THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES This book is DUE on the last date stamped below T r^ 1924 I SOUTHER; V ^^i-aduate School J^^"^^"^ ESSENTIALS OF INDUSTRIAL COSTING ESSENTIALS OF INDUSTRIAL COSTING BY GEORGE S. ARMSTEONG, C.E., M.E. CONSULTING INDUSTRIAL ENGINEER ; MEMBER OF THE AMERICAN SOCIETY OF MECHANICAL ENGINEERS; ASSOCIATE MEMBER OF THE AMERICAN SOCIETY OF CIVIL ENGINEERS WITH EIGHTY ILLUSTRATIONS D. APPLETON AND COMPANY NEW YORK : 1921 : LONDON 40041 COPYBIGHT, 1921, BY D. APPLETON AND COMPANY PBIXTED IX THE UNITED STATES OF AMERICA 3 'VH>^ Bus. Admin. , ^ , v*-^ Library PREFACE "It is a fundamental economic axiom that a product cannot long sell under its cost of production." From the above it may be seen that the cost of produc- tion is a tremendously important commercial consider- ation, particularly at this time of readjustment, and that its sure determination could readily transcend all other business necessities. This text is concerned solely with the principles and methods by means of which the cost of production may be derived. It is based upon an extended and varied prac- tice in many and diverse industries. It is the culmination, not only of this experience, but of the professional con- viction that the extension of costing in business has been retarded by the scarcity of literature in which theory and practice have been combined so as to facilitate compre- hension and enable actual application. Originally outlined as the basis of a course of lectures on the subject for a prominent university, it has been developed in book form for a wider distribution of whatever good it may possess. I have sought to proportion details according to im- portance, to anticipate the possible pitfalls awaiting in- stallation efforts, maintaining throughout a sympathetic perception of practical necessities and supplying solu- tions for representative difficulties. The theory has been presented on what might be termed the clinic, or case, system, thus eliminating speculative discussion and con- centrating on concrete issues. It has been deemed de- sirable to introduce the text with a chapter on the economic development and necessity of costing. The chapters succeeding develop the theory with suggestive V vi PREFACE inferences, emerging finally in a complete working example of the principles established. It is believed that the data so prepared and the details incident to the connection of the costs with the general books and the preparation therefrom of statements of operation and condition are complete and exhaustive. If the details so depicted are carefully studied, it is believed a working grasp may be obtained of one of the most essen- tial phases of costing hitherto largely a matter of prac- tice rather than of print. Technical differences of opinion "with some of the doc- trines and opinions expressed herein will undoubtedly be held, but this at least can be said, that they represent sincere and demonstrated beliefs and have been tested by successful trial. George S. Ahmsteong CONTENTS PAGE Preface v CHAPTER I. Economic Development and Necessity op Costing . 3 Accounting, its Function and Growth 3 Expansion of Industrial Units 4 Cost Accounting 6 Factors in the Development of Industrial Costing . 8 Tariff Legislation 8 Ignorant Competition 10 The World War 14 Relation of Cost to Value and Price 17 Costing the Crux of Commerce 19 11. The Purpose and Function op Costing 21 Costing Primarily Concerned with Profits .... 21 Costing as an Aid to Business 22 Price of Maximum Return 23 Prices and Competition 25 Effect of Excess Capacity 26 Current Statements of Operation 28 Classified Statements of Operation 30 Current Statements of Condition 32 Prevention of Destructive Competition 34 Statistical Operating Control 35 Costing as Basis of Budget 38 Costing and Labor Management ....... 38 Costing as Red Tape 40 Costing as a Business Expense 41 III. The Mechanism of Costing 43 Methods of Costing Collection 44 Relation of Planning and Costing 46 Basis of Modern Accounting 48 Reserve Accounts 49 Controlling Accounts 50 Functional Division of Expense 51 Departmentalization of Expense 52 vii viii CONTENTS CHAPTER PAGE IV. Elements of Costing and Sources of Costing Data . 54 The Elements of a Cost 54 Stages of Costing 55 Variations in Proportions of Costing Elements . . 56 Perspective in Costing 58 Operating Ratio 59 Sources of Costing Data 60 Material Requisition Distribution 61 Supply Requisition Distribution 63 PajToll Distribution 65 Voucher Register 67 Petty Cash Expenditures 70 Entrance of Costing Data through Journal ... 70 V. The Costing op Material 72 Material Accounting 72 Facts Regarding Material 73 Material Specifications 73 Quantity of Material 74 Value of Material 81 Distribution of Invoices 85 Classification of Material Control Accounts ... 88 Vouchers 90 Costing of Handling Expense 90 Material Stock Records 92 Costing of Supplies 97 Scrap, Waste and Spoilage 98 Costing of Scrap 99 The Costing of Spoilage 102 Accounting of Seconds 104 Marginal Values of Material 104 Costing of Material of Fluctuating Prices .... 105 VI. The Costing of Labor 108 Variability of Labor Costs 108 Timekeeping 110 PajToll Ill Cost Cards 119 Classification of Labor 121 Difficulties in Costing Labor 123 Nonproductive Labor 124 Inspection Labor 126 Setting-up Labor 127 CONTENTS ix CHAPTER PAGE Repair Labor 127 Unit Basis of Charging Labor 127 Wage Systems . 129 1. Day Rate 129 2. Piece Rate 130 3. Differential Piece Rate 133 4. Halsey Premium Plan 135 5. The Rowan Premium Plan 136 6. The Gantt Task and Bonus System .... 138 7. The Emerson Bonus 139 Service and Attendance Bonus 140 Administrative and Office Salaries 143 VIL The Collection op Expense in Costing 146 Nature of Expense 146 Expense Departments 147 AiTangement of Equipment 148 Basis of Departmentalization 149 Collection of Expense 150 Expense Analysis 151 Depreciation 167 Calculation of Fixed Charges 167 Reserves for Replacement 168 VIII. The Costing op Depreciation, Interest, and Power . 169 Depreciation 169 Methods of Calculation 176 Importance of Depreciation 178 Appreciation 179 Interest 179 Heat, Light and Power 184 IX. The Distribution and Application of Expense in Costing 203 Distribution of Expense 203 Contributing Expense Departments 204 Administrative Exjoense 205 1. Office Department .206 2. Garage Department 206 3. Laboratory Department 207 4. Engineering and Drafting Department . . . 207 5. Machine Shop Department 208 6. Millwright Department 208 X CONTENTS CHAPTER PAGE 7. Steam, Light, and Power Department .... 209 8. Repair or Service Department 209 9. General Faetoiy Department 209 Direct Percentage Rate 211 Machine Hour Rate 211 The Unit Basis 212 Fallacy of Applying Expense to Material .... 213 Introduction of Concrete Example 214 PajToll Distribution 216 Supply Requisition Distribution 217 Voucher Register 217 Fixed Charges and Similar Items 218 Proof of Closing Expense Analysis 241 Method of Closing Expense Analysis 242 Normal and Abnormal Expense 244 X. FixAL Costing 248 Final Costs in Assembly Industry 248 Final Costs in Continuous Industry 248 Examples of Final Costs 249 Handling Fluctuations in Final Costs 255 Ledger Control of Costs 259 Setting of Selling Price 263 XL The Conxectiox of Costing with the General Books AND THE Preparation of Monthly Statements There- from 264 Acid Test of Business 264 Method of Compiling Profit Statement 274 An Actual Example . 276 ILLUSTRATIONS PAGE 1. Tabulation Showing Relation of Sales to Capital and Sur- plus, Turnovers of Inventory, etc., in Selected Industries 24, 25 2. Abridged Statement of Operation Showing Contrast in Method of Computing Profit from Cost of Sales and from Inventory Differences 31 3. Statement of Condition 33 4. Specimen Sheet from Expense Analysis Indicating the Ac- cumulation of Expense for a Selected Department . . 37 5. Material Requisition Distribution 62 6. Supply Requisition Distribution 64 7. Payroll Distribution 66, 67 8. Voucher Register 68, 69 9. Specification Sheet 73 10. Specification Sheet 75 11. Stock Card . ' 76 12. Stock and Price Record 78 13. Purchase Requisition 80 14. Material and Supply Record 80 15. Quotation Inquiry 81 16. Purchase Order in Triplicate 82,83 17. Receiving Record 85 18. Typical Instructions for Invoice Distribution .... 86 19. Voucher Record 89 20. Combined Voucher and Voucher Cheek 91 21. Form Indicating Method of Supplying Storage and Handling Expenses to the Cost of Material 92 22. Material Requisition 93 23. Request for Count 94 24. Bin Tag 95 25. Bale Tag 96 26. Supply Requisition 97 27. Melt Report 100 28. Carding Report 101 29. Spoiled or Defective Goods Report 103 30. Material Journal 106 31. Front and Back of Clock Card 109 32. Memorandum Authorizing Entrance of New Employees on Payroll 110 xi xii ILLUSTRATIONS PAGE 33. Quit Slip Ill 34. Rate Change Request 112 35. Payroll 114 36. Employee Wage Record, Individual, Departmental and Sum- mary 116-118 37. 38. Time Cards Used with Hollerith Tabulating Machine . 121 39. Special Repair or Maintenance Order, Front and Back . 124, 125 40. Specimen Card Used with Day Rate or Piece Rate . . . 130 41. Coupon Work Ticket Used in Connection with Piece Rate . 131 42. Front and Back of Differential Piece Work Card Used in Connection with the Hollerith Machine at Link Belt Corn-* pany, Philadelphia 133 43. Time Card Used with the Halsey Premium Wage System . 135 44. Time Card Used with the Gantt Task and Bonus System . 136 45. Standard Bonus Percentage Table for Use in Determining Bonus Earnings 138 46. Service Card 139 47. Bonus Record 140 48. Graphical Comparative Representation of the Various Dif- ferential Wage Systems 141 49. Operation Cost Record 142 50. Parts Cost Card 144 51. Specimen Expense Analysis for Selected Departments of a Cotton Mill 152-155 52. Specimen Expense Analysis for Selected Departments of a Foundry 156-159 53. Specimen Expense Analysis for Selected Departments of a Machine Shop 160-164 54. Distribution of Fixed Charges . 166 55. Standard Depreciation Rates for Factory Buildings and Equipment 171, 172 56. Standard Depreciation Rates as Used in the Electrical Manufacturing Industry . . 173-175 57. Equipment Inventory 177 58. Relative Position of Industries as Power Users .... 187 59. Horsepower Requirements of Machine Motors . . . 191-198 60. Range of Steam Consumption in Steam Prime Movers . 199 61. Annual Cost of One Horsepower in Factory Steam Power Plants 200, 201 62. Complete Expense Analysis with Full and Actual Working Details as Devised for a Cutlery Manufacturer . . . 219-239 63. Expense Analysis Proof Sheet 240 64. Determination of Excess or Insufficient Actual Expense Com- pared with Normal 246 e5A. Part Cost Card , . 250 ILLUSTRATIONS xiii PAGE 65b. Part Cost Card 251 65c. Subassembly Cost Card 252 65d. Final Cost Card 253 66. Final Cost Sheet 254 67. Final Cost Sheet . 255 68. Final Cost Sheet 256 69. Cost of Bottles Shipped 257 70. Cost of Bottles Made 258, 259 71. Rope Record 260 72. Trial Balance as of January 1, 1920 265 73. Ledger Balances 266-274 74. Cost of Sales for January, 1920 275 75. Cost of Goods Finished for January, 1920 277 76. Ledger Postings 278, 279 77. Trial Balance as of January 31, 1920 280 78. Statement of Operation as of January 31, 1920 .... 281 79. Statement of Condition as of January 31, 1920 . . 282, 283 80. Chart of Accounts Showing Closing Journal Entiies, facing 284 ESSENTIALS OF INDUSTRIAL COSTING ESSENTIALS OF INDUSTRIAL COSTING CHAPTER I ECONOMIC DEVELOPMENT AND NECESSITY OP COSTING It is a fact too little realized that an accurate determination of costs is fundamentally related to manufacturing efficiency. — Federal Trade Commission. Accounting;, its Function and Growth.— The function of accounting is a dominant factor in modern business and its rise to prominence is an outstanding feature of the present phase in the advance of commerce. Rising from the primitive tallies of barter through the com- mercial progressions of centuries past, accounting, con- forming to the complex processes of modem economic organization, has been evolved as a highly specialized statistical science. The essential ''debit and credit" con- cept dates authentically to the time of Caesar and was developed into finer and finer technique with the increas- ing necessities of the commercial relationships occurring from that time to this. The concentration of the factory system compelled a more comprehensive grasp of the productive operations and stimulated not only the method but the practice of accounting. This statement is supported interestingly by the fact that the ''Directory of the City of London" listed 11 accountants in 1799, 24 in 1811, and 73 in 1824, and further, by the Company Act of Parliament of 1845 4 ESSENTIALS OF INDUSTKIAL COSTING which made certain provisions for periodical examina- tions by auditors of the companies chartered under its clauses. This time marked the beginning of the promotion of the first ventures in enterprise where capital from vari- ous sources was pooled and applied to the pursuit of industry. The factory units of that day were small affairs compared to those of to-day and existed chiefly for securing the mechanical advantage of power. The inter^'al from then to now has been notable as mark- ing the birth and extraordinaiy development of the machine era. With unlimited power the genius of men turned to the substitution of mechanical means for hand labor and human energy, and the annals of history reveal no period comparable to that of the Nineteenth Century in the mastery of the production of the necessaries as well as the luxuries of life, and the manner in which the physical resources of nature were converted to the uses of man. Just as the inventive faculties brought forth machines of multiplied productive power and ingenuity, so corre- sponding methods of accounting were devised to interpret in terms of money values the operating success and condition of these complex instruments of production. Accounting came into service to register the commercial activity of the vast physical properties so developed and to furnish the basis of their operating control. Expansion of Industrial Units.— It is perhaps of in- terest to illustrate the expansion of the manufacturing units and the rapidity with which the small commercial entities of the pioneer period reached proportions of great magnitude, and possibly nothing would describe this better than the figures of the United States Census of Manufactures listed herewith: DEVELOPMENT AND NECESSITY OF COSTING 5 Expansion of Industrial Capital Year 1850 1870 1890 1900 1910 1915 Capital per Capital per Establishment Employee $4,334 $406 6,720 825 18,387 1,534 22,710 1,000 68,636 2,785 82,638 3,239 ^Excludes hand and neighborhood industries. In a term of 65 years the capital per establishment increased 20 times and the capital per employee increased eight times. The increase in capital per employee is a fair index of the growth of the machine period. The multiplying of capital per establishment represents some- thing beyond the expansion of machine production and is a direct measure of the trend toward combination of units and the concentration of productive capacity to secure the economies of that measure. This merging of prop- erties of similar output was not the only cause for the increase in capital value per unit, since this trend also was influenced by the tendency to link up preceding and following processes so as to include with greater com- pleteness all the stages from raw material to finished article and was known as "integration." This period of consolidation was especially accelerated at the close of the Nineteenth Century as the following information will show. In the ten years from 1887 to 1897 there were 86 large amalgamations with a total capitalization of $1,414,294,000, whereas in the last three years from 1897 to 1900 there were 149 mergers with a capitalization of $3,784,010,000. These figures present forcibly the sharp trend in events in the sudden creation of huge properties of widely distributed ownership presenting large managerial and 6 ESSENTIALS OF INDUSTRIAL COSTING financial requirements. The operating success of these companies was not a matter of easy measurement and an analysis of their condition and worth involved entirely new classifications and comparisons. Accounting was the means of determining the prosperity and controlling the policies of these corporations, and the reports compiled annually were designed to show first, a statement of operation and then a statement of condition, the one known as a "profit and loss statement" and the other as a "balance sheet." Accounting in smaller concerns and with fewer trans- actions was conducted on a receipt and expense basis, and the relation of the two gave a fair idea of profit, but vrith the larger units and the complex intei'play of credit, sinking funds, and accnied and deferred items, the basis of accounting was shifted to that of income and expendi- ture. This change and the requirement for annual state- ments brought accounting to a high professional basis, and when these large corporations under pressure of opinion made their statements public, a veritable clinic of accounting procedure was made available. These statements were studied and compared and gradually standard methods were evolved which definitely formed practice and thus brought about statistical studies of great assistance to investors and to the executives in charge of these properties. Cost Accounting. — Annual reports on operating show- ing the excess or not of income over expenditures, and of resultant net worth, were helpful, but immediately the need was apparent for further differentiation and more current tabulation. This need brought into being that specialized branch of accounting known as ** costing." At this point it may be well to digress and to insure DEVELOPMENT AND NECESSITY OF COSTING 7 a full appreciation of the fact that the machine age had also called into play the relatively new profession of applied science, or engineering. Machinery required a knowledge of kinematics, mechanics, and properties of material, and successful production was essentially a function of the handling of and attention to big instru- ments known as ''plant and equipment," which in their entirety define the collective term — "engineering." It is also interesting to observe at this point that, as engineering talent brought into being increasingly mar- velous mechanical creations of larger scale and greater complexity, it similarly controlled, with the monopoly of exclusive knowledge, the methods of design, construc- tion, and operation, and, as a by-product of extensive and varied experience in numerous installations, gradu- ally acquired a grasp of the economic background which in last analysis controlled the whole scheme. Indeed it has been said by a noted engineer ' ' that the adaption of scientific principles to the production of goods is the primary field of the engineering science. ' ' When the first blush of inventive success had passed and the problem, instead of being straight mechanics, be- came one of balanced financial factors, the broader gauged engineers sought to express engineering units in terms of money values and so their labors impinged on the field of accounting. This contact in the course of time resulted in a composite statistical process whereby the principles of accounting as well as those of engineering were applied to the control of industrial operation. This process in brief is known as "cost accounting." So the commercial world witnessed the arrival of a new and powerful aid to the successful conduct of manu- facture, and technical interest in the subject was both strong and productive. The pioneers of cost accounting 8 ESSENTIALS OF INDUSTRIAL COSTING can hardly be said to date back further than 1900, yet reference to the texts of that time will show a very ele- mentary development compared with the brilliant and ingenious practice which has since been established. Factors in the Development of Industrial Costing.— There have been several successive incidents which have furnished impetus to the rapid advance in the technique of cost accounting and these may be considered profitably at this time. Tariff Legislation.— American industries had for years been regarded as something more than minors in the eyes of the law — they were actually considered infantile compared with the established manufactures of Europe, particularly England. The phrase, *' protect our infant industries," was the chief motive of our tariff legisla- tion, and quite properly it did designate the fact that enterprise could not be promoted in this country against what might develop as aggressive, even destructive, for- eign competition. Further, the standard of living in this country was superior to that of any other country and this condition rested entirely on a higher wage scale. Comparative costs of production showed higher fig- ures for the United States than Europe, and this, with the other factors, instituted the protective tariff policy which has been an almost uninterrupted influence in our foreign commerce. It has been designed to restrain importation which would ruin the established industries of like kind in this country, although the tariff schedules for years Avere more the footballs of politics than mat- ters of strict economic equities. Pressure for tariff reform compelled some more ac- curate basis of legislation than had previously been available, and a tariff commission was constituted, the chief function of which was to establish relatively the DEVELOPMENT AND NECESSITY OF COSTING 9 true costs of various commodities as produced here and abroad. This commission produced voluminous reports and stimulated thereby a consideration of the proper basis of costing, as it was quickly seen that without a dependable method of measurement, such comparisons were not any closer to facts than the limits of error in the measure. Tariff history clearly related a continuous decrease in protective provisions and finally recorded a tariff based on revenue principles entirely. The margins of profit in manufacture had been de- creasing, in fact, as the first promotions passed and the speculative features of the unknowoi were removed by actual experience and demonstration, more capital was invested, capacity extended, and the returns naturally fell. As instance of this tendency the earnings of a large steel corporation are tabulated herewith: Year Earning Per Ton 1902 $13.25 1903 10.50 1904 8.51 1905 10.45 1906 11.90 1907 12.55 1908 12.06 1909 10.98 1910 10.86 1911 8.91 1912 6.67 1913 9.05 1914 6.00 The tightening of margins and the absence of stronger protective tariff provisions compelled closer scrutiny of business operation, and under these circumstances, as always, increasingly adequate methods of analysis or costing were forthcoming. To quote Sherer on this point ; 10 ESSENTIALS OF INDUSTRIAL COSTING The pressure of industrial circumstances directs the intelli- gence of many minds towards the comprehension of some single central point of difficulty, the common knowledge of the age induces many to reach similar, solutions : that solution which is slightly better adapted to the facts comes out victorious. Ignorant Competition.— Another powerful impetus which furthered scientific costing was the ruin from the blasts of ignorant competition. As productive capacity fluctuated with demand there came periods of surplus production and bitter, even savage, competition. Trading often became a chase or pursuit, in which whatever com- pensation resulted came from the activity itself, as the profits were frequently small and occasionally non-exist- ent. A few barren years pointed the futility of this policy, although manufacturers pressed to their limits had set their security generally on what was their presumed cost of production. The repeated failure of profit to materialize after trading success extended on these costs soon brought manufacturers to question the machinery and method used in the derivation of the costs. The surprising vari- ations were explained almost entirely in the differing bases of calculation and the obvious need for such a pressing situation was the establishment of a uniform system of costs. The period from 1908 to date has seen a pronounced movement to secure such uniformity in system and al- ready at least fifty progressive associations of manu- facturers of similar products have either secured or considered definite plans for securing the benefits of a uniform method of costing for the members of their respective associations. The wisdom and promise of this policy among manufacturers is something which al- ready has been apparent to them and cannot fail but react to the benefit of the country as a whole, whose best DEVELOPMENT AND NECESSITY OP COSTING 11 ends are served, in the last analysis, by sane competition and by the prosperity and not bankruptcy of its produc- ing' enterprise. To one who has had access to these comparisons of costs of identical articles and of cost methods of manu- facturers, the discordance passes belief. If any argu- ment should be advanced for a favorable regard toward costing or to give reason for the appearance of this or similar volumes, it would be contained convincingly in such data, which have for the first time made it possible to show the enormity in variations and the grave possi- bilities which can result from the absence of or ignorance of proper costing principles and methods. In one industry the prices varied as widely as 85 per cent on standard products and the costing methods showed the reason for the irregularity. In another in- dustry the highest and lowest costs on identical articles and the average compared as follows : Range of Costs on Identical Articles Article Lowest Highest Average of 25 Companies 1 $9.36 $11.24 $10.50 2 8.12 11.00 10.40 3 13.66 19.24 16.94 4 14.80 18.20 16.98 5 6.70 11.16 9.28 6 10.32 17.26 13.76 Article six shows a difference between the lowest and highest of over 65 per cent, article five similarly, and not one of the articles compare between the lowest and high- est within 20 per cent, which exceeds what would be an average of the profit on sales. It is significant, in the light of these cases, to learn the effect of such insufficiency on actual profits, and here 12 ESSENTIALS OF INDUSTRIAL COSTING we may turn to the published reports of the United States Internal Revenue Department for 1917 (the most recent year available). This report shows that 79,642 manu- facturing corporations reported, and of these 20,854 — or 26.1 per cent — showed no net income. The total gross income of all these corporations was $42,200,635,483, on which a net income was returned (exclusive of income and excess profits tax) of $4,231,772,272, or a little over 10 per cent. The report of the United States Internal Revenue Department does not, of course, show the range in profits and only shows the average. I present in this connection a record of the experi- ences of an auditing finn bearing on this point, published originally by one of the partners. The record shows the wide range in return on invested capital which their examinations indicated as existing in various companies. The period reported is prior to 1914 and the results are as follows: Range of Return on Invested Capitaij 10 cases earned 40 per cent or more 7 cases earned 30 to 40 per cent 11 cases earned 25 to 30 per cent 16 cases earned 20 to 25 per cent 26 cases earned 15 to 20 per cent 16 cases earned 12 to 15 per cent 11 cases earned 10 to 12 per cent 20 cases earned 8 to 10 per cent 5 cases earned less than 6 per cent 14 cases earned less than 5 per cent 4 cases did not earn interest charges 3 cases showed actual loss Of 143 cases, 26, or over 18 per cent, earned either noth- ing or no more than the legal rate of interest on the invested capital. These figures represent various industries and it may be claimed that the range does not indicate so much ineffi- DEVELOPMENT AND NECESSITY OF COSTING 13 ciency as inherent differences in the industries them- selves. But in one entire industry the range in return on invested capital went from 0.87 per cent to 27.6 per cent with an average less than six per cent. Also, in another industry the profit on sales varied as follows : Range of Profit on Sales 1 concern showed 27 per cent profit 1 concern showed 25 per cent profit 1 concern showed 20 per cent profit 1 concern showed 14 per cent profit 2 concerns showed 12 per cent profit 5 concerns showed 10 per cent profit 2 concerns showed 7 per cent profit 2 concerns showed 6 per cent profit 1 concern showed 4 per cent profit 2 concerns showed loss Of course, these variations in profits are more the re- flex of mismanagement than anything else, but there is no doubt but that much of the condition results from ignorance of proper costing methods. Indeed, the Fed- eral Trade Commission has recognized the urgency of proper costing and has published a most helpful and informing pamphlet on the subject of '^ Manufacturing Costs." In this pamphlet they estimate as the result of their investigations, favored by the wide means at their disposal, that only 10 per cent of the manufacturers in this country cost adequately and the remaining 90 per cent reveal methods going from mere insufficiency to utter ignorance. That the connection between this con- dition and those revealed by the United States Internal Revenue is organic and direct needs, it is thought, no further argument. Business is strewn with failures, as the following mortality taken from System will indicate : 14 ESSENTIALS OF INDUSTRIAL COSTING Death Rate in IManufacturixg The rate is given as the percentage of failures to the total in business during a period of 30 years. Line Death Rate 1. Furniture 53.7 per cent 2. Flour and grist mill products 53.0 per cent 3. Iron works products 58.9 per cent 4. Printing 48.2 per cent 5. Lumber and timber products 75.0 per cent 6. Boots and shoes 57.1 per cent 7. Cigars and tobacco 75.4 per cent 8. Hosiery and knit goods 30.0 per cent 9. Creamery products 56.5 per cent 10. Brass, bronze and copper products 52.1 per cent 11. Clothing 43.3 per cent 12. Drugs 68.1 per cent 13. Automobiles 57.1 per cent 14. Carriages and wagons 71.6 per cent Death rate for 14 leading lines 57.1 per cent Death rate for 199 other lines 66.9 per cent Death rate for 1,327 factories in 213 lines. . 62.0 per cent The war has strengthened the financial reserve power of industries generally, but prior to 1914 the risks of receivership in industry were greater than other com- mercial enterprise, as the following figures T^all evidence : Risk of RECEnT:RSHip in Per Cent of Capital Invested Steam railroads 1.84 per cent Industrials 2.07 per cent Public utilities 0.37 per cent Costing is the happiest illustration that "knowledge is power" and that failure to secure this knowledge is a business sin which will lead inevitably to death as its wage. The World Wax.— The third impetus to the recognition and adoption of costing as a justifiable business necessity was the descent and toils of war. Modern warfare quickly evidenced itself as a contest of industrial strength and resources, and its demands exposed all weaknesses DEVELOPMENT AND NECESSITY OF COSTING 15 with the searching persistence of a surgeon's probe. The war effort in industry brought the concentrated intel- ligence of the country to its problems, and wherever bad conditions as well as inefficient practice existed they were exposed. American industry responded with less diffi- culty than English industry because in America higher knowledge and better methods had leavened somewhat the huge industrial lump which in England had been resisted until then with the full strength of that nation's traditional conservatism. It is particularly significant, though, that one of the first publications of the British Ministry of Reconstruc- tion was a pamphlet on the "Uses of Costing" which ap- peared in 1919. In this pamphlet the conclusion of the United States Federal Trade Commission is noted, that less than 10 per cent of American manufacturers knew their costs and without reserve or apology this Ministry states that "competent opinion places the English figure at five per cent. ' ' They further say, which is of interest, that "practically all industry has some sort of accounts, but not many cost accounts. Anything which relates to collecting debts or the cash balance is elaborately re- corded, but whatever pertains to the due appreciation of the greatest asset, the labor is rare, partial, or obscure." Thus, in the two greatest commodity-producing coun- tries in the world it is found that intelligently directed control of the vast and complex machinery of manufac- ture exists in less than 10 per cent of the one and five per cent in the other in industry as a whole. This de- plorable condition is one which is well on the way to remedy, once recognized and admitted. The processes of cost accounting are well established and demonstrated, and all that is lacking is the initiative and willingness to adopt and install them. 16 ESSENTIALS OF INDUSTRIAL COSTING The condition as described is not as desperate nor as retrograde as might appear. It is simply a natural phase in the maturing of the industrial organism which has exhibited similar evidences of unequal development and inability to function efficiently before. There is scarcely a fundamental policy in industiy to-day which did not arrive slowly and painfully. The whole stnicture has always been somewhat of a growing Frankenstein which overtaxed its contemporaries but which, nevertheless, was ultimately directed properly. The general prac- tices of attractive plant settings and arrangements, wel- fare organizations, insurances, such as life, liability, etc. are all institutions which came after opposition was en- lightened by a recognition of their business expediency. So in the matter of costing, the situation and tendency are simply traditional manifestations of the resistance to change which have retarded almost every stage in the progress of industry. Nor should this inertia to change, this seemingly ob- stinate disregard of measures of primary self-interest, be charged against plant owners as evidence of incompe- tence. Criticisms on this point must consider, first, the huge responsibility which fastens on men engaged in any entei'prise. The burden of business is not an easy one ; the infinite details, the absorption in daily demands, the ebb and flow in the stream of production, the eddies and whirlpools, all keep a man's eye on the compass and his hand at the helm to the loss of observations of the stars. Sufficiently assuring is it to know that now the science of cost accounting has arrived, it has the aid and urging of governmental investigation and it has the examples of successful and telling practice in enough cases to make it only a matter of short time before it will become a ■universal business custom. DEVELOPMENT AND NECESSITY OP COSTING 17 This introduction has gone to some length because a study of cost accounting should rest upon a sympa- thetic attitude and should predispose the reader or stu- dent in its favor, as working details might otherwise be tedious and insignificant. Cost accounting, therefore, must be regarded as a logical phase in the evolution of industry and a process which itself has yet to develop its fullest powers and value. Relation of Cost to Value and Price. — So much for what might be called the economic forebears of cost account- ing, and now let us consider more fully the meaning of ''cost" and its relation to its fellow terms, "value" and *' price." The terms "price," "value," and "cost" are curiously confused in popular usage, and yet the clearest definition of them should be in mind if the object and significance of cost data are to be understood. Value is the very essence of the process of exchange and underlies the multitudinous transactions which com- pose commerce. Treatises have been written on value and the term has been extended to all shades of signifi- cance and meaning, but there is one essential quality which is the vital attribute of value, surmounting all others in importance, and that is, utility. Utility com- passes, in a word, the capacity of an object, commodity or service to render satisfaction. This is the paramount purpose of supply to render satisfaction, or to convey utility, and value, it has been said, is the calculation form of utility. That is, in the labyrinth of wants for com- modities and the capacity and desire for their satisfac- tion there must come some common denominator, some universal language or formula which will equate the con- flicting elements or forces to a basis of comparative strength or influence. By this is meant that life has evolved far beyond those primitive conditions where each 18 ESSENTIALS OF INDUSTRIAL COSTING man was a host unto himself, growing his own wheat, grinding his own flour, with his wife spinning yam and weaving cloth from which the family garments were fasliioned. The point is that to-day is an age of specialization with the individual devoted to the production of some par- ticular commodity or service. His wants are no longer self-supplied but are provided for by the complex proc- esses of exchange, the extent of satisfaction being con- ditioned by the degi*ee of his ability to participate in this exchange. It is evident that 50 pounds of worsted yarn cannot be traded for an equal quantity of the raw wool from which it is spun, and yet a relation exists between them which must be expressed if the business of wool growing and worsted yarn spinning are to pro- ceed. Value may be defined then as the ordinary means of conveying the stimulus or perception which releases the latent possibility for this exchange, and as such is the touchstone of commerce. Study will indicate that until the consummation of an exchange there are two further concepts in value, one the demand price and one the supply price, which brings us to a consideration of "price." Smart says: "Then we found value naming itself in something given up and that something in developed civilizations is money, and price becomes the universal expression of value. When we conceive of price as the sum of money seeking after goods, it is demand, or de- mand price." And further: "The sum we are willing to offer, our demand price, is confronted with and at all times affected by another sum which seems independ- ent, the supply price, and this latter seems determined by cost of production. These two sides and their mutual relation are necessary for our complete theory of value." DEVELOPMENT AND NECESSITY OF COSTING 19 So it appears that the processes of commercial ex- change operate by establishing an equilibrium of demand and supply price and are accompanied by a continual up- setting thereof by extraneous conditions with the result- ing necessity of adjusting to equilibrium anew. When the point is reached when demand price and supply price are interchangeable, then business is done. Marshall, the eminent English economist says, "There has been long controversy as to whether cost of production or utility governs value. It might as reasonably be dis- puted whether it is the upper or lower blade of a pair of scissors that cuts a piece of paper." Eeviewing, we have value as the calculation form of utility, price supplying the terms in money for the calcu- lation, and this price found to consist of two component forces, namely, demand and supply, which must come to equilibrium before exchange can occur. We find supply price resting upon the cost of production, and therein is established the relationship of costing to the fabric of economics, for costing is then seen to be a method of determining the supply price of a commodity and as such it becomes the actuating medium to exchange and the whole flow of values which constitutes the work of the world. Costing the Crux of Commerce.— Costing appears, therefore, in the light of this exposition, as the crux of commerce, and since the whole scheme of exchange is predicated upon it, can there conceivably be any more transcendent business function than accuracy in the de- termination of the cost of production? It requires but little imaginative play to see how false the basis of ex- change becomes when the supply price is incorrect and how really precarious the entire structure of business rests when the sands of ignorance are seen beneath. 20 ESSENTIALS OF INDUSTRIAL COSTING This conclusion should not be taken as to mean that an accurate cost system is indispensable to successful commercial activity. On the contrary the business his- tory of the world shows ultimate success and prosperity without adequate costing, and some approximate means must have existed for setting the price of exchange. Con- servative business organizations knew within reasonable accuracy at the end of a year whether or not they had made or lost, and so in a very general way they could establish a safe relation of their costs to their prices. But that this method was successful in some cases does not remove the spectre of the high mortality of which they were the survivors nor does it bring assurance to the great consuming public that if costs had been known definitely their expenditures might not have been less. The essential thesis of this chapter has been to estab- lish the absolutely vital necessity of accurate costing as an indispensable economic function. It has further been its object to develop from the historical side the trend in events which, though large in outline, has never- theless converged with undeterred momentum to bring about the modern institution of costing. The wastes of the past are gone beyond hope of sal- vage, but the pressure of life is increasingly toward a higher standard of living. Everj^ decrease in supply price opens up new areas of purchasing capacity and so increases demand, and the cj'cle can go on indefinitely, subject only to the safe control that the action is based on decreased price or cost of production. Costing may now be seen not only as a desirable and necessary commercial institution, but as a powerful di- recting agent in the vast scheme composing the economy of existence. CHAPTER II THE PURPOSE AND FUNCTION OF COSTING If the world is not governed by figures, they at least show how the world is governed. — McPherson. Costing" Primarily Concerned with Profits.— Although service is becoming increasingly the motive of business, this tendency should not obscure the underlying neces- sity of the rate of return. Admittedly, wherever pos- sible, the considerations should be combined, but it should be understood that in the end the goal of enterprise is profit and that the measurement of a policy or method is the extent of profit in which it results ; and, that funda- mentally, the problem in any commercial undertaking is to so direct the capital engaged as to result in a maximum return on that capital. It is, therefore, axiomatic to say that the function and purpose of manufacturing costs are to contribute toward the attainment of that objective and so are primarily concerned with profits. The connection of adequate costs and their contributing statistical data with this necessity of maximum return is immediate and direct, for it is essentially a proposition of establishing price or pur- chase policies and supplying the analytical means for determining as immediately as possible the relation be- tween ''cause and etfect" in these policies. Costs, in order to render this service, must supply dependable data for the computation of production costs, and for the basing thereon of prices, they should depict the essential characteristics of a given business and give 21 22 ESSENTIALS OF INDUSTRIAL COSTING a full description thereof; and, through process of pre- senting current operating reports, indicate the success of and direct the extension of all controlling policies. In brief, costs should constitute the hygiene of corporate well-being and, therefore, not only govern the conduct but also arrest habits or practices contrary to the interests of the business to which they are devoted. Costing as an Aid to Business.— How a well designed and successfully installed cost system renders this assist- ance to business will be explained, and as preliminary thereto the process is briefly summarized herewith. Costs contribute to the end of profit by supplying service which may be best appreciated by specific mention, as follows : 1. By determining the rate of maximum return, or by fixing prices for commodities which will result in that volume of sales which will bring the greatest net return. 2. By showing currently month by month or oftener a statement of operation indicating profit or loss. 3. By further division of this current statement show- ing profit or loss by products or classifications, or by territories or by salesmen and so govern the extension of lines and the promulgation of policies. 4. By showing currently month by month or oftener a Statement of Condition or Balance Sheet based on this operating statement and the Ledger balances after clos- ing out all the usual accounts through the Profit and Loss account. 5. By avoiding unintelligent competition and further- ing the exercise of good business strategy. 6. By compiling and classifying expenses so as to guide the internal control of the business and enable judi- cious executive action and budgetary control. 7. By presenting data that ^vill permit of a construc- tive and harmonious wage policy. PURPOSE AND FUNCTION OF COSTING 23 Each of these topics will be discussed in turn, and the first one is of especial interest, because, although not frequently recognized and acted upon as such, it is, at least instinctively, the guiding motive to the general price policy of any business. Price of Maximum Return. — Risking the tedium of pure exposition it might be well to present the theory which underlies this matter of maximum return, and then to explain the specific assistance which cost data may ren- der in the practice of the theory. In the first chapter the transient equilibrium between demand price and supply price was explained and how the cost of production should properly fix the supply price and so determine the equa- tion of exchange. But the first chapter did not mention an important corollary from that relation, namely, that ex- change usually occurs with increasing frequency as price is decreased, and vice versa. This relation of price and volume has evolved the two familiar price policies which govern business, namely, large volume at small margin, and small volume at large margin. Within the limits of the two policies there are many selective possibilities, but before considering the assistance of cost data in de- ciding among them, it is important to recognize the ranges in profits which characterize different industries and which primarily control price setting and define the outer limits of the two policies cited above. The rate of profit which should be added to the cost of production to insure a proper return on capital varies with the na- ture of the business and necessarily, as will be seen, could not be uniform for all. There are various terms expressing the relation of capital to that of margin of profit, and ''turnover" is the familiar one. By ''turnover" is generally meant the activity of that portion of the capital invested in the 24 ESSENTIALS OF INDUSTRIAL COSTING Figure 1. — Tabulation Showing Relation of Sales to Capital and Ratios of Capital Sales to Kind of Manufacture and Capital Sales Surplus and Surplus Steel company $1,990,000,000 64,000,000 0.62 $1,231,000,000 59,000,000 Locomotive company 0.92 Meat packing company 120,000,000 4.80 575,000,000 Leather company 126,000,000 0.74 93,000,000 127,000,000 70,000,000 62,000,000 Rubber company 206,000,000 132,000,000 58,000,000 0.61 Tobacco company 0.53 Motor car company 1.06 inventory. The frequency of turnover is an important factor in the question of the margin of profit, but it is not the all controlling one. It represents but a part of the enterprise's assets, but not the entire wealth or resources engaged in a given business. It is necessary, therefore, to go beyond the turnover and consider the relationship which gross sales bear to the capital in- vested, in a well conducted and normal manufacture of a given kind. Accordingly, as part of this discussion, there have been tabulated the following data (Figure 1) which show for various industries the following : 1. Gross margin of profit on sales. 2. Ratio of gross sales to the total capital invested. 3. The equivalent of the gross profit expressed in rate of return on the capital. Instead of considering merely that part of the capital represented in inventory the whole capital investment is placed in relation to sale, and it is found that the turn- over as thus computed varies from as low as 0.53 in the case of a tobacco company to 4.8 in the case of a meat packing company. It is obvious from this tabulation PURPOSE AND FUNCTION OF COSTING 25 Surplus, Turnovers of Inventory, Etc., in Selected Industries Gross Per Cent Gross Per Cent Gross Profit on Total Number of Turn- overs of Inventory in Sales Per Cent Inven- Profit Profit on Sales Capital and Surplus Inventory tory to Gross Sales $343,000,000 27.0 16.7 $182,000,000 6.8 14.8 6,300,000 10.6 9.8 19,600,000 3.0 33.2 20,465,000 3.5 16.8 74,900,000 7.7 13.0 17,300,000 18.6 13.8 56,500,000 1.6 60.7 147,000,000 11.6 7.1 48,500,000 2.6 38.2 8,700,000 12.4 6.6 40,500,000 1.7 57.9 8,600,000 13.9 14.8 21,500,000 2.9 34.7 that any question of legitimate or required profit on sales must involve a consideration of the rate of turnover of the entire capital, for it is the rate of turnover on capital which largely determines capital value. Prices and Competition.— From the foregoing is ap- parent the process for determining, in the case of any industry, the approximate rate of profit which must be added to the production cost to arrive at a definite return on capital. If, however, the entire affair of insuring this return on capital were as simple as that, business would not be difficult to conduct; as it is, however, the play of competitive forces bears heavily on price, and hence, by deduction, profit. It is this fact of competition which stresses the importance of the selection of a price policy and which presents opportunity to costing of serving in its highest function. This function may be briefly stated as the supply of data which will assist in negotiating in a competitive market the productive capacity of a given plant as represented in its commodity output so as to secure that volume of sales at those prices which will result in the greatest aggregate return on the capital. 26 ESSENTIALS OF INDUSTRIAL COSTING It is not an easy affair to wrest from a heavily con- tested trading demand the vohime at the prices as de- scribed above, and failures and shortcomings are experi- enced and success is a matter of fortune as well as of fine calculation. There are numberless cases where, in pursuit of larger sales totals, orders have been booked at prices which left little addition to the profits, and there are many instances where insistence upon price has brought volume to an almost unprofitable minimum. The significance of this discussion has lost point some- what, due to the abnormal demand of the war, and it is necessary, therefore, to recall conditions prior to the war and which are sure to be paralleled in the future. The average plant before the war had capacity beyond its sales demand and in support of this assertion the following information is cited in the case of New Jersey, which is a typical industrial state, and in preface thereto the following excerpt from an editorial of the New York Times of date prior to 1914 is quoted : It is generally recognized that the manufacturing capacity of the industrial plants in this country is much in excess of the needs of the population. The excess varies in different lines, but the general average has been put at about 25 per cent. Effect of Excess Capacity.— With this fixed invest- ment and the definite knowledge that total producing capacity exceeded total demand, the essence of success was contained in those deliberations which settled the price basis. With this in mind, the question arises as to the procedure for ascertaining such a price basis and in what manner cost data contribute to the solution of the problem. It must be admitted at once that cost data alone will not suffice in a decision of this kind, because the finer limits of price are matters of judgment more than fact. PURPOSE AND FUNCTION OF COSTING 27 Average Percentage op Capacity Employed in Various Industries IN New Jersey Brick and terra cotta . . Electrical appliances . . . . Furnaces, ranges and heaters Leather, tanned and fin- ished Machinery Paper Pottery Rubber goods, hard and soft Silk (bi'oad and ribbon goods) Steel and iron (construc- tion ) Woolen and worsted goods Twenty-five industries. 1913 1912 73.50 68.53 74.23 72.62 69.38 j 70.37 83.62 83.94 73.04 79.26 75.35 69.71 85.94 72.50 76.34 61.75 77.91 70.87 65.27 65.74 83.75! 85.89 1911 70.30 73.28 72.46 67.94 69.37 71.88 65.68 83.97 75.65 78.77 71.26 58.00 77.78 1910 72.10 76.23 70.42 74.69 75.48 68.40 88.12 78.18 77.80 73.65 64.42 6.40 1909 71.62 64.26 71.92 76.75 66.76 85.75 77.09 77,39 1908 55.30 55.63 57.69 67.80 56.92 80.53 41.88 67.67 76.23 71.02 67.83 159.78 84.38 174.42 1907 74.00 73.10 65.57 75.29 68.03 77.14 77.00 75.11 87.76 74.54 78.87 78.26 75.00 81.38 77.36 They are a presumption based upon intimate knowledge of trading conditions and their success is in a large part a matter of personnel, but costs should and can supply information which supports judgment and should be to an industrial executive what a well organized intelligence service is to an army. The chief service of cost data in an inquiry of this kind is to delineate those constituents of unit costs which fluctuate with volume. In this connection it might be well to describe those elements in cost and the extent to which prices would be weighted relatively according to the degree of pro- ductive activity. Two elements in costs, that is, direct labor and material, generally are fixed items and de- crease or increase in direct ratio with volume, but the remaining factor, expense — overhead — or burden, as it is variously known, contains some important elements which are fixed by nature and which, therefore, vary in the amount of their unit le\^ in cost dependent upon 28 ESSENTIALS OF INDUSTRIAL COSTING the volume of production over which their total must be distributed. As illustration of the character of such ex- penses might be cited depreciation, taxes, interest (if admitted into costs), administrative salaries, office and shop executive salaries, to large extent power, heat, and light, and, in general, the expenses incident to the con- duct of a plant as a going concern. These items, though differing in proportion to total expense, according to the business, are considerable in amount if not predominant. It is these elements in expense which govern price fixing, and price fixing, therefore, presupposes a clear cut delineation in the records of expense; and methods of accumulation and presentation of the facts which are readily accessible, flexible, and possible, not only of easy resolution to their constituent parts, but also of uniting these parts in such combination and distribution as may be needed for the calculation. When expense is sub- divided and classified in this manner it is then a matter of straight computation to determine the influence of expense or any part of it upon price in proportion with volume of sales. Current Statements of Operation.— The second use of costs in furthering profits is to furnish correct state- ments of operation indicating profit or loss. In most manufactures to-day the profit or loss on operation ac- tually is unknown until the end of the fiscal year, when an inventory is taken, the books closed, and the state- ments drawn off. This condition is so general and com- monly accepted that its shortcomings and risks have been overlooked and security taken chiefly in the fact of the universal custom which it represents. Yet to any- one who has been supplied with more immediate advice on operation — let us say, a monthly report — the egre- gious insufficiency of the older practice is staggering. PyRPOSE AND FUNCTION OF COSTING 29 Developments and inventions have been increasing the velocity of business transactions with such speed that a report showing results at the end of the year is nothing short of an astonishing anachronism, particularly as there is no convincing reason why any manufacturer should be without a monthly financial record indicating the amount of profit or loss for that period. The ac- counting process on which such a statement rests is sim- ple, as will be established, and will be explained herewith. A traditional statement of profit based upon the state- ment of a physical inventory might be briefly repre- sented, as shown in part 1 of Figure 2. As will be noted, the inventory at the beginning is listed and the payroll and raw materials used and ex- pense for the year added to it. The inventory at the end of the period is then deducted, the balance remain- ing, therefore, being the presumed cost of the material or product which has been shipped and, for that reason, designated as the cost of sales. The manner of determining current statements of operation by months (illustrated in part 2 of Figure 2) is in direct opposition to this method and is based upon the extension of the quantity of the products or com- modities sold by their manufacturing cost. The proof of the accuracy of the monthly statement, therefore, is contained in the closeness with which the physical inven- tory taken at the end of the year checks with the inven- tory which this method of establishing profit indicates. In a word, to the Goods in Process inventory at the be- ginning of the period is added the current consumption of raw material, and productive labor and expense and the cost of sales is deducted from this total which, neces- sarily, leaves the presumed Process inventory, and this inventory can be checked at any time against the physical 30 ESSENTIALS OF INDUSTRIAL COSTING inventory in proof of the relative accuracy of the profit, as indicated by this statement. This describes the manner in which cost data permit of such timely assistance as statements, monthly or oftener, with proof of accuracy as described in the Proc- ess inventory which must agree within fine limits with the inventory taken at the end of the year. Of course, this method depends upon accurate costs, but it should also be remembered that the pricing or valuing of a phys- ical inventory in the traditional practice was work de- manding similar information, and since this information was not usually available, it develops that the data on which the statement itself rested were insecure. Hence, not only was the former method belated in its completion, but inaccurate. For, in order to price a physical inventory properly, the cost of process goods at all intermediate operations is necessary and this can- not be done without a dependable cost system. If, there- fore, cost data are accumulated for this purpose, it is but a short step further to compile a current statement by deducting from the sales the cost of sales. The full detail of the accumulation of such statements and their connection with the general books will be considered in a later chapter. Classified Statements of Operation.— Operating state- ments of this kind and frequency are indicative of man- agerial success, as well as depicting the trading condi- tions of a given period or periods. A further extension of this statement which should logically be made is to show the profit classified by products. Possibly no better aid exists to the wise setting of prices or wise additions to a line than an analysis of the resulting profits by items of classifications within the line. It is a sure telltale to policy and ability, and reflects results in dol- PURPOSE AND FUNCTION OF COSTING 31 FiGURK 2. — Abridged Statement op Operation Showing Contrast in Method op Computing Profit prom Cost op Sales and prom In- ventory Diffe:rences : 1. Profit Derived from Inventory Differences: Sales $221,000.00 Less allowances 1,000.00 Net sales $220,000.00 Materials used $33,000.00 Productive labor 70,000.00 Manufacturing expense .... 85,000.00 Total materials used, productive labor and manufacturing- expense $188,000.00 Inventory at beginning of period .... 160,000.00 Inventory at beginning of period plus additions $348,000.00 Inventory at end of period 163,000.00 Cost of Sales $185,000.00 Manufacturing profit 35,000.00 2. Profit Derived from Cost of Sales : Sales $221,000.00 Less allowances 1,000.00 Net sales $220,000.00 Materials used $33,000.00 Productive labor 70,000.00 Manufacturing expense 85,000.00 Total materials used, productive labor and manufacturing expense $188,000.00 Inventory at beginning of period .... 160,000.00 Inventory at beginning of period plus additions $348,000.00 Cost of sales $185,000.00 $185,000.00 Inventory at end of period 163,000.00 Manufacturing profit $35,000.00 Cost of sales is subtracted in second case. Inventory at end is sub- tracted in first ease. Materials used is derived in a similar manner and with similar inversion between the two methods, lars and cents which is the common measure of business success. It is abnost a platitude to say that any business with a wide and varied line experiences varying rates of profit 32 ESSENTIALS OF INDUSTRIAL COSTING over the line, and unless these differences are set out in relief against the total volume of which they are a part, futile efforts are apt to be expended unconsciously, and the satisfying profit of one year may be changed to an unexpected decrease the next. Repeatedly, manufac- turers have said, "What avail are costs, detailed by items in the line, when certain articles are sold as bread and butter business, or possibly only as bread on the water? They are demanded by the trade and must be supplied if the other profitable articles are to be sold." This attitude is somewhat akin to the business philosophy which brought one of the Potash and Perlmutter part- ners to say in scorn: '*Yes, to the devil mth expenses, we have lots of them," and it resembles the ostrich in- stinct to confuse blindness with safety. It is impossible to pronounce with sufficient emphasis that, when trading limitations of that kind exist, the necessity for accurate report of the actual loss is even greater than would be required if the margin were more liberal, and whether or not such conditions exist, a statement of profit sub- divided by items or classes of items in the line is one of the chief contributions of costs to successful manufac- turing operation. Frequently, these statements are classi- fied by salesmen or territories and the distribution of profit by those divisions is shown, the benefit of which will be apparent to any sales executive who has developed either an organization or various territories. Current Statements of Condition.— The fourth manner in which cost data serve the cause of good management is by the current construction of a balance sheet, or a statement of condition, the form of which is illustrated in Figure 3. A balance sheet differs from a profit and loss statement in that the latter shows the profit on sales, while the former shows the resultant net worth of the PURPOSE AND FUNCTION OF COSTING 33 o o o" o o CO S2 SB r-T O O o o r-^ 00 o cc o o^ lO' of CI CO C5 00 OD lO GO tH C^ tH -* CO 1:0 O (M" CO CO !>.' ^ "* ^+1 CM CO CO co" io~ of co" of 10 «0 Ol CO OJ Ol 1-1 01 o Oi ^ g § tU S D 2 "— * 'rv-O cS CO 'X3 ' 00 I O H S CO O o ^-^^ :: o (M "^ o CO 00 .^co^ 0:1 01 l^ OJ S 'cj cr I' &. e ^ "S ■♦» h CO (M Ol t> iq 00 |sj c> co' 00 00 ■^ l> I— 1 oT of 00 2 TJH^ Oi €e- i-T (M 03 CC rt; CS T-H ci GO od 03 T^ co^t>^t^ oTco'irf o] in o] CO iH tH ^ Oh S 00 01030C1-IC5O01 rH O] C5 T-J OJ rH GO t"; oi oi go' CO co' co' co' co' Tf'TtH-^CO'*-t<^ I>^ Gi^ CO^ I>-^ t^_^ t-^ t> t^^ of 00" of lo" ciT of co' o iHTt^OJCOrHTHGOCi €e- CO O r-H Ah S S i -S -s -a^ ^«^ o C 5 ■» Of >-• „ „ '-I 55 y, S « ^ i^i rt^ ^ — •?/■? DD " Heat, Light, Power 1 ( 7 /V Wl " General factory 1 y /<^? PP GG TH TI TOTAL INDIRECT EXPENSE / f: '' ^'^ JJ TOTAL SPRING ASSEMBLY EJ \ >^,, Y,r •,V 1£A AVERAGE HOURLY RATE •V Figure 4, — specimen sheet from expense analysis indicating thb accumulation of expense for a selected department 37 38 ESSENTIALS OF INDUSTRIAL COSTING the turnover, the production per man, and the average cost may be compared monthly. Statistics of this kind are invaluable and serve to guide the management in a way which cannot be fully appre- ciated until experienced. There are devotees of shirtcuff calculations who scoff at the details and intricacies to which a fine development of cost analysis may be carried, but Tv^thout disparage- ment to such individuals, their admitted ability, though successful, would be enhanced and secured by the records just described. Costing as Basis of Budget. — Costs also supply the basis of fixing a budget, a device used in modem control of expenditures. The budget is an intelligent estimate of probable expenditures, it indicates the financial re- quirements that are to be met, sets a definite limit upon appropriations and serves as a standard for comparing the trend in current expenses vrith. normal. The use of the budget system is increasing, for its usefulness is rec- ognized wherever it is tried, and, while more familiar in connection with governmental expenditures, it is of tremendous value in any fiscal undertaking and, there- fore, applies to manufacture as well. Costing and Labor Management.— The management of labor has always been the keystone to the arch of indus- trial stability, and the war simply served to etch out the fact from the background of past obscurity. The factory system was a rapid development, the handling of men in large bodies, its essential quality, was an unknown and the chasm in output between satisfied and misunder- standing employees was not conceived. The relation be- tween production and "pay," which is the essence of costing, was unexplored and so, vast latent possibilities remained dormant, like that of steam until its substance PURPOSE AND FUNCTION OF COSTING 39 was touched by the imagination of Watt. And so for years wages continued on the dead level of day rate, until progressive minds devised the various differential sys- tems, all of which operate through payment scaled ac- cording to production. A wage system or adjustment of any kind cannot be made advantageously without the full knowledge of the anatomy of the wage fund which the dissection of a cost system furnishes. In fact, no executive is in position to adjust wages equitably to his directors or to the em- ployees unless he is supplied with data which at least in- dicate the causal relation between unit cost and increased wage. Costs supply this information, and although no reports are available to sustain his opinion, I believe that, during the last five years of continued wage un- settlement, those companies succeeded best in the try- ing conditions who had adequate costs and who knew thereby the limits as well as the effects of their action in the matter of wage policy. The purpose and function of costs have been outlined at some length, and reduced to their very pith it may be said they serve simply to supply intelligence and to illuminate operating conditions which might otherwise be obscured. The particular form of their benefit has almost infinite phases. The essential ones have been dis- cussed, but knowledge of costing is comparable to that of language in that a grasp of the rudiments through practice alone can reach to higher and higher expression. Obviously any refinement or extension in the use of cost- ing must be justified by commensurate commercial value. Monthly operating statements, statements of condition, classified or unclassified, abstracts and analyses of ex- penses, wage policies, are simply the familiar and tra- ditional forms of business intelligence, and also impor- 40 ESSENTIALS OF INDUSTRIAL COSTING tant ones, and hence they have been discussed at some length. Costing as Red Tape.— There is not as much recognition of the benefit of costs to industrial operation as there should be, and many who recognize the trend in economic forces and who admit the practical value of costs refrain from action because of the deep rooted distrust which surrounds system and which may be better described as an instinctive apprehension of all that the term ''red tape" signifies. There is a very real fear that, while costs are valuable, even desirable, their necessity does not surmount the objection of too great expense of operation or installa- tion. The belief often encountered is that the risks of loss through inadequate costing do not justify the pre- mium which has to be paid in the form of the clerical expense required to operate a cost system. There can be no quarrel with this attitude. It is simply another case of judgment where the speculative element might easily justify any contention or policy. There is, however, much magnifying of the actual ex- pense of cost operation and much ignorance of the facts, because of which it may not be amiss to present a few definite figures on the subject. It is not possible to state a figure which wiU apply wdthout exception, but it is pos- sible to approximate closely and to give a dependable basis upon which to measure the worth or financial ex- pediency of such equipment as costing. In the first place, the function of costing protrudes into several other department records and it is not pos- sible to establish precisely the boundary where the ex- pense of costing begins and the expense of the other serv- ice ends. For instance, every plant requires a payroll clerk or department and practice varies as to the extent PURPOSE AND FUNCTION OF COSTING 41 of the information collected by such a department. Costs require the payroll, but they also require a finely detailed analysis or distribution of this payroll. In some plants this distribution would be regarded as a payroll expense, and a common practice of the plant, whereas if it were in- formation required and only developed for the costs, it would be regarded as an expense for developing costs. Costs also rest upon the production system and are aided or complicated according to the extent and method of production control. Costs further require a distribu- tion of invoices and sales and, frequently, a reclassifica- tion of accounts and quite an increase in the number of closing journal entries each month. From all of this may be seen the extent to which costs overlap or transfuse with other operating records and why it is difficult to ascertain that portion of the entire expense of maintain- ing all these records which may properly be charged to costs. Costing as a Business Expense.— However, it may be stated with full reservation for variation and mdest dif- ference in individual cases that costs (and by that is meant the system of collection of all data required for statements connected with the general books) range from one-quarter of one per cent to one per cent of total ex- pense. There are some cases where this is exceeded, but by and large these figures are fair and representative. Personally, I do not know of a single installation of ade- quate design which cannot easily offset this expense by saving in other expenditures which saving otherwise would not be made. This states the fact modestly, for it is usually the case that costs bring greater results and have often prevented insolvency and very often have in- creased profits many times beyond what otherwise would have been their amount. 42 ESSENTIALS OF INDUSTRIAL COSTING Managers will frequently accept increases to non-pro- ductive labor in the factory as an unquestionable physical necessity, and tolerate additions to expense in this man- ner, yet will decline to incur the additional clerical ex- pense of costing. In a word, the usual expense of cost- ing is a small proportion of total expense and yet, fre- quently, it meets strenuous objection, when other expenses equal or far greater in extent are accepted without scru- tiny. In conclusion, it is my conviction that a properly de- signed and operated cost system should be and is a legiti- mate and relatively minor business expense which no plant can evade on the grounds of economy. This con- clusion is subject only to the observation that a cost sys- tem is, like any machine or equipment, valueless if not intelligently used. CHAPTER III THE MECHANISM OF COSTING Mechanism : In general the means or mode by which particular effects are produced or purposes accomplished. — Century Dictionary. Definition of a Cost. — A cost is a financial evaluation of a physical fact and from this definition may be under- stood the essential connection which exists between the form of the cost system and the character of the manu- facture. The evaluation is simply a method of the measurement of the processes necessary for or resulting in a given product expressed in terms of money. It is obvious, then, that the processes of manufacture and the character of the product decide to a considerable degree the type or design of the cost system. Indeed the character of the productive processes is the paramount influence on cost- ing design, and in the whole gamut from needles to loco- motives and embroidery to oleomargarine, classification, as may be imagined, is a difficult procedure. Costing Systems.— The essential systems of costing are two, namely, Single and Multiple Single costs, as might be inferred, refer to production where there is one determinate unit, identical and uni- form in the raw material, and the operations required for its manufacture. 43 44 ESSENTIALS OF INDUSTRIAL COSTING Multiple costs apply to manufacture where units exist but are dissimilar as to material and labor requirements, and that frequently bear little if any relationship in the operations required for their production. The single system is simple and operates by accumu- lating the total expenditures for a desired period and dividing them by the units produced. Of course, adjust- ments must be made for inventory differences, but that is readily done and the results are exceedingly accurate. If further refinement is desired, the unit cost may be developed in the same way for any particular item or groups of items composing the total expenditures. As an instance, assume the total unit cost of a commodity to be $5.90 per barrel. This cost may be resolved into its various elements, as raw material, labor, or power per barrel, and all this may be done readily and accurately without intricate costing measures. But by far the greater part of manufacture requires the multiple system and the development of that system, its essential methods, and its principles with examples will be the purpose of this volume. Methods of Costing Collection.— After this considera- tion of types of system it is logical to discuss the methods of accumulating the costs against the product and which may be stated as the — Production, or job-order, method, and the Operation, or process, method. These terms are almost self-explanatory. The produc- tion-order method means the charging of all expenditures incurred for the article specified in the order to that order. The operation, or process, method determines the individual costs of operations or processes and by inte- gration of the various processes or operations to a total, MECHANISM OF COSTING 45 ascertains the complete cost. Either of the methods of accumulation (that is, by production or by process) may be used with either tjipe of cost system, although it is probable that in practice the process system Avould be the more likely selection for single costs. The multiple cost system may use either method of ac- cumulation. As a concrete instance, let us take the manu- facture of tableware, in a line of 200 patterns, ranging from condiment sets to chating dishes and consisting of from five to 15 pieces assembled together. In the pro- duction-order method all parts and sub- and final assem- blies would be made on a factory order to which all labor expenses and material would be charged. Chafing Dish No. 505 might cost $7.59 on one series of production orders and then $7.99 on a later one. By the operation method each individual operation would have been costed and an average taken of many orders, and so a unit operation cost determined that, when totalled for the costs of all required operations, would give, with the material and expense added, the complete cost. This example repre- sents a case where either method can be used alternately, but there are many manufactures in which it is imprac- ticable to maintain the identity of an order through the course of production and the orders are massed in a stream which is costed by the operation or process, by means of the selection of arbitrarj^ units ignoring the boundaries of individual orders. The reason for the process method has been well put by a prominent authority in the terse quotation, ''many items which are direct in relation to a process are indirect in relation to the factory order." This observation con- tains the very pith of costing principle, namely, to attach to the product its portion of cost as near to the point of incidence as possible. In a word, the selection of the pro- 46 ESSENTIALS OF INDUSTRIAL COSTING duction-order, or process, method of accumulation is to be governed solely by the degree of adequacy and accu- racy with which the proper portion of cost is attached to the product. A study of the processes of a particular manufacture might reveal operations most of which could be success- fully costed by factory order, and yet there would be one or two the cost of which could only be accumulated by the process method. In fact, with, accuracy and economy as the guiding motive of all costing design there is no limit to the combinations and legitimate compromises which may be made of the two methods within the same manu- facture. But whether costing depends upon the factory order or the process it presupposes some device for the measurement of production, the selection of a definite unit to which the monetary scale of dollars and cents may be applied. Relation of Planning and Costing.— It so happens that a directly allied function of manufacture known as "planning" requires a similar unitizing of production. Planning is a device for executing the production demand placed upon a factory with the best possible service in delivery, the least possible occupation of capital in inven- tory, and the least possible equipment in activity. Plan- ning operates by analysis of the character and quantity of the demand, and the capacity of the equipment and the assignment of the former to the latter with the point of maximum efficiency. It regulates the size of the order and its precedence through the factory, and it selects the machines on which the required operations are to be done. Planning requires the most complete physical description of the product with itemized lists showing every opera- tion required, the machine or machine groups on which each operation is done, and the department in which each MECHANISM OF COSTING 47 of the machines or machine groups are located, and it also estimates the rate of production by each operation. Planning further requires detailed material specifications showing just what materials and the quantities thereof are needed for the product, because it is the business of planning, among other things, to assure the material being on hand ready for production as required. Planning, therefore, is closely correlated with costing, in fact, so intimate are the functions that no one could undertake to set the boundaries between them. A good cost system collects data and arranges factory orders in a way extremely amenable to the development of planning, while planning furnishes a groundwork on which the cost system may be established with considerably lessened difficulty than without the planning. As a matter of sound modem practice the two functions are indispens- able, one to the other, and their combined installation en- hances the value of each and lessens the cost below that of their separate operation. In some manufactures, the work ticket sent by the planning department is issued in duplicate and serves as a time card for the cost depart- ment, and the arrangement of orders is identical with that required for costing. The form shown in Figures 45 and 47 illustrates such a ticket. The planning department authorizes all plant activity whether in the way of maintenance or production. It also provides for production reports which frequently contain information essential for costing. In fact, the interests of the two departments are so close in this mat- ter of production reports that the forms may be designed to combine the data that each requires, and in addition, the data which may be necessary only for one. The pro- duction reports shown in Figures 31 and 30 illustrate typical usage in this matter. Figure 31 is a carding 48 ESSENTIALS OF INDUSTRIAL COSTING report which not only indicates the output, but also reports the waste. Figure 30 is a comparable report for a foundry and shows the metal used, the percentage of good castings, the unaccounted for losses, etc. This report is indispensable to costing and is also a gauge of producing activity for the planning department. Basis of Modem Accounting. — There are further basic conditions in costing to be considered, which are matters of such common practice that the significance of their development and use is apt to be overlooked, yet it is the author's opinion that their recognition is of vital im- portance and their discussion necessary for a complete treatment of the subject to which this volume is devoted. This refers to that great advance in accounting which brought it from the rudiments of the bookkeeping of cash movements to the handling of extensive transac- tions by which profits might be represented without their being apparent in cash. This development has been ex- pressed excellently by Dr. A. M. Sakolski in the Yale Review when he says : Modern accounting, especially as regards the determination of net profits, rests upon the principle that income is to be dis- tinguished from receipts and expenses from disbursements. Prior to the advent of the corporate form of business organiza- tion bookkeeping was concerned almost exclusively with tracing out the movements of cash. The accounts showed the amounts and the sources of cash received and the manner in which it was disbursed. The main purpose of the early accounting methods was the testing of the honesty of the employees handling cash. The gauging of the proprietor's profits as the result of individual transactions was of secondary importance. In modern times this condition is reversed. Present day accounting aims to exhibit in correct and intelligible form the net gain or loss of business operations independent of the movements of cash therein. The tracing of the actual cash receipts and the actual disbursements of cash, though an important part of every accounting system, has no direct relation to the results of the business operations and is absolutely no gauge of the net losses or gains incurred in MECHANISM OP COSTING 49 a specific period of time. Profits may be earned though not actually realized in cash. Reserve Accounts.— The excerpt states this phase of modern accounting perfectly and the point it makes is of even greater import to costing than to corporate account- ing, xter se, because, in the process of constructing current costs and accumulating current expenditures, many ex- penses are set up which may not become actual disburse- ments, but once in the year or once in several years, and may even continue indefinitely as contingencies or re- serves. As examples of such items may be mentioned property taxes, insurance depreciation, interest, extraor- dinary replacements, etc. Property taxes are generally paid once a year, yet for the uses of costing and their proper representation therein, the anaount of taxes has to be assumed, the monthly quota determined, and a credit balance established by journal entry monthly against which the disbursement when made is charged. This applies similarly to fire insurance, liability insur- ance, group life insurance, special insurance such as boiler or flywheel, and interest and depreciation. In- deed, it is a pity that there is no agency which can compel attention to an expense before it is incurred in cash. The negligent attitude of many manufacturers to the impor- tant item of depreciation may be traced to the fact that depreciation is a contingency which they refuse to recog- nize as a liability until the cash cost of machine replace- ment or actual failure bring the fact forcibly before them. Reverting to the principle of accounting just estab- lished and its peculiar necessity in costs, an example of extraordinary replacements is of importance. Furnace linings in the steel and glass industries are big expendi- tures occurring possibly at intervals of six to nine 50 ESSENTIALS OP INDUSTRIAL COSTING months or longer. If the system of cost accounting is not mere approximation, but is as near to fact as can be located, such expenditures must be anticipated by the setting up of specific reserves wnth the proper propor- tions included, in the monthly expenses and therefrom in the calculation of costs. Controlling Accounts.— Another development in ac- counting which is employed in the connection of costs with the general books and the preparation of current statements of operation and condition is the Controlling account. This master account is a device for registering in the General Ledger a multitude of transactions w^ith a few summary entries, the full details of which are de- picted in subsidiary records. The Controlling account, originally developed under the now very familiar cap- tions, "Accounts Receivable" and "Accounts Payable," has been applied in cost accounting to the movements of raw material, part stock, the distribution of payroll, the accumulation and apportionment of expense and the ebb and flow of the work in process. To be specific, the Raw Material accounts of a manufacture might be brass, cop- per or wool of various grades, or cotton. All receipts of these materials would be charged to the respective ac- count from the Voucher Register (see complete details, Chapter IV). The actual withdrawals during the month would be represented by one total of possibly daily requi- sitions and this would be credited to the account by jour- nal entry and charged according to its destination, gene- rally to "work in process." The balance of the account would represent the cost value of the material on hand. The same principle applies to the payroll and to the other accounts mentioned, full detail of which will be pre- sented in later chapters, the point immediately before us being the application and necessity of controlling ac- MECHANISM OF COSTING 51 counts to complete costing, and to effect the connection of costs througli the general books with current statements of operation and condition. Functional Division of Expense.— The elements of cost- ing and cost data will be given full consideration in the succeeding chapter, but in connection with the subject of expense it is thought desirable to discuss in this chapter certain general properties which belong properly to the study of the mechanism of costing, the topic of this chap- ter. Manufacture divides into two general functions, as distinct as the legislative, judicial, and executive depart- ments of a government, and they are Distribution, or sales, and Production, or manufacturing. Expense follows these lines of division and it is the fundamental tenet of modem costing that they be kept distinct and separate in the calculation of costs. Ac- cordingly we have Selling expense, and Manufacturing expense. There are some who assert that there is a. third kind of expense which they term ' ' administrative ' ' and which it is of equal importance to segregate and to apply separately in costs. It is, however, my contention that administra- tive expense is not a distinct entity and that it should be apportioned to either selling or manufacturing expense, or both, and in this treatise administrative expense will be handled in that manner. If in practice it happens to be the desire of an executive to isolate administrative ex- penses from selling and manufacturing expense and apply it separately in costs, it can be done, but it is my opinion that it is not necessary and that it does not add to cost accuracy to do so, and that this expense should be 52 ESSENTIALS OF INDUSTRIAL COSTING spread over selling and manufacturing expense as de- scribed. The chief point that it is desired to establish is the distinction between selling and a manufacturing ex- pense as the two basic components of operating expense. DepartmentaJization of Expense. — The next essential concept in the fundamentals of costing is that of the de- partmental division of manufacturing expense. This sim- ply is a mathematical correspondence with that division of labor which has been designated in economics as the outstanding feature of the factory system. This means specialization instead of completion, the reduction of the processes of production to their individual parts, and the training of labor to parts as distinct from the whole. The division of labor, together with the development of even more highly specialized machines, resulted in a central- ization of effort which grouped processes and in which the processes were sharply differentiated by the amount and character of labor as well as the extent and kind of machinery required for them. Despite the obvious trend to arrange processes in cen- ters and despite the equally obvious differences in capital invested in equipment and attention required to these cen- ters, it was for years the accounting custom to lump all manufacturing expense in one sum and levy that on the productive labor, regardless of "the character of the de- partments in which the labor was engaged. The bed rock of modem cost accounting is the princi- ple of the departmentalization of the plant, and by that is meant the accumulation of manufacturing expenses by departments with the determination of a separate over- head rate for each department. It requires no profound knowledge of accounting to realize that in a department with extensive bench work the equipment and power charges are much less than those of a department with MECHANISM OF COSTING 53 costly machinery of high power duty with severe mainte- nance demands. This exaggerates the case to illustrate the point which may be better understood by the state- ment that in a plant with a blanket overhead of 120 per cent it may be found that departmental overheads vary as much as 60 per cent to 500 per cent. Such a discrep- ancy directly affects costing accuracy and in some cases, where the products take irregular courses with different departmental routing, the blanket overhead is simply mis- leading if not actually destructive to accuracy. So the last essential in the mechanism of costing is the departmental overhead. This itself may be taken in further refinement to any length desired or practicable and in many instances the machine hour or the process hour, of which more will be said later, have been used to assure the accuracy of the cost. The mechanism of costing has one controlling principle to which all others are auxiliary and that is, to attach directly to the product every element of cost which it is commercially feasible to do, and so to collate and apply the remaining factors as will reduce the margin of error to a minimum. It is a principle as simple as that of mili- tary strategy which calls for ''getting there first with the most," but its execution, like war or battle, is, in the specific problem, a matter of the inventive ability of the one in charge and then of the personnel and organization back of the plan, the expense of which, in the last analysis, only is limited by commercial expediency. CHAPTER IV ELEMENTS OF COSTING AND SOURCES OF COSTING DATA For he who grrasps the problem as a whole Has calmed the storm that rages in his soul. — Goethe. The Elements of a CJost.— In the preceding chapter the various types of cost systems and the influence of the physical processes on these types were discussed, and now a further analysis of the structural elements, or anatomy, of costs is in order. A cost is composed of three essential elements, factors, or constituents, namely : Material Labor Expense Material is the substance of manufacture — it is the medium on which the productive processes are exerted in order to increase its utility. To account for the use of material and to determine its proportion in costs is usually not troublesome, but there are conditions where it is a problem of exacting difficulty and where proper so- lution is a predominant factor in costing accuracy. It might also be added that there are certain conditions in waste and scrap where by-products of gi'eater or less value are developed, which present almost profound com- plexity in costing. Material, for convenience, is divided into two kinds, direct and indirect, otherwise known as productive and nonproductive. Direct, or productive, material is that which is an integral or actual part of the product when finished, or in any stage of the processes incident to 5i ELEMENTS OF COSTING 55 finishing and which may be charged as such. Indirect or nonproductive, material, sometimes termed supplies, is that which is required in the operating processes, but which is not at any time a part or physical feature of the product, nor is it measurable for direct charge to the product. Direct material might be illustrated by blade steel in cutlery, yarn in cloth, pig iron in a foundry, sand in glass manufacture, whereas indirect material might be represented by crocus for blade polishing, belts for looms, moulding sand in a foundry, and refractory lining bricks for a glass melting furnace in the same respective manufactures. Labor is similarly divided into direct and indirect, or productive and nonproductive, and here again the dis- tinction is determined simply by the possibility or not of assigning it directly to the cost of the product. If the labor cannot be attached directly to the product in the cost, it automatically becomes indirect, or nonproductive, and must be applied otherwise. These items of indirect material and labor, with certain other expenditures, are collected in an accounting plexus known as expense, either manufacturing or selling. By expense, in modem costing, is implied a departmental subdivision of the total and in the listing of such expense departments there are two classes analogous to the direct or indirect distinctions in labor and material, known as contributing and productive. The contributing depart- ments are those which, by nature, supply service to vari- ous productive departments, and while accumulated sep- arately they ultimately are merged with the productive departments on some basis of prorating, selected to se- cure the greatest accuracy. Stages of Costing.— The elements of cost, namely, mate- rial, labor, and expense, compose the various stages of 56 ESSENTIALS OP INDUSTRIAL COSTING total cost which in practice are termed as shown in the following illustration : • Direct material $50.00 Direct labor 50.00 Prime cost $100.00 Manufacturing expense 50.00 Manufacturing cost $150.00 Selling expense 15.00 Selling cost $165.00 Prime cost is thus seen to be the total of direct mate- rial and labor, manufacturing cost the total of prime cost and manufacturing expense, and selling cost the total of manufacturing cost and selling expense. In this con- nection it might be well to state that administrative ex- pense is apportioned to and included in manufacturing and selling expense. Of course, these are expressions for summary figures only, for in practice the direct labor would be itemized by departments and the overhead ap- plied on the labor by means of departmental rates. Variations in Proportions of Costing Elements.— The provision for the collection and distribution of expense ordinarily constitutes the chief technical province of costing, for it is generally this element or factor in costs on which attention must be concentrated if success is to be attained. By deduction, therefore, it follows that the objective of costing design is to eliminate every possible item from expense consistent with clerical economy and to allocate as much of the cost as can be done directly to the product, as labor or raw material. Only an irreduci- ble minimum should be left to compose expense. Success in this effort is largely a function of the kind of manufac- ture to be costed. Some products involve a low labor ELEMENTS OF COSTING 57 ratio with high, expense, others are high in labor and low in material and expense, while in others material is the major factor with labor and expense of relative insignifi- cance, and frequently intermingled or merged as befitting minor portions in total expenditures. Paper manufac- ture is a case of high expense with low labor, cutlery one of high labor and low expense, whereas cordage is a con- version industry where the raw fiber constitutes as much as 80 to 90 per cent of the cost. A summary description of manufacture such as this may indicate the wide variety which may be encountered in the relative composition and proportions of the ele- ments of costs in different industries and possibly induce recognition of the unquestioned fact that success in cost- ing design demands perspective, for it most surely re- quires a comprehensive grasp of the peculiar character- istics and contrasting elements of various manufactures and a sense of the fitness of facts, for it may truly be said of costing that 'Svhat is meat for one would be poison for another." No matter how great the divergence in the elements of costs in one manufacture from another, the principle of charging every possible dollar of expenditure directly to the product is the first necessity and the cardi- nal rule. The variations in proportion of these elements in cost has been mentioned only to show that the factors in the problem are anything but constant and that the de- gree of success in charging expenditures directly to costs in one manufacture may be easily surpassed or utterly unapproached in another with the same technical skill applied. The average manufacturing overhead or expense rate ranges from 100 to 150 per cent on productive, or direct, labor, which shows that with best efforts to allocate as much as possible directly to labor, the proportion is no 58 ESSENTIALS OF INDUSTRIAL COSTING better than one to one dollar and a half of expense to every dollar of productive labor. It is rare that an over- head rate runs lower than 50 per cent and sometimes the rate amounts to 300 or 500 per cent or higher. As indicative of the problem which is presented in the varying proportions of the elements of costs in different industries, the following approximations are given, show- ing the ranges which maj^ exist and which in individual cases may even be exceeded. Productive labor may range from 25 to 75 per cent of total manufacturing cost. Productive material may range from 15 to 90 per cent of total manufacturing cost. Manufacturing expense may range from 25 to 65 per cent of total manufacturing cost. It is the obvious principle of costing, as well as the common sense procedure in the specific industry, to ascer- tain the proportions of the elements of cost so that effort may be directed to best effect by concentration on the es- sential items. For it will be easily evident that refine- ment in costing the larger elements will result in greater aggregate accuracy than equally detailed measures for accounting lesser elements in costs. This is likewise true of the constituents of an element. For an example, even if labor might be the comparatively high item of the three, the endeavor to account for the expenditure repre- sented by the payroll must be controlled by practical con- sideration in the matter of time collection, the important and large amounts being carefully recorded and the lesser in amount and character not too exhaustively an- alyzed. Perspective in Costing.— Much of the distrust of cost- ing which fills the popular mind and is the frequent obses- sion of executives has been bred from disregard of this ELEMENTS OF COSTING 59 common sense policy. This has been occasioned often by narrow zealots of costing technicalities who applied the same exacting procedure to all items regardless of im- portance and who, while correct in the strict science of the work, lacked judgment and balance in its applica- tion. As example of this weakness I have seen cases where the detailed cost of a product had been carried to four and even five decimal places, when this silly practice ignored the obvious fact that the margin of error in the whole costing machine could hardly justify extension beyond three decimal places. This example is simply clerical waste and while typical is not as serious as the tendency often shown to cost items to such fine limits that the expense of calculation approaches that of the item itself. It must be remembered always that as long as costing is a device for commercial service, it must be designed to carry its own weight at all times and under all circumstances. I know of no apter commen- tary on this weakness against which constant gTiard and scrutiny must be held than that contained in a letter written by Lord Chesterfield to his son on the matter of personal accounts, and which, because of its essential truth as much now as in 1749 is quoted herewith : But remember, in accounting, as well as every other part of life, have the proper attention to proper objects and the proper contempt for little ones. A strong mind sees them in their true proportion, a weak one views them through a magnifying me- dium, which, like the microscope, makes an elephant of a flea and magnifies all little objects but cannot conceive great ones. Operating Ratio.— We have spoken of the variations one to the other in the ratios of labor, material, and ex- pense, and it may be of interest to mention that these ele- ments of cost are frequently employed by statisticians in determining what is known as the "operating ratio." This ratio, possibly more familiar in connection with rail- 60 ESSENTIALS OF INDUSTRIAL COSTING roads, signifies the percentage relation of cost of pro- duction to income. The trend of this operating ratio through the years gives a general guiding index of manu- facturing efificiency and when analyzed further into its elements of material, labor, and expense, is an exceedingly helpful measure of operating efficiency. This operating ratio, of course, varies so greatly that it has no compara- tive value in different industries, but limited to one cor- poration it is informing and as has been stated, is fre- quently employed by statisticians to ascertain and to an- ticipate the connection of financial worth with operating conditions and tendencies. Returning to the essential matter of the elements of cost it has been seen that they consist of Direct material Direct labor Manufacturing expense Selling expense. In the previous chapter the mechanism for costing these elements has been discussed, the treatment in the two chapters being introductory and preparatory to the study of working details which is to occupy the remainder of this volume. The principles have been enumerated ; their execution in practice, the data which actuate them, and the derivation of these data will now receive attention. Sources of Costing Data.— The essential records to which all accumulated information is subsequently con- densed or from which it is abstracted are as follows : Material Requisition Distribution Supply Requisition Distribution Payroll Distribution Voucher Register Journal The collection of all data required for these records will be explained in the following chapters, but it has ELEMENTS OF COSTING 61 been deemed wise to consider these records as focal points before entering the maze of details of which they are the convergence. These records and data are com- piled at regular intervals and the almost universal cus- tom is to consider the month as the costing period. The calendar month is used whenever the payroll ends with the month. Many companies pay twice a month, on the first and fifteenth, but the prevailing majority pay each week with a certain number of days reserved as a work- ing allowance for the clerical routine of computing the payroll. With this arrangement the calendar month would usually end before the payroll week and this in- volves excessive labor in splitting the payroll for proof of its total against the detailed distribution. Because of this difficulty it is the frequent practice, and may be un- hesitatingly recommended, to establish arbitrary costing months consisting of four- and five-week periods. By this device one five-week period succeeds two four-week periods until the end of the year. In detail this would work out as follows : First Quarter Second Quarter Third Quarter Fourth Quarter Total 4 weeks 4 " 5 " 4 weeks 4 " 5 " 4 weeks 4 " 5 " 4 weeks 4 " 5 " 13 weeks 13 weeks 13 weeks 13 weeks 52 weeks It will be found in applying this to the year that the arbitrary costing periods closely approximate the calen- dar month and coincide within a maximum difference of five days and usually two or three. Material Requisition Distribution. — The material requisition distribution is illustrated in Figure 5. It \ 0. Z ^^ 2 ^ t- J" 3 ) , 1 fi ^ V. r "i N J^ K ^ > |i t n «> b -. ^ I •^ s ■>, - ^ !: s V s + ,»• " - = ^ > s. * i -^ ^ • :; i iv ■*« s^ > »■ - ,^ S s j > ■5 t~ ,> > S . \ V •^ ^ > ^» > V * > ^ > \ 1 0^ 62 ELEMENTS OF COSTING 63 shows the cost value of the different kinds of material consumed in the month and besides this gives the full de- tail of the charges to factory order number, process or classification on which the material was used. Material is the common term for direct material and supplies or stores for indirect material. Occasionally direct material is used as supply or expense and the amount of this dis- bursement is indicated on the material requisition distri- bution. Similarly a supply or indirect material might be requisitioned as direct material and such a transfer would be represented on the Supply Requisition Distri- bution. Material used as supplies and supplies as materials are frequent occurrences in manufacture. For instance, the sheet iron used in knife handles might be desired for a machine repair and a bolt ordinarily stored for repairs might be requisitioned for the assembly of a special machine in regular production. These items are cited not because important in amount, but to illustrate the detail which a material distribution record furnishes. The ma- terial requisition distribution is the source of the journal entry made monthly, whereby the various raw material accounts are credited with the totals shown on it and corresponding charges made to the Finished Part Stock account, the Work in Process account or, in the case of a material used as a supply, the Manufacturing Expense account. Supply Requisition Distribution.— The Supply Requisi- tion Distribution, like the Material Requisition Distribu- tion just discussed, shows the cost value of the supplies issued for the month and is illustrated in Figure 6. The credit in this case is generally made to but one account, Stores, and the charge in bulk in proper proportions to the Controlling account under the caption Manufacturing p 3 O S 2 « E 1 U) ^ §1 K 3 (0 = ■■ ^ ^ ? s ^ I t t ^ z o > *, ^ > . * « »- • * 1 > , t- fc > t > fcs -i L> i * - ^s ■V |! a. N* ^ ^ ^ u V ; * a : ^ > > ^ X t ^ ^^ -J i t ^ - ^ ^ i! ^ a •;; -\ -^ )■ X t ^ ^ > I ■; ^i "J -■X i L > V ^ ^ &. t * L v; ^ X i- ■ u ,^ i > ^: 'j^ i; , 3 - ^ « L V ^ .i" ' »' -! I - e ; > ■ i 1 r ; ■- ~t ^ J z - 64 ELEMENTS OF COSTING 65 Expense and Selling Expense. The Supply Requisition, however, also furnishes the detail of the departmental charges of the supplies used and any refinement or analysis of these charges which may be considered of sufficient moment to record. For instance, in a plant of 20 departments the bulk charge for supplies used may be an appreciable proportion of the total expense of those departments, and in such a case the charges may be re- solved into their parts. For example, in a department using files, small twist drills, or in another department using various kinds of expensive abrasive wheels or grains, it may be desired to know the amount of each and this information may be compiled on this Supply Requisi- tion Distribution. Information of this character is not needed in such detail to compile operating overheads, but it does tabulate data which are of inestimable benefit to the management. An executive should trace all expenses to their lair and by constant vigilance and statistical study keep himself apprised of the various items which com- pose current expense. A record of this kind will supply the means and also may be extended at will. Pa3rrolI Distribution.— The Payroll Distribution in most industries is the most expensive feature of the cost system and it is generally also the most difficult to secure with accuracy. It is dependent upon time reports which in a later chapter will be seen to contain great possibilities for error and incorrect charges. It is fre- quently a work of such detail that its enormity detera steps for its proper execution, and even with adequate provision for its compilation, correctness in its details de- mands constant and closest supervision. The Payroll Distribution accounts for the disposition of the money ex- pended for labor, whether it be shop wages or office or administrative salaries. The latter are readily dis- 66 ESSENTIALS OF INDUSTRIAL COSTING PAT aoti. CMSTmaunoN . ' . .^^^u ..u. _. WFT ptrr M»T ' -^ • ! ! ! • ■" " - ■ C—^-^-* /t 1 ^ , ' " ^• . .. ..ir, , 1 ■ 'I^;. ,. kic , . 1 n ^ *fH" i . tj , . , » , Tr-t * r ., ... '■^- , , ::,i.. , ., 1 L- Tt^' — -^i ^—4^ Al:; ■• ^ h , J. , . ■ .. ■ "P^ ^ ^ '-^ — '-" ■ r,u>B-. "WW.. ^• , ■ . "rt- f « '4' f r"/1 '/\' ** ' f--.-J-,- ..rvi -, ■ U)MM f^ n -—tH ;., ■ — - ,, .,1 □ 1 □ cr a n u LJ L_T.l tn *j FiGUEE 7. — PAYROLL DISTBIBUTION tributed and almost invariably are fixed in proportion and, therefore, rarely require detailed time reports, so that the distribution of shop wages constitutes the chief work of the payroll department. The Distribution must prove with the total payroll and its detail is determined by the specific requirements of the particular manufac- ture. The primary division is between direct and indirect labor, or productive and nonproductive. The productive labor shows the charges against factory order or process and thus in whatever subdi\'ision is required, the nonpro- ductive covers the big field of all labor not engaged on actual production. It may include repair and main- tenance labor, supervision, inspection, power, heat and light labor, yard labor, roustabout, stores department, re- ELEMENTS OF COSTING 67 I -PAY ROLL OlSTWIBUnON 1 PITODUCTH.C „,.„ 1 t,.,T Dtrr DPj-r 1 DEPT DOT DiPT 1. .1 1 .9 • 1 » 1 K 1 » 1 _ 1 1 :: ; r.Tm - #,^ p s^ n: ftt'^ "If""' F -^ - 1 S -^ iio.iM - r : :; ... ^ - -t" - ijiri -i Pz 4 - - m ~t 4+- -H^^ F - -- :|j::_ :: _[_ 1 ■. ! 1 J ; r ! 1 7^: 1 ii %\. r ! T 1 j_ i:- i 1 • 11 , 1 ' i''li li^- rtf 11 H^'.^ • i 1 1 [2 ■•\ Lu, ,/ ?T -ilx 1 1 T^ L> - r » T -li l/^l Ti Iff'*'' \ 1 rP' -'^ ,j ,, E tx-1 ^, i ( t-L ^ 1 I' 1 Ea. .j, , i -t W t , ^ * , i c2 1 ^ t i iu£ ■ 1 fit Mf*^ , r ^ "T ' ' ' ' ^ Lr^ Li/ 1 It. ,. 1 ■ l.i., 1 1 /, , '/F> z - tTpj i: -J- - -U+4[- ^ - - ILii g ttg :::i I :: :: I :: '^::: '.'. '/ _.:.„ - ^P^- B Dl ^Y ,, ,; Uv ii ■^.^TC;- •/f/' 1 rTt "7* — -■- — — - -r^' __t- ""! i,, iV.... ,3-^ — — t k — 1 ti: zX- — fi' ^^4- ^ ^^L- — -- ■— - *rrr -f- ■/, iIkiii 1 7?<- - «'-A -^ <*"- 1 "J^ ^ 'f 1 ri,in-/f/-''i"" ■^ it. ., ■ 1 V ^r---><'^^/i ''- : ^t t ; "^ 4' // .i- .'*!»,. .r ■■X^- J ■ M- lt^>fc.T >■<■/. ^ rr^° ,1 i , ■ * Wf.rt. /■/'.. /«^ (f.. — _^J. 1 t-'J- 1 -t*?L- ' ■; ?, J.^^2l^ Try, €. ^f}t ^ . V L/ i./.fi.Jl,. -^i ;►?., -yV y_.. 1 r'4r • f,*^ - 4 • '^: K/-.... rf. ■ . , z' . *,Jc^» Li ^ ^.-j??;'?H-j —irrnssTST — — «... . .. 1 .. ..,„_. 1 ..... .. .»... 1 .. ».... 1 ..... — .. -<..., = .-,.u.. ^S= nxn. =..-. 1 . Mr '^^ f'J - - ''1 'Ml 1 ■ irii. ^ i [ (.L i£ '^ , ■ ' 1 1 T r 1 --- fe - - ' -- ,^ II r ^■r r '7 ■ < 1 'y Jr C . - — ' . " — -■- ' --- .■J = =, ^ L •■ (( LS , f.I r ti ^^ ^i - — ' T I. Figure 8. — voucher register {Cont,inued) tion after taking a physical inventory. In order to local- ize possible errors, raw material is divided into its sev- eral leading kinds, supplies are carried in a stores ac- count, the details of departmental expense are controlled by one clearing account, generally termed ''manufac- turing expense.'^ These measures describe in brief the use of the Voucher Eegister for costing and are illus- trated in a typical Voucher Register in Figure 8. As will be observed, this form provides space for the voucher number or index by folio and line, the name of the dealer or creditor, the date of payment and then a series of captions covering the charge distribution. First, 70 ESSENTIALS OF INDUSTRIAL COSTING tliere are the fixed asset accounts and here are listed only the ones which are presumably active in the way of addi- tions, or a blank column for the other asset accounts entered, with designation by account. Then the list of raw material accounts, then supplies, then payroll, in which the weekly payrolls are entered, and then manu- facturing expense. The totals of each of the columns under these captions are transferred monthly as charges to the accounts by which they are entered, the entire total being a credit to accounts payable. In connection mth the Voucher Register the manufac- turing expense account column is particularly note- worthy, for this supplies the detailed charges to depart- ments of all items which cannot be charged through pay- roll or on requisition. Each of these charges is entered from invoices bearing the charge key or code number, in- dicating either the subsidiary account number, or, as in the illustration, the line in the Expense Analysis which, as will be described later in the volume, is a device for handling subsidiary expense accounts more readily and practicably in greater detail than the conventional sub- sidiary Expense Ledger. Petty Cash Expenditures.— It might be of value to add that petty cash expenditures are handled through the Voucher Register. A fixed fund is impressed for facili- tating small cash payments and a voucher drawn at the end of the month for the amount expended. This voucher is entered in the Register with such distribution of charges as its own record indicates and the fund thus re- plenished. This method avoids the necessity of consider- ing petty cash as a separate source of costing data and thereby assists the routine considerably. Entrance of Costing Data through Journal. — Up to this point there has been described the Material and Supply ELEMENTS OF COSTING 71 Requisitions Distribution and the Voucher Register as sources of cost data, and in conclusion it is necessary to explain further items which are derived from monthly journal entries. These items have been mentioned in the chapter on The Mechanism of Costing, but for comple- tion and by way of brief repetition, they are presented herewith. Certain expenditures are made infrequently, possibly only once a year or even once in three years. Among these are depreciation, taxes, insurance of all kinds, items of extended duration in use but consumable and carried in suspense accounts, etc. In order to main- tain current records of comparative value it is necessary to reduce such items to an equivalent monthly amount arbitrarily put into costs by process of journal entries. These items are charges to manufacturing or selling ex- pense and credits to the various accounts to which they are assigned, as depreciation, taxes, fire insurance, group life insurance, liability insurance, and such extraordinary replacement accounts as may be required. Credit bal- ances to these accounts are thus constructed to which the expenditures when made are charged through the Voucher Register or other costing channels. This chapter has presented the elements of costing and essential sources of costing data. The succeeding chap- ters will present explicitly the specific methods of ac- cumulating the information from which costs are derived, and it will follow the plan as developed in treating first of material, then labor, and then expense. CHAPTER V THE COSTING OF MATERIAL All product of factories consists of combinations of materials and the time of the necessary fonnative processes. — Dexham, Often the waste products of an industry prove to be as valuble as the product itself. — The Wall Street Journal. Material Accounting.— Material is money and the ac- counting of its movements is of importance equal to the control and checking of cash. Currency, prohably be- cause it is the readier medium of exchange, instinctively receives scrupulous watchfulness, but the fact that mate- rial may possess equivalent or even greater value is often a difficult working concept to instill into the minds of those responsible for its care. Yet absolutely correct accounting of every dollar expended for material is not only a prerequisite of costing, but a preliminary to economy, and by accounting is implied something beyond purchase and the registry and proper payment of bills therefor. For ac D< (to oo 1 I 1 OS m 1 O 3 Z 2 CD 1-H \ '' > O M u N I o hi 1- Z D Si 1-H L s >• > t ' CM »-H "a ■ hi OS 1-H 2 < ] 1 b 4 Z 5 : C : J 1-H U >* 1 ■ ( H Z 1 < >■ Z < » ( ^ ,. Ph 76 COSTING OF MATERIAL 77 woolen cloth. Cloth is a product composed of yarns of various sizes, mixtures and proportions. The problem of ascertaining how much of each yarn is required for a yard of cloth is not as easy of solution as the compilation of the bill of material of the parts of a dump wagon. Sometimes it will be found that manufacturers have maintained records showing how much of each of the different yarns are used in a certain yardage of each cloth, but this information often is unreliable and should be checked before its use in costing. Also the styles change with the seasons and it is necessary to estab- lish estimates of costs from short runs or merely sam- ples. In such cases, actual physical dissection of the product into its constituents is resorted to and a meas- ure made of the kind and quality and amount of each yarn. Dissection is usually resorted to in textile fabrics for this purpose, as instance of which might be men- tioned carpet manufacture, in which a small sample is dissected or picked apart to its constituent yarns of which the weight is taken, the total being checked against the original weight of the sample intact. Paper is a product the composition of which it is im- possible to establish by analysis of the finished product. Paper comes in wide variety of grades, determined largely by the character of the ingredients. Various fibers and loaders are used and often there will be no assured records of just what furnish or mix is used for a given grade, and as one of my former associates has said, this difficulty is further eomphcated by changes made at the beater's whenever a tearing test in process indicates the paper requires some modification. As may be gathered, the condition is one which must be met and solved. The proper procedure is to determine by exhaus- tive study, if necessary, the formula of each grade of k « £ 3 < o c •; z kt z ; J I < a (0 i S > i C . UI o H 1 !;! O »• It o £ -J- I S ° z » . 2 3 . t 5?S 2- 5 1? „l So £1^^ °! w ; < o u ; r i ft 78 COSTING OF MATERIAL 79 paper and then to maintain accurate records of the actual execution of these formulaB at the beater's and to note any departure therefrom that might prove necessary. Somewhat the same problem is presented in cordage manufacture where, because of the high factor in cost represented by the fiber, it is intensely important that the proportions and kinds of the fiber going into each rope be accurately established and then that the batching be faithfully carried out and properly recorded. As an idea of what this means 1,500 different sizes and kinds of rope may be made from readies composed of 75 different kinds of yarn representing 30 different batches and pos- sibly 15 different fibers and fillers. Plated ware presents an interesting problem in the charging of the plating materials directly to the product. Nickel and silver and gold are valuable materials and are big items in the cost of plating. The amount of such plating materials used on the product is difficult to deter- mine, especially if there is a wide variety in shapes and sizes. Plating materials represent a concrete case of a considerable factor in costs which should be charged directly, but which compel ingenious measures to do so. The easy escape is through the inaccurate method of in- cluding their cost in expense and applying this expense on the labor which would give absolutely invalid results. A satisfactory procedure is to establish the surface area of each article by developing the surface on a plane. A unit of area plated in a given period establishes a plating material cost per unit and this may be attached to the article on the basis of the proportionate surface area it possesses. In actual execution the surface rela- tion one to the other in square feet of the various articles produced would be established and the plating materials used in the month distributed on that basis. 80 ESSENTIALS OF INDUSTRIAL COSTING PURCHASE REQUISITION no PURCHASE DEPARTMENT PLEASE ORDER O^'T^ /J^^ DESCRIPTION ^,<^r -^^ A**t£^ ^<^g-<^^!^ ^ USUAL DEALER APPROVED FiGtJKE 13. — PURCHASE REQUISITION This discussion may indicate tlie scope of the problem encountered in deteraiining the quantity, size, and kind of material used in a given product. Happily, in most in- stances this information is readily procured, but in some instances it is a matter of patient investigation and great labor. Ma^rial and SypFLY Purchase Record NAME ADDRESS t»«tCl r».,.„ - 1 ^yCe.'***^ce^ fiCje-et-^oZi^ ^ C«-t_-«_c^ /^i^^ ^ 4 r ^^:!^.. ^y-i^^^jL^^^ C /^^^.-^^.iiii^^^X >^ /^ .^ /^^..^::^ <>1.^^jCjC^. ^o ^^^^^-^^-^j:^' '^ ^ ^ 4 ^^ ^^^ y" Figure 14. — material and supply record COSTING OF MATERIAL 81 REQUEST FOR QUOTATION Please Quote on This Sheet Your Best Price F. O. B.. For the Items Specified Below: (EACH ITEM SEPARATELY) dCA.^'i^^^ '^^^ Date — sA s / a i DESCRIPTION 1500# 80a Horse Leather. THIS I& NOT AN ORDER REQUiaiTION NUMBEH T o Premier leather CnmpRny. C o rry ,. f a. 1466 Quotitioii Signed ^ -^t-^-'^^c^Sa PURCHASE ORDER NO. Figure 15. — quotation inquiry Value of Material.— The valuation of the material used in production, once the quantity, size, and kind are estab- lished, is accomplished from stores records. Successful costing of material revolves about a centralized and fully authorized stores system. Stores are now well estab- lished and well known institutions in manufacturing practice, but while the principles are well understood the in TO rraalar Laathsr Coapaoy o-oo N? Corry. Pa. o*t. 2A5/21 4520 11 ■Mi^viA freight MAAK aHiFwiNT Order 10.4026 »•<>• Corr7. P». »p»iT «»»iMT Tciwa 2% 10 days, oat SO «» "«> 14S6-8tor«B Mil itm «.»..>T, ' nacm 1 i S : 1 5 : i J : r H \l Hi ■ z S • 1BOO# 3»» Boraa laathar at • SI ;8r t> K) K) ToPretnier Leather conpany Corry. Pa. s«r«,> freight ' ° • Corry, Pa, '«»-»J< 10 days, net 30 .ir«iNT Order Ilo,40P5 14S6-Stares :.As/H? «20 Sea Horaa Laatbar Figure 16 A axd B. — original and duplicate of purchase ordeb 82 COSTING OF MATERIAL 83 >o Tc^eoler Leather Cowponj Coiry, P». r2A5/: ,^9 4520 ■sHiFvi» freight ""^ Corry, Ta. ™""»E< 10 days, net JO 1 •HinaiNT Order |io.4Q2S 1456-Stores I I I >o Sea Roree Leather Figure 16 C. — triplicate of purchase order applications often leave much to be desired. As an in- stance, I recall an investigation of the accuracy of stores records which was made by totalling the issues as repre- sented by requisitions, and then comparing this amount with the consumption indicated by the differences in physical inventories and the purchases for the year. The former amount was only 87 per cent of the latter, indicat- ing an error of 13 per cent. Stores records should be maintained within a margin of error of one-half to 2 per cent, although this degree can only be achieved by per- fection in the machinery of stores and diligence in its operation. Material in modem practice is ordered from stock cards or sheets, although occasionally by specific requisi- tions for special orders. Its ordering is a function of the planning department, its purchase in charge of the 84 ESSENTIALS OF INDUSTRIAL COSTING purchasing department, which may or may not be sub- ordinate to the planning department. As illustrative of Material Stock Cards Figures 11 and 12 are presented. It will be obsen'ed from these cards that the amounts ordered, received, and used are shown and the balances on order, on hand, or available are indi- cated together with unit prices. Whenever the quantity on hand goes below a low limit known as the minimum, it stimulates a purchase requisition for a definite order quantity, also indicated on the purchase record. The Purchase Eequisition, a form of which is illustrated in Figure 13, when finally authorized, goes to the purchas- ing department. Thereafter, practice varies, although, of course, the common objective is to secure best sendee in delivery and best price. Assuming a conventional case, the purchasing department keeps cards. Figure 14, show- ing the dealers in each of the commodities with certain descriptions of the character of each dealer in the matter of deliveries and prices. Quotation inquiries (Figure 15) are then sent to each or to a select list of the dealers, inviting a price on the material specified in the requisi- tion. L^pon receipt of these quotations decision is made after such personal negotiation as may be desired as to whom the order is to be given. A purchase order, illus- trated in Figure 16, is then made out in triplicate, as indi- cated. The original goes to the dealer, the first copy stays in the purchase department for follow-up, and the second copy goes to the storeskeeper. The original has a detach- able acknowledgment slip requesting promise of delivery and immediate return of the slip. Upon receipt of this slip the date of acknowledgment and promise of delivery are entered on the copy of the order in the purchasing department. The storeskeeper 's copy does not show the price and sometimes the quantities are omitted, although COSTING OF MATERIAL 85 this latter procedure is an optional affair. The object in not showing the quantity is to guard against the possible temptation to omit count on receipts. This is a very real consideration, for frequently in the rush of a big day's re- ceipts the count may be slighted and the order used to re- port the quantity received. Receiving slips are made out RECEIVING RECORD N9 4097 Received From AilrlreBR EXPRES5 FREIGHT PARCEL POST 1 WKISHT PAID COLLECT WEIGHT PAID COLLECT WEIGHT QUANTITY MSCRJPTION WEIGHT fvcbut Onlu No. BY DATE BY Hmufastviiiu ar AMERICM SALES BOOK CO., UaiTB, NlUlU Fuuw ■• T. Figure 17. — receiving record by the storeskeeper as indicated in Figure 17. The receiving slip goes to the purchasing department and from it the quantity of material received is noted on the copy of the order in the purchasing department. Distribution of Invoices.— In connection with these forms there are some things to be noted particularly. The purchase requisitions show the account to which the charge is to be made, or, if it is an expense item, the code symbol. This same account designation is copied on the 86 ESSENTIALS OP INDUSTRIAL COSTING purchase order in the place provided. When the invoice arrives the copy of the order gives the information nec- essary to check and distribute the invoice, which is as follows : Quantity received Price Distribution or charge The matter of distribution is very important, because it is the guide which fixes the point of entrance of the charge into the books. The direct connection of the account symbol on the purchase requisition with the invoice eliminates lost motion, and simplifies and insures accuracy in distribution. As a guide for the proper charge on anything pur- chased it is good practice to compile a detailed list of all items composing the various accounts and of the sub- sidiary code symbols of expense. An illustration of such a list is shown in Figure 18. This shows the composition of the asset accounts, the raw materials, and articles considered as stores, and the index of code sjTubols for expense, of which latter more in a later chapter. Figure 18. — Typical Instructions for Invoice Distribution STANDARD INSTRUCTIONS Serial No. 2 Issued to Date Issued: April 22nd, 1920 SUBJECT: Invoice Distribution. As assistance in makinsr out Material Requisitions and makinsr the proper charge for Shop Ordei's, we assume that the following will be of assistance. "We cany accounts in our General Ledger which require the classifica- tion of various purchases according to their captions. These accounts are as follows and a general idea of the items to be charged to them is indicated therewith: COSTING OF MATERIAL 87 Steel; Stores: Blade steel Acid Gaskets Resin Spring steel Alcohol Gauges Rivets Bolster iron Alundum Glass Rollers Lining iron Aprons Gloves Sand Babbit metal Glue Sandpaper German Silver : Balls Goggles Saws All silver in strips Beeswax Graphite Screws used for knife ma- Belting Grease Shellac terial Belt cement Grease cups Shear bids. Belt dressing Grindstones Snips Packing Material : Belt hooks Hacksaws Soap Labels Bolts Hammers Soda ash Knife boxes Bricks Handles Stamps Packing cases Brooms Holders Steel, CR Brushes Iron Rex Brass : Buff sections Joints Razor All sheet brass in Burners Latches Stone strips or rolls used Bushings Lead Stools for knife material Cans, oil Leather Suet Carborundum Lime Tacks Covering Material : Castings Mills Tallow Celluloid Coal Nails Tallow sticks Boxwood Coil springs Nippers Taps Redwood Compound Nitrate Tees Stag Crocus Nuts Thermos rods Pearl Cuspidors Oil Thinner Fibre Cushions, rub. Packing Tripoli Hard rubber Cutters Padlocks Twine Fancy handles of Dressers Paint Valves any kind such as Drills Paper Vises metal, ivory, etc. Drill rod Paste U's Elec. lamps Pegs Washers Purchased Parts : Ells Pliers Waste Scales, bales, cle- Emery Pins Wax vises, or shackles Emery cloth Pipe Wheels Chains, shields not Felt Plugs Wire our make Files Pyralin Wrenches Nail blades, etc. Fire clay Pumice stone Zinc Forge plates Rags Frame blocks Reflectors Building Account: All buildings except those dwellings carried under separate accounts, including foundations and construction. Machinery and Tools: All machinery, machine foundations, hand and foot machines, machine guards or safety devices, blowers, furnaces, forges, dies, patterns, pol- ishing wheels, shafting, hangers, bearings, belting in use, marking blocks, box and plates, machine attachments, shears, drops, wheel frames, balancing rocks, arbors, tumbling barrels, presses. 88 ESSENTIALS OF INDUSTRIAL COSTING Steam Power: Boilers, boiler feed pumps, feed water heaters, engines, blower for draft, stacks, steam mains and valves. Water Power: Water Wheel. Electrical Equipment: Generators, motors, switchboards, starting boxes, pyrometers, amme- ters, power feed wiring, lighting wiring. Permanent Fixtures: Elevators, galvanized blower pipes, factory phone system, sprinkler system, fire extinguishers, etc., lavatories, water closets, watchmen's clocks, water pump, water tanks. Pipes and Fittings: All heat and water pipes (not connected with sprinkler system) and radiators, etc. Factory Furniture and Office Equipment : Trucks, racks, benches, stools, lockers, filing eases, desks, chairs, time clocks and racks, tote boxes, vises, wheelban-ows. (Note: Eefer to Expense Analysis for Code for Expense Charges, Chapter 9.) Classification of Material Control Accounts.— This list also shows the policy of classifying important material accounts, which is done to localize jxtssible error in the material transactions. For instance, in a cutlery plant the important items of material are : Steel Brass Nickel silver Covering material Packing material Purchased parts and in a knitwear plant : Yarn, Trimmings Chemicals Cases Packing material and in a cordage plant : ^Manila hemp Sisal Isal Jute Oil, whiting and tar COSTING OF MATERIAL 89 VOUCHER RECORD Date Invoice Received V. R, No. Price Check by Extension Check by Received Date Receiving Shp No. Freight or Express On Rochester Statement DISTRIBUTION ACCOUNT AMOUNT ACCOUNT AMOUNT FiGUEE 19. — VOUCHER RECORD Accordingly the raw material accounts are classified in this manner in each of the cases cited. It is apparent that by this subdivision of accounts it is easier to check the balance with the physical inventory and so measure the accuracy of the current records of material movements. Each of the accounts is charged with the purchases and credited with the issues indicated by the storeroom requisitions. Should a difference be- 90 ESSENTIALS OF INDUSTRIAL COSTING tween the ledger and physical inventory balance be en- countered the subdivision of the accounts makes it easier to locate the source of the error. Vouchers.— This describes how the quantities, prices, and distribution are taken from the purchase order in the purchase department. This information for con- venience and accuracy is entered on a voucher slip when single bills are entered, such as Figure 19, which is at- tached to the invoice, or a full sized voucher is used against which several bills are collected from the same dealer. Frequently this voucher is a duplicate copy of the check drawn in payment, as illustrated in Figure 20. The invoice is then entered in the Voucher Register as described at length in a previous chapter. The invoice, or a copy, is then sent to the planning department where the entry on the stock records is made, together with the unit price. Costing of Hajidling Expense.— In connection with handling expense there is an important consideration which modern costing has established in line ^vith the principle of charging all expenditures- as directly to the product as possible. This refers to the addition to the billing price of the transportation and hauling charges and sometimes of the cost of handling and storing. In my experience the usual custom is to add freight and express and cartage to the billing price, and to carry the stock- room expense as a contributing department, which is charged into the productive departments. There are criti- cisms of this method which may properly be made to the effect that this handling expense should be added to the material cost. If this is desired, and occasionally it is im- perative, the expense of the stock department may be ac- cumulated and the ratio determined of its total to the value, weight, or any other unit of material, either pur- 14*7 FLOOR NICHOLAS BUILDING, TOLtOO.OHIO TO TMC fte-7 • 6.60 5.50 95.69 ?.50 110.29 2.21 loii.08 Home Savings Bank ToLEOO.OhIO June 11, 1917. /^j5^ Toledo, Ohio A v\ BiVY TO THE ORDER OF The Walding, Klnnan ft llarviii Co.. Toleio. Ohio. >4 « 6A WM J« 5.J0 The n^Ulng, KiBBan a Barvla Oo», ^ ToUde. Ohle. ■? f-ACE /jO LINE t?)j MONTH OF Ifay 1917, C"- Noint of pricing — it is in the taking out of this varying material price in the cost of sales when used to determine profit. It is obvious that, in any system which develops profit by deducting from income a production cost composed of '■* MATEIRIAI- JOURNAL Used on Ctassfficat-c^ SL^-M^ WmM .» IM P*c* U *& •.• MATERIAL ISSUED pi-a«T Pnt. 1 Ou«>? Prtc 0— «7 Pncc 1J«~^ p™. Q-uar Plies «—«W »*• i 1 f I i 1 1 1 i 1 • \ 1 1 • \ 1 ' f i 1 1 ' i I 1 1 1 i MATERIAL IN GOODS SHIPPED | 1 1 1 ] 1 1 Figure 30. — material journal parts of many expenditures, the essential necessity is to deduct in costs no more nor less than expended or to take from income every dollar of expenditure, thus leaving the margin of profit. If costs are kept by order number and the finished products mentioned at the various producing costs just COSTING OF MATERIAL 107 as stock records of varying priced raw material, this problem is not difficult. For it is only a matter of deduct- ing the average cost as the product is shipped. But if the order system is not used and it is desired to approach its accuracy in the matter of accounting for material in costs, a material journal may be used such as indicated in Figure 30. This form was developed for a manufacturer using circles of brass and copper of vari- ous sizes. As these circles were issued to manufacture they were posted with their price to the journal. As the articles were shipped the cost was figured less the ma- terial and this factor was added from the material jour- nal on the sheet indicated by the size of the circle used. This concludes the discussion on material costing, the object of which has been to present the essential require- ments, the means of meeting them, and then to consider certain complicated phases of the problem with sugges tions as to methods of successful solution. CHAPTER VI THE COSTING OP LABOR Time is the measure of business as money is of wares. — Francis Bacon. Variability of Labor Costs.— The difficulty and neces- sity of labor costing are illustrated by the statement of Director Clayton of the United States Training Service to the effect that about three-fourths of the employees produce less than the average output of their respective establishments and usually fall below 35 per cent of a normal day's production. The significance of this statement should not be over- looked, for it indicates the great range in individual capacity existing in the usual plant and describes a con- dition which obviously complicates the accurate costing of labor. Labor is also one of the costliest items of total expendi- tures and one of the most elusive, and the foregoing statement of the head of the United States Training Service would certainly bear this out. Labor is also a large item of expense which is variable and which requires constant managerial effort and super- vision to control its economy and even higher skill to reduce its cost. Material is a definite and relatively fixed element in costs and so are taxes, insurance, heat, light and power, but the payroll for labor is a big expen- diture, usually the predominant one in which exists probably greater latent possibilities of variation and 108 COSTING OF LABOR 109 flexibility than in any other. For years wages were con- fused with labor cost until the fine analysis of intelligent research showed the fallacy of this confusion and de- veloped the true, or "unit," cost. Unit cost is the arith- -PAY CH£CE- Pay Period Endinq Form No. S 8914 WFEK ENP'W No. NAME 1 MORNINQ AFJERNOQN OVERTIME i IN OUT IN OUT IN OUT t- sun: «0N. rue. WEO TMU. FRL MT. RA TO THIS PAY-CHECK MUST BE OASHEO BV OWNEB. IF THIS PAY-CHECK 18 LOST THE CHIEr TiME-KEEPEB SHOULD BE NOTIFIED IMMEDIATELY, AND IF IT MAS NOT BEEN CASHED PR"OB TO THE NOTIFICATION. PAYMENT WILt BE STOPPED AND A NEW CHECK ISSUED TO THE LOSER. The Company will not be responsible fob The coss of pay due to the cashing of this PAY^JHECK when phesenteo by the wrong party. THIS SIDE OUT No. NAME PftM o» ttotrntnenit Thao RnorfflBf Co. ol N. Yi Figure 31. — front and back of clock card metic relation between wages and output and cannot be computed without both. Labor costing, therefore, is devoted to the determina- tion of unit costs as far as productive labor is concerned, and to the classification of the expense represented by nonproductive labor. It is a phase of costing etf ort which 110 ESSENTIALS OF INDUSTRIAL COSTING deals with the biggest side of all industry — the human — and, therefore, requires qualities of corresponding big- ness in its application. Timekeeping.— The introduction of a timekeeping system is one of the most delicate industrial ventures which may be imagined. The reason for this is contained in the instinctive attitude of resentment which seems to possess many individuals when called upon to account Date. Pay Roll Department: Please enter on Pay Roll No.. Name -. this operative has been employed as. in Dept at rate ol ^per hour. Signed Employment DepL Figure 32. — memorandum authorizing entrance of new employee on PAYROLL for their activity. It is a brother to the distrust which first fastened upon time study, a much more ambitious, scientific, and analytical effort than cost recording, but it is bred of the same blood and should be met with the same policy, namely, absolute frankness. Anything which contributes to the world's good is desirable ; he who can make two blades grow where one did before is a benefactor, and cost recording has this aim fundamentally. It is not directed at bigger profits for capital alone^ but also to greater service by estab- COSTING OF LABOR 111 lishing definite knowledge of the financial nature of the physical necessaries of life. If this motive can be made plain, installation of timekeeping will be simple. There should be no misunderstanding if honest motives actuate both the employee and the company and if no ulterior or unjust end is being furthered or protected by either. This chapter has been prefaced with the foregoing commentary because accurate labor costing cannot be done without time clocks and the cooperation of every QUIT SLIP Employment Department: Plea.se be advised that No. Name Hmployed In Dept. hn<; Quit <^ff<>ctiv<^ lO for reji«nn of Supt. Figure 33. — quit slip employee in the inquiry which the time report represents. Many manufacturers are constrained from accumulating dependable costs because of the hostile attitude of their labor, and costing as a remedy for this madness is viewed suspiciously as a "hair of the dog that bit them." Payroll.— Labor costing is the detailed accounting of every dollar expended in the wage fund and that includes office and administrative salaries. It requires first, an authentic periodical record of what this fund consists, which is known as the payroll. In small plants with few 112 ESSENTIALS OP INDUSTRIAL COSTING employees the superintendent can compute the payroll from the memory of his morning and evening nods and greetings, but this condition is rare to vanishing and is gone for the purpose of this treatise to the dead limbo of the past. In modern plants with thousands of employees some form of mechanical register of attendance is indispen- sable, and this has been supplied by the check or clock system. The check system is antiquated and its record RATE CHANGE REQUEST Date Name No. Has requested an increase in wages which I d^oot^rMommend *°'" *••€ following reasons: Foremao Approved Rating Present Rate Supt. Granted Changed Rate Approved Not Qraoted Mgr. Employment Dept. FiGUKE 34. — RATE CHANGE REQUEST of doubtful legality. The only quality of this method deserving attention is the number which it attaches to each employee. This number system sacrifices per- sonality to some extent in submerging the name, but results in a vast lightening of clerical detail. The in- and-out clock system is the only dependable and cer- tainly the most satisfactory method of recording attend- ance. Special clocks for the purpose have been developed which are foolproof and automatic and are controlled electrically from masters and are indisputably correct. The usual type of clock uses a card, such as shown in COSTING OF LABOR ll3 Figure 31. This card shows th-^ employee's number and name and registers the time daily by morning and after- noon and overtime, that is, time beyond the regular hours. This card also has a receipt which is detached and held by the employee and then presented for pay- ment, duly signed. Provision for these time cards is made by the payroll department upon receipt of the advice of the employ- ment department. When an addition is made to the number of employees a memorandum, illustrated in Figure 32, is sent to the payroll department and when an employee quits or is discharged the time card is drawn by the employment department and the card, attached to a memorandum (Figure 33), is returned to the pay- roll department. Changes in the base hourly rate should be made intelligently and in many companies authority in this matter is taken from the foreman and vested in a committee or some higher plant executive. Advice of whatever action is taken is sent to the payroll depart- ment on a form similar to that shown in Figure 34. The clock cards are extended, that is, the hours spent each day are marked for the day in the margin provided on the card and then totalled for the week. In day rates these hours are paid at a fixed rate and the time is ex- tended by this rate and entered on the payroll. In the case of piece work, bonuses, or other differential wage systems of payment, the hours on this card are used as the check against other time cards or as the basis of calculation of the wage payment and, therefore, in any case, are the fundamental facts of labor costing. Payroll forms vary largely with particular conditions, but Figure 35 is a representative sheet which has been designed to work with an addressing machine and thus save labor in printing the names. It is divided depart- f2 114 COSTING OF LABOR 115 mentally and each week a new fly sheet is used so that the same name sheet may be used with such additions or withdrawals as may occur. Income tax legislation has required the individual record of wage payments, and the forms shown in Figures 36A, B and C were devised for this purpose. By a simple adaption they may be used for the departmental records. Figure 36A is the sheet maintained for each individual and it will be observed it provides for 52 weeks, or a year, as it is printed on both sides. Figure 36B is kept departmentally and shows the wage of the employees in each department. The margin provides for names and the sheet is made out weekly. Figure 36C is a summary record made weekly from the totals of the departmental wage records, as shown in Figure 36B. By means of this sheet an individual record may be kept for the year and by use of the margin may be converted into a weekly departmental record and a further summary of the same. The location of an employee in a particular department is denoted by his clock number. To effect this each de- partment is given a. range of clock numbers and all em- ployees in that department have a clock number within that range. For instance: Department Number Clock Number 17 100-175 18 176-280 19 281-350 20 351-425 21 426-525 etc. So far this discussion covers the basic or proof record of the total time and total wages known as the payroll, but this serves only as a check upon the finer time dis- tribution representing the varied activity of every employee. This information is obtained from the coUec- EMPLOYEE WAGE RECORD OePARTMCNT , NUMflCR Hi X 1 '' ,,,...., , , ....._,. ill 8 sL ' i ' " ■- s ~ • ; ■ ■j< i liM s= ii H f _ ^- ' 1 ' ' ;■• 1 jiii '! 1 ! ii J n S ; T ? ! s 1 . 5 ^ , r If °i 1 1; 8 S! ..,™ Ph 116 ] { ■ 2 1 < ft i « 5 6 • > ■a ^ n ~i § 1 1 .5 J s ^-4 • I EMPLOYEE WAGE RECORD i 5 i * ]i[\ p If 1 :| ^ r ... H if : :1 > II r I \ : I il i * I'l 1 1 11 «nc II .... 1 1 I— 1 m ^ 117 5 S 1 " 1 1 I i 4 G i C l < tr «o 1 E i i: J Ip .. - 1 S C Z Jj z,,. °1 Q IT O u bJ X i 1 hi S > -1 Q. UJ < z i? : 1 J i 1 2 3 IN i! "^ 1 1 1 ■^ t 1 =■ j ir 1 1 ! 1 1 1 1 — - If I'l j - p J ; 1 ! = 1 Z If f 1 11 „n> B is .... 1 o 118 COSTING OF LABOR 119 tion of data showing the time spent upon such divisions of productive and nonproductive labor as may be re- quired for the system. It effects this collection through the medium of a cost card. The cost card shows the time spent on every order number or process, the operation done, the quality of work done, the identity of the work, etc. Cost Cards.— The form of the cost card has almost infinite variation and is governed by the requirements peculiar to the industry or the manner in which it is conducted. For instance, in some cases an employee may do the same process or work on the same order day in and day out ; in others an employee may be engaged on as many as 15 different orders or processes in a day. The form of the time card is also effected by the kind of wage system in use, and also by the method of time collec- tion whether by the employees or special clerks or by pencil or by cost clock. These factors govern the design of the card, but certain essential information must be secured by it which is summarized as follows : Date Time of beginning job Time of ending job ' Order number or process Article number or other description Quantity done Quantity good Piece rate or bonus data sufficient to calculate the wage An important consideration in the collection of cost cards described is in what manner the clerical labor rep- resented shall be done. There is a wide field for choice here, for the man may keep his own time, or his foreman may, or a special cost clerk may, and this may be done in written record, or the time may be registered by cost clocks. Decision as to which method is to be used is 120 ESSENTIALS OF INDUSTRIAL COSTING again a balanced judgment in which expense or cost is weighed against accuracy. It may be said certainly that the least accurate way is for the man to keep his own time and the most accurate is by use of a special clerk with a cost clock. It is simply a matter of deciding whether costs are to be 80 per cent or 99 per cent correct and this statement of the case is in no way exaggerated. In the matter of economy it is verj^ doubtful if the man or foreman keeping time is cheaper than the use of a special clerk, although because the expense of the former method is not always apparent it is often considered cheaper. If employees spend their time productively and the foreman spends his on supervision, the use of a cost clerk is an economy, for no greater economy can be attained than by "each man to his function." A clerk can handle from 30 to 100 men, dependent upon the number of jobs and the detail required, and it is recommended that a clerk be used whenever possible. A cost clock is also a desirable appurtenance and re- sults in cleaner cut records and further because of the ingenuity of some of the clock systems the calculation of unit costs is greatly facilitated. Apropos of this matter of calculation it is well to say that the detail of checking and extending daily cost cards and registering their charges composes the labor which has affrighted many executives and it is truly appalling to think of the clerical labor involved in distributing the labor charges for 5,000 men engaged on five to ten jobs daily. Much of this undeniable burden has been facilitated by mechanical devices. As a splendid example the tabulating machine may be mentioned. By the use of this machine great masses of statistical data are handled almost automati- cally, and with further possibilities of classifying and COSTING OF LABOR 121 reclassifying from the same records. The card used with this machine is shown in Figures 37 and 38. The one card is (Figure 37) master card for all total daily- time and the other card is a job card which is proved against the master and then distributed. /Employee „„ / Name No- 1 'J clock STAMP HOURS RATE AMOUNT ORDER NO. OPER. PIECES Date F EmpIoyettB Uouis Amount S >■ 1 2 3 1 1 1 222 333 1 1 22 33 1 2 3 1 1 22 33 1 1 22 33 p w _5 S F 00 S CO F 4 5 6 444 555 666 44 55 66 4 5 6 44 55 66 44 55 66 It m S F iS T 7 8 9 777 88 8 999 7/ 88 99 / 8 9 / / 88 99 88 99 1 2 3 s DEPT. 1 TOTAL D.W. P.W. SHIFT 1-2-3 horeman 2 2.2 3 3:3 4 4;4 5 5;5 6 e'e 7 7;7 8 sis 9 g!9 0:0 ' 1 lit 1 1 2 2;2 2 2 3 313 3 3 '4 4:4 4 4 5 5J5 5 5 6 6:6 6 6 , 7 7:7 7 7 8 e:8 8 8 9 919 9 9 X 0,6 1:111 2:222 Sis 3 3 4l4 4 4 5 5 3 6 6 7 7 7 8 6 8 9 9 9 0(0 1 jl 1 1 212 2 2 3)3 3 3 4 4 4 5 5 5 6 6 6 7 7 7 8 8 8 9 9 9 Figures 37 and 38. — time cards used with Hollerith tabulating machine Classification of Labor.— The actual detail of labor classification and what division and refinement shall be made in the cost collection are contingent on the condi- tions of the given industry. The distinction between pro- ductive and nonproductive as direct and indirect labor is arbitrary in the extreme. In general, productive labor is that which can be attached directly to the cost of the goods, while nonproductive labor is that which makes its separate identity by order number and process impracti- 122 ESSENTIALS OF INDUSTRIAL COSTING cable. The guiding effort should be to include as much of the wage fund as possible in productive labor and that means to include every dollar consistent with commercial limits. This latter restraint varies with the individual executive — some are willing to refine closely, others are satisfied mth approximations. The ratio of productive to nonproductive labor ranges from 5 to 1 to 10 to 1 and in some cases the ratio is greater. Of course, there are industries in which the element of productive labor is so dispersed over many machines and the amount of expense or overhead is proportion- ately so much greater than the labor that effort to dis- tribute the productive labor closely is relaxed. The reason in a case of this kind is that the overhead applied in such high rate to labor, which itself may be of doubt- ful accuracy in distribution, magnifies any errors which may exist in the Productive Labor Distribution. This situation is met by the use of machine hour rates which include the labor as a form of expense. As a specific example let us assume a tender operating eight different looms engaged on four different orders. His attention or labor is divided irregularly among the looms, some of his time is spent on routine details, more, and probably the greater portion of his time to caring for machine stoppages from broken threads or some similar operat- ing exigency. The report of his time by order numbers might be correct, but the chances are against it and so the machine hour rate is used. That is, the order is charged ^\ith a certain number of loom hours in the cost of which is included the labor of tending as an item of expense. This example presupposes, of course, that the operator is engaged on cloth of similar w^eaving require- ments and not with fancies on one loom and plain fabrics on another. But w^hile this condition is often encoun- COSTING OF LABOR 123 tered, by and large productive labor is a big factor in proportion to expense and its correct distribution is of vital importance. In most manufacture the classifica- tion of labor, the designation of operations, and the accumulation of unit labor costs are functions only of the clerical machinery necessary to collect them. The order or process is clearly defined, a suitable time card easily designed, and the routine of labor costing not dif- ficult to establish. Difficulties in Costing Labor.— Occasionally baffling peculiarities in particular circumstances will arise. As an instance, I recall a window screen plant producing on a basis of many small residence orders. The window openings varied enormously in number, area, and dimen- sions. If the system could have used the order basis of collection, costs could have been accumulated without trouble. Unfortunately, however, the small orders meant that many operatives handled 40 orders per day and the labor of timekeeping was too onerous to permit of cost- ing on the order basis. The operation or process basis was the alternative, but here the problem was the utter lack of resemblance or identity of the individual screens which were of all areas and of different proportions in dimensions. Obviously this prevented the use of the screen, the natural unit, as the basis of costing. So that here was a problem in labor costing of establishing a unit of manufacture wherewith to record the labor. Study of the manufacturing process revealed the fact that practically all operations were functions of the linear feet in the frame of the screen or perimeter of the opening. This suggested, of course, the use of the screen foot as the costing unit. With the exception of two small operations, such as attaching hardware which could be accurately costed on the individual screen basis, the 124 ESSENTIALS OF INDUSTRIAL COSTING SHOP ORDER DATE ORDER ORDER NO. DATE REQUIRED LABOR ACCOUNT NO. DATE COMPLETED MATERIAL ACCOUNT NO. PLEASE DO THE FOLLOWING WORK AND CHARGE AS INSTRUCTED BELOW Manager Charge all LABOR on individual time card showing both this Order No. and this LABOR Acct. No. Charge all MATERIAL on supply requisition showing both this Order No. and this Material Account No. Figure 39A. — special repair or maintenance order, front screen foot was used and dependable unit operation costs developed from which it was easy to compute the indi- vidual order costs in the office. Nonproductive Labor.— Nonproductive, or indirect, labor is always found in one form or another. Yard labor, trucking labor, storeroom labor, millwright and repair, machine-shop labor, foremen supervision, and sometimes inspection, are representative of that part of the factory payroll which cannot readily, and, in some cases, cannot possibly, be attached directly to the cost of the product. Accordingly this labor is collected and COSTING OF LABOR 125 COST RECORD Date Dept. Man No. Rate Am'nt. Expense Date Dcpt. Man No Rate Am'nt. Expense MA TERIA. L \ Date Amount Date Amount Date Amoun RECAPITULATION Labor Exp. Mal'l. Total FiGlTRE 39B. — SPECIAL REPAIR OR MAINTENANCE ORDER, BACK charged into expense and applied in the form of a per- centage on the productive labor composing the cost of the product, or is used with the productive labor and other expense to determine a machine hour rate. The timekeeping of nonproductive labor is relatively simple, as it is work which in the first place is well identified. This is accounted for by the fact that nonproductive labor generally receives close analysis and scrutiny on the part of executives and only that portion which is indispensably necessary is permitted to exist. This atti- tude has resulted in accurate designation of nonproduc- 126 ESSENTIALS OF INDUSTRIAL COSTING tive labor, by means of code numbers, or standing ac- count or order numbers to which this labor is charged. Details of these will be considered at length in the chap- ter on expense. Some of the work, however, especially that done by the machine shop and millwrights, has to be authorized by special repair, or maintenance, order, an example of which is illustrated in Figures 39A and 39B. Inspection Labor.— There are some forms of labor, such as inspection, setting-up labor in machine shops or press- rooms, and productive repairs which are mooted matters in regard to their classification as productive or non- productive labor. Here again the cardinal rule demands that whatever can be charged productively should be, but there are complications in so doing as the following dis- cussion will evidence. Inspection is a variable — it may change from one lot of the same product to another, due to uncontrollable variations in the shop. At one time it might bear heavily on the product, and again not. A heavy inspection charge might be made against a prod- uct and at the same time the inspection might have indi- cated and corrected operating conditions which brought other products through with fewer flaws. In a word, the later product might benefit by an inspection, the charge of which was fastened entirely upon a previous lot. It is because of such variations that inspection is generally regarded as nonproductive labor although sometimes it is costed as productive labor and even paid by piece rates. In plants engaged on interchangeable parts manufacture, where the inspection is routine in amount and frequency, there is no difiiculty in charging inspection to the product directly. The extent of inspec- tion in a manufacture of this kind may be gathered from the practice of a large gun company where as many as COSTING OF LABOR 127 200 inspections are made on the parts composing one type of gun. Setting-up Labor.— Setting-np labor is a charge which usually can be made against the product directly as far as its connection with the operation for which it prepares is concerned. But in many cases the same setting-up labor will be used for many orders and then obviously its apportionment over them is so purely empirical as to make the effort futile and it is then regarded as non- productive labor. Repair Labor. — Productive repairs, sometimes known as excess labor, defines the labor expended on repairing remediable defects in the product incurred in process. Excess labor is frequently regarded as nonproductive but there are cases where such disposition would not result accurately. Pocket knives are made with a bone stag cover and sometimes with a fiber cover. Stag is brittle while fiber is not, and the riveting operation cracks stag easily and entails repairs five to ten times as great as those developed in the same operation on fiber. If the entire repair labor Avere included in overhead, the levy on stag or fiber would be the same, a manifest inequity which would make substantial difference in the actual costs. In such a case, repair labor must be differentiated and charged to the particular product or order. The examples may serve to show the complexities which are inevitably met in costing design and to which there is only the advice to charge directly to product if practi- cable and if not, into overhead. Unit Basis of Charging Labor.— In the pursuit of the principle of charging all possible labor directly or pro- ductively, conditions are met which seem to preclude so doing. Many times workmen will be engaged on an oper- ation and on different kinds or grades of product to 128 ESSENTIALS OF INDUSTRIAL COSTING which there are no definite or reasonable points of begin- ning and ending between jobs. In a case of this kind the unit system may be used to advantage. This unit system, or unitizing as it is called, operates by determin- ing mtli accuracy the relation in time required to do a given operation on different grades of the product. Assume as example a case as follows : Time Required Per 100 Grade Pounds for Operation 1 5 hours 2 4 hours 3 3 hours 4 6 hours 5 7 hours e unit relationship would be developed as follows : Grade Unit 1 1 2 0.80 3 0.60 4 1.2 5 1.4 Production Equivalent or Unit Grade in Pounds Production 1 13 X 1.0 13 2 10 X .80 8 3 5x .60 3 4 25x1.20 30 5 35 X 1.40 49 103 unit production Assume the operator in nine hours did 103 units at a day's wage of $6.00. The cost per unit w^ould then be $6.00 divided by 103 or $0.0583. If the actual cost per pound is desired, it is only necessary to multiply the cost per unit by the unit factor of the particular grade desired. As an example, assume the case of Grade 5 where the unit factor is 1.4. The cost per actual pound of that grade is $0.0583 multiplied by 1.4, or $0.0817. COSTING OF LABOR 129 The foregoing describes and illustrates a very in- genious method of ascertaining unit labor cost under difficult circumstances and the same principle will appear again in a later chapter in connection with the distribu- tion of expense. So far this chapter has not considered in detail the effect upon timekeeping and costing of the various forms of differential wage payments. Wage systems are prime factors in economy and in their application the immedi- ate economies are put before the matter of convenience in their proper costing. So many volumes have included dissertations on the different kinds of wage payments, per se, that I will discuss them very briefly and will then concentrate on the phase of their operation most appropriate to this volume, namely, the method of han- dling them in costs. Wage Systems.— There are seven prominent methods of wage payment, of which there are variants negligible from the point of principle, so that the essential methods may be stated as follows : 1. Day Rate 2. Piece Rate 3. Taylor Differential Piece Rate 4. Halsey Premium 5. Rowan Premium 6. Gantt Task and Bonus 7. Emerson Bonus 1. Dat/ Rate. — The day-rate system is the traditional basis of payment based on the time put in and a definite hourly rate. It is independent of production and cannot readily be made equivalent, although it is supposed to approximate the value of productive ability by increas- ing the hourly rate. It is, however, far too inflexible for any such purpose and is an exceedingly primitive basis of exchange. The day rate is probably the most unsatis- 130 ESSENTIALS OF INDUSTRIAL COSTING factory system of wage payment from the point of cost- ing, because of the admitted absence of any definite rela- tion of wage and production. As far as the clerical means of collection go it is simple, but the great fluctuation in unit costs in which it results justify the criticism made. The day-rate system operates with the time card illus- trated in Figure 40, varying chiefly with the kind of cost clock used. 6«07» X mil FINISH START .,..,„T RATE AMOUNT 1 PIECE RATE DAY WORK DOLLARS CENTS OYCiTnl ■•■■ JuuMir lial Figure 40.— specimen cabd used with day eatb or piece bate 2. Piece Rate.— The piece-rate plan is a basis of pay- ment by which the operator receives a wage directly con- ditional on output, in fact, it might be distinguished from day rate as a form of pajTuent wherein units of produc- tion instead of units of time are multiplied by money. Piece rate is perhaps the most accurate basis of labor costing that may be attained, for by it the operator receives as wage what is the actual cost. It is also one of the simplest in timekeeping because in most cases it is not necessary to record the elapsed time on each BLADE ORDER MACHINE GROUND Blade No. Quantity Operation No. 63— BU.'^DE SWEDGINa— M. C. Man No. JrtJer No. Blade No. Quantity Operation No. 62— BL.ADE MACHINE GRIND— M. G. Man No. )rd• "illi"l' MuiT MOT CICICO "*" •""• ......TO. P«IP*t*TiQN tlNE ":;,cV" TOTAL ro» HO OP PC». Fl> I C TIHE TA>ni "l-E" NO. Nouns PfM Meet OHE.»«LP ^Oaii* 0»liB tost Figure 42. — front and back of differential piece work card used in connection with the hollerith tabulating machine at link belt company, philadelphia pioneer in scientific management, and was designed to reward the specially productive piece-work operatives beyond the earnings made at the fixed rate. It served to maintain production at the highest possible level for the unusually skilled and also provided a superincentive for those less skilled to improve. By its arrangement a 134 ESSENTIALS OF INDUSTRIAL COSTING standard was fixed for a product up to which payment was made at the basic piece rate and beyond which pay- ment was made at a higher piece rate. The differential piece-rate system is fitted admirably to a manufacture in which there is a continuous flow of the same article and in which there are few, if any, changes within the payroll period. When, however, there is frequent change of article, it is necessary to keep elapsed time on each job (see Figure 42) and to calcu- late the rate or production to determine whether the dif- ferential rate applies to the different jobs. Under such conditions the computation is equally as involved as with any wage system, and the relative simplicity of compre- hension of this system to the operator is largely lost to the operative. In costing the question presented is how the differen- tial is to be treated. Obviously to adhere to the basic principle it should be charged to the order or process. At once, however, the advantage of a flat piece rate in fixing the unit cost disappears, for the extent of the dif- ferential is an uncertainty on every job and so the unit cost is variable. On the strict order basis this is not disadvantageous but on the operation basis it is. To obviate this difficulty the differential may be carried in the overhead of the department in which it is earned and so it may be applied uniformly on the production cost represented by the piece price. There is no objection to this method nor does it impair accuracy, because if the piece prices are equitably established, the differential should be uniform. In fact, considering the range in personal efficiency of different operatives, it equates the cost and so prevents the possibility of two identical jobs done by two operatives reflecting two different labor costs. COSTING OF LABOR 135 4. Halsey Premium Plan. — The Halsey Premium Plan is a differential system of payment which has to its decided credit simplicity in calculation and comprehen- sion to the operative. The premium system works by establishing a time standard for a job and granting the operative a percentage of the time by which the standard is reduced. The percentage usually given is 50 per cent, although sometimes 33 1/3 per cent is awarded. The OPERATION TIME CARD PAY ENDING- OEPT. NO. MAN'S NO. machine.no. oroebno, NAME OF PART BATCH NO. NO. OF BATCH Time AlIoFCd DATE TIME DATE TIME i 16 2 17 3 18 4 19 5 20 9 2410 25 11 26 12 27 13 28 21 14 29 22 » 23 15 30 31 TIMEALIOWEO UNIICOST Tulal Time Allowed TOTAL TIME TAKEN TOTAL TIME SAVED AMOUNT Figure 43. — time card used with the halsey premium wage system workman receives his hourly rate for the time actually spent on the work, plus half or one-third of the time saved on the standard. A time card used on the Halsey system is shown in Figure 43 and it may be noted that the calculation is relatively easy. Here again, as to costing disposition the differential may be charged into costs directly or into the overhead with the same arguments pro and con as were presented in the handling of the differential piece rate. 136 ESSENTIALS OP INDUSTRIAL COSTING 5. The Roivan Premium Plmi. — The Rowan Premmm Plan was devised hj a member of the firm of the David Rowan Company of Scotland and it is comparable in part to the Halsey Premium Plan in that a standard is RET'D ISS'D CHARGE MAN'S NAME DEPT- MAN'S NO. TIME ALLOWED TIME TAKEN FINISHED NOT FINISHED BONUS HOURLY RATE TRANSFERRED PAY FOR WAGES BREAKDOWN CAUGHT UP MACHINE NO. MACHINE EXPENSE MAN EXPENSE OPEFiATION ORDER NO. ARTICLC OPER. NO. AMOUNT FINISHED WAGES ENTERED IN O. K. FOR QUALITY O. K. FOR QUANTITY OEPT. CLERK SCHCO- UtE MAN RECORD PAV ROLL COST RECORD 75M 2-18 Form B 150 PRODUCTION CARD J Figure 44. — time card used with the gaktt task and bonus system set and payment made for reduction below the standard of the time for doing the work. It differs from the Hal- sey Plan in that the percentage of premiums is not fixed but is determined by the relation of the time saved to the time allowed. For instance, if a standard for a job is set at five hours and one hour is saved, the percentage would COSTING OF LABOR 137 be one-fifth, or 20 per cent. The operative would receive four hours ' pay at clay rate, say 60 cents or $2.40 and a premium of 20 per cent or 48 cents, making a total pay of $2.88. To the author's knowledge the Eowan system is rarely used in this country and it has been impossible to secure a time card representing the application of the system. 6. The Gantt Task and Bonus System. — The Gantt Task and Bonus System of wage payment adopts the Taylor principle of a sharp hiatus between high and low production. The Gantt system does not rest on a piece rate but pays at day rate for all actual time, plus a bonus for reaching a standard. If the standard is not met, no bonus is paid and there are no graduations for degrees of approach to the standard. Either the standard is reached or it is not, and the payment of a bonus is based accordingly. A production card used in connection with the Gantt Task and Bonus System is illustrated in Figure 44. 7. The Emerson Bonus. — The Emerson Bonus, fre- quently called the Efficiency System, is an exceedingly ingenious arrangement which not only seiwes as a basis for wage payment, but also as an index of the operating efficiency of the individual, the department, or the entire plant. It, too, is based upon a time standard and the percentage relation of that standard to actual perform- ance. This relation may be more clearly expressed in the form of an equation, as follows : Let E = efficiency S =: standard time A =: actual time Then 138 ESSENTIALS OF INDUSTRIAL COSTING Figure 45. — Standard Bonus Percentage Table for Use in Deter^ MINING Bonus Earnings Bonus Percentage of Bonus Percentage of Per Cent Wages Per Cent Wages Effici- ency Effici- ency 20 33>^ 50 Per 20 33H 50 Per Per Cent Per Cent Cent Per Cent Per Cent Cent 66.7 0.00 0.00 0.00 84.5 5.85 9.75 14.62 67.0 0.01 0.02 0.03 85.0 6.17 10.28 15.42 67.5 0.02 0.03 0.04 85.5 6.50 10.83 16.24 68.0 0.04 0.07 0.10 86.0 6.84 11.40 17.10 68.5 0.07 0.12 0.18 86.5 7.20 12.00 18.00 69.0 0.11 0.18 0.27 87.0 7.56 12.60 18.90 69.5 0.16 0.27 0.40 87.5 7.94 13.23 19.84 70.0 0.22 0.37 0.55 88.0 8.32 13.87 20.80 70.5 0.29 0.48 0.72 88.5 8.71 14.52 21.78 71.0 0.37 0.61 0.91 89.0 9.11 15.18 22.77 71.5 0.46 0.76 1.14 89.5 9.51 15.85 23.77 72.0 0.55 0.92 1.38 90.0 9.91 16.52 24.78 72.5 0.65 1.08 1.62 90.5 10.32 17.20 25.80 73.0 0,76 1.27 1.90 91.0 10.74 17.90 26.85 73.5 0.88 1.47 2.20 91.5 11.18 18.63 27.94 74.0 1.02 1.70 2.54 92.0 11.62 19.37 29.05 74.5 1.16 1.93 2.89 92.5 12.08 20.13 30.19 75.0 1.31 2.18 3.27 93.0 12.56 20.93 31.39 75.5 1.47 2.45 3.67 93.5 13.04 21.73 32.59 76.0 1.64 2.73 4.09 94.0 13.52 22.53 33.79 76.5 1.81 3.02 4.53 94.5 14.02 23.37 33.05 77.0 1.99 3.32 4.98 95.0 14.53 24.22 36.32 77.5 2.18 3.64 5.46 95.5 15.04 25.07 37.60 78.0 2.38 3.97 5.95 96.0 15.56 25.94 38.91 78.5 2.59 4.32 6.47 96.5 16.09 26.82 40.23 79.0 2.80 4.67 7.00 97.0 16.62 27.70 41.55 79.5 3.03 5.05 7.57 97.5 17.16 28.60 42.90 80.0 3.27 5.46 8.17 98.0 17.70 29.50 44.25 80.5 3.52 5.87 8.80 98.5 18.25 30.42 45.63 81.0 3.78 6.30 9.45 99.0 18.81 31.35 47.02 81.5 4.05 6.75 10.12 99.5 19.39 32.32 48.48 82.0 4.33 7.22 10.85 100.0 20.0 33.33 50.0 82.5 4.62 7.70 11.55 100.5 20.5 33.83 50.5 83.0 4.92 8.20 12.30 101.0 21.0 34.33 51.0 83.5 5.23 8.71 13.07 101.5 21.5 34.83 51.5 84.0 5.53 9.22 13.84 COSTING OF LABOR 139 The bonus is applied on a percentage of the day rate earnings. The original percentages were graded as shown in Figure 45, the 20 per cent bonus at 100 per cent efficiency is the prevailing scale in practice. The time, or service, card used in this system is illustrated in Figure 46. In some cases it is applied by calculating the average Fm.29i.-«-13. SERVICE CARD. W. M. W. LOT NO. AMT. RCQ'O Size DATE OF ORDER OPERATION NO. NAME OF OPERATION PRODUCTION TIME MEN EMPLOYED COST j NAME RATE AMOUNT 1 BALANCE TO DO QUIT STARTED DO TODAY »OB HRB. ELAPSED FINISHED ALLOWANCt DATE SCHEDULE NO. STD. QUANTITY PCS. pen HOUR BALANCE NET ACTUAL STD. TIME Pen 100 TOTAL «T0. "•V*V nnr^ MCN Figure 46. — service card efficiency of all jobs within the payroll period, in which case some form of collection note must be used and this is illustrated in Figure 47. As to costs, if the bonus is figured for each job, it may be charged directly; if it is figured for a week as an average of many jobs, it can only be handled economi- cally in overhead. In the former case it may also be treated as an item in overhead and in the author's experi- ence this method of handling the bonus is fully satis- factory. Service and Attendance Bonus.— In modern times recognition of service is frequently made by corporations to employees who merit it. This is done by various meas- 140 ESSENTIALS OF INDUSTRIAL COSTING ures. Sometimes it is a certain amount per hour per year of service or sometimes a fixed amount per week. Also, under recent conditions certain employees took advan- BONUS RECORD Week Endir OiU Oi^rN. Aitdt DiubtT ^1 Adul Tmt OiU OrdoNr Kitdt CautilT Tmt Adul Tttal 1 1 '=^ Bmu Pcubu Figure 47. — boxus record tage of higher wages in working fewer hours and were satisfied with their old week's wage which they found they could make in less time. To counteract this baneful tt 40 eo 60 100 170 140 leo lao zoo zzo zw zw tso zoo 56 PRODUCTION Figure 48, — graphical comparative representation op the various dif- ferential WAGE systems The percentage of production has no influence on day wages, ■which will always remain at 100 per cent whether the operator produces at 10 or 300 per cent. Straight piece rate or the low rate of a differential piece rate plan coincides up to 100 per cent, when the differential piece rate is increased, perhaps, 50 per cent and then is increased in proportion to increased production as indicated. "Time and piece" rates above a certain minimum (in this case taken at 60 per cent) correspond with day wages up to the time that output equals 60 per cent of standard, when they change to a piece-work plan for all increased production. The Gantt 30 per cent bonus plan follows the line A-C-H, increasing 30 per cent over day wages at 100 per cent production, and from then on increasing in the pro- portion indicated. The Emerson efficiency plan begins to increase wages at 66 2/3 per cent and pays 20 per cent more than day wages at 100 per cent production ; from then on it pays the percentage as shown. The Halsey premium method pays day wages (line A-C) until production is equal to the best previous record (here assumed to be 100 per cent). AH increased output is paid in the proportion indicated. The Rowan premium plan differs from the Halsey as indicated. 141 11 1 » / 1 o 1 1 o E - j- DU ^ u, u d 7, H .^ a < 1 a u H i \ .» \ LJ :i 1 D !2 o \ o \ 7. 1 1 o V d j H ^2 { 0! \ U &< 1 ^ Q / 1 ■ft'O UJ ^^ < :.S 7. •rti H U. < 30 c- I. u / >- ' / S .H ... ^^ c tc ^ \ < c. \ ?. \ < / T / 5r I ij i^ \ 1 ■ i H :3 S a 1 j 6 7i fc? / gz \ o O „ < Z to u. D a, O 3 1 143 COSTING OF LABOR 143 tendency attendance bonuses were paid based upon a minimum attendance. Both the service and attendance bonus, if readily converted to an hourly rate, may be figured as productive labor. However, due to variations in the method of award, etc., it may be expensive and the service and attendance bonus may be carried in the over- head of the department. Discussion of the Differential Wage System would not be complete without graphical representation by means of which the lines of agreement and points of departure may be portrayed. This has been accomplished excel- lently in the graph and accompanying explanation shown in Figure 48 which was developed by the United States Training Service. The unit costs as developed from the time or cost cards are posted to operation cost sheets or the time is posted to order cost records. Typical operation and order cost forms are shown in Figures 49 and 50. Cost cards also supply the basis of the labor distribution, which in the previous chapter has been stated to be one of the chief sources of costing data. Administrative and Office Salaries. — The foregoing dis- cussion has treated entirely of shop wages. There is another part of the payroll which must be distributed and that is the office, administrative salaries, although such departments as engineering, drafting, and labora- tory are encountered, which seem to pertain more closely to production than clerical and official salaries. Fre- quently portions of the salaries in such departments can be charged directly to production and whenever this can be done it should be. It is good policy to carry to fine divisions the office, technical, and administrative salaries, as it facilitates their distribution and assists their control. i i ] < 1 1 > ^- 1 (- J c 1 ll _ ' u 1 (1 1 1 — d Z i |i 1 1 (3 s o i s 1. o ^ II i - *- ^ * * - « o c (2 1 8 1 i 1 2 s z 2 ~ 1^ a o 2 i E I i C : I i i i 1 1 1 1 z i2 2 Ij s 5 f2 H 3 1 1 1 •2 i 1 E P 1 3 -1 1' - 1 B H 1 : 1 — 20-I736 'S COST CARD Date Issu Name _ 3 b = 1 1 s 6 Z ' 1 i 1 1 1 1 ^ 1 1 s S 1 1 144 COSTING OF LABOR 145 The costing of labor has been discussed at length. The object has been to present the essentials and sufficient details to illustrate the practice and to indicate the com- plex conditions which frequently confront labor costing efforts. CHAPTER YIl THE COLLECTION OP EXPENSE IN COSTING Control is possible only when accurate knowledge of the amounts entering into each item composing overhead are known. — Chamber of Commerce of the United States of America. Nature of Expense.— Expense lias been seen to consist of two classifications determined by the functional attri- butes of eacli, nanielj": Manufacturing expense Selling expense For the purpose of this chapter, however, the two classifications may be considered as one, because the process of the collection of expense is identical for both and the composition of expense is similar in many items. Expense has been described as an accounting complex, the truth of which designation would be better appre- ciated if the nature of expense could once be perceived. For expense is a control center in which are collected all those items which cannot be allocated directly to the product and from which the expenditures thus pooled are prorated and distributed and ultimately applied to the product with as close approximation as possible to what would have been their incidence as direct charges. The necessity for intelligence and ingenuity in the design of this part of the costing mechanism may be bet- ter realized when it is understood that often as much as 30 per cent and occasionally as much as 60 per cent of all expenditures must be transmitted to the product 146 COLLECTION OF EXPENSE IN COSTING 147 through expense. If the disproportionate relations among the various elements of expense are considered, the wheel within wheel aspect of the mechanism realized, the matter of the costing of expense may be approached with a proper recognition of its great inherent difficulties and the fact that accuracy in it, like infinity, is a con- ception measured by degrees of approach, not arrival. Expense Departments.— In devising the costing of ex- pense probably the chief influence upon accuracy is the basis of division into those precincts of expense known as departments. These departments consist of two tj^es, contributing and productive, which, as mentioned before, are analogous to the indirect and direct division of labor and material. Departmentalization, as it is called, is a means of securing closer costing of expense to product than may be done in any other way. It is difficult to pre- scribe a rule which would apply without exception as to what procedure is required in establishing productive departments, "for rules are made for average conditions, but the average is a composite of variations." Practical limits often set the boundaries of depart- ments, some executives being disposed to curtail the number of departments to save clerical detail. Others desire the finest division. Certainly, if accuracy is the objective, it is better to err on the side of too many rather than too few departments. The nature of the process, or the extent and arrangement of the equipment, govern largely the departments. Originally the necessity for this division into departments arose with the advent of machinery and the disparity not only between the num- ber of machines required for different operations, but also between the investment values of the different ma- chines within the same machine grouping. The extent of machine production and the ratio of 148 ESSENTIALS OF INDUSTRIAL COSTING employees to the mimber of machines within different industries has a definite connection with the form of the cost system and the departments of expense. The fol- lowing data taken from the transactions of the Ameri- can Society of Mechanical Engineers may throw some light on this important consideration: Number of ^Machines Per 100 Employees Earthenware manufacture 17 Furniture manufacture 40 Rubber goods manufacture 60 Printing manufacture 67 Cotton mills manufacture 357 It is obvious that with a high ratio of machines to employees the element of expense takes increased impor- tance and departmentalization becomes a more crucial necessity. The distribution of machinery forms, many times, natural boundaries for departments although, of course, machine disposition is made with the central purpose of facilitating the flow in production. Bearing on this point I quote an earlier work of mine : Arrangement of Equipment. — There are essentially two main plans according to which equipment may be arranged in order to meet productive requirements, although in many plants the plans will be found at times to have been merged. The two essential arrangements might be called: Production Center arrangement Unit arrangement The production — center arrangement — calls for the centering of machines of the same type and capacity in separate depart- ments or lo«ations. It means the massing of similar equipment at definite stations, with the object of concentrating the pro- ductive capacity in order to meet the operating requirements of demand with the minimum of machine inactivity and the great- est output per machine unit. By this method the demand on production is combined and routed to meet the fixed basis of the machine layout. The principle of the unit arrangement is diametrically oppo- site to that of the production center plan. It provides definite COLLECTION OF EXPENSE IN COSTING 149 channels for complete processing whereby the machines are lo- cated in succession for the sequence of operations, and these channels, or units, govern distinct currents of production. That is, the demand is not merged or interchanged over the equip- ment but is divided into currents that flow separately through the several units in each of which production proceeds uninter- ruptedly. Where the unit arrangement exists, either a unit cost may be obtained, each unit being regarded as a separate plant for the purpose, or departmental classification may be made within the unit and separate rates established for purposes of comparison with other units or closer examination of the unit cost. The production center ar- rangement prevails to-day in manufacture and the so- called centers establish the logical divisions into depart- ments. It must be understood, however, that frequently costing may require finer analysis than the production center, for if the sizes of similar machines within a center range widely and within them the relative investment, it may be necessary to isolate the single machine into a department, of which later, under ' ' Machine Hour Rate ' ' (p. 211). Basis of Departmentalization.— The underlying prin- ciple in departmentalizing is to localize expense to cen- ters or foci of similar or identical kind, at which the product may receive a representative quota of the ex- pense at each of the centers thus established. Contrib- uting, or indirect, departments are determined by the conditions of the particular manufacture. In general they are typified as follows : Office Laboratory Engineering department Heat, light and power Repair machine shop Repair carpenter shop Millwright and maintenance General 150 ESSENTIALS OF INDUSTRIAL COSTING The selection of the contributing departments is deter- mined by the various nonproductive functions, such as office, power, etc., the extent of division into contributing being governed by the desire for finer analysis for con- trol, or because the ultimate distribution over the pro- ductive departments may be facilitated thereby. The dis- tribution of the contributing department over the pro- ductive department will be considered in a later chapter. The productive departments are determined by the equipment arrangement and the amount of investment represented by it. Within each department are collected the various items of expense charged there directly and those prorated from the contributing departments. These items in expense are collated by departments from sev- eral sources of information, as follows: Indirect, or non-productive labor distribution Indirect, or non-productive material distribution Indirect expenditures from Voucher Register Journal entries covering contingent and accrued items Collection of Expense. — It may be gathered that the array of figures covered by the above is considerable and that devising the form or method by which such figures are collected, or ultimately resolved in proper propor- tion to the point of application to the product, and are held at all times to proof control comprises a complicated problem. In some cases this is arranged by a series of interlocking subsidiary ledger accounts in which the vari- ous items are ac ^ >> ■> > ^ ^fht \ ^ '^ i >? ^ >^ A ^^ A » j^ i s V V t- M \ ") ;s -V r ^ V 3:^3: »> n " % z si • -? ;^ ; ,?^^ A "1 * s > \ 4^ % <* ? 1- s >^ ■>■ <) , ^ s S ^ V h A ^ Y 1^ s ^ t ■*i > * 1 ■? ; •*- fv \ ^1,^ > V ',^ ^ s^ ^^^ « s ^ (, •• > \ ^ ii 53 ; \ ^ > ^ > » k ■? ^ ■: ^ % k ^ * > > -t ^ r ^ 1, n - K ,"> V,' •* "^1 '^ V ."1 fr ^ K s X ^ h % \. ^ _Si X N : o » V « _^ ^ N1 s C3 "5 ^ [S ■^*\ > ^ > X > > ^ ,1 C ^ ^ >» ^ I- ■^ •V, ■> ^ ;> s, ^ V, 'v So ^ M L, ^ ». > V •» A V V1 <> -5 V V 't, Ii, i V "} "} V « *> > ^ ^ ^ h -5 ^V ^ s J ^ \ ?! ?l^^ % ~* Q t^ h M 3 jfc iS ^ ^ ^: '-S^ kii-a --!» ri: — — -- — — - - :s "t^ ^ =? U^ ^ 3h V ^ ttttt^ ;^ ^ ~ = - — — = ~ _ >■ [■■ ^ ' s n, W \ > 1 *- !>- ^ fl. KjNB S. ^ ^ ^ "V V ■s, o cTn ^h ^ > ^ H, ^ 1 N-. 1 K u. -1 S| s ^ •^ "1 > >l ">> s 1 ^ ^1 .> ^^ ^ ^ 1 V -f o« ^ 1, ■> ~ i V > "^ !k ^ ^ V J^ ^ r < >i "T s ^r; ^ r y- _t ^ -^ -i -^ X -i \ ^ , ■ ' — - - - ' 1 — — — — 1 . 1 ^ , ■»i ^ ^ ^ T .. > ^ h- i^ S ->. ^ V ^ ■5 v: f , Khl ■J ^ "4 ^ s "^ V t ■^ o< i- ^> N > " } .: ^ ^ H s 5 I a f 1 8 i3 &! i ; C 1 c E ■ ■£ ' i 1 \ c c 1 t £ c E E- X c s > < 1 a S 3 Z - « > c c u 2 ? 166 COLLECTION OF EXPENSE IN COSTING 167 either on material purchases or issues. Premiums on special explosion insurance and liability insurance on boiler, engine, and flywheel are direct charges to the heat, light, and power department, of course after being reduced to a monthly basis. Employees' liability, or compensation, insurance is charged directly to each department according to its estimated cost based on the payroll of the employees in each department. The rate for the compensation insur- ance is determined per dollar of payroll and an analysis of the payroll by departments is used to compute the premium cost for the different departments. Group life insurance is handled in almost identical manner. It is also desirable to have these different forms of insurance carried on separate lines in the Expense Analysis and controlled by separate ledger accounts as described later. Depreciation. — Depreciation is an expense which is often neglected and much misunderstood. It is a contin- gent item really in the nature of a speculation as to what term of useful life may be granted to any part of the fixed investment under the vicissitudes of wear and tear and obsolescence. Calculation of Fixed Charges.— The theories and sys- tems of depreciation and the methods of calculation with those pertaining to reserves for maintenance will be the exclusive topic of the succeeding chapter. Immediate discussion is limited to the disposition in expense of the gross amounts of depreciation, maintenance reserves, and interest once they are established and admitted into expense. Depreciation on buildings is apportioned to departments according to the square feet of floor area and handled in this respect identically as fire insurance or taxes. Depreciation on equipment is charged into departmental expenses on the basis of the invested value 168 ESSENTIALS OF INDUSTRIAL COSTING in each. Interest on investment, if admitted into costs, is distributed over expense on value subsequently to de- partments on square feet for building, but entirely on value for equipment. Fixed charges is the customary term for the taxes, fire insurance and depreciation, and the basis of their apportionment in costs should be placed on permanent record and may be derived by the use of a form such as the one shown in Figure 54. Reserves for Replacement. — Reserves for maintenance or replacement are determined by investigation of the frequency with which the necessity which they represent arises. Furnace linings, large grindstones, etc., wear out rapidly and generally in direct relation to a certain amount of production. The cost of the replacement may be secured from past records or by estimate and when the periods of replacement are determined it is a simple affair to establish what monthly installments must be set up in order to build a reserve to meet the replacements when they occur. Of course, the object in doing such a thing is to equalize a considerable factor in expense which, if not handled in this manner, might load unduly the costs at one time and undercompute at other times. The collection of expense has but one purpose and that is to attach to the cost of production an equitable share of the expense incurred by the production. If this funda- mental axiom can be grasped, success in costing expense is then only a matter of common sense in setting the extremes of effort with which to accomplish the best results consistent with the economies of the given situation. CHAPTER VIII THE COSTING OF DEPRECIATION, INTEREST, AND POWER The need of making proper provision for depreciation is more im- perative to-day than ever before. — Hurley. The question of whether interest on the capital invested is a proper charge against cost of production is one on which there is marked differ- ence of opinion. — Federal Trade Commission. The problem of the cost of power necessitates the application of sev- eral branches of exact science for its solution. — Gould. Depreciation.— By depreciation is signified the con- tingency whereby equipment or plant investment may either be rendered useless or have its value impaired by various agencies, which the consensus of authorities define as : "Wear and tear Deferred maintenance Age or decrepitude Obsolescence Inadequacy or supersession Decline in market value The broad distinction between these activating causes for depreciation has been made as physical and func- tional. Physical depreciation refers to the tangible con- dition of property as effected by the destructive tenden- cies of actual usage or of neglect, etc. Functional depre- ciation describes the intangible, but nevertheless real, diminution in value as occasioned by the circumstances of obsolescence, inadequacy, or decline in market value. The distinction between the several agencies of depre- 169 170 ESSENTIALS OF INDUSTRIAL COSTING ciation are finely drawn, but the essential meaning of the terms employed are as follows: Wear aixd tear is the physical effect of actual usage. Deferred mmyite nance is an euphonious synonym for neglect or insufficient maintenance. Age or decrepitude is the loss in physical structure and integ- rity concurrent with time and independent of usage and is the inexorable consequence of mere existence. Obsolescence refers to the circumstance whereby mechanical, technical, or trading advances or changes may depreciate original value or destroy it in toto. Inadequacy or supersessiwi differs from obsolescence in that it refers to the specific contingency that growth or change in the character of the manufacture may result in super- session of the plant or equipment which otherwise is ade- quate. Decline in market values is a possibility of frequent realiza- tion. It refers to the possibility of reduction in purchase cost of equipment from that obtaining at time of original installation. Frankly I am not at all persuaded of the practical usefulness of the definitions just given, for while the con- tingencies which they describe may occur, the extent and exact measure of each cannot be foretold. The only prac- tical expedient is to recognize in each of the causes a possibility which may develop and to provide a collec- tive reserve of sufficient proportions to meet any even- tuality. This can be done best by consulting the com- bined experience within an industry or within allied industries. Tables of expected life or rates of deprecia- tion have been established by many groups of manu- facturers and as illustration I am presenting such tabu- lations in Figures 55 and 56, DEPRECIATION, INTEREST, AND POWER 171 Figure 55. — Standard Depreciation Rates fob Factory Buildings AND Equipment A meeting of manufacturers of conveyors and elevators, Chicago, Feb- ruary 25, 1916, called to draw up an agreement on some standardized form of accounting procedure, established the following depreciation standards. Reproduced from the Iron Age of November 30, 1916. Buildings and Accessories Reinforced concrete or steel and tile Brick and steel with non-eonibustile roof and concrete floors Brick, steel and wood Brick and wood Steel frame, wooden roof and corrugated iron walls Steel frame, non-combustile roof and corru- gated iron walls Concrete block, with wooden roofs and floors. All wood structures, well built (20 years) . All wood structures, cheap (20 years) .... Sprinkler system (20 years) Heating and ventilating system (20 years) Water and sewer piping and sanitary fixtures (where separate) Tanks and reservoirs, steel Tanks and reservoirs, wood (10 years) Note: All repairs and maintenance to be charged to account 8059. Machinery and Large Equipment Boilers, pumps, feedwater heaters and air compressors Switchboards, main wiring and conduit .... Power piping Engines and dynamos Machinery, motors, machine tools, traveling cranes, etc Punch presses, bending rolls, power shears and drop hammers Machine tool accessories — boring bars, drivers' key seating broaches, etc. (all renewals to repairs) Cupolas, converters, melting furnaces and ac- cessories Annealing and heating furnaces, ovens, forges, etc Per Cent on Cost 2.5 3 3 3.5 3 3.5 4.5 5 4 4 4 4.5 9 6 6 6 5 4.5 4.5 Per Cent on Reducing Balance 50 5 5 4 5 5 7 6 8 10 12 7.5 7.5 7.5 10 20 15 15 15 10 10 10 10 10 172 ESSENTIALS OF INDUSTRIAL COSTING Figure 55. — Standard Depreciation Rates for Factory Buildings AND Equipment {Continued) Machinery and Large Equipment Motor trucks Storage battery locomotives (battery renewals to repairs) Horses and wagons Steel shelving, lockers, etc For items below a single write-off at the rates specified is made and the balance carried as a part of the inventory with- out further reduction. Only items ac- tively used in fabricating standard prod- uct and described in schedule as net items, should be so treated, all other items being charged off wholly to ex- pense. Small Tools For machines, net additions Hand tools, net additions Punches and dies (Standard) net additions.. Chills, iron and steel flasks and accessories (net additions) Fixtures, Furniture and Miscellaneous Equipment Mechanical appliances, net additions Departmental wiring and electric fixtures, net additions Miscellaneous items (wood) net additions . . Patterns (Standard) Metal, net additions Wood, net additions All patterns required for a particular order or contract to be charged to the job. Drawings All new standard drawings to be charged to expense. All drawings required for a particular order or contract to be charged to the job. Miscellaneous Beal Estate Improvements Pavements, sidewalks, fences, retaining walls, roadways, tracks, yard drainage, general conduits, tunnels, vaults, etc Per Cent on Cost Per Cent on Reducing Balance 20 10 12 5 50 50 50 50 60 60 70 100 60 30 35 12 4.5 10 DEPRECIATION, INTEREST, AND POWER 173 FiGUKE 56. — Standardized Ac?counting and Cost System for the Electrical Manufacturing Industry, APPENDIX A determination and application of rates for depreciating manufac- turing PLANT accounts General 1. All rates are to be applied to first cost. 2. The rates recommended are those which are to be applied to first costs to obtain amount to be included in costs and estimated costs, and are in addition to maintenance expenditures and renewals as provided for in indirect manufacturing expense accounts. 3. All rates recommended are based on normal operating conditions. In case of a factory working overtime and with night shifts for any appreciable length of time, or under other extraordinary conditions, higher rates should be assessed so as to absorb in the costs during the period of extraordinary activity: 1. The abnormal physical exhaustion. 2. The abnormal primary cost of equipment. 3. The cost of equipment estimated to be surplus in normal times. 4. Rates recommended are to be applied to the items shown in the further subdivisions of the manual. A. La/nd Kate Recommended a. 1. Land — purchasing price per cent 2. Land — grading and improvements per cent B. Buildings a. 1. Buildings (total resen'e 75 per cent) : 1.1 Wooden buildings and sheds 10 per cent 1.2 Corrugated iron buildings 10 per cent 1.3 Brick and wood (mill construction) . 5 per cent 1.4 Brick and steel (fireproof construc- tion) 3 per cent 1.5 Reinforced concrete (fireproof con- struction) 3 per cent Note: In those cases where plant accounts include accessories, care should be taken to segregate such accessories, in order that the proper rates of depreciation may be applied. 174 ESSENTIALS OF INDUSTRIAL COSTING Figure 56. — Standardized Accountixg and Cost System for the ELEcrraiCAii Manufacturing Industry {Continued) b. Structures (total reserve 90 per cent) : 1. Structures 121/2 per cent 2. Water, drainage and sewer pipes (outside) 6 per cent 3. Piping and electrical conductors (outside) 6 per cent c. Sprinkler system (total resen'e 90 per cent) .... 12i/^ per cent d. 1. Heating and ventilating (total reserve 90 per cent) 5 per cent 2. Other inside piping and wiring (total reserve 90 per cent) 5 per cent C. Machinery and Tools a. 1. Machinery (total reserve 90 per cent) : 1.1 Special machinery. ...7y2 per cent to 90 per cent Rates on special machinery depend upon the estimated period of present use and their adaptability for other use. 1.2 Standard machinery. .71/^ per cent to 10 per cent a. 2. Electrical apparatus (total reserve 90 per cent) 714 per cent to 10 per cent 3. Ovens and furnaces (total resen'e 90 per cent) . 10 per cent 4. Power plant equipment (total reser\-e 90 per cent) TYz per cent b. 1. Foundations for machinery and apparatus (total reserve 100 per cent) 12^/2 per cent 2. Installation of machinery' (total reser\-e 100 per cent) I2V2 per cent Years to be Applied c. 1. •Semi-durable tools (total reserve 100 per cent) 25 per cent on each year's expenditure 4 Set up on the books an estimated value equivalent to the additions to the ac- count during the last four years. 2. *Electrical equipment (total reserve 100 per cent) 16^ per cent on each year's expenditures. 6 3. *Moulds, jigs, punches, dies and special ma- chinery (total reserve 100 per cent) 33^^ per cent on each year's expenditures 3 4. *Metal flasks (total reserve 100 per cent) DEPRECIATION, INTEREST, AND POWER 175 Figure 56. — Standardized Accounting and Cost System for the Electrical Manufacturing Industry (Continued) Inasmuch as all foundries have their proper equipment of metal flasks, the cost of making all metal flasks is to be charged to indirect expense account No. 460. When flasks are scrapped, the scrap value will be credited to indirect ex- pense account No. 460. The difference between the inventory at scrap value at the beginning and end of the year will be taken in the expense account. There will, therefore, be no depreciation on this item. D. Patterns and Drawings (total reserve 100 per cent) a. *Patterns 333^ per cent on each year's expendi- tures 3 b. Drawings Set up on books estimated or appraisal value. Expenditures chargeable to de- velopment or shop supplies account No. 240. E. Furniture, Fixtures and Appliances (total reserve 100 per cent) a. *Furniture and fixtures in 20 per cent on each year's expenditures.. shops h. *Furniture and appli- ances in factory offices c. *Fire protective appara- tus From a valuation viewpoint, it is recommended that 100 per cent reserve be set aside. F. Other Equipment (total reserve 90 per cent) Rate Recommended a. 1. Railway tracks and overhead equipment, re- newals and repairs charged to operating expense None 2. Rolling stock 3 to 6 per cent 3. Automobile and other conveyances 25 per cent Property Other Than Manufacturing Plants The rates recommended are those that would be applied for similar items for manufacturing plant items. In case items are dissimilar rates should be applied consistent with those used for manufacturing plant items. * Set up on the books a value obtained by inventory where practicable. Where this method is impracticable, a value should be set up on basis of previous years' additions, the number of such years being dependent upon the varying circumstances. 176 ESSENTIALS OF INDUSTRIAL COSTING Methods of Calculation.— The calculation of deprecia- tion, once the rate is established, may be made in various ways which are known as follows : 1. Straight line or equal installment method 2. The increasing installment method 3. The decreasing installment method 4. The interest or sinking fund and annuity method The straight line method sets up an equal annual amount disregarding the element of repairs on the assumption that a machine of uniform producing ca- pacity through the years should be charged into costs with similar uniformity. The increasing installment method rests on the as- sumption that the process of depreciation goes on at a variable rate, increasing as a function of time and that reserve should be proportioned upward through the years. The decreasing installment method also assumes the geometric progression of depreciation, but maintains that this condition necessitates offsetting repair expenditures of increasing amounts with age and asserts that the depreciation installment should diminish therefore with age in order to equate the combined annual cost of up- keep and depreciation. The interest method considers the depreciation reserve as a fund properly subject to compound interest and com- putes an annual installment which, with accumulated interest through the years, establishes an adequate reserve. The use of any of these methods is optional. The straight line method has the advantage of simplicity in principle and calculation and may be used securely in most cases. It operates by deducting the salvage value DEPRECIATION, INTEREST, AND POWER 177 or equipment from the original capital value and divid- ing this difference by the estimated life, thus establish- ing equal annual installation. As an example, assume a machine installation cost of $7,000.00, the salvage value as $700.00, and the life as 10 years. The straight line depreciation would be : $7,000.00 — $700.00 = $630.00 per year 10 DetctiiitiOD Uaker EXJUIRMENT INVE74TORY Machine Na LocadoD SiM qoaltty ^uchaaed fnttt Date of PuKhaw Purcbaae PMce Fidgbl Installation Appunenance Total Coet DEPRECIATION 1 •Vmmr Ajnount Y«r ■r,^ Amount Y«r Anwunt Q Year Amount | Figure 57. — equipment inventory An excellent plan is to keep an equipment inventory record showing full data as to cost of installation of indi- vidual machines with the annual installments for depre- ciation noted thereon (Figure 57), and it is needless, perhaps, to add that in modem accounting depreciation is carried in a separate reserve account, not credited to the actual equipment accounts. Much has been written about the various methods of calculation, the relative advantages of which are often asserted with a vigor which in my opinion may easily be misspent. It must be remembered that at best deprecia- 178 ESSENTIALS OF INDUSTRIAL COSTING tion is an estimate and that while experience has de- veloped tables of reasonable accuracy, they compare very much with the mortality tables by which the expectation of human life is computed, in that they are apt to err seriously in the individual case and at best are conjec- tural. However, with full admission of the uncertainty of depreciation, monthly provision for it in costs is indis- pensable to accuracy and from a banking viewpoint the appearance of a depreciation reserve on the balance sheet in adequate amount is a matter of plain business in- tegrity. For depreciation is the reserve against that loss in invested value which cannot be restored by repairs or maintenance. The actual occurrence of this loss in value is beyond dispute and is a consequence of either use or disuse. The stockholders or owner who have lightened depreciation below a conservative allowance in order to enhance the apparent profit are, as some one has said, virtually attaching a gratuitous piece of the plant to each article of production sold. As illustration of the unsound practice in regard to depreciation in the past and of the urgency of proper provision for it in costs, the following comments by E. M. Hurley are quoted : Importance of Depreciation. — Some years ago the prac- tice among those who realized the necessity for making pro- vision for depreciation of plant equipment was to make a charge to profit and loss at the end of the year. This plan might at that time have answered the purpose if it had been carried out, but many manufacturers would look at the profit and loss statement before making this charge and, if the year had not been a particularly profitable one, they would reduce the amount of the charge or even eliminate it altogether, expecting to make it up the following year. The inevitable re- sult was that the amount set aside for depreciation fell short of the proper percentage. Conditions to-day demand that depre- ciation be recognized as an element of cost and that provision be made each month to include it in the costs of that month. If a DEPRECIATION, INTEREST, AND POWER 179 machine were of a type that would wear out in a month, could any one say that the entire cost of that machine should not be paid by that month 's production ? The fact that a machine may be expected to last for ten years instead of a month is no reason why every month of those years should not pay its share of the cost of the machine. Appreciation. — Appreciation is the opposite of de- preciation and means the gain in invested value which may occur with time and use. The classic example in- evitably drawn upon to illustrate appreciation is the roadbed of a railway, which does improve in structural qualities with time. In manufacture, omitting the factor of land values which are frequently enhanced, there are few cases of appreciation. However, appreciation in values has occurred and may occur and our interest is in what the procedure for handling it in costs should be. This may be answered briefly by the statement that con- servative financial practice does not recognize apprecia- tion until it is realized by transfer or sale. Hence, the influence of appreciation on cost of production is nil until change of title or ownership with adjusted book values brings appreciation into the same category as original machine value. Interest.— The question whether interest is or is not a proper or a necessary factor in costs comprises a legacy of unsettled dispute which can only be approached with due sense of temerity and frank admission of futility in reconciling the opposing views. The question takes its place with other classic arguments which have engaged the speculations of mankind and to which there is no final answer since decision rests in the processes of opin- ion and policy and not within the canons of abstract law or principle. It is difficult, therefore, to satisfy inquiry on this point and determine judgment, but it is possible to consider the broader phases of the question and pre- 180 ESSENTIALS OF INDUSTRIAL COSTING sent both ar^ments in presenting individual opinion whicli will be done herewith. Cost is a term which means the accumulation of all expenditures required for a given undertaking and the cost plus the profit must be contained within the price of a commercial transaction if the actual purpose of busi- ness is to be achieved. Profit is not entirely necessary, however, because the low limit of commercial success is measured by mere solvency. The cost must be such, therefore, as to insure solvency, although, of course, it could not long continue with that motive, since something beyond a breaking-even is required in business and profit must be contemplated in price. But the point is made because in my opinion the matter of solvency versus profit is the underhdng distinction which influences the proper treatment of interest in cost. Interest in cost is a financial and not an economic consideration, for, from the strictly scientific viewpoint of theoretical economy, the charge of capital is as essentially a part of cost as the wage of labor and the earnings beyond this minimum charge or interest are profit. These earnings constitute inducement for the investment and the basis of a higher evaluation of the capital. In a word, interest, as a part of cost, is, from the financial viewpoint, only regarded as necessary when its exclusion from cost would precipi- tate insolvency. In finance bonds are regarded as heavy burdens and are only issued as a last resort and then minimized as far as possible. The history of industrial finance indi- cates a fear of the burden of interest, and an escape therefrom by the institution of preferred stock with or without cumulative provisions. Bonds have rarely been initial features in the financial organization of indus- trial enterprise and have usually been issued to secure DEPRECIATION, INTEREST, AND POWER 181 additional working capital or to meet some similar strin- gency. In fact, before the war the trend in finance was away from bonds and was evolving new securities, the purpose of which was to secure through earnings and not on assets and to forestall legal action in case of default. Henderson says as to railroads : A soundly financed railroad will try to keep its bonded indebt- edness well under 50 per cent of its capitalization. Professor Ripley believes that the percentage should be only 40. The reason is elementary. Net incomes will necessarily fluctuate much from year to year. Bumper crops, industrial and com- mercial activitj^ and fair weather will bring large incomes ; crop failures, business stagnation, and severe storms or floods will bring small incomes. Now interest on bonds must always be met, if there is a default the road is insolvent, but dividends on stock can be reduced or suspended without serious consequences. The amount normally paid out in dividends or put away in sur- plus is, therefore, the margin of safety which separates the rail- road from insolvency. In proportion as the bond issue, with its inescapable fixed charges increases, this margin of safety nar- rows and, if it shrinks beyond a certain point, there is constant danger that one of the recurrent periods of meager earnings will wipe it out completely and throw the road into receivership. In industry the fluctuations in earnings are wider and hence the risk of interest burden proportionately greater, so bonds are rare issues and interest, therefore, not often a compulsory element in cost. Summing up, this dis- cussion is intended to show that interest is only a neces- sary addition to cost when it must be earned to prevent insolvency and, therefore, need only cover that part of the invested capital that is in bonds. Business enter- prise is devoted to profit and not to a bifocal affair of interest and profits. A cost should represent the base upon which price must be erected in order to secure profit. To me there appears no convincing reason why interest should be isolated as a minimum charge of capital and included in costs. Manifestly the only pos- sible purpose in doing so would be either 182 ESSENTIALS OF INDUSTRIAL COSTING 1. To assure a minimum earning on capital because no price could be lower than cost, and, if cost included interest, the earning would be secure. 2. To attain greater relative accuracy in costs of dif- ferent articles in the same manufacture. Frankly, in my opinion, any responsible officer who is unable to operate profitably when the flat costs of pro- duction are known without interest included is hardly fitted to his post and for this reason the contention of including interest in costs as a factor of safety is hardly complimentary and, in the opinion of many executives, complicates more than protects price administration. As to the bearing of interest on costing accuracy the only possible connection would be that different products of the same comjDany occupied relatively less or more capital in their manufacture, either by amount or time of engagement or turnover, and hence had different capi- tal costs. This circumstance conceivably might exist, but I cannot summon up one concrete example where the difference in capital cost affected substantially what should have been the margin of profit on two different articles within the same company. Of course, it is true that the turnover of invested capital varies in different indus- tries. Probably the sales of the average corporation about equal the capital or surplus. In some industries the ratio may be five to one instead of one to one, and in some seven-tenths to one, and this activity of invested capital is determined by the nature of the productive processes and the credit basis of distribution. This fluctuation in capital activity is offset by the margin of profit. The margin is greater on slow turnovers and less on fast turnovers. Thus the relative activity on capital in production is compensated by the extent of profit and the rate of profit for a given industry required DEPRECIATION, INTEREST, AND POWER 183 to defray the cost of capital is set accordingly. But this has nothing to do with costs whatsoever, and if it is argued that it has, then costs might logically be held to include profit, a claim not held by any one to my knowledge. Argument for including interest in costs frequently rests on the comparative cases of proprietary and tenant operation. That is, in the case of a company renting its buildings versus one owning its buildings, the claim is made that, since rent is admitted into cost containing, as it does, interest on the landlord's investment, interest on buildings owned by a company should also be included in costs. Accepting this argument, would it not be equally proper to charge the landlord's profit in excess of interest? Further, assume cases of two companies, one with a repair machine shop and one without. The latter company pays a profit to a jobbing machine shop for all repairs and properly charges the expense into costs. Would it be feasible or desirable to charge costs in the case of the first shop with repairs made in its own machine shop at a profit? I must again dissent from this position and hold that these examples simply sustain the point that the inclusion of interest in costs is entirely a financial consideration. ' If, through lack of capital, money is borrowed, or if a building is rented because none is owned, the interest paid is the penalty of capital insufficiency and a tax on the cost of doing business, but the price commanded in a competitive market is no greater than that of a. company capitalized adequately and which earns thereon the interest that the other com- pany has to pay out. This can hardly be said to justify the inclusion of interest in all costs any more than an equal provision for bad debts should be made in all com- panies regardless of their credit making abilities. 184 ESSENTIALS OF INDUSTRIAL COSTING To conclude, it is conceded that in theoretical eco- nomics a distinction is made between interest and profits, and costs are considered to include interest with profits abiding beyond. But it is my contention that theoretical economics and the technique of business practice as well as the laws of bankruptcy differ in this respect. For business and commercial law regards interest as a cost only when it must be earned to maintain solvency. Further, the argument that greater relative accuracy is secured in costs by including interest and thus reflect- ing the difference in capital engagement seems somewhat remote from actual probability. I cannot think of a concrete instance where the ratio of sales volume to total capital and surplus shows any two products within the line of a given corporation which depart widely in this same ratio for their particular requirements. To explain this point assume a manufacture where every dollar of capital and surplus produces $1.50 of sales value in the year. I believe it doubtful if any such manufacture might have in its line individual articles the sales on which would depart very far from this average of one to one and a half. Unless there was a great departure it does not appear that any considerable error could creep into the costs of these products if the factor of interest were ignored. Heat, Light, and Power.— The provision of heat, light, and power in manufacture is a primary necessity and the machinery whereby it is done is governed by the technical principles of engineering. The source of en- ergy which it is the function of this machinery to convert to applicable form is generally coal, occasionally water and sometimes a manufacturing waste such as sawdust or bagasse. The proportion of energy to the unit of production or per dollar of value required in manufac- DEPRECIATION, INTEREST, AND POWER 185 ture varies tremendously with the character of the product. Paper mills and glass factories are industries in which great quantities of energy are demanded both for heat and for power. A paper mill axiom holds that "a pound of paper requires a pound of coal," and although this proportion has been bettered in modern engineering prac- tice, the relation has never been reduced below 0.7 of a pound of coal to a pound of paper. Glass plants invari- ably are located in natural gas centers or near good gas coal, because the requirements for heat are very great and the consumption of gas per unit of product is large. In fact, the heat factor is so prominent in cost in these two industries that it is doubtful if competition could be developed against proximity to a relatively cheaper fuel source. In general, in manufacture the provision of energy either in the form of heat or power is not such a vital factor in production, nor is it so prominent an element in expense. For in industry by and large the entire cost of power and heat probably does not exceed one to seven per cent of total expense with a fair average of four per cent. The comparatively minor aspect of this factor in expense has resulted in the past in disre- gard of its possibilities in the pursuit of economy and a slighting of effort to apportion it accurately in costs. With the passing of time and the closer scrutiny of all elements of cost and the sharp rise in the price of coal, the matter of heat and power have received increasing attention both in regard to technical betterments and application in costs. Accurate accumulation of the cost of heat and power and its proper distribution in costs involve the principles of engineering more than account- ting and at least an elementary understanding of the 186 ESSENTIALS OF INDUSTRIAL COSTING technical side of the subject should be acquired if suc- cess in this phase of costing is to be attained. Manufac- ture presents a demand for power and light and heat in proportion and in amounts conditioned by the nature of the processes and the product. Heat is usually supplied from steam, although often directly from gas, coal, or coke. Light in modem plants is supplied by electricity, although in rare instances by gas. Power is generated from coal or fuel oil, or from the fall of water. It is produced in the form of motion by the internal combus- tion engine, steam engine, or turbine or water wheels. Power thus generated is transmitted by belts and shaft- ing and pulleys to the driving of machinery or converted into electricity and applied by motors either for groups of machines or indi^^dually. In rare cases water power is similarly applied directly to machiner5^ The power requirements for different industries per employee, per $1,000 capital, and per $1,000 of value of product is listed in the interesting tabulation (Figure 58) taken from an article by H. E. McKensit in the Canadian Engineer. The power is supplied as follows ; Steam engines or turbines 70 per cent Internal combustion engines 5 per cent AYater wheels 8 per cent Rented from central stations 17 per cent The power thus supplied is expended in driving ma- chinery, either by line shafting or motors. The propor- tion of each follows: Motor drives 22 per cent Shaft drives 78 per cent Coal is the leading fuel used Avith coke, oil, and gas of secondary importance in amount. Coal is a mineral con- taining certain elements, chiefly carbon, which when oxi- DEPRECIATION, INTEREST, AND POWER 187 Figure 58. — Relative Position of Industries as Power Users Horse Power Relative 2 Per $1,000 Capita 3 Per $1,000 Value of Product Use of Industry 1 Per Capita Power Average of 1, 2. 3 1. Clothing 0.14 0.16 0.07 0.12 2. Boots and shoes . . 0.45 0.43 0.19 0.36 3. Canning and pre- serving 1.13 1.92 0.68 0.55 0.52 0.02 0.78 4. Meat packing 0.82 5. Foundries and ma- chine shops 1.40 0.57 0.71 0.89 6. Farm implements. 1.66 0.39 0.68 0.91 7. Car shops, railroad 0.98 1.23 0.72 0.98 8. Carriages and wagons 1.52 0.72 0.79 1.01 9. Paints and var- nishes 2.55 1.54 0.56 0.98 0.45 0.93 1.13 10. Furniture 1.15 11. Electrical machin- ery and apparatus 1.51 0.60 1.41 1.17 12. Woolen mills 2.07 0.84 0.83 1.25 13. Smelting, lead 3.45 0.20 0.16 1.33 14. Creameries 3.22 1.42 0.37 1.67 15. Petroleum refining 5.45 0.50 0.38 2.11 16. Breweries 5.20 0.56 0.93 2.23 17. Cotton mills 3.35 1.58 2.06 2.33 18. Giindstones 3.72 1.16 3.38 2.75 19. Lumber, saw and planing mills 3.62 2.51 2.46 2.86 20. Bricks and tiles . . 3.99 1.95 3.68 3.21 21. Chemicals 7.50 1.34 1.77 3.54 22. Smelting copper. . 9.40 1.42 0.42 3.75 23. Iron and steel roll- ing mills 8.1 2.09 2.13 4.11 24. Sugar and mo- lasses 10.70 9.00 1.05 2.11 0.58 1.30 4.11 25. Oil and cottonseed 4.14 26. Flour and grist mills 12.90 12.6 2.44 1.98 0.97 5.9 5.68 27. Portland cement. . 6.83 28. Paper and wood t)u1d 16.0 27.2 3.19 2.41 4.86 3.00 8.02 ir^ IT ••••••• 29. Blast furnaces 10.87 30. Carbide of calcium 37.4 12.1 14.5 21.3 188 ESSENTIALS OF INDUSTRIAL COSTING dized or burnt give off heat. The combustion takes place in the firebox of the boiler and the hot gases convey the heat to water, transforming it into steam. The value of coal is measured by its content in heat units or B.t.u. ; the efficiency of combustion is measured by the per cent of these units which are absorbed by the forming of steam. The average bituminous coal contains 12,000 to 13,500 B.t.u. per pound. The small industrial boiler ope- rates at an average eflBciency of little over 67 per cent, although occasionally 76 per cent may be achieved. In central station operation 85 per cent is the order of the day, and industrial operation on a small scale without adequate supervision or skill suffers in contrast. Steam is used to operate an engine or a turbine at a pressure, in industrial plants, of 125 to 150 pounds, and sometimes as high as 200 pounds. Some manufacturers require live steam for industrial purposes, that is, in the actual proc- ess of production and distinct from power, as in cooking, dyeing, or drying operations. Steam used for heating the buildings is generally taken from the engine exhaust, as the temperature of steam at the throttle and exhaust pressure wiU show the relatively large amount of heat energy which the engine cannot extract. Temperature of steam at 150 pound pressure is 365 de^ees F. Temperature of steam at 5 pound pressure is 228 degrees F. The power jDroduced by the engine is measured by the unit of horsepower, an arbitrary measure that may be defined as 33,000 foot-pounds of work per minute. Power is a rate of doing work and work is the product of force times distance. One horsepower is 33,000 pounds moved through one foot of distance per minute. The steam engine is a device for converting the heat energy of steam into mechanical energj^ and the process DEPRECIATION, INTEREST, AND POWER 189 is extremely wasteful, due entirely to the inability of the engine to operate at pressure low enough to utilize all the heat in the steam. The engine is limited to atmos- pheric pressure, although by an arrangement known as condensing, the back, or exhaust, pressure may be re- duced below atmosphere and thus convert more heat energy. The limits at best are very small and the ave- rage engine does not operate much better than at 10 per cent efficiency or cannot use more than 10 per cent of the available heat units. It can be seen that the derivation of power from coal is attended by great losses and the best practice rarely secures better than 12 to 14 per cent of the energy in the coal, while average industrial practice probably does not exceed five to seven per cent. The costing of power is an accounting for this waste; it does so by charging all expenditures against the net output at such stages in the course of operation as may be necessary. In general practice the boiler steam main and the switchboard are the terminal points for costing, and so the usual depart- ments of expense are Steam Light and power Into the steam department are charged coal, waste, boiler compound, fireman's wages, its fixed charges with coal representing fully 50 per cent or more of the total. Out of the steam department is secured so many pounds of steam which in turn are chargeable according to des- tination and service. If live steam is used in industrial processes, the quantity thus used must be metered or closely estimated and the balance of the steam charged against light and power. Light and power are charged with engineer's wages, the cost of steam, lubricant, fixed charges, etc., and the total cost thus determined is used 190 ESSENTIALS OF INDUSTRIAL COSTING to measure the unit cost of the kilowatt hour output meas- ured at the switchboard. The kilowatt-hours at the switch- board may be used for lighting or power. The division between the two may be obtained from meters or by the wattage calculated as the lighting load, which may be done by ascertaining the individual lamp wattage, the number of lamps and the lighting period in time. The power load may be metered or determined from the total motor power at the load factor at which they operate. For costing purposes it is necessary to secure this division of power cost by departments. The lights are easily determined by departments and the proportionate share of each in the total lighting cost computed. The departmental charge for power, if accuracy is desired, should be metered, but if this is not feasible, the dis- tribution may be made on the basis of motor horsepower. In summar^^, steam cost may be prorated on the basis of steam-flow meter readings and is most accurate when handled in this manner. Power costs may be distributed on the basis of meter readings, but this may be done on the basis of departmental motor capacity. In case there is no motor drive, the distribution can only be made on the basis of horsepower required per machine. The horsepower requirements of all standard machines are matters of record and i^iay be ascertained. The table shown in Figure 59 covers certain leading industries with their essential equipment, but if no record is avail- able it may be necessary to take brake tests in order to determine the horsepower. Heating by exhaust steam involves a credit to the steam going to the engine, based upon the relative heat or calorific value of the exhaust steam compared to live steam. Illustrative of the method of calculation let us assume a set of specific conditions and calculate the credit DEPRECIATION, INTEREST, AND POWER 191 Figure 59. — Horsepower Requirements op Machine Motors 1. Lathes * engine lathes Swing, Horse- inches power 14 2 16 3 18-20 3 22-24 5 27-30 71/2 36-48 71/2 SPECIAL LATHES Type Horse- power Car wheel, 48 in.... 20 Double axle, moder- ate duty 15 Double axle, heavy duty 25 DRIVING WHEEL LATHES Size, Horse- inches power 51 15 60-69 20 79 25 84 25 90 30 50 100 5 tail stock 2. Vertical Boring Mills * Size Horsepower 24-30 in 5 36-42 in 71/2 60-90 in 10 100 in 15-5 rail 10 ft 20 71/2 rail 12 ft 20 71/2 rail 14 ft 25 71/2 rail 16 ft 30 10 rail 3. Drills RADIAL Size, Horse- feet power 4 3 5 5 6 5 10 71/3 UPRIGHT Size, Horse- inches power Friction 14 15 1/2 20-26 1 28-34 2 42-50 3 MULTIPLE-SPINDLE Size, Horse- inches power 4-2 71/2 6-2 10 8-2 10 ^Charles Bobbins, transactions of the American Society of Mechanical Engineers. 192 ESSENTIALS OF INDUSTRIAL COSTING FiGTJKE 59. — Horsepower Requirements of Machine Motors (Continued) 4. Milling Machines^ horizontal, plain or universal Table Feed, inches Cross Feed, inches Vertical Feed, inches Horsepower, Moderate Heavy 24 30 36 50 8 10 12 12 18 18 20 20 3 5 -71/2 71/0—10 10 —15 vertical milling machines Table Spindle Diameter, Diameter, Horsepower inches inches 28 4 5 32 4 7y2 40 4y2 10 54 5 15 70 6 20 SLAB MILLING MACHINES TTidth of Table, inches Horsepower 24-30 10 36 15 60 25 36 hea\'A' 25 42 heavy 50 5. Horizontal Boring, Drilling and Milling Marhines ' Spindle, * Horse- inches power 3V2 3 4 5 5 7% 6 10 7 15 * Transactions of the American Society of Meclianical Engineers. DEPRECIATION, INTEREST, AND POWER 193 Figure 59. — Horsepower Requirements op Machine Motors (Continued) 6. Planers * medium duty Size, inches Horse- power 24 X 24 5 30 X 30 71/, 36 X 36 10 48 X 48 15 56 X 56 15 HEAVY DUTY Size Horsepower 24 X 24 in 71/2 42 X 42 in 25 56 X 56 in 25 Frog and switch forge. 30 12 X 10 ft 60 10 14 X 12 ft 75 12 7. Shapers * Size, inches 14-20 24 36 (rail) (rail) Horse- power ... 3 ... 5 . . . 71/2 8. Crank Blotters^ Light, Medium and Heavy Size, inches Horsepower Medium 10 3 5 10-16 5 71/2 20 71/2 10 26-30 15 .... Geared Blotters 24-60 20 < 9. Cold Saws ' Diameter, inches Thickness, inches Horsepower 12 5/32 2 15 5/32 2 18 3/16 3 20 3/16 3 24 3/16 5 32 3/16 71/2 36 3/16 10 * Transactions of the American Society of MecJuinical Engineers. 194 ESSENTIALS OF INDUSTRIAL COSTING Figure 59. — Horsepower Requirements op Machine Motors (Continued) 10. Grinders * Horsepower Size, itches Medium Heavy 10 X 50 5 71/2 10 X 72 5 71/2 10 X 96 5 71/2 10 X 120 5 7y2 14 X 72 10 18 X 120 10 15 18 X 144 10 15 18 X 168 10 15 18 X 96 10 15 44-in. car wheel grinder 30 11. Band Saws Diameter of Revolutions Maximum Depth Horsepower Wheels, inches per Minute of Timber, inches 42 400-500 20 5 38 450 16 5 36 500 16 5 36 400 14 3 34 500 12 3 30 500 12 3 12. Band Eesau^ ' Diameter of \Ylieel, inches Revolutions per Minute Width of Saw Blade, inches Maximiun Depth Timber, inches Motor Horsepower Revolu- tions per Minute 60 54 48 44 42 40 38 550 GOO 650 650 650 700 450 8 6 5 4 4 3 2 36 30 36 24 24 20 12 50 40 30 20 15 15 7.5 600 600 720 720 720 720 514 ' Transactions of the American Societi/ of Mechanical Engineers. ' Electrical Eeview and Wesrtern Electrician. DEPRECIATION, INTEREST, AND POWER 195 Figure 59. — Horsepower Requirements of Machine Motors (Continued) 13. Band Rip Saws, Power Feed* Diameter of Wheel, inches Revolutions per Minute Maximum Depth Timber, inches Motor Horsepower Revolutions per Minute 42 40 650 600 12 15 15 10 720 600 14. Circular Saws Maximum Diameter of Saw, inches Revolutions per Minute of Saw Capacity Horizontal, inches Vertical, inches Horsepower 42 36 32 30 24 900 1,000 1,225 1,200 1,225 17 14 11 10 8 's 6 6 25 25 20 20 20 15. Circular Rip Saws Maximum Diameter of Saw, inches Maximum Revolutions per Minute • Maximum Thickness of Stock, inches Feed, feet per minute Horsepower 20 16 12 2,100 2,600 2,400 6 5 2 60-180 64-194 50-100 15 15 7.5 16. Hand Feed Circular Rip Saws ' Maximum Diameter of Saw, inches Saw Revolutions per Minute Horsepower 14 16 20 24 30 36 2,700 2,400 2,000 1,600 1,250 1,000 7.5 10 15 15 20 20 'Electrical Review and Western Electrician. 196 ESSENTIALS OF INDUSTRIAL COSTING Figure 59. — Horsepower Requirements of Machine Motors (Continued) 17. Power Feed Gang Ripping Machine' Number of Saws Maximum Revolutions per Minute 2 3,400 10 3 2,300 15 4 2,500 14 Power feed gang edffer and ripper 8 I 2,500 I 14 Diameter of Saws, inches Feed, feet per minute 180 200 100 to 180 90 to 200 Horsepower 15 30 25 35 IS. Circular Cut-Off Sous 2 Maximum Diameter of Saw, inches Revolutions per Minute of Saw Horsepower 14 16 2,700 2,600 5 7.5 Maximum Capacity, inches 8x4 ... 10 X 4 . . 12 X 6 . . 14 X 6 . . Maximum Capacity, inches 4x4.. 6x4.. 8x4.. 10 X 4 . . 12 X 5 . . 14 X 6 . . Maximum Size of Timber, inches 15 X 4 19. Inside Molders 20. Outside Holders* 21. Stickers Horse- power .... 25 . ... 25 . ... 35 .... 35 Horse- power . ... 10 . ... 15 . ... 20 .... 25 .... 30 .... 35 Horse- power .. 5 18 X 4 7.5 20 X 4 10 'Electriccl Eevietv and Western Electrician. DEPRECIATION, INTEREST, AND POWER 197 Figure 59. — Horsepower Requirements of Machine Motors (Continued) 22, Jointers * Maximum Width of Timber, Horse- inches power 8 2 12 2 16 3 20 5 24 7.5 36 7.5 23. Single Surfaces' Maximum Width of Timber, Horse- inches power 16 7.5 20 10 24 10 30 15 36 15 24. Double Surfaces ^ Maximum Width Horsep ower Timber, inches Medium Work Heavy Work 26 20 35 30 25 35 36 30 •• 25. Drum Sanders' Number of Drums Size Sander, Maximum Width Stock, inches Horsepower 1 30 10 1 36 15 1 42 15 2 30 20 2 36 20 2 42 20 2 48 25 3 • 30 20 3 36 25 3 42 and 48 30 3 54 to 66 35 3 72 40 3 78 •• 'Electrical Eeview and Western Electrician. 198 ESSENTIALS OF INDUSTRIAL COSTING Figure 59. — Horsepower Requirements of Machine Motors {Continued) 26, Chisel Mortising Machines* Maximum Number of Chisels Maximum Size of Chisel, Square Horsepower 1 0.5 2 1 0.75 2 1 0.75 3 1 1.25 5 2 1 3 3 1 5 4 1 5 5 0.8125 5 6 0.8125 7.5 7 0.8125 7.5 27. Planers and Matchers* Maximum size of Timber, Horse- inehes power 9x6 35 15x6 40 20x6 45 24x6 45 26x8 45 by the solution suggested by an article in the Septem- ber, 1920, issue of Power Plant Engineering. Assume a noncondensing Corliss engine of 250 horsepower using steam at 150 pounds gauge pressure and a steam rate of 25 pounds per i.h.p. with back pressure of 5 pounds and steam returns of 200 degrees Fahrenheit. Obviously during the nonheating period there ^^11 be no credit for exhaust steam used. However, during the winter months a calculation w^ould have to be made. For simplicity let us reduce the term of operation to one day. 250 h.p. at 25 lb. per i.h.p. for 9 hours equals 56,250 lb. steam- Steam at 150 lb. pressure contains 1,195 B.t.u., so that all told 56,250 X 1,195 or 67,218,750 B.t.u. are available. Steam heating in this case only requires one-third of the ex- ' Electrical Beview and Western Electrician. DEPRECIATION, INTEREST, AND POWER 199 Figure 60. — ^Range of Steam Consumption in Steam Prime Movt^js Type of Prime Mover Single throttling, non- condensing engine ... Single automatic, shaft governor Single condensing Cor- liss Compound condensing, automatic shaft gov- ernor Simple condensing pop- pet Marine triple Marine turbine Land turbine Compound condensing Corliss Land triple Uniflow (Strumpf) sim- ple Wolf compound locomo- bile Ljungstrom turbine . . . 3 « ** K > ^ « " ^ S O >>
  • Z'i 3.30 4.60 8.33 8.90 9.80 11.00 13.00 14.0 15.0 14.6 16.8 17.5 18.3 be "3 >>ft< Q tic o c^ a g =5 o 39.2 47.8 53.1 55.6 47.6 53.4 61.5 66.2 72.2 65.5 73.1 74.1 74.7 haust steam or one-third of 56,250 pounds, or 18,750 pounds. Steam heating uses the difference between 5 lb. and 200° F. in B.t.u., or 1,156 — 169 equals 987. Therefore, the B.t.u. in exhaust heating would be 18,750 X 987, or 18,506,250 B.t.u. 18,506,250 which is • of the total heat available, or 27.5 per cent 67,218,750 of the total steam cost. In other months the proportion would be less. The average cost of power production is composed as follows : 200 ESSENTIALS OF INDUSTRIAL COSTING Figure 61. — Annual Cost op One Horsepower in Factory Steam Power Plants ^ SIMPLE non-condensing ENGINES Rated capacity of plant, horsepower Cost of plant per horse- power ' Fixed charges at 14 per cent Attendance Oil and other supplies A. Cost per horsepower less fuel B. Pounds of steam per horse- power-hour C. Pounds of steam per pound of coal burnt D. Pounds of coal per horse- power-hour = b/c E. Coal per horsepower-year at $1 per ton Cost of 1 horsepower-year, A. + E.' \... 80 $175.00 $24.50 $13.00 $2.60 $40.10 30 7 4.29 $5.90 $46.00 ^ Plants operating 10 hours a day, 308 days in the year at 80 to 100 per cent of rated capacity; boilers hand-fired. ' Includes buildings, entire equipment, and erection. 'Cost with coal at $1 per ton. For any rate x (dollars) of fuel cost per ton, cost of 1 horsepower-year = A -(- 'Ex. Fuel 50 per cent Wages 18 per cent Oil, waste, supplies. ... 4 per cent Repairs 3 per cent Depreciation 25 per cent 100 per cent The element of fuel is so high in power costs that it indicates the urgent necessity of engine equipment of the least possible steam consumption consistent with in- vestment. The range in steam, and hence coal consump- tion, is very wide, and as evidence there are submitted herewith the data in Figure 60 taken from an article in a National City Bank bulletin. It is obvious that such differences in operating econ- DEPRECIATION, INTEREST, AND POWER 201 Figure 61. — Annual Cost of One Horsepower in Factory Steam Power Plants compound condensing engines 100 300 500 1,000 2,000 $170.00 $23.80 $12.00 $2.40 $126.00 $17.65 $8.60 $1.72 $96.00 $13.45 $6.20 $1.24 $60.00 f8.40 $3.50 $0.70 $56.00 $7.85 $3.00 $0.60 $38.20 $27.97 $20.89 $12.60 $11.45 20 18 16 15 14 8 8 9 9 9 23 2.25 1.78 1.67 1.56 $3.44 $3.09 $2.45 $2.30 $2.15 $41.64 $31.06 $23.34 $14.90 $13.60 omy would materially affect costs and to illustrate this, as well as to present in condensed form the costs of actual practice, Figure 61, taken from the Engineering Magazine, is presented. The cost of power is affected to some extent by the number of hours the plant operates and this point is invariably brought up when central station versus local power costs are discussed. That it has an important bearing on the cost of power may be gathered from the following data quoted from E. J. Pigott's lecture at Johns Hopkins University: Hours Work 8 10 16 20 24 Use Factor 18 — 24 per cent 21 — 28 per cent 30 — 42 per cent 36 — 46 per cent 45 — 60 per cent 202 ESSENTIALS OF INDUSTRIAL COSTING With a heavy fixed investment, such as a power plant represents, the percentage of activity bears strongly on the unit cost of production. To conclude and to revert to the essential point. In industrial costing power and steam constitutes a sizable factor in expense and the accurate collection of the charge it represents and its distribution are important phases of costing effort. The cost is obtained by departmentaliz- ing the power production into steam and power depart- ments. Live steam is metered if used for industrial pur- poses, otherwise, charged into power. Power is credited with the value of exhaust steam used in heating on the basis of relative calorific service. Power is distributed by meter readings on motors or by motor horsepower or by machine horsepower ratings to each department based upon its requirements as thus indicated. CHAPTER IX THE DISTRIBUTION AND APPLICATION OF EXPENSE IN COSTING It is one thing to determine what are fixed charges and quite another to arrange for their equitable distribution. The aim is to have each unit of production bear its due and proper proportion of the total, — Porter. Distribution of Expense.— The manner in which ex- pense is collected and the basis of the introduction into expense of such items as interest and depreciation have been presented and the topic of this chapter will be the method of expense distribution whereby overhead rates on labor or machine or process hour rates are established and ultimately applied to the cost of the product. Expense departments have been seen to consist of two types, namely, the contributing and the productive, simi- lar to the indirect and direct classification of labor and materials. The contributing departments are absorbed by the productive departments through a system of pro- ration, which acts by direct transfer or by the fusion of several contributing departments which, when so con- densed, are then distributed to the productive depart- ments. The way in which this is done is important to consider, for it has a measurable influence upon final accuracy, which may be better comprehended in the light of the fact that contributing departments frequently com- prise 30 per cent of total expense and may, under some circumstances, amount to as much as 50 per cent. It will be obvious that the basis of the disposition of con- tributing departments to and through the productive de- 203 204 ESSENTIALS OF INDUSTRIAL COSTING partments bears almost as much on final results as the application of the productive expense departments to productive labor. Contributing Expense Departments.— Unfortunately it is impossible to determine precisely the arithmetic rela- tion existing between the contributing department ex- pense and the productive department expense. This point, although not true of all such departments, may be better grasped by the enumeration of a few contributing departments, as follows: 1. Office 2. Garage 3. Laboratorj' 4. Engineering or drafting 5. Machine shop 6. Millwright 7. Heat, light, and power 8. Eepair or service 9. General factory These departments encompass work and service which either in part or in their entirety cannot be charged into costs directly to productive expense departments. Fre- quently some of the elements which compose these ex- pense departments can be charged as productive depart- ment expense, or to asset accounts, but the identity of a department as a contributing department is determined by the fact that after all productive charging off a residue of expense remains that bears no direct functional rela- tion with productive labor, and hence such a residue must be applied indirectly. The application of these depart- ments to productive costs is negotiated by clearing them through the productive departments from which points they are absorbed into costs. The basis of this proration or clearing, the selection of the unit of measurement or other physical or financial DISTRIBUTION OF EXPENSE 205 relationship whereby these departments are projected into productive departments and thence into costs is worthy of most careful study. In many cases time sup- plies a convenient unit, in others some measure such as motor horsepower or radiating surface is employed, whereas in others some device such as a steam flow meter or gas meter may be used. The essential motive is to determine the basis of measurement which approxi- mates the probable facts most closely. For example, a repair machine shop may charge its time against depart- ments with commensurate share of expense according to the work actually done and the time spent for the depart- ment. Power expense may be distributed on the basis of respective horsepower requirements of the machinery within the department ; steam by the relative proportions of radiating surface within the department; and steam may be metered by departments and an absolute basis thus obtained for apportioning the expense contained in these departments. There are times when the expense of a service is accu- mulated within a department in order to localize and to reduce to further refinement the items composing it, even though the particular purpose or service rendered may be chargeable to only one productive department. This arrangement possesses statistical value only and it is not a costing necessity and is mentioned only to illus- trate the conditions which shape the character of the contributing departments. Administrative Expense.— The specific items of ex- pense which are involved in this discussion and the spe- cific contributing departments will now be considered. Administrative expense consists largely of the salaries of officials, the association of whose duties and labors with the cost of production of an article is not usually 206 ESSENTIALS OF INDUSTRIAL COSTING apparent, although unquestionably existent and of trans- cendent business value. The problem of securing the proper proportion of administrative expense may be simplified to some extent by a division of effort along the two fundamental lines, selling and producing. Argument to the contrary notwithstanding, it is quite possible for an executive to appraise the relative value of his service to sales and to production. This may not be a function of time, for conception and judgment do not often ope- rate on that basis, but time is a reasonably fair guide and may be modified by such other considerations as may apply. The point is that it is possible to distribute the cost of administrative service to sales and to production. This is the first step in the costing of administrative expense and the share chargeable to production appears as an item in the General Factory Department. 1. Oifice Department. — Office department is a reser- voir for accumulating the expense of maintaining the book records of the transactions and correspondence inci- dent to the conduct of the business. As with adminis- trative expense its total is apportioned in part to the factory and in part to the selling departments. The share chargeable to the factory is transferred to the General Factory Department as an intervening step to its charge into the expense of the productive departments. Prob- ably the fairest basis of division of office expense is ao cording to the proportions of office payroll chargeable to selling and production, respectively. 2. Garage Department. — Garage represents a depart- ment which may serve both selling and production and, in the case of the latter, more than one department. For instance, the hauling of shipments to freight or express stations is distinctively a selling expense, the handling of raw material until it arrives at the factory is a general DISTRIBUTION OF EXPENSE 207 factory department charge, whereas the hauling of coal and ashes is chargeable to the steam department. This distribution may be obtained by means of establishing either a truck hour or a truck mile cost and keeping rec- ords of occupation or engagement on either of the two bases. With short hauls where time, more than distance, is the controlling factor, the truck hour probably will result in more equitable distribution. 3. Laboratory Department, — The laboratory is the symbol of applied science and it is an institution of in- creasing frequency in manufacture. Its service is three- fold, to develop by research new methods or economies for the particular manufacture, to control the quality of raw materials by routine analyses and by the preparation of specifications to which analyses must correspond, and to guide the manufacturing processes with the object of maintaining standard quality and character. Laboratory expense is the kind of expense that it is well to isolate for purposes of statistical control as well as for proper distribution. The value of its service to the various productive departments may be measurable directly and if so, it is by far the preferable way to handle it. If this relation is not distinct, it must then be collected in the composite General Factory total for ulti- mate apportionment to the productive departments with all other items contained therein. It niiay be that some of the laboratory service is of a development nature and as such, chargeable to a deferred expense account, there to await the production or the process for which it was intended to benefit and then to be applied as the sei'vice and nature of the production or process may warrant. 4. Engineering and Drafting Department. — The work of this department may pertain predominantly to either sales or production, dependent on the operating condi- 208 ESSENTIALS OF INDUSTRIAL COSTING tions of the particular industry. Much of the work in such a department may be charged directly into costs, as it may apply directly to jobs. Naturally wherever this can be it should be done. Some of the expense of such a department is frequently incurred for development work which, as with the Laboratory Department, may be held in a suspense account pending its ultimate distribution to the production for which it was the preliminary. This arrangement is made, of course, in order to relieve cur- rent production of charges contingent on future conditions. 5. Machine Shop Department. — Modem industry rests upon the machine as its indispensable medium of pro- duction. Machine operation is destructive to original condition and inevitably brings a succession of repairs and small renewals, attention to which may be summed up in the word "maintenance." Practically every plant must be prepared, therefore, for these necessities and so it is the customary arrangement to equip a machine shop in the manner and to the extent needed for these minor emergencies. The repair machine shop presents little complication in its proper participation in costs. The expense incident to its operation is collected within the Machine Shop Department. The labor in the department is spent on orders which furnish direct charges, either to productive departments or asset accounts and the expense is levied on this labor exactly as if it were a productive department. 6. Millwright Department. — Millwright expense is simply another phase of maintenance and is distinguished from the machine shop only where no established depart- ment or headquarters for the purpose is arranged so that the millwrights working in different departments charge their time directly thereto. If a department is equipped DISTRIBUTION OF EXPENSE 209 for pipe cutting, with cut-off saws and planers for mis- cellaneous millwright work, then it is handled exactly as the repair machine shop. 7. Steam, Light, and Power Departme'dt. — The dis- tribution of Steam, Light, and Power expense depart- ment has been discussed in the preceding chapter because the method of distribution rests upon an understanding of the technical side of the subject which was outlined in that chapter. 8. Repair or Service Department. — Manufacturers are called upon increasingly to maintain in good operating condition the commodities they sell. Accordingly, articles are sent back to the factory for minor repairs or replace- ments. Generally this work is handled in a separate department especially provided for the purpose, because that arrangement has been found more economical than to have repairs made as part of the regular production. A department of this kind may repair without charge or at cost or at a profit. It is obvious that gratis repairs react as an expense and are properly a part of the selling expense. Repairs at cost or at a profit involve a process control account into which the total expense of the repair department is charged or which is credited with the cost of repairs billed. For convenience the costing of repairs can best be handled by establishing a separate expense department, part of which, represented by no charge re- pairs, would be transferred to selling expense and the balance into a special repair process account, or, if the amount is too small to justify this precaution into the general process account. 9. General Factory Department. — General Factory is the caption of that expense department which is the final reservoir of items collected at once or impounded origi- nally in other places and subsequently transferred to this 210 ESSENTIALS OF INDUSTRIAL COSTING department. It is the last point of concentration from which contributing expense is applied to the productive departments. The total of this department is frequently an appreciable proportion of total expense and the basis of its distribution to the productive departments is criti- cally related to accuracy. The usual assumption is that General Factory Department containing as it does the cost of superintendence factory clerk hire, is a function of productive hours and that, therefore, its total should be distributed over the productive departments on the basis of the productive hours contained therein. There is much in support of this assumption and in practice I have used it invariably, albeit with frank admission, of its possible divergence from what would be the facts if they were determinate. Objection to this basis centers in the argument that hours are not truly a comparative measure, and further, that a department containing relatively cheap labor, such as unskilled women, would receive a share of the General Factory Department expense greater than some other department of fewer hands but of greatly higher skill, and that, therefore, the dollar of productive labor value is the fair basis. There is merit to this contention but probably no greater general applicability than the pro- ductive hour basis. In fact, no dogmatic generality can be asserted on this point, for there does not exist any measurable basis for absolute accuracy and any measure adapted is at best empirical. The chief endeavor should be to minimize the amount of expense in general factory and to charge every possible dollar to a productive ex- pense department once it is established that it cannot be considered as productive labor or productive material. When the contributing departments have been applied to the productive departments the final step is the applica- DISTRIBUTION OF EXPENSE 211 tion of the productive expense so collected to the labor costs. This is done essentially in three ways : 1. Direct percentage relation 2. Individual machine, machine group, hourly rate, or process hourly rate 3. Unit basis Direct Percentage Rate. — The Direct Percentage rela- tion is the prevailing method of costing expense and ope- rates by determining the ratio of a dollar of expense in a productive department to a dollar of labor. An overhead rate of 80 per cent means 80 cents of expense for each dollar of labor, and a rate of 180 per cent means $1.80 of expense for each dollar of labor. It is a simple and, generally, an accurate method of applying expense and it only comes into question when it is difficult to delineate productive labor or where the proportion of expense to labor is exceedingly high, as in cases of 400 or 500 per cent overhead rates. In such a case as the latter there exists possibility of magnifying errors in the Productive Labor Distribution and so generally some other method is employed. Machine Hour Rate.— The percentage rate also mis- represents costs if the departmental subdivision has not been sufficiently fine, with the result that items of expense do not have proportionate relation to labor. For in- stance, assume a drill department consisting of machines of a wide range in sizes and hence of varying cost of installation. The percentage method averages all charges and proposes that every dollar of productive labor, no matter if it is spent on a large or a small ma- chine, receives the same quota of expense which is obvi- ously inequitable. The machine and the process hour rates have been devised to obviate this difficulty and to achieve thereby closer accuracy. The machine hour rate 212 ESSENTIALS OF INDUSTRIAL COSTING registers the activity of the machine or group of identi- cal machines and accounts for the cost of this activity in the same unit of time. The method of doing this is indi- cated in the Machine Grinding Department in the Ex- pense Analysis illustrated. The process hour rate is obtained in a similar manner and may be varied by deter- mining the expense and labor cost per unit of production, such as pound, yard, etc. The Unit Basis.— The unit basis is a variant of the process rate employed when the time involved on proc- essing differs according to the grade or size of the com- modity and when the current division of labor is difficult to secure. The drawing of wire, the fulling of woolen cloth, the dyeing and diyiug of fabrics are typical opera- tions which may be costed by the unit system. The unit basis operates by determining the time or value relation- ship or both between different sizes or grades of a com- modity and using the arithmetic ratios of these times to establish equivalent values so that the entire production may be reduced to a unit or comparable basis. For in- stance, in cloth fulling the time per yard varies with the quality of the goods and a line may be classified on this operation as follows : Time Per Yard Unit Ratio Class A 1 234 hours 1.83 Class B 214 bours Class C 1 114 hours Class D ! 21/4 hours 1.67 1.00 1.15 Some class has to be taken as unity and then the deci- mal relation of each of the others to it is calculated. The production by means of these factors can be reduced to a unit production basis : DISTRIBUTION OF EXPENSE 21B Class A Class B Class C Class D Actual Production Unit Production 10,000 yards @ 1.83 5,000 yards @ 1.67 18,000 yards @ 1.00 7,000 yards @ 1.5 40,000 18,300 8,350 18,000 10,500 55,150 unit yards Assume a total labor and expense of fulling of $2,787.60 and this means a cost per unit yard of $0.0505. If the actual cost per yard of any class is desired, it is only necessary to multiply the unit cost by the factor, as example of which the actual cost of fulling a yard of class A goods would be $0.0505 times 1.83, or $0.09 per yard. Fallacy of Applying Expense to Material.— This describes the three leading ways of applying expense in costs, though in the case of the percentage basis there are modifications which should be discussed. It has been the practice in some industries to apply expense rates on the total of labor and material value and not on labor alone. This method is one of the false traditions which have come from the past and it can be said emphatically that material value is not in any way connected with expense. The reductio ad absurdum of this method was encountered by me in the pocket cutlery manufacture. In this industry it had been the practice to levy overhead on the total of both labor and material. It so happened that pearl used as a knife covering composed 33 per cent of the prime cost of manufacture as against other coverings almost negligible in proportion. Despite the fact the actual labor required was substantially the same for stag and pearl covered knives, the pearl knives indicated a tremendously higher cost because the burden was applied to the material as well as the labor value. 214 ESSENTIALS OF INDUSTRIAL COSTING Introduction of Concrete Example.— "With this discus- sion of the principles of expense distribution concluded, their application will now be considered and this will be done by a complete exposition of an actual expense analysis. It has been thought that perhaps the best manner in which to do this would be to present a complete working example illustrating the composition as well as the closing out of this important cost record. The treatment of this representative Expense Analysis will be developed along the following lines : 1. Nature of departmental divisions 2. Structure of the record itself 3. Original sources of entries 4. Method of closing out The expense analysis is composed of two essential tjT^es of departments known as contributing and produc- tive, the distinction between which has been discussed at length in Chapter VII and previously in this chapter. The actual designations of the departments in each of these classes in this particular analysis are as follows: Contributing 1. Office Department 2. Garage Department 3. Machine Shop 4. Steam Department 5. Heat, Light and Power Department 6. General Factory Department Productive 7. Press Department 8. Forge Department 9. Heat Treating Department 10. Machine Grinding Department 11. Hand Grinding Department 12. Blade Preparatory Department 13. Spring Preparatory Department 14. Covering Department 15. Assembly Cutlery Department DISTRIBUTION OF EXPENSE 215 16. Hefting Department 17. Finishing Department 18. Buffing Department 19. Cleaning and Packing 20. Selling Expense The items composing departmental expense are auto- matically defined and located in the Expense Analysis by the serial number of the department and the letter with which each line on eveiy sheet is designated. For instance, 14J in the Expense Analysis illustrated (Figure 62) is the code index for miscellaneous non- productive labor in Department 14, the Covering De- partment, and 7E is the similar symbol for belting used in Department 7, the Press Department. This index, or code, system is used throughout all distributions of data composing the Expense Analysis as will be specifically illustrated later in this discussion. The record provides for the posting of the monthly amount of each item, the sub-total and final total of all these items and then a cumulative total of these amounts for the year up to any month. It further provides for this same information for the previous year. This is effected by the arrangement of four columns for each (see Fignire 4), as illustrated, the captions of which are : Month of , current year Period to date, current year Month of , previous year Period to date, previous year Each department in the Expense Analysis will further be found to have two classifications of expense, namely, direct and indirect. The direct expense items are those which may be charged directly to the department and which to 'a large extent fluctuate proportionately with operating activity. The indirect expense items are those which are charged from contributing departments, such 216 ESSENTIALS OF INDUSTRIAL COSTING as office, garage, machine, etc., and they also contain the fixed charges of the particular department. These charges, by their nature, are constant and fixed, regard- less of the degree of productive activity within the department. The sum of the direct and indirect expense gives the total departmental expense and the ratio of this amount to that of the productive labor for that department gives the overhead or expense rate. In the case of machine hour rates the sum of total ex- pense and productive labor, if itemized as such, is divided by the number of active machine hours to determine the machine hour rate. The sources of data for the Expense Analysis are : Payroll Distribution Supply Requisition Distribution Voucher Register Journal entries covering: Life insurance Liability insurance Fire insurance Taxes Depreciation and other reserves It might be well at this time to recall that these various sources of expense data have been discussed and illus- trated in the text previously in connection with their con- tribution to costs generally, and particularly to call at- tention to the fact that the illustrations used are the same ones which supply the information appearing in this model expense analysis. In other words, the text has been developed by the use of examples appearing in various places, but all of which are part of the general scheme of presenting a complete, concrete working ex- ample of the theory developed in the text. Payroll Distribution.— Considering then, as the first source of expense entry, that known as the Payroll Dis- DISTRIBUTION OF EXPENSE 217 tribution, if the illustration in Figure 7 is reverted to there will be found all of the data pertaining to the pay- roll expenditures. The payroll, as may be seen, is sub- divided or classified and each amount thus classified is transferred to the expense analysis as described here- with. Eeference to this distribution will show each item coded by the department number and line letter, by which it is identified. For example, select on the Payroll Distri- bution item 9J of $376.70 and then turn to Department 9 in the Expense Analysis, line J, which will be seen to be miscellaneous labor and also correctly posted as $376.70. Every item on the Payroll Distribution may be checked to the Expense Analysis and in so doing the actual steps of compiling the Expense Analysis may be followed in so far as payroll items are concerned. Supply Requisition Distribution.— The Supply Requisi- tion Distribution, Figure 6, was used to illustrate that part of the text describing its function in costing and is now referred to again to explain its relation to the Ex- pense Analysis, Here again the code or symbol identifica- tion is used as with the Payroll Distribution. Item 15M for $26.72 on the supply requisition will be found in de- partment 15, the Assembly Department, as miscellaneous supplies and item IIF for $15.22 may be located in the Expense Analysis as emery wheel dressers in the Hand Grinding Department. The total of the Supply Requi- sition Distribution so itemized and so posted to the Ex- pense Analysis accounts for that element of expense incurred by the consumption of stores and is a credit to that account and a charge to the control account of Manufacturing Expense. Voucher Register. — The Voucher Register, Figure 8, is an immensely important member in the costing struc- ture, but its contribution to the Expense Analysis is 218 ESSENTIALS OF INDUSTRIAL COSTING limited to the data obtained from the two columns, manu- facturing expense and selling expense. The items ap- pearing under these captions in the Expense Analysis constitute charges to manufacturing expense which can be made in no other way. They contain charges for such matters as outside services, as auditing, purchased re- pairs, and they also include petty cash charges which take this channel into expense by use of a monthly voucher covering total expenditures for the month from the im- prest fund. Keference to the Voucher Register will show that these entries are indexed by code, as illustration of which consider item IK of $75.84, defining the telegraph charges to office expense in the month. Fixed Charges and Similar Items.— All other expendi- tures portrayed in the Expense Analysis are derived from journal entries. The cost of the liability and life insurances is calculated departmentally each month ac- cording to the number of men employed. The total amount thus computed is journalized as follows : Dr. Manufacturing Expense Cr. Life Insurance Liability Insurance The so-called fixed charges are obtained from the Dis- tribution appearing as Figure 54. Reference to this will show the items of depreciation, taxes, and insurance for each department. Item 19BB, amounting to $78.38, is the depreciation appearing in the Expense Analysis for the cleaning and packing department, while 12AA, amounting to $1.62, is the monthly tax expense for the blade prepara- tion department in the Expense Analysis, and 6Z, amount- ing to $119,91, is the insurance charge to general factory department for the month, and will be found properly posted to the Expense Analysis according to its code. DISTRIBUTION OF EXPENSE 219 Figure 62. — Complete Expense Analysis with Full and Actual Work- ing Details as Devised fob a Cutlery Manufaotubek Share of Administrative salary Office manager salary Stenographic salary Billing clerical salary Invoice clerical salary Accounting salaries Miscellaneous clerical salaries . Postage Telephone Telegraph Stationery Miscellaneous supplies Miscellaneous expense Millwright labor .... Millwright material . Machine shop labor . . Machine shop expense Machine shop material Share of group life insurance Share of liability insurance . Total direct expense Share of insurance Share of taxes Share of depreciation Share of steam Share of power and light . . . Total indirect expense Total office expense Distribution Share to general factory expense, %. Share to selling expense, % , 19. MONTH OP 1,000.00 250.00 625.30 346.82 222.60 450.70 290.86 178.90 35.62 75.84 273.14 240.00 25.35 15.42 1.75 17.27 2.86 989.25 1.15 .76 61.42 38.95 29.89 195.35 8,184.60 5,456.67 2,727.93 PERIOD TO DATE 220 ESSENTIALS OF INDUSTRIAL COSTING FiouEE 62. — Complete Expense Analysis foe a Cutlery Manufactueee (Conti7iued) No. 2 A B C D E F G H I J K L M N O P Q R S T U V w X Y Z AA BB CC DD EE FF GG HH II JJ KK LL MM NN 00 PP QQ RR S.S TT UU W WW XX YY ZZ AAA Driver's wages Gasoline Oil Reserve for tire replacement Accessories Outside repairs Miscellaneous supplies Miscellaneous expense Millwright labor . . . . Millwright material . Machine shop labor . . Machine shop expense Machine shop material Share of group life insurance Share of liability insurance . Total direct expense Share of insurance Share of taxes Share of depreciation Total indirect expense Total garage expense . Distribution (jeneral factory expense Selling expense Steam Cost per iruck hour $150.70 15.76 5.81 75.50 15.26 47.82 25.92 19.44 22.52 .85 2.50 394.56 12.10 .49 117.41 PERIOD TO DATE 130.00 524.56 Hours 262.28 105 50% 115.40 46 22% 146.88 58 28% 624.56 209 2.51 DISTRIBUTION OF EXPENSE 221 Figure 62. — Complete Expense Analysis for a Cutlery Manufacturer (ContiTmed) MACHINE SHOP Share of foreman's wages Undistributed labor Tool steel Drills and reamers Abrasive wheels . ., Cutting compound Miscellaneous supplies Miscellaneous expense Millwright labor . . . . Millwright material . Share of group life insurance Share of liability insurance . Total direct expense Share of insurance Share of taxes Share of depreciation Share of steam Share of power and light . . . Total indirect expense Total machine shop expense . . . . Total chargeable labor Per Cent expense to labor Distribution Office Garage Steam Power and light Press department Forge department Heat and treating department . . . Machine grinding department . . . . Hand grinding department Blade preparatory department . . . Spring preparatory department . . Covering department Assembly or cutler's department . Hefting department Finishing department Buffing department Cleaning and packing department MONTH OP $286.50 258.92 12.5.76 82.76 55.76 12.46 4.92 18.85 988.63 3.84 .85 236.23 31.16 160.69 432.77 1,421.40 1,872.56 75.9 Labor 25.92 76.49 125.42 552.87 214.16 82.46 155.42 32.17 40.97 26.49 166.82 115.42 72.92 82.67 87.14 15.22 $1,872.56 PERIOD TO DATE Expense $19.44 57.37 94.06 420.80 162.55 62.59 117.96 24.42 31.09 20.11 127.62 87.60 55.35 62.75 66.14 11.55 $1,421.40 222 ESSENTIALS OF INDUSTRIAL COSTING FiGUBE 62. — Complete Expense Analysis for a Cutlery Manufacturer (Continued) Xo. 4 A B c D E F G H I J K L M N O P Q R S T U V W X Y Z AA BB CC DD EE FF GG HH II JJ KK LL MM NN 00 PP QQ RR SS TT UU \'V WW XX YV 7.Z AAA BBB Fireman's wages Coal Miscellaneons supplies Miscellaneous expense MUlwrig-ht labor . . . . Millwright material . Machine shop labor . . Machine shop expense Machine shop material Share of group life insurance Share of liability insurance . Total direct expense Share of insurance Share of taxes Share of depreciation , Share of garage Total steam expense Distribution Power 78.0% Office l-59f Machine shop 1.2% Press 1-8% Forge 1.1% Heat treating 1.4% Machine grinding 2.8% Hand grinding 1.8% Blade preparatory 1.2% Spring preparatory 8% Covering 1.4% Assembly 2.7%, Hefting 1-2% Finishing 1.4% Buffing 8% Cleaning and packing 9% MONTH OP $275.76 1,875.42 76.42 32.74 16.49 76.49 57.37 22.84 3.47 1,937.85 19.23 .49 492.42 146.88 2,596.87 2,025.56 38.95 31.16 46.74 28.57 36.36 72.71 46.74 31.16 20.77 36.36 70.11 31.16 36.36 20.79 23.37 PERIOD TO DATE $2,596.87 DISTRIBUTION OF EXPENSE 223 Figure 62. — Complete Expense Analysis fob a Cutlery Manufacturer (Continued) Cylinder oil Engine oil . Miscellaneous supplies Miscellaneous expense Millwright labor .... Millwright material . Machine shop labor . . Machine shop expense Machine shop material LIGHT AND POWER Engineer's salary Share of group life insurance Share of liability insurance . Total direct expense Share of insurance Share of taxes Share of depreciation Share of steam Share of garage Total indirect expense Total light and power expense Distribution Power and light Kilowatt-hours, light Kilowatt-hours, power Total kilowatt-hours Cost per kilowatt hour Distribution light Office 10% Machine shop 5% General factory 14% Press department 5% Forge department 2% Heat treating department 4% Machine grinding department 3% Hand grinding department 5% Blade preparatory department 6% Spring preparatory department 5% Covering department 7% MONTH OP $200.50 35.67 42.80 46.94 3.5.76 15.90 125.42 94.06 76.47 1.55 5.62 680.69 4.72 .49 502.45 2,025.56 2,533.22 3,213.91 7,598 74,577 82,175 $0.J385 $29.89 14.94 41.84 14.94 5.98 11.96 8.97 14.94 17.93 14.94 20.92 PERIOD TO DATS 224 ESSENTIALS OF INDUSTRIAL COSTING Figure 62.- -CoMPLETE Expense Analysis for a Cutlery Manufacturer (Contimied) P G H I J K L M N O P Q R S T U V W X Y Z AA BB CC DD EE FF GG HH II JJ KK LL MM NN 00 PP QQ RR SS TT UU vv WW XX YY ZZ AAA Assembly or cutler's department 12% Hefting department 6% Finishing department 7% Bui&ng department 5% Cleaning and packing department 4% Power distribution Machine shop Press department 20% Forge department 6% Heat treating department 3% Machine grinding department 10% Hand grinding department 5% Blade preparatory department 4% Spring preparatory department 4% Covering department 6% Assembly or cutler's department 7% Hefting 10% Finishing 12% Bufllng 8% Cleaning and packing LIGHT AND POWER — Continued Summary distribution light atid power Office Machine shop General factory Press department Forge department Heat treating department Machine grinding department Hand grinding department Blade preparatory department Spring preparatory department Covering department Assembly Hefting Finishing Buffing Cleaning and packing MONTH OP PERIOD TO DATB $35.88 17.93 20.93 14.94 11.98 $298.89 145.75 583.00 174.90 87.45 291.51 145.75 116.60 116.60 174.91 204.05 291.50 349.80 233.20 $2,915.02 29.89 160.69 41.84 597.94 180.88 99.41 300.48 160.69 134.53 131.54 195.8S 239.93 309.43 370.73 248.14 11.96 $3,213.91 DISTRIBUTION OF EXPENSE 225 Figure 62. — Complete Expense Analysis for a Cutlery Manupactueer (CantiTmed) No. 6 a B C D E F G H I J K L M N O P Q R S T U V w X Y Z AA BB CO DD EE FF GO HH II JJ KK LL MM NN 00 PP QQ RR SS TT UU vv WW XX YY ZZ AAA GENERAL FACTORY Share of administrative salary Superintenaent's salary Timekeeping clerical salary . Stock room wages Receiving room wages Watchmen's wages Nurse and hospital wages . . Hospital expenses Miscellaneous supplies Miscellaneous expense Millwright labor . . . . Millwright expense . . Machine shop labor . . Machine shop expense Machine shop material Share of group life insurance Share of liability insurance . Total direct expense Share of insurance Share of taxes Share of depreciation Share of office expense Share of steam Share of power and light . . . Share of garage Total indirect expense Total general factory expense . . . Distribution Press department '. Forge department Heat treating department Machine grinding department . . . hand grinding department Biade preparatory department . . . Spring preparatory department . . Coverfng department Assembly or cutler's department . Hefting department Finishing department Buffing department Cleaning and packing department 19 MONTH OP PERIOD TO DATE $10,000.00 550.00 750.50 952.80 490.60 307.10 250.75 187.72 172.46 47.82 24.90 19.48 8.72 10.46 13,773.31 119.91 7.23 764.70 5,456.67 41.84 262.28 6,652.63 20,425.94 Amount Hours $2,153.54 16,570 692.11 5,328 349.95 2,694 868.47 6,678 7o0.69 5,856 1,613.42 12,412 817.16 6,283 3,321.86 25,564 4,478.91 34,472 1, -.06.23 10,817 2,225.77 17,126 943. d8 7,258 793.95 6,ii2 $20,425.94 157,170 226 ESSENTIALS OF INDUSTRIAL COSTING Figure 62. -Complete Expense Analysis for a Cutlery Manufacturer (Continued) PHESS DEP.IRTMENT 19 No. 7 MONTH OF I'KltlOD TO DATE A $178.92 492.86 B Undistributed setting-up labor C D E Belting 28.92 F G H I J Miscellaneous labor 576.67 982.14 K Production bonus L M Miscellaneous supplies 170.46 N Miscellaneous expense 26.72 12.14 P Millwright material Q R Machine shop labor .552.87 s 420 80 T 123.48 U V w 3.75 12.22 3 587 95 X Y Z 20.49 2.35 2,174.13 46.74 597.94 AA BB CO DD EE Share of general factory 2,153.54 FF GO HII 4,995.19 II 8.583.14 JJ Total productive labor 8,246.52 102.8% KK Per cent expense to productive labor LL MM NN 00 PP QQ RR ss TT UU VV WW XX YY ZZ AAA Average hourly earnings .56 DISTRIBUTION OF EXPENSE 227 Figure 62, — Complete Expense Analysis for a Cutlery Manufacturer (Contmued) FORGE DEPAUTMENT 19 No. 8 MONTH OK PERIOD TO DATE A $170.82 B C D Gas for heating furnaces 196.75 E Belting 25 42 F Fire brick and clay 55.96 Cr H 24 92 I J 298.87 457.27 K L M 15 38 N Miscellaneous expense 49 86 p 18 42 Q R Machine shop labor 214.16 s 162 55 T Machine shop material 17.48 U V w 9 76 X 3915 Y 1,756.77 5.65 1.62 335 R7 z aa BB CO 28.57 DD EE FF GG HH 1,244.70 3 001 47 11 JJ Total productive labor 3,137.42 KK 96% LL MM NN GO PP QQ RR SS TT UU vv WW XX YY ZZ AAA .671 228 ESSENTIALS OF INDUSTRIAL COSTING FiGUBE 62. — Complete Expense Analysis foe a Cutlery MANUFACximEB (Continued) No. 9 A B C D E F G H I J K L M N O P Q R S T U V X Y Z AA BB CC DD EE FF GG HH II JJ KK LL MM NN GO PP QQ RR SS TT uu vv WW XX YY ZZ AAA HEAT TREATING DEPARTMENT Foreman's wages Lead Gas for heating Charcoal Fire brick and clay Tempering oil Pyrometer fire ends Hardening pots and annealing boxes Miscellaneous labor Miscellaneous supplies Miscellaneous expense Millwright labor Millwright material Machine shop labor Machine shop expense Machine shop material Share of group life insurance Share of liability insurance Total direct expense Share of insurance Share of taxes Share of depreciation Share of steam Share of power and light Share of general factory Total indirect expense Total heat treating department expense Total heat treating productive labor Total heat treating expense and productive labor Distribution A production - 1.5 B production 1.0 C production 8 D production 1.2 E production 9 Total unit production Total heat treating cost per unit 19.. Average hourly earnings MONTH OF $175.47 15,27 85.98 7.56 35.56 19.42 18.76 32.76 376.70 19.67 22.76 11.48 82.46 62.59 6.84 6.76 21.22 1.001.26 4.32 1.38 252.72 36.36 99.41 349.95 744.14 1,745.40 1,672.84 3,418.24 Actual 12,768 doz. 18,976 " 7,586 " 5,968 " 9,749 " 55,047 PERIOD TO DATE Production Unit 19,152 doz. 18,976 6,069 7,162 8,764 60,123 .057 doz. DISTRIBUTION OF EXPENSE 229 FiGUKE 62. — Complete Expense Analysis for a Cutlery Manufacturer (Continued) No. 10 A B D E F G H I J K L M N O P Q R S T U V w X Y z aa BB CC DD EE FF GG HH II JJ KK LL MM NN 00 PP QQ RR SS TT UU VV WW XX YY ZZ AAA MACHINE GRINDING DEPARTMENT Foreman's wages Belting . . . . Ring wheels Miscellaneoua labor Production bonus . Miscellaneous supplies Miscellaneous expense Millwright labor .... Millwright material . Machine shop labor . . Machine shop expense Machine shop material Share of group life insurance Share of liability insurance . Total direct expense Share of insurance Share of taxes Share of depreciation Share of steam Share of power and light . . . Share of general factory .... Total indirect expense , Total machine grinding expense - Total machine grinding productive labor Total machine grinding expense and prod, labor. Distribution Machine hours , Setting-up hours Wheel change hours Other lost hours Productive hours Total machine hours Per cent productive machine hours Total cost per productive machine hour Average hourly earnings 19. MONTH OP $172.80 15.22 322.17 101.50 376.49 36.76 22.76 15.46 155.42 117.96 10.49 15.47 51.60 1,414.10 11.89 1.94 728.56 72.71 300.48 868.47 1,984.05 3,398.15 3,376.42 6,774.57 175 156 65 5,692 5,968 94.5% $1.19 .565 PERIOD TO DATB 230 ESSENTIALS OF INDUSTRIAL COSTING Figure 62. — Complete Expense Analysis foe a Cutlery Manufactuber (Continued) HAND GRIXDDfG DEPARTMENT 19 No. 11 MONTH OF PERIOD TO OATI X $180.42 B C D E Belting 35.96 F Emery wheel dressers 15.22 G 350.00 H I J 175.92 676.18 15.48 K l M N 14.22 P Q R Machine shop labor 32.17 s 24.42 T Machine shop material 6.48 U V W Share of ^roup life insurance 11.46 X 45.17 1,583.10 2.56 1.33 126.87 y z AA BB CC 46.74 160.69 DD Share of power and light EE 760.69 FF GG HH 1,088.88 2,6Bl.98 II JJ 4,679.13 KK 57.2% LL MM NN 00 PP QQ RR ss TT UU VV WW XX YY ZZ AAA .91 DISTRIBUTION OF EXPENSE 231 FiGUBE 62. — Complete Expense Analysis for a Cutlery Manufacturer (Continued) BLADE PREPARATOIiV DEPARTMENT 19 No. 12 MONTH OF PERIOD TO DATE \ $170.50 B C D E Belting l"-, 9 9 F Drills 30.47 22.7fi 10.22 276.80 69.-). 45 6. .59 G Wheels H I J K L M N Miscellaneous expense Millwright labor 15.46 P 8 72 Q K 40.97 31 09 s T Machine shop material 8.92 U V w Share of group life insurance 18.27 X Share of liability insurance 92.46 1,443.90 3.18 1.62 157 01 Y z AA Share of taxes BB CC Share of steam 31.16 134 53 DD EE General factory 1,613.42 FF GG HH Total indirect expense 1,940.92 3,384.82 II Total blade preparatory expense JJ Total blade preparatory productive labor 6,258.76 KK 54% LL MM NN 00 PP QQ RR SS TT UU vv WW XX YY ZZ AAA A verage hourly earnings .56 232 ESSENTIALS OF INDUSTRIAL COSTING Figure 62. — Complete Expense Analysis for a Cutlery Manufacturer (Cotitinued) SPRING PREPARATORY DEPARTMENT 19 No. 13 MONTH OP PERIOD TO DATE A B $154.56 C D E F 10.28 Drills 47.76 G Wheels H Tallow sticks 18.22 I J Miscellaneous labor 156.47 K L M N 337.52 8.74 p Millwright labor 14.22 4.56 Q ji 26.49 S T 20.11 14.20 U V w 9.76 X 47.82 Y 868.71 Z 3.29 AA 1.98 1!53.30 BB CC Share of steam 20.77 DD 131.54 EE 817.16 FF GG HH l.T28.n4 1.996.75 3,149.37 II JJ Total spring preparatory productive labor KK 63% LL MM NN 00 PP QQ RR SS TT UU W WW XX YY ZZ AAA Averaffi hourly earnings .55 DISTRIBUTION OF EXPENSE 233 Figure 62.- -CoMPLETE Expense Analysis for a Cutlery Manufactukee (Continued) COVERING DEPARTMENT Foreman's wages Saws Belting , Drills Milling cutters Miscellaneous labor Production bonus . Miscellaneous supplies Miscellaneous expense Millwright labor .... Millwright material . Machine shop labor . . Machine shop expense Machine shop material Share group life insurance Share liability insurance . Total direct expense Share of insurance Share of taxes , Share of depreciation . . . . Share of steam , Share of power and light Share of general factory . , Total indirect expense Total covering department expense Total covering department productive labor Per cent expense to productive labor Average hourly earnings MONTH OP $175.55 22.30 12.17 42.17 15.22 286.94 1,562.48 17.47 12.72 8.97 166.82 127.62 10.97 19.76 191.87 2,673.03 3.69 1.86 185.37 36.36 195.83 3,321.86 3,744.97 6,418.00 11,682.41 55% PERIOD TO DATE .519 234 ESSENTIALS OF INDUSTRIAL COSTING FiGUKE 62. — Complete Expense Analysis fob a Cutlery Manutactuker {Continued) >'o. 15 A B C D E F G H I J K li M N O P Q R S T U V w X Y Z AA BB CC DD EE FF GG HH II JJ KK LL MM NN 00 PP QQ RR SS TT UD VV WW XX YY ZZ AAA ASSEMBLY OR CCTLEr'S DEPARTICKKT Foreman's \rages Belting Drills ^NTieels Files Miscellaneous labor Production bonus Miscellaneous supplies Miscellaneous expense Millwright labor Millwright material Machine shop labor Machine shop expense Machine shop material Share of group life insurance Share of liability insurance Total direct expense Share of insurance Share of taxes Share of depreciation Share of steam Share of power and light Share of general factory Total indirect expense Total assembly department expense Total assembly department productive labor Per cent expense to productive labor Average hourly earnings MOSTH OF 1220.46 15.76 76.92 25.96 387.52 2,478.91 26.72 10.47 6.76 11.5.42 87.60 22.84 51.10 255.17 3,780.61 7.18 5.14 299.82 70.11 239.98 4.478.91 5.101.04 8,881.65 20,762.18 42.7% .678 PERIOD TO DATB DISTRIBUTION OF EXPENSE 235 Figure 62. — Complete Expense Analysis for a Cutlery Manufacturer (Continued) HEFTING DEPARTMENT 19 No. 16 MONTH OF PERIOD TO DATE A $175.40 B D E Belting ; . 40.55 . F Sand paper and cloth 25.60 G Wheels 46.72 18.92 201.14 828.96 H I J Miscellaneous labor K L M 17.78 N Millwright labor 25.22 P Millwright material - 15.46 Q R 72.92 s 55.35 T Machine shop material 11.45 U V w Share of group life insurance 19.27 X 87.46 Y 1,642.20 z 3.86 3.07 151.84 aa Share of taxes BB CC Share of steam 31.16 309.43 DD EE 1,406.23 PP GG HH 1,905.39 3,547.79 8,127.49 43.5% II JJ KK LL MM NN 00 PP QQ RR ss TT UU VV WW XX YY ZZ AAA Average hourly earnings .825 236 ESSENTIALS OP INDUSTRIAL COSTING Figure 62. — Complete Expense Analysis for a Cutlery Manupactueee (Contiriued) FINISHING DEPAKTMENT 19 No. 17 MONTH OF PERIOD TO DATE A $195.26 B C D E Belting 26.92 F G Wheels 15.27 12.47 15.96 275.36 897.29 34.72 H Tallow sticks I J K L M N Miscellaneous expense 12.14 7.56 p Q R Machine shop labor 82.67 s 62 75 T 7.96 U V w Share of group life insurance 31.46 X 127 76 Y 1,805.55 6.18 2.87 316.34 Z AA Share of taxes BB CC Share of steam 36.36 370 73 DD Share of power and light EE Share of general factory 2,225.77 PF GG HH Total indirect expense 2,958.25 II 4,763.80 JJ 11,942.78 KK 40% LL MM NN 00 PP QQ RR SS TT UU vv WW XX YY ZZ AAA Average hourly earnings .75 DISTRIBUTION OF EXPENSE 237 Figure 62. — Complete Expense Analysis for a Cutlery Manufacturer {Continued) BUFFING DEPARTMENT 19 No. 18 MONTH OP PERIOD TO DATE A $182.50 B C D E Belting 14 29 F Buffs 35.76 14.72 8.92 142.72 482.93 a H Tallow sticks I J K L M 18.44 N Miscellaneous expense Millwright labor 18.42 9.76 P Millwright material Q R Machine shop labor 87.14 S Machine shop expense 66.14 T Machine shop material 5.86 U V w 14.72 54.58 X Share of liability insurance Y 1,156.90 3.72 2.35 165.25 Z AA Share of taxes BB cc Share of steam 20.79 248.14 943.88 DD EE Share of general factory FF GG HH Total indirect expense 1,384.13 II Total huffing department expense 2,541.03 JJ Total buffing department productive labor 4,378.46 KK Per cent expense to productive labor 58% LL MM NN 00 PP QQ RR SS TT UU VV WW XX YY ZZ AAA Average hourly earnings .67 238 ESSENTIALS OF INDUSTRIAL COSTING FiGUKE 62. — Complete Expense Analysis for a Cutlery Manufacturer (Continued) CLEANING AND PACKING DEPARTMENT 19 No. 19 MONTH OF PERIOD TO DATE A Foreman's wages $150.00 B C D E F Wiping cloths 12.46 G Wood alcohol 5.90 4.76 75.82 H Oil I J Miscellaneous labor K L M Miscellaneous supplies 15.27 N Miscellaneous expense Millwright labor 2.75 P Millwright material .49 Q R Machine shop labor 15.22 S Machine shop expense 11.55 T Machine shop material 1.75 U V w Shart of group life insurance 14.73 45.42 X Share of liability insurance Y Total direct expense 356.12 z Share of insurance 2.14 2.34 78.38 A A Share of taxes BB Share of depreciation CC Share of steam 23.37 11.96 DD Share of power and light EE Share of general factory 793.95 FF GO HH Total indirect expense 912.14 II Total cleaning and packing department expense. 1,268.26 .TJ Total cleaning and packing productive labor.... 2,176.43 KK Per cent expense to productive labor 58% LL MM NN 00 PP QQ RR SS TT UU vv WW XX YV 7.7. AAA .1 reragc hourly earnings .30 DISTRIBUTION OF EXPENSE 239 Figure 62. -Complete Expense Analysis for a Cutlery Manufacturer (Conti7iued) SELLING EXPENSE 19 No. 20 MONTH OF PERIOD TO DATH A Share of administration expense $10,000.00 18,646.19 8.972.42 B Agents' commissions s . . . c .\gents* traveling expense D E F Samples 1,200.76 G Credit agency 187.96 H I J K L M Miscellaneous .supplies N Miscellaneous expense P Q R S T U V W X Y Total direct expense 39,007.33 1.18 .57 61.43 Z Share of insurance AA Share of taxes BB Share of depreciation CC BD Share of garage i . . 115.40 2,727.93 EE Share of office expense FF GG HH Total indirect expense 2,906.51 41,913.84 254,872.87 ir Total selling expense JJ Total sales KK Per cent selling expense to sales 16.5% 189.642.16 22.2% LL Total cost of sales MM Per cent selling expense to cost of sales NN 00 PP QQ RR ' SS TT UU VV WW XX YY ZZ AAA I M I M M I I M I I IJ I I i I I i I M I I I I ■v I , ,^ K -. ;i V X ■^ ^ ^•^ r^ ^ ^ ■; X "> ^• ^ ^ >■>■- . ' t > r^r c' ' ^'^ '"T^ I 1 ^ , 1 : 1 ..<-, J- ^ '^. 1. - t. :■ "I r > '^ • o 1^ ^ ^ L;^ '5 : :'-:;:,< -t >•- ^'- 1^ ^ nim 240 DISTRIBUTION OF EXPENSE 241 Proof of Closing- Expense Analysis.— Having consid- ered the nature of the departmental division of and the structure of the record of and the sources of entry into the Expense Analysis, the discussion of this working model will be concluded by describing the method of clos- ing out the departments of the Expense Analysis. The Expense Analysis must prove when closed out with the control accounts, known as Manufacturing and Selling Expense, as that check is the only certain way of deter- mining whether the expense rates correctly include all items of expenditure. This proof is accomplished by use of the proof sheet, Figure 63. The total of all depart- ments equals the total charges to the Manufacturing and Selling Expense control accounts. Then when the con- tributing departments are prorated or distributed over the productive departments, the accuracy of this opera- tion is ascertained by the agreement of the total expense of all the productive departments with the total of all departments before this distribution. Reference to the proof sheet will show the total of the departmental charges to Manufacturing and Selling Expense to have been as follows : Payroll (nonproductive only) $68,470.11 Supply Requisition Distribution 4,791.90 Voucher Register 11,419.90 Group life insurance 260.43 Liability insurance 1,115.66 Fire insurance 240.23 Taxes 40.73 Depreciation 7,361.52 Grindstone, or wheel reserve 350.00 Tire reserve 75.50 $94,126.07 This indicates the charges to both contributing and productive departments and all of the items are con- 242 ESSENTIALS OF INDUSTRIAL COSTING trolled with the Ledger. When the contributing depart- ments have been closed out over the productive depart- ments the total of the expense of the productive depart- ments should be the same as the original charges. Ref- erence to the proof sheet shows the final expense totals of the productive departments as taken from the Expense Analysis and proves this to be the case. As further explanation of this entire operation the Ledger shown in Figure 73, and which is the control of the Expense Analysis presented herewith, will be found to contain two accounts, Manufacturing and Selling Ex- pense. These accounts are the controlling accounts and will be found to show the total net charges as follows : Manufacturing Expense $52,212.23 Selling Expense 41,913.84 Total $94,126.07 Method of Closing Expense Analysis.— The sequence of closing out the contributing departments is determined by their interrelation or the degree to which they inter- lock. Where contributing departments contain recipro- cal charges, one to the other, it may be necessary to as- sume the overhead in so far as the charges to the other are concerned in order to close out. The small error thus involved is charged over the remaining charges for that department. In the example illustrating this discussion the sequence of closing out is : Garage Steam Light and Power Machine Shop Office General Factory The charges to Garage, Steam, Light and Power De- partments from the machine shop were made by esti- DISTRIBUTION OF EXPENSE 243 mating the overhead of the machine shop in the case of the three departments. This was necessary because the Machine Shop and Power Department contain reciprocal charges and neither could be closed out without the other going first through this routine. Whenever this condi- tion is encountered and such device is required, it will be found that experience and the accumulated records make it possible to make an estimate of a department overhead with close approximation. In this case the overhead rate of the Machine Shop was assumed in order to compute the charges to the Garage, Steam and Power Departments for work done in the machine shop. The balance of the expense in the machine shop was then pro- rated over the remaining departmental repair labor charges. The Garage Department, as the first department to be closed out regularly, is totaled. Its expense is charged according to the record of truck activity to general fac- tory, selling expense and steam department. General fac- tory constituting inbound freight hauling; selling ex- pense, outbound freight; and hauling and steam depart- ment, the hauling of coal and ashes. The Steam Department is totaled and distributed ac- cording to the power demand and the thermal value in the exhaust steam as used for heating. The calculation on which such a distribution is based has been explained in Chapter VIII. The Power Department is totaled and charged accord- ing to the horsepower demand of the various depart- ments, as discussed in Chapter VIII. The Machine Shop will be found complete after these preceding departments have been dealt with and is closed out by prorating the expense according to labor charges, but only using the balance remaining after the amounts 244 ESSENTIALS OF INDUSTRIAL COSTING first charged into Garage, Steam and Power Depart- ments, as explained just previously, have been deducted. Office expense is then totaled and distributed two- thirds to general factor}^ and one-third to selling expense. This division was based, in this case, upon the determined facts that service was rendered to the two departments in those proportions. General Factory can now be totaled and the expense of this department is charged over the productive depart- ments on the basis of the productive hours in these de- partments. The pro and con arguments for this basis of division have been considered prior in this chapter and the example selected has utilized the hour basis. When the contributing departments are thus closed out, the next step is to total the expense of the productive departments as finally recorded, which has been done. The whole process of closing out of the Expense Analy- sis is exceedingly difficult to describe, but it is believed the explanation given, if carefully followed and supported by study of the Analysis itself, will result in a working conception of the steps and method of compiling and closing the record. Normal and Abnormal Expense.— So much for the methods of applying expense in costs, but the subject cannot be dismissed without adequate consideration of an important and rather involved phase of the problem. The first demonstration of the monthly accumulation of ex- pense rates by departments will reveal that the rates of each department vary somewhat each month and if the business is highly seasonal the variations will be noted to complete a cycle. This occurrence must be recognized and proper provision made therefor. The cause for this may be seen by mention of the clothing industry which is, unless regulated by judicious policy, of a highly seasonal DISTRIBUTION OF EXPENSE 245 character with a large percentage of the demand concen- trated in a very few months. It will be recognized that a large portion of factory expense is inflexible and quite fixed by nature and hence during the inactive season the ratio to productive labor is higher than in the rush sea- son. This same condition is experienced in lesser degree in most businesses and sometimes is occasioned by the seasonal fluctuations of the labor supply. It is obvious that if goods were costed with current actual overheads, they would diifer materially according to the period of the year in which they were figured, due to the variations in overhead rates. This is a condition disruptive to price policies and manufacturing control and some basis of reducing its effect and still assuring the inclusion in costs of every dollar expended is imperative. The manner in which this is done is quite simple if once understood. The expense rates over the same period are studied through the course of several years and the char- acter of the cycle is established. Then starting with the current rates a normal rate is established, which is pre- sumed to represent the composite for the entire year. The divergence of the actual rates from this normal rate is computed monthly and the difference in money value is recorded in a special account provided for that purpose and which, in my practice, has been called an Abnormal Business account. In further explanation of this matter there is pre- sented a concrete case (Figure 64) which shows the method of calculating the difference between the normal and actual rates. Of course, the normal expense rates are used in figuring costs, but the Ledger must reflect the current and cumulative differences between the total normal and actual expense. The normal expense is as- certained by applying the normal rate to the productive 246 ESSENTIALS OF INDUSTRIAL COSTING Figure 64. — Determination of Excess or Insufficient Actual Expense Compared with Normal^ Department Actual Rate Actual Expense Normal Rate Normal Expense 7. Press 102.8 per cent 96 per cent $0,057 _^ $1.19 57.2 per cent 54.9 per cent 63 per cent 55 per cent 42.7 per cent 43.5 per cent 40 per cent 58 per cent 58 per cent $8,583.14 3,001.47 1,745.40 3,398.15 2,681.98 3,384.82 1,996.75 6,418.00 8,881.65 3,547.79 4,763.80 2,541.03 1,268.26 So per cent 90 per cent $0,065 $1.05 55 per cent 60 per cent 60 per cent 55 per cent 50 per cent 40 percent 45 per cent 65 per cent 55 per cent $7,009.54 8. Forge 2,823.68 9. Heat Treating. . . 10. Machine Grinding. 11. Hand Grinding. . . 12. Blade Preparation 13. Spring Preparation 14. Covering 15. Assembly 16. Hefting 17. Finishing 18. Buffing 19. Cleaning and Packing 2,069.45 3,795.06 2,573.52 3,755.26 1,889.62 6,425.33 10,381.09 3,251.00 5,374.25 2,846.00 1^97.04 Total $52,212.24 $53,390.84 52,212.24 $1,178.60 * In this example the normal expense is greater than the actual, and hence a credit to Abnormal Business is developed. labor as indicated in the example. The normal expense, according to this computation is $53,390.53, while the total actual is $52,211.93, showing that the normal ex- pense is $1,178.60 greater than the actual. The Journal entries which would reflect this difference would be: Dr. Goods in Process $1,178.60 Cr. Abnormal Business $1,178.60 These Journal entries indicate that actual expense is higher than normal for the year and that the normal amount is charged into process and the difference into the Abnormal Business account. This account is credited whenever the actual expense becomes less than the nor- mal, as would occur in the peak season, and if the rates DISTRIBUTION OF EXPENSE 247 are well set, the account should balance at the end of the year. If it does not, the difference is written off through profit and loss. The connection of this matter of normal expense rates and the accounting of them with the Ledger control of a modern system of costs and statements is shown in Chap- ter XI. The costing of expense is usually the crux of ac- curacy and the principles of procedure must be under- stood if success is to be reached. It is hoped that this chapter has been conducive to that end. CHAPTER X FINAL COSTING Finis opus coronat. The costing of labor, material, and expense as indi- vidual elements has been discussed and their union in final costs will now be presented. Final Costs in Assembly Industry.— Happily this phase of costing contains few difficulties if the preliminary measures in obtaining labor and material and expense costs have been properly devised and executed. Comput- ing a final cost is a summary operation compared to the detail in the collection of the data which precedes it and on which it is based. The form of final costing is gov- erned by the character of the product and may be done in stages leading to the last result. For instance, in machinery costs, or in fact in any assembly manufacture, the parts are costed first, then sub-assemblies, and finally the complete assembly. The sub-assembly cost is derived by adding to the cost of the parts entering it the labor and expense of the operations involved in its making and the final assembly is costed by adding to the cost of the individual parts and sub-assemblies the labor and expense of the final assembly operations. Final Costs in Continuous Industry.— In continuous in- dustries the process rates per unit of production are mul- tiplied by the particular quantity to determine the final cost. Of course, the finished product is a net quantity and the balance remaining after the losses or waste of the process have been deducted. As an instance of this re- 248 FINAL COSTING 249 quirement in costing let us assume a cordage plant where the rope uses a yarn of certain size and quantity per hundred pounds of rope. The yam was the net yield of the processes needed for its conversion from fiber. Each state was accompanied by a waste of fiber. Take an operation on the yarn, the labor and expense, cost of which was $0,158 per pound with a waste, subsequent to this operation and the completion of the yarn, of 5 per cent. The equivalent cost of this operation in finished yam would then be : $0,158 $0,158 100 per cent — 5 per cent 95 per cent = $0,166 per pound of finished yarn Examples of Final Costs. — As example of the collection of assembly product costs the methods used in the cost- ing of a pocket knife have been selected. A pocket knife consists of parts, such as blades and springs, and of sub- assemblies, such as the handle. Conforming to the methods mentioned earlier in the chapter, the blades, springs, and parts entering the sub-assembly are listed separately, as shown in Figures 65 A and B. The sub-as- sembly consists of scale and a covering, the latter gen- erally purchased ready for attachment. The costing of the knife handle sub-assembly is illustrated in Figure 65C. The final assembly and the finishing operations on the pocket knife are collected in the form shown in Figure 65D. In further illustration of final cost forms, Figures 66^ 67 and 68 are shown. These forais were used in a variety of conditions and may contain ideas applicable to the particular requirements of a given industry. The accu- mulation of a final cost presupposes the existence of accu- PAR PART NAME Pt^^f^ T COST CARD e>-Z.c^J^ PART NO. ^^^ KIND OF MATERIAL b^,^..^^^p| SIZE OF MATERIAL '4- 'T a- GROSS WT. of Material SCRAP WT. of Material 1 NET WT. of Material 4-- . ^. DETAIL — 1- cos MATE roF RIAL N — r DEPT. PERCENT EXPENSE ■■ I LABOR 1 . expnse|total BLANKING 1 1 (6.«'7f a(,3 to O iL3 DROPPING i£ A3a'^ Z^a SSJZ tf J ANNEALING IH- no^ oS-y o^ af£ TRIMMING 1 1 li.o'T^ n 3 /«o 5fJ NAIL NICK II i6,oi^\ "11 (^-? ^A'T STRAIGHTENING 1 1 1 lo o"o ■"ht "7,9 •"? LEVELING '1 lUo fi "^3 o ++ oq^ GRIND TANGS 1^ i'-fo •"TT oJ-^ '•STf GRIND BACKS 1 7 Uo<^ «+ ^AH- otf HARDENING i4- ^ FlGUBE 65A. — PART COST CARD 250 PART COST CARD PART NAME ^^M— '5^ . PART NO. ^4-^ KIND OF MATERIAL Jj^,^. NET WT. of Material DETAIL COST OF MATERIAL DEPT. PfRCENT EXPENSE [labor EXPANSE TOTAL BLANKING " i6.ofr ol.?. ( o o 1 tJ ' LEVELLING 1 / l(, O^ oR^ o^f otA 1-vLiXy'\J....^Xf..^ C3> .'ij ?^ 3.2.0 ^ ^ ^ 1 ■K^ TOTAL PER ^^• 1 A + ; SCRAP WT. of Material NET WT. of Material DETAIL COSTOF MATERIAL DEPT. PERCENT EXPENSE LABOR EXP'NSE TOTAL MARKING J.O ,..< ao L> OOCJ O 1^" DRILLING J.O 'M-^'^ o2 U •"^i. oL^ FLASHING SIDES -2 a ..o^. oa H a o -^ o <\ MILLING SCALES Ao 1 H-o "fa o 1 ? 0+3 DISHING SCALES A a -+.-^ ^' I :> -. .V M- RIVETTING COV. r^ O IH-O*^ o' i o iS" 04- .> Drilling Mid. Holes ...U«T ^" II T.1.1 M.t.nil Teal PTOl.«d P.n> Tol.r M.n.f.nuno.. Tn-l « I'"-" ■" '■•>•> . — _ — — J — _ — _ _ — - Figure 67. — final cost sheet point without entering a discussion on elementary mathe- matics and the treatment in this volume will rest at this point. However, there is a vitally important phase to final costing which cannot be overlooked and that pertains to the connection with statements of operation, the topic of the next chapter. In the preparation of statements of operation or profit and loss it is necessary to deduct from 1 C 1 7 6< _ i 2 "^ •t 5 ?' i 1 1 . 1 1 _- ^ - ^ 1 •3 = 2 i 1 s 1 ^ i a o li H^ 1 '-1 - 1 1 > * » 1 1" J " 1 8 * •1 ; 1 5 J Z " = " ■1 X '^ ^ I 1 i s -1 ^ J ^ i s i 1 3 3 i 1 - 1 \ \ I ■ 1 6 u i > S 5 3 ^ >S 256 FINAL COSTING 257 the billing value of sales the cost value of the commodi- ties represented therein. The cost of a given article may- vary considerably during the year and in the case of some industries where raw material ranges through wide price fluctuations and is a high factor in total costs as in cor- dage or rubber tire or knitwear industries, the ditferences Smect Cost of Bottles Shippeo I9t__ = = •»"- ii ....... r^ = 1! ■7::r - I!.i:v. ....... 1^;.., - 1 •HH rz — 1 ' i; FiGUKE 69. — COST OF BOTTLES SHIPPED in costs of the same article through the operating period are substantial. Since it is the fundamental axiom of cost procedure that costs ultimately must represent every dollar of ex- penditure, it is obvious that these variations in costs are proper reflections of financial activities and if the profit is to be correctly represented, proper adjustments must be made in order to determine the actual cost of goods 258 ESSENTIALS OF INDUSTRIAL COSTING PUAMT r4o l40Hn4 191 •r 1^. marrx^m X. .». .vco ~ - 1 «.^ ;r~ ::r-z „ —M... ..,~. " — — — T ■"= ~- ^. 1 . r : 1 1 ! 1 1 ^ 1 . ' ' 11 1 ' ' 1 1 1 : 1 : 1 '■11 1 1 n 1 1 1 1 ' 1 1 i I 1 1 1 1 1 1 1 lllllil lillii llillll _. l_ FiGUKE 70. — COST OF BOTTLES MADE sold. This requirement is met quite similarly to the method used in pricing raw material, and is illustrated herewith. Figure 69 shows the stock record kept of finished goods and the shipments from and additions to during the month. The particularly interesting and economical feature of this fonn is in the provision it makes for totaling the column marked ''shipped," thus furnishing the total cost of goods shipped directly from what is virtually a stock record of finished goods. Figure 70 is the form used in connection with the above to deter- mine the monthly cost of production and it will be ob- served that it, too, provides for checking of totals with other summary records as proof of accuracy of the costs represented. For instance, the total of the column pro- duction good and bad must check with the production FINAL COSTING 259 L._ir Ljj 1 — h-TTT Figure 70. — cost of bottles made reports covering those items, the value of mixing mate- rials must check with the stock records for those mate- rials, etc. As further illustration of the manner of handling fluc- tuating production costs through cost of sales in order to represent profit properly Figure 71 is presented. This applies to cordage manufacture where the fiber, a con- stituent having a high percentage of cost, must be re- corded as it passes along in the variable costs in which it is the responsible factor. Ledger Control of Costs.— Final costs are not difficult to accumulate, as the preceding discussion will illustrate, but their control in the general books is somewhat more complicated. The ledger control of cost of production is maintained through process accounts, which may be ! hi!! — : 1 ' ! 1 : . i i =t==pii ':>]''' ' M ' i 1 ■ ' 1 | 1 ! zj ■i^^"'r''i'''!''' -i:"'.ii.^ i\i1 ■:.:::: I ,:— ui 1 1 | 1 1 1 1 i 1 1 1 1 ! 1 j 1 i ■ - - j-t- - ! i-LU-| _ — 1 — . : — __ 1 . 1 i i . 1 , , , 1 , 1 j - i::::::::::::::::::::::::::e:::j::::::::4:::: 1 1 1 fl ii us.,,,,,,,,,,^-\'\'^ ,,mi,,,|iiLi^^ HLj-.^.l"''"''" :' ' |I|M|'|||||"||| d .^ 1 ! !i i"^ III :1 ,, -;::4±: ' i —-:::::::::::::,:::::: g - '.,.:.,;,;,, - " -■ '^-=======-=^=== »'- —7— ^ — ■ ' — '^==--=- ; ; ! ! W ,,,,,,.;.,., .;,,., 1 ! n 1 I i 1 C^ i » ' ' ' ----- - ■ ' ' ■ — -^— ! 1 . t ■ i I . 1 1 M 1 1 T • i i ^^"""t:__ j^ ._„ . ij : ' ' ' ^n H H--H H pLlIX 1 ' ' i 1 j Lb--!- -LI U-- H-L-U ^ - ||::::;;;;^m;=;====^;==;;^ ' ;^:;:;;;:;==.::: rirlilr '!''!!"''' *''Nn-i;''liiiii' -' '■ I > '-J^ I - i II ^ i 1 1 1 ' 1 ':'!".: i 1 ' ==^^- p- Jl^ I ._ fH 260 FINAL COSTING 261 devised in various ways according to conditions in tlie particular case and which might be summarized as fol- lows: 1. Process account for process goods only with separate finished goods account. 2. Process account on parts, finished part account and process assembly account. 3. Process accounts by departments. 4. Process accounts by specification numbers, classifica- tions, or order numbers. In the first the process account is charged with all labor, expense, and material used in the month. It is credited with the cost of the goods made in the month, which in turn is charged into the finished goods account. The control is furnished by the division into process and finished goods accounts. This method is generally satis- factory and of frequent usage. The journal entries for this arrangement would be Dr. Finished Goods Cr. Process account with cost of goods made in the month. Dr. Cost of Sales Cr. Finished Goods with cost of goods shipped in the month. If the process account is large and a further division is desired of the process inventory, it is frequently di- vided into process for the making of parts, finished parts for the parts in stock waiting assembly, then assembly process for the assembly operations. The journal entries covering these accounts would be : Dr. Finished Part account Cr. Process Part Preparation account with cost of parts finished in month ; Dr. Assembly Process account Cr. Finished Part account 262 ESSENTIALS OF INDUSTRIAL COSTING with cost of finished parts used in month; Dr. Cost of Sales Cr. Assembly Process account with manufacturing cost of completed assemblies sold in month. Occasionally it is desired to secure control of the process inventory by departments and in such a case the journal entries might be indicated as follows: Dr. Department B Process account Cr. Department A Process account with cost of production Department A going to Depart- ment B ; Dr. Department C Process account Cr. Department B Process account with cost of production of Department B going to De- partment C, etc. Process accounts maintained by classifications or speci- fications or order number are of frequent occurrence and, if properly kept, are of supreme value in proving the profits shown by classification or specification or order number. A statement of profit by classifications in the line or by particular specification numbers is a splendid institution for operating control, but it must be right or it possesses possibilities of greater harm than good. The best proof is to regard each classification or specification as if it were produced independently, which is done by distributing the labor and expense and material used according to the process account classification. What- ever division of process or finished goods accounts are made, the essential motive in the matter is to provide control for costs and, in case of evident mistake, to cir- cumscribe the error within narrower limits and so facili- tate its location and correction. The current operation of ledger accounts to show cur- FINAL COSTING 263 rent results and to prove them is the basis of modern management and the essence of costing. The closing out of the various accounts through other intermediate ac- counts, the successive closings finally reducing to profit and loss done monthly, instead of being maintained as an annual institution, compose one of the finest achievements in accounting procedure. The technique of this operation in the ledger is shown in the Chart of Accounts in Chapter XI, Figure 80, and its mechanical simplicity, when once comprehended, makes it surprising that its practice has been so long in maturing. Setting of Selling Price.— In concluding the discussion on final costs it is pertinent to outline the method of com- puting selling-price once the selling cost is known. The usual difficulty here is that rate of profit is measured on gross sales and not on costs and the method of estab- lishing the selling price based on the cost has not always been apparent despite its simplicity. The method pos- sibly can best be presented by example and for this pur- pose assume it is desired to fix the selling price on an article, the selling cost of which is $17.00 and it is further desired to make a 15 per cent profit on the selling price. The selling price would be arrived at very simply, as fol- lows: $17.00 • ■ = $20.00 100 per cent — 15 per cent Or to express it as a working rule, divide the selling cost by 100 per cent less the per cent of profit to be at- tained on the selling price. Final costs are the last preliminary step to the con- struction of statements of operation and condition which are to be discussed in the next and concluding chapter. CHAPTER XI THE CONXECTION" OF COSTING WITH THE GEXER.\L BOOKS AND THE PREPAR-^TION OF MONTHLY STATEMENTS THEREFROM Eveiy manufacturer, therefore, is vitally concerned with the two items — cost and profit. — McCullough. Acid Test of Business. — The statement of profit or operation is the acid test of business and the statement of condition the barometer, and the intelligence they both convey should establish the relative success of commercial acti^'ity. The final purpose of costing is to derive profit and has, as its underlying motive, the enhancing of profit and the promotion of industrial stability. The long technique of costing which the previous pages have expounded takes its flower in the preparation of current statements of operation and condition proved and controlled by the gen- eral books. To explain the detail of this connection of costs with the general books and the preparation of state- ments therefrom it has been considered best to present the full details of a specific case. For this purpose and as a starting point the Trial Balance (Figure 72) as of January 1, 1920, of a representative corporation will be taken. The Ledger Balances from which this Trial Bal- ance was taken are shown in Figure 73. The business transactions which have occurred in January are the sale of $254,872.87 worth of goods and the purpose is to show what profit transpired from these sales and in what man- ner the month's activity effected the net worth of the business. 264 CONNECTION WITH GENERAL BOOKS 265 Figure 72. — Trial Balance as op January 1, 1920 Abnormal Business Accounts Receivable Accounts Payable Brass Building Capital Stock Cash Cost of Sales Covering Material Discounts Given Discounts Taken Electrical Equipment Factory and Office Furniture Finished Goods Fire Insurance Goods in Process Land Liability Insurance Life Insurance Machinery and Tools Manufacturing Expense Miscellaneous Material Nickel Silver Packing Material Payroll Permanent Fixtures Pipes and Fittings Profit and Loss Purchased Parts Reserve for Depreciation Reserve for Grindstone Replacement Sales Selling Expense Steam Power Steel Stores Surplus Water Power $410,783.27 12,367.14 222,342.72 209,274.56 27,047.83 45,748.13 18,787.26 126,322.94 475,840.91 42,782.50 568,722.67 12,848.96 14,746.82 8,533.46 25,748.92 12,458.14 7,284.19 42,128.33 47,846.72 27,123.75 25,000.00 Total $2,383,739.22 $175,346.18 1,200,000.00 152,907.14 3,746.18 851,739.72 $2,383,739.22 266 ESSENTIALS OF INDUSTRIAL COSTING Figure 73. — Ledger Balances (Italics indicate red ink) ABNORMAL BUSINESS DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATS Jan. 31 Balance 1,178.60 1,178.60 J. Balance 1920 Jan. 31 1,178.60 1,178.60 1,178.60 Jan. 31 ACCOUNTS PAYABLE DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 31 Jan. 31 Balance C. B. 185,2.57.58 186,.=iS7.97 175,346.18 196,449.37 V. R. Balance Balance 1920 Jan. 1 Jan. 31 371,795.55 371,795.55 186,537.97 Jan. 31 ACCOUNTS RECEIVABLE DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 1 Jan. 31 Balance Balance S. L. 410,783.27 254,872.87 212,407.^^1 i53,2i8.33 C. B. Balance 1920 Jan. 31 Jan. 31 665.656.14 665,656.14 Jan. 31 453,248.33 BRASS DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 1 Jan. 31 Balance Balance V. R. 12,367.14 2,764.17 3,762.86 ll,368.i5 J. Balance 1920 Jan. 31 Jan. 31 15,131.31 15,131.31 Jan. 31 11,368.45 CONNECTION WITH GENERAL BOOKS FiGUEE 73, — Ledgee Balances (Continiied) BUILDING 267 DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 1 Balance Balance 222,342.72 222,342.72 Balance Jan. 31 222,342.72 222,342.72 Jan. 31 222,342.72 DISCOUNTS TAKEN DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE Jan. 31 J. 2.796.41 2,796.41 C. B. 1920 Jan. 31 2,796.41 2,796.41 ELECTRICAL EQUIPMENT DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 1 Balance Balance V. R. 45,748.13 230.00 i5,978.13 Balance Jan. 31 45,978.13 45,978.13 Jan. 31 45,978.13 FACTORY AND OFFLCE FURNITURE DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 1 Balance Balance 18,787.26 J8,787.26 Balance Jan. 31 18,787.26 18,787.26 Jan. 31 18,787.26 FINISHED GOODS DATE ITEMS FOL. DEBITS CREDITS POL. ITEMS DATE 1920 Jan. 1 Jan. 31 Balance Balance J. 126,322.94 201,426.18 189,642.16 138,106.96 J. Balance 1920 Jan. 31 Jan. 31 327.749.12 327,749.12 Jan. 31 138,106.96 268 ESSENTIALS OF INDUSTRIAL COSTING FiGUEE 73. — Ledger Balances (Continued) FIRE IXSUBANCE DATB ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 31 Balance V. R. 360.55 240.23 120.32 J. Balance 1920 Jan. 1 Jan. 31 360.55 360.55 Jan. 31 120.32 CAPITAL STOCK DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE Jan. 31 Balance 1,200,000.00 1,200,000.00 Balance Balance 1920 Jan. 1 1,200,000.00 1 1,200,000.00 1,200,000.00 Jan. 31 CASH DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 1 Jan. 31 Balance Balance C. B. 209,274.56 207,646.39 182,461.17 23i,i59.78 C. B. J. Balance 1920 Jan. 31 Jan. 31 416,920.95 416,920.95 Jan. 31 234,459.78 COST OF SALES DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATB 1920 Jan. 1 Jan. 31 J. J. 189,642.16 41,913.84 231,556.00 J. 1920 Jan. 31 231,556.00 231,556.00 COVERING MA.TERIAL DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 1 Jan. 31 Balance Balance T. R. 27,047.83 3,976.38 6,872.71 ik,151.50 J. Balance 1920 Jan. 31 Jan. 31 31,024.21 \ 31.024.21 Jan. 31 24,151.50 CONNECTION WITH GENERAL BOOKS Figure 73. — Ledger Balances (Continued) DISCOUNTS GIVEN 269 DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 31 C. B. 4,761.42 4,761.42 J. Jan. 31 4,761.42 4,761.42 GOODS IN PROCESS LAND LIABILITY INSURANCE DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 1 Jan. 31 Jan. 31 Jan. 31 Balance Balance J. J. J. 475,840.91 32,974.21 89,590.21 53,390.83 201,426.18 i30,369.98 J. Balance 1920 Jan. 31 Jan. 31 Jan. 31 651,796.16 651,796.16 Jan. 31 450,369.98 DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 1 Balance Balance 42,782.50 42,782.50 Balance Jan. 31 42,782.50 42,782.50 Jan. 31 42,782.50 DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE Jan. SI Balance 1,115.66 1,115.66 J. Balance 1920 Jan. 31 1,115.66 1,115.66 1,115.66 Jan. 31 LIFE INSURANCE DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE Jan. SI Balance 260.iS 260.43 J. Balance 1920 Jan. 31 260.43 260.43 260.43 Jan. 31 270 ESSENTIALS OF INDUSTRIAL COSTING FiGDEE 73. — ^Ledger Balances (Continued) MACHINER"i AND TOOLS DATH ITEMS FOI.. DEBITS CREDITS FOL. ITKHB DATS 1920 Jan. 1 Balance Balance V. R. 568,722.67 3,750.60 1 j 572^73.27 Balance Jan. 31 572,473.27 572,473.27 Jan. 31 572,473.27 1 MANUFACTURING EXPENSE DATB ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATK 1920 (Jan. 31 Jan. 31 Jan. 31 Jan. 31 V. R. J. J. J. 1,058.85 4,791.90 39,823.92 9,380.89 2,843.33 52,212.23 J. J. 1920 Jan. 31 Jan. 31 Jan. 31 55,055.56 55,055.56 1 MISCELLANEOUS MATERIAL DATH ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 1 Jan. 31 Balance Balance V. R. 12,848.96 2,768.14 2,741.84 12,875.26 J. Balance 1920 Jan. 31 Jan. 31 15,617.10 15,617.10 Jan. 31 12,875.26 NICKEL SILVER DATB ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 1 Jan. 31 Balance Balance V. R. 14,746.82 968.46 3,971.62 ll,7i3.66 J. Balance 1920 Jan. 31 Jan. 31 15,715.28 15,715.28 Jan. 31 11,743.66 PACKING MATERIAL DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATB 1920 Jan. 1 Jan. 31 Balance Balance V. R. 8,533.46 1,276.76 2,134.70 7,675.52 J. Balance 1920 Jan. 31 Jan. 31 9,810.22 9,810.22 Jan. 31 7,675.52 CONNECTION WITH GENERAL BOOKS 271 Figure 73. — Ledger Balances (Continued) PAYEOLL DATS ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 31 V. R. 158,060.32 158,060.32 J. 1920 Jan. 31 158,060.32 158,060.32 PEKMANENT FIXTURES DATB ITEMS FOL. DEBITS 1920 Jan. 1 Balance Balance V.R. 25,748.92 550.45 26,299.37 Jan. 31 26,299.37 CREDITS FOL. ITEMS DATE 26,299.37 Balance 1920 Jan. SI 26,299.37 PIPES AND FITTINGS DATH ITEMS FOL. DEBITS 1920 Jan. 1 Balance Balance 12,458.14 12,458.14 Jan. 31 12,458.14 CREDITS FOL. ITEMS DATE 12A58.U Balance Jan. SI 12,458.14 PEODUCTIVE LABOR DATS ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 31 J. 89,590.21 89,590.21 J. 1920 Jan. 31 89,590.21 89,590.21 PROFIT AND LOSS DATB ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 31 Jan. 31 Jan. 31 J. J. J. 231,550.00 21,351.86 4,761.42 254,872.87 2,796.41 J. J. 1920 Jan. 31 Jan. 31 257,669.28 257,669.28 272 ESSENTIALS OF INDUSTRIAL COSTING Figure 73. — Ledger Balances (Continued) PURCHASED PARTS DATH ITEMS FOL. DEBITS 1920 Jan. 1 Jan. 31 Balance Balance V. R. 7,284.19 786.19 8,070.38 Jan. 31 6,507.58 CREDITS FOL. ITEMS DATE 1,562.80 0,507.58 J. Balance 1920 Jan. 31 Jan. 31 8,070.38 RESERVE FOR DEPRECIATION DATE ITEMS FOL. DEBITS CKKDITS FOL. ITEMS DATE 1920 Jan. 31 Balance 160,268.60 152,907.14 7,361.52 J. Balance Balance 1920 Jan. 1 Jan. 31 160,268.66 160,268.66 160,268.66 Jan. 31 RESERVE FOR GRINDSTONE REPLACEMENT DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 31 Balance ■i,096.18 3,746.18 350.00 J. Balance Balance 1920 Jan. 1 Jan. 31 4.096.18 4,096.18 4,096.18 Jan. 31 SALES DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 31 J. 254,872.87 254,872.87 S. L. 1920 Jan. 31 254,872.87 254,872.87 SELLING EXPENSE DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 31 Jan. 31 Jan. 31 Jan. 31 V. R. J. J. J. 10,361.14 28,646.19 63.18 2,843.33 41,913.84 J. 1920 Jan. 31 Jan. 31 41,913.84 41,913.84 CONNECTION WITH GENERAL BOOKS Figure 73. — Ledger Balances (Continued) STEAM POWEE 273 DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS SATE 1920 Jan. 1 Balance Balance 42,128.33 42,128.33 Balance Jan. 31 42,128.33 42,128.33 Jan. 31 42,128.33 STEEL DATE ITEMS FOL. DEBITS 1920 Jan. 1 Balance Balance V. R. 47,846.72 5,746.18 53,592.90 Jan. 31 41,665.22 CREDITS FOL. ITEMS DATE 11,927.68 41,065.22 J. Balance 1920 Jan. 31 Jan. 31 53,592.90 STORES DATE ITEMS FOL. DEBITS CREIDITS FOL. ITEMS DATE 1920 Jan. 1 Jan. 31 Balance Balance V. R. 27,123.75 3,791.18 4,791.90 26,123.03 J. Balance 1920 Jan. 81 Jan. 81 30,914.93 30,914.93 Jan. 31 26,123.03 SURPLUS DATE ITEMS POL. DEBITS CREDITS FOL. ITEMS DATE Jan. SI Balance 873,091.58 851,739.72 21,351.86 J. Balance Balance 1920 Jan. 1 Jan. 31 873,091.58 873,091.58 873,091.58 Jan. 31 TAXES DATE ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE Jan. 31 Balance 40.73 40.73 J. Balance 1920 Jan. 31 40.73 40.73 40.73 Jan. 31 . 274 ESSENTIALS OF INDUSTRIAL COSTING Figure 73. — Ledger Balances {Continued) TIRE RESERVE dTB ITEMS FOL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. SI Balance 75.50 75.50 J. Balance 1920 Jan. 31 75.50 75.50 73.50 Jan. 31 WATER POWER DATE ITEMS POL. DEBITS CREDITS FOL. ITEMS DATE 1920 Jan. 1 Balance 25,000.00 25,000.00 Balance 1920 Jan. SI 25,000.00 25,000.00 Jan. 31 Balance 25,000.00 Method of Compiling Profit Statement.— As outlined at length in previous chapters, the profit is determined by the simple process of deducting from the sales the cost of the sales so that the first point of attack is to determine the amount which represents this cost of sales. This cost is obtained by an itemization of the sales for the month by pattern numbers with the quantities of each pattern sold. The quantity indicated for each pattern number is then multiplied by the cost of that number, the total of all patterns obviously being the presumed cost of the sales. A tabulation of this kind is shown in Figure 74. It is evident that unless some check exists whereby the accuracy of this cost of sales could be assured, the appar- ent profit would not be a dependable or useful figure. The proof, however, of this method of ascertaining profit is available and is obtained by means of the valuation of the process and finished goods inventories. A month's operation in such a business involves the issue of raw material to process, the engagement of labor thereon with an accompanying burden of expense, the resultant values CONNECTION WITH GENERAL BOOKS Figure 74. — Cost of Sales for January, 1920 275 PATTERN NO. QUANTITY SELLING COST VALUE IN DOZENS PER DOZEN 275 250 $18.69 $4,672.50 276 365 16.37 5,975.05 279 294 12.70 3,733.80 281 293 26.78 7,846.54 289 148 45.56 6,742.88 301 157 17.49 2,745.93 312 72 18.72 1,347.84 470 203 17.88 3,629.64 564 228 18.50 4,218.00 727 252 14.75 3,717.00 926 367 12.86 4,719.62 1012 420 13.50 5,670.00 1014 391 17.83 6,971.53 1046 429 18.59 7,975.11 1176 432 17.50 7,560.00 1180 472 18.58 8,769.76 1203 422 15.98 6,743.56 1210 373 13.74 5,125.02 1375 188 35.76 6,722.88 1396 155 37.87 5,869.85 1415 294 16.20 4,762.80 1610 330 17.39 5,738.70 1756 445 13.49 6,003.05 1810 178 8.92 1,587.76 1926 67 11.28 755.76 2213 66 18.21 1,201.86 2310 294 19.47 5,724.18 2315 235 18.60 4,371,00 2325 375 18.02 6,757.50 2330 472 14.29 6,744.89 2346 304 17.54 5,332.16 2357 172 28.99 4,986.28 2367 100 37.46 3,746.00 2372 511 17.55 8,968.05 :!386 409 18.94 7,746.46 2397 335 13.31 4,459.20 $189,642.16 being additions to the amount of goods in process as shown by the balance of that account as of January 1. It also envisages the sale of the finished product and the withdrawal of value from the finished goods account in the shipments made and concurrently through purchase addi- 276 ESSENTIALS OF INDUSTRIAL COSTING tions to raw material reserves, with the necessary obliga- tions therefor. Also, as goods are completed they are transferred from the Process account to the Finished Goods account. Therefore, the proof of the accuracy wdth which the profits are determined from the cost of sales resides in the value of the balance of goods repre- sented by the process and finished goods inventories. The profit statement, or statement of operation, thus requires the cost of sales, the cost of goods completed, the cost of the various raw materials entering process and the productive labor and expense which are applied to convert the raw materials. This information is ob- tained from Material Requisition Distribution Figure 8 Labor Distribution Figure 10 Cost of Sales Figure 76 Cost of Goods Completed Figure 77 Expense Analysis Figure 63 The expense rates are established bj" the Expense Analysis, and the illustration in Chapter IX of such an analysis is part of the system herein presented. The Ex- pense Analysis, as was described in that chapter, rested upon the several sources of data. Supply Requisition Distribution Figure 9 Voucher Register Distribution Figure 11 Nonproductive Labor Distribution Figure 10 Journal Entries Figure 78 An Actual Example.— "VYith this information at hand the statement of operation illustrated in Figure 78 was constructed. This statement shows the sales, the cost of sales, and the profit ; it shows the value of materials used, labor and expense as additions to process inventory ; and it also shows the cost of goods completed as deductions from the process inventory and addition to the finished goods inventory. CONNECTION WITH GENERAL BOOKS 277 Figure 75. — Cost op Goods Finished for January, 1920 PATTERN NO. QUANTITY MANUFACTURING VALUE IN DOZENS COST PER DOZEN 187 302 $12.40 $3,744.80 197 275 17.46 4,801.50 225 399 14.70 5,865.30 246 417 16.70 6,963.90 275 495 16.06 7,949.70 294 566 15.43 8,733.38 305 1079 8.15 8,793.85 312 360 15.78 5,680.80 327 554 12.16 6,736.64 356 395 10.97 4,333.15 389 447 8.47 3,786.09 465 501 9.46 4,739.46 492 562 12.18 6,845.16 525 463 14.56 6,741.28 564 499 15.72 7,844.28 786 813 10.75 8,739.75 872 577 11.15 6,433.55 884 472 12.16 5,739.52 898 318 14.92 4,744.56 924 262 13.86 3,631.32 945 567 10.12 5,738.04 987 309 12.75 3,939.75 1004 277 14.96 4,143.92 1012 346 11.47 3,968.62 1018 279 15.67 4,371.93 1019 601 14.92 8,966.92 1079 589 13.87 8,169.43 1118 692 12.92 8,940.64 1186 610 14.67 8,948.70 1210 897 11.69 10,485.93 1254 496 17.96 8,908.16 1610 155 12.88 1,996.15 $201,426.18 The cost of sales is determined, as detailed on the Cost of Sales Sheet, Figure 75, and amounts to $189,642.16. The value of the material used in the month is obtained from the Material Requisition Distribution (Figure 5) and is $32,974.21. The productive labor expended in the month appears on the Payroll Distribution (Figure 7) as $89,590.21. 278 ESSENTIALS OF INDUSTRIAL COSTING Figure 76. — Ledger Postings From Voucher Register: Dr. — Machine and Tools Electrical Equipment Permanent Fixtures Steel , Brass Nickel Silver Covering Material Purchased Parts Packing Material Miscellaneous Material Stores Payroll Manufacturing Expense Selling Expense Fire Insurance Cr. — Accounts Payable From Cash Book: Dr.— Cash , Discounts Given Cr. — Accounts Receivable Dr. — Accounts Payable Discounts Taken , Cr.— Cash From Sales Ledger: Dr. — Accounts Receivable Cr.— Sales From Material Requisitions Distribu tion : Dr. — Goods in Process Cr. — Brass Nickel Silver , Steel , Covering Material Purchased Parts Packing Material Miscellaneous Material . , From Supply Requisition Distribution Dr. — Manufacturing Expense Cr. — Stores , DR. I 3,750.60 230.00 550.45 5,746.18 2,764.17 968.46 3,976.38 786.19 1,276.76 2,768.14 3,791.18 158,060.32 1,058.85 10,361.14 360.55 207,646.39 4,761.42 185,257.58 254,872.87 32,974.21 CR. 4,791.90 $196,449.37 212,407.81 2,796.41 182,461.17 254,872.87 3,762.86 3,762.86 3,971.62 11,927.68 6,872.71 1,562.80 2,134.70 2.741.84 4,791.90 CONNECTION WITH GENERAL BOOKS Figure 76. — Ledger Postings (Continued) 279 From Payroll Distribution: Dr. — Selling Expense Manufacturins: Expense Productive Labor Cr. — Payroll Dr. — Manufacturing Expense Selling Expense Cr. — Reserve for Depreciation. Taxes Fire Insurance Liability Insurance Group Life Insurance . . . Reserve for Grindstone Replacement Tire Reserve Dr. — Selling Expense Cr. — Manufacturing Expense Dr. — Goods in Process Cr. — Productive Labor Dr. — Goods in Process Cr. — Manufacturing Expense Abnormal Business .... Closing Journal Entries: Dr. — Finished Goods Cr. — Goods in Process . . . . , With cost of goods finished. Dr. — Cost of Sales Cr. — Finished Goods With cost of goods sold. Dr. — Cost of Sales Cr. — Selling Expense Dr. — Profit and Loss Cr. — Cost of Sales Dr.— Sales Cr. — Profit and Loss Dr. — Profit and Loss Cr. — Discounts Given Dr. — Discounts Taken Cr. — Profit and Loss , Dr. — Profit and Loss Cr. — Surplus DR. $28,646.19 39,823.92 89,590.21 9,380.89 63.18 2,843.33 89.590.21 53,390.83 201,426.18 189,642.16 41,913.84 231,556.00 254,872.87 4,761.42 2,796.41 21,351.86 CR. $158,060.32 7,361.52 40.73 240.23 1,115.66 260.43 350.00 75.50 2,843.33 89,590.21 52,212.23 1,178.60 201,426.18 189,642.16 41,913.84 231,556.00 254,872.87 4,761.42 2,796.41 21,351.86 280 ESSENTIALS OF INDUSTRIAL COSTING FiGURB 77. — Trial BAiiANCE as of January 31, 1920 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Abnormal Business Accounts Payable Accounts Receivable Building Brass Capital Stock Cash Covering Material Electrical Equipment Factors' and Office Furniture . . . Finished Goods Fire Insurance Goods in Process Land Liability Insurance Life Insurance Machinery and Tools Miscellaneous Material Nickel Silver Permanent Fixtures Pipes and Fittings Packing Material Purchased Parts Resen'e for Depreciation Reserve for Grindstone Replacement Steam Power Steel Stores Surplus Taxes Tire Reserve Water Power DR. $453,248.33 222,342.72 11,368.45 234,459.78 24,151.50 45,978.13 18,787.26 138,106.96 120.32 450,369.98 42,782.50 572,473.27 12,875.26 11,743.66 26,299.37 12,458.14 7,675.52 6,507.58 42,128.33 41,665.22 26,123.03 25,000.00 $2,426,665.31 CR. $1,178.60 186,537.97 1,200,000.00 1,115.66 260.43 160,268.66 4,096.18 873,091.58 40.73 75.50 $2,426,665.31 The total manufacturing expense developed in the month is $52,212.23, which may be checked from the Ex- pense Analysis (Figure 62) and the Proof Sheet (Figure 63). This amount is less by $1,178.60 than the normal ex- pense (see Figure 64) used in computing the costs, on which the cost of sales is based, so that the total charge into goods in process is $52,212.23, plus $1,178.60, or $53,- 390.83, as the journal entries in Figure 78 portray. CONNECTION WITH GENERAL BOOKS 281 Figure 78. — Statement of Operation as of January 31, 1920 GROSS SALES $254,872.87 cost OF SALES : Materials used in month: Brass $3,762.86 Nickel Silver 3,971.62 Steel 11,927.68 Covering Material 6,872.71 Purchased Parts 1,562.80 Packing Material 2,134.70 Miscellaneous Material 2,741.84 Total materials used $32,974.21 Productive labor 89,590.21 Normal manufacturing expense 53,390.83 Total additions to inventory $175,955.25 Inventory Process Goods as of Jan. 1 . . . 475,840.91 Inventory Process Goods as of Jan. 1, plus additions $651,796.16 Cost of goods finished 201,426.18 Inventorv Process Goods as of Feb. 1 . . . $450,369.98 Inventory Finished Goods as of Jan. 1. . $126,322.94 Cost of Goods Finished 201,426.18 Inventory Finished Goods plus addi- tions $327,749.12 COST OF SALES 189,642.16 $189,642.16 Inventory Finished Goods as of Feb. 1 $138,106.96 MANUFACTURING PROFIT $65,230.71 Selling expense 41,913.84 SELLING PROFIT $23,316.87 Discounts Taken 2,796.41 PROFIT PLUS ADDITIONS $26,113.28 Discounts Given 4,761.42 NET PROFIT, ACTUAL $21,351.86 Abnormal expense 1 178.60 NET PROFIT, NORMAL $22,530.46 282 ESSENTIALS OF INDUSTRIAL COSTING Figure 79. — Statement of Plant and Equipment : Buildings $222,342.72 Electrical equipment 45,978.13 Factory and office furni- ture 18,787.26 Land 42,782.50 Machineiy and tools .... 572,473.27 Pemanent fixtures 26,299.37 Pipes and fittings 12,458.14 Steam power 42,128.33 Water power 25,000.00 Total plant and equipment $1,008,249.72 Less depreciation 160,268.66 Depreciated plant and equipment $847,981.06 Current Assets: Liventory Brass $11,368.45 Covering material 24,151.50 Miscellaneous material 12,875.26 Nickel silver 11,743.66 Packing material 7,675.52 Purchased parts 6,507.58 Steel 41,665.22 Stores 26,123.03 Goods in process 450,369.98 Finished goods 138,106.96 Total inventory $730,587.16 Accounts receivable 453,248.33 Cash 234,459.78 Prepaid operating expense Fire insurance 120.32 TOTAL ASSETS $2,266,396.65 The data specijfied in the foregoing supply the basis for constructing the statement of operation (Figure 78). Keference to this will show that the materials used are itemized by the accounts from which they come, the pro- ductive labor and the normal expense added to them, the total increasing the process inventory by $175,955.25, resulting in a total value in Goods in Process of $651,796.16. From this is deducted the goods finished CONNECTION WITH GENERAL BOOKS 283 Condition as op Januaey 31, 1920 Capital Stock $1,200,000.00 Current Liabilities : Accounts payable $186,537,97 Abnormal business 1,178.60 Accrued Expense: Tire reserve 75.50 Reserve for wheel replacement 4,096.18 Liability insurance 1,115.66 Group life insurance 260.43 Taxes 40.73 Surplus, January 1 $851,739.72 Profit, January , 21,351.86 193,305.07 873,091.58 TOTAL CAPITAL, LIABILITIES AND SURPLUS. $2,266,396.65 in the month, as shown in Figure 75. This tabulation shows the manufacturing cost of the patterns finished and totals for the month, $201,426,18, which amount, when de- ducted from the above figure, leaves a balance in goods in process of $450,369.98. This balance may be verified on the Ledger, Figure 73, the Trial Balance, Figure 77, and the Statement of Condition, Figure 79. To the inventory of finished goods as of January 1st, 284 ESSENTIALS OF INDUSTRIAL COSTING namely, $126,322.04, the cost of the goods finished in Jan- uary is added, giving a total of $327,749.12, which is re- duced by the cost of the goods shipped in the mouth, or $189,642.16, leaving a balance of $138,106.96, which may be checked in the same manner as the Goods in Process. This figure, $189,642.16, is the cost of sales which, when subtracted from the sales, leaves the manufacturing profit of $65,230.71. The selling expense is accumulated in the Expense Analysis, Figure 62, and the control account in the Led- ger, Figure 73. The total selling expense thus collected is $41,913.84 and is charged against the sales for the month, leaving a selling profit of $23,316.87. To this profit is added the discounts taken, of $2,796.41 on invoices paid in the month and from this total is deducted the discounts given of $4,761.42 on outstanding bills paid for in the mouth, lea\ing a net actual profit of $21,351.86. The ab- normal business account balance, since it is on the credit side, is added to this profit to indicate the net normal profit of $22,530.46. This result is the goal of costing and accounting effort, as well as the return for the transac- tions which are represented thereby. The figures de- scribed are verified by the Ledger accounts, and the con- trol through the general books is obtained by the series of Journal entries (Figure 76), which, if carefully followed through, will be seen to comprise a kind of accounting narrative of the transactions of the month with the re- sults expressed in profit. The Journal entries, when posted, likewise control the Expense Analysis shown in Figure 62, the operation of which was exhaustively described in Chapter IX. After the posting of these Journal entries in the Ledger (Figure 73) a Trial Balance, Figure 77, is drawn off. From this Trial Balance the Statement of Condition ?E 80 ACCOUNTS JOURNAL ENTRIES CONNECTION WITH GENERAL BOOKS 285 (Figure 79) may be drawn up and it will be observed that the accounts remaining on this Trial Balance, and hence which appear on the statement of condition, are only those which remain after all others have been closed out through profit and loss. The principle on which the Statement of Condition is erected was described and illus- trated in Chapter 11. The closing out of the various accounts and the con- nection which is made between the costs, the Expense Analysis and the various subsidiary distributions and the general books is the vital aspect of modern accounting and is the abiding aim of this volume. In order to clarify the words and the figures a graphic presentation of the closing of the accounts and of the nature of the entries is made in a Chart of Accounts, shown in Figure 80. This chart may give a readier grasp of the details and enable better comprehension of the pro- cedure, and it is added with that end in mind. It may be observed that the illustrations throughout the book con- tain data that contribute to the final statements just de- scribed and with them compose a complete and specific case or example illustrating the principles developed in the text. This arrangement has been made with the pur- pose of presenting clearly and practically the basis of modern industrial costing, its control by the ledger, and its final flower in statements of profits and of net worth, or condition. INDEX Abnormal and normal expense, 245-247 Abnormal Business account, 245, 246 a basis for commercial operat- ing control, 4 Accounting and cost system, standardized for electrical manufacturing (table), 173 development from rudiments to complex process, 48 evolution of, 3 narrative, furnished by jour- nal entries, 284 registers commercial activity, 4, 6 most vital aspect of, 285 Accounts, chart of, showing entries and closing of accounts, fac- ing 284 controlling, 50 payable, 50 process, in ledger control of costs, 200, 261, 262, 263 receivable, 50 reserve, 49 Accuracy, in costing, an indispen- sable economic function, 20 Acknowledgment slip, 84, 85 Actual and normal expenses, and the journal, 246 in addition to ledger, 245, 246 Administrative and oflSee salaries, charging off, 143 Administrative expense, appor- tion able to selling or manu- facturing, 51 in costs, 205-211 Agencies in depreciation, 169, 170 Allocation of cost to product, the main principle of costing, 53 Analysis, expense, controlled by journal entries, 284 discussion of, with specimen sheets, 151-167 method of closing, 242-244 proof of closing, 241, 242 typical complete, for cutlery manufacturer (tables), 219-239 typical illustration of, 214-216 Annual statements, and account- ing procedure, 6 Appreciation, what it is, and how to handle it in costs, 179 Assembly industry, final costs in, 248 Attendance and service bonus, 139, 140, 143 Balance, trial (table), 280 Balance, trial, and statement of condition, 284, 285 reproduction of, 265 Balances, ledger, reproduction of, 266-274 Balance Sheet, as showing condi- tion of an enterprise, 6 based on operating statement, 22 how it differs from profit and loss statement, 32 statement of condition, cost data, 32, 33 Base hourly rate, of great im- portance, 113 Bin tag, a condensed stock record, 96 Blanket overhead, 53 Bonds, and the burden of interest, 180, 181 287 288 INDEX Bonus percentage tables, stand- ard, 138 Bonuses in relation to clock cards, 113 British Ministry of Reconstruc- tion and its figures on cost- ing, 15 Budget fixed on basis of costs, 38 Budgetary control and costs, 22 Business account, Abnormal, 245, 246 Business strategy aided by cost data, 34 Business, the acid test of, state- ment of profit or opera- tion, 264 the barometer of, statement of condition, 264 By-product, when, sci'ap becomes, 99 Capacity, average percentage of, employed in New Jersey industries (table), 27 normally largely exceeds sales demands, 26 Capital and turnover, 23 Capital increase, 65-year period, per establishment, per em- ployee, 5 Capital, industrial, table showing development of, 1850-1915, 5 should bring maximum return, 21 surplus, and sales, 182 and similar items, 218 Charges, fixed, calculation of, 167, 168 Charging expense to costing, 41 Chart of accounts, facing, 284 Chesterfield, Lord, on pei'spec- tive in costing, 59 Clerical expense of cost system not heavy, 40 Clock numbers to locate em- ployees in departments, 115 Coal as a fuel in industry, 186, 188, 189 Collection of expense, 150, 151 Combination of the two costing methods possible, 46 Commerce, costing as the crux of, 19 Company Act of Parliament, 1845, provides for auditing certain companies, 3 Compensation, or employees' lia- bility, insurance, 167 Competition, ignorant, furthered costing, 10 in relation to prices, 25 intelligently controlled by cost data, 34, 35 unintelligent, avoided through cost system, 22 Compiling statement of profit, 274, 275, 276 Condition and operation state- ments, 263 Condition of an enterprise, shown on "balance sheet," 6 and trial balance, 284, 285 Condition, statement of, the barom- eter of business, 264 Contingencies or reserves, 49 Continuous industry, final costs in, 248, 249 Contributing and productive de- partments of expense, 147, 148, 203-205 Contributing departments, 55, 214, 244 Contributmg, or indirect, depart- ments, list of, 149 Control, ledger, of costs, 259, 261, 262, 263 process, account, 209 Controlling accounts, 50 manufacturing and selling ex- pense as the, 242 Cost, a, defined, 43 and accounting system, stand- ardized, for electrical manufacturing (table), 173, 174, 175 reviewed, 60 of power, and hours of opera- tion, 201 of sales, 275, 277 INDEX 289 Cost, of sales, determining the, 274 how arrived at, 29 part, card, reproduction of, 250, 251 prime, 56 Cost sheet, final, reproduction of, 254, 255, 256 elements of, 54 value, price, 17 variation in, 56, 57 Cost accounting and engineering, 7 Cost accounting and manufacture, 7 Cost accounting, beginnings of, 7,8 Cost card, final, reproduction of, 253 for detailed work record, 119, 120 form of, governed by certain factors, 119 keeping the, 120 sub-assembly, reproduction of, 252 Cost data, a means of controlling cut-throat competition, 34, 35 as showing fluctuating factors in unit costs, 27 balance sheet, statement of con- dition, 32 in determination of price basis, 26 Costing, actuating medium to ex- change, 19 controlling principle of, 53 crux of commerce, 19 of scrap material, 99 Costing and labor management, 38, 39 Costing and overhead, 245 Costing and production reports, 47, 48 as a good investment, 41, 42 by factory-order method, 46 by process method, 46 collection methods, 44 Costing design, the objective of, 56 Costing design, highest function of, 25 industrial, factors in develop- ment of, 8-16 in relation to planning, 46, 47 material of fluctuating prices, 105-107 Costing months or periods, 61 of expense, the crux of accu- racy, 246 of labor, all-important as deal- ing with human factor, 110 definition of, in relation to payroll. 111 originated to meet a special need, 6 primarily concerned with prof- its, 21 proper perspective and propor- tion in, 59 Costing systems, two main, 43, 44 Costs, as a basis for the budget, 38 as contributing to the end of profit, 22 final, handling fluctuations in, 255, 257, 258, 259 in assembly industry, 248, 249, 254, 255 in continuous industry, 248, 249 last preliminary to opera- tion and condition state- ments, 263 including all expenditures in, 245 labor, three ways of applying productive expense to, 210, 211 ledger control of, 259, 261, 262, 263 price, and profit, 35 sub-assembly, how derived, 248 the three items of, labor, ma- terial, expense, 27 two fixed items in, 27 Costs and interest, 181, 182 Count request in relation to mini- mum quantities, 94, 95 Coupon system under piece rate, 132 290 INDEX Current operating reports com- puted from costs, 21 Current results, importance of showing, 262, 263 Current statements of operation, by months (table), 31 one of the big features of cost- ing, 28 Day rate, piece work, and clock cards, 113 Day rate system of wages, 129, 130 "Death Rate" in manufacturing, for thirty years, table showing, 14 Decreasing-installment method of calculating depreciation, 176 Definition of a cost, 43 Definition of cost, value, price, 17 Demand and supply, in relation to competition, 34 Department, Engineering and Drafting, in administrative expense, 207, 208 garage, in administrative ex- pense, 206, 207, 243, 244 general factory, 206, 209-211, 244 laboratory, in administrative expense, 207 machine shop, in administrative expense, 208, 242, 243 millwright, in administrative ex- pense, 208, 209 office, in administrative ex- pense, 206, 244 repair, or sei'viee, in adminis- trative expense, 209 steam, light, and power, in ad- ministrative expense, 209, 243 Departmentalization, basis of, 149, 150 of expense, 52 of the plant, the bed rock of modem accounting, 52 Departments, contributing or indi- rect, list of, 149 of expense, 147, 148 Departments, of expense, con- tributing and productive, 203-205, 214 productive, determination of, 150 Depreciation, a contingent item, 167 agencies in, 169, 170 definition of, 169 functional, 169 importance of, 49, 178, 179 methods of calculating, 176 phj'sical, 169 taxes, insurance, 71 Developments in costing natural- ly slow, 16 Differential piece rate, or Taylor, system, 133, 134 Differential wage systems, 113 graphic comparison of, 141 Difficulties in costing labor, 123, 124 Direct and indirect expense, 215, 216 Direct percentage rate, 211 Director^' of City of London, list of accountants, 3 Distribution, of expense, 203 of invoices, 85, 86 or sales, a function of manufac- ture, 51 payroll, 216, 217 supply, requisition, 217 Drafting and Engineering Depart- ment, in administrative ex- pense, 207, 208 Economies, theoretical, and busi- ness practice, 184 gained by costing, 42 of existence, closely related to accurate costing, 20 "Efficiency," or Emerson bonus, system, 137 Elements of cost, variation in, 56, 57 Emerson bonus, or "Efficiency," system, 137 Employees and machines, ratio be- tween, 148 INDEX 291 Employees' liability, or compen- sation, insurance, 167 Engineering, a science evolved in the "machine age," 7 Engineering and Drafting Depart- ment, in administrative ex- pense, 207, 208 Engineering and the economic fac- tor, 7 Equipment, arrangement of, 148, 149 Equipment, inventory, 177 Evaluation, definition of, 43 Exchange, in relation to value and price, 18 Expenditures, all, must be in- cluded in costs, 245 infrequent, 71 Expense, a control center, 146 administrative, in costs, 205- 211 ledger, 70 normal and abnormal, 245-247 normal and actual, and the jour- nal, 246 in relation to ledger, 245, 246 or overhead, or burden, 27 productive, three ways of ap- plying to labor costs, 210, 211 Expense analysis, 70 complete, for cutlery manufac- turer (tables), 219-239 controlled by journal entries, 284 discussion of, with specimen sheets, 151-167 in relation to expense rates, 276 method of closing, 242-244 of great value in department records, 36 proof of closing, 241, 242 sources of data for, 216 typical illustration of, 214-216 applying, to material, fallacy of, 213 collection of, 150, 151, 168 costing of, the crux of accu- racy, 247 departmentalization of, 52 Expense departments, 147, 148 direct and indirect, 215, 216 distribution of, 203 ■factory, its ratio to productive labor, 245 irreducible minimum of, 56 labor, material, 54 Expense rates, as related to ex- pense analysis, 276 Expense record, tabulated, of a department, 37 subdivision and classification of, 28 the variable item in costs, 27 two classes of, selling and manu- facturing, 51 various factors in, as determin- ing price-fixing, 28 Factory Department, General, 206, 244 Factory expense and productive labor, ratio between, 245 Factory order costing, 46 Federal Trade Commission, on proper costing, 13 Final cost card, reproduction of, 253 Final cost sheet, reproduction of, 254, 255, 256 Final costs, handling fluctuations in, 255, 257, 258, 259 in assembly industry, 248, 249, 254, 255 in continuous industry, 248, 249 last preliminary to operation and condition statements, 263 Finished and shipped goods, 283 Finished goods and profit inven- tories as proving profit, 274, 276 Fixed charges, and similar items, 218 calculation of, 167, 168 Fluctuations in final costs, hand- ling of, 255, 257, 258, 259 Function of costs defined in sim- plest terms, 39 292 INDEX Gannt task and bonus sj^stem, 137 Garage Department, in adminis- trative expense, 206, 207, 243, 244 General Factory Department, 209- 211, 244 Goods in process inventory, 29 Halsey premium plan, 135 Handling expense, allocation of, 90, 92 Heat, light, and power, in cost- ing, 185 Horsepower, one, in factory steam power plants, annual cost of (table), 200 Horsepower requirements of ma- chine motors (tables), 190- 198 Hour, process, rate, 212 "In-and-out" clock system for la- bor attendance, 112 Income tax and wage payments, 115 "Income and expenditure" basis of accounting, the modem way, 6 Increasing-installment method of calculating depreciation, 176 Indirect and direct expense, 215, 216 Indirect, or contributing, depart- ments, list of, 149 Industries as power users (table), 187 Industiy, assembly, final costs in, 248 continuous, final costs in, 248, 249 Infrequent expenditures, 71 Inspection labor, how to cost, 126 Insurance and interest in account- ing, 49 Insurance and taxes in costing, 71, 165, 167 "Integration" of processes in pro- duction, 5 Interest and insurance in account- ing, 49 Interest and proprietary and ten- ant operation, 183 Interest, inclusion of, in costs, 181, 182 its problem in costs, 177-184 Interest method of calculating de- preciation, 176 Interlocking subsidiaiy ledger ac- counts, 150 Internal Revenue Department, United States, report, 1917, of average profits, 12 Inventory and count request, 95 Inventory, annual, poor substitute for current statements, 28 of equipment, 177 Invested capital, range of return on, 12 Invoice distribution, instructions for, 86-88 Invoices, checking of, 85, 86 distribution of, 85, 86 Journal, as reflecting normal and actual expense, 246 entering costmg data in, 71 in costing, 60 material, instead of order sys- tem, 107 Journal entries, as an accounting narrative, 284 as controlling expense analysis, 284 in process accounts, 261, 262 Labor, a difficult item in costing, 108 a fixed item in costs, 27 a large and variable item of ex- pense, 108 classification of, 122 Labor costing, deals with the big- gest side of all industry, 110 what it is in relation to payroll, 111 Labor costs, three ways of apply- ing productive expense to, 210, 211 INDEX 293 Labor costs, direct and indirect, 55 inspection, how to cost, 126 Labor management in relation to costs, 38, 39 material, expense, elements of costs, 54 productive, and factory expense, ratio between, 245 and non-productive, ratio be- tween, 122 repair, or excess labor, how classified, 127 setting-up, how classified, 127 unit basis of charging, 127, 128 Laboratory Department, in admin- istrative expense, 207 Ledger balances, 22 reproduction of, 266-274 Ledger control of costs, 259, 261, 262, 263 Ledger postings (tables), 278, 279 Ledger, relating to normal and ac- tual expense, 245, 246 the control of the expense an- alysis, 242 Light, costing of, in industry, 189, 190 Light, power, and heat in costing, 185, 209 Locating employees by clock num- ber, 115 Loss, must be accurately charged, 32 Lots, recording by, 96, 97 Machine or process hour, to in- sure accuracy of cost, 53 Machine Age, the, 4, 5, 6, 7 Machine hour rates, 122, 211-212 Machines and employees, ratio be- tween, 148 Machine Shop Department, in ad- ministrative expense, 208, 242, 243 Maintenance, or special repair, order, 126 Manufacture, two general func- tions of, 51 Manufacturers' Associations favor uniform costing methods, 10 Manufacturing costs, and profits, 21 Manufacturing profit, 284 Marginal values of material, 104 Matei-ial, a fixed item in costs, 27 Material accounting, importance of, 72 Material control accounts, 88, 89 direct and indirect, or produc- tive and non-productive, 54 essential facts concerning, 73 fallacy of applying expense to, 213 Material journal, instead of order system, 107 labor, expense, elements of cost, 54 marginal values of, 104 minimum quantity of, 93, 94 movement of, from stock, 92 Material requisition distribution, 60, 61, 62, 63 Material stock cards, discussion of, 84 Maximum return, in relation to costs, 22 Methods of costing collection, two, 44 Methods of costing improved as tariff protection decreased, 9 Millwright Department in admin- istrative expense, 208, 209 Money in relation to value, 18 Motors, machine, horsepower re- quirements of (tables), 190- 198 Multiple costs, definition of, 44 Multiple cost system, illustration of, 45 Nineteenth Century, a period of progress in accounting, 4 a wonderfully productive era, 4 close of, great growth of or- ganizations, 5 294 INDEX Non-productive labor, the costing of, 125 timekeeping of, 125 Normal and abnormal expense, 245-247 Normal and actual expense, and the journal, 246 in relation to ledger, 245, 246 OflBce and administrative salaries, charging off, 143 Office Department, in administra- tive expense, 206, 244 Operating control aided by cost data, 35, 36 Operation and condition state- ments, 263 Operation and "profit and loss statement," 6 Operation or order basis of cost- ing labor, which? 123, 124 Operation, or profit, statement of, the acid test of business, 264 statement of, 281, 282, 283 illustrated, 276, 277, 280-285 Order number, keeping costs by, 106, 107 Order or operation basis of cost- ing labor, which? 123, 124 Order quantity, 94 Overhead and costing, 245 Overhead, blanket, 53 rate of, variable, 57, 58 Overheads, variation in, affect costing accuracy, 53 Overlapping of other operating records with costs, 41 Part cost card, reproduction of, 250, 251 Payroll and labor costing. 111 Payroll distribution, 60, 65, 66, 67, 216-217 and productive labor, 277 Payroll forms, 113 Percentage of costs to total ex- pense, 41 Percentage relation, direct, 211 Perspective in costing needed, 59 Petty cash and the voucher regis- ter, 70 Piece rate wage system, 130, 132, 133 Piece work, day rate, and clock cards, 113 Planning and costing, 46 Planning department, 84 Planning, function of, 46, 47 Policies promulgated with aid of costs, 22 Pooling of capital in industry, early steps in, 4 Postings, ledger (tables), 278, 279 Power and steam in industrial costing, 189, 190, 202 Power costs, division of, 190 Power, Light, and Steam Depart- ment in administrative ex- pense, 185, 209 Premium plan, Halsey, 135 Rowan, 136 Price, cost, value, 17, 18 profit, and costs, 35 related to demand and supply, 18 selling, setting of, 263 Price and stock record, 78 Price-fixing, in. relation to expense, 28 Price policies, two familiar, 23 Prices, as related to competition, 25 fluctuating, and costing, 105-107 Pricing, a physical inventory, 30 Process accounts in ledger con- trol of costs, 260, 261, 262, 263 Process and finished-goods inven- tories in relation to profit, 274, 276 Process control account, 209 Process costing method, 46 Process or machine hours, to in- sure cost accuracy, 53 Process hour rate, 212 Producing and selling in adminis- trative expense, 206 Product and portion of cost, 45 INDEX 295 Production, a function of manu- facture, 51 Production reports and costing, 47,48 Production-center arrangement of equipment, 148, 149 Production cost in relation to price, 19 Productive and contributing de- partments of expense, 147, 148, 203-205 Productive departments, 55, 214, 244 determination of, 150 Productive expense, three ways of applying to labor costs, 210, 211 Productive labor and factory ex- pense, ratio between, 245 Productive labor and payroll dis- tribution, 277 Productive labor distribution, 122, 123 Profit, classified by products, 30 gross, equivalent of, in rate of return on capital, 24 gross margin of, on sales, 24 manufacturing, 284 price, and costs, 35 proving the, 274, 276 selling, and selling expense, 284 selling cost, and selling price, 263 Profit or operation, statement of, the acid test of business, 264 Profit statement, based on physi- cal inventory (table), 31 method of compiling, 56, 274 Profit and Loss account, 22 Profit and Loss statement, in re- lation to operation, 6 Profit and Loss statements, fur- nished by costs, 128 Profits, classified statement of, 262 differences in, shown against the total volume, 32 vitally related to costing, 21 Property taxes and accounting, 49 Proprietary and tenant operation, and interest, 183 Purchase requisition, 84 Purchasing department, 84 Quantity, difficulty of ascertain- ing, illustrations of, 74, 77, 79 of material, 74, 77, 93, 94 order, how determined, 94 Quotation inquiries, 84 Rate, direct percentage, 211 machine hour, 211, 212 process hour, 212 Rate of profit, varies with nature of business, 23 Ratio, operating, 59 Raw material, market for, some- times lacking, 104 subdivided and graded, 104 "Receipt and expense" basis of accounting, a primitive method, 6 Receivership, risk of, 14 Receiving slip, 85 Records of costing data, essential, 60 "Red tape," sometimes the objec- tion to costing, 40 Repair, or excess, labor, 127 Repair, or service, department in administrative expense, 209 Replacement, reserves for, 168 extraordinary, 49 Requisition for material issue, 92, 93 Reserve accounts, 49 Reserves, for replacement, 168 or contingencies, 49 Rowan premium plan, 136 Salaries, administrative and of- fice, charging off, 143 Sales, cost of, 274, 275, 277 gross, as related to invested capital, 24 in proportion to capital and surplus, 182 range of profit on, 13 296 INDEX Sales executive and profit state- ments, 32 Sales totals, prices, profits, 26 Savings effected by costs render costing a good investment, 41 Science of cost accounting estab- lished to stay, 16 Scrap, costing of, dependent on importance of the item, 102 in tableware plant, 100, 101 percentage of, 99, 100 waste, spoilage, accounting of, 98, 99 "Seconds" in relation to costs, 104 Selling and producing in adminis- trative expense, 206 Selling cost, selling price, and profit, 263 Selling expense, selling cost, and profit, 263 Selling expense and selling profit, 284 Selling price, setting of, 263 Service, supplied by costs, 22 Service and attendance bonus, 139, 140, 143 Service, or Repair, Department in administrative expense, 209 Setting-up labor, how classified, 127 Single costs, definition of, 43, 44 Sources of information for the expense analysis, 216 Specialization, the present period of, 18 Special repair, or maintenance, order, 126 Specification sheets, or bills of material, 73, 74, 75 Spoilage, costing of, 102, 103, 104 Standard bonus percentage table, 138 Standard depreciation rates for factory buildings and equipment, 171, 172 Standardized accounting and cost system for electrical manu- facturing (table), 173, 174, 175 Statement of condition (table), 33 the barometer of business, 264 Statement of condition and trial balance, 284, 285 Statement of operation, 281, 282, 283 illustrated, 276, 277, 280-285 Statement of profit, method of compiling, 274, 275, 276 Statement of profit or operation, the acid test of business, 264 Statements of operation and con- dition, 263 Statistics of costs aid operation, 35, 36 Steam and power in industrial costing, 202 Steam consumption in prime movers, range of (table), 199 Steam, Light, and Power Depart- ment in administrative ex- pense, 209, 243 Stock and price record, 78 Stock card, 76, 83 Stores records, their importance in relation to costing, 81, 83 Straight-line calculation of depre- ciation, 176 Sub-assembly cost card, reproduc- tion of, 252 Sub-assembly costs, how derived, 248 Subdivision of accounts an aid in material records, 89 Subsidiary records of material, 74 Supplies, costing of, 97, 98 Supply and demand, in relation to competition, 34 Supply requisition distribution, 60, 63, 64, 65, 217 Surplus, sales, and capital, 182 Tabulating machine for statistics, 120 Tariff, protective, 8, 9 Tariff Commission, its effect on costing, 8, 9 INDEX 297 Tariff legislation and industrial costing-, 8 Task and bonus system, Gannt, 137 Taxes, insurances, depreciation, 71 Taxes and insurance in costing, 165, 167 Taylor, or differential piece rate, system, 133, 134 Tenant and proprietary operation, and interest, 183 Textiles and the problem of waste, 102 Time cards and the payroll depart- ment, 113 Time clock, essential to accurate labor costing, 111 ia-and-out, most satisfactory la- bor attendance record, 112 Timekeeping, in costing of labor, 110, 111 Time-study, as an aid in setting piece rates, 133 Traditional practice compared with modem costing, 30 Training Service, United States, graphic explanation of dif- ferential wage systems, 141 Trial balance and statement of condition, 284, 285 reproduction of, 265 Trial balance (table), 280 Turnover, definition of, 23 frequency of, and margin of profit, 24 Typical expense analysis, com- plete, for cutlery manufac- ^ turer (tables), 219-239 concretely illustrated, 214-216 Uniform costs system established, 10 Unit arrangement of equipment, 148, 149 Unit basis, a variant of the proc- ess rate, 212-213 Unit basis of charging labor, 127, 128 "Unit" cost, relation of wages and output, 109 Unitizing, or the unit system of charging labor, 127, 128 United States Training Service, graph of differential wage systems, 141 Utility, value, cost, price, 17 Valuation of material, relation of, to stores records, 81 Value, price, cost, 17 Variations between costs of iden- tical articles, an argument for costing, 11 Varying material price in rela- tion to costing, 106 Volume and prices, 25 Volume, effect of the war upon, 26 large, at small margin, 23 small, at large margin, 23 Voucher, function of, 90 Voucher register, 50, 60, 67, 68, 69, 70, 217-218 Wage policy and its relation to costs, 22 Wage record (tables), 117, 118 Wages, in relation to labor, 109 Wage svstems, different kinds of, 129 differential, 113 discussion of, 129-145 Waste in the textile industry, 102 Work ticket, relation of to cost- ing and planning, 47 World War, an impetus to proper costing, 14, 15 (1) BOOKS ON ACCOUNTING MODERN 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