THE ARTHUR YOUNG ACCOUNTING COLLECTION Graduate School of Business Administration Library of the University of California Los Angeles This book- DT ae last date stamped below. SOUTHERN BRANCH UNIVERSITY CF CALIFORNIA - I-'-' >~~ Cost Accounting By J. LEE NICHOLSON, C.P.A. President of the J. Lee Nicholson Institute of Cost Account- ing; Supervising Cost Accountant, Ordnance Department, U. S. A., 1917-18; Author "Factory Organization and Costs," " Cost Accounting. Theory and Practice," etc. And JOHN F. D. ROHRBACH, B.C.S., C.P.A. Of the firm of J. Lee Nicholson and Company, Instructor in Cost Accounting, Columbia University Fifth Printing fc Library Graduate S.Mol of BufM-^ a ^ministration Copyright, 1919, by THE RONALD PRESS COMPANY PREFACE Cost accounting, as a vital factor of successful business administration, has, in the last few years, been brought home in various ways to many manufacturers who before had never seriously appreciated its importance. The Federal Trade Commission, working for more stable conditions, has conducted a widespread campaign of education, explaining in detail what a cost accounting system is, how it is operated, and the resulting business advantages. Various manufacturers' associations have first paid skilled accountants to devise cost-finding methods suited to their spe- cial trade conditions, and then have instituted a vigorous propa- ganda to induce all engaged in their own particular industry to adopt them, thus making these methods uniform in the trade and securing uniformity of selling prices and the end of reck- less and ignorant price-cutting. Now the government, with its need to levy war taxes and its consequent necessity for searching investigation into income and excess profits, requires that estimates and approximations as to production costs and profits shall give place to rational accounting systems giving actual figures by uniform methods. As a result of this pressure and the more intelligent educa- tion in accounting given by the better modern schools, cost ac- counting has become the rule in all intelligently conducted industries, and its methods have been extended to many estab- lishments other than manufacturing industries. Under these circumstances it has been found necessary to bring out this volume as an extension of Nicholson's "Cost Accounting, Theory and Practice" published in 1913, making the work more comprehensive, and bringing it in all respects up to the latest practice. In its preparation the authors have kept constantly in view the following aims: i v PREFACE First, to classify the details of cost accounting so that the reader, be he accountant, manufacturer, or student, is given a well-defined idea of the forms and records required for each separate operation and of how these forms and records fit into the general system used in the particular establishment. The need for such a classification has many times been brought to the attention of the authors by points raised during con- ferences with manufacturers. Second, to present additional and specially important data, such as the comprehensive table of depreciation rates or, pages 146 et seq., and the classification of and distinction be- tween asset and perishable tools on pages 509 and 510. Defi- nite information of this kind based on standard practice solves many of the perplexities which arise when such arbitrary mat- ters as depreciation and classification are left to individual judgment with its tendency to be biased by the current state- ment of profit and loss. Similar problems and difficulties have arisen in inter- preting the terms of the numerous government contracts made during the war period and their cancellation at the time of writing. Therefore, the present work is brought up to date by a detailed discussion of what may be chargeable to such con- tract work and what compensation the contractor may be enti- tled to on the cancellation of a fixed price, a fixed profit, or a cost-plus contract. Acknowledgment is hereby made to Lieutenant-Colonel M. F. Griggs and Captain J. P. Carlin of the Ordnance Depart- ment, U. S. A., for their valuable contributions to the discus- sion of depreciation rates; also to the editorial staff of the Ronald Press Company for their careful revision and helpful suggestions as to form and arrangement of manuscript. THE AUTHORS January 2, 1919 CONTENTS Part I Elements and Methods of Cost-Finding CHAPTER PAGE I COST-FINDING AND ITS FUNCTIONS , . I Changing Social and Industrial Demands Phases of Efficiency Progress Importance of Cost-Finding Functions of Cost Accounting Cost Accounting as Related to General Accounting Objections to Cost Systems Advantages of Cost Systems Application of Cost Principles Uniform Methods of Cost-Finding II ELEMENTS OF COST ..... . .13 Manufacturing Costs Direct Material Direct Labor Direct Expense Indirect Charges Packing Expense Selling Expenses Administrative Expenses Selling Price Deductions Analysis of Elements of Cost III GENERAL METHODS OF COST-FINDING 24 Requirements of Cost-Finding ORDER METHOD OF COST-FINDING Distinctive Features of Order Method Construction Work Repair Shops Plating Shops Cabinet Shops Garment Manufacturing Plants Straw and Felt Hat Plants Boot and Shoe Plants Wood-Working Plants Metal-Working Plants Assembling Departments PROCESS METHOD OF COST-FINDING Distinctive Features of Process Method Foundries vi CONTENTS CHAPTER PAGE Paper Mills Paint and Varnish Manufacturing Plants Chemical Manufacturing Plants Rubber and Celluloid Manufacturing Plants Manufacture of Foodstuffs Coal-Mining Ice Manufacturing Plants Treating Departments Cutting and Machining Department Wood-Working Plants Summary of Cost-Finding Methods IV DEPARTMENT AND PRODUCT CLASSIFICATION ... 35 Factory Departments Productive Departments Designation of Departmental Divisions Non-Productive Departments Miscellaneous Departments General Operating Expenses Summary of Departmental Classification Classification of the Product Part II Factory Routine and Detailed Reports V FACTORY ORDERS . 45 Function of the Factory Order Inadequacy of Verbal Orders Written Factory Orders Kinds of Factory Orders Production Orders Classification Designation of Quantities Sub-Production Orders The Grouping of Small Orders Special Production Orders The Production of Parts and Finished Stock Repairs to Product Orders Miscellaneous Factory Orders Classification Construction Orders Betterment Orders Repair Orders Standing Orders Order Numbers Summary of Factory Orders Designing Factory Orders Issuance and Authorization Number of Copies Simple Form of Factory Order Development of Factory Order Filing and Final Disposition of the Factory Order Sales Orders Registering Sales Orders CONTENTS vii CHAPTER PAGE VI MATERIAL AND MATERIAL REPORTS , ., . . ... . .,65 Procedure in Handling Material Purchasing the Material Purchase Requisition Purchase Order Register of Purchase Orders Filing of Catalogues, etc. Receiving the Material Receiving Record Report of Material Received Invoices from Creditors Storing Material Bin Records Record of Raw Material Issuance of Material Material Requisitions Bill of Material Credit for Material Returned Disposition of Issued Material Report of Material Used Interdepartmental Material Reports Pricing the Material Inventorying the Material Summary of Material and Material Reports Procedure in Handling Records VII WAGE SYSTEMS , 98 Kinds of Wage Systems Day-Rate System Piece-Work System Differential-Piece-Rate Plan Premium and Bonus Systems Contract System Profit-Sharing and Stock-Distributing Plans VIII LABOR REPORTS 108 Classification of Labor Outside and Inside Labor Direct and Indirect Labor Direct Labor Reports Time of Reporting Labor Method of Reporting Labor Requirements of Labor Reports Form of Time Report Pay-Roll Exception Report Labor Transfer Reports Rate Records Summary of Labor Reports Procedure for Handling Reports IX DEPARTMENTAL APPLICATION OF OVERHEAD 126 Classification Indirect Material vlii CONTENTS CHAPTER PAGE 1. Material Which Cannot Be Applied as a Direct Charge 2. Supplies 3. Scrap or Waste Material 4. Small Perishable Tools and Dies Indirect or Non-Productive Labor i. (a) Cost and Idle Time of Productive Workers 1. (b) Time of Helpers, Sweepers, Truckers 2. Supervisors and Foremen 3. Superintendence 4. Inspection, When Not Considered as a Direct Labor Charge 5. Factory Clerks' Salaries 6. Employees on Defective Work 7. Employees on Experimental Work Indirect Expenses 1. Rent 2. Insurance Fire and Liability 3. Taxes 4. Interest 5-7. Power, Light, and Heat 8. Freight and Cartage Inward 9. Over, Short, and Damage Account 10. Miscellaneous Factory Expenses X DEPRECIATION AND MAINTENANCE, . . 144 Depreciation Effect of Repairs and Renewals on Depreciation Factors to be Considered in Fixing Rates Schedule of Depreciation Rates Basis- of Standard Rates Group Rates Rates for Special Machinery Method of Charging off Depreciation Difference between Amortization and Depreciation Legal Definition of Depreciation and Amortization The Effect of Overtime on Depreciation Limit of Maximum Percentage for Overtime Abnormal Depreciation and Amortization Maintenance, Repairs, and Renewals XI DISTRIBUTION OF FACTORY OVERHEAD , 163 Direct and Indirect Distribution of Overhead General Operating Expenses Methods of Distributing Overhead 1. Prime-Cost Method Calculation of Prime-Cost Rate Advantages and Disadvantage Conditions under which Inapplicable 2. Productive-Labor-Cost Method Applicability of Labor-Cost Method 3. Productive-Labor-Hours Method 4. (a) Machine-Rate Methods Method of Compiling Machine Rate CONTENTS IX CHAPTER PAGE 4. (b) Fixed Machine-Rate Method 4. (c) Sold-Hour Method 5. Miscellaneous Methods Fixed Versus Fluctuating Rates Adjustment of Factory Overhead Summary of Factory Overhead XII FACTORY OVERHEAD REPORTS 185 The Source of Overhead Items Reports for Recording Indirect Material Reports for Indirect Labor Freight and Cartage Inward Indirect Expenses Fixed Charges Maintenance, Repairs, and Renewals- Power Expenses Over, Short, and Damage Distribution or Analysis Record Deferred Expense Record Summary of Factory Overhead Reports XIII METHODS OF REPORTING PRODUCTION 198 Purpose of a Production Report Form of Production Report Simple Production Reports Production Reports Showing Progress of Product Factory Orders as Production Reports Tag and Coupon System of Production Report Material Reports as Production Reports Labor Reports as Production Reports Defective Work Reports Time of Reporting Production Disposition of Product Procedure in Handling Production Reports Summary of Production Reports Part III Compiling and Summarizing the Cost Records XIV COST SHEETS 211 Scope of Cost Sheet The Job or Order Cost Sheet The Process Cost Sheet Information in Heading Details Shown on Cost Sheets Simple Form of Cost Sheet Departmental Cost Sheets Detailed Summary of Costs Progressive Cost Sheet Schedules of Estimated Costs Posting Cost Information Posting Material Reports Posting Labor Reports CONTENTS CHAPTER Entering Overhead Costs Entering Quantities Mechanical Aids for Posting Costs Checking Costs Summary of Procedure Method of Filing Cost Sheets Summary of Method of Compiling Cost Sheets PAGE XV STOCK RECORDS Purpose and Kind Method of Keeping Stock Records Raw Material Stock Records Work in Proces-s Stock Records Finished Parts Stock Record Finished Stock Records Simple Types of Stock Records Records of Stock Available for Unfilled Orders Consignment Records Semi-Finished Goods Stock Records Procedure in Handling Stock Records Entering Inventory Balances Posting Charges- and Credits Testing, Proving, and Adjusting Loose-Leaf Versus Bound Stock Record Obsolete Stock Record Filing Stock Records XVI SUMMARIZING RECORDS CHARGING FACTORY Ex- 231 XVII PENDITURES Purpose of Summarizing Records Cost Period Charging Factory Expenditures Method of Handling Purchase Invoices Purchase Record Posting from Purchase Record Accounts Payable Voucher Voucher Register Posting from Voucher Register Advantages and Disadvantages of Voucher Register Combination Voucher Register and Purchase Record Distribution or Analysis Record ' Summary of Material Received Pay-Roll Pay-Roll Analysis Analysis of Charges to Jobs Process Pay-Roll Summary Summary of Salaries COST SUMMARIZING RECORDS TRANSFERS WITHIN THE FACTORY Kinds of Records Summary of Material Requisitions Summary of Departmental Material Used 242 266 CONTENTS XI CHAPTER XVIII XIX XX PAGE Summaries of Material Transfers Summary of Departmental Transfers of Labor Summary of Shop Order Costs Summary of Defective Work Costs Summary of Factory Overhead Distribution Summary of Production COST SUMMARIZING RECORDS SALES, COST OF SALES, AND JOURNAL ENTRIES 276 Kinds of Records Shipping Records, Sales Records, and Costing Sales Sales Summary Cost of Sales Summary Return Credit Records Returns Summary and Cost of Returns Summary Costs and Sales Journal Entries Journal Vouchers and Standing Journal Entries Chart of Cost Summarizing Records Part IV Controlling the Cost Records GENERAL LEDGER CONTROL OF FACTORY ACCOUNTS. . The Control of Cost Records Income and Expense Accounts Purchase Transactions Pay-Roll and Analysis Sales Transactions Cash Transactions Ledger Accounts Merchandise Inventory Controlling Factory Transactions First Method Controlling Factory Transactions Second Method Proving the Inventory Balances- Subdivisions of Controlling Accounts Controlling Factory Transactions Third Method Factory Ledger Controlling Account in the General Ledger Classification Chart of General Ledger Accounts Arrangement of General Ledger Accounts 293 FACTORY LEDGER CONTROLLING ACCOUNTS . Methods of Keeping the Factory Ledger Factory Journal Raw Material Accounts Postings to Raw Material Accounts Work in Process Accounts Postings to Work in Process Accounts Form of Work in Process Account Part-Finished Stock Accounts Postings to Part-Finished Stock Accounts Finished Stock Accounts 315 xii CONTENTS CHAPTER PAGE Postings to Finished Stock Accounts Productive labor Accounts Factory Indirect Expense Accounts- Distributed Overhead Account General Ledger Account Summary of Factory Ledger Controlling Accounts Classification Chart of Factory Ledger Accounts Form of Factory Ledger Arrangement of Factory Ledger Accounts Verification of Controlling Accounts Adjusting Discrepancies in Cost Closing of Factory Ledger Accounts XXI FINANCIAL AND FACTORY STATEMENTS 338 Time and Form of Preparation Kinds of Reports Reports to Executives Balance Sheet Profit and Loss Statement Manufacturing Statement Trading Staetment Statement of Merchandise Inventory Statement of Changes in Plant and Equipment Reports to the Sales Departments Statement of Salesmen's Sales, Costs and Expenses Statement of Production, Shipments and Inventory of Finished Stock Daily Statement of Sales and Cost of Sales Statement of Sales, Actual Costs and Estimated Costs Statement of Obsolete or Slow-Moving Finished Stock Reports to the Purchasing Department Reports to Factory Superintendent and Production Manager Statement of Costs and Production Statement of Labor Statistics and Cost Averages Statement of Obsolete Orders in Process Statement of Factory Expenses Statement of Machine Statistics Summary of Financial and Factory Statements Method of Presenting Statements Disposition of Statements Style and Ruling of Reports Interlocking and Agreeing Reports Time of Presenting Reports XXII METHOD OF TAKING INVENTORY 377 Inventory Methods Testing the Inventory Inventory Adjustments Inventory Sheet Physical Inventories Preparation for Physical Inventory Instructions- as to the Taking of the Inventory Method of Taking the Inventory CONTENTS xiii CHAPTER PAGE Method of Listing the Inventory Method of Pricing the Inventory Pricing Raw Material Pricing Work in Process Pricing Finished Parts and Finished Stock Items Figuring, Checking and Proving the Inventory XXIII PLANT ASSET RECORDS 391 Nature and Valuation of Plant Assets Plant Asset Records Purposes of Plant Record Machines Tools- Fixtures Machine Parts Dies, Molds, etc. Records by Appraisal Companies Part V The Installation of a Cost System XXIV GENERAL CONSIDERATIONS 399 The Cost Accountant Work of the Cost Accountant Cost Classification of Enterprises Internal Problems Affecting Cost Installations Fitting the Cost System to Existing Conditions Red Tape Reports for Executives Summary of Cost Procedure 1. Charging the Factory 2. Receiving and Storing Material 3. Proving and Charging Pay-Rolls 4. Delivering Material to Operation 5. Computing Costs 6. Crediting Production 7. Distributing the Factory Overhead 8. Charging Production to Stock 9. Costing Sales and Shipments 10. Preparing and Posting the Summarizing Records 11. Proving Subsidiary Records 12. Preparing and Proving the Trial Balance 13. Preparing Factory and Financial Statements Cost Systems Forms for Cost Records and Reports Presenting Report on Cost Systems XXV INSTALLING A COST SYSTEM EXAMINATION OF PLANT 414 Nature of Examination Examination of an Existing Cost System Efficiency Details Procedure for Examination of a Plant I. Product Classification XIV CONTENTS CHAPTER PAGE 2. Sales Department 3. Departments of the Factory and Manufacturing Processes 4. Foundry Department 5. Plating Room 6. Wood-Working Shops 7. Dry Kilns 8. Power Department 9. Packing Department 1C. Shipping Department 11. Estimating Department 12. Cost Department 13. Factory Orders 14. Raw Material and Storeroom Requirements 15. Purchasing Division 16. Receiving Department 17. Storeroom 18. Labor and Labor Reports in- Use 19. Factory Overhead Items 20. Production 21. Finished Parts and Finished Stock 22. Compiling the Costs 23. Cost Summarizing Records 24. Genera' Accounting Records of Original Entry 25. General System of Accounting 26. Statements 27. Miscellaneous Information Examination of Auxiliary Mechanisms Method of Obtaining the Information XXVI INSTALLING A COST SYSTEM METHOD OF STARTING OPERATIONS 442 Preliminary Test of Records Order of Procedure Qassifying and Reanalyzing the Beginning Inventory Entering Inventory on Records Proof of Entries Handling Work in Process Items Starting New Orders in the Factory Overhead Distribution Classification of Product, Departments and Accounts Reports and Records Part VI Simplified Cost-Finding Methods XXVII ELEMENTARY COST SYSTEMS 451 Valuation of Closing Inventory Method of Preparing Statements Advantage of Percentage Method Percentage Method Applied to Several Product Clas- sifications Unit Method of Figuring Costs Applicability of Unit Method Proof of Records CONTENTS xv CHAPTER PAGE XXVIH ESTIMATING COST SYSTEMS. . 459 Special Features of Estimating Method Method of Operating System Summary of Procedure Development of System VERIFICATION OF TOTAL COSTS FIRST METHOD Special Records Required General Ledger Accounts Method of Verification VERIFICATION OF MATERIAL, LABOR AND OVERHEAD ESTIMATES SECOND METHOD Special Records Required Analysis of Inventory Operation of Ledger Accounts Method of Verification VERIFICATION OF COSTS BY SEVERAL LOTS OR GROUPS THIRD METHOD Special Records Required Raw Materials Costs Labor Costs Overhead Costs Opening Inventory Analysis Operation of Ledger Accounts Method of Verification VERIFICATION OF COSTS BY OPERATING DEPARTMENTS FOURTH METHOD Special Forms Required Ledger Accounts Opened Charges for Expenditures Crediting Production Recording Cost of Sales Method of Verification Adjusting Differences in Inventory XXIX UNIFORM COST METHODS 481 The Advantages of Standard Methods Examples of Haphazard Methods Method of Standardizing Costs Details to be Considered Part VII Cost-Plus Contracts XXX RECOMMENDATIONS OF INTERDEPARTMENTAL COST CONFERENCE 487 Work of Conference Recommendations Their Object Fair Terms and Fixed Prices Form of Purchase-and-Sale Contract X vi CONTENTS CHAPTER PAGE Relations Established by Contract Fixed Profit Plan Adjustment of Fixed Profit Standardized Forms' and Methods Summary of Recommendations Normal Costs versus Total Costs XXXI COST-PLUS CONTRACTS MATERIAL, LABOR, AND EQUIPMENT ITEMS 496 General Consideration of Terms of Contract Need of Special Rulings BETTERMENTS AND EQUIPMENT Treatment of Additions and Special Facilities Treatment of Fixtures and Special Equipment Office Furniture and Fittings Rebuilding, Renovating and Equipment Charges Freight or Express on Equipment Setting Up Machines Monorail System Installing Workmen's Washing Facilities Housing of Laborers REPAIRS, RENEWALS AND REPLACEMENTS Method of Treatment Extraordinary Repairs MATERIALS AND SUPPLIES ITEMS Material Cost Supplies Pricing of Material and Supplies Shortages, Overs and Obsolete Material Inventory Adjustments Drayage Packing and Packing Supplies Transfers of Inventory Items Between Factories Spare Parts TOOLS Distinction Between Tools and Machines Asset Tools and Perishable Tools Scrap Value of Tools Classification of Tools Handling and Storing of Tools Accounting for Tools Asset Tools Charged at Cost Perishable Tools Old Tools Remade or Salvaged Repairs or Replacement of Tools Identification of Tools Used Treatment When Basis of Contract is Changed CONTENTS XVll CHAPTER XXXII PAGE OVERTIME AND IDLE TIME Overtime Idle Time on Operation Waiting Time as a Deferred Charge COST-PLUS CONTRACTS EXPENSE AND OVERHEAD ITEMS DISTRIBUTION OF OVERHEAD Direct and Indirect Distribution Distribution Over Periods of Less Than a Month Overhead on Bulk Products DEFERRED OVERHEAD CHARGES Preliminary Expenses Deferred Expenditures ADMINISTRATIVE EXPENSES Method of Treatment Excessive Salaries Salaries Paid After Termination of Employment BONUS AND PENSION PAYMENTS Bonus Payments Pension or Compensation Indemnities INSURANCE AND TAXES Fire Insurance Insurance Other Than Fire Liability Insurance Premiums for Life Insurance Income and War Excess Profits Taxes- Government Taxes on Freight INTEREST, DEPRECIATION AND DEPLETION Interest as a Cost Interest on Borrowed Money Interest on Working Capital Inventories Interest on Plant, Machinery and Equipment Depreciation and Interest on Plant Assets Depletion Method of Figuring Depreciation GUARDING OF PROPERTY Police Protection Guard House Guards' Uniforms, Badges and Other Equipment Distribution of Protection Charges MISCELLANEOUS EXPENSE ITEMS Blue-Prints Cash Discount XV111 CONTENTS CHAPTER XXXIII Drafting Expenses Defective Work Experimental Expense Employment Department Intercompany Expenses Patents and Royalty Rental Specific Charge for Same Scrap and Waste Selling Expense Testing Expense Training Employees Expense Welfare Work ERRORS AND LOSSES DUE TO CHANGES Reclamation of Errors Changes in Specifications ITEMS NOT CHARGEABLE UNLESS STRICTLY APPLICABLE Attorney Fees Bad Debts Brokerage Expenses Donations and Entertainment Real Estate Investments, Expenditures, etc. Reserves Engagement of Expert Services SUSPENSION OR CANCELLATION OF CONTRACTS . . General Considerations CANCELLATION OF FIXED PRICE CONTRACTS Valuation of Inventory Settlement of Commitments Amortization Plant Rearrangment Experimental Work Special Tools Lease of Grounds or Building Occupancy Contract for Service Organization Expense Profits Saving Clause in Contract CANCELLATION OF FIXED PROFIT CONTRACTS Difference Between Fixed Price and Fixed Profit Contracts Saving Clause CANCELLATION OF COST-PLUS CONTRACTS Distinction Between Fixed Profit and Cost-Pius Contract PAGE 540 FORMS AND CHARTS ELEMENTS OF COST FORM PAGE 1. Diagram Showing Relation of Cost Elements to Selling Price . 20 2. Chart Showing Analysis of Cost Elements 22 GENERAL METHODS OF COST-FINDING 3. Chart Showing Methods of Cost-Finding Applied to Various Industries 33 4. Classification Chart of Factory Departments 41 FACTORY ORDERS 5. Classification Chart of Factory Orders 56 6. Simple Factory Order 58 7. Sales Order 62 MATERIAL AND MATERIAL REPORTS 8. Purchase Requisition 66 9. Purchase Order 69 10. Register of Purchase Orders 71 11. Receiving Record 73 12. Report of Material Received 75 13. Invoice Stamp 77 14. Bin Record 78 15. Record of Raw Material 79 16. Material Requisition 83 17. Bill of Material 85 18. Credit for Material Returned to Stock 87 19. Report of Material Used 89 20. Interdepartmental Material Report 90 21. Inventory Test 93 22. Inventory Sheet 94 23. Chart Showing Handling of Material and Material Reports . 96 LABOR REPORTS 24. Daily Labor Report 114 25. Daily Piece-Work Report 115 26. Job Ticket 116 27. Pay- Roll Exception Report 117 28. Labor Transfer Report 119 29. Wage Rate Record 120 30. Classification Chart of Labor Reports 121 xix xx FORMS AND CHARTS FORM PAGE FACTORY OVERHEAD REPORTS 31. Classification Chart of Factory Overhead 183 32. Schedule of Fixed Charges 191 33. Power Plant Distribution Record 194 34. Classification of Factory Overhead Reports 197 PRODUCTION REPORTS 35. Daily Production Report Simple Form 199 36. Defective Work Report 205 37. Classification Chart of Production Reports 208 COST SHEETS 38. Process Cost Sheet 213 39. Cost Tag 216 40. Departmental Total Cost Sheet 216 41. Individual Departmental Cost Sheet 217 42. Complete Cost Sheet, Giving Departmental Details . . 219, 220 43. Progressive Cost Sheet 222 44. Calculation Blank Used in Garment Factory 223 45. Classification Chart of Cost Sheets 229 STOCK RECORDS 46. Finished Stock Record 235 47. Finished Product or Parts Stock Record 236 48. Finished Product Stock Record, Showing Filled and Unfilled Orders 237 SUMMARIZING RECORDS 49. Invoice Stamp, Covering Data for Purchase Record .... 244 50. Purchase Record 246 51. Accounts' Payable Voucher 247, 248 52. Voucher Register 252, 253 53. Distribution or Analysis Record 256 54. Summary of Material Received 258 55. Pay-Roll Record 260 56. Pay-Roll Analysis 263 57. Summary of Material Requisitions 267 58. Summary of Shop Order Costs 271 59. Summary of Factory Overhead 273 60. Summary of Production 974 61. Shipping Order 277 62. Shipping Order Combined with Customer's Invoice, Sales Record and Cost of Sales Record 278, 279 63. Sales Summary 282 64. Cost of Returns Record Combined with Customer's Credit Memo and Office Record Memo 284, 285 65. Register of Sales and Costs 287 66. Journal Voucher 289 67. Standing Journal Entries Form 290 68. Chart of Cost Summarizing Records and Procedure . 291 FORMS AND CHARTS xxi FORM PAGE CONTROLLING ACCOUNTS 69. Classification Chart of General Ledger Accounts . . . 312, 313 70. Work in Process Account 321 71. Work in Process Account Showing Elements of Cost . . . 321 72. Factory Indirect Expense Account for Each Item .... 326 73. Factory Indirect Expense Account for Each Department . . 326 74. Summary Chart of Factory Ledger Controlling Accounts . . 330 75. Classification Chart of Factory Ledger Accounts . . . 323, 333 FINANCIAL AND FACTORY STATEMENTS 76. Comparative Balance Sheet 341 77. Profit and Loss Statement 344, 345 78. Manufacturing Statement 347 79. Comparative Statement of Merchandise Inventory .... 350 80. Statement of Charges in Plant and Equipment .... 351 81. Statement of Salesmen's Sales, Costs and Expenses .... 354 82. Statement of Production, Shipments and Inventory of Finished Stock 356 83. Daily Statement of Sales and Cost of Sales 357 84. Statement of Sales, Showing Profit or Loss on Special Items 358 85. Statement of Sales, Actual Costs and Estimated Costs . . . 360 86. Statement of Obsolete or Slow-Moving Stock 361 87. Statement of Merchandise Purchases and Inventory of Raw Materials 363 88. Statement of Obsolete Raw Material Items 364 89. Comparative Statement of Maximum and Minimum and Actual Quantities 365 90. Statement of Costs and Production 367 91. Statement of Labor Costs and Averages 369 92. Statement of Obsolete or Slow-Moving Orders in Process . . 370 93. Statement of Factory Expenses 371 94. Statement of Machine Costs 372 95. Chart of Financial and Factory Statements 374 INVENTORY RECORDS 96. Work in Process Inventory Sheet 380 97. Inventory Tag 385 98. Plant Asset Record 392, 393 ESTIMATING COSTS 99. Schedule of Total Estimated Costs 463 100. Summary of Estimated Costs of Sales ........ 464 101. Analysis of Inventory 467 COST-PLUS CONTRACTS 102. Record of Tools Issued, Used and Scrapped 511 COST ACCOUNTING Part I Elements and Methods of Cost-Finding CHAPTER I COST-FINDING AND ITS FUNCTIONS Changing Social and Industrial Demands The importance of efficiency in business organization has never been so generally recognized as at the present time, and there is promise of even greater development in the future. One indication of this condition is the increased volume of literature that is now available on the subject More than 90% of this literature has been published in the last decade, and fully 75% in the last five years. The ultimate causes of this are to be found in the broad field of economics. The gradual absorption and development of natural resources, the exploitation of new fields of com- merce, the increase of population, the higher standards of living, the greater complexities of demands in modern life these are but a few of the innumerable influences reflected in the industrial life of today. Transformed to some extent, these changes meet the manufacturer in the form of demands for more wages and better labor conditions, in the increased cost of materials, and in a much keener competition in every phase of manufacturing and selling. He must either adapt his methods to meet the situation, or retire from the field. Only one practicable road lies before him, and that is a keener realization of the existing i 2 COST-FINDING ELEMENTS AND METHODS possibilities in his business. To be specific, he must eliminate waste of every kind and plan his organization so as to increase the production per unit of cost. Phases of Efficiency Progress This search for factory efficiency assumes many phases which overlap each other, more or less. From the mechanical standpoint, it involves a study of plant location and construc- tion, new and better types of machines, economies in producing and using power, etc. From the labor standpoint, it has given rise to new and improved methods of wage payment, such as the differential rate plan and the premium and bonus methods with their various modifications, all of which offer increased pay for greater individual effort and efficiency. Even the motions and operations of the workmen are being analyzed as to their component parts, with the view of eliminating those which are unessential and wasteful of effort. While some of these methods are still novelties, the time is not far distant when most manufacturers will have to adopt them, or some- thing similar, for their own salvation. From the standpoint of factory organization, more has been attempted and accomplished than in almost any other direction, because the need has been pressing and immediate. The purpose is to bring the activities of the whole plant, no matter how widespread, under the direct review and control of the management. It is felt, and rightly so, that a con- siderable loss is incurred unless efficient systems and reliable statistics enable the management to keep in touch with the various steps of production, and to locate the responsibility for waste, lost time, shop errors, etc. Quite as essential in its bearing on efficiency is the proc- ess of cost-finding; that is, finding just what it costs to manu- facture a certain order or article. Not only is this necessary for the purpose of determining possible selling prices, but it COST-FINDING AND ITS FUNCTIONS 3 provides the ultimate measure by which manufacturing methods may be compared, and the best be thereby deter- mined. Importance of Cost-Finding Through the Sherman Act, the United States Government prohibited manufacturers from agreeing on a uniform selling price. While this was a justifiable law and was necessary in order to curb combinations, at the same time it produced a certain amount of chaos because of the constant cutting of prices. There is, however, no law to prevent the introduction of a cost system or a uniform method of cost as applied to a certain definite industry, and the importance of this has re- cently been strongly emphasized by the government. The Federal Trade Commission, through the untiring efforts of its former chairman, Hon. Edward N. Hurley, in its work in con- nection with cost-finding, made a deep impression on the minds of manufacturers throughout the country as to the advantage and necessity of this branch of accounting. Government investigations show that out of a quarter of a million business corporations in this country, the majority are making no profit, and that over jo% are making less than the salary of a good executive; furthermore, these statistics show that only 5% of the manufacturers know what their goods cost them to make. This statement does not mean that the manufacturer does not figure his cost, for every manufacturer, no matter how crudely it may be done, must do some sort of figuring on his cost in order to arrive at a selling price. The trouble, in the majority of cases, is that the manufacturer has no systematic method of figuring costs and has no way of proving his cost estimates after he has made them. The need for better methods of cost accounting has been justified by the confusion which the government found exist- 4 COST-FINDING ELEMENTS AND METHODS ing at the outbreak of war in many of the trades in connec- tion with this matter. It was necessary in case after case to establish, at an immense expense, a bureau and corps of ex- perts to endeavor to find out the cost of manufactured products. All this trouble, waste of time, and expense would have been saved for the government, and much for the manufacturer as well, had there been proper methods of cost accounting in operation. The war is over and the country at the present time is in a very prosperous state. A huge program of reconstruc- tion along industrial and economic lines must take place. As stated by the Canadian Minister of Trade and Commerce: "The world is about to plunge into a trade and economic con- test in which forces will assume totally new alignments ; when competition will be keener and stronger than ever, and when science and organization will play a part in every successful role." The introduction of correct cost methods, backed by a sound organization, will enable the manufacturer to be pre- pared to meet his problems and to solve them intelligently when the time conies. Functions of Cost Accounting While the present book treats primarily of cost account- ing, it would be a mistake if its scope were limited to finding costs only. Any good cost system, properly operated, per- forms two distinct though related functions : The first, which may be called the direct function, is that of ascertaining actual costs. This should always be supple- mented by the second, or indirect function that of supplying, in its system of reports, the information necessary to organize the many departments of a factory into working units. In addition to this, it enables the activities of these units to be directed in accord with some definite plan designed to eliminate the inefficiencies in the various departments of the business. COST-FINDING AND ITS FUNCTIONS 5 Cost Accounting as Related to General Accounting Cost accounting, as a science, is a branch of general ac- counting. Its province is to analyze and record the cost of the various items of material, labor, and indirect expense in- curred in the operation of a factory, and so to compile these elements as to show the total production cost of a particular piece of work. With the cost books once established, the best modern usage is to incorporate their record in total in the general financial books. In this way the modern cost system builds up an interlocking series of accounts which furnish the basis for a detailed study of the operations of a manufacturing business. The accounts which appear in the cost books, however, differ in nature and scope from those in the general financial books. The latter exhibit the complete record of the financial and commercial transactions of a business, whereas the former treat only of those transactions which deal with, and are properly chargeable to, the manufacture of the product. Like the general books, the cost records show the amounts spent for material, supplies, labor, and indirect expenses ; but, in addition, there appear accounts with the raw material classi- fications, accounts with various operating departments, and accounts with the classifications of the finished and partly finished product. The last named accounts are those which make an analysis of costs possible. Objections to Cost Systems Arguments against cost systems have been presented so often that perhaps it may prove advantageous to review some of these so-called objections. They may be summarized under the five headings which follow : i. Unique Business. The commonest objection set forth by a manufacturer who opposes cost systems is that his busi- ness is entirely distinctive, and that a cost system is absolutely 6 COST-FINDING ELEMENTS AND METHODS impracticable in so far as his particular industry is concerned. Of course, there may be a few exceptional industries where it is impossible to operate successfully a complete cost system with all of its ramifications. Some practical cost system, how- ever, can be installed in every manufacturing industry. It may be that the most improved methods could not be installed in their complete form, but some of these advanced methods can be installed and can be made thoroughly practicable. 2. Cost of Installation. Cost systems are objected to on account of the excessive cost of their installation. This should be considered in the same way as any other investment that is, the amount paid for the system should not be regarded alone, but its cost should also be considered in connection with the income-producing power of the system. "What is the system worth as a producer of profit?" is a far more im- portant question than, "What did the system cost?" 3. Cost of Operation. In reviewing the objection that the cost of operating the system is excessive, consideration must again be given to the value of the system as a producer of income. If the advantages derived from the operation of the system do not compensate the manufacturer that is, if it does not save more money than is paid for clerk hire, sta- tionery, and other expenses incidental to its operation the cost system either is a poor one or is not serving its entire purpose. Cost systems cannot be operated successfully with- out brains, and if the information disclosed by the reports of the advanced cost systems of today is not used in an efficient manner, the cost system is not serving its purpose as a "pro- ducer of profits." 4. Red Tape. The accusation that a cost system is al- ways tied up with "red tape" is often made without being proved. What is meant by the term "red tape" depends to some extent upon the workings of the mind of the person using that expression. It may represent a violent prejudice COST-FINDING AND ITS FUNCTIONS 7 against cost-finding in general or against the number and kinds of forms and records which are necessary in the opera- tion of the cost system and which the uninitiated regard as more or less superfluous. As a matter of fact, most cost systems which have been properly planned and which are operated efficiently provide for numerous "short cuts" in summarizing the information for accounting purposes. Mechanical devices as an aid in the operation of cost systems have practically eliminated the so- called "red tape." 5. Failure of Numerous Cost Systems. It is a matter of record that a cost system frequently fails to give the results expected from its operation. The test of success or failure lies in the fact that it is or is not serving all of its functions, which include ascertaining true and accurate costs to be used as a basis for correcting irregularities and thereby "producing profits." Numerous facts which may explain the failure in some instances of cost systems may be cited. These include : (a) Impracticable system. (b) Practicable system, improperly installed. (c) Management not in sympathy with the work of systematizer. (d) Opposition or lack of co-operation on the part of employees. These are not to be considered as excuses for the failure of cost systems. They include only recorded facts which have accounted for failures. As a word of caution, therefore, it may be said that, before devising or installing a cost system, it is absolutely essential to secure the active support of the management so that all "kinks" may be overcome and all dis- senters eliminated. Systems cannot be successful if they are installed against the wishes of the management. 8 COST-FINDING ELEMENTS AND METHODS Advantages of Cost Systems The advantages of cost systems, with respect to increas- ing the efficiency of a plant from an organization standpoint, may be summarized under the following six headings : 1. Perpetual Inventory. The cost records provide for a perpetual inventory which furnishes information for the prep- aration of monthly statements showing the industrial and financial condition and the operating results of a company. These monthly statements should include : (a) Balance sheet showing the financial condition of the company at the end of each month. (b) Profit and loss statement showing the financial operations of the company during the month. (c) Manufacturing statement, or statement of factory expenditures, showing the financial operations of the various departments of the factory during the month. (d) Statement of salesmen's sales and costs showing the profit or loss of each salesman or territory of the country for the month. 2. Prices and Policy Data. The costs of each article, class of product, or operation being separately shown, the management has the necessary data at hand to guide it in making changes of policy or methods, these including: (a) Establishing correct selling prices with the true costs as the basis. (b) Eliminating the manufacture of any articles which show losses, and substituting for these more profitable articles. (c) Increasing the efficiency of the salesmen by enabling them to concentrate their efforts and energies on the more profitable articles. COST-FINDING AND ITS FUNCTIONS 9 (d) Establishing correct rates of commission for sales- men upon the various classes of product. 3. Comparative Costs. Costs for different periods and under different conditions are obtainable, enabling the follow- ing comparisons to be made : (a) A comparison of each article, job, or operation cost with standard, estimated, predetermined, or pre- vious costs. (b) A comparison of article, job, or operation cost under various methods of manufacturing, as for instance, bench work with machine work, day- work with piece-work, piece-work with premium or bonus work, etc. (c) A comparison of article, job, or operation cost with outside prices under the various market condi- tions, thus ascertaining when parts or operations may be purchased or manufactured outside at a lower cost than the particular cost shown in the plant. 4. Detection of Inefficiencies. The records provide for following the material from the raw state until it becomes finished product, and for ascertaining the time, labor, and ex- pense involved in its manufacture. In this way, the following inefficiencies may be detected: (a) Losses of material (b) Wasted time (c) Defective work (d) Poor supervision (e) Various other "leaks" 5. Detailed Inventories. A cost system provides for keeping perpetual inventory records in detail of raw material, work in process, finished parts stock, and finished stock. 10 COST-FINDING ELEMENTS AND METHODS These records provide a means for discovering or deter- mining : (a) Losses of material. (b) Obsolete stock. (c) Insurance requirements for the merchandise in the various departments of the plant. (d) Information for the purchasing department as to the quantities of materials on hand and the necessary requirements. (e) The correct quantities of product which must be manufactured in order to maintain stock require- ments. (f ) Information for the sales department as to deliver- ies on orders. 6. Standardization Data. A cost system supplies the in- formation necessary for standardizing the work of a plant, which might include: (a) Ascertaining the unit of production upon which the various departments of the plant may operate efficiently, thereby keeping the various operating departments balanced with each other. (b) Changing day-work operations to piece-work opera- tions, or perhaps to the premium or bonus system of paying wages. (c) Establishing a basis for a planning or routing sys- tem of orders in the various departments. These six advantages are not to be regarded as a brief for the value of cost systems, but rather as an analysis showing the lines along which a cost system influences the business or- ganization. Application of Cost Principles The principles underlying cost-finding have all oeen anal- yzed and defined, but when it comes to the actual installation COST-FINDING AND ITS FUNCTIONS n of cost systems, the greatest skill and caution must be observed in applying these principles to the conditions that exist. No two manufacturing plants are alike, even in the same line of business. Every plant has peculiarities that bear upon the methods of cost-finding, and this makes each factory a problem in itself. It follows that in either writing or reading a treatise on the subject, this distinction must be clearly conceived. The knowledge of principles, without a corresponding familiarity with the facts and conditions of manufacturing, produces the theoretical cost-finder, who is frequently a nuisance. On the other hand, it is only the shallow thinker who trusts to a superficial study of forms and accounting practices, with the idea that such knowledge prepares him to go into any business and install a cost system. To attain success in cost work, one must understand the principles of cost accounting and be familiar with the conditions which actually exist, and must apply the principles so as to fit these conditions. Uniform Methods of Cost-Finding In almost every line of manufacturing industry trade asso- ciations have been formed, and during the last ten years great progress has been made through these trade associations along efficiency lines in buying, in manufacturing, and in extending trade. Furthermore, a valuable end has been served in pro- moting cordial and sympathetic relations among the various members of the associations. By means of these trade asso- ciations, the fact has been proved that while competition is beneficial, at the present time manufacturers can accomplish much more lasting results by assisting each other in their problems than by conducting a continuous trade warfare among themselves. Out of the work of the trade associations has grown the idea of uniformity of cost-finding methods. In this connec- tion, the expression "uniform cost system" has been used fre- 12 COST-FINDING ELEMENTS AND METHODS quently and has caused considerable misunderstanding on the part of manufacturers. A uniform cost system, even as applied to a particular line of industry, is impracticable if not impossible, and manufacturers are fully conversant with this fact. The proper phrase to use is "uniform methods of cost- finding." This means outlining the standard principles of cost accounting and, from these principles, arriving at uniform methods of treating costs as applied to a particular industry. An illustration of this matter may be given in connection with the manufacture of hosiery. Some plants buy their yarn, others manufacture it; some send out their goods to be dyed, others do their own dyeing; some manufacture cotton goods, others woolen goods. While a uniform system could not be applied, uniform methods may be established in the various plants according to their peculiar conditions. The greatest advantage to be derived from uniform cost methods is that of insuring a more uniform selling price. This object would be attained, even if the uniform system were not as scientific as it should be; for if errors were made through the method established, all manufacturers would at least be figuring the same way, all would be making the same mistakes, and unfair and ignorant competition would be eliminated. No one questions the old adage that competition is the life of trade, but the majority of manufacturers know also that. unfair com- petition is the curse of trade. No one should dread fair com- petition, for success will then depend on his own organization. If a manufacturer cannot make money in competition with other concerns when using the same methods of figuring costs, he can only conclude that his goods or his marketing, or both of them, are costing him too much. His next step, naturally, is to analyze closely the methods and conditions under which he is manufacturing and marketing his product, until he finds and corrects the inefficiencies which are handicapping him so seriously. CHAPTER II ELEMENTS OF COST Manufacturing Costs Material, labor, and expense are the three subdivisions of manufacturing costs which are known as the elements of costs. These elements may be grouped under the two following headings : 1. Direct charges 2. Indirect charges Direct charges consist of those elements of costs which, entering into and forming part of a product, can be charged directly to the product. These direct charges, therefore, in- clude : 1. Direct material 2. Direct labor 3. Direct expense All elements of costs which are not chargeable directly to the product fall under the heading of indirect charges and include : 1. Indirect material 2. Indirect labor 3. Indirect expense Direct Material The cost of the substance or substances from which a product is made, is the direct material charge. In manufac- turing industries, often the direct material charge includes several different kinds of material. For example, in a wood- 13 I 4 COST-FINDING ELEMENTS AND METHODS working plant, lumber, hinges, knobs, locks, paints, oils, and varnishes may all be used in the construction of the articles manufactured, and therefore, the direct material cost would include all these items. Direct material should be charged either to : 1. Some definite job, order, or article 2. Some definite manufacturing process However, often an item by its very nature may be a direct material cost but, from a practical standpoint, cannot be charged directly to the product and therefore is included, as indirect material, among the indirect factory expenses. For example, nails and screws are often included among the in- direct factory expenses in wood-working plants because it is impracticable to charge these items directly to the cost of a particular job, order, or article. Also, in a straw hat factory, the materials that enter directly into the manufacture of the hat are braid or straw, the band, the sweat, the trimmings, and the thread. From a tech- nical standpoint, this thread is just as much a direct material charge as the band or trimmings, but it would cost as much to find out the amount used in the manfacture of a dozen hats as the thread itself costs. It is, therefore, usually handled as an indirect factory expense item in the sewing department and is distributed and charged to the various hats on the basis of the number of hats produced. This is a good illustration of applying common-sense instead of theory, which is so neces- sary at times in cost-finding. On the other hand, certain expense items are often in- cluded as a part of the direct material charge. For instance, when material is purchased in foreign markets, the amount of duty and import expenses should be added to the foreign cost of the material in order to ascertain the "landed cost" or direct material charge. Also, it is often found to be quite ELEMENTS OF COST 15 feasible to add the incoming freight, express, and cartage cost directly to the invoice cost of material; the direct material charge then including the material cost plus cost of the incom- ing freight, express, and cartage. Direct Labor That portion of the factory wages which is productive in character and which may be applied directly to the product or to the manufacturing process, is the direct labor charge and is often termed the productive labor charge. Direct labor should be charged either to : 1. Some definite job, order, or article 2. Some definite manufacturing process In manufacturing industries, the direct labor charge is generally subdivided into various different kinds of operations. For example, in a garment industry the direct labor charge would include the following operations : 1. Cutting 2. Trimming 3. Hand sewing 4. Machine sewing 5. Ribboning 6. Inspecting 7. Pressing 8. Boxing Direct Expense Any other expense which is applicable and which may be charged directly to a job, order, or article, is included as a direct expense charge. Such expenses are not infrequent, an example being the transportation and hotel expenses of fore- men and workmen engaged on out-of-town special construction orders. Experimental work on special orders is often included in the costs under the caption "direct expense," although items 16 COST-FINDING ELEMENTS AND METHODS of this character are more frequently considered part of the factory indirect expenses and distributed over the entire prod- uct manufactured. Indirect Charges Indirect charges include indirect material, indirect labor, and indirect expenses. These indirect charges are often termed "factory overhead," "indirect factory expenses," "manufacturing expenses," "burden," or "oncost." Indirect charges as a class may be analyzed under the two following headings, depending upon the application and distribution of the items composing them and the methods of apportioning and distributing them to job, order, or article, or to the manu- facturing process : 1. Departmental expenses, which include those expenses chargeable to definite departments of the factory because they are incurred in these definite depart- ments. 2. General operating expenses, which include those ex- penses chargeable either over the entire plant or over more than one department of the plant. The items composing the indirect charges will necessarily vary in almost every factory, but the following classified list includes certain items which invariably appear among the in- direct charges of a plant: 1. Indirect Material : Direct material which cannot be applied in a direct manner Supplies Scrap material Small tools 2. Indirect Labor: Indirect or non-productive labor ELEMENTS OF COST 17 Supervision or foremanship Superintendence Inspection, when not considered as a direct labor charge Factory clerks' salaries Defective work Experimental work, when not considered as a direct labor charge 3. Indirect Expenses : Rent Insurance fire and liability Taxes Interest Depreciation Maintenance, repairs, and renewals Power Light Heat Freight and cartage inward, when not considered as a part of the direct material charge Over, short, and damage Miscellaneous factory expenses Packing Expense The cost of production, or the factory cost, ends when the article is finished and ready for sale. Therefore, the fac- tory costs include the direct material, direct or productive labor, direct expense, if any, and the indirect charges. In some instances, a portion of the packing expense is included as part of the factory cost. When the finished articles are packed uniformly and stored in the finished stock warehouses, the packing department, in such an instance, may be included as a factory department and its costs considered part of the factory cost. 18 COST-FINDING ELEMENTS AND METHODS Selling Expenses The items which are generally included among the selling expenses are the following : Advertising or advertising department expenses Sample expenses Commissions Salesmen's salaries Salesmen's expenses Traveling expenses Sales office expenses: Rent Clerks' salaries Telephone and telegraph Printing and stationery Postage Miscellaneous expenses Freight and cartage outward Shipping department expenses and finished stock ware- house expenses may also form a part of the selling expenses. The selling expenses have no direct bearing upon the produc- tion or factory costs of the article, but provision must be made to cover them when determining the price for which the article will sell. Administrative Expenses The segregation of the administrative expenses as a dis- tinct group is sometimes a difficult matter. In the majority of cases the time of the administrative force is spent in super- vising the selling organizations, in solving factory problems of production and labor conditions, and in looking after the finances of the business. Therefore, administrative expenses often are partly production or factory costs and partly selling and administrative costs, and it is necessary to make an arbi- ELEMENTS OF COST 19 trary distribution of them so that the factory and sales depart- ments will be charged with proportionate amounts. In any event, before determining the selling price of the article, pro- vision must be made for covering these administrative ex- penses. The following items are generally included among the ad- ministrative expenses : Officers' salaries Executives' expenses Auditing expenses Legal expenses Administrative office expenses: Salaries Rent Light and heat Telephone and telegraph Printing and Stationery Postage Office supplies Miscellaneous expenses Selling Price Before determining the selling price of an article con- sideration must be given to the various elements of costs and expenses which have been classified as : 1. Direct material 2. Direct labor 3. Direct expenses 4. Indirect charges 5. Selling expenses 6. Administrative expenses Prime Cost. The sum of the direct material cost plus the direct labor cost is known as the prime cost. 20 COST-FINDING ELEMENTS AND METHODS Factory Cost. The sum of the prime cost plus the in- direct charges is known as the factory cost. Total Cost. The sum of the factory cost plus the sell- ing expenses and the administrative expenses is known as the total cost. Selling Price. The sum of the total cost plus the profit is known as the selling price. These gradations of cost may be further illustrated by means of the following simple diagram (Form i), which illus- trates the steps leading from the material cost to the selling price. PROFIT 25 cents SELLING AND ADMINISTRA- TIVE EXPENSES as cents INDIRECT CHARGES 50 cents SELLING PRICE $i-75 TOTAL COST $1.50 FACTORY COST DIRECT $1.25 LABOR COST 50 cents PRIME COST 75 cents DIRECT MATERIAL COST as cents Form i. Diagram Showing Relation of Cost Elements to Selling Price ELEMENTS OF COST 21 Deductions In practice it is customary to allow certain deductions from the established selling prices, or from the established purchasing prices. These deductions include : 1. Trade discounts 2. Allowances 3. Rebates 4. Cash discount As a rule, the trade discounts are deducted directly upon the invoices rendered, and therefore do not enter into the account-keeping of the seller or purchaser. Allowances to customers are treated as deductions from sales, though in some cases these items are included among selling expenses. Allowances received from creditors are generally considered as direct deductions from the invoice values and treated accordingly. It is quite customary to delay the passing of disputed invoices for account-keeping until all legitimate allowances have been deducted. Special rebates allowed customers at the end of a definite period or after the expiration of a specified contract, may be treated usually as miscellaneous deductions from income. In some instances these items may be considered as deduction?, from sales. Similar rebates received by the purchaser may be treated either as miscellaneous income or as deductions from cost. However, it is often very impracticable to treat items of this character as deductions from cost because, in the operation of the cost system, it may be necessary to use the cost values shown upon original invoices this because the amount of the rebates deductible cannot be definitely ascer- tained until the expiration of a particular period. Cash discounts allowed and received are items which are treated in various ways in practice. In some instances, they form part of the capital expense and capital income, be^ 22 COST-FINDING ELEMENTS AND METHODS FACTORY COST TOTAL COST SELLING EX- PENSES PRIME /I. Direct Material COST \2. Direct Labor INDIRECT CHARGES ADMINIS- TRATIVE EXPENSES 1. Indirect Material 2. Indirect Labor 3. Indirect Expenses Material which cannot be applied in a direct manner Supplies Scrap Material Small Tools and Dies Indirect or Non-Productive Labor Supervision or Foremanship Superintendence Inspection (when not considered as a direct labor charge. Factory Clerks' Salaries Defective Work Experimental Work Rent Insurance Fire and Liability Taxes Interest Depreciation Maintenance. Repairs, and Renewals Power Light Heat Freight and Cartage Inward (when not considered as part of direct material charge) Over, Short, and Damage Miscellaneous Factory Expenses Advertising Sample Expense Commissions Salesmen's Salaries Salesmen's Expenses Traveling Expenses Sales Office Expenses Rent Clerks' Salaries Telephone and Telegraph Printing and Stationery Postage Miscellaneous Expenses Freight and Cartage Outward Shipping Department Expenses Finished Stock Warehouse Expenses Officers' Salaries Office Salaries Executives' Expenses Auditing Expenses Legal Expenses Administrative Office Expenses Salaries Rent Light and Heat Telephone and Telegraph Printing and Stationery Postage Office Supplies Miscellaneous Expenses TOTAL COST+PROFIT=SELLING PRICE Form 2. Chart Showing Analysis of Cost Elements ELEMENTS OF COST 23 ing included as deductions from, and additions to, income. In other instances, they are deducted from sales prices and the purchase prices. When fixing selling prices, these miscella- neous items should also be considered as well as the elements of cost and the selling and administrative expenses. Analysis of Elements of Cost Form 2 shows the items which should be considered in fixing a selling price. CHAPTER III GENERAL METHODS OF COST-FINDING Requirements of Cost-Finding As costs furnish the basis for determining the selling prices of the manufactured product, they naturally should be compiled so that the total cost of the job, order, or article may be readily ascertained. Actual conditions in manufacturing determine the sys- tem of cost-finding to be used, which should include : 1. A method of ascertaining or reporting the material, labor, and overhead costs. 2. A method of compiling these elements of cost. 3. A method of determining the total cost of the job, order, or article. For present purposes the actual conditions which exist in manufacturing industries may be grouped or summarized in two general classes, and the methods of cost-finding applicable to these two classes may be designated as follows : 1. Order method of cost-finding 2. Process method of cost-finding ORDER METHOD OF COST-FINDING Distinctive Features of Order Method When the order is the tangible basis upon which the ele- ments of cost are charged, compiled, and determined, the order method of cost-finding is generally used. In other words, under such conditions the material costs, labor costs, 24 GENERAL METHODS 25 and a pro rata share of the factory overhead are all charged to definite factory orders, and the elements of material, labor, and overhead costs are compiled so that the total factory cost of each individual order may be determined. If a number of units are manufactured under the definite factory order, the unit article cost may be determined by dividing the total fac- tory cost by the total quantity manufactured or produced. Definite factory orders may be issued for the manufacture of a number of units, for a single unit, or for the manufacture of certain parts of a unit. The order method of cost-finding is often designated by other terms, such as : Special-order method of cost-finding Specific-order method of cost-finding Job method of cost-finding However, in all industries in which a definite job or order furnishes the basis for the compilation of the cost of the article, this method of cost-finding may be used, and in view of the fact that it includes the issuance of orders for the manu- facture and production of standard articles, as well as for special articles, it is most accurately described by the term "order method of cost-finding." Examples of the applicability of the method to specific trades and industries are given below. Construction Work A good example of an industry in which the order method of cost-finding may be applied is the building trade. This includes building contractors of various kinds, such as general building, iron and steel, foundation, masonry and stone-work, carpenter, plastering, electrical, plumbing, and heating contractors, and various subcontractors. In this class of industries each job, or order, is treated separately and the material, labor, and overhead costs are 26 COST-FINDING ELEMENTS AND METHODS ascertained for each job independently of the costs applicable to any other job. Therefore, the order method of cost-finding is suitable and may be applied very readily. Repair Shops In repair shops, which may include garages, wagon re- pairs, and machine shops doing repair work, the material, labor, and overhead costs are ascertained, compiled, and de- termined for each job separately, and the bill to the customer is prepared with this cost information as a basis; therefore the order method of cost-finding may be used. Plating Shops There exists, throughout the country, a considerable number of plating shops doing a so-called special-order busi- ness. In these, the material, labor, and overhead costs of each individual job are necessarily ascertained independently so that the proper charge may be made to each customer for his particular job or order. The order method of cost-finding may be here used satisfactorily. Attention is called to the fact that this classification does not include the plating departments of large concerns which have their product standardized to such an extent that the plating operations become continuous for long periods of time. When these conditions exist, the order method of cost-finding cannot well be applied, and the process method must be used to ascertain accurate costs. Cabinet Shops Considerable special job work is done in various kinds of cabinet shops. These shops manufacture, or build, only on order; that is, they construct various kinds of furniture, fix- tures, and equipment to meet the individual requirements of each customer. Each job, therefore, is handled as a separate GENERAL METHODS 27 unit, bears no relation to any other piece of work in the shop, and the elements of cost for each must be determined sepa- rately. Garment Manufacturing Plants On account of the change in styles each season, the gar- ment industries manufacture on more or less definite demand, and manufacturing is started with the issuance of orders for definite styles and quantities. As these definite orders furnish the basis upon which the costs are calculated, the order method of cost-finding is used most advantageously. Each order for the production of a definite quantity of a particular style of garment is charged with material, labor, and a proportion of the overhead cost; and the article or single garment cost is ascertained by dividing the total cost of the order by the num- ber of garments produced. Garment manufacturing industries include the manufacture of cloaks and suits ; coats, waists and dresses; underwear; gowns and evening dresses. In some of the garment manufacturing industries, the product is standardized and the same articles are manufactured continuously day after day. Under such conditions, the in- dividual order cannot be used as a cost-finding basis for the reason that it loses its identity during the regular daily routine of manufacture. It is then more feasible to use the process method of cost-finding to ascertain reliable and accurate article costs. Straw and Felt Hat Plants Straw and felt hat plants are also affected by changes in styles, and these changes in styles are reflected in the volume and kind or orders received. The definite order, then, fur- nishes the basis on which the article cost is compiled and ascer- tained. However, in industries of this character certain depart- 28 COST-FINDING ELEMENTS AND METHODS ments may be so constituted that their costs are more readily ascertained by the process method of cost-finding. For ex- ample, certain treating processes may be used for all braids and felts of a particular kind regardless of the production orders, and in departments where such conditions exist the process method is used for ascertaining costs. Boot and Shoe Plants In these industries, again, the styles are a governing fac- tor as to the quantity and kind of production which should be manufactured during a particular season. The order, there- fore, furnishes the basis for reporting, compiling, and ascer- taining the article costs in most of the boot and shoe plants. Standardized articles and a large volume of production may change manufacturing conditions to such an extent that the process method of cost-finding can be used more advan- tageously. However, before the process method of cost-find- ing becomes the more practical method, the identity of the in- dividual factory orders must be lost in the large volume of factory production which is continuous day after day. Wood-working Plants In wood-working plants, after the lumber is cut and ma- chined, it is, as a rule, chargeable to some particular factory order. These factory orders may be for standard articles or they may be for special work to meet the requirements of cer- tain customers. In the departments in which the material, labor, and overhead costs can be applied to definite factory orders, the order method of cost-finding may be used to advan- tage. Metal-working Plants In metal-working plants it is the practice to charge the cost of the castings to a factory order or to some definite job. GENERAL METHODS 29 This is invariably the case where definite factory orders can be used as a basis for reporting and compiling the material, labor, and overhead costs. Under these circumstances the order method of cost-finding may be used to advantage either in those plants in which standard articles are produced, or in which special articles are made to meet customers' require- ments. In metal-working plants producing large quantities of similar articles for stock the process method of cost-find- ing may be applied to the product. Assembling Departments The order method of cost-finding may be used advan- tageously in the assembling departments of various manufac- turing plants. This is true even though, preparatory to assem- bling, the plant may manufacture numerous small parts the cost of which can only be compiled by the process method of cost-finding. In the assembling department definite orders are usually issued for the production of fixed quantities of articles. These orders may be for a standard product or for a special product, and in either case the particular order or job may be taken as a basis for reporting and compiling the elements of cost. PROCESS METHOD OF COST-FINDING Distinctive Features of Process Method Whenever the process of manufacture is continuous for regular periods of time so that the definite factory orders and jobs lose their identity and become part of a large volume of production, the material, labor, and overhead costs are charge- able to the definite processes or operations and the process method of cost-finding is used. This method is sometimes called the "product method of 30 COST-FINDING ELEMENTS AND METHODS cost-finding." However, in view of the fact that the word "product" refers more particularly to article rather than operation, the designation "process method of cost-finding" is more explicit and is preferable. This term includes the method commonly known as the "machine-cost method," for the reason that the same general principles of cost-finding apply. After the material, labor, and overhead costs and the total cost of the various processes or operations are ascertained, these should be summarized and redistributed so that the job, order, or article cost may be determined, usually on the basis of volume. The quantities which are used as the basis are the weight, the number of units, or the measurements of the va- rious jobs, orders, or articles; in other words, tons, pounds, gross, dozens, yards, feet, etc. Foundries A common industry where the process method of cost- finding may be used to advantage is the foundry. This in- cludes iron foundries, brass foundries, and various other metal foundries. In these, the melting operation is continuous for regular periods of time and no reference is made to the definite orders or jobs because their identity cannot be ascertained readily. In operation, the material, labor, and overhead costs are all charged to the cupola, and at the end of a definite period, when the total production is ascertained, the castings cost per pound can be determined. Paper Mills The material, labor, and overhead costs in the manufac- ture of paper are chargeable to the milling processes. The total quantity or the total number of pounds of paper manu- factured at the end of a definite period is determined, and the cost of the paper per pound is then computed. GENERAL METHODS 31 Paint and Varnish Manufacturing Plants In small paint and varnish manufacturing plants, the material cost may be applied to the various batches definitely, as the identity of each batch can always be ascertained and the materials which are put into each are counted or weighed. Under these conditions the order method of cost-finding may be used. However, if much red tape is involved in ascertaining the labor and overhead cost applicable to each particular batch, the labor cost and overhead cost of the various batches should, as a rule, be ascertained according to the 2 rocess method of cost-finding. Chemical Manufacturing Plants In chemical manufacturing plants, continuous operations are carried on for regular periods of time and, as the material, labor, and overhead costs are applicable and chargeable to the processes, the unit or article cost can only be ascertained after the definite quantity of production is known. In small chemical manufacturing plants, where the volume of production is not large and where definite small orders are manufactured specially for various customers, it may be pos- sible to use the order method of cost-finding to advantage. Rubber and Celluloid Manufacturing Plants The manufacture of rubber and celluloid calls for condi- tions in which the process method of cost-finding can be em- ployed advantageously. The identity of individual orders or jobs is entirely lost as the process of manufacturing is con- tinued for regular periods of time. The materials which enter into the manufacturing processes are weighed and counted, and charged to the particular process. The labor and over- head costs are also charged to definite processes and, after the total production is obtained, the unit cost is found. 32 COST-FINDING ELEMENTS AND METHODS Manufacture of Foodstuffs In plants where foodstuffs are manufactured and the proc- ess of manufacturing is continuous, the identity of definite orders cannot be readily ascertained without interfering with production. Therefore the process method is used, the mate- rial, labor, and overhead costs being charged to the various processes of manufacture. Coal-Mining Coal-mining affords a common example of the process method of cost-finding. The labor and overhead cost are charged to the definite operations, and, when the production or total quantity of coal mined is known, the unit cost per ton is determined. Ice Manufacturing Plants In the manufacture of ice, the process method of cost- finding is used, the material, labor, and overhead costs being charged to the manufacturing processes. When the total quantity of ice produced is known, the cost per ton of ice manufactured can be ascertained. Treating Departments All the product used in textile mills, metal plants, wood- working plants, and straw hat plants undergoes a special proc- ess or is treated in a certain way in particular departments. In such treating departments the process method of cost-find- ing is employed and the treating cost for each article is ascer- tained after the quantity treated is known. Cutting and Machining Department Wood-Working Plants In wood-working industries where large quantities of standard product are manufactured, the costs of cutting and machining operations may be ascertained according to the proc- GENERAL METHODS 33 1 cfl 8 I T3 C 1 34 COST-FINDING ELEMENTS AND METHODS ess method of cost-finding. This may be done in cases where large quantities of lumber for the standard product are cut and machined in the same manner for regular periods of time. The material, labor, and overhead costs are charged to the various cutting and machining operations, and, after the total quantities produced are ascertained, the unit article cost is determined. Summary of Cost-Finding Methods Form 3 shows in summarized form the two basic methods of cost-finding and the industries, or departments within a plant, to which they are applicable under the conditions al- ready described. CHAPTER IV DEPARTMENTAL AND PRODUCT CLASSIFICATION Factory Departments Before it can be decided which method of cost-finding may be used in any particular plant, the manufacturing depart- ments of the plant must be classified. In some industries the order method of cost-finding might be applicable to certain de- partments, and the process method of cost-finding might be applicable to the remaining departments. It is not an unusual condition to find both methods of cost-finding used in the operating departments of a plant. The classification of fac- tory departments also plays a very important part in ascertain- ing costs, because the departments furnish the basis for the cost reports and also for the cost accounts. The various elements of cost material, labor, and over- head are compiled and proved for each factory department, and the costs thus grouped can be proved with a greater de- gree of accuracy for each department than would otherwise be possible. The operating departments of all factories cannot be clas- sified in the same manner, though most factories are so organ- ized that they may be divided into four main sections : 1. Raw material and supplies storerooms 2. Manufacturing departments 3. Finished parts storerooms 4. Finished stock storerooms For cost purposes, a still more important classification is that based on the relation of the factory departments to the 35 36 COST-FINDING ELEMENTS AND METHODS output of the plant and on this basis they may be grouped and classified under the three following headings : 1. Productive departments 2. Non-productive departments 3. Miscellaneous departments Productive Departments The productive departments include those manufacturing departments that do the actual work upon the product. This would include work upon the different parts which will eventu- ally be combined to form the completed article ; it may include work upon items of material which will be returned to stores and later be requisitioned out as raw material ; and it may in- clude actual productive operations upon articles which will be stored in a semi-completed state to be made into the completed articles at a later date. The productive labor element of cost is classified by opera- tions as milling, graining, filling, etc., and each productive operation is known by some definite term. The sequence, re- lation, or uniformity of these productive labor operations usually furnishes the basis for establishing productive depart- ments in the factory. The sphere of a productive department may be limited to a "center" from which the productive work is reported. For example, certain labor operations which are closely related as to the men and machines employed may be grouped to form a particular department, or "center" from which the work is reported after the final operation in that department has been completed. In other words, after a cer- tain number of operations are completed, an inspection or a count of the articles manufactured is made, and the quantity produced is reported. To sum up, productive departments are established after considering first the actual work done upon the product; secondly, the relation or uniformity of the productive labor DEPARTMENTAL CLASSIFICATION 37 operations; and thirdly, the basis for reporting production. When dividing the factory into its departments the aim should be to split it up, so far as possible, into uniform and connected operations which represent distinct steps in the progress of the product through the factory. Designation of Departmental Divisions Productive departments, and the operations in these de- partments, should be given distinctive names and, if possible, be designated by distinctive symbols. The names and number of productive departments in a particular factory depend upon the nature of the work and the size of the plant, but the departmental classification may differ in factories turning out similar products. The following lists show fairly typical de- partmental divisions. Furniture factory : 1. Cutting department 2. Machining department 3. Cabinet shop special work 4. Cabinet shop standard work 5. Paint and varnish department 6. Trimming department 7. Inspecting department Metal-working plant: .1. Iron foundry 2. Brass foundry 3. Machining standard castings 4. Machining special castings 5. Plating department 6. Assembling department 7. Inspecting department Garment factory: 1. Cutting department 2. Hand-sewing department 38 COST-FINDING ELEMENTS AND METHODS 3. Machine-sewing department 4. Trimming department 5. Inspecting department 6. Pressing and boxing department Non-Productive Departments The non-productive departments of a factory are those in which the work done is only incidental to, or has an indirect relation to the product manufactured, as for instance the power plant or storerooms. These departments furnish centers about which the various elements of factory overhead arising therein or applicable thereto may be compiled. The total factory in- direct expenses arising in, or applicable to, the non-productive departments is ascertained and is then redistributed to the productive departments, for the reason that all factory ex- penses must eventually be charged to the productive depart- ments in order to reach the definite jobs, orders, articles, or processes to which they properly apply. The non-productive departments are more or less the same in different industries, and the following list covers those usually found in a well-organized plant: 1. Power plant 2. Purchasing department 3. Receiving department 4. Storerooms 5. Engineering and drafting room 6. Cost department 7. Planning and routing department 8. Employment department When inspection and experimental work involved in pro- duction cannot be charged to jobs, orders, or articles, the ex- pense of such work may be departmentalized and treated as that of a non-productive department. DEPARTMENTAL CLASSIFICATION 39 Miscellaneous Departments In many manufacturing plants the work of some depart- ments is partly productive and partly non-productive. A pat- tern or tool room, for example, may make patterns or tools chargeable to a specific job or order and make other patterns or tools chargeable to the factory overhead; or a mechanical department may construct machinery, fixtures, and equipment for sale or for the use of the factory itself in which case their cost is to be capitalized among the fixed assets of the business; or such a department may also do work which is purely inci- dental to production, such as repairs and maintenance the cost of these items forming part of the indirect or administra- tive expenses of the factory. In such cases, on account of the two-fold character of the departmental work, a separate clas- sification must be provided and they are usually known as mis- cellaneous departments. Miscellaneous departments usually include: 1. Mechanical, millwright, or repair department 2. Pattern department 3. Tool room Under some conditions, these miscellaneous departments may be advantageously classified as productive departments. When this is the case these departments should receive credit for (i) all work done upon the product, (2) the cost of any construction work such as the manufacture of machinery, fix- tures, and equipment for factory use, and (3) any repair and maintenance work chargeable to overhead. In most cases, however, the work of miscellaneous departments is largely non-productive, in which case it is absorbed in the factory overhead in the usual way. General Operating Expenses All items of overhead should be distributed to the depart- ments which benefit from the expenditures, whenever this is 40 COST-FINDING ELEMENTS AND METHODS possible. In large plants, however, not all expenditures can be assigned in this way. Some of them, such as repairs to factory sidewalks, tramways, general yard work, general superintendents' salaries and expenses, production managers' salaries and expenses, and so on, are obviously incurred, not for the benefit of one or more departments, but for the plant as a whole. Expenses of this character are considered as general operating expenses, and are treated in the same manner as costs which are applicable to the non-productive departments. To dispose of these expenses so that they will eventually be absorbed in the cost of the product manufactured, they may be charged in the article cost as a separate item of overhead, or provision may be made for distributing them over the va- rious departments of the plant. Summary of Departmental Classification Form 4 shows the classification of various factory depart- ments in summarized form. Classification of the Product One of the objects of operating a cost system is to deter- mine the profits on the various classes of product manufac- tured. Year by year the variety of articles placed on the market increases and experts have gone so far as to say that many inefficiencies and losses are due to the fact that too wide a range in variety is offered to the public. In other words, the manufacturers of today are not standardizing their product as they should. Under such circumstances as these, the cost of each article or product manufactured is vital information, as without it the manufacturer works in the dark. He cannot intelligently standardize production because, not knowing which are his most profitable lines, he does not know on which to concen- PRODUCT CLASSIFICATION CO M C C tuo jy ^H bfl "tn *j .SOS n fUniformity or Similar [Production Centers Power Plant Purchasing Departmen Receiving Department Storerooms Engineering and Draft Cost Office Planning and Routing Employment Departmi fMechanical or Millwi 1 (Repair) | Pattern Department [Tool Room 1 +2 1 CO 1 s ^ Departmeni production. II Si fO 'o ~S 1 1 tjl 0.0 i. Productive Work upon ti II ^2 (3 "^ -si Jf o o w y "D *t? c Q |S| o rs ^-^'s i < 42 COST-FINDING ELEMENTS AND METHODS trate. Therefore, every cost system should provide for a comprehensive classification of the product, and costs should be ascertained on each class. Some factories make only standard products, others work only on special orders, and others again combine both and also buy manufactured goods for resale. In the latter case the first step in the classification is to divide the articles sold as follows : 1. Standard articles manufactured for sale. 2. Special articles made to meet the requirements of cus- tomers. 3. Articles purchased for resale. The three broad divisions enumerated above may be sub- divided into as many classifications as there are lines of manufacture, or kinds of product sold. One of the best sources of information for establishing this classification is the catalogue or advertising literature issued in connection with the sales of the product. The fol- lowing classification is an example. Varnish and paint industry: High-grade varnishes Medium-grade varnishes Wood-stains Fillers Japans Dry colors Mixed paints Enamel paints, etc. In certain industries, it may be advantageous to have a very extensive product classification, the number depending, of course, upon the differences in the costs of a varied line. The above heading "mixed paints," for example, might be further subdivided into a dozen or more classes if the cost of PRODUCT CLASSIFICATION 43 the various kinds of mixed paints varied sufficiently to make it worth while to calculate the cost of each separately. The classification of the product also furnishes a basis for establishing storerooms for the different lines produced, such storerooms being controlled separately by distinctive cost ac- counts. These provide a means for checking the accuracy of the application of the elements of cost to the items of product stored. Part II Factory Routine and Detailed Reports CHAPTER V FACTORY ORDERS Function of the Factory Order After the product manufactured has been definitely classi- fied, and distinctive factory departments established to pro- vide centers for determining and reporting costs, some means must be found for applying the cost to the product as it passes through the operating departments. For this purpose, all items of product must be distinctively designated. This is usually done by means of order numbers, which not only facili- tate the compiling of the elements of cost but also aid in trac- ing the jobs, orders, or articles through their different stages of manufacture. Work, whether upon orders or repairs, is generally put in operation by means of a proper authorization known as a "factory order." This carries a number by which the job, order, or article is thereafter known and distinguished from others. Inadequacy of Verbal Orders In small plants where the work is simple in character, in- structions may be issued verbally. This practice is to be con- demned regardless of whether or not a cost system is used, as many inefficiencies may be traced to orders of this character, the following being typical : i. Loss of time due to delay of proper instructions in reaching the operating departments. 45 46 DETAILED FACTORY REPORTS 2. Loss of time in tracing the product in the operating departments of the plant. 3. Errors in workmanship due to the misunderstanding of instructions. 4. Irregular production due to the absence of the tan- gible instructions which are essential if factory work is to be given out in the proper order. 5. Indefinite and unreliable deliveries to customers due to the absence of a systematic record and method of tracing the various jobs, orders, or articles through the operating departments of the plant. 6. Absence of a definite record to serve as a basis for an accurate system of reports, whether it be a sys- tem of cost reports or a system of production or statistical reports. Written Factory Orders The efficiency of a plant can be judged only from the information furnished by a well-planned system of reports. Therefore, it is absolutely necessary that the authorizations to the factory to do any sort of work be made in writing so that these instructions may be kept in a permanent and accurate form and serve as a basis for reports and records. Before deciding on the form and general style of factory orders, consideration should be given as to whether or not they give sufficient information so as to dispose of the objections to verbal orders. These objections summarized are loss of time, errors in workmanship, interference with production, improper deliveries to customers, and absence of permanent records. If the written factory orders dispose of these objections and insure the establishment of a permanent, accurate, and reliable system of reports, the benefits derived are apparent. In order to provide for these qualities of per- manency, accuracy, and reliability, which are most essential FACTORY ORDERS 47- and which are not obtainable with verbal orders, the written orders must contain the following: 1. Date, order number, and description and authoriza- tion of the work to be done, thus permitting ready identification and furnishing a basis for applying and charging the elements of cost. 2. Complete instructions as to the method of doing the necessary work. 3. Required date of completion, so as to provide a means for ascertaining the order in which the different articles should be manufactured. 4. Provision for recording information as to the prog- ress and completion of the order in each depart- ment of the plant, so as to provide a means for tracing orders and insuring prompt deliveries to customers. It is evident that the above information covering working instructions can only be accurately transmitted in written form. A logical objection to the use of written factory orders some- times advanced is that, if the mechanics in a small factory or a repair shop were always to wait for the issuance of written orders before beginning a fresh job, unnecessary delays would occur and time would be lost because of the red tape methods. In some cases verbal instructions may be given ; but a written order should follow the verbal instructions so that workers cannot plead ignorance if mistakes are made and so that time and material may be charged to the order number to which they are to be applied. Kinds of Factory Orders Factory orders are of two kinds: those relating to pro- duction and those relating to miscellaneous factory work. A production order authorizes the manufacture of certain 4 8 DETAILED FACTORY REPORTS i*** kinds of goods, or a single article which may be either for sale or for stock. Miscellaneous factory orders are issued for the purpose of authorizing the construction or repair of factory buildings, machinery, tools, fixtures, or equipment. These orders are variously termed "Repair," "Betterment," "Maintenance," "Construction," "Shop," and "Plant" orders, the precise desig- nation depending upon the character of the work to be done and the method in use in the plant. Production Orders Classification Production orders may authorize the manufacture of either the completed product or parts thereof, and may be classified as follows : I. As to special production: (a) Orders for specially manufactured product. (b) Orders for specially manufactured parts. 2. As to standard production : (a) Orders for standard product. (b) Orders for standard parts. (c) Orders for part-finished product. (d) Orders for manufactured parts. 3. As to repair production : (a) Orders for repairs to the product for cus- tomers, or for repairs on product in the various stockrooms. (b) Orders for disposition of defective work, or the correction of defects in finished stock, part-finished stock, or finished parts. Designation of Quantities In the order method of cost-finding the quantities to be manufactured and the disposition of the product are in most instances specified in the production orders. If the product FACTORY ORDERS 49 is a standard article kept in stock, it is advantageous to estab- lish a definite quantity to be produced at any one time. Stand- ardized units of production tend to increase shop efficiency by equalizing the demands for material and labor and insuring a steady flow of work through the factory. If the quantities of a standard product which is manufactured over and over again vary on each factory order, work tends to become spasmodic and its flow uneven with, in consequence, either congestion or slackness in the operating departments. Under the process method it is not always practicable to specify definite quantities upon the production orders, for the reason that where this method is used the processes are usually continuous, lasting one or more days or even weeks. Orders are issued daily, weekly, or monthly, as required for the production of the articles designated thereon, and the quantity produced is usually determined after their manufac- ture and inspection is completed. Sub-Production Orders Where the product is composed of several parts manufac- tured separately, two kinds of production orders are issued : 1. The main or principal production order 2. Sub-production orders The main production order designates the quantity and kind of completed articles, while the sub-production orders cover the manufacture of the various parts. The sub-produc- tion orders may be prepared and issued at the same time as the main production order,- or they may be written up by the factory foremen or their clerks when it is necessary to manu- facture the parts. The Grouping of Small Orders In factories where the units of production are small and numerous, the preparation of a separate order in each case 50 DETAILED FACTORY REPORTS may involve so much clerical work as not to be worth the expenditure in time and trouble. If the system of cost-finding proves this to be a fact, the work can be simplified by grouping a number of small orders daily, weekly, or monthly and accord- ing to the classification of product. In this way one compre- hensive order can be issued to cover the production of a score or more of small special orders. The advantages of thus grouping orders when the product is sufficiently homogeneous to permit it, are apparent. The number of records required is greatly reduced, with a corresponding reduction in the clerical work involved. Special Production Orders In some industries the entire line of merchandise is spe- cially manufactured to customers' requirements. In such cases all the production orders issued to the manufacturing de- partments are for special production. These authorize the manufacture of the special product and the special parts, all of which are ready for shipment as soon as the work has been completed. In other industries the product manufactured is more or less standardized and the special product forms only a portion of the total factory production. In cases of this kind it is essential so to designate the special production that it may be classified separately and not be confused with the regular staple line of merchandise. The Production of Parts and Finished Stock Production orders are issued for a standard product or for the manufacture of material or parts which will later form part thereof. This standard product includes those articles which form the staple line of the particular industry and which may be carried in stock for future sale. When the finished stock of certain standard articles is depleted, production orders FACTORY ORDERS 51 may be issued for standard product which is to be shipped to customers as soon as the manufacture of the articles is com- pleted. Under such circumstances, the standard product does not go to the stock-rooms at all. Standard production orders may authorize the manufac- ture of finished stock, finished parts, part-finished stock, or manufactured parts. The term "finished stock" designates the completed product stored ready to be shipped. Finished parts comprise those portions of the product which are stored to await their assembly into the completed article. Part-fin- ished stock comprises all stock in an uncompleted stage of manufacture. Though "manufactured parts" has practically the same meaning as "finished parts," in some industries the parts to be used in the manufacture of the completed article are stored in the raw material storeroom where they are treated as raw material and requisitioned out when needed. To dis- tinguish them from any finished parts kept in a parts stock- room, they are designated "manufactured parts." To illustrate these various classes of production, the classifications used in the manufacture of desks may be cited. The completed desk is classed as finished stock; the sides, top, and drawers of the desk may all be completed separately and stored as finished parts ; the assembled desk in the white, that is, before the varnish and finish has been applied, may be known as "part-finished stock." The locks and handles may be manufactured and transferred to the raw material store- room and be designated as "manufactured parts." "Finished stock" is also known as "manufactured stock" and "completed stock." "Finished parts" are also often termed "completed parts" and "manufactured parts." "Part- finished stock" is frequently designated "semi-finished stock," "partly finished stock," "partly completed stock," and "partly manufactured stock." The precise term used is immaterial if the meaning in alt cases is clear. 52 DETAILED FACTORY REPORTS Repairs to Product Orders Production orders are sometimes issued to cover repairs to product, especially where the necessity for repairs occurs frequently. Such an order may relate to defective articles which are to be repaired and made salable. In all cases, pro- duction orders issued for the disposition of defective work, or for the correction of defects in articles manufactured, should be numbered and distinctively designated so that the costs may be properly applied. If the defective product can- not be repaired, the only practicable method of disposal may be to scrap it and sell it as such, or to reconvert it into raw material. Miscellaneous Factory Orders Classification Miscellaneous factory orders include the following: 1. Construction orders, issued for the erection of new buildings, or the manufacture of machinery, tools, and equipment. 2. Betterment orders, issued to improve the buildings, machinery, tools, and equipment, or for experi- mental work which would tend to improve the processes of manufacture. 3. Repair and standing orders, issued to authorize the necessary repairs to the buildings, machinery, tools, or equipment. These orders, like any other factory orders, are issued to collect the cost of the work they designate. The disposition or treatment of the cost is separately considered in following sections. Construction Orders As the cost of work done under construction orders adds to the capital investment in plant, it is capitalized among the FACTORY ORDERS 53 fixed assets. While it is apparent that no items of cost should be charged against a construction order which would unduly inflate the value of the asset produced, it is necessary to point out that this is frequently done through inexperience. Ma- chinery constructed in a plant ill-adapted for the purpose has sometimes been capitalized at a much higher figure than that at which it could be purchased in the open market. Betterment Orders If betterment orders are issued for improvements which are permanent in their nature, such as the erection of parti- tions or the construction of a roadway, the costs should be capitalized among the fixed assets. If the betterment is an ex- pense of a recurring nature, it should be charged to overhead, in which case, if large in amount, it may be treated as a de- ferred charge and its cost spread over several periods. The expense of painting the building is a case in point. Such a betterment obviously cannot be regarded as of any asset value, and yet it is not an expense wholly chargeable to the period in which the work is done. Repair Orders The cost of any repair work on buildings, machinery, tools, fixtures, and equipment should be compiled and charged to the department for which the expense is incurred, or to a general "Maintenance and Repairs" account if the expense is to be distributed over more than one department. Certain kinds of repair work which recur with regular frequency, such as the repairing of belts, the sharpening of tools, the changing of dies, etc., may be covered by monthly repair orders. This makes unnecessary the issuing of a new repair order every time such work needs to be done, as all work of this character can then be charged to a "standing order" number to be described in the following section. 54 DETAILED FACTORY REPORTS Standing Orders Where the same kind of product is manufactured in simi- lar quantity with more or less regular frequency, or where certain kinds of repair work form part of the ordinary routine of factory maintenance, a "Standing Order" may be issued to authorize the performance of that particular kind of work as required. Such an order may cover a definite period or "stand" until further notice. Workers then charge their time and any material used on a particular standing order against its number. This procedure does away with the necessity of issuing new orders to cover similar jobs again and again, while it standardizes and greatly simplifies the giving of in- structions to employees. To enable workers to charge their time and material cor- rectly, the standing orders and their numbers are usually brought to the attention of factory employees by posting them on the department bulletin boards or by printing them on the back of time sheets properly classified as to kinds of work for ready reference. When a considerable number of standing orders are issued, an order register is a convenience, showing the fixed standing order numbers and the description of the work to be done under each of these orders. Order Numbers All factory orders should be numbered and classified by means of a definite series of numbers allotted to each class as i to 5,000 for standard production orders, 6,000 to 8,000 for special production orders, 9,000 to 10,000 for other fac- tory orders, and so on. The classification may also be desig- nated by prefixing or affixing letters of the alphabet to the numbers. Employees then know at once the class of work involved when the key letter or number of the order is re^ ferred to. FACTORY ORDERS 55 Summary of Factory Orders Form 5 summarizes the various kinds of factory orders which may be issued and the functions of these records. Designing Factory Orders The precise ruling of, and information furnished by, the factory order depends wholly upon the functions it is to per- form. In actual practice it ranges from a simple notice to begin operations upon a certain class of work, to an elaborate record upon which may be compiled the various elements of cost affecting the particular order. The design of the form may be determined by answers to the following questions. These will indicate the amount of information the record is to contain and thus the rulings and spaces to be provided. 1 . By whom is the order to be issued and authorized ? 2. How many copies are to be issued? 3. What is to be the disposition of each copy? 4. What are the requirements as to recording progress of work, defects, shipments, etc.? 5. What is to be the final disposition of all copies? The answers to the above questions are covered in following sections. Issuance and Authorization In a large plant a special order department may be organ- ized for the issuance of factory orders if the work is sufficient in its volume and detail to occupy the time of several em- ployees. In some cases, however, the order work is taken care of in the factory superintendent's office. In small factories, the cost department, the shipping department, or the sales de- partment may handle the work. When special goods are manufactured for customers their 56 DETAILED FACTORY REPORTS Finished Product Finished Parts is 3 8.1 cflCU ifil t! ^o!-^ 1 S1 Illl" 0.2 S3 03 ~ oft e 11 ~ >,-g >,-g >,-g 111 III, 111 sSS.g- ^^c.B-S ^S.S- o = >s y 3 fi w 3 1J& '3 0-2 '5^0- CQ^W OQ^WOH coSu o S9S -3*2 M Bt?8 Address You are hereby authorized to furnish the following material on to be shipped to via QUANTITY DESCRIPTION PRICE TERMS Kindly acknowledge receipt of this order, and place above order number on all packages and invoices. (Signature) Form 9. Purchase Order. (Size, 8 x 5.) When contracts are placed for the purchase of material and part shipments are received over long periods of time, provision should be made for recording, upon the back of the 70 DETAILED FACTORY REPORTS purchase order, part deliveries of the material. Purchase orders should also provide for recording the date of approval of the invoice, which denotes that the purchase order has been properly filled and completed. After this the material having been received and the invoice passed for entry and payment the copy of the purchase order in the office is transferred to a "filled orders" file. It is often desirable to combine the purchase requisition and purchase order, thereby eliminating the necessity of having two forms. This is especially true in small concerns, and in such case, three copies of the form would be prepared. The original copy goes to the selling company and serves as a purchase order; the duplicate copy remains in the purchasing department as the reference copy of the purchase order; and the triplicate copy remains in the department in which the order originated, in this case serving as a purchase requisi- tion. Register of Purchase Orders Every purchase order should, of course, be given a serial number so that it can be filed numerically after it is filled, for future reference. On the other hand, it is often necessary to file unfilled purchase orders alphabetically under names of the concerns to whom the purchase orders were sent. From this file information can be obtained at any time as to the exact date and number of every purchase order which has been sent to any particular concern. If these orders are arranged and filed alphabetically, ac- cording to the names of the concerns to whom they were sent, it may be desirable to prepare also a register of purchase orders (Form 10), showing the date, the number, and the name of the selling concern in a columnar-ruled record so as to facili- tate reference to individual orders when checking the invoices, and receipt of material, etc. MATERIAL AND MATERIAL REPORTS REGISTE For the R OF PURCHASE ORDERS month of , 19 DAY PURCHASE ORDER No. NAME OF CONCERN Form 10. Register of Purchase Orders. (Size, 8 x n.) Filing of Catalogues, etc. The purchasing departments of large concerns receive nu- merous catalogues, price lists, and price quotations in con- nection with the material and supplies which are ordinarily purchased by them. The riling and method of using these quo- tations, price lists, and catalogues is an office organization matter, and as a rule has little direct connection with the cost organization. All catalogues should be. numbered and should be indexed by names and by articles, so as to facilitate refer- ence to them. The price quotations on materials and supplies, which fluctuate considerably, should also be registered upon a per- manent record so as to facilitate reference to the prices which were quoted at different times. This price record is of value, as well, for checking the prices upon the purchase orders and invoices and in discovering discrepancies. 72 DETAILED FACTORY REPORTS Price records may be kept upon a standard 3x5 index card, these cards being headed with the name of the concern which has made the quotation and price. The date of the price, and the description or kind of material, should also be specified upon these cards. The cards are usually arranged alphabetically under the name of the concern, but in some in- stances it may be advisable to arrange them alphabetically, ac- cording to the article or the class of merchandise which is quoted. Receiving the Material In receiving material and supplies, the following records are usually employed: 1. Receiving record 2. Report of material received 3. Invoices from creditors Receiving Record It may be necessary in some industries to keep a separate receiving record of all packages, boxes, barrels, cases, and casks of goods received. This record should show the date the material is received, the concern from whom it is received, and the number of packages, boxes, barrels, etc., received. The record should be made by the person receiving the ma- terial. A record of this kind is kept when it is impossible to inspect, count, and check promptly all the material received, and it is very simple in design. Form n will answer the purpose in many cases. Sometimes the receiving record takes the form of a re- ceipt book, each receipt of material being recorded in this book upon a separate page. In most instances, it is used for tracing items the receipt of which is questioned. It is of little value for checking invoices received from the selling concerns as MATERIAL AND MATERIAL REPORTS 73 it does not go into sufficient detail. For this purpose, it is necessary to use a more specialized form of material received record. RECEIVING RECORD No Date Received from Address NUMBER AND KIND OF PACKAGES DESCRIPTION Signed Form 1 1 . Receiving Record. (Size, 6 x 4.) When goods are not opened for count and inspection as soon as they are received, it is often necessary to accept the invoice temporarily as a record, checking the number of pack- ages as shown by the invoices with the receiving record just mentioned. It may then be necessary at a later date to make a claim for "over, short, and damage," which is discovered when the merchandise and supplies are actually opened, in- spected, and counted. 74 DETAILED FACTORY REPORTS Report of Material Received When a thorough inspection is made of material received, the results are often reported upon an especially designed report of material received, this report being prepared by the person making the count and inspection. The advantages of using a material received report instead of checking the ma- terial directly with the invoices received from the selling con- cern, is that it insures an actual count and inspection of the merchandise and supplies by the receiving clerk, which is not always the case when the invoice is used. A report of material received should provide for a record of the date the material is received, the name of the concern from which it is received, the quantity and complete descrip- tion of the material. Provision may also be made for record- ing the purchase order number as well as information as -to the cost of material and cost of handling, including freight, express, and cartage costs. If the material is specially or- dered for immediate use upon a particular factory order, col- umns may be provided on the material received report for recording the distribution and charging of the various items of material cost. The material received report should, of course, be signed by the person preparing it, and it may re- quire the approval of some person in authority, who then also signs the report. This approval is necessary when the de- tailed reports are prepared by some clerk acting in a subordi- nate capacity. Form 12 is a simple form of the report of material received. The purchase requisition, purchase order, and report of material received should act as a complete check upon every phase of a purchase. It is often advantageous to use a copy of the purchase order as a material received report. If this can be done, it eliminates the necessity of a special record for the material and supplies received. Any additional copies of the purchase order MATERIAL AND MATERIAL REPORTS 75 needed, containing details as to the description of the material, the name of the concern, the date, the purchase order num- ber, etc., are prepared by means of carbon paper at the same time the original copy of the purchase order is prepared. The quantity of material ordered is often not shown upon the copy REPORT OF MATERIAL RECEIVED No Received from Address Purchase Order > Fo QUANTITY DESCRIPTION OF MATERIAL . Date Received Date of Invoice Received by . Date of Invoice Date Inspected Entered on Summary Inspected by Entered on Stock Records Form 12. Report of Material Received. (Size, 8 x 5.) which is to serve the purpose of a report of material received. This copy goes to the receiving clerk or to the person who in- spects and counts the merchandise and who, when it is re- ceived and the count and inspection are made, enters the quantity actually received upon the report. The receiving clerk 76 DETAILED FACTORY REPORTS is thus compelled to count or measure the material. When the merchandise has been received, counted, and inspected, the copy of the purchase order which acts as a material received report is returned to the office for the purpose of checking it with the invoice from the selling concern. All material received reports should be sent to the office, where they can be checked with the invoices which are received from the creditors. It may be necessary to keep a copy of the report of material received at the place where the form orig- inated and often it is advisable to have a copy of the form pre- pared for the use of the cost clerk or stock-keeper so that the proper entries can be made upon the cost summaries and cost records. Invoices from Creditors Invoices received from creditors should be passed for entry upon the general and cost summarizing records. How- ever, before these invoices are approved, they should be checked with the purchasing and receiving records. The ma- terial purchased should be checked as to the kind, quality, and quantity required, ordered, and received. The price as shown upon the invoice should also be checked with the price as shown upon the purchase order or as shown by the office price rec- ords. After the quantity, description, and price have been checked, the mathematical calculations should be verified. In order that all invoices may be properly checked before they are passed for entry and payment, it may be advisable to stamp each invoice as it is received with a blank form provid- ing space for recording upon the invoice the date or dates on which it was checked, and the names of the persons who have checked the various features of the invoice. This stamp may be designed differently to meet each individual require- ment. Form 13 shows a simple design which may be used advantageously in many cases. MATERIAL AND MATERIAL REPORTS 77 Purchase Order No Receiving Report No Quantity O. K Price O. K Extensions O. K Charge Account No $. Charge Account No $. Charge Account No $. Purchase Record Entry Stock Record Entry Approved Form 13. Invoice Stamp. (Size, 3 x 3.) Storing Material In storing material, two classes of stock records are usu- ally employed : 1. Bin records 2. Stores ledger records Both of these record information of a similar character, but the bin records are often limited to quantities only, whereas the stores ledger records contain more complete information, dealing with prices and costs as well as quantities. Bin Records Raw material and supplies are arranged in the storerooms in closets, racks, or bins. It is essential that the bin record be tacked in a convenient place where the material is stored. This bin record should provide for information as to the re- ceipt and issuance of the material. Columns may be provided for showing the dates and the quantities of receipts and with- DETAILED FACTORY REPORTS drawals and the quantities on hand. These entries should be made upon the bin record daily at such times as material is put into, or taken out of, the storerooms, and are usually made by the persons who handle the material. Bin records should always be of the simplest character and be used for checking the more complete transactions shown by the regular stores ledger records. A simple bin record is shown in Form 14. BIN R] ECOR D No Articl e Units.... DATE QUAN- TITY RECEIVED QUAN- TITY ISSUED QUAN- TITY ON HAND DATE QUAN- TITY RECEIVED QUAN- TITY ISSUED QUAN- TITY ON HAND Form 14. Bin Record. (Size, 6 x 8.) Record of Raw Material The record of raw material (Form 15) is one of the most important of the factory documents. This record is also known by the terms "Stock Record," "Stores Ledger Record," "Storeroom Record," etc. It bears the same relation to the stock that the cash book bears to money, and therefore should be kept with equal care. Stock represents money and is MATERIAL AND MATERIAL REPORTS 79 BALANCE 1 1 QUANTITY i a K CJ o 2 O 1 s 5 II CQ Q 01 JLIVERED / BALANCE g to 6 Q QUANTITY % O *> 2 2 " C "^ W .2-3 d 55 ^a S Q QUANTITY | 3 8 s .si *>. b a> . a d Z d ol y *s 15 a < Q 80 DETAILED FACTORY REPORTS only another form of it. As the cash book shows the receipts and disbursements of the money and the balance on hand, the stock record shows the material received, material used, and the balance which should be in the storeroom. The effectiveness of the stock record depends very largely upon actual storeroom accommodations and upon the precau- tions taken to prevent any but properly authorized persons from removing the material from its designated place. If access to the storeroom is permitted to everyone, material is likely to be taken to fill orders without the authority of a material requisition. Also, if access to the stock is easily obtained, the men will often replace material damaged in proc- ess without making a record of the material withdrawn. Such a leak is serious and must be guarded against carefully, for, if it exists, it both falsifies the costs and causes consid- erable trouble in the cost department. The storeroom should be centrally placed, unless a sepa- rate storeroom is conducted for each department. The racks, bins, etc., should be arranged with reference to the materials, so that the whole will be orderly and not look like a junk room. Disorder in appearance tends to create disorder in handling. Bin records and finding lists, showing the location of the stock, may be necessary when the stores are complex and contain a great variety of articles more or less similar. Special store- rooms or yard places should be reserved fof heavy and cum- bersome materials close to the place where these materials will be needed. To record the location of material and to save time and space, a system of reference numbers and letters should be devised. Thus if B is the symbol for "bolts," B-4-C-I7 might mean a 4-inch bolt in division C, section 17, of the storeroom. These symbols may be used throughout the system of records and accounts and result in a great saving of time and trouble. A systematically conducted stock record performs other MATERIAL AND MATERIAL REPORTS 8l valuable functions besides showing leaks. One of the most important of these is to provide the data for the "perpetual" or "going" inventory. The troubles of inventorying are well known; it usually takes a long time, causes much work, and sometimes necessitates the temporary closing of the plant. Even then the accuracy of the inventory is questionable, yet its information is essential in the preparation of any reliable statement of financial standing and earnings. With a well-kept stock record these usual inventory troubles are avoided, as a complete inventory is at hand at any time, showing both the amounts and the values of materials in the storeroom. To do all this, the record must be designed with columns for ma- terial ordered, received, requisitioned out, and balance on hand. Besides these columns for inventory information, extra columns may be added to distinguish between material re- served for orders already received and the balance available for new orders. This distinction, together with the record of the maximum and minimum amounts, and a column showing material ordered but not yet received, gives all the informa- tion necessary for keeping the stock supplies up to working requirements in every respect. When the same article is carried in stock in numerous sizes, colors, or styles, it is sometimes advisable, for easy ref- erence, to use one sheet for the article as a class, and group the different varieties separately. Active stock will require separate sheets for each article ; but where purchases are infre- quent and the stock is drawn out in large quantities, one sheet may be sufficient for several articles, blank lines being left on the sheet between the different articles. The stock record should be verified from time to time by actual weight, count, or measurement, so that any discrepancy or leak may be discovered. It is a good policy to verify a cer- tain number of articles each day or week, without letting it be known in advance what articles are to be inventoried. 82 DETAILED FACTORY REPORTS Stock records may be designed to give information only as to the quantities of material and supplies, or they may give the values as well as the quantities of the material on hand. As it is quite usual to have several storerooms in one in- dustry, it is often advantageous to have a separate set of stock records for each storeroom. Some industries are so organized that storeroom records are kept for the main storerooms and an entirely separate set of records for the sub-storerooms. Whether or not it is advisable to keep one set of stock records or several distinct sets of stock records depends, to a large extent, upon the physical lay-out of the plant. As cost accounting deals largely with the analysis and control of sepa- rate detailed items of cost, it is always advantageous to plan all records which deal with factory operations so that dis- crepancies may be localized and responsibility placed upon def- inite persons in the organization. Issuance of Material The issuance of material from the storerooms usually involves the following forms and records : 1. Material requisitions 2. Bills of material 3. Credits for material returned Material Requisitions A material requisition (Form 16) is an order upon the storeroom for a certain quantity of material and supplies needed for a particular purpose. Material requisitions may be used as requisitions for supplies chargeable to an expense ac- count, or for materials for certain definite jobs, orders, or articles. Such requisitions are prepared by the foremen of the operating departments and by the heads of the other depart- ments of the organization. They are formal orders upon the storerooms, approving and authorizing the issuance of the MATERIAL AND MATERIAL REPORTS N > 1 -M W 3 li* O " ' e w <^ o fe O K C 1 .. a. d W * z Uc D H H H F We o | i H It c/5 sj 1 S CO CO *o *o ^w*^w^N wl ^v^V^' **s^^> *^^^**S^^* ^~*J*^. *~**S~^iif***S^S^iS*-- Charge Ac Credit Ace count Entered o n Cost Rec n Summary n Stock Re< 3rd ount Entered o Entered o :ord Form 17. Bill of Material. (Size, 5 x 8.) the materials to be issued have been standardized both as to quantity and kind. Therefore, it takes the place of material requisitions in factories where the product manufactured is standardized, the same articles being manufactured repeatedly and requiring the same kind of raw material for their com- pletion. A bill of material is prepared for each article manu- factured and a copy is given to the stock clerk. When a pro- duction order is issued, it is then only necessary to present a 86 DETAILED FACTORY REPORTS copy of this crder to the stock clerk who, referring to his bill of material for information, will know what material to issue. No material should ever be issued, in such cases, unless it is covered by the bill of material. Of course, it is always possible to use a supplementary or special material requisition for material to replace spoiled or defective goods. When many different kinds of material are used in the manufacture of one article and the product of the plant has been standardized, these bills of material may be printed in quantities as there is practically no variation in the estab- lished specifications. When the order method of cost-finding is in use, the bill of material given to the stock clerk may specify the order number as well as the number of articles to be manufactured. Then, when the material is drawn out of stock, the clerk should check it with the production order and obtain a receipt for all material delivered. Under the process method of cost- finding, material obtained from stock, as shown by the bills of material, is chargeable to certain definite processes of manu- facture, this information being obtained from the bills of material. Credit for Material Returned When material is returned to stock, it is necessary to pro- vide for a storeroom credit slip. This form, which is often termed "Credit for Material Returned" (Form 18), should be filled in by the person who returns the goods, and sent to the storeroom with the material which is returned. It may then be attached to the original requisition or, if the original requi- sition cannot be located readily, this form should be posted and summarized separately in the routine of the cost system. All material returned should be deducted from the cost of the material which has been charged to the particular order, job, or process. MATERIAL AND MATERIAL REPORTS X => 1 : - fe -t-> i ^ S* C 35 U p w o fr. O < tt, : u :| 1 K QJ O M u ^ ^ tj o 2 ^ H a 1 1 cfi ' oo . w 1 5 H & II to Stock. I 1 "8 J 1 " 1 Z p +-> CO 2 p 3 4 C/5 C/) 1 H 2 1 " ^ ^ a c "c v2 p. W W 3 S U H 00 S ^D o 3 fc u "S 1 .(_, -t-> c3 C 1 >H 3 o ** ' 2 3 > | c c3 g i P O s I w . g !" Q> 13 t 1 S _id 4) /H 4 S *y rt ^> C i S o ^ < 3 CO CO *. i f-r C 4 C C e /- C 3 4-1 r 1 I K [ 4 *-> *-> C C 2 1 1 w w ^ hH g I [ 1 5 1 | > t 1 * 4 4 1 | Ip il D < 1 ! X u u w DETAILED FACTORY REPORTS +J > > 1 I C 1 1 &5 ? ; P i o o W < o I o c cu H Q OH g & s 1 C '3 bfl aj c/5 K 2 5 a s !f, C/5 w t HJL 1 o i i^ ! Z D 1 M IP j a Q 1 1 4 sSl 1 U ; 3 > 111 u u w MATERIAL AND MATERIAL REPORTS 91 ing the quantities and descriptions of such material, and also provide a column in which to enter its cost. These reports should be signed by the persons preparing and approving them. Interdepartmental Material Reports Interdepartmental material reports (Form 20) also termed "Material Transfer Reports" show the quantities and kinds of material which are transferred from one storeroom to another, or from one operating department to another. These reports should provide for recording the departments from which and to which the material is transferred, and for recording the cost of the transferred material. These reports should be properly numbered and dated. They should also contain the signatures of the persons preparing and approving them. In some plants material requisitions or the report of ma- terial used (Form 19), may be employed for the purpose of recording the transfer of material between operating depart- ments. Pricing the Material In the preceding discussion of the various material re- ports, reference has been repeatedly made to the cost of the material. The cost of the material is primarily the market price at the time the purchase is made, to which should be added freight and cartage to give the cost delivered at the yard. Often raw material is purchased in bulk and has to be sorted and graded, and at such time has to be revalued accord- ing to the various grades. This is true especially in the case of feathers, tobacco, and wool in the grease. The invoiced amount of the material purchased must then be adjusted and allocated over the various grades, so that the total amount of the invoice will be in agreement with the costs assigned to the various grades. 9 2 DETAILED FACTORY REPORTS Complications sometimes arise in the pricing of scrap material which is used in making by-products. Generally the percentage of scrap to material is used in arriving at the material cost of the by-product. When this is done, the cost of the by-product is then deducted from the cost of the pri- mary product. However, often there is no way of determin- ing the percentage of waste used except at a considerable ex- pense. Under such conditions, the scrap value is estimated and this estimated cost is applied to the by-product and de- ducted from the cost of the primary product. When, how- ever, it is absolutely impossible to estimate the cost value of the material which goes into the by-product, the amount re- ceived from the sale of the by-product is treated as sundry income and is added to the profit from operation without any consideration being given to the material cost of the scrap or waste used in its manufacture. In considering the cost of material, it is frequently nec- essary to make a provision for adding the storeroom over- head, as well as the freight and handling cost. When this is done, the storeroom overhead is distributed and added to the material cost, according to a percentage method. In some in- dustries, however, this method does not give accurate ma- terial costs, for high-priced material upon which there may be very little storeroom work is then taxed with too large a percentage of the storeroom overhead, while low-priced ma- terial which is cumbersome to handle and requires much of the stock-keeper's attention, might not be charged with its share of the storeroom overhead. If it is impracticable to base the distribution upon an arbitrary percentage, the charge should be absorbed in the general operating expenses and in this way distributed over departments. The market price of material often fluctuates, in which case there are several methods of figuring the cost of the material as it applies to the particular jobs, orders, or MATERIAL AND MATERIAL REPORTS 93 articles manufactured. The one method provides for ascer- taining the average cost of all material of a certain kind on hand at such time as any of the material is issued and used. Another method provides for charging the material to the job at the highest value and using up the higher-priced mate- rial first. Still another method provides for charging the ma- terial cost on the basis of the prices at which the various lots were purchased. This latter method would mean that the quantity of material purchased at the earliest date would be priced at its particular price until this first lot was eliminated ; then the price of the second lot would be used until it too was eliminated, and this method would be pursued for each sub- sequent lot. No matter what method is adopted, when an inventory INVENTORY TEST Department No Article Date.. Actual Quantity Price $ Amount $. Book Quantity Price $ Amount $. Difference Quantity Price $ Amount $., Remarks Taken by Checked by Priced by Investigated by. Extended by Approved by Form 21. Inventory Test. (Size, 8 x 5.) 94 DETAILED FACTORY REPORTS of material is taken, it should be figured at cost or market value, whichever is the lower, and at that time adjustment of the material values upon the various stock records may be necessary. Inventorying the Material When a complete cost system is in operation, the cost records provide for a perpetual inventory shown by the stock records. If this perpetual inventory is kept, it is then only necessary to test the various items of raw material at certain periods during the year, at which times Form 21 may be used to advantage. The book quantity is then compared with the actual quantity and any discrepancies which cannot be defi- Listed by INVENTORY SHE! DEPA T RTMENT No Di Extended ite bv Checked by Added by Priced by Approved by QUANTITY DESCRIPTION V PRICE AMOUNT Form 22. Inventory Sheet. (Size, 8 x u.) MATERIAL AND MATERIAL REPORTS 95 nitely located should be adjusted upon the factory records and accounts. When a physical inventory is taken of the raw material and supplies, the items should be counted, listed, and priced at a certain date. All this information may be re- corded upon an inventory sheet similar to Form 22. Summary of Material and Material Reports Form 23 shows the various steps in the handling of ma- terial, and the material reports which are necessary to record material costs. Procedure in Handling Records The procedure in handling each material record may be standardized and would then be as follows : 1. Numbering Reports. A definite series of numbers should be allotted to each kind of material report so that the office will know whether or not all reports are being received from the factory. If any of these reports are spoiled or voided in the factory, they should be sent to the office so that all re- ports can be accounted for. 2. Collecting Reports. It is necessary to provide a well- planned system of collecting the material reports. It may be necessary to collect reports at the end of each day or at the beginning of the next business day, or even several times dur- ing the day at such times as the factory messenger makes his usual rounds. 3. Examining Reports. All material reports which are received at the factory office must be examined to see that they are properly numbered and dated, and that they contain a proper description of the material to which they relate. They should also be examined to see that they are properly receipted, signed, and approved. 4. Pricing Reports. The material reports which record 96 DETAILED FACTORY REPORTS 1 OT C/3 o I rj 0) 13 1 z 5 o i f^ r> 1 [ Purchase Requisition 1 Purchase Order J Register of Purchase Ord { Price Records and Quota [ Receiving Record I Report of Material Recei I Invoices from Creditors Bin Records 1 Stork Rerorrk /Main S 1 stock Kecor Jsub-St. f Material Requisition \ Bill of Material ( Credit for Material Retu / Report of Material Used \ Interdepartmental Mater / Inventory Sheet \ Inventory Test I | i e 1 1 | 1 -4-1 | 1 K C/5 i i B HH c/) H 1 K 1 a *O en n'? z .8"2o8 en ^ a>2 Q% 4)^2^3 H O^o .5 ^^*cc 8 & 2^ S o W B u <*" bcS' 600 ' "S'i i 1 v'-DChettbObcctt 1 - 1 " U 'S c"^ c C'3 c M B.SS-85'S^ pc 9? H'C'fl a 8.9 M*a < MATERIAL AND MATERIAL REPORTS 97 the information as to costs must be priced, these prices being obtained from the stock cards or other price records. 5. Calculating Reports. The material reports which con- tain the information as to costs must be calculated so that this information can be properly posted to the various cost-sum- marizing records. 6. Posting to Stock Records. All material reports which show the receipt of material and issuance of material must be posted upon the stock records, so that the movements of each item of raw material can be shown upon these stock records at all times. 7. Posting to Cost Records. The material reports which contain the information as to material cost must be posted to the various cost records under the order method of cost-find- ing, to the definite cost records of each job or order; under the process method of cost-finding, to the particular cost record of the definite process or article affected. 8. Marking Accounts to be Charged and Credited. Ma- terial reports which record costs give the amounts to be charged and credited to the various accounts, and upon these reports must be entered the information as to the accounts to be charged and credited. 9. Summarizing and Proving for Accounts. After the information has been entered upon the material reports as to the accounts to be charged and credited, they should be sum- marized so that the total charges and total credits affecting various accounts may be ascertained. 10. Filing Reports. After the information upon the re- ports has been transferred to the proper summarizing records, they may be filed. It is well to provide for filing each kind of report in a distinctive file; i.e., the material requisitions should be filed separately, also the bills of material, etc. It is advan- tageous to file these reports, in most instances, according to the report numbers. CHAPTER VII WAGE SYSTEMS Kinds of Wage Systems The form of labor reports (to be discussed in the follow- ing chapter) will depend largely upon the wage system used in a particular industry. As it is necessary for a cost account- ant to be familiar with the various kinds of labor reports and devices for recording the cost of labor, it is equally necessary for him to be familiar with the various methods of paying wages. Therefore, the wage systems which are most com- monly employed will be explained briefly in the present chapter. No one system of wage payment can ever be recom- mended as the best for all conditions. Each has its charac- teristics which are peculiarly suited to some conditions, and at the same time impossible of consideration under other con- ditions. The various methods of paying wages considered here are as follows: 1. Day-rate system 2. Piece-work system 3. Differential-piece-rate plan 4. Premium system 5. Bonus system 6. Contract system 7. Profit-sharing plan 8. Stock-distributing plan Several other wage systems, not so well known but suc- cessful under some conditions, are also briefly described in the consideration of those enumerated. The foundation of these systems is either the time WAGE SYSTEMS 99 consumed or the quantity of work done. In other words, the "time" or the "piece" must furnish the basis for any of the systems mentioned. Each of these designated plans is sub- ject to modification, and therefore there are many forms of time and piece methods of paying wages, as well as various forms of premium and bonus plans. The bonus and premium plans are known by various terms, and are often named after the person who first installed them or tried them out. Day-Rate System The day-rate system provides for paying each workman a predetermined sum for a certain number of hours' work. Therefore, either a day wage is established, which is the amount of wages a man receives for a day's work consisting of a definite number of working hours ; or an hourly rate may be established which, multiplied by the hours in the working day, gives the daily wage. The wage rate under either plan depends upon: (i) the skill called for; (2) the locality in which the plant is placed; (3) the demand for labor; and (4) other special labor conditions which may exist at the time. The day-rate system is the one most commonly used, and is the original method for paying wages. However, since all other plans have been devised in an effort to get away from it, it is fair to assume that there are gross defects in the sys- tem as it stands. Disadvantages of Day-Rate System. The principal dis- advantages of the day-rate method of paying wages may be summarized as (i) lack of incentive to effort, and (2) diffi- culty of finding labor costs. Lack of incentive on the part of the workmen is the one thing that has caused the failure of the day-rate system of paying wages. The workman has little or nothing to gain by doing his best, putting his heart into his job, and exerting him- self. He is kept up to a certain dead level of performance by 100 DETAILED FACTORY REPORTS the fear of losing his job, and this is his only incentive to effort. Why should he do more than the man next to him when they are both paid alike ? This sort of reasoning may not apply to the one man in a thousand who by sheer exertion forges ahead of his fellow-workers, but it does apply to the great mass of workers in manufacturing industries. The result is shown in both the small quantity and poor quality of the output. The difficulty of finding labor cost under the day-rate system of paying wages is principally due to the fact that a uniform labor rate per day, or per hour, does not always in- sure a uniform labor cost per article. The wage rate may remain the same, but the product and its labor cost may vary from day to day, and often this variance is material when comparison is made of the work done by different men. Applicability of Day Rate. There are classes of labor, however, for which no other kind of wage system is practicable. Where the work is purely a function of time, as in the case of firemen, watchmen, instructors, foremen, factory clerks, etc., the simplest and most practicable method of paying wages is the day- or time-rate system. The work of repair men and men who plan and construct special machinery is also usually paid for by time because of the difficulty of reducing such work to any kind of piece basis. In general, indirect labor is more suited to payment by time than direct labor. Piece-Work System A piece-work plan is a system of paying wages on the basis of the amount of work done. A rate is established for the various operations incidental to the production of an article, either as a result of past experience or by means of a special test. Under this plan, the employer makes what he considers a fair estimate of the time required for each operation, or makes a special test, and then bases the piece-work wages upon the results of this estimate or test. If the rate is fair, the entire WAGE SYSTEMS IOI arrangement looks so equitable that it may be surprising to learn that in many cases friction and dissatisfaction have arisen from its use. In answer to the question as to why this should be so, an imaginary case may be considered, which, however, is based on actual experience. An employer, having decided to introduce the piece-work system in his business, sets out to determine the allowance or rate he should make on each piece of work. He and his as- sistants watch the men and their work for some time ; then he makes what he considers a fair allowance for the increased production that he expects will follow under the new plan, and waits for results. Under the stimulus of payment propor- tioned to effort, the rate of production soon shows enormous gains and the employer frequently finds that production, in- stead of increasing according to the low per cent he allowed for in determining the new rates, has increased 50%, 60 %, or has even doubled. As a result, men who were earning, say, $2.75 per day, are soon earning $4 or more. By this time the employer is likely to think that his em- ployees cheated him in the beginning, and as a result of this are now receiving altogether too much pay ; so he proceeds to cut the rate per piece, and then trouble with his workmen begins. They, on their part, soon discover that they are be- tween two fires; if they produce too little their wages are small, and if they produce too much the rate is cut, after which they must continue to work harder and receive no more pay than formerly. The natural result of this is an agree- ment between the workmen in each class to limit their pro- duction to a certain amount which they consider safe. At this point the piece-work system breaks down and fails in the purpose for which it was introduced. In the above instance, the conflict of interests between employer and employees is evident. The employer is working for the largest possible results for a given wage scale, and 102 DETAILED FACTORY REPORTS the men are working to receive the maximum wages for their time and work. The employer, in fixing the piece rate, does not anticipate that wages will increase much over what they were before, or at least not in the same proportion as the pro- duction increases ; so he fails to see his real gain by the change of method. The workmen, on the other hand, consider that they have been exploited by the cut in the piece rate and are correspondingly bitter over the situation. It is clear that the critical point here lies in the rate. In the example given, the employer was ignorant as to just what the men could do; and this is the underlying cause of trouble in nine cases out of ten. To establish a satisfactory piece- work system it is essential to set such a rate that, barring ex- cessive business depression or some equally unusual condition, it can be successfully maintained. If the employer wishes to approximate maximum production, he must be prepared and willing to pay more than the ordinary day rate he paid before ; and no piece-work plan will attain its object unless he takes this stand. If he can afford to pay a certain amount for the making of an article now, he can surely afford to pay the same amount per article when a larger number are produced per day. This is all the more so because the indirect expenses are increased comparatively little by the increased production in a given period of time, and as these expenses are distributed over a larger number of articles produced, the cost of each article is, therefore, proportionately decreased. Method of Fixing Piece Rates. The first step necessary to determine the proper rate is to get true records of the work that can be done. In the matter of small, or wholly machine- made articles this is not difficult. If the operations are com- plex and include much handling of the material, it will be nec- essary to separate the whole process into simple operations and fix a time for each. The sum of these time rates, plus a WAGE SYSTEMS 103 percentage for unavoidable delays, will determine the time to be taken on the article as a whole. These analyses are all- important, as experience has shown that they afford the most accurate and practical method of fixing a fair piece rate. The more carefully the rate is fixed in the first instance, the less the likelihood of disagreement later. Differential-Piece-Rate Plan The differential-piece-rate plan is a specialized piece-work method modified by an application of time rate to the work. The idea is to pay a fixed piece rate up to a certain amount of production in a given time, and, if by rapid work the employee can produce more than that amount, to pay him a higher piece rate, either on the whole amount produced or only on the out- put above the standard set. The considerations and cautions mentioned in the straight piece-work plan are all applicable here, and with double force, since the ideas are the same but emphasized. The differential-piece-rate plan is specially devised to speed up production where the indirect expenses are high in proportion to material and labor costs. To get the best results in such a case the productive capacity must be made as effec- tive as possible, even at a higher payment for labor cost. What is lost on the high piece rate will be more than made up by the distribution of the large amount of indirect expenses over an increased output. The point of great importance in the differential-piece- rate plan is the making of a fair rate at its introduction. An ill-judged rate at this time may be fatal and the utmost skill and judgment are necessary to guard against such a mistake. The plan also calls for a well-organized supervising corps, the actual increase of cost for this depending entirely on local conditions, the nature of the shop, and the organization. 104 DETAILED FACTORY REPORTS Premium and Bonus Systems The premium system, together with its modifications, dif- fers from piece-work methods in basing the wages primarily on a time rate instead of on the quantity produced, and then paying extra wages for time saved in the operations. It re- sembles piece-work in that it presupposes a time rate on the process of manufacturing single articles, or on the separate steps in such processes. The fact that it guarantees a mini- mum wage places it in a more favorable light before employees, and often results in less opposition on their part to its intro- duction than they show toward the piece-work plan. Linked to the premium plan and related to it in general principles, are the several forms of bonus plans. In each of these plans "there is an increase of pay as the time to do a defi- nite amount of work is shortened; but instead of being cal- culated directly from the time saved, it takes the form of an increase in the hourly wages for the time actually spent, the rate depending upon the percentage of time gained and in- creasing in proportion. The simplest form of bonus system is to pay each work- man a daily wage plus a piece rate on each unit in excess of a specified minimum. Thus, a laborer receives $1.50 a day for shoveling earth, and on each cubic yard in excess of 15 cubic yards per day he receives a bonus of 7 cents per yard. If he shovels 25 cubic yards, he receives $1.50 plus $.70, totaling $2.20 for his day's work. The differential-bonus system is much the same, except that there is an increasing scale for increasing performance. As an example, the workman might receive 7 cents bonus for every cubic yard above 15, and an additional 7 cents bonus for every cubic yard over 20. His day's pay for the work men- tioned above would then be $1.50 plus $.35, plus $.70, or $2.55. The Gantt system of differential payment is known as WAGE SYSTEMS 105 "Task Work with a Bonus." A high standard is set, but one entirely possible of attainment. The workman receives a regu- lar day rate and in addition, if he reaches the standard, he is paid a bonus, which may be 25% or 33 1/3% of his regular wages. This system seems to have worked out well in prac- tice; and it is especially recommended as a good transition step from the old day rate to some form of piece-work. A very important feature of the Gantt plan is the bonus that the foreman gets for every man under him who makes his bonus. Thus, if a foreman had twelve men under him and eight of the twelve made their bonus, the foreman would get, say, 80 cents bonus, or 10 cents for each man. The result in practice has been to make the foreman a teacher of the men, invariably giving his attention to the men below grade in order to get them up to bonus standard. In the "stint" system the appeal is made to the workman by a gift of all the time he may save. A certain output is assigned as a day's work. If he does it in less time, say 7 hours, he has earned his wages and is free to go home. The names "merit," "standard operation plan," "gain- sharing," and others, are sometimes given to wage-payment plans worked out in particular shops or industries. If they differ at all from plans here described, it is only in details devised to meet particular conditions. Since the plans described as "premium" or "bonus" are so closely related in object and principle, they may be grouped together for comparison with other methods. Introduction of System. In introducing a premium or bonus system, the same caution must be observed as with the piece-work systems. It is essential to be quite sure of the cor- rect standard before the step is taken, if the disastrous results that have followed too high piece rates are to be avoided. If an error is made on the side of too high a scale, it is less costly than in piece-work, because the employer is not working on so I0 6 DETAILED FACTORY REPORTS narrow a margin; also the effects of such an error would be more evenly divided. Contract System Under the contract system each employee is regarded as a contractor who has a given time in which to finish a definite job. As in the case of the stint system, if he gets through beforehand he has earned his wages, but instead of leaving he undertakes a new contract. In some cases he is penalized if his work is not done in contract time. When the units of work are large, the foreman often be- comes the contractor, and becomes responsible for the comple- tion of the job. There is a wide amount of freedom in the arrangements for wage-paying and profit-making between him and the management. Under the contract system in its simple form, the contractor hires his own men and arranges the work as seems best to him, while the company allows him a certain amount for the job. Anything that he saves out of this goes to him as profit. Strict inspection of his work is necessary, of course, to hold him up to the proper standard. A very common instance of a contract system of paying wages is in the building trade, where the main contractor has certain sections of the work done by sub-contractors. In the garment manufacturing industry, also, the contract system of paying wages is used where outside laborers do certain opera- tions upon the various garments manufactured. Profit-Sharing and Stock-Distributing Plans The profit-sharing plan, as its name implies, provides that the workman shall share in a certain percentage of the profits of the shop or factory as a whole. The stock-distributing plan makes the employee a part owner in the business, and so gives him an interest and incentive to use his best efforts for its welfare. WAGE SYSTEMS 107 A special form of profit-sharing which has proved suc- cessful in operation, though it can be used only under special conditions, consists in setting a price on every article produced under the supervision of the factory management. The fac- tory is charged only with such expenditures as relate directly to the production of the articles and is credited at the fixed scheduled prices for articles produced whether they are sold or not. At the end of the year, or whenever an actual in- ventory is taken, the factory account in the ledger shows the difference between the actual cost and scheduled prices in other words, the factory profit. This profit is then distributed among the foremen of the various departments and sometimes among the employees as well, according to the rate of pay and total wages of each. A penalty is provided for poor attend- ance and other penalties of various kinds may be incorporated in the plan, according to the conditions under which it i? operated. CHAPTER VIII LABOR REPORTS Classification of Labor In the majority of manufacturing industries the direct- labor cost is more readily determined than is the cost of the direct material. This is especially true when the piece-work wage system is in operation, as under such conditions the direct-labor cost can be computed without any further detailed analysis or compilation than that involved in the operation of the wage system. As a matter of working convenience, the various labor operations should be classified and a well-defined term be given to each operation. In addition to this, it is often advisable to provide symbols or numbers, so that the different opera- tions on each article manufactured are definitely designated both by operation name and by operation number or symbol. This is specially important where the product manufactured is standard and the operations on the products and parts are continuous from day to day. Outside and Inside Labor Two classes of direct labor common in manufacturing establishments are: (i) outside labor, (2) inside labor. Outside labor is that which is performed outside the par- ticular manufacturing plant, as in the garment industry, where much of the hand embroidery work, and dyeing and bleaching operations are done by persons who do not form part of the regular factory force. In recording labor costs, provision must be made for both outside and inside labor where both exist. 108 LABOR REPORTS 109 Direct and Indirect Labor Labor is further classified into: (i) direct or "produc- tive" labor, (2) indirect or "non-productive" labor. The present chapter deals mainly with direct labor costs and reports, as this is one of the prime elements of cost. In- direct or non-productive labor is treated in later chapters which deal with overhead. Direct Labor Reports Labor reports may be divided into two classes: (i) re- ports used for pay-roll purposes); (2) reports used for cost purposes. There may be, and frequently are, combinations of these two classes of reports whereby one report will answer both purposes, being used first for pay-roll work and then for cost work. When separate reports are used for each of these pur- poses, they should be differentiated by distinctive designa- tions. Reports used for pay-roll purposes are often termed "Time Reports," whereas reports used for cost purposes only are more frequently known as "Work Reports." Time and work reports are also often designated by such terms as "Job Tickets," "Work Tickets," "Day- Work Reports," "Piece-work Reports," "Laborers' Reports," and "Factory Employees' Re- ports." Before taking up the form of time and work reports, the time and general method of reporting labor requires considera- tion. Time of Reporting Labor The time of reporting labor depends to a large extent upon the pay-roll system used in a particular plant. This is usually established and takes precedence, the cost accounting requirements conforming to pay-roll requirements. In other 1 10 DETAILED FACTORY REPORTS words, the pay-roll period usually determines the time of re- porting labor costs by the factory employees. Wages may be paid weekly, twice a month, monthly, or shortly after comple- tion of the jobs, orders, or articles, and reports may be turned into the office from the factory at these times. Where it is practicable to report labor daily this should be done, especially in factories or industries where a large number of employees are working. In those cases where the employees are paid after the completion of a certain job, order, or article, it may only be necessary to have the labor reported at such time as the particular work is completed. Method of Reporting Labor Labor usually constitutes the most important element of production cost, and small variations in the methods of hand- ling the men and their reports lead to great differences in re- sults. The importance of the matter is evidenced by the large number of mechanical devices made for the purpose of regu- lating labor, and for gathering and compiling labor cost, such as time clocks, time stamps, patent time cards, and mechanical labor cost recorders of many different styles. While the writ- ing of the reports by hand is the most common practice, it is sometimes contended that this method is unreliable, especially if the reports are made out by the workers themselves. If, however, the records are prepared by a competent clerk, even though by hand, accurate costs can undoubtedly be established. Where mechanical devices are used, it is clear that they elimi- nate the imperfections of labor reports prepared by hand; but even mechanical devices may be tampered with and thus falsify the cost figures unless the mechanism and records are carefully inspected. The complex and variable conditions which exist in man- ufacturing industries call for many different methods and forms for reporting and recording labor costs. It is often LABOR REPORTS IH necessary to use several different kinds of time and labor re- ports in the same factory according to the different require- ments of the various operating departments. So far as pos- sible, standard sizes of time reports and standard methods of reporting labor costs should be adopted. The numerous me- chanical devices on the market have, to a large extent, affected the standardization of the forms and methods of reporting labor. Written reports may be made for: 1. Each individual employee. 2. Small groups of employees often termed "gangs." 3. Large groups of employees, including employees of entire operating departments. These reports may include the time and work done upon all the jobs, orders, articles, or processes handled during the period of time for which the report is rendered; or separate reports may be made showing the time and work done upon each job, order, or article, or for each process. All labor reports made by factory employees should be approved by a foreman or other official and the method of recording this labor should be properly supervised so that true and accurate costs may be obtained so far as possible. The successful operation of any system of reports de- pends largely upon the simplicity of the records used and the clearness with which their operation is explained. Clerical labor on the part of factory employees should be reduced to a minimum so as not to take up the time of employees more than is absolutely necessary, and whatever writing is required should be simplified as much as possible by reducing it to the entry of a few figures. In many lines of manufacture, the conditions are such that a workman may spend only a few minutes on a single job. In such cases it is not practicable to charge this direct labor 112 DETAILED FACTORY REPORTS cost specifically to the individual job, order, article, or process, and a plan must then be arranged for its distribution over a number of orders. In Chapter V, which deals with factory orders, the method of handling numerous small orders is taken up- Verbal labor reports are inadequate and unsafe, and should be discouraged in all cases if correct costs are desired. Employees are sometimes permitted to report their time ver- bally to a department timekeeper who makes the written rec- ord, but this is unsatisfactory and unreliable. The tracing of a particular item in dispute is then difficult and often leads to unnecessary argument and disagreement. Requirements of Labor Reports The principal points to be considered in choosing or de- signing labor reports are covered by the answers to the follow- ing questions : 1. Is the form to show productive labor only, indirect labor only, or a combination of both ? Wherever it is possible to do so, indirect or non-productive workers should report their time upon separate forms. However, if indirect or non- productive time appears upon a productive labor report, pro- vision must be made for summarizing this element of over- head so that it may be included among the factory indirect ex- penses and be distributed properly. 2. Is the labor report to show time only or both time and cost? Factory employees engaged on productive work should be required to report only the time spent upon the particular job, order, or article, and should not be asked to calculate costs. A clerk stationed in the operating department may calculate the costs upon the labor reports before they are sent to the office. 3. Is the labor report to show the time daily, weekly, twice a month, or monthly? The pay-roll system in use will LABOR REPORTS 113 give the answer to this question. Before designing any de- tailed form of labor report, the method of paying wages to the factory employees should also be given careful considera- tion. 4. Is the labor report to be filled in by a factory employee, a clerk, or will a mechanical device be used ? As already sug- gested, handwritten reports are likely to be inaccurate, and also a certain proportion may be "doctored" by unscrupulous employees. Another important fact is that the writing up of records diverts productive time to clerical labor. Mechanical devices do away with these objections to a large extent. While the installation of mechanical equipment may be costly at first, it saves time and trouble and proves to be less costly in the end. This is especially true if the factory is of any size or the work is complex. 5. Is the report to be used by individual employees, "gangs," or department groups? In small factories a single combination report may be used for all men doing the same class of work. This report can so be arranged as to provide all the necessary information for pay-roll purposes as well as cost-finding purposes. In large manufacturing industries, however, it is often necessary to provide a separate time report for each employee. 6. According to the wage system in use, what informa- tion, in addition to time, is required upon the labor report? The answer to this question depends upon whether the em- ployees are paid for "time" or for "piece." If the day-work or premium system is in operation, it may only be necessary to show the time. If the piece-work plan or bonus plan is used, the report should show quantities and time. In both cases the cost and amount of wage is left to the cost clerk and pay-roll clerk. When a combination system of paying wages is in use, an additional column upon the report gives the necessary information as to cost and total wages. DETAILED FACTORY REPORTS 7. Is the labor report to show the time for each job, order, or article, or for several? The labor report may provide spaces upon the one form for recording the time and work done for the several jobs, orders, or articles worked upon dur- ing the day, or it may be more advantageous to have separate reports in each case. To sum up, it may be said that the method of reporting labor should be so devised as to ascertain the cost of any job, order, or article as a whole or any part thereof, or on any oper- ation or process, with the least possible amount of writing or figuring on part of the employees. Depart Emplo Occupz DAILY LABOR REPORT ment Date pee's Name No ition Machir ie ORDER No. DESCRIPTION OF WORK TIME STARTED TIME STOPPED FOR OFFICE USE Elapsed Time Amount V ^X^^X^X^N^^^>^X^*N^^^^X^X^^ ****^*^s~^i^s^. s^r^s^**^-*^ *^^^*^^**^** *~+>s~**r+* S***,^* ******* ApprcN Wage 1 red Ent ered on Si ted to Cos immaries ^ate Pos t Sheet Form 24. Daily Labor Report. (Size, 4 x. 6.) LABOR REPORTS Form of Time Report All time reports should be dated and properly numbered. They should contain columns or space for recording informa- tion as to the exact nature of the work done, that is, the desig- nation of the job, order, article, or operation. Columns should also be provided to record the quantity produced, the period DAILY PIECE-WORK REPORT Department Date Employee's Name No Operation Machine ARTICLE V QUANTITY FOR OFFICE USE Rate Amount V Approved Entered on Sun Posted to Cost imary Entered on Pay-Roll Sheet Form 25. Daily Piece- Work Report. (Size, 4 x 6.) of time required to produce it, and the rates and amounts of wages in dollars and cents. The information as to rates and wages is supplied in the office. It is also important to provide for the approval of some person in authority, and all reports should be examined and n6 DETAILED FACTORY REPORTS O K'd by this person before they are sent to the office. Furthermore, where labor reports are used both for pay-roll and cost purposes, it is often necessary to provide columns for checking the postings, so that an examination of the reports will show whether or not the information has been properly transferred to the pay-roll and various cost summaries. As previously stated, time reports and labor reports have JOB TICKET Description of Work. Order No Employee's Name No Operation Dept. No Machine No QUANTITIES TIME WAGES Good Stopped Piece Rate Defective Started Time Rate Total Elapsed Amount Approved Cost Sheet Entry Pay-Roll Entry Summary Entry Form 26. Job Ticket. (Size, 5 x 3.) become more or less standardized. A few of the simplest forms are: the daily labor report (Form 24), the daily piece- work report (Form 25), and the job ticket (Form 26). In the light of the preceding explanation, the operation of these forms will be readily understood. They may be developed by the addition of further columns and spaces for recording such special information as may be required for the particular cost and pay-roll system. In small plants where conditions are simple, it is often LABOR REPORTS 117 practicable to combine labor reports with the production order, by providing the latter with a column for collecting informa- tion as to the amount of productive time spent upon the work covered by the order. Under complex manufacturing condi- tions it is impossible to use a form of this kind to advantage. Pay-Roll Exception Report Labor reports should be made for every factory employee, but in the usual course of events some employees will be ab- PAY-ROLL EXCEPTIO: E 1ST REPORT >EPARTMENT No.... Date To PAY-ROLL DEPARTMENT & COST OFFICE: All employees in my department were present full time with the following exceptions: Foreman EMPLOYEE'S No. EMPLOYEE'S NAME REMARKS AS TO IRREGULARITIES v^w^V^-^w^X^^^^V-^v-^Xrf^s, ^^^^^^^^^^^^^f^^^^^^^^^,^^ *'>-x> l ^-s^> l >ii'-x^'>^ 1- N h x> - x l 'Xx'X*'' <1 ^^ Noted on Pay-1 Noted on Cost ^oll Summaries Form 27. Pay-Roll Exception Report. (Size, 5 x 8.) Il8 DETAILED FACTORY REPORTS sent, others will be tardy in arriving at work, while others will leave for an hour or two during the day or before closing time. Information as to the tardiness and absence of employees should be reported to the office by a foreman or department head upon a pay-roll exception report (Form 27). It is true that both the time-clock records and the employee's labor re- port should show this information, but in order to call the particular attention of the cost department and pay-roll depart- ment to these irregularities, they should also be reported upon the pay-roll exception report. Pay-roll exception reports should be numbered and dated and show the department in which they originate, the em- ployee's name and number, and all irregularities as to tardiness and absence from the plant. Such a report assists the cost department when summarizing the productive labor for the purpose of comparing its cost with the total amount of wages paid as shown by the pay-roll. Labor Transfer Reports Though employees usually work in their own depart- ments, it may be necessary to transfer some of them to another department. When such temporary transfers are made, it is not necessary to change the men's numbers and positions on the pay-roll, but a notification should be sent to the office so that their wages may be charged to the department in which they are working. The transfer of men from one department to another is generally reported upon a labor transfer report (Form 28). This should be properly dated and numbered, should show the department in which the man is usually engaged and the de- partment to which he has been transferred, and contain an approval of the transfer by some person in authority. It may be necessary to provide columns on the report for recording information as to time, quantity of work done, and its cost LABOR REPORTS 119 LABOR TRANSFER REPORT DEPARTMENT D No ite EMPLOYEE'S No. NAME TRANSFERRED TO DEPARTMENT Entered on Cost Summaries: Foreman Form 28. Labor Transfer Report. (Size, 5 x 3.) Rate Records It is usual for the wage rates or piece-work rates of fac- tory employees to appear upon the labor reports notwithstand- ing the fact that in many cases this information is of a some- what confidential nature. It is obvious that it is necessary to have full and correct information as to the different wage rates of factory employees in both the pay-roll and cost departments. The pay-roll clerk must have access to these rate records in order to calculate the total amount of wages to be paid, and the cost department must use them in working out costs. The rate records should be kept up to date and all increases in pay and changes in piece-work rates should be sent to both the pay-roll and cost departments. Such a record also gives useful information when considering the granting of an increase in pay to employees whose length of service merits recognition. 120 DETAILED FACTORY REPORTS The form used for keeping rate records (Form 29) shows each employee's number and name, the date he begins his em- ployment, and in the last two columns the dates and the in- creased rates when changes are made. The information may all be recorded very satisfactorily upon separate 3x5 index cards. In some cases it may be more convenient for the cost WAGE RATE RECOR DEPARTMI D iNT EMPLOYEE'S No. EMPLOYEE'S NAME WAGE RATE Date Rate Form 29. Wage Rate Record. (Size, 8 x n.) department to keep wage rates in a loose-leaf binder, the record for all employees of a particular department appearing on one sheet. If this is done, the rate record may then be of letter- head size, 8xn. If the manufacturing plant is large, it is often necessary to have several copies of these records in use in the pay-roll and cost departments. It is then important to see that all changes in rates are recorded upon each copy, and, to insure this, the series should be numbered. LABOR REPORTS 121 CO 3 a eu o 1 2 | ' Daily Weekly Twice a month Monthly t Completion of job, order, or Reports for Pay-Roll Purpos Reports for Cost Purposes Combination Time and Wor Pay-Roll Exception Report Labor Transfer Report Rate Records Preparing Reports Collecting Reports Examining Reports Pricing Reports Calculating Reports Marking Accounts to be Chi Posting to Pay-Roll Records Posting to Cost Records Filing en 1 I | I ' "c I I -3 J "8 CO t S 3 1 1C JH X K a , , c 1 g p 8 o i K