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
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o
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34 ESSENTIALS OF INDUSTRIAL COSTING
business. A balance sheet shows the distribution of in-
vested capital and the current additions to surplus re-
sulting from profit. The balance sheet is simply a tabu-
lation of the balances of those accounts which remain
when all other accounts have been closed out through
profit and loss. It reflects the degree of success with
which the capital has been invested and in combination
with the profit and loss statement furnishes, if properly
compiled, all the data essential to a critical considera-
tion of the operating and financial condition of a corpora-
tion at the time, and by comparison with similar state-
ments for other periods presents a panorama of its cumu-
lative vicissitudes, its successes, or its failures.
Prevention of Destructive Competition.— The fifth man-
ner in which it is the function and purpose of costs to
serve is by avoiding unintelligent competition and by en-
abling the exercise of intelligent business strateg}". The
law of supply and demand is an inexorable condition of
business activity and it has been the classic assumption
of economists that its free operation was suflScient con-
trol for all commercial endeavor, the argument offered in
support being that, if supply decreased when margin in-
creased, more capital would be invested, the supply in-
creased and thus reduction in margins induced. If this
balance of supply and demand was maintained without
serious sacrifice, its success would be beyond question, but
unfortunately, its results are not obtained without a toll
too sizeable to overlook.
It so happens that demand is fickle and that frequently,
in fact, Tvith almost cyclical regularity, supply exceeds
demand, and at such times competition becomes merci-
less and cut-throat and the failures in which it results
fasten a heavy burden on the country. Hence, it has
been one of the interesting phases of cost development
PURPOSE AND FUNCTION OF COSTING 35
to observe that, as better knowledge of actual costs and
producing factors was acquired, the suicidal quality of
these competitive orgies became less prominent and saner
measures followed. It was seen that ignorance of facts
had brought about desperate heedlessness to the shaping
of policies and that, frequently, competitive action was
like striking in the dark, the futility and destructive force
of which were shown in the clear light of definite informa-
tion which costs furnished. Gradually it was learned
that those manufacturers who were guided by sufficient
financial information met and withstood the recurring
periods of depression with greater success and then, that
the more general this information was available to all
companies in an industry the better that industry as a
whole weathered the gale.
In a word, accurate cost knowledge within an indus-
try as a whole restrained individual companies from
actions intended for self-protection, but springing from
an ignorance of the forces opposing and in the end
actually harmful to the plant and to the industry as a
whole. Costs stake the limits of price beyond which
profit ends and so bring competition to the sane basis of
a trial of relative physical strength and efficiency of vari-
ous plants, and not an endurance test with bankruptcy as
the result. For with accurate cost knowledge at hand
no executive could act in the matter of price without ad-
vance knowledge of the degree of financial jeopardy in
which his decision would result.
Statistical Operating Control.— The sixth service of
cost data as listed in the outline introducing this chapter
is to compile data reflecting true operating efficiency and
to classify expense so as to guide management. There
are men who, by long intimacy and close contact with
operating conditions, can measure instinctively the
36 ESSENTIALS OF INDUSTRIAL COSTING
operating condition of a plant, and to whom a given busi-
ness is the fabric of their very being.
Unquestionably such men are indispensable and their
advice invaluable, but the risks of depending so com-
pletely on the human factor are great. Further, as the
size of plants increases comprehension of their operating
details exceed human limits unless supplemented by other
methods of intelligence. Nothing has yet been devised
which so successfully supplies this control as a well-
designed cost system, the elements of which represent
sufficiently detailed analysis and sufficiently clear presen-
tation and flexible accumulation of the various factors
composing the cost of production. It is in this function
that cost information takes on the full character of sta-
tistics and what has prompted the quotation that is at
the head of this chapter, namely, ''that if the world is
not governed by figures, they at least show how the
world is governed. ' '
As illustration of this there is shoAvn herewith (Figure
4) from the expense analysis of a certain plant one of the
tabulated expense records of one of the various depart-
ments. Herein is seen the full cost of maintaining that
department as independently as if it were a separate
institution. It shows the relation of expense to labor,
the variations in the relations through the months and
comparatively with the previous year, and is discussed
in full in Chapter IX. Attention is directed to it here
simply because of its statistical value, aside from its con-
tribution to costing. This record supplies data pertain-
ing to a department in such form and completeness that
the department can be regarded virtually as a separate
plant with its own equivalent fixed charges, etc. The
record can also be utilized to show such data as appear
at the bottom of the sheet, where the average hourly rate,
EXPENSE ANALYSIS
#23
SPRING ASSEMBLY BEPT.
iB,..?^::^.
1
i<-u.t^..ytr^.
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TOTAL DIRECT EXPENSE
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TOTAL INDIRECT EXPENSE
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TOTAL SPRING ASSEMBLY EJ
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TOTAL SPRING PROD.LABOR
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NUMBER SFRINQS ASSEMBLEI^
AVERAGE COST PET? SPRING
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MONTHLY LABOR TURNOVER
■>
•,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
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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
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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
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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
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ceiving department, shipping department labor, etc. All
of this is analyzed as required for departmental expense
collection. An example of such a distribution is shown in
Figure 7. This sheet, showing the information required
for a certain installation, gives no hint of the great mass
of detail of which it is the resultant.
Voucher Register.— The Voucher Register furnishes
the modern method of recording accounts payable and,
by adaption, is one of the chief structural members in
costing, and the connection of costing to the general led-
ger. The development of the Voucher Register and the
controlling accounts payable is now of some years ' stand-
ing. Formerly, individual accounts were maintained in
the Ledger for each creditor, which entailed a burden of
clerical labor almost impossible to realize. "With the
68
ESSENTIALS OF INDUSTRIAL COSTING
rouo
VOUCHER REGISTER
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Figure S. — voucher begisteb
Voucher Register all individual accounts are abandoned
and just the one "accounts payable" is maintained.
At the present juncture our immediate interest is in the
manner in which the Voucher Eegister depicts the
charges represented by the invoices entered in it and
particularly how these charges are recorded so as to con-
tribute the data required for costing and the general
ledger control of costing. As has been seen in preceding
chapters, costing and monthly statements based thereon
operate by recording directly current manufacturing ac-
tivity as distinguished from the belated and inverted
method of determining the cost of the activity by deduc-
ELEMENTS OF COSTING
69
VOUCHER REGISTER
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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<?ounting also consists of accurate
records of the disposition of material, its charge to prod-
uct or expense, its ultimate destiny in finished article
or its diversion as scrap, waste, or by-product. Records
showing the course of material consumption with its es-
sential events outlined are indispensable to fullest effi-
ciency, as well as to costing accuracy. In fact, in some
businesses material is of transcendant importance, as in
cases where the composition or mix, the waste, the loss
or gain in weight from the manufacturing processes are
direct determinants of profit or loss with an extremely
close margin in these factors between them.
72
COSTING OF MATERIAL
73
Specification
Sheet
riATc- nonru
P^TTF"" wn QUANTITY Date Wanted
BLADE FJNISM
TANG FINISH
SWEDGC
NAIL MARK
SPRING FINISH
IPRINO HOLC
SKETCH OF KNIFE
FAKT HO.
F..„H«.
StOCN
Figure 9. — specification sheet
Pacts Regarding Material.— The essential facts with
regard to material that are required for costs vary with
the industry, but as a general rule they are as follows :
Quantity
Kind
Size
Purchase cost
Purpose or charge
Elements of waste or scrap
Spoilage
Seconds
Material Specifications. — The manner in which this in-
formation is supplied will now be described. The quan-
74 ESSENTIALS OF INDUSTRIAL COSTING
tity, kind, and size of material required for a given prod-
uct may be ascertained generally without difficulty. In
certain assembly industries this information is compiled
in the form of a Specification Sheet or Bill of Material.
These records, illustrated in Figures 9 and 10, show the
parts or sub-assemblies which compose the finished prod-
uct.
They also show the parts which contribute to the sub-
assemblies and for these parts indicate the kind and size
of raw material from which the parts are made.
Specification Sheets or Bills of Material of this kind
may often be made complete, but in some cases the detail
is too great to be considered in one sheet and is, there-
fore, compiled on subsidiary records. For instance, man-
ufacture to-day is conducted increasingly on a basis of
physical specification. Indeed, the processes of modern
heat treatment of alloy steel depend for their success
upon a definite chemical composition which must be con-
sidered in purchase and use. In such cases a code letter
or sjTiibol suffices to define on the Bill of Material what
material is required for a given part, and other records
are kept showing the technical detail or purchase speci-
fications of the material itself. This is also true of mate-
rial which comes in various patterns or colors, such as
celluloid in the manufacture of pocket knives. Here,
in the case of a knife using a celluloid cover of a certain
kind, the code number would be used, as "No. 646 cellu-
loid," instead of the full description of the particular
celluloid thus intended.
Quantity of Material.— Generally the material required
for a product is readily determinable though often a work
of extensive detail, but there are manufactures where this
information is exceedingly difficult to establish, and as
example of such there might be cited the manufacture of
SPECIFICATION SHEET
STYLE
DESCRIPTION SIZE
PART NO.
PART NAME
MATERIAL
QUAN.
PER DOZ.
Body
Sleeves
1 Gusset
2
3
4
Shirt Cuffs
Dr. Cuffs
Collarette
Shoulder Straps
Facing
Stay
Buttons
Braid
Lace
Ribbon
Figure 10. — specification sheet
75
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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
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C . UI o
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t 5?S
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w ;
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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
>^
/^
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^
4
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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,
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nacm
1
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:
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\l Hi
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•
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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"- N<W.27j64
BKB ♦<» ' 1 NO. 2
HO. 3
NO. 4
NO.. 1 NO.. 1 1 1
MniXNC
CASH TRANSFER
EOWPMENT
DISCOUOT ON PURCHASES
'
SALES MISCEI.
RES.I1EPAWS
LEERS
GENERAL OfTlCE
MOLDS
FACTORY ADMIN.
CRATES
ROYALTY
RJEL
SELUNG-CENERAL
MAT. MIMNC
'
1. 2 AND J
STORES
9?
64
- 4
rRElCHr
n.
to DR. CXPE^SE
EXP. BOTTLE
a M. EXPENSE
f,
,^ MOLD EXPENSE
REPS. FURNACES
- 1 FFR<
SAND DBPT.
- MAOdNES
BUILDINGS
- MOUM
EQUIPMENT
- PLANT
EX£LOfilVES
FUEL
PAYROLLS
STORES
1
EXPENSE
1
REPAIRS
1
L-J_- —
1 1
— ^
: -
~] 1
i—trrn
— t
!lr
I " — 1
n^
APPROVED __
r^2s
A. ^\ i^if
( 5^ L ) V "V
Vo,; ;
Figure 20. — combined voucher and voucher check
91
92
ESSENTIALS OF INDUSTRIAL COSTING
chased or issued (Figure 21). This ratio will then be
added to the unit price if it is to be applied on purchase,
or to the requisition if it is to be applied on issues.
Whichever way it is applied the expense for the month
of the stock department must be distributed to the Mate-
rial and Stores accounts.
Rnnd
MATERIAL COST ,^^
Product 'n
Miterial
Storage
Misc£UaiKon&
Tot«l
QuMllr
UiM CmI
TMal
OuaUl?
PoM
WiCmi
T.UI
TMab
ProducUoa
Cost Per
Cost Per
Cost Per
Figure 21.
-FORM INDICATING METHOD OF APPLYING STORAGE AND HANDLING
EXPENSES TO THE COST OF MATERIAL
Material Stock Records.— Up to now the stock and pur-
chase records and the handling of invoices has been con-
sidered and it is timely to discuss the matter of material
issue. The movement of material from stock is actuated
from the planning department by a requisition such as
illustrated in Figure 22. These requisitions are signed
when filled by the storeskeeper and returned for entry
on the stock records, where they are priced. After
COSTING OF MATERIAL
93
pricing they are extended and then summarized to show
the consumption of material in each of the accounts out-
lined for the particular system. The requisition also
indicates the charge, whether to factory-order classifica-
tion, or process, and a summary of the requisitions for
the month are entered on the Material Requisition Dis-
tribution described and illustrated in Chapter IV, pages
61-63.
MM
MATERIAL REQUISITION
Urt
M
"i»TF
CHARRP
J
QUANTITY
DESCRIPTION
UNIT PRICE
TOTAL VALUE
one ITEM ONLY ON EACH ftEQUISmOH
SIGNED
Figure 22. — material requisition
The stock records have been stated to show a minimum
quantity which is established arbitrarily and which is
generally figured as a certain percentage of the total
requirements. This figure for each kind and size of mate-
rial is determined by the planning department and it is
based upon an estimate of the annual output of the plant.
Generally the minimum is three months, or twenty-five
per cent of the estimate, but sometimes more and some-
times less. It is a factor fixed by experience in secur-
ing delivery on the particular article. If experience
94 ESSENTIALS OF INDUSTRIAL COSTING
shows that a commodity requires a six-week period for
shipment and two weeks for transit, the total eight weeks
would be the minimum. Generally, however, a margin for
contingencies should be added.
The order quantity is established by buying condi-
tions. The economical order unit is that which will be
large enough to receive the best price and yet not be so
large as to constitute too big a proportion of the yearly
requirements. This consideration has to do with the en-
gagement of working capital, the main object being to
REQUEST FOR COUNT
Date
Storekeeper :-
Kindly count the following item and advise
on this slip the result.
Description
size
Signed
Date
Count
Signed
Storekeeper
FiGUKE 23. — REQUEST FOR COUXT
minimize its occupation in inventory to the lowest limit
consistent with judicious purchase, and assured supply
for production. This is also a duty of the planning
department and is touched upon here only in passing and
for completion.
Whenever the stock records indicate that the minimum
has been reached, a purchase requisition is made out as
previously described, also a Count Request (Figure 23)
is sent to the storeskeeper, who is instructed to make an
immediate count of the item specified. Upon the return
of the count request with the inventory noted on it, the
COSTING OF MATERIAL
95
count is compared with stock records and if adjustment is
indicated, it is made. By this method every item is in-
ventoried whenever it reaches a minimum, which, on a
BIN QtAG
ARTICLE
UNIT MIN.
RECEIVED 1
Oiy HAND
USED 1
0*TE
OUANTITV
DATE
quantitV
Figure 24. — bin tag
25 per cent basis — the general average — would mean
at least four inventories a year. A summary record of
these counts and book balances is kept comparatively, and
96 ESSENTIALS OF INDUSTRIAL COSTING
examination of it gives a fair measure of the accuracy
of the stock records. It is also a constant reminder to
the storeskeeper for care and faithfulness in reporting
the material movements of which he has charge. As a
supplementary record many companies use a bin tag
which is attached to all items and which in effect is a
condensed stock record. To this Bin Tag, illustrated in
Figure 2-i, are posted all receipts and withdrawals so
W.J.D.&SONS,lnc.
Bale No.
Lot Weight
Tare
Mark Net
Scoured
Weight-
FlGXTBE 25. BALE TAG
that the storeskeeper is aware of the condition of stock
balances. It is also good practice to show the minimum
on the bin tag and then the storeskeeper can notify the
stock record clerk whenever the bin tags show down to
the minimum. This serves as a tickler to the stock record
clerk who, after posting his requisitions, can check off the
memorandum sent by the storeskeeper. If the stock rec-
ords do not reflect a below-minimum condition and the
storeskeeper 's memorandum does, an investigation is a
helpful check on the stock records.
Certain materials, such as textile fibers or yarn, like
wool, cotton, manila hemp, or sisal come in bales, which
COSTING OF MATERIAL
97
are weighed and recorded by the lots in which they are
received. This is done in order to trace variations in
quality and also to prevent mistakes in issue of incorrect
goods of fibers or yarns which, to the unskilled, might
look alike. Lot tickets and bale tags are used for this
purpose as illustrated in Figure 25.
This describes the handling of material and the steps
which lead to the Material Requisition Distribution as an
Form 2 2SM MO
§ SUPPLY REO
CHARGE DEPT,. / ^^
UISITION
No._
n»TF
CCo. 7M1
V^/C
QUANTITY
DESCRIPTION
UNIT PRICE
TOTAL VALUE
/^A
(y V" /d^^^Z^-^
u
J
^0
ff
/
o~e ,TC- o.., o. „CH .cou,s,r,o»
SIGNED
^/^y^/T
Figure 26. — supply eequisition
original source of entry into costs and the control thereof
in the general books.
Costing of Supplies. — Supplies are handled in an
identical manner, using the same stock cards or sheets.
The Supply Eequisition, Figure 26, is printed on differ-
ently colored stock than the Material Eequisition and
further distinguished from the latter by the large initial
''S" where the Material Eequisition shows "M." The
same purchase procedure, the same pricing are done with
98 ESSENTIALS OF INDUSTRIAL COSTING
supplies as material and the summary of issue requisi-
tions is compiled in the exact manner as of Material
Requisitions, the whole leading to the Supply Requisition
Distribution discussed in the preceding chapter as a fun-
damental source of costing data. The Supply Requisi-
tion shows the expense symbols and the summaries of
these are stated, of course, in the distribution.
Scrap, Waste and Spoilage.— The matter of the
quantity, size, kind, price, and destination of material
has been treated at length, and in many manufactures
this particular discussion could be concluded as com-
plete for the subject. Unfortunately, however, there is
another phase of material costing which is universally
present in a minor way, but which in some manufactures
is of great influence and that is the accounting of scrap or
waste or spoilage. Scrap or waste, and spoilage, are
terms designating a part of the material which does not
continue to normal completion of the manufacturing op-
erations nor appear in the final form of the product. This
material is a kind of precipitate thro^^^l off by the pro-
ductive processes and presents a problem for equitable
treatment in costs which equals in complexity, if not in
money value, that of expense distribution.
Scrap or waste is the loss of material as an inherent
and repetitive occurrence in the processes, while spoil-
age is the loss of material due to original defects in raw
material, accident, carelessness, or failure to pass inspec-
tion limits. It is a rare commodity where the finished
product represents a transformation in toto from the
original material and it seems to be an inexorable con-
dition that loss of material or value or duplicate process-
ing of a portion must accompany all production and be
involved at some point. So that in practically every in-
dustry the conversion of raw material to the finished
COSTING OF MATERIAL 99
product is attended by loss or the expense of reclamation.
The terms used to designate this loss vary with the
nomenclature of the particular industry. Scrap is the
word for the metal working industries, waste for the
textile, cullet for the glass, broke for paper, dross in
smelting, gates and sprues in foundries, etc. All refer
to a portion of the material which contributes to the
making of the final product, but which has lost immediate
availability for actual inclusion in that product.
Sometimes the scrap or waste may be reworked and
finally reach the state of finished product and sometimes
it can have no ultimate identity as finished product and is
predestined to be scrap beyond reclaim. In the latter
case it might, however, possess salvage value, that is,
command a market and price and whenever such a price
reaches sizeable proportions in comparison with the prin-
cipal product, scrap takes on a higher dignity and is
known as a by-product.
It is the basic practice in costs to have the finished
product or the good production bear the cost of all mate-
rial consumed with the exception of the admission of the
sale of scrap or waste as a proper credit. The arbiter
6f this credit is market value and if, perchance, the par-
ticular scrap possesses no such disposal value, the full
cost of the original material must be borne by the finished
product.
Costing of Scrap.— The manner of handling scrap or
waste and spoilage in costs varies with the degree of their
importance as factors in the results. The value of the
material and the relative amount of scrap are determi-
nants of this. For instance, scrap or waste may range
from almost nothing to 10 per cent of total material and
it has been mentioned that material ranges from 20 to
80 or 90 per cent pf costs, so that scrap or waste might
100
ESSENTIALS OF INDUSTRIAL COSTING
be as much as 8 or 9 per cent of the total cost. This
shows it to be at times a matter of great moment which
must be carefully accounted. The method of account-
ing varies with the operating conditions, and the follow-
ing examples illustrate the conditions usually encoun-
MELT REPORT
POUNDS
PRICE AMOUNT
METAL USED
Pig No. 1
Pig No. 2
Pig No. 3
Scrap
Total Metal Used
PRODUCTION
Bad Castings
Grates & Risers
Good Castings
Total Production
Unaccounted For Loss
% Unaccounted For Loss
% Bad Castings
^0 Gates & Risers
% Good Castings
% Total
COST PER POUND OF METAL
.
FiGUEE 27. — MELT EEPOET
tered and the essential accounting devices for costing
the scrap or waste.
In a tableware plant where sheet brass or copper is
used and the initial operation is the press blanking of
irregular shapes, the proper procedure would be to attach
to each part the proportion of loss on scrap entailed in
COSTING OP MATERIAL
101
its production. This is accomplished by accumulating
data as to the scrap and crediting the cost of the part
with the sales value of the scrap in which its production
FoffBNo. 101. M-li-a-lJ, SUMM
CARDING REPORT
WEEK ENDING - — 19«
ITEM
POUNDS
TOTALS
GRAND TOTALS
PSn CINT.
PtH CKN1
SPINNING '
r :
1 ..oa.N.
\r«
PICKING ) „o„,„„
AND /
CARDING \ TIIUNK WMTC
1 swEep*
1 CAWO GTRtPS
FLY 1
TOTAL FLY FRAME WASTE. ....
PRODUCTION SPEEDERS ....
INVISIBLE WASTE
PRODUCTION
TOTAL
HANK
HANKS
POUNDS
SPINDLES
REMARKS
1
Figure 28. — carding report
resulted. If the order or lot cost method is being used,
the order or cost must carry all material cost, including
scrap or waste, the good production carrying the burden.
102 ESSENTIALS OF INDUSTRIAL COSTING
In foundries there is a melting loss which must be
charged against the output. The manner in which this
is done is shown in Figure 27, which also serves as
a production report.
In textiles the problem of waste is generally handled
by the process method. The quantity of material enter-
ing a process is charged against the process, the material
leaving, when adjusted for inventories, is a net figure
which differs from the charge by the waste developed.
The production report (Figure 28) as used in a cotton
mill shows the waste developed and constitutes an im-
portant record for the proper costing of the net
material used. With proper credit for the waste
the net material value is computed and charged into the
succeeding process. If more than one kind of stock is
processed, it is desirable and necessary for full accuracy
to keep the records by the kinds of stock.
Sometimes when the element of scrap is small, as in
iron or steel metal working, the sale value of scrap is
credited to manufacturing expense, the product being
charged wdth all the material.
The refinement of the method must be governed by the
practical consideration of the importance of the item.
It can be emphatically stated that the practice of regard-
ing the sale of scrap as a credit to profit and loss is a
weak expedient and, in some industries, ruinous to accu-
racy and subversive of the entire motive of costing.
The Costing of Spoilage.— Spoilage is a variable but
its accounting is as necessary as that of scrap. It must
first be reported and that is accomplished by means of
the Spoilage Slip illustrated in Figure 29. This slip is
costed as shown and the charge for the spoilage, less its
scrap value, carried in manufacturing expense for distri-
bution over the entire production, or localized as a partic-
COSTING OF MATERIAL 103
ular article, order, or lot. In some manufactures a pecu-
liar and deceptive condition exists which might be illus-
trated by sugar refining. In this industry the essential
raw material is sucrose, which is the content of the vehicle
transported through the manufacturing processes. At
all points any waste or spoilage developed is regarded
lightly, simply because it can be readily reclaimed and re-
enter the stream of production. This condition in one
SPOILED OR DEFECTIVE GOODS
No
Dept Date
Order No. Part No.
No. Pieces Name of Part
Cause
Man's No. Signed
FOREMAN
BOTH COPIES MUST BE SENT TO PLANNING DEPARTMENT AT ONCE
PLANNING DEPARTMENT
COST DEPARTMENT
Schedule Adjusted
Labor
Replace Order Entered
Expense
Materia!
Total
Figure 29. — spoiled or defective goods report
refinery held true right up to the packing room, where
heavy breakage of the lump sugar was entailed, but no
record kept because the broken sugar could be dissolved
and reworked. It appeared as if, because the sucrose con-
tent could not be lost, it was not of importance how fre-
quently it might undergo manufacture. In a case like
this, the costs are adequately handled by having the good
production bear all expense of working and reworking,
but as a matter of managerial policy the absence of re-
104 ESSENTIALS OF INDUSTRIAL COSTING
ports showing the current output with the amount revert-
ing to production again, certainly disregarded an obvious
control of operating efficiency.
Accounting of Seconds.— Seconds, although not chiefly
a matter of material, represent a perversion of manufac-
turing function and it is possibly timely to consider their
handling in costs. Seconds refer to that portion of the
product which cannot command full selling price and
must be disposed of, if at all, at some price which in-
volves a lessened margin or a loss. In most cases seconds
are handled by including their sales value in the sales,
and their full manufacturing cost in the cost of sales, so
that the effect of the second is directly indicated in manu-
facturing profit or loss.
Marginal Values of Material.— There are manufactures
in which the raw material is subdivided or graded and
in which no market values exist that might be used to
determine the material cost of the resultant subdivisions
or grades.
This condition is encountered in the leather industry,
as cited by S. H. Bunnell, when a hide is split several
times and is processed differently, resulting in various
finished products. The problem here is in the absence of
a market for the raw material as split — ^what basis of
division can be used? If the original cost of the hide were
prorated by weight over its splits, costs might result in-
dicating a loss on some products and an excessive margin
on others. In a word, it is obvious that splits are not
equal in value to grain side and differ among themselves.
If no market price can be ascertained for the splits, the
only recourse is to work back from the selling prices of
the finished leather a proportion against which the cost of
the whole hide may be distributed.
This same condition exists in wood working plants
COSTING OF MATERIAL 105
where lumber used for a given article may leave waste
pieces sufficiently sizable for other articles. Again the
question arises, Shall the division of material costs be
based on board feet or shall it be conceded that the lesser
pieces, the waste, possess lesser value and if so what shall
establish this value? Here again, unless a market price
is available there is nothing left but an arbitrary price
which may be determined from the selling price of the
resulting articles or by judgment. It is preferable to
have some standard. Fortunately, in the world as con-
stituted to-day, there is a market for almost every form
of scrap or waste and, when this is so, the material value
for the waste is the market price. If there is no market
price, it is better to deduce one from relative selling
prices of the finished article than to select one arbitrarily.
Costing of Material of Fluctuating Prices.— This chap-
ter on material costs would not be complete without con-
sideration of the handling of those materials in costs that
might be termed speculative, because of the frequent or
wide fluctuation in the purchase prices. Cotton, brass,
copper, hemp, and, to some extent, rubber, are basic
materials which are thus characterized. There is no
great difficulty in charging these materials into costs,
which is done in one or two diiferent ways. The bills are
charged, of course, in total with transportation added to
the respective accounts, and the bills are similarly shown
on the stock cards. When the material is issued to
process the requisition must be extended either with a
changing price as each lot of material is used up or by
an average price of all lots. The average price is the
common practice and is generally the easiest. There are
industries, like the textile, in which the lots are recorded
in stock separately and then the price may be used of
the lot from which the issue was actually made.
106
ESSENTIALS OF INDUSTRIAL COSTING
The problem of costing is not at this i>oint 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
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1
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1
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MATERIAL IN GOODS SHIPPED |
1
1
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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
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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<T
DATE
ELAPSED
TIME
MACH. No. . _
UAN'S No
_l
riNJSH
HOUR
TENTH
'^^^^^,1
ORDER NO.
•TART
OPERATION
PART NO.
FINISH
START
CHARGE |g^?V
FINISH
PART No.
START
PIECES
«>» 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<T No. BlAc No. Quantity
JrdcT No.
Operation No. 61— BLADE BACK GRIND— M. G.
Man No.
Blade No. Quantity
Order No.
Order Na
Operation No. 56— BLADE STRAIGHTENED— M. C.
Man No.
Order No. Blade No. Quantity
Operation No. 60— BLADE TEST— M. C
Man No.
Blade No.
Quantity
Operation No. 59-BLADE HARDEN and TEMPER— II. G.
Man No.
Order No. Blade No. Quantity
Operation No. 53- BLADE TANG GRIND— M. G^^
Man No.
Blade No. Quantity
Operation No. 57— BLADE LEVEU-M. G.
Man No.
Blade No.
Quantity
Operation No. 55— BLADE NAIL NICK— M. G.
Man No.
Blade No. Quantity
Operation No. S4— BLADE TRIMMING— M. G.
Man No.
Blade No. Quantity
Order No.
Operation No. 53— BLADE ANNEALING— M. Q.
Man No.
Blade No. Quantity
Operation No. 52— BLADE FORGING— M. G.
Man No.
Blade No. Quantity
Operation No. 51— BLADE BLANKING— M. G.
Man No.
Blade No. Quantity
Operation No. 50— BLADE SHEARING— M. C.
Man No.
Blade No. Quantity
Figure 41. — coupon woek ticket used in connection with piece batjj
131
132 ESSENTIALS OF INDUSTRIAL COSTING
job. A coupon system is used effectively under the piece-
rate plan such as shown in Figure 41. The assertion as
to the accuracy of piece rate may appear sweeping in
view of the qualifications which must be mentioned.
Piece rate was the first step from day rate and the man-
ner of its introduction and operation often has been
hedged about with stupidity which vitiated accuracy.
Piece rates were set haphazardly, cut unhesitatingly, and
often bore no equitable relation in basic earning capacity
one with the other. In a certain cutlerj^ plant a prevail-
ing custom for years had been to scale the piece prices on
the various operations according to the market prices of
the knives. The cutlery industry, like many businesses,
had patterns in the line that sold at small margins, even
none, and others mth big margins.
The cheaper knives in selling price were manufactured
at piece prices less than the piece price of knives higher
in sales value despite the fact that the actual work in-
volved was equivalent.
This method not only resulted in an unsettled labor
situation, but was absurd as the basis of costing because
the time actually spent on operations was entirely con-
trary to the piece price, so that the apparent cost con-
structed on the piece price was untrue. Piece prices
should be investigated therefore to determine their rela-
tive earning equities and, in this w^ay, their costing ac-
curacy. Frequently, in the use of piece prices, the start-
ing of new men in a department must be done on day
rate until the men acquire sufficient skill to earn on
piece rate. Obviously this cost of training is a charge
general to the department and it is good costing practice
to carry the difference between this wage and their piece-
rate earnings as an overhead item for apprenticeship or
learners.
COSTING OF LABOR
133
Piece rates to-day are set by time study and are becom-
ing increasingly accurate and dependable and hence in-
creasingly serviceable in costing.
3. Differential Piece Rate. — The differential piece rate
is the creation of Frederick W. Taylor, the acknowledged
/
1
19 20
2I22
OP
"<'■"
Pntv FIN
F1M TODAY
CASTINGS
(/ ,„
^ 1 «,
— 1
|0
o°'o'o°o o|o o"o"6 o|o'o"6|d'o'o"o'o"o'"6|o"d'b
o"o"'o|o"o''olo'£rd| 1
1 ORDER AND ITEM .tio.pJECtS. ; : ;
I 1 i i
II i
i' 1 ^
! 3
tw
B i :
IL
1
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STOPPED
1 «i 1
BTARTEO
!
i i i ! 'M
J b Frclk P.tPU«TO<lAliow T^m.^ ^OT
TwMi Ur*. [•r«tD- Hkcb. HacblM.
Mui'a Total
00 NOT PUNCH '
AT THIS END
INSTRUCTIONS
PIECE WORK
PREMIUM WORK
OPERATIONS
toot
CUT
™..
• PEED
MION •»■
A;:.";o"„
6 ;;".•„;,':',•;-%"
>• "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
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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.
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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<?umulated and then distributed to the
department to which they belong in proper proportion
for the various items in each department, but this unfor-
tunately results in an enormous number of accounts and
great clerical labor.
Nicholson, one of our foremost authorities, has stated
this situation succinctly, as follows:
COLLECTION OF EXPENSE IN COSTING 151
Each item of indirect expense is applicable to definite operat-
ing departments and provision must be made for shoAving the
charge in each case. The simplest method is to open an account
for each item of overhead for each department and this is the
method used in large concerns. The obvious drawback to this
method is the large number of expense accounts which it entails.
Expense Analysis.— This problem is solved in various
waj^s, and I would like to describe the Expense Analysis
as a record permitting of minnte subdivision of expense
items which at the same time is compact and subject to
exact proof and considerably less burdensome in clerical
labor than the separate account for each item in each
department method. The Expense Analysis provides
for current monthly cumulative totals of all items in
expense for the year and has parallel columns for com-
parative purposes of the same figures for the previous
year. Each item of expense within the department has
a separate line which is lettered and which with the
number of the department combines to supply an identi-
fying code number by which the item is known.
The grouping of items is arranged to show all the
controllable or direct expense at the top and the fixed
or indirect expense underneath. Totals of each are listed
and then a grand total of both is shown which, with the
productive labor also shown, establishes the percentage
relation or overhead rate.
This discussion will be amplified in Chapter IX and
the Expense Analysis is mentioned and illustrated here-
with chiefly to show how it applies to representative
industries. Accordingly, the following illustrations
(Figures 51, 52, 53) of an expense analysis for a textile
plant, a foundry, and a machine shop, for typical depart-
ments, are presented. These include only a few depart-
ments to show the essential lines of departmentalizing.
152
ESSENTIALS OF INDUSTRIAL COSTING
FiQURE 51. — Specimen Expense Analysis for Selectted Departments
OF A Cotton Mill
No. 30
A
B
C
D
E
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19.
picking and carding
Share overseer's wages
Second hands' wages . .
Picker tenders' wages .
Card tenders' wages . . .
Drawing tenders' wages
Oil and waste
Brooms and brushes
Card clothing
Belting
Miscellaneous supplies
Miscellaneous expense
Millwright repair labor
Millwi-ight repair materials . . .
Machine shop repair labor . . .
Machine shop repair expense .
Machine shop repair materials
Share of liability insurance
Total direct expense
Share of taxes
Share of insurance
Share of depreciation
Share of heat, light and power
Share of general factory
Total indirect expense
Total picking and carding expense
Pounds carded
Total picking and carding cost per lb
Month of
Period to
Date
COLLECTION OF EXPENSE IN COSTING
153
Figure 51. — Specimen Expense Analysis for Selected Departments
OF A CoiTON Mill (Continued)
FLY FRAMES
Share overseer's wages
Share second hands' wages . . .
Share third hands' wages
Bobbins
Oil and waste
Brooms and brushes
Roll covering
Belting
Skeiners
Miscellaneous expense
Miscellaneous supplies
Millwright repair labor
Millwright repair materials . . .
Machine shop repair labor . . .
Machine shop repair expense .
Machine shop repair materials
Share liability insurance
Total direct expense
Share of taxes
Share of insurance
Share of depreciation
Share of heat, light and power
Share of general factory
Total indirect expense
Total fli/ frame expense
Spindle weeks run
Slubbers
Intermediates
Fine frames
Total spindle weeks
Active spindle weeks
Per cent activity
Cost per active spindle week . .
19.
Month of
Period to
Date
154
ESSENTIALS OF INDUSTRIAL COSTING
Figure 51. — Specimen Expense Analysis for Selected Departments
OF A Cotton Mill (Continued)
No. 32
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
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BB
CC
DD
EE
FF
GG
HH
II
JJ
KK
LL
MM
NN
00
PP
AAA
SPINNING DEPARTMENT
Share overseer's wages
Second hands' wages . .
Roving men
Section hands
Bobbins
Oil and waste
Brooms and brushes . .
Roll covering
Belting
Skeining
Miscellaneous supplies
Miscellaneous expense
Millwright repair labor
Millwi'ight repair expense
Millwright repair materials . . .
Machine shop repair labor . . .
Machine shop repair expense .
Machine shop repair materials
Share of liability insurance . . . .
Total direct expense
Share of taxes
Share of insurance
Share of depreciation
Share of heat, light and power
Share of general factory
Total indirect expense
Total spinning department expense
Total spindle weeks . .
Cost per spindle week
19.
Month of
Period to
Date
COLLECTION OF EXPENSE IN COSTING
155
Figure 51. — Specimen Expense Analysis for Selected Departments
OF A Cotton Mill (Continued)
Miscellaneous supplies
Miscellaneous expense
weaving department
Share overseer's wages
Second hands' wages . .
Third hands' wages . . , .
Loom tenders' wasres . .
Harness
Shuttles
Belting
Millwright repair labor
Millwright repair expense . . .
Machine shop repair labor . .
Machine shop repair expense
Machine shop repair materiah
Share of liability insurance . . . .
Total direct expense
Share of taxes
Share of insurance
Share of depreciation
Share of heat, light and power
Share of general factory
Total indirect expense
Total weaving department expense
Loom hours
Active loom hours
Cost per active loom hour
19.
Month of I Period to
Date
156
ESSENTIALS OF INDUSTRIAL COSTING
Figure 52. — Specimen Expense Analysis for Selected Departments
OP A Foundry
No. 10
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
AAA
melting department
Foreman's wages
Charging floor labor
Handling iron, coke and coal labor
Coke
Coal
Wood
Reserve for relining
Miscellaneous supplies
Miscellaneous expense
Millwright repair labor
Millwright repair materials
Machine shop repair labor
Machine shop repair expense . . .
Machine shop repair materials . .
Share of liabilitj- insurance
Total direct expense
Share of taxes
Share of insurance
Share of depreciation
Share of heat, light and power .
Share of general factory
Total indirect expense
Total iron melting expense
Pounds good castings made
Total cost per pound
19.
Month of
Period to
Date
COLLECTION OF EXPENSE IN COSTING
157
Figure 52. — Specimen Expense Analysis for Selected Departments
OF A Foundry {Continued)
CORE DEPARTMENT
Foreman's wages .
Undistributed labor
Sand
Binder
Core wire
Miscellaneous supplies
Miscellaneous expense
Millwright repair labor
Millwright repair materials . . .
Machine shop repair labor . . .
Machine shop repair expense .
Machine shop repair materials
Share of liability insurance . . . .
Total direct expense
Share of taxes
Share of insurance
Share of depreciation
Share of heat, light and power
Share of general factory
Total indirect expense . .
Total core making labor .
Per cent expense to labor
19.
Month of
Period to
Date
158
ESSENTIALS OF INDUSTRIAL COSTING
Figure 52. — Specimen Expense Analysis fob Selected Departments
OP A Foundry {Continued)
No. 12
MOULDING department
19.
Month of
Period to
Date
A
B
C
D
E
F
G
H
I
J
K
L
M
N
P
Q
R
S
T
U
V
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X
Y
Z
AA
BB
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DD
EE
FF
GG
HH
II
JJ
KK
LL
MM
NN
AAA
Foreman's wages
Sea coal
Graphite
Moulding sand . . . .
Choplets, etc
Brushes, small tools
Miscellaneous supplies
Miscellaneous expense .
Millwright repair labor
Millwright repair materials . . .
Machine shop repair labor . . .
Machine shop repair expense .
Machine shop repair materials
Share of liability insurance . . .
Total direct expense
Share of taxes
Share of insurance
Share of depreciation
Share of heat, light and power
Share of general factory
Total indirect expense
Total moulding expense
Moulding productive labor ....
Per cent expense to labor
COLLECTION OF EXPENSE IN COSTING
159
Figure 52. — Specimen Expense Analysis for Selected Departments
OP A Foundry (Continued)
cleaning department
19.
Month of
Period to
Date
Millwright repair labor
Millwright repair materials . . .
Machine shop repair labor . . .
Machine shop repair expense .
Machine shop repair materials
Foreman's wages
Tumbling shot . .
Chipping chisels
Miscellaneous supplies
Miscellaneous expense
Share of liability insurance
Total direct expense
Share of taxes
Share of insurance
Share of depreciation
Share of heat, light and power
Share of general factory
Total indirect expense
Total cleaning department expense . .
Total cleaning department labor ....
Total cleaning dept. labor and expense
Distribution
160
ESSENTIALS OF INDUSTRIAL COSTING
Figure 53. — Specimen Expense Analysis for Selected Departments
OP A Machine Shop
No. 20
TOOL ROOM
19..
Month of
Period to
Date
A
B
C
D
E
F
G
H
I
J
K
L
M
N
X
Y
Z
AA
BB
CC
DD
EE
FF
GG
HH
II
JJ
KK
LL
MM
NN
00
PP
QQ
RR
YY
ZZ
AAA
BBB
Foreman's wages . .
Undistributed labor
Drills
Reamers
Milling cutters
Files
Miscellaneous supplies
Miscellaneous expense
Share of liability insurance . . . .
Total direct expense
Share of taxes
Share of insurance
Share of depreciation
Share of heat, light and power
Total indirect expense
Total tool room expense
Total tool room chargeable labor.
Per cent expense to labor
Distribution
Chargeable labor and expense ...
New tools and machines
Engine lathe department
Screw machine department .
Drill press department ....
Milling machine department
COLLECTION OF EXPENSE IN COSTING 161
Figure 53. — Specimen Expense Analysis for Selected Departments
OF A Machine Shop (Continued)
engine lathe department
19....
Month of
Period to
Date
Foreman's wages
Belting
Cutting lubricant
Miscellaneous supplies
Miscellaneous expense
Millwright repair labor
Millwright repair materials . . .
Machine shop repair labor . . .
Machine shop repair expense .
Machine shop repair materials
Share of liability insurance
Total direct expense
Share of taxes
Share of insurance
Share of depreciation
Share of heat, light and power . . ,
Share of tool room
Share of general factory
Total indirect expense
Total engine lathe expense
Total engine lathe productive labor
Per cent expense to labor ,
162
ESSENTIALS OF INDUSTRIAL COSTING
Figure 53. — Specimen Expense Analysis for Selected Departments
OP A Machine Shop (Continued)
No. 22
A
B
C
D
E
F
M
N
O
P
Q
R
S
T
U
V
W
X
Y
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AA
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CC
DD
LL
MM
NN
00
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QQ
RR
SS
WW
XX
YY
ZZ
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screw machine department
Foreman's wages
Operator's wages
Belting
Cutting lubricant
Miscellaneous supplies
Miscellaneous expense
Millwright repair labor
Millwright repair materials . . .
Machine shop repair labor . . .
Machine shop rei:)air expense .
Machine shop repair materials
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 heat, light and power
Total screw mach. prod, lahor d: exp.
Setting up screw machine hours. . . .
Active screw machine hours
Per cent activity
Cost per active screw machine hour.
19.
Month of
Period to
Date
COLLECTION OF EXPENSE IN COSTING 163
Figure 53. — Specimen Expense Analysis for Selected Departments
OF A Machine Shop (Continued)
Reamers
Drills
Belting
Cutting lubricant
DRILL press department
Foreman's wages
Miscellaneous supplies
Miscellaneous expense
Millwright repair labor
Millwright repair materials , . .
Machine shop repair labor . . .
Machine shop repair expense .
Machine shop repair materials
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 heat, light and power
Total drill press department expense.
Total drill press productive labor. . . .
Per cent expense to labor
19.
Month of
Period to
Date
164
ESSENTIALS OF INDUSTRIAL COSTING
Figure 53. — Specimen Expense Analysis for Selected Departments
OF A Machine Shop (Continued)
No. 24
A
B
C
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
WW
XX
YY
ZZ
AAA
Miscellaneous supplies
Miscellaneous expense
Millwright repair labor
Millwright repair materials . . .
Machine shop repair labor . . .
Machine shop repair expense .
Machine shop repair materials
GROUP A MILLING MACHINES
Foreman's wages
Share of liability insurance
Total direct expense
Share of taxes
Share of insurance
Share of depreciation
Share of heat, light and power . . .
Share of general factory
Total indirect expense
Total Group A milling machine expense
Total Group A milling mach. prod. lab.
Per cent expense to labor
19..
Month of
Period to
Date
COLLECTION OF EXPENSE IN COSTING 165
In Chapters IX and XI a complete expense analysis for
a cutlery plant is presented and its connection with the
books and current statements described in full.
Consultation of these specimen analyses will perhaps
convey a better idea of the method of expense accumu-
lation than all of the text. The indirect labor is taken
from the Payroll Distribution, each item coded with its
index symbol. The supplies are similarly taken from
the Supply Requisition Distribution, also coded to facili-
tate correct entry into expense. The items of expense
from the Voucher Register also have the charge symbol
attached (Figure 8 in Chapter IV). This leaves the con-
tingent or accrued items, such as insurance, taxes, re-
serves for depreciation, and maintenance and interest.
Taxes and insurance are of several kinds and are han-
dled in costs accordingly. Taxes in connection with ex-
pense are limited to those forms which are permissible
items in expense and which exclude therefore Federal or
state income taxes. Specifically they include taxes on
real estate and, in some states, on equipment. Insurance
covers fire and special liability or explosion insurance
on boilers, engines, and flywheels, compensation, and
group life.
Taxes and fire insurance are regarded as partly
equivalent to rent and are charged to the departments
on the basis of the square feet in each department. In
order to effect this an estimate must be made of the
amount of taxes and the amount of fire insurance pre-
miums due in the year. When this is determined the
amount is prorated to the departments according to the
area of each and a monthly quota set for each depart-
ment. Sometimes part of the fire insurance is charged
into the material or stock department, as an element of
expense of handling material and charged into costs
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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
<u 0) o 2
-w h^ o
48.0
38.0
19.75
19.75
15.50
14.5
11.4
10.6
10.05
10.08
9.0
8.9
8.0
3 (P ►>
O >> <li
go o§
5.33
3.60
2.15
2.15
1.72
1.65
1.40
1.30
1.11
1.12
1.08
1.00
0.91
.£:-6
M 0.5 o.
4.25
6.58
11.10
11.80
13.12
15.5
18.6
20.0
20.2
19.8
22.1
22.4
24.4
>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-
^<J +
MACHINE GRIND
1 s-
,
oio
SWEDGING
SQUARING
DRESSING EDGES
3 1
..-<
pfo
7"^'
,
s.'^i
MARKING
1^
6^--^
ct +
oJ-'f
ou
DRILLING
,'f?
La-'^
"f^
"'^bL
^34;
TANG FINISHING
3 1
IXcfo
rf*-H
30^
-5-^
NUMBER & BRAND
...
3 1
<»?M-
t & <y
l^f
<U.^. U^J^ <».^i
T/
.^.'.p
.^
TOTAL PER^^-»
1
i>
FlGUBE 65A. — PART COST CARD
250
PART COST CARD
PART NAME ^^M— '5^ . PART NO. ^4-^
KIND OF MATERIAL Jj^,^.<?r.,f
SIZE OF MATERIAL
'^1
14- (7 c-
GROSS WT. of Material
SCRAP WT. of Material
- 1 ■>
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<i,.^^^,..-q
/?
f
us- 9^
eCi
J 4- o
,o ;}
DRILLINcF
r?
(csr"^
a^H-
oS-f
,3g
CROP and PIERCED
-
1
DRESSING
'f
\0 OVO
fr+'?
iT + 'T
&<??
'"
A>....^Xf..^ C3> .'ij
?^
3.2.0
^ ^ ^
1
■K^
TOTAL PER ^^•
1
A
+ <?»*
Figure 65B. — part cost card
261
SUBASSEMBLY COST CARD
PART NAME jSc^-L..^.^^ Ct^ PART NO. ^ ^ ^ ^ uf J^
KIND OF MATERIAL ^3^2.^ J^
.U:^^
^-t..ic^c^
SIZE OF MATERIAL
c^ ^ A. .f «.
cf -4- 3.
^o
GROSS WT. of Material
— >;
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
<J^1
SAWING ON
J-o
(f o •^
.'^ +
^3 3
J ^7
Drilling Pin Holes
^ o
1 •-t-O "a
° 1 ^
a 1 6
-^jr
PINNING ON
Jo
"^c'rf
ojn
o3n
o>M-
RIVETTING COV.
r^ O
IH-O*^
o' i
o iS"
04- .>
Drilling Mid. Holes
<i
1^0 '^
at J
<? / L.
^if
SHIELDING M. S.
J.0
'f-o rf
oof
oo^
o < l»
Drilling on Shields
S.
"t-3 fc
o 1 .;
O 1 (,
oi^
PINNING ON
A o
J'
.-.^1
.^f3
"Tf
Countersink Pin Holes
A a
fS-o '^c
<J o*^
o^ 1
Run.thi-uCov. &C. Hole
A o 1 4- o 'T^
v- I .■
o 1 4"
0<2i,
/c^xXc "7+^
Vf-^
.?+4-
Ihx^ <^^A
5iS
J«^'
J-i<..uJLJ^ So
o <S
o \-S
TOTAL PER 3„ /^
1
ii<=l
FiGUBE 65C SUB-ASSEMBLY COST CARD
252
FINAL COST
CARD
KNIFE NO. ^ ^ ^ ^ ^^
DETAIL
COST OF ^^^^
PARTS HDEPT.
PIRCENT
EXPENSE
LABOR
EXPNSE
|total
P/^a£^'^ iM-<?
S-yU
/2^ •• q^fi
s^-\
J-Z/t-A^^^-o. O «? f-^
,?f ?
1
?,%°[
PAS'
U
^ivy y-a .
y^f.
r^
L,n-
PUTTING UP
."^
is<
ffio
H-H-^
^Ca
HEFTING
^7-^1
fno'fo
ZS^
M-5.i
txfe
FINISHING j^^vyi
M-3.a
i^S'T^
IH-jf
Jn^
f.^^
WHITENING
^^
fi-So'fo
03%
ocjS'
'J3
BUFFING
.?»*-
'3a^c
'^1
ifoj."
J^oS
CLEANING
dS
• ' -^'fp
O'JO
oZ 1 1
15"/
PACKING
3 L.
^::
-J
'^o
n
1 TOTAL PEE DOZ.
^
4-M-f
1,
1
■ 1
FlQlTKE 65D. — FINAL COST CAED
253
254 ESSENTIALS OF INDUSTRIAL COSTING
rate and detailed information as to raw materials used,
price records thereof, unit labor costs, and overhead
rates. With these data available the final cost is only a
matter of straight computation. Of course, the work
must either be done or super\dsed by some one familiar
with the technical nature of the product and as well
, , ,
FINAL COST SHEET
KINO
VomM
Rile
Vtloe 1 Rnte
VlllUI 1 JUU!
V.lno
RiU
V.™ 1
R«bi
Val»
Total Material Cost
1
.
- Ubor
E.p.n« \ T.,.l
v.i™.
V,. 1
..,„
V...
V.,. \ v.,„ 1
MkLpHmI rn<)t
Weavinit
1
1
Total Cnrt. W«ivin» Yds.
fi^illinf *n<1 Hrvinf
H FiiiiFihinit flnH Packinit
1
SelliiiB FTD<.nM
ToTAi. Cost
\
—
FlGUBE 66. — FINAL COST SHEET
reasonably conversant with approximate cost ranges.
This knowledge guards against mistakes which, unless
otherwise prevented, are apt to be grotesque. I have seen
costs in which errors had been made umvittingly and
which would have been apparent to any one but a tyro
by the absurdity of the result, and can assure the reader
FINAL COSTING
255
that it is an advantage to have final costs computed by
an intelligence seasoned with specific experience in the
given line.
Handling Fluctuations in Final Costs.— The computa-
tion of a final cost can hardly be enlarged beyond this
ARTin F
FINAL
COST ^HEET
PINISHPIVWFir.HT
0«T
PURCHASED PARTS |
rART
„.<c»m™»
.„..„,„
..mi.r
!
V.,,.
'-"- 1
A.,OU»T 1
"-■" 1
.MOl'N.
.>...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)
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