657 W'Te- 7 , ' i s Production Costs ELEMENTS ENTERING INTO COST OF PRODUCTION. Vt ^ R A Direct Material (including Incoming Transportation) fl Time Work 3 Freniur. Wages E Direct Labor 3 Piece Work 4 Specific Bonus to Productive Workers V A E C / D ^Salaries E and F Supplies G Superintendents and Foremen Draftsmen &Drftg Material Time & Cost Dept & Supplies Stores Dept & Supplies Shipping Dept & Supplies Bookkeepers, Clerks;, Steno- graphers & Shop Auditors Salaries Shop Pure-., x. ^ - Supplies & Stationery- Postage C 2 Non-Pro- ducing Labor A Tool Making & Repairing E Tool Boys (Messengers) C Pattern Makers, part only D Inspectors E Carpenters F Painters, where cannot be directly applied G Engineers & Firemen H Porters I Truckers J Elevator Men K Packers L Special Bonus M Overtime Allowance Manuf act uring3 Taxes Expense 4 Insurance 5 Water, Light & Fuel 6 Pattern Material 7 Racking Material 8 Experimental (not including Develop- ment ' Work 9 Factory Supplies ■„ including Incoming trars portation) 10 Miscellaneous Manufacturing Expense n Royal - '* ies A Buildings E Power, Heat, vt ? & Light C Power Tools 11 Mainten- D Small Tools ance E Shop Furniture & Fixtures F Patterns S All Other Equipment i n 0,0 wuxmeu. nxea Rat It Sellare V ;orf erial & ’ tortoansh iP ,v Digitized by the. Internet Archive in 2017 with funding from University of Illinois Urbana-Champaign Alternates https://archive.org/details/costaccountingsyOOhydr { 1 Salaries, ex;- cepting where directly con- nected. wit' Sncp Organization. A Executive Officers F Salesmen C Bookkeepers and Clerks D Stenographers E Auditors Salaries 2 Advertising Supplies and static nery Advertising of all Kinds Postage Rent, Insurance and Ta. . - Light and Heat 3 Office Supplies and stationery Depreciation and Maintenance, Offic Buildings and Equipment Commercial Expense a- General Pur- Salaries chasing De- Supplies and Stationery partment Postage 5 Traveling Expenses 6 Entertainment 7 Telegraph and. Telephone 8 Postage 9 Commission 10 Dr ay age (Outgoing) 11 Freight (Outgoing) 12 Legal Expense 13 Drawings for Estimates 14 Fatent Cos-s 15 Miscellaneous General Expense 16 Bad Debts NOTES A - Direct Material and Direct Labor to be charged to Product. x) - Shop overhead or Burden to be included in Manufacturing or Shop Cost on a basis of per oe.it. of productive lal^r, productive hour, machine hour rate, or any other equitable basis that may be the practice of the member Company. (It is recommended that Departmental Distribution of Jurden be followed as far as praot icable) . C ~ Commercial Expense to be distributed on a basis of per cent, of total shop cost. D Interest and Exchange Development Work Federal Taxes Special Amortization Special Reserves Strike Defense These items not to be included in the cost of a pump. They are to be treated as a direct charge against profits. X t l /I » The Committee depreciation: recommends the following minimum rates of ? SR CENT . 4 Buildings, wood brick., concrete 3 Mechanical Equipment 6-2/3 Plant Power and Large Equipment 10 Machinery kO Small Tools, Dies, Jigs and Fixtures 20 Patterns 25 Drawings 30 Furniture and Fixtures 10 Typewriters and Adding Machines 20 Horses, Wagons and Harness 20 Automobiles.. 20 Additional percentages should be used in the case of a shop operating overtime as a regular thing. It is recommended that the additional percentages as outlined in schedule of depreciation rates to cover the additional hours, should be as follows: 1 hrs. 2 " 3 « 4 it 5 « 6 n 7 " 8 " S " 10 " 11 " 12 " 13 " 14 " 15 or more add 5$ " 10 " 15 " 20 « 25 " 30 " 35 » 40 » 45 " 50 » 57 ^ «» 67j *' 80 '* 95 of the normal rate In carrying out this system cf cost accounting, each and every member should keep control accounts in the general ledger, in- corporating the manttfactuins and cost accounting as a part of the general accounting scheme of -she Company. The main controlling accounts used to accomplish this purpose are: 3 i ( 1 4 Stores (Raw Material or Supplies) Work in Process Finished Material Cost of Sales This will necessitate a stores system with material requi- sitions and stock records; a system of production orders to which will be charged all productive material and labor; and a system of standing or special asset and expense orders to which will be charged all other material and labor, so that all material and labor will be accounted for. All labor should be entered on time tickets, the total value of these to be verified with the pay roll. In figuring cost of castings, instead of using a uniform price per pound, either an individual cost should be compiled, using the same system as in the machine shop, or at least a limited classification cost based on trial individual casting costs. The per pound cost of castings will vary la: ,el. : '-a the character of the casting. For example, take the case v ? a runner as compaied with a base plats. In the one case you may u ave an intricate and expensive core, while in the other there is no core work at all. The Chart outline is placed first in order in the report as it represents the frame work of the system and can be, and w-ii' 1 be more readily referred to than if absorbed in the body of the report. It may be of advantage to comment on the various headings so as to indicate in the report of the Committee the elements in eluded urfder the several headings. PRODUCT ION CCS TS The general divisions of Production Costs are:- Caption - A. DIRECT MATERIAL. (Including Incoming Transportation) The proper distribution of material charges over product can be brought about only through a store's room system, by means of which a "Store's or Material Order" is used to withdraw such material, from which order the material sc withdrawn is charged to the individual shop order numB r, which number appears on the order when presented to the Stores-keeper . The Committee recommends that all material be charged to the respective shop orders at actual cost. In coming Transportation should be added co the cost of material received and included in the price at wnich it is with- drawn. 4 \ (+ * DIRECT LABOR. 4 * Caption - B. B - 1 . Time Work B - 2. Premium Wages B - 3. Piece Work B - 4. Specific Bonus to Production Workers These are direct charges to product, and the proper distribution of productive labor charges can be brought about only through a time s^tem witch charges time consumed to individual shop order numbers. The medium of payment is optional, whether it be time work, premium wages, production bonus, or piece work. We define Productive Labor to be all ^abor which can be applied directly to specific shop orders-all other labor we would designate as Non- productive. Caption - C. MANUFACTURING EXPENSE. Under this general caption we have made fourteen subdivisions, and these in the opinion of the Committee, w-i.11 account for all overhead shop expenses likely to be met with. Cp.pt ion - C - 1. SALARIES A ,; P SUPPLIES. A, Superintendents and Foremen, Should a Superintendent or Foreman put in } art of his time as a producer, such time should be charged directly to the parti- cular shop order. Where their work is devoted to supervision, the salaries of these men will be treated as a charge to shop over- head. B. Draftsmen and Drafting Material. All Drawing Room wages and material, except on new designs, should be charged as an expense. Time on new designs should be charged to Drawings Account, representing an asset. It w-ill hardly be necessary to do this with Drawing Material. C. Time and Cost Department. The whole expense of this Department as it relates to manu- facturing is properly a manufacturing expense, since the records of this department will enable us to compare the relative costs of various manufacturing methods in succeeding shop orders. D. Stores Department. As this department enables .us to keep a close check on our stores and an accurate account of all material going into various shop orders, it should be handled in the same manner as the Time and Cost Department. 5 V ' % i t \ ' E. Shipping Department, Wages paid in this Department and material used in ordinary packing are usually treated as a part o I factory overhead. F. Salaries ot Bookkeepers, Clerks, Stenogra. -'■id Shop Auditors, where noi covered in a particular department... expense will he treated as shop overhead under this Caption. G. Shop Purchasing Department. The Expenses of this department as distinct from the General Purchasing Department which functions for several factories, will constitute a part of the shop overhead. Caption - C - 2. NON-PRODUCING LABOR. A. Tool making and repairing. A conservative plan is to charge all wages and material in this connection to expense where the- Tools and Jigs manufactured cost $50* 00 or under. If the cost is in excess of this amount a charge should be made to ’’Special Tools”, an asset account. E. Tool Boys (Messengers) The wages of these boys are a proper charge to expense. C. Pattern Makers. Where patterns are made for special rachi es their cost should be charged to the individual shop order. Where patterns are made for standard lines, the cost should be charged to "Patterns”, an asset account. All costs in connection with the maintenance, re- pairs and renewal of patterns should be treated a s-r expense. D* Inspectors E. Carpenters C F. Painters The wages of men in the above classes are chargeable to shop overhead unless such wages can be applied to specific shop grders. G. Engineers and Firemen. The wages of these men will be chargeable to expense, although in the larger Companies it is recommended that the wages of these men and all other expense in connection with the operation of a Power Plant be accumulated under "Pew er Department Expense”, and that the expense so accumulated be prorated agaiist various operat- ing departments on the basis of power consumed measured by meters or Engineer's estimates. 8 T .J t • f a > H. Porters I. True lie rs J. Elevator Men The wages of tbese men are a matter of general shop expsense since they cannot be dir.uly applied. X# Packers. The wages of these men • ill fall naturally under the same classification as shipping department wages. L. Special Conus as distinguished from Specif ic I on '•-> is to be treated as an expense since it cannot be directly applied to specific orders. M. Overtime Allowance. This is in the nature of special compensation and is to be treated as part of the general overhead since to add it to direct labor cost would destroy the value of comparison of costs on succeeding shop orders. Caption - C - 3. TAXES. This will cover taxes of every description in connection with the operation of the factory, such as real estate and personal property taxes, but not taxes on storage warehouses or offices, which should be included in commercial costs. Caption C~£. INSURANCE. The same remarks apply as to Taxes. Caption C-5. WATER, LICET AND POWER. The cost of these items will be treated as general expense unless partially collected under "Power Expense" as indicated under "Engineers and Firemen ", A portion of Taxes and Insurance will also be applicable to "Rower Expense". Caption - C-3. PATTERN MATERIAL. The cost of pattern material should be treated in the same manner as wages under the Caption "Pattern Makers ", This naterial should be originally charged to Stores Account and withdrawn on requisition. Caption -C-7. PACKING MATERIAL. The cost of this material should follow the same course as indicated for wages under the Caption "Packers". This material should also be originally charged to Stores account and withdrawn on requisition. 7 ( «» T i It is recommended that all expenditures of money in connection with exper it mental work V.§ charged to expense so far as it covers ordinary experimental work which is being co t.M -jaily done by all manufacturing companies. Where it takes the oh rm of the develop- ment of new lines of product for the purpose of creating a new field of action, or of a rai : cal departure frnm existing models same line already he manufactured bv t.’ e Gompuny, it „ represents an unusual add ahnSrmal expenditure w. : ch is a y itatter of general policy and not chargeable to shop operations. Caption - C -S FACTORY SUPPLIES (including Incoming Transportation) All supplies, with incoming transportation added, should be charged to stores and from there withdrawn by requisition and charged to general overhead. This will consist of all such supplies as are used for operating or making repairs to the plant or to the machinery in the plant and will include belting, brooms, brushes, carbon, electrical supplies, oil, sandpaper, waste, and other similar articles. Caption - C - 10. MISCELLANEOUS MANUFACTURING EXPENSE. This is intended to cover Telephone, Telegraph, arid other expenses where service is received not taken care of under other headings • Caption - C -11 , MAINTENANCE. This with its sub-divisions is intended to cover all repairs or other items of expense necessary for the maintenance of any property items in such conditions that the only loss on them from time to time would be their normal depreciation. It is recommended that a maintenance account representing such repairs and renewal be carried for each asset account. This has already been touched upon as regards drawings, tools and iigs and patterns. Caption - C - 12. DPRECIATION AT NORMAL FIXED "'* rr ES, Owing to the wide variation in rates of depreciatd'. n 'ecommend- ed by various authorities the Committee have incorporated rates of their own chos-ing which they feel can be safely used as a minimum •in normal depreciation. They have also set up increases in rates to be charged out as a special expense where the plants are regular- ly run overtime. These rates of depreciation should be figured on the original value of the asset account as it stands on the b ;oks on the first day of the year. This value multiplied by the rate of depreciation will be the normal depreciation for the current year and should be divided by 52, giving the weekly amount to be absorbed into The depreciation thus set up should be credited to reserve accounts bearing the names of the respective assets. Insurance and taxes should also be treated in this way by charging weekly to costs the 'estimated prorata weekly proportion of the anticipated insurance and tax payments for the year. The credits thus set up on "Estimated Insurance and Taxes" are to be offset b^ charges for actual payments made and the account adjusted at the end of the year. 8 4 > 1 Caption - C -13, DEFECTIVE MATERIAL AND WORKMANSHIP. Into this account should be incorporated Tosses due to defective material and labor, also any expense in ci den Taj. thereto such as transportation charges paid by the factory on the receipt of de- fective material returned. Caption - C-14. WELFARE WORK. All expenditures for First Aid, Hospital, Restaurant, Clubs, Safety Appliances and other of like nature should be set up in this account. Caption - D. ROYALTY. To this account will be charged any and all Ro 3 a lties paid for a product and sold by virtue of such payment. This is set up as a separate caption coming between manufacturing expense and comm- ercial expense, since while they constitute an additional cost to. the article they have nothing to dow ith the manufacturing operations either as labor, material or expense. In other words. Royalties are never paid for the privilege of manufacturing something but for the privilege of selling something and while they must, be taken into account in costs, such payments are in a class by them- selves. COMMERCIAL EXPENSE . Caption - 1. Salaries (Except where directly connected with shop organization) Under this Caption are included the salar: es paid outside of^ the shop organization, except those having to do with the Advertis- ing and General Purchasing Departments, which should be preferably charged as a part of the expense of each of these departments. Caption - 2, Advertising. Into this account should be incorporated all expense .n con- nection with Advertising, including cost of models. Show Room, Exhibitions and an}?- other form of publicity. Caption - 3. Office. It is recommended that an account be kept under the name of "Head Office Expense", in which should be incorporated all items having to do with the maintenance and operation of such office and that a similar account be kept for each branch office. Caption - 4. General Purchasing Department. To this account should be charged all salaries and expenses having to do with the operation of the General Purchasing De- partment as distinct from the Shop Purchasing Department. 9 <6 7 / ' T * Caption - 5. Traveling Expense (T 6. Entertainment n 7. Telegraph & Telephone n 8. Postage IT S. Commission fT 10. Dray age (outgoing) n 11. Freight (outgoing) n 13. Legal Expense It is optional whether these expenses are recorded under accounts with the above designations or whether they be included under 20ffice Expense" as part of the legitimate expense for maintaining such offices. Caption - 13. Drawings for Estimates. This expense should incorporate wages and material for all drawings made for Company estimates. This a] c r may properly be charged to "Office Expense" as u sually this work will be done for some particular office. Caption 14. Patent Costs. A safe plan is to charge all expenditures direct to ^ ' account although it my be considered advisable in the case of large ex- penditures, the returns from which will be deferred, to capitalize such expenditures writing off to a reserve an annual prorated amount. Caption - 15, Miscellaneous General Expense. Any items chargeable to Commercial Expense not already provided for may be covered under this Caption. Caption 16.. Bad Debts. This is an item of loss which should be taken care of in Commercial Expense because of its correspondence to what really amounts to a depreciation of "Accounts Receivable ", an asset account This can be readily done by setting up a reserve to which Bad Debts will be charged only when it becomes evident that they are uncollectable . GEITSRATj IIOTES . £■. At. The application of direct material and direct labor as or A >.< charges to Production have been fully gone into and are pretty generally understood. % 10 1 « ^ * ; > ^ I i i E. The Commi «t,ee have left it optional v* eh Company to distribute shop overhead on such basis as ay be their present practice as they feel that- considerable latitude must be allowed •in this direction. C# The Committee is of t *e opinion that the .epical 'ethod of figuring costs is the building up process. Foundry to be complete in itself; machine Shop cost to be complete j.tself, incorporating Foundry cost as material; and Commercial xxpense to be added to the costs already built up on the basis outlined in the chart. D, The items set up under this general note are felt to be of such a rature that they must be eliminated from ; con- sideration in comparative cost finding and be treated as a direct charge agairs tprofits. With regard to the first item, that of Interest and Exchange, there is a wide difference of opinion. While it might be per— m-issable to charge ordinary interest as a Commercial Expense, the inclusion of interest on bonded indebtedness or on capital invest^ ment should not be so treated. Some authorities take the ground that where the manufacturer rents a plant he will charge up the rental as a part of his cost and. that as an offset to this the manu- facturer who owns his plant should cnarge into his cost interest on his investment. Supposing that he did this, on what part of his •■investment would he charge interest and at what rate? When he charges depreciation he sets up a reserve which is not to be dis- tributed as profits. If he charges up the interest on his in estmen he creates a reserve which is distributable as profits. In other words, this is part of his profits. The mar eb usurer who rents his plant as a rule would rent only real esl: e and buildings. The payment of rental relieves him from repairs, maintenance, in- surance, and taxes; also from a depreciation charge ,io buildings. The manufacturer who owns his buildings must mai rtain them, keep the in repair, pay insurance and taxes and charge up ‘ lion. The difference between the rent paid by one and the :,ments and charges of the other is the only amount whiun could be figured to a disadvantage to the manufacturer who rents. On the other hand the manufacturer who rents has a certain amount of working capital which he otherwise would have invested in real estate and buildings and on which his return tnrough the business would presumably more than compensate for this difference. The same argument could be applied as regards working capital secured by the issuance of bonds. The Federal Trade Commission have ruled that such interest •is not an expense but is chargeable to profit and loss. Committee are not submitting forms as they believe that standard stock forms can be readily secured for factory use through which the advocated cost system will function, but "chat even ^ the general adoption of the theory and practice oi the system set forth standard forms can be later decided upon. <0 < ^ (l / 1 3 - > The foregoing c to the actual find-in,, comparisons are made distributors the diffex company's price to the co or distributors should be pense under the heading of For example, if a company and kind on which costs were to the consumer was $100*00, this Wo price to the consumer cf $500,000. ■•ions that relate ent that any cost .es to agents and a be a member .. -,e price to agents g of its selling ex- iumps of a certain size 'ed, anu ns pH ze to •resent a tot Gv J. ^ 3 lling If his actual sales during the ,erm are 1000 Pumps @ $100. ear $100,000. 10CJ n @ 90 u 90,000. 1000 n @ 80 a 80,000. 1000 a @ 70 n 70,000. 1000 n m 0 60 n 60,000. The actual total net return would have been $400*000. which would be $100,000. less than the total consumer price foi the 5000 pumps. This sum should be added to the total selling expense and -in this case, for purpose of the comparison, would add $20.00 to the unit cost of the pump. This would be for cost comparison purposes only, and would net change any member company's actual accounting practice in this respect. W. R, DCREMFS Chairman C. H. ROHRBACH Secretary \ X C^ c 1 C *r . GROUP MEETING DISCUSSIONS \7e present herewith portions of the discussions which took place at the first series of meetings. For the benefit of members who did not attend, any of the meetings and to refresh the memories of those who were present, some of the more important questions brought up and the answers given are offered for what they are worth, A study of them no doubt will make it a bit easier to grasp the progress of the cost work to date. MEMBER : Yi/hile we account for material going into the garment we do not believe it wise to credit waste because it is difficult to dispose of, C0I1MENT : In order to illustrate the effect of waste credit on the final cost, a member made up the following esti- mate and emphasized that while the effect was small at the present market price of waste, there are times when it amounts to very much more. i ■ MATERIAL ESTIMATE FOR TY/ENTY- POUND GARMENT Yarn in Skeins Cost of Dyed Yarn $ 1*50 Freight — ,02 Handling — .01 1,53 Coning Labor ,03 Overhead ,02 Y/aste 2 % — ,05 * 08 TOTAL 1,61 Credits for baste Coning *02 pounds @ 0.10 — - . 002 Cost delivered to knitters 1,608 . fe. DEPITS 20 pounds @ 1,608 32,16 3/& Knitting Y/aste ,96 P> 33,12 CREDITS Cutting Y/aste, li pounds® 0.10 — .15 d€T Jo 99 lldB Oil ~ ••• s . 4r 1 • ••• . f • i • ’ ■ i . ■ i < X9isfl9 * i fi j; 9 atom XX. tw Woof) pa ic©rf«t lo Ybn * s ^ stfc nv id rjj- ) cveXIsd ->jh 9-.; -''iVj c ‘;fX 9^^'llaaXXi r*: ; . . ;. • j ffS ■ ~ i ' r i ■ .. or. .■ ,j i If i /x - n j- . - - ■ ' ti teg .. . ■ • / ' *1 ^ r .1 •' ■ -r i ■ - ^ -X " . ~ ■: •!, 1 ^ :■ • * , :o iS i" • t y. & ,1 •irY -:'Vd '• - jao r . . i - P lOGf-'-J Jr,~OT soc i. oJ bo? vilab .ao^ di.: s si,c£ ae« £Od f I V; bciu q 0 C: .. 0 .ii 01 . iV' Q<£ y/ ,vXscV * \ /