39. Any system of cost records is deficient that does not provide for the tabulation of all items entering into the cost of individual units or jobs, in such form as will permit of the computation of the total of such costs for comparison with records of total manufacturing expenditures. Three elements enter into the cost of the finished product—material, labor, and expense.

Under the head of material is included the cost of materials of all kinds of which the product is made.

Labor is of two classes, direct and indirect. Direct labor is that which is applied directly to the manufacture of a given article; indirect labor is that which, while necessary to the operation of a shop or factory, is not applied to specific jobs or the production of individual units. In a manufacturing industry operating a machine shop, the labor of machine operators would be classed as direct, while the labor of porters, oilers, and general workers employed in the shop would be classed as indirect. The superintendent of the plant, shop foreman, factory clerks, engineers, firemen, and general workers also belong in the indirect classification. For accounting purposes, indirect labor is divided into two classes—shop indirect and general indirect. Shop foremen and general workers employed exclusively in the operation of a single shop are properly classified as shop indirect, and their wages are charged against the operation of the shop. The superintendent, factory clerks, and general workers necessary to the operation of the plant, whose time cannot be charged against the operation of any one shop or department, are classified as general indirect.

Expense includes all items entering into the cost of the product or the operation of the plant, that are not included in the charge for material and labor. Expense, like labor, is properly divided into shop expense and general expense. General expense includes the cost of all supplies and miscellaneous items of expense incurred in the operation of the plant, which cannot be charged to individual shops. Such items as heat, light, building maintenance, taxes, insurance, and depreciation belong in the classification of general expense.

Any classification of expense items that is not made with reference to a specific plant, must be general; items that in one plant must be classed as general expense, are applied in others as shop expense. The item of power costs furnishes an example. In a plant equipped according to modern engineering ideas, with electrical transmission of power and each machine equipped with its own motor, an exact distribution of power costs to individual shops is a simple problem. The total cost of power for a month is divided among the several shops in proportion to the amount used by each, as shown by meters. Even the hourly cost of power for each machine can then be determined. With a shaft-and belt-driven plant the problem of distributing power costs is less simple. When power costs can be distributed accurately to departments, however, it should be done; otherwise such departments as the drafting room will be charged for power when none is used.

COLLECTING COST DATA

40. For the purpose of making the necessary summaries, complete details of all items of cost for each operation must be collected. This data supplies the foundation for all tabulations of cost statistics.

The first step necessary to insure a record of the cost of manufacture of a given article is the entering of a production order, followed by the necessary shop orders, and the orders of the foremen to the workers. The details of these orders are fully described in another section.

When a foreman receives a shop order, his first duty is to ascertain what material will be needed. He then orders this material from the storeroom, using a requisition as described in the discussion of systems for the stores department.

On receipt of the material the quantity is checked against the foreman's copy of the requisition, which is then sent to the cost department. In the storeroom, the necessary entries are made on the stores records, after which the requisition is sent to the cost department.

When the foreman is ready to assign the work, he issues work orders to his men. As explained in the discussion of labor records, the usual form for work orders is a time-card. On completion of each job, the men deposit the time-cards in the rack provided for that purpose. These are later sent to the cost department.

In actual practice, it is usually best to have all requisitions and time-cards collected once during each day by a messenger from the cost department. Sometimes, the cards are also filled out in the cost department and delivered to the foreman with his shop order, leaving him to enter only the man's number. When this plan is followed, the cost clerk must be familiar with all of the operations required, and must keep the foreman supplied with work orders to keep the shop employed for at least a day ahead.

The receipt of the requisitions and time-cards supplies the cost department with the necessary data for material and direct labor charges to individual jobs. Data for similar charges on account of repairs is secured in the same way.

The character of the records compiled from this data determines the real value of the entire system of cost accounting. If, as is so often the case, the compiling extends no farther than a mere tabulation of costs of individual jobs, it does not reach its full value as a part of the accounting records. Like single-entry bookkeeping, such records are no more than mere memoranda. The full value is reached only when the records of the cost department are made a part of the general accounting system of the business; where controlling accounts absorb all individual items of cost.

41. Material Costs. The compilation of material costs from the requisitions should exhibit the total cost of all material used in the plant and the total cost of material used on each job.

The records intended to exhibit the cost of all material issued to the factory should be divided according to classes, following the same classifications as used for material purchase accounts in the general ledger. This is very important as the information secured from such classifications is needed to form the connecting link between the cost and general accounting systems.

The value of the accounting records is greatly enhanced if, in the general ledger, a purchase account is kept for each class of material and supplies. If but one kind of material is used, only one material purchase account is needed, but in a furniture business, for instance, separate accounts should be kept for purchases of lumber and hardware; in a harness manufacturing business, accounts should be kept for harness leather, patent leather, saddle leather, and hardware. The proper classification for any special business will readily suggest itself, but the material should be classified according to its most natural divisions.

The stores records also should be divided according to the same 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Material and labor costs are accurately determined. The value of material drawn for all purposes, as shown by the report in Fig. 9, is credited to material purchase accounts, and these accounts are checked against the storeroom records. Reports of supplies drawn are handled in the same manner. The labor report, Fig. 12, covers all labor charges and must agree with the pay-roll for the period covered.

In the distribution of expense, however, there are many opportunities for error. While the total expense to be charged against the factory for a given period is accurately determined, the amount is not known until the end of the period. This is represented by the amounts charged to the different expense distribution accounts. In the meantime, to determine the cost of individual jobs, it is necessary to apportion expense on a percentage basis, as explained in the discussion of that subject. Since that ratio for the current period is unknown, it is necessary to assume that the actual ratio for the preceding period still is correct; therefore, that ratio is used in figuring the cost of all jobs. It is only when the expense distribution for the current period is made on the general books and the true ratio determined, that discrepancies, if any, are discovered. Unless the distribution is accurate, the resulting ratio will be incorrect.

Formerly, it was the custom to base the expense ratio on the actual figure for the preceding year, which meant that changes in expense ratio were not taken into account for an entire year. As a result, the total manufacturing cost shown by the books at the end of the year, did not agree with the costs as figured in the cost department; it was usually much higher.

By operating the controlling accounts, making accurate distributions of expense, the period can be limited to one month. Discrepancies are then quickly discovered and the necessary adjustment made in the expense ratio used. If it is found, at the end of the month that the true ratio of expense is higher or lower than for the preceding month, the percentage to be used for the next month is raised or lowered accordingly. With a careful distribution of the expense items each month, the variations in the ratio should be very slight.

The objection is sometimes made that a monthly distribution of expense is inequitable—that certain expenses may be abnormally high in some months and below the average in others. But with proper controlling accounts, this objection ceases to be serious. Certain expenses are paid in one month that should be distributed over an entire year—as taxes, insurance, and repairs. The amounts charged to the expense distribution accounts each month, are only the amounts that should be apportioned to that month. Taking taxes as an example, one-twelfth of the entire amount should be charged each month.

As an example of adjusting entries for controlling accounts, journal pages are illustrated, in Fig. 21, containing entries made at the end of the month—with explanations. It will be noted that the last entry is a charge to manufactured goods account, and a credit to manufacturing account of the total cost of finished goods, as shown in the report, Fig. 20.

This account, manufactured goods, occupies the same position as a purchase account. It represents the cost of finished goods to the commercial division of the business. To this cost must be added an amount sufficient to cover selling expense and provide a profit, as is done when goods are purchased for resale. Selling expense should not be included in the cost department's figures; nothing should be added to the actual cost of manufacture, unless it is desired to add a small amount to provide a factory profit.

Manufacturing account has been charged for the cost of manufacture—material, labor, and expense—and credited with the cost of finished goods. This does not close the account, however, because all jobs started have not been finished, as there still is work in process. The balance of the manufacturing account, then, represents the cost of this work and should agree with an actual inventory of work in process.

No attempt has been made to describe a cost system for a particular business—principles only have been considered in this discussion. Proper application of these principles, however, will result in a practical system for any manufacturing business. The exact manner of applying these principles—the detail—depends on the nature of the business; the results desired are the same in all lines. Physical conditions, nature of the product, the policy of the management, the manner in which the business is conducted—all of these factors must be studied and given due consideration in outlining the system. Then the most simple system that will produce results is best, but in the effort to make the system simple, necessary details should not be overlooked. It must be remembered that in a comparison of details of cost, increases are more quickly located than if the comparison refers to finished work.

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