form Cost System of the National Association of Ice Indus- tries,’ “The phrase ‘Live and let live,’ when modernized be- comes, ‘Live efficiently and let others live efficiently.’” 2.4.2202..2 a ehauaiienweaeheysacnde4as ecioneaeews 7,035.72 Acerued) labor? 2526.644-05.cboteeoee knee 4a he hae tana dite oes 686.79 Factory Overhead Accounts Credited as Follows: Department A, 1,802 hours at 67 cents..........-..e sees ee eee 1,207.34 q Bi 252g. Do ga Shes, beat i ataaerdiane mrad 1,311.96 a Cagis 8 MOE aedeh eecacwe se ee oeyae 662.70 An account receivable of $64 from goods sold in December is considered lost; $125 should be reserved for bad debt losses of the month. (d) State the type of a cost accounting system which the above problem illustrates. (Wisconsin, 1919.) COST ACCOUNTING 508 go'zz9‘St | Sg°Sg6$ | 66°Zor$ | Ez'6gS¢ | PZ-gzl$ | SzP6$ | 00°74] OO' IPRs | OQ'QOS$] OP PELIP | “s**t TTT TTT SyeIOT, 6°63 ereees on eeee ween ee £e'Q SZ'91 oo'F1 ween gg’os sees aoe (a013O) asusdxy [erouex 61: Z£z SZ9S ore eee 00°2 £f'g Sal OO°L ee oS 9g'0S oo’ZII ener eee ee eee eee suiddiys Se-o1g |oS1g jofbvor |ersir |SZev |S2g |oo'Z |ozgor | zZ101 | o£:Sgr “79 ‘ydaq peayiaaGQ A1079e,T PLIer1 |orSz1 | 6£:Zoz | og’Zbz | coor |oo0'0z | 00°91 | ObOE | SI°Zz1 | Oz 1Sz “gq ‘ydaq preyiaaG A1079e.J zo'ezi‘t | ogSor | o6SS1$| 00'6S1 | 00'S |ooS1 |oozr |ofzSz | ZZ 101 | oS-obe ‘ty ‘idaq PeayssaGQ A1039e.7 66:Zov 01662 ee ceee | oonvee | wen ene | coeee | woene feveeee 6z°9£ ¢ 09°26 ‘+ asuadxq A102 Jeter) £z'6gS 00°SIz eoeeee eeveone CEer ose o0'z enenoe ee eeoe oF oSe ee ee) saredayy oo'gSe rr eeveees eeeees o0°oPr OO'Or 00°8 eeeeoe eo erne oo0’00£ eT IaM0g og'g0S $| oS:zorg] ****** | o0°Sg $¢| oooh $ | OO'Oz$ | oo-zI$] O1'FB $)°'*** |OO'SgI gf ec ttt t+ osuadxq Surpring asusdxg TWOTyeID pue asusdxq -sidaq aoue osusdxq syej}oy, |sarddng | Atopeg | srredayy oy soxey, |-ansuy | JoMog |3urpimg | s0qey sjunosoy 0} sjzIqeq aie yerauay dAIOSIY SINNODIV OL SLIGHYD COST ACCOUNTING PROBLEMS 509 Problem 31 The main office of the Black Manufacturing Company is located in Milwaukee, but the factory is at Waukesha. The cost records are kept at the factory, but at the end of each month the necessary data is given the main office so that the proper accounts may be closed into the manufacturing account, compiled on the general books as a section of the general revenue account. Both cost and general books are kept by double entry. The following accounts having to do with manufacturing appear on the general books of the Black Manufacturing Company, March 31, 1915, before closing entries are made: Inventory, Jobs in Progress, March 1............cceeeceeeeeee $ 3,000.00 Inventory, Finished Goods (not yet shipped) March 1.......... 2,000.00 Inventory, Raw Materials, March 1..........-.eceeeeececeeees 5,000.00 Raw Materials Purchased During Month................0000% 10,000.00 Productive’ labor i2c2.dsdushaeaiecndloes oe bas askewseenerags ca 5,000.00 Rente tacos tee st toeuytan ania aces aera ca tsk Gane aR oO 200.00 Heats assudec sasaasee 46 autaeotlnnse oss 004 examen be tees 50.00 Vight: wy gneesiondiees es cas Gdandida ne oa obese na auaierecaeemieasies § 25.00 ROWE I eich cede tens cress eb SAO wc ceuswneta cust Sesahe Fiscal ove B's Geos R CLL Bvaa Sos 150.00 Repairs tO Machinery ..ccci csi escnasteseecceessaegnonneceee 150.00 Sundry Factory Supplies........... 0. ccc eee eee eee eeeeeeesees 25.00 Superintendénce:® gi..5 thse Vane craic aeemnan ehh sees we tatnedredeae 300.00 Unproductive Labor oo. icisewsvnnanenagues sobs oeseeepsacilontes 150.00 The following items of expense should also be considered in building up the accounts on the general books for the month: Taxes: (month's, shateé) ia sesccc4 vve ease Sead eee ee oS Ek 8a aaa Re $ 20.00 Insurance (month’s share).............eeceeceeceesccceceences 15.00 Depreciation on Plant (month’s share)...........--..ee sence eee 300.00 The Accrued Productive Labor on March 31 amounts to...... 100.00 The cost records show the following data: Materials Charged to Jobs in Progress During Month.......... $11,000.00 Materials Charged to Finished Goods During Month............ 9,000.00 Labor Charged to Jobs in Progress During Month............. 5,100.00 Labor Charged to Finished Goods During Month.............. 4,000.00 Indirect Expense Charged to Jobs in Progress During Month.... 1,475.00 Indirect Expense Charged to Finished Goods During Month.... 1,025.00 Jobs in Progress, Balance March 1.......sceceeceecesceeceeeees 3,000.00 510 COST ACCOUNTING Finished Goods, Balance March 1..........c0cceesceuceveucuucs 2,000.00 Manufacturing Account, Balance March 1........ccecsecevececs 5,000.00 Sales, Goods Shipped During March...............eeeeceevees 20,000.00 Finished Goods, Balance (goods not yet shipped) March 31..... 1,500.00 (a) Construct the accounts as they would appear on the cost ledger. (b) Close the cost ledger. (c) Give the journal entry connecting the cost and the general books. (d) Compile the Manufacturing account on the general books, showing as the balance thereof the actual cost of goods sold during the month. (e) Reconcile the profits as shown by the general books with those shown by the cost records. (Wisconsin, 1915.) Problem 32 A textile-mill, employing some 700 hands, operates five depart- ments, with a superintendent or head foreman in each. About 500 hands are paid upon a piecework basis, 50 on a part piecework and part day rate, according to the duties assigned to them from day to day; 100 are on a straight day-rate basis, while the remainder are paid weekly salaries but no overtime. Describe clearly and concisely the methods you would recommend for assembling and recording the data entering into the weekly pay-roll. Also state how you would have the pay-roll prepared and the wages, as shown thereon, paid to the hands, having in view both economy in clerical work and the securing of proper safeguards against frauds. (Penn- sylvania, 1911.) Problem 33 As a result of extended patent litigation, the A Manufacturing Company is ordered to account for the profit on the sales of a certain class of goods which they have been manufacturing. In: reply to this order they submit a statement showing a very small profit on said sales. COST ACCOUNTING PROBLEMS 511 You are called upon by the attorneys for the complainant and are advised that other manufacturing plants have made very large profits on this same line of articles, and that they desire to verify the correctness of the reports rendered. You visit the plant of the infringer and find that a very large number of different articles are manufactured, that no cost system is in operation, and that while the classification of sales is made as between the different groups of articles manufactured, that no separate costs appear upon the face of the general accounting books. You are also told by the company that in view of the fact that it made only limited total profits during the period under review, the profit on the articles in question could not be anything like what the attorneys for the complainant said should be the case. State just what steps and what studies you would make and what books and records you would examine to determine either the cor- rectness of the reports rendered, or the actual profits obtained from the articles in question, and to what extent, if any, you would tie up these results with the total results of the plant operations. Submit your answer in report form. (Pennsylvania, 1917.) Problem 34 The Riverside Manufacturing Company‘desires to prepare monthly financial statements on sound accounting lines, although the books have not been kept so that the cost of the product may readily be determined therefrom. The trial balance as at January 31 (one month since the previous annual closing) is as follows: Bilding sassawineewds eae ea noo WaasenGnee. cmesane $ 15,000.00 Machinery, Machine-Shop ..............eeeeeeeee 40,000.00 Machinery, Carpenter Shop.............0.....005, 5,000.00 Power House and Equipment.................... 10,000.00 Cash. .ccsiadinier nes eae axe Sebieadee’s sce oreeR s 1,000.00 Accounts Receivable ...........-.. eee eee ee eeeee 10,000.00 Accounts Payable ........... 0c cece eee cece eens $ 5,000.00 Salesian tide cir tees panama iebcia annese ra senee 23,000.00 Sales of Scrap Borings ......-....-.eeeeeeeeeeeene 50.00 Labor 22Aisikew tees ccleaner as pica d ed ecece 6,850.00 Repairs and Supplies ........--..--ee eee cree eens 525.00 Fiiel. icc cstigrnse ouigoeesseG hee seawaula gee ee dete a ars 250.00 Materials Purchased ........-.0..0csee cece eeees 25,000.00 512 ne COST ACCOUNTING Salaries and Office Expense ..............0000005 550.00 Capital. sicssnusaws oceasassaawednuwmasios s ceaaeenA 75,000.00 Surplus (December 31) .....ccscececvecareuncvas 11,125.00 $114,175.00 $114.175.00 The factory operates a machine shop covering 5,000 sq. ft. and using about 500 horse-power, and a carpenter shop covering 3,000 sq. ft. and using about 125 horse-power. Depreciation at 6% per annum on all capital assets is to be written off. An inventory at January 31 discloses the following: Raw Materials: ac.ccc cso wuiencasedlees casei eh gh otea aa omnen ee $6,500.00 Goods in Process: Material’: asst ss ve'seasdaisetucegoad ¢ hae 266 60 Sareea es 5,400.00 Labor of -Machinists: iss)cescosdsecacee acces scavcieweewesanys 1,200.00 Labor of Carpenters 24. 4sdacandeue s0 030 t8 on ioldnaeaatians 300.00 It is required to reconstruct the accounts on a simple plan of cost accounting, showing the operations of the departments, and to pre- pare a balance sheet as at January 31. On further analysis of the accounts, the expenditure for labor is found to cover the following: Machinists? icAad-cedinn sso Sa oelee atsiniene o bis aed. Pynera lca enle es $3,500.00 Carpenters! pegaits