Chapter C: E. Knoeppel (5)

It is, therefore, extremely difficult to arrive at the actual power used during a month, and for this reason most plants do not attempt its calculation, and are quite ready to charge its cost off as a whole to general expense. To departmentalize it, means extra expense with no benefit gained──except to engineering science.

=20. Productive Labor and Expense Compared.= Having now dissected the pay─rolls and drawn off the departmental and general expense accounts, it is but a matter of bringing these two statements together to produce the final results. It will be remembered that all that is necessary to know is the rate between the two, therefore place them side by side, item for item, as already shown:

───────────────╥─────────────╥─────────────╥──────────────────
║ Productive ║ ║ % Expense to
║ Labor ║ Expense ║ Prod. Labor
───────────────╫─────────┬───╫─────────┬───╫────────┬─────────
General ║ │ ║ $67,840│00 ║ │ 32.6
Department E ║ $104,409│00 ║ 22,731│00 ║ 21.8 │
" F ║ 31,429│00 ║ 5,419│00 ║ 17.3 │
" G ║ 5,528│00 ║ 2,465│00 ║ 44.6 │
" H ║ 10,659│00 ║ 3,174│00 ║ 29.8 │
" I ║ │ ║ │ ║ │
" J ║ │ ║ │ ║ │
Etc.║ │ ║ │ ║ │ 26.5
───────────────╫─────────┼───╫─────────┼───╫────────┼─────────
Total ║ $208,133│21 ║ $122,985│00 ║ │ 59.1
───────────────╨─────────┴───╨─────────┴───╨────────┴─────────

The percentage columns shown give us what may be considered a very close figure as to what are the actual factory conditions of operating expense and productive labor, and the relationship of the former to the latter. These results are all the more reliable because they are based on actual figures taken from the books of the company, thereby eliminating all estimating and the basing of important calculations on guesses and assumptions, which later generally prove to be far from the real facts in the case. The above results, gathered from six months' operation of the plant, are a fair statement of what the same expenses will be found to be in the long run, although if it is desired to go into the matter still deeper, the same tabulation may be made covering a year, with practically the same results.

What do the above figures show?

(a) That the total operating expenses of the plant are 59.1% of its productive labor, of which amount, 32.6%, is necessary to cover the general expenses, and 26.5%, the average for all shop operations.

(b) That the expense of operating the different productive departments vary according to conditions. That while _Department E's_ expense is found to be 21.8% of its productive labor, that for _Department F_ is found to be but 17.3%; each department having its own rate based on its own actual figures.

(c) Since, as already shown, each department must shoulder its own expense and its share of the general expense, it is seen from results just shown that for every dollar spent on productive work in _Department E_, 21.8 cents must be added to cover its own operating expense, and 32.6 cents as its share of the general plant expense, and that every dollar spent on production here cost $1.544. This has been covered in detail under heading, _True Cost_.

=21. How to Use Percentages.= Let us continue the use of the same figures. It is apparent that, if to the cost of each productive order worked on in _Department E_ during the period of six months just considered──all of which is shown in detail in _Production Ledger No. 2_, the sum total of whose labor cost is $104,409.00──21.8% is added, the amount thus added will be $22,731.00 (the actual figure is a trifle more), which is just the amount of _Department E_'s expense shown in the _Private Ledger_ and found in detail in _Expense Ledger No. 1_.

Again, if to the cost of each productive order worked on by any and all departments in the plant during this same period──the sum total of whose labor cost is found to be $208,133.21 and which is shown in detail by the individual cost sheets in _Production Ledger No. 2_──32.6% is added, the amount thus added will be $67,840.00 (actual figure is a few dollars more), which is just the amount of total expense shown by the _Distribution Account_ in the _Private Ledger_.

It is now a simple proposition. Having found our average ratio of expense to productive labor for each department, and also for general expense covering a period of six months' operations, we can begin to distribute the expenses of succeeding months on the same basis with the same results.

In closing up the _Production Ledger_ at the end of each month preparatory to drawing off a monthly summary of all the totals therein to obtain the total cost of production for the month for entry through the journal into the _Private Ledger_, it is simply necessary to enter on each cost─sheet, in columns provided for that particular purpose, two items of expense, one for department expense and one for general expense. In the case of _Department E_, just cited, the expense for the department is to be calculated at 21.8%, and the general expense item at 32.6%.

=22. Even Percentages May Be Used.= In a large plant with an elaborate system of manufacturing job orders worked on daily with perhaps hundreds of cost─sheets on which an expense calculation must be made, the use of percentages with three figures may require more time in figuring than desirable, in which case an even percentage may be used. Instead of 21.8 for _Department E_ use 22, and for general expense, instead of 32.6 use 33. This means that under usual conditions, more expense would be added to production than shown by the expense accounts, and the _Private Ledger_ would show whether there had been an over─distribution or an under─distribution in each department's account after the distribution had been made. Turning to _Private Ledger Account, Department E_, while it is shown that, for January, the expense that should have been distributed, if done exactly, would have been $3,697.33 (had the productive labor for the same month been, say, $17,095.45), the amount added to production by using 22% would have been $3,761.00, an over─distribution of $63.67. To adjust this overdraft in figuring the next month, use 21%, the idea being to have the ledger accounts as nearly balanced out as possible. Should the general expense rate prove more than sufficient when 33% is used, reduce it or increase it to meet the fluctuations of the expense, with the thought always in mind to keep all balances as small as possible, and to make as nearly a perfect distribution as figures will permit.

It is suggested that where these percentages come close to 16⅔, 20, 25, 33⅓, etc., that these figures may be used to advantage. By so doing the expense calculations can be figured mentally and very rapidly, and generally without interfering with a satisfactory distribution. If, however, the overlap each month increases, these should be modified to bring closer results.

=23. Journal Entry for Distribution.= While it is not the intention in the consideration of this subject of _Expense Distribution_ to depart therefrom into the general field of cost accounts and cost records, it is assumed that on whatever form of cost─sheet used, provision will be made for the proper recording of the three elements of cost: labor, material, and expense, the latter in two items. Inasmuch as only totals should be carried into the _Private Ledger_, it is only necessary for drawing off the amounts on the individual sheets in _Production Ledger No. 2_ to provide summary sheets with sufficient money columns to accommodate, among other credits, all items for each department's expense and also for general expense. This, when done and totaled, will give the total cost of production for the month, made up of the following items:

(a) Labor──amount of which should check total of productive labor
shown by the dissection of the monthly pay─roll.

(b) Material──amount of which represents withdrawals from stores
during month.

(c) Departmental Expense──each separate, representing the amount of
expense actually distributed and thrown into production.

(d) General Expense──representing the total amount actually
distributed and absorbed by production.

This done, our journal entry will be:

Debit Production.
(This may be subdivided
into as many accounts as
desired.)

Credit Labor.

Material.

Expense Dept. E
" F
" G
" H
" I
Gen'l Exp. Distribution.

=24. Expense Ledger.= The totals from the _Expense Ledger_ should also be drawn off in a similar manner, and the same items will appear as those shown in the _Production Ledger_, except that no expense will be added, for it will be remembered that the entries in the _Expense Ledger_ constitute the very items which are transferred to the _Production Ledger_ through the percentage added.

The journal entry for this ledger will be:

Debit Expense Dept. A
" B
" C
" D
" E
" Etc.

Credit Labor.

Material.

=25. Results of Distribution.= Having posted the journal, turn again to the _Private Ledger_ and note what has taken place. It is found that the two items of labor posted have just balanced out the _Labor Account_, and every dollar of pay─roll has been accounted for somewhere, either into expense or into production. It it also found that all the debits in the shop─expense accounts have originated in _Expense Ledger No. 1_, and the credits have originated in the _Production Ledger_. The various subdivisions of general expense have been consolidated in one _Distribution Account_, which has also been disposed of through the _Production Ledger_. What once appeared as an expense cost has now been wiped out, absorbed by production and converted into an asset, just as Mr. Clinton E. Woods, previously quoted, states it should be. A glance at the trial balance reveals scarcely a trace of expense, the small undistributed balances only remaining.

=26. Undistributed Balances.= Under any method of distributing expense on a _pro─rata_ basis, it is apparent there will be small balances left, representing either an over─distribution or an under─distribution, as already explained. These may be treated in either one of two ways. If the product manufactured has been practically completed during the year, and but little carried over into the next year to be finished, these balances can be charged off and become a part of the _Loss and Gain_ account for the year in which they were created, and the new year begun with a "clean score."

If the product, however, consists of large contract work but partially finished when the year closes, the work on same continuing for some time into the new year, these balances may be also carried over to be worked out in succeeding monthly distributions as the work continues. When this latter method is chosen, of course it will be necessary that these balances be taken into consideration when preparing the _Balance Sheet_.

=27. In Conclusion.= While it is realized that the _Percentage Method_ is not perfect in all its details, yet it is quite generally admitted to be the best means that has yet been devised for distributing expenses. A manufacturer using it may be assured that his costs thus figured are correctly shown, from the fact that this method is used and recommended by our highest technical authorities in accounting. From the practical side, it appeals to the manufacturer who is more interested in successful manufacturing than he is in the science of accounts, by the simplicity of the method and economy with which it is operated. The same amount of time spent in planning economies and devising means for cheapening the cost of production that is often spent in lengthy attempts at fine figuring, which, when finished, prove unsatisfactory, will be productive of far better results. Any method which eliminates the unnecessary and simplifies the essentials cannot help but prove attractive both to the successful manufacturer and the progressive accountant.

OPERATING EXPENSE STATEMENTS

=28.= To properly analyze detailed records, and to be able to extract therefrom the essentials and eliminate all items of minor importance, so that the exact situation and final conclusions can be expressed briefly and in an attractive manner, is an art in itself. A bookkeeper may be ever so well posted in up─to─date methods, and his books may show great care, and be models in appearance, yet when it comes to preparing an intelligent statement of any feature of the company's business, he may be sadly deficient. It does not necessarily follow that because he can do the one thing well, he can make a success of the other. Even as the pleasure naturally to be derived from a carefully prepared dinner may be completely wrecked by poor service, so can the intent of what would otherwise be an interesting tabulation of statistics be made meaningless by the presentation of a jumbled and carelessly arranged lot of figures.

It is as necessary to clearly show _on paper_ the results of the factory operations as it is that they should be correctly recorded on the company's books. While the two operations are entirely distinct and separate, they are closely allied, and every progressive accountant should be interested in both.

The object of a statement is to convey to the reader certain information in an intelligent manner; if it does not do this, it might as well not have been written. This leads us at once to the question: "What constitutes a good statement?"

=29. Lengthy Statements Undesirable.= That we may have "too much of a good thing," and that even those things worthwhile may be overdone, is true in the matter of statements. The general tendency seems to be to elaborate rather than simplify, and to crowd into the tabulation a lot of figures representing details which are almost always passed over without examination, or are even hardly looked at. If the same amount of time is spent in studying such a statement that is spent in its preparation, it would not be altogether without value, but the fact remains that it seldom is thus considered.

The size of a company's statement is oftentimes all out of proportion to the size of the business; some of the smaller industries present reports of their operations so voluminous in size as to rival that of the United States Steel Corporation, or that prepared by the actuary of one of the mammoth insurance companies.

It should be remembered that a busy manager is more interested in economical management than in wholesale bookkeeping, and has but little use for a formidable array of figures, except in so far as they show general results. Such a statement, when presented to him, is usually tossed aside to be examined later, while if it were condensed and served up to him in a more attractive form, it would probably be eagerly examined and studied with interest. A multitude of figures is more apt to confuse than to enlighten the situation, is a waste of an accountant's time, and, being a source of displeasure to the employer, thereby defeats the very object for which it was made.

Detailed records should always be kept, and in such shape as to be immediately available when called for, but it is hardly necessary to incorporate them in a tabulation intended to show results. It will be well, in submitting figures to the manager, to always bear in mind an imaginary notice over his desk: "This is my busy day; be brief." It is safe to say that a good statement should contain as few figures as possible to intelligently show the desired result.

=30. Tabulate the Essentials.= The data for a good statement should be well chosen. A manufacturer wants results. He is in business for profit making, and wants to know the true condition of his shop operation and the expense, in a concise presentation of facts, and has but little use for comparisons beyond those necessary for showing him the result of his management. He is not often found to be a philanthropist, eager to load down his expense account so that his clerical assistants may use his time to pursue their studies in the science of accounting. He wants to know what his costs of production and the expense of operation are, and where they may be cut, and it is as much to an accountant's interest to show him this in a clear and self─explanatory statement as it is by an elaborate and dazzling array of statistics to show his own ability in handling figures.

A manufacturer will doubtless obtain just as much solid comfort and real pleasure in knowing that special tools recently made have enabled him to clip a few cents off the cost of one of the units of his product, and that economics in his shops have reduced his operating expenses 2% or 3%, as to be furnished the startling information that his _Printing and Stationery_ account is .7148% of his _General Expense_, his _Insurance_, 6.2714%, _Postage_, .5218%, _Telephone_ and _Telegraph_, .6538%, and so on down the list.

The illustration used is not an imaginary one either. Statements are occasionally seen wherein all the individual items of expense are thus figured and the percentages carried out four decimal places. Of what conceivable use can such figures be? The only imaginable excuse seems to be that the accountant hoped to lower these percentages in the next period──possibly the third and fourth figures in the decimal──by bringing pressure to bear on the telephone company and on the insurance underwriters sufficient to get the rates reduced, and by telling the mail boy he must use less postage stamps. Rather a peculiar method of cutting expenses, and it is quite safe to say that the same effort applied in other directions would be productive of far more satisfactory results. A good statement, then, should be clear, concise, and complete.

=31. What the Statement Should Show.= The two elements in a factory, in which the management is directly interested, are the _productive output_ and the _operating expense_. The former should be pushed to the utmost limit, while the latter should be trimmed at every point possible; and it is readily seen that the point of greatest efficiency is reached when the plant is producing at its full capacity. A factory with a complete organization is operated at a heavy expense when running at but 50% of its full capacity. These two elements, output and operating expense, are so closely related that a change in one immediately affects the other, and the relationship between the two, which is expressed in a percentage, is either raised or lowered according to the character of the change.

(a) If the operating expense remains stationary and the production increases, or

(b) If the operating expense is lowered and the production remains unchanged, or

(c) If the output increases at a greater rate than the expense increases, or

(d) If the output decreases at a lower rate than does the expense, then the percentage which expresses the ratio of expense to production is lowered, which means increased operating efficiency and a decrease in the cost of production.

On the other hand:

(a) If the operating expense remains stationary and the production decreases, or

(b) If the operating expenses are on the increase while the production remains unchanged, or

(c) If the operating expenses increase faster than the production increases, or

(d) If the operating expense decreases at a less rate than does the productive output, then these tell─tale percentages automatically increase also, which the manager is quick to note, and mean a falling─off in the economy with which the plant is being operated, for increased expense means increased cost of production.

This means, then, in order to be in complete control of his plant, a manager must have production costs and operating expense well in hand, for these two factors are the keys to successful management. It is up to the accountant to show the manager, in figures, the facts as to the true conditions in the shops, and the statement presented to him monthly must be sufficiently explicit to show him at short notice what the expense of operating each department of his plant has been, and what the items were that made it up.

=32. Comparative Figures.= It is quite unnecessary to demonstrate the value of comparative statements, for this is generally admitted without argument. They portray at once whether what now is, shows an improvement or a falling short over what has been; in fact the degree of success or failure in any line is gauged by comparison with results previously attained.

A statement showing operating conditions with those of a previous period cannot help being interesting as well as instructive; in fact it is from this source that a manager obtains the information which enables him to size up the changing conditions in his plant, and in case of loss in efficiency, shows him where the remedy should be applied.

If a comparison or test is made between the operating expense and productive output, covering a period of, say, six months or a year for each department or process in the plant, as well as for the general expense, the resulting percentages show what the factory conditions will average in the long run. Any departure or deviation from this average in any succeeding month, as shown by the operating statement, serves to indicate to the manager what he may expect as the results of the present period when actual figures are in hand and actual results known. If a falling off in efficiency is noted, opportunity is offered to make economies before it is too late, and for the balance of the period to make a better showing. While it is true that an extraordinary expense, such as a breakdown of machinery, may cause an unfavorable showing for a particular month, it is quite essential that this long run average should be closely followed, in order to show that the previous efficiency has again been maintained, or better still, improved upon.

A comparative statement shows at once any radical departure from normal conditions and accepted standards, and is, in reality, the manager's barometer of factory operating. The discovery that his operating expenses are increasing without a corresponding increase in the output, means that the storm signals are immediately raised, and there are likely to be squalls ahead in the department responsible for the increase, with an explanation in order from its foreman. The operating statement, then, should show up excessive operating expense, what it is, where it is, and what caused it.

=33. Source of Data Used.= Having now in mind what characteristics should be embodied in the tabulation, proceed to gather the necessary data for the statements.

Continue the original plan and make the _Operating Expense Statement_ consistent with the _Percentage Method_, and extract the data for same from the cost records and books of account in a factory where this method is used.

=34. Expense Manufacturing Departments.= First prepare the shop operating expense statement for the manufacturing departments. If the cost records have been kept in two binders──one for operating expense in _Expense Ledger No. 1_, and the other for production in _Production Ledger No. 2_──the procedure is simple. The _Private Ledger_ account for each department shows the total expense for each month posted in total, with all the details shown in _Expense Ledger No. 1_, to which now refer.

Inasmuch as everything is charged to some job number, both labor and material, it is simply a matter of drawing off the job totals, which will check the department total expense as shown in the _Private Ledger_. A convenient grouping of job numbers will be found of great assistance; say

_Jobs 1─99. Standing expense orders._
_100─999. Special expense orders._

Generally, _Job 1_ is used to cover miscellaneous expense costs not covered by other job numbers, and includes _foremen_, _sub─foremen_, _clerks_, _tool─room men_, _helpers_, _watchman_, _small repairs_, etc., both labor and material. In the matter of repairs, it will be noted that such charges originate from two different sources: those done by the department for itself, and those done for the department by another department, and frequently spoken of as _inter─department_ work. By providing two cost─sheets for labor items on _Job 1_, one for direct labor charges, and the other for inter─department labor, the two items may be easily kept separate.

The material on _Job 1_ should also be kept in the same manner. The reason for this is apparent, as it shows up at once how much a foreman is charging to his department himself, and how much is being charged to him by other foremen on inter─department work.

_Jobs 2, 3, 4_, and so on down the list, can cover the various subdivisions of shop expense, such as new small tools, repairs to tools, repairs to machinery, and as many detailed items as may be considered desirable. If expensive repairs are to be made to one of the large machines, it is desirable to keep a separate cost of same by assigning a special job number for the work, say _Job 100_, rather than throw the cost into one of the standing orders, where it is lost. In fact, a limit of cost should be placed on all new tool─costs, or repairs chargeable to standing orders, so that these jobs may not be used as a dumping ground for extensive repairs, which a foreman may be inclined to conceal from the manager's notice, and for which a special permit should be given by the manager, and job number assigned, before such repairs are begun.

The productive labor of the department will be found in _Production Ledger No. 2_, the total of which, if added to the total of the non─productive labor found in _Expense Ledger No. 1_, will equal the total department pay─roll.

The resulting percentage of expense to productive labor expresses the ratio existing between the two, and is used as the basis for distributing the same expense over the various items of production. The question of distributing expense is only referred to here, having been discussed at length elsewhere. Inasmuch as it will be seen that this percentage will fluctuate somewhat each month, it will be well to show on our statement, the same percentage for the previous month for comparative purposes. The extent of the monthly fluctuation is the key to the situation, for these percentages sum up in one figure the actual results of shop management, toward the lowering of which the best energies of the manager are always directed.

For the sake of illustration, take a plant with a weekly pay─roll of about $10,000.00. Having drawn up a form in which the features already discussed have been provided for, extract from the _Expense Ledger_ some imaginary figures. The expense accounts of the different producing departments in the plant will appear as shown in Fig. 4.

After studying the same a moment, what will the manager of the plant discover? Among other things he will see at once:

(a) The total expense of operating each department in the works, with the principal items which go to make it up.

(b) That the total productive labor was 79.9% of the total monthly pay─roll while the non─productive was 20.1%; that the former has been apportioned over the various departments and every dollar of same accounted for.

(c) The ratio of expense to productive labor for each department reduced to a percentage, the average of which for all the productive departments is 25.7%.

(d) From the comparative figures, that the August percentage showed an improvement in operating expenses in most of the productive departments over those for July and that they are a trifle lower than the average for the first six months of the year.

(e) That the operating percentage for _Department F_ has jumped up 4.7%, which means that something is wrong in that department, and must be investigated.

(f) That for every dollar spent for productive labor, he must add 56.8 cents to cover operating expenses, of which amount, 25.7 cents covers the expense of operating the shops and 31.1 cents covers the general expense of the plant.

The item of _General Expense_ = 31.1% is not derived from any figures that appear in this statement, but is taken from the tabulation covering _General Operating Expense_ presented later. It is desirable to have this appear here, as well as the _Department_ average percentage, in order to show the total operating expense (56.8%) on the labor, bringing total plant results on one sheet.

=35. General Expense Statement.= This statement serves as the companion sheet to the one just shown for _Departmental Expense_, every operating expense appearing on either one of these two statements. It is drawn off in just the same manner as the _Departmental_ statement, the total of the various expense accounts in the _Private Ledger_ and the details of the four expense departments shown in _Expense Ledger No. 1_ checking the total _General Expense Distribution_ account shown in the _Private Ledger_. It will be seen at once that the _General Expenses_ of the plant may be reduced to the following general divisions:

Special Ledger Accounts:

Executive, Insurance, Taxes, Depreciation, Freight, Express, Cartage,
Printing and Stationery, Telephone and Telegraph, Traveling, Postage,
Legal, etc.

Department A──Offices: Clerks and supplies.
Department B──Storehouse: Clerks, laborers, and supplies.
Department C──Power House: Engineers, firemen, coal, etc.
Department D──Yard: Laborers, teams, and supplies.
Unclassified Expense: Not included in above.

The _General Expense Distribution_ account referred to originates by closing monthly all the various ledger accounts listed above into one account. This brings all these scattered expense accounts together in one total, necessary not only for the purpose of distribution, but for convenience in ascertaining and handling general expense. The details can be readily taken from the individual accounts before thus closed, while _Departments A_, _B_, _C_, and _D_ are carried in detail in the _Expense Ledger_. The total _General Expense_ shown then by the statement will check the total shown by the _Distribution_ account in the _Private Ledger_.

The form Fig. 5, will be found a very convenient and satisfactory exhibit. Detailed explanation is quite unnecessary; the tabulation explains itself and needs no assistance. The general conclusion arrived at is that the plant's general expense is found for the month of August to be 31.1% of the productive labor; in other words 31.1 cents must be added to every dollar of productive labor to cover its proportion of the general and administration expense of the plant. The same figures are also shown for comparative purposes for the previous month, and also for the first six months of the year; the manager can see at once exactly how the plant is running.

The same summary figures are placed at the bottom of this statement as were shown on the departmental statement, that each may show the final results of the other.

=36. Statements for Foremen.= It is often asked whether or not it is a good plan to furnish the foremen of the various departments any cost figures. In a good many shops, it is the rule to _tell them nothing_ and to keep them in entire ignorance of their expense costs, the feeling being that in case of an unsatisfactory showing they will be inclined to _doctor_ their expense returns by diverting them into production in order to make a more favorable showing.

While it is undoubtedly true that a foreman is frequently tempted to resort to such measures──not a very far─sighted policy to be sure, for it is bound to be shown up later──it would seem advisable to furnish him a copy of his operating expenses not only for his information but as an incentive to practice economies on his own initiative without waiting for a _call_ from the manager. Most foremen are quick to see that it is for their own interests to do this and to make the best possible showing for their department. It also creates a good─natured rivalry among the various foremen, which tends towards good results in which both foremen and management share.

The statement furnished the foreman is simply a copy of the expense of his department as shown on the _Departmental Expense Statement_, and may be made up substantially as shown on the form herewith presented, Fig. 6.

=37. Charts.= While the value of chart records is generally admitted, there will probably be no one in the plant who will appreciate this form of presenting figures more than the manager, who, from his mechanical training, will at once grasp the situation as thus presented. The general trend of operations for the whole period is immediately revealed at a mere glance, without any systematic study of the figures involved, and any unusual condition is detected at once.

To show the possibilities of thus arranging comparative statements, two charts, Figs. 7 and 8, are presented, on which are plotted the same results appearing on the tabulated statements already shown, or previously used for the purpose of illustration on Pages 31 and 34.

On one chart is shown the total pay─rolls with split─up of same into productive and non─productive labor, with the percentage of each on the total; the other shows the total expense, also subdivided into shop and general expense, with the resulting percentages of same on the productive labor as shown on the first chart.

=38. In Conclusion.= While there is no end to the number of statements that can be prepared and that can be elaborated almost indefinitely, it is well to continually bear in mind that the statement which best serves its purpose is the one which conveys the most information in the fewest figures; is not overloaded with unnecessary detail; whose tabulated data is well chosen, and whose make─up is sufficiently attractive to cause it to be read and studied, and not thrown into the waste basket.

COST SUMMARIES

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

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

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

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

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

COLLECTING COST DATA

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

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

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

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

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

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

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

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

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

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

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

The stores records also should be divided according to the same classifications, so that the records of material included in any one purchase account can be checked, without reference to the records of other classes. In the storeroom of a harness business, a card or sheet would be used for the record of each item in the hardware stock, while all of these individual records would be filed under the general classification, _hardware_.

This method provides three records, each closely related to the others. In the general ledger, there is a _hardware purchase_ account; in the storeroom, a detailed record of the hardware stock; in the cost department, a record of all hardware issued to the factory. When the cost department record is brought into the _hardware purchase_ account, by a credit through the journal, the balance of this account should show the value of the hardware stock and should agree with the records of the stores department.

The compilation of supplies costs should be made along similar lines, and the same care should be used in the classifications. Fuel purchases, for instance, should be kept in a separate account, while general factory supplies──as oil, belting, waste, etc.──may be kept in one account or subdivided, depending on the size and nature of the business.

=42. Material Cost Reports.= The material records of the cost department relating to totals issued should be made in the form of reports, as they will be required in the general accounting office. These reports need not show order numbers, but should show whether used on production, construction, or repair work. The supplies record should show by what department the supplies are used.

Fig. 9 shows a form for a report of material costs. In the heading is given the class of material, being the caption of the purchase account in the general ledger, and the month for which the report is made. The body of the report provides for a daily record of amounts charged to production, repairs, and construction, with an extra column for any special classification that may be needed at any time.

This form is in duplicate, the original being printed on light weight paper to insure perfect carbon copies. A loose─leaf form is most satisfactory because both copies, with carbon paper between, can be kept in a binder and the entries made each day.

Duplicate sheets are used for each material classification. Each day, the amounts are extended on all requisitions. The requisitions are then sorted according to material classifications, those applying to production, repair, and construction orders being kept separate. Those of each subdivision are footed, preferably on an adding machine, and the total is then entered on the report.

For sorting requisitions, a box or rack, with compartments for the divisions in each class, is most convenient. Such a rack is shown in Fig. 10.

Reports of supplies issued to the factory are handled in the same manner as materials. The form used for this purpose and shown in Fig. 11, is similar to the material report form, the only difference being that amounts are distributed to the several departments.

At the end of each month, the report forms for material and supplies are footed, the original is sent to the general accounting office, and the duplicate is left in the binder in the cost department. When the cost accounting is handled in the general accounting office, it is not necessary to make these reports in duplicate; this is necessary only when the offices are separated.

=43. Labor Costs.= From the time─cards or work orders, labor costs are compiled both for separate jobs and to show totals by departments and for the entire plant. The compilation showing totals is made for the purpose of checking the pay─roll──to prove that all labor paid for has been charged to factory operations in some form.

The time─cards should first be sorted according to departments, then re─sorted to separate the direct production, indirect production, repair, and construction labor of each department or shop. The cards representing the different classes should be footed on an adding machine, and the department totals compared with the pay─roll records. Daily comparisons should be the positive rule in order that discrepancies may be adjusted while the matter is fresh. On no account should the adjustment of discrepancies be omitted──labor reports from the factory _must_ agree with the pay─roll. Cards showing the class of work done must be turned in for _every_ man.

The tabulation of labor costs is really made for the purpose of distribution; that labor charges may be distributed to the proper accounts. The nature of the tabulation will, therefore, depend largely on the class of business for which it is to be used. In some lines, costs must be distributed by both departments and classes of labor; in others, by classes of labor only; sometimes, by classes of product──though this will usually be covered in the departmental distribution.

A form intended for the distribution of labor costs in a single department is shown in Fig. 12. This form is in loose leaf and is filed in a binder, the sheets being arranged in numerical or alphabetical order representing the departments. If the cost and general accounting departments are separated, this form should be in duplicate; otherwise, one copy is sufficient.

In the body of the form, distribution columns are provided for the different classes of labor──direct, indirect, repair, and construction, with a column for any special classification that may be needed.

After comparison with the pay─roll record, the total labor costs are entered daily on this form. At the end of the month, the sheets are footed and originals sent to the general accounting office.

=44. Job Costs.= When they have served their purpose in compiling total material and labor costs, the material requisitions and time─cards are sorted by job numbers, direct and indirect, repair and construction cards being kept separate. Where operation costs are desired, the time─cards for direct labor on each order or job number are re─sorted by operation numbers. Totals of material costs for each job, and totals of direct labor costs for each operation and job are obtained, these amounts being the basis on which charges to jobs for the day are made.

The totals of each class, obtained from requisitions and time─cards, must agree with the totals of corresponding classifications on the monthly tabulation of material and labor costs, as in Figs. 9 and 12. Totals of material and direct labor for jobs and operations are next entered on job or operation records, or both. As a rule, it is best to arrange job records so that material and labor costs can be entered daily, no matter how much time is required to finish the job.

Fig. 13 shows a form designed for the assembling of material and labor costs for a single shop or department. For the labor distribution, as many columns as necessary are provided for the record of costs by operations. In the material column, the kind of material is entered and the amount extended. When the manufacture requires operations in several shops, one of these forms is used for each shop on each production order──that is, a form for each separate shop order. When the job is finished, the costs for all shops are assembled on one form to obtain the total cost of the job.

The total material and direct labor costs are brought down on this form, but indirect labor and shop expense are added as a percentage, as has been described in the discussion of expense distribution. General indirect labor and general expense is added to the combined total of all shop costs. In this connection it may be well to emphasize the importance of distributing every expense possible to individual shops, leaving only those items that cannot be so distributed to be added as general expense. For the ostensible purpose of reducing labor, it is the practice of some accountants to throw all expense items into one class, adding the whole as general expense. This is not to be commended, as it results in an unequal distribution. In one shop, the ratio of indirect labor, or of the cost of supplies, to direct labor, may be much higher than in another; the expense for oil, belt lace, waste, etc., is heavy in the machine shop──nothing in the assembling shop. Adding all expense under one head, means that the same per cent is added to direct labor costs in all shops to cover these items; plainly, an unfair charge.

A further reason for distributing expense to shops is, that costs of separate operations are more accurately figured. To reach their greatest value, cost records should reduce costs to the smallest possible unit. Every detail should be shown, and these records should be available for comparison.

Fig. 14 shows how the Boston ledger may be used for a continuous cost record. The regular form is used, five lines being set aside for each job. The first line is for the job number, following which, material, direct labor, indirect labor, and expense are entered. Under each date, the first column contains particulars of previous costs, the second, the costs added for the day, and the third column contains the totals to date. It is not necessary to use the column for previous costs except the first day for which the page is used; daily costs can be added to totals for the previous day.

Several jobs can be recorded on one page and the record can continue until a job is finished. Additions can be made daily, weekly, or even monthly. This form is used to excellent advantage for contracts that cover a long period.

When a large number of small jobs are going through the factory at all times, the labor of the cost department can be reduced and, as a rule, satisfactory results secured, if tabulations of job costs are made when the job is finished. This should not be allowed to interfere with the daily tabulation of total costs, but when requisitions and time─cards have been re─sorted by job numbers, they may be filed by these numbers, in a job rack──new cards being added from day to day until the job is finished. Tabulations can then be made of material costs, showing the quantity and cost of each kind used, and of the labor costs, showing costs by operations or by order numbers.

Each business requires its special form for job cost records. The form must provide for the information of greatest importance to the business in which it is used. The forms shown herein are submitted as examples for their suggestive value.

Fig. 15 shows a form adapted to many lines. This form is intended for a record of the cost of parts, but could be used for assembled machine costs. Provision is made for detailed labor costs by man, numbers, and kind of work. It will be noted that, after obtaining the actual manufacturing cost──material, labor, and factory burden──profits are added. In our opinion, profits have no place in cost records. To establish a selling price, it is legitimate to add a factory or manufacturing profit before adding a percentage to cover sales expense and a selling profit, but the addition of these percentages has no bearing on the actual manufacturing cost.

Fig. 16 is a representative form for a machine shop. All operations and materials are listed by name, totals only being recorded. Factory expense is added to the labor cost, while a percentage to cover loss and waste is added to material costs. This form is subject to the criticism that all expense is added as one item──no provision is made for segregating the expense of each shop.

The form shown in Fig. 17 is adapted to a small shop, or for repair jobs. This is the most simple form that could be devised; columns are provided for all essential information, and all items are to be written in.

=45. Comparative Cost Records.= The chief value of cost statistics lies in the opportunity offered for comparison. The fact that the last lot of part No. 10 cost $1.17 each, does not, of itself, indicate that the cost is either low or excessive; but if our records show that two previous lots have cost $1.20 and $1.21 each, the comparison reveals the fact that the cost is low.