classifications, so that the records of material included in any one
purchase account can be checked, without reference to the records
of other classes. In the storeroom of a harness business, a card or
sheet would be used for the record of each item in the hardware stock,
while all of these individual records would be filed under the general
classification, _hardware_.
This method provides three records, each closely related to the others.
In the general ledger, there is a _hardware purchase_ account; in
the storeroom, a detailed record of the hardware stock; in the cost
department, a record of all hardware issued to the factory. When the
cost department record is brought into the _hardware purchase_ account,
by a credit through the journal, the balance of this account should
show the value of the hardware stock and should agree with the records
of the stores department.
The compilation of supplies costs should be made along similar
lines, and the same care should be used in the classifications. Fuel
purchases, for instance, should be kept in a separate account, while
general factory supplies──as oil, belting, waste, etc.──may be kept
in one account or subdivided, depending on the size and nature of the
business.
=42. Material Cost Reports.= The material records of the cost
department relating to totals issued should be made in the form of
reports, as they will be required in the general accounting office.
These reports need not show order numbers, but should show whether used
on production, construction, or repair work. The supplies record should
show by what department the supplies are used.
Fig. 9 shows a form for a report of material costs. In the heading is
given the class of material, being the caption of the purchase account
in the general ledger, and the month for which the report is made. The
body of the report provides for a daily record of amounts charged to
production, repairs, and construction, with an extra column for any
special classification that may be needed at any time.
This form is in duplicate, the original being printed on light weight
paper to insure perfect carbon copies. A loose─leaf form is most
satisfactory because both copies, with carbon paper between, can be
kept in a binder and the entries made each day.
[Illustration: Fig. 9. Monthly Statement of Material Issued]
Duplicate sheets are used for each material classification. Each day,
the amounts are extended on all requisitions. The requisitions are
then sorted according to material classifications, those applying to
production, repair, and construction orders being kept separate. Those
of each subdivision are footed, preferably on an adding machine, and
the total is then entered on the report.
For sorting requisitions, a box or rack, with compartments for the
divisions in each class, is most convenient. Such a rack is shown in
Fig. 10.
Reports of supplies issued to the factory are handled in the same
manner as materials. The form used for this purpose and shown in Fig.
11, is similar to the material report form, the only difference being
that amounts are distributed to the several departments.
At the end of each month, the report forms for material and supplies
are footed, the original is sent to the general accounting office, and
the duplicate is left in the binder in the cost department. When the
cost accounting is handled in the general accounting office, it is not
necessary to make these reports in duplicate; this is necessary only
when the offices are separated.
[Illustration: Fig. 10. Rack Used for Sorting Requisitions]
=43. Labor Costs.= From the time─cards or work orders, labor costs are
compiled both for separate jobs and to show totals by departments and
for the entire plant. The compilation showing totals is made for the
purpose of checking the pay─roll──to prove that all labor paid for has
been charged to factory operations in some form.
The time─cards should first be sorted according to departments, then
re─sorted to separate the direct production, indirect production,
repair, and construction labor of each department or shop. The
cards representing the different classes should be footed on an
adding machine, and the department totals compared with the pay─roll
records. Daily comparisons should be the positive rule in order that
discrepancies may be adjusted while the matter is fresh. On no account
should the adjustment of discrepancies be omitted──labor reports from
the factory _must_ agree with the pay─roll. Cards showing the class of
work done must be turned in for _every_ man.
The tabulation of labor costs is really made for the purpose of
distribution; that labor charges may be distributed to the proper
accounts. The nature of the tabulation will, therefore, depend
largely on the class of business for which it is to be used. In some
lines, costs must be distributed by both departments and classes of
labor; in others, by classes of labor only; sometimes, by classes
of product──though this will usually be covered in the departmental
distribution.
A form intended for the distribution of labor costs in a single
department is shown in Fig. 12. This form is in loose leaf and is filed
in a binder, the sheets being arranged in numerical or alphabetical
order representing the departments. If the cost and general accounting
departments are separated, this form should be in duplicate; otherwise,
one copy is sufficient.
In the body of the form, distribution columns are provided for the
different classes of labor──direct, indirect, repair, and construction,
with a column for any special classification that may be needed.
[Illustration: Fig. 11. Monthly Statement of Supplies Issued]
After comparison with the pay─roll record, the total labor costs are
entered daily on this form. At the end of the month, the sheets are
footed and originals sent to the general accounting office.
=44. Job Costs.= When they have served their purpose in compiling total
material and labor costs, the material requisitions and time─cards are
sorted by job numbers, direct and indirect, repair and construction
cards being kept separate. Where operation costs are desired, the
time─cards for direct labor on each order or job number are re─sorted
by operation numbers. Totals of material costs for each job, and totals
of direct labor costs for each operation and job are obtained, these
amounts being the basis on which charges to jobs for the day are made.
[Illustration: Fig. 12. Departmental Labor Distribution Sheet]
The totals of each class, obtained from requisitions and time─cards,
must agree with the totals of corresponding classifications on the
monthly tabulation of material and labor costs, as in Figs. 9 and 12.
Totals of material and direct labor for jobs and operations are next
entered on job or operation records, or both. As a rule, it is best to
arrange job records so that material and labor costs can be entered
daily, no matter how much time is required to finish the job.
Fig. 13 shows a form designed for the assembling of material and labor
costs for a single shop or department. For the labor distribution,
as many columns as necessary are provided for the record of costs by
operations. In the material column, the kind of material is entered
and the amount extended. When the manufacture requires operations
in several shops, one of these forms is used for each shop on each
production order──that is, a form for each separate shop order. When
the job is finished, the costs for all shops are assembled on one form
to obtain the total cost of the job.
[Illustration: Fig. 13. Recapitulation of Departmental Labor and
Material Costs]
The total material and direct labor costs are brought down on this
form, but indirect labor and shop expense are added as a percentage, as
has been described in the discussion of expense distribution. General
indirect labor and general expense is added to the combined total of
all shop costs. In this connection it may be well to emphasize the
importance of distributing every expense possible to individual shops,
leaving only those items that cannot be so distributed to be added
as general expense. For the ostensible purpose of reducing labor, it
is the practice of some accountants to throw all expense items into
one class, adding the whole as general expense. This is not to be
commended, as it results in an unequal distribution. In one shop, the
ratio of indirect labor, or of the cost of supplies, to direct labor,
may be much higher than in another; the expense for oil, belt lace,
waste, etc., is heavy in the machine shop──nothing in the assembling
shop. Adding all expense under one head, means that the same per cent
is added to direct labor costs in all shops to cover these items;
plainly, an unfair charge.
[Illustration: Fig. 14. Boston Ledger Form Adopted for a Continuous
Cost Record]
A further reason for distributing expense to shops is, that costs
of separate operations are more accurately figured. To reach their
greatest value, cost records should reduce costs to the smallest
possible unit. Every detail should be shown, and these records should
be available for comparison.
Fig. 14 shows how the Boston ledger may be used for a continuous cost
record. The regular form is used, five lines being set aside for each
job. The first line is for the job number, following which, material,
direct labor, indirect labor, and expense are entered. Under each date,
the first column contains particulars of previous costs, the second,
the costs added for the day, and the third column contains the totals
to date. It is not necessary to use the column for previous costs
except the first day for which the page is used; daily costs can be
added to totals for the previous day.
Several jobs can be recorded on one page and the record can continue
until a job is finished. Additions can be made daily, weekly, or even
monthly. This form is used to excellent advantage for contracts that
cover a long period.
When a large number of small jobs are going through the factory at all
times, the labor of the cost department can be reduced and, as a rule,
satisfactory results secured, if tabulations of job costs are made when
the job is finished. This should not be allowed to interfere with the
daily tabulation of total costs, but when requisitions and time─cards
have been re─sorted by job numbers, they may be filed by these numbers,
in a job rack──new cards being added from day to day until the job is
finished. Tabulations can then be made of material costs, showing the
quantity and cost of each kind used, and of the labor costs, showing
costs by operations or by order numbers.
Each business requires its special form for job cost records. The form
must provide for the information of greatest importance to the business
in which it is used. The forms shown herein are submitted as examples
for their suggestive value.
[Illustration: Fig. 15. Recapitulation of Costs for a Single Job]
Fig. 15 shows a form adapted to many lines. This form is intended for
a record of the cost of parts, but could be used for assembled machine
costs. Provision is made for detailed labor costs by man, numbers,
and kind of work. It will be noted that, after obtaining the actual
manufacturing cost──material, labor, and factory burden──profits
are added. In our opinion, profits have no place in cost records.
To establish a selling price, it is legitimate to add a factory or
manufacturing profit before adding a percentage to cover sales expense
and a selling profit, but the addition of these percentages has no
bearing on the actual manufacturing cost.
Fig. 16 is a representative form for a machine shop. All operations
and materials are listed by name, totals only being recorded. Factory
expense is added to the labor cost, while a percentage to cover loss
and waste is added to material costs. This form is subject to the
criticism that all expense is added as one item──no provision is made
for segregating the expense of each shop.
The form shown in Fig. 17 is adapted to a small shop, or for repair
jobs. This is the most simple form that could be devised; columns are
provided for all essential information, and all items are to be written
in.
[Illustration: Fig. 16. Cost Summary for Use of a Machine Shop]
=45. Comparative Cost Records.= The chief value of cost statistics
lies in the opportunity offered for comparison. The fact that the last
lot of part No. 10 cost $1.17 each, does not, of itself, indicate that
the cost is either low or excessive; but if our records show that two
previous lots have cost $1.20 and $1.21 each, the comparison reveals
the fact that the cost is low.
Valuable as this comparison is, it would be still more valuable if it
showed _why_ the cost is less. Suppose labor and material costs are
segregated. Comparison shows that the reduction of three cents is
made up of one cent material and two cents labor. Now if the quantity
and cost of each kind of material used, and the time and cost of each
operation are segregated, an analysis will show the exact operations
on which the saving has been made. It will be found, perhaps, that the
cost of operation No. 10 was actually decreased three cents, but that
the cost of No. 16 increased one cent. Why these variations? Was some
unusually favorable condition responsible for the saving on No. 10, or
can the new cost be maintained? Can the cost of No. 16 be brought back
to the former figure?──these are the questions to be answered by the
production engineer. The records of the accountant supply him with the
means of comparison──point out both saving and waste. Profiting by the
information, the engineer devises ways of approaching more closely to
maximum standards of efficiency.
[Illustration: Fig. 17. Cost Summary for Small Shops and Repair Jobs]
Comparative records should, therefore, provide for a comparison of
every item entering into manufacturing cost. Comparisons should be
based on standard units; if two jobs are to be compared, they must
be identical or the comparison is of no particular value. The modern
method of manufacturing standard parts makes comparison of practical
value. Savings and wastes are more readily located in the manufacture
of parts, than in building a complete machine.
[Illustration: Fig. 18. A Comparison of Labor Costs]
[Illustration: Fig. 19. A Comparative Record of Material Costs]
Excellent examples of comparative records are shown in Figs. 18 and
19. Fig. 18 provides a detailed comparative record of labor costs, the
costs of seven jobs being recorded on each sheet. This shows, for each
operation, the number of pieces, hours, amount, average labor cost, and
average time consumed. If on three orders, 2,000, 3,000 and 5,000 parts
are made, this record will show the total cost of each order, the cost
of each part, and by comparison, the relative cost when manufactured in
different quantities.
[Illustration: Fig. 20. Monthly Comparison of Costs of Standing or
Expense Orders]
To provide for an analysis of material costs, the form shown in Fig. 19
is used. This is similar to the form shown in Fig. 18, the difference
being that it shows detailed costs of each separate kind of material.
Fig. 19 is printed on the reverse of Fig. 18. The form is loose leaf
and the sheets are filed in a binder in the order of part numbers.
Fig. 20 is a card form used for a monthly comparison of costs of
standing orders or expense orders, with labor and material costs
separated. The form provides for a comparison of monthly costs covering
a period of four years──a very valuable record. As an illustration of
the manner of using this form, it will be supposed that machine shop
repairs are made on order No. 460. Both material and labor are included
in the cost of repairs. One of these cards would be used for this order
and, at the end of each month, the totals of material and labor used on
machine─shop repairs would be entered. The total would be extended in
the third column.
CONTINUOUS PROCESS FACTORIES
=46.= A distinct class of manufacture, which involves certain special
problems in cost accounting, is the business in which the process is
continuous. For convenience, we refer to such factories as _continuous
process factories_. Any factory in which a definite quantity of raw
material is converted into a finished product, the quantity of the
product not being definitely determined in advance, is classed as a
continuous process factory. Examples are flour mills, sugar and salt
refineries, nail mills, button and pin factories, and yarn mills.
The problem in factories of this class is to find the total cost of
production and the total number of units of production; the former
divided by the latter will give the cost per unit.
The cost of production includes the cost of material, labor, and
expense. It is necessary, therefore, to keep an accurate record of
material and supplies issued to the factory, just as is done in
factories manufacturing goods on special orders. Labor costs should be
recorded by departments, and the distribution of expense should be by
departments, as far as possible. Forms similar to those shown in the
preceding pages can be used.
=47. By─Products.= A special problem found in certain industries
is to provide for an accounting of salvage, which is either sold
in its natural state or manufactured into other products──known as
_by─products_. For example, the operation of the cutting room of a
harness factory is a continuous process──sides of leather are cut to
produce the largest possible quantity of stock that can be used in the
manufacture of harness. The pieces produced vary in size, and it is
necessary to figure the cost of cut stock by weight. After this stock
has been produced, there remains a certain quantity of scrap leather.
This scrap leather is not worth what it originally cost in the sides
of leather, but has a certain market value. It should, therefore, be
weighed and the value credited against the gross charge for leather to
the cutting room.
Now, some manufacturers, instead of selling this scrap as it comes
from the cutting tables, convert the best of it into such by─products
as heels and washers, selling the residue as scrap. Here is an added
manufacturing process──a new department, operated because the price
obtained for the by─product makes it profitable. The natural thing
to do is to keep accurate cost records for this department, charging
the material at scrap prices and take credit for the profits. But
some accountants contend that the value of the by─product──less cost
of production──should be credited against the material charge to the
principal product. Provided the volume and value of the by─product is
small, there is no serious objection to this plan, but it is not a safe
rule to follow.
In some industries, the value of the by─products is greater than
that of the so─called principal product. The large soap factories
make glycerine and other by─products of greater value than the soap
products. So profitable is this branch of the business that the scrap
or residue from the manufacture of soap, is bought from smaller
factories, to be used in the manufacture of these by─products. The
by─products from the manufacture of gas produces a revenue, in the case
of a large gas company, more than sufficient to pay the entire cost of
operating the plant. Under these conditions, it is readily seen that
the manufacture and sale of by─products should be treated as a distinct
branch of the business; otherwise it might easily be shown that the
principal product is without cost.
PRODUCTION RECORDS
=48.= Methods of recording the cost of material and labor used, and of
tabulating these costs for individual jobs, have been discussed in the
preceding pages. To complete the cost department records, there should
be a record of total production──a record showing the cost of all
finished jobs. This information has an important bearing on the general
accounting system.
The form of the report of production will naturally vary in different
lines of business, though the information needed follows the same lines
in all cases. The essential feature is an exact record covering every
article manufactured in the factory; and every order for parts must be
considered as an order for finished product.
[Illustration: Fig. 21. Monthly Recapitulation of Job Costs]
Sometimes daily reports of finished orders will be required by the
main office, especially when the factory is located at a distance. As
a rule, however, a report covering a period of a week or a month will
serve the purpose.
A form that is adapted for most industries, and for daily, weekly, or
monthly reports, is shown in Fig. 21. In the heading of this form,
provision is made for the name of the department. When it is desired to
keep separate records of two or more classes of goods made in the same
factory, it is necessary to make a report of each class. The class is
usually indicated by the name of the department; when it is not, the
name of the class should be substituted. The body of the form records
the date started, order number, date finished, quantity, and cost in
detail.
The making of this report requires very little additional labor in the
cost department. Each day, when costs are tabulated on the finished
job cost cards, the details are entered on the report, each job being
placed in its proper class. At the end of the week or month, the total
column is footed and the report is sent to the general accounting
office. If the office and factory are widely separated, the report
should be made in duplicate, and a copy retained in the cost department.
CONTROLLING ACCOUNTS
=49.= Certain controlling accounts are required in the general ledger
to complete the connection between the cost and general accounting
system──to bind the two together. These controlling accounts, which
absorb all of the elements of cost from month to month, furnish the
means of proving the accuracy of cost figures; they change the cost
system from single entry to double entry.
Two controlling accounts are necessary──_Manufacturing_ and _Expense
Distribution_. The former finally absorbs the latter and is, therefore,
the principal controlling account.
One manufacturing account may represent the entire product of the
plant, or there may be several accounts representing different classes
of goods, or departments of the business. In machinery manufacture,
the foundry is frequently treated as a separate business; in the
manufacture of knit underwear, the yarn and knitting mills are
operated as separate plants; in a harness factory, separate accounts
are kept of the manufacture of harness, collars, and saddles. Each of
these divisions, whether departments or kinds of goods, calls for a
manufacturing account.
Expense distribution is subdivided in every business having more than
one department or shop. The subdivisions of this account are _General
Expense Distribution_ and _Shop Expense Distribution_, an account with
the latter being kept for each shop.
The sources of charges to manufacturing accounts are reports of
material issued to the factory on production orders, Fig. 9, reports
of direct and indirect labor employed on production, Fig. 12, and the
expense distribution accounts. Credits to manufacturing accounts are
derived from reports of finished jobs, as in Fig. 21.
The sources of charges to expense distribution accounts are: reports of
material issued to the factory to be used for repairs, Fig. 9, reports
of supplies issued, Fig. 11, reports of labor employed on repair
jobs, Fig. 12, and the different accounts covering expense items that
must be apportioned. A credit to expense distribution account, with
a corresponding charge to manufacturing account, closes this account
monthly.
=50. Controlling Account Entries.= The accuracy of the entries to
controlling accounts in the general books is of the utmost importance.
Upon them depends the proof of accuracy of the cost figures of the cost
department on individual jobs.