superintendent to the foreman to do certain work or to manufacture
certain articles. The order may call for the manufacture of a certain
article complete, or it may be for parts to be later assembled into
a complete article. Shop orders are as varied in form as production
orders.
[Illustration: Fig. 42. Shop Order Showing Total Work Cards]
When a superintendent desires to start work on a stated production
order, he lays out the work and issues the necessary shop orders to the
foremen of the different departments in which the work is to be done.
A shop order is issued for each shop──usually these are exact copies.
If work on an order requires work to be done in four shops, the four
copies are made on the typewriter, at one writing, by means of carbon
paper.
Fig. 41 shows a convenient form of shop order. This form includes the
shop order number, piece number, drawing number, material, date to be
completed, date of order, production order number on which the shop
order applies, and the date completed. The body of the order is left
blank for a description of the work and the necessary instructions.
Explicit instructions must be given on every shop order──the order
should leave nothing for granted.
[Illustration: Fig. 43. Shop Order with Name of Shop]
[Illustration: Fig. 44. Shop Order Showing Progress of the Work]
The special feature of the shop order shown in Fig. 42 is the space for
_card number_ and _total cards_. When an order is made out, as many
copies are made as there are shops or departments through which the
work must pass. The number of the copies of the order is entered under
the heading _total cards_──that is, if the work is to pass through
four shops, the figure 4 is entered in the space provided for total
cards. The copies are numbered in the order in which the work will be
done──that is, the order for the shop that does the first work is given
No. 1, the second shop No. 2, etc.
There are two special advantages in having the shop orders numbered.
Each foreman knows, when he receives his order, how many operations
are ahead of his own and how many follow, and can lay out his work
accordingly. It does not always follow, however, that because one
foreman receives order No. 3, two other operations must be completed
before his own can be started. Each shop order may call for the
manufacture of a different part, to be sent to the assembly shop, but
if one of these parts is in stock, no order is issued. The foreman
receiving order No. 2, when his number naturally would be 3, knows that
one of the parts is in stock and that his operation must be hurried
accordingly.
The employes in the cost department find the numbering system
invaluable, for it enables them to tell how many operations there are
on a job; also operations which have been completed. This information
is of considerable assistance in tracing orders through the shop.
The shop order shown in Fig. 43 answers the same purpose as the form
shown in Fig. 42. Instead of the system of numbering the order copies,
the plan of inserting the names of all shops is followed. Following the
name of each shop is the name of the operation to be performed. This
also enables the shop foreman to so lay out his work that the order can
be handled promptly when it reaches his shop.
=25. Work Orders.= The work order is the written instruction of the
foreman to the workman to do certain work. As a rule, this order
is made on the production time card, as shown in preceding pages.
Sometimes, however, it is unnecessary to give more explicit directions
than can be written on a small card, which makes it advisable to issue
a special order.
In certain classes of work, also, it is advisable to use one work order
for a job which is to pass through the hands of several men. Such a
work order is shown in Fig. 44. This order shows the numbers of the
men and machines to which the work is to go. Another class of work
for which special orders should be issued is outside repair work──as
plumbing, steam fitting, electrical repairs, etc.
=26. Standing Orders.= Manufacturing is fast developing into a system
of producing standard parts to be assembled into complete machines
and appliances. Every part that goes into a machine is made from a
standard pattern and is interchangeable with the same part in every
other machine of the same style made in the same shop. It is no longer
necessary to design each machine, and each part required to fill an
order──the parts are manufactured in large quantities and carried in
stock till needed. An order from a customer may require the manufacture
of one special part, the balance consisting of parts to be assembled.
The manufacture of parts as standard units is not an accounting
problem, but the accounting department and the manufacturing
departments must coöperate in maintaining proper records of the
manufacture of those parts. The manufacture of one lot of standard
units involves the same operations whenever the same unit is made.
Adopting this principle to accounting, it is advisable to establish
standards in respect to orders. Whenever the same standard part is
needed, the order should be for the same quantity; this, of course,
after a standard quantity has been established. When units and
quantities have been standardized, order numbers should be made
standard──whenever the same work is to be done the _same order number_
should be used. If this plan is followed, orders are soon recognized
by number──and the order number informs the foreman as to the work
required.
Series of order numbers should be assigned for different classes of
work. Numbers 1 to 100 might represent regular plant maintenance and
repair orders; numbers 101 to 200, plant construction and special
repair orders; numbers 201 to 400, the manufacture of special tools;
numbers 401 to 1000, the manufacture of parts; numbers 1001 to 1500,
assembling or production orders for complete machines. Shop orders can
be distinguished by a second series of numbers starting at, say 5000.
Illustrating the above, the superintendent of a typewriter factory
might receive order number 1007, meaning that he is to assemble
1000 No. 7 typewriters. His assembling order to the foreman would
bear the same number. After the parts have been drawn from the parts
storeroom, it may be found that the stock of certain parts is running
low. Production orders are issued for parts, No. 417 being the number
for frames for No. 7 machine. The shop orders may bear the numbers
5060─_a_, 5060─_b_, and 5060─_c_, _a_ being the order for the foundry,
_b_, the order for the machine shop, and _c_, the order for the
finishing department.
[Illustration: Fig. 45. Manufacturing Order Register, Showing Location
of Work in the Shop]
As to expense orders and construction orders, it is very necessary that
the work to be charged against each order number be clearly specified.
When the expenditure involved exceeds a certain amount, or where the
work is of a special nature, a special order should be required.
Explicit instructions for charging all expense items should be given to
each foreman, preferably in printed form──or in typewritten form when
the number of foremen is small. Many concerns issue printed instruction
books containing the order numbers and specifications, with any rules
that may be in force governing the conduct of employes, for general
distribution among employes.
RECORDS OF MANUFACTURING ORDERS
=27.= An essential record in any system of cost or factory accounting,
is a record of manufacturing orders. A system of records shouldbe
maintained, which will show the exact number and nature of the orders
issued to the shop or factory, and from which it will be possible to
locate every order──to determine in what stage each order is, and to
estimate closely the date of completion.
[Illustration: Fig. 46. Front and Reverse of Card Showing Total
Production and Progress of Orders.]
Such records are equal in importance to records of material, both
raw and partly finished, in store at all times. Without them, it is
impossible to obtain authentic information about work in process.
Orders are certain to be side─tracked, and it is extremely difficult to
estimate, with any degree of accuracy, delivery dates for either new or
old orders.
The records should be so complete that it will be literally possible
to run the business from the office──without calling foremen from
the shops, who must return and investigate the condition of an order
before an intelligent answer can be given. The manager who can
conduct his business from the office is following modern ideas; he is
far─seeing──not lucky──for this condition is the result of carefully
made plans to insure records that will show him exactly what he wants
to know.
Along the line of running the business from the office, Mr. F. E.
Webner, in an article in the _Engineering Magazine_, cites an apt
illustration. Two very large corporations with a common line of
product were concerned. Each of these in turn was asked verbally by an
executive officer of a concern which is a large user of the product,
as to what delivery could be made on a stated quantity of goods. One
concern used the long─distance telephone to a number of its plants;
the other concern consulted records within its office and was able to
give a decisive reply within half an hour, and to know just which of
its works was best able to turn out the goods. The first concern had a
number of superintendents on edge looking up data and could not give a
positive answer short of two days.
As in every other department of a business, the expense of maintaining
an adequate system of order records in the manufacturing departments
is infinitesimal, when compared with the results obtained. A single
contract lost for the lack of needed information may mean the loss of a
valuable customer, the profit on whose business would pay the cost of
an adequate system many times over.
=28. Manufacturing Order Register.= The form of the manufacturing
order register necessarily depends on the nature of the business, the
product, and the number of operations or departments through which an
order must pass. It need not be complicated──simple forms always are to
be preferred──the main thing is that all orders be so recorded as to be
readily located.
[Illustration: Fig. 47. Daily Report of the Transfer Clerk]
[Illustration: Fig. 48. Foreman's Daily Report of Shop Production]
A simple and convenient form for a register of manufacturing orders
is shown in Fig. 45. This should be in loose leaf, a sheet being used
for each style or size of machine, part or piece manufactured. If, for
instance, a typewriter is made in five styles, five sheets would be
used──one for each style. Separate sheets would also be used for each
part──as many sheets for each as there are sizes.
The sheets should be indexed under the names of the parts and those in
each division arranged in the order of sizes. Supposing type bars to be
made in ten sizes──numbers 191 to 200──the sheets would be filed in the
order of these numbers. Should the industry be one in which orders are
issued to assemble parts into complete machines, the sheets on which
assembling orders are recorded should be filed with a separate index,
but may be kept in the same binder. It is also advisable to use sheets
of a different color for these orders.
The heading of this form, Fig. 45, shows the name of the part, the
machine on which it is used, the drawing number, pattern number, and
style or part number. Orders to manufacture are entered in the columns
at the left of the body of the form, giving the date, order number,
quantity ordered, and total ordered to date──that is, if 500 parts are
ordered on the 10th and 300 on the 25th, the sum of the two, 800, would
be entered in the total column. Following the order record columns are
columns for the departments, the form illustrated being designed for
a furniture business. Under the heading for each department, a daily
record is made of the quantity received, quantity delivered to the next
department or to stock, and balance in the department, the latter being
in an uncompleted state. This form can be adapted to almost any class
of manufacture by a proper arrangement of departmental columns.
In most all industries, it is practical to keep a continuous record of
all manufacturing orders; sometimes it is best to keep a record for
each order. A form of this class, designed for the use of a machine
shop, is shown in Fig. 46. This form shows the progress of a single
order through all of the departments. A card is used in this case,
both sides being required to accommodate the number of operations, and
they are indexed by order numbers.
=29. Tracing the Order.= The system of tracing orders through the
shop or factory is very important and should be as nearly automatic
in operation as possible. There may be many orders which need not
necessarily be traced, but a system that will automatically keep
the office informed on the progress of _all_ orders, will pay for
itself in the time saved in tracing a single order without proper
records. To attempt to find the exact condition of work in progress
without a tracing and recording system, is not alone expensive, but
unsatisfactory in results; the degree of accuracy is measured by the
ability of foreman to make accurate estimates. Practically, foremen
should be best able to estimate the time required to complete a job,
but their estimates will be found to vary greatly on similar jobs; time
standards are more accurately determined by a comparison of the records
of past performances.
When practical──and it has been found practical in many industries──a
transfer office should be maintained in the works. This office should
be in charge of a transfer clerk, who will record all transfers of work
in progress from one department to another. Theoretically, all work
should pass the transfer office. In the manufacture of small parts,
this can be done without loss of time, provided the transfer office is
centrally located. When heavy work is the rule, it is not practical to
carry out this plan in detail, but such transfers should be conducted
under the supervision of the transfer clerk.
The transfer clerk should maintain records of orders in progress, which
will be duplicates of the office records, reporting all transfers
to the office on the form shown in Fig. 47. This is a simple report
form, giving order numbers, part numbers, quantities, and names of the
departments between which transfers are made.
When no transfer clerk is employed, it is necessary to obtain reports,
in the same form, from the different foremen. This report should
provide for an acknowledgment of the receipt of work, as well as a
record of deliveries. The form shown in Fig. 48 gives a double check,
since the quantities received must agree with the report of deliveries
from the department from which the work was received.
From these reports, the order records are made in the office. In
addition to their value in maintaining a record of orders, the tracers
and reports are used to advantage in compiling an inventory of work in
progress.
[Illustration: COST DEPARTMENT, NATIONAL CASH REGISTER CO., DAYTON,
OHIO]
GENERAL EXPENSE AND COST SUMMARIES
EXPENSE DISTRIBUTION
=1.= In order to obtain a thorough understanding of a subject, and
to gain a clear insight into the various questions involved, so that
one may understand not only its underlying principle, but also its
operation in detail, it is quite essential to know first, _why_ a thing
is done, and second, _how_ to do it. While a general knowledge of a
subject is always desirable, and to be commended, it is often found
insufficient when put to the test. Special subjects require special
consideration and study, especially when the how─to─do─it is involved.
On the subject under consideration this is particularly true, for it
seems to be a common confession among those handling factory accounts,
that while they know in a general way how their expense accounts should
be treated, they seem to be in a maze when it comes to actually doing
it. The "knowing how" is the best asset of a good accountant; and
in these days when the subject of costs is of vital interest to the
manufacturer, the up─to─date accountant has the opportunity to show
his value. To make the necessary repairs to a touring car broken down
on the country road may take but one dollar's worth of the repairer's
actual time, but the "knowing how" may be worth ten dollars to him when
rendering his bill, and usually is.
While it is realized that there are differences of opinion among
accountants on some of the questions considered in the presentation
of this subject, it is the intent of this article to present what is
generally conceded by our leading accounting authorities as the best
practice in a well─organized, up─to─date, industrial plant, and to
so present the subject to the prospective student that he may fully
understand and master the "why" and the "how" of this important
question in factory accounting.
That the subject may be carefully considered in all its various
phases, it will for convenience be developed under the following
general divisions in the order in which they are naturally suggested:
(1) Basis of Expense Distribution.
(2) Methods of Expense Distribution.
(3) Percentage Method Exemplified.
BASIS OF EXPENSE DISTRIBUTION
=2. True Cost──What Is It?= Without trespassing on the general subject
of cost accounts, it is quite essential to clearly establish at the
very outset what constitutes _true cost_. It would be difficult to
conceive of a manufacturer to─day who would simply take the value of
wages paid and material used for a cost price, and to this amount add
the usual percentage of profit he desires to make on his output, and
sell at that price. It would be folly to attempt business on any such
basis. No business can be conducted without expense, and yet, in the
case just cited, the manufacturer has simply ignored it. Suppose the
expense of conducting his business exceeds the percentage he added
for profit, what then? He soon finds he has made a serious error in
figuring his cost, and the item omitted is the cause of his business
losses. His selling price was based on less than the true cost of his
product and it is noted he has made no provision, in making up his cost
price, for covering the expense of operating his factory, his offices,
and general expense, including insurance and taxes. It is apparent
then that this matter of _expense_ has a very important bearing on the
cost, in fact is a part of it, and must be carefully considered in
making up the cost records. The factor of expense is frequently found
to be greater than the direct labor cost itself, and a successful
manufacturer must know how much expense his costs should absorb and how
to figure it. The sales from his product must more than pay for the
direct cost to manufacture and all the expenses of his factory besides,
and if his sales are not sufficient to pay for both there is no profit.
This expense, then, is an indirect charge to the cost of production,
and must be included in it before the selling price can be established.
Many a manufacturer has been ruined by not properly handling his
manufacturing expense, and the necessity for its careful consideration
cannot be emphasized too strongly.
Mr. Clinton E. Woods, one of our leading authorities in factory
organization and accounting, very clearly states that expense and
"overhead" charges must be absorbed into the cost of production as much
as labor and material, by which operation expense is really converted
into an asset.
True cost includes first, _direct labor_; second, _material_; and
third, _expense_. The last item will admit of further subdivision and
originates from two different sources: First, the expense of operating
the work─shop or factory itself; and second, the general expense of
offices and administration.
The cost of production, therefore, resolves itself into the following
elements:
Direct labor $
Material
Factory expense
────────
Factory cost
General expense
────────
Manufacturing cost
=3. Selling Expense.= _Selling expense_, oftentimes spoken of as
_commercial expense_, has no bearing on cost price. The correctness
of this position is easily shown. Two manufacturers, competitors in
the same line of production, both operating up─to─date plants with the
finest equipment, may produce at the same cost. The expense necessary
to market the product from one factory may be so excessive as to cause
one concern to lose business to their competitors who can sell their
output at less expense, while the actual cost to manufacture may be
identical in both shops. Again, while one manufacturer, who can produce
at a low cost but carries a heavy selling expense, may conduct his
business at a loss, his next door rival in trade may not be able to
manufacture as economically but can sell his product with less expense,
and thereby carry on a profitable business. In the two instances cited,
the key to the losses of one manufacturer and to the profits of the
other is in the expense of selling, and not in the cost of production.
In a large plant with an elaborate, well─organized, and expensive
sales division, where the dividing line between the commercial and
production expense is clear cut, these two expense accounts should be
kept entirely separate; the commercial being charged off to _Loss_
and _Gain_ direct, while the latter only should be merged into
manufacturing cost.
In a small plant, where the selling division is conducted through the
general office at an expense so small as not to affect the cost of
administration over what would be necessary for manufacturing purposes
only, or where there is difficulty in separating the selling from the
manufacturing expense, the two are often combined as general expense
and pro─rated as one account into production costs.
Theoretically, selling expense is not a charge to production, but the
dividing line between this view and the practical one in most cases
is a very fine one, and in the interest of simplification instead of
elaboration, the commercial will be treated in this presentation of the
subject as a part of the general expense, and will be considered in
detail later.
=4. Expense Based on Cost Price or Selling Price.= Having shown that
expense is of necessity an item which must enter into true cost, the
question at once arises as to what it is related. Is the amount of
expense to be borne by any article of production based on its cost or
its selling price? While it is noted that some accountants claim the
latter should be the basis for calculation, the consensus of opinion
seems decidedly in favor of the cost price as the correct one, and
there seems to be good argument for the stand thus taken:
(a) Inasmuch as the selling price cannot be established until the
cost price has been ascertained, which is to include the expense, it
is apparent that the expense must be calculated from data already in
hand; either the direct labor or material cost. The selling price is
established after, and contingent on, the cost price, not the reverse.
(b) Again, the selling price may vary according to the demands of
trade; different prices to different classes of customers, as well as
the wholesale and retail prices for the same article. In either case,
the cost price is the same and is not influenced one way or the other
by the selling price. The selling price may fluctuate while the cost
price remains positive and stationary.
(c) While the selling price is theoretically based on cost, it is often
fixed by the trade, or regulated to meet competition regardless of
cost, and the expense accounts are found to continue about the same
each month whether the selling price is high or low.
(d) In times of depression, or when business is slack, it is common
practice to "mark down" the selling price and increase the amount of
sales at a smaller percentage of profit.
(e) It is difficult to see wherein there would be any difference in the
expense of manufacturing an article which sells at $110.00 over what it
would be were the price but $100.00, yet there would be if the selling
price were used as a basis.