HF B\is. Admin. Lib. ADVANCED TEXT THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES SOUTHERN UNIVERSITY OF CALIFORNIA, LIBRARY, ANGELES, CALIF. School ofSSS., Univergity of California Angles 24, California Rowe's Bookkeeping and Accountancy Advanced Text For Merchants Corporation and Cost Accountancy for Manufacturing Sets By HARRY M. ROWE, Ph.D. COPYRIGHTS 1910 AND 1911 BY HARRY M. HOWE ENTERED IN STATIONER'S HALL, LONDON, 1910 AND 1911 43265 BALTIMORE THE H. M. ROWE COMPANY EDUCATIONAL PUBLISHERS COPYRIGHT 1910 COPYRIGHT 1911 BY HARRY M. Rows ENTERED IN STATIONERS' HALL LONDON, 1910 ENTERED IN STATIONERS' HALL LONDON, 1911 BY HARRY M. Rows Copyright protects all the copyrlghtable com- ponent parts of this work and prohibits a'.l unlaw- ful use of its composition, illustrations, methods, etc. Infringers will be punished to the full extent of the law. Bus. Admin. Library CORPORATIONS. ft 79 b(T 617. A Corporation was defined by Chief Justice Marshall as " an artificial being, invisible, intangible, and existing only in contemplation of law." It is sometimes termed an "artificial person." 617a. Corporations are necessary to provide a convenient means of combining the funds which a number of individuals may have for investment, in order to supply the capital required to conduct and carry on large commercial and indus- trial enterprises without requiring those who contribute this capital, whether in large or in small amounts, to assume the responsibilities and liabilities of the ordinary partner; consequently, laws have been enacted^ by the legislatures of the different states creating for corporations a separate legal existence, and extend- ing to stockholders certain privileges and exemptions from liability, and other advantages which cannot be secured in the ordinary partnership relation. Cor- porations, as a rule, may be formed for any legitimate purpose. 6176. Corporations are created in two ways, by charter and by general statute. When created by charter, a special act must be passed for each -corporation, which is known as its charter. This charter defines its powers and privileges. When cre- ated by general statute, all that is necessary is to comply with the provisions of the statute, which defines its powers and privileges. Nearly all corporations are now created by general statute, and very few by special charter. 617c. The method of procedure in forming a corporation by general statute is very simple. The required number of individuals (not less than two and usually not less than five) join in a written instrument known as "Articles of Incorpora- tion," which, when properly acknowledged before some competent officer, is sub- mitted to the judge of a court for his examination as to whether or not it conforms with the law creating it, and when properly approved and certified by him it becomes a certificate of incorporation, the act under which the corporation is formed being its charter. After this certificate is properly recorded the corpora- tion is formed, and when by-laws are adopted and the board of directors and officers are elected the corporation is ready to proceed in conducting the business for which it was created. Nora The legal part of the formation of a corporation should invariably be entrusted to an attorney. 618. Terms and definitions. There are certain terms and definitions used in connection with corporations with which you should be familiar. Some of them are here described. 619. The capital stock is the amount of stock authorized by the charter or certificate of incorporation, at its par value. The paid-in capital is the amount paid on the subscribed shares of stock by the stockholders. 103 194 BOOKKEEPING AND ACCOUNTANCY 620. Treasury stock is stock of a corporation which has been previously issued to stockholders, and is later purchased from the funds of the corpora- tion or is secured by donation or gift. Unissued shares of the authorized capital stock must not be considered as treasury stock. Treasury stock does not participate in dividends. "Treasury stock is the stock of a company issued as fully paid, which subsequently comes back to the company: (a) as settlement of an account due the company; (6) as a purchase by the company; or (c) as stock donated for working capital." 621. The stockholders of a corporation are the individuals who own the property of the corporation, e-ach stockholder's interest being measured by the number and value of the shares he holds. 621a. A stock certificate is a document issued by the corporation to each stockholder, certifying that he is the owner of a certain specified number of shares of the capital stock of a specified par value. 622. The board of directors is elected by the stockholders and represents them. It is vested with the management and direction of all the affairs of th^ corporation through its officers, who are generally elected from among its own number. These officers are usually a president, vice-president, secretary, and treasurer, whose duties are defined in the by-laws. 623. The president is the chief executive officer, who presides at the meet- ings of the board and ordinarily exercises the authority of the board when it is not in session. 624. The secretary keeps the official records of the corporation. He is custodian of and is responsible for the charter and seal of the corporation, and for the minute book and the various other books containing the records relating to the stockholders of the corporation. The most important of these books are : (a) The minute book, in which is recorded the proceedings of all the meetings of the stock- holders and of the board of directors. This record should be most complete, as the officers must look to it for the necessary authority to conduct the affairs of their respective offices, and in case of litigation it is taken as prima facie evidence for the acts of the board of directors and officers. It should contain the by-laws of the corporation, and the minutes of each meeting should be signed by the secretary and also by the president. (b) The stock certificate book is a book of printed certificates, with stubs, which are filled ACCOUNTANCY MANUFACTURING ACCOUNTS. 638. Commercial and industrial pursuits may be divided into two classes : those of traders or distributors, who are known as merchants, and those of makers or producers, who are known as manufacturers. 639. The merchant buys and sells; the manufacturer makes and sells, i.e., the merchant buys and sells the finished product, while the manufacturer buys the materials and hires the labor to turn these materials into the finished product which he sells to the merchant. Sometimes the manufacturer acts as his own merchant or distributor by selling his product directly to the user or the consumer, just as occasionally the merchant may manufacture some part of that which he sells. 640. Just as the principal profit of a mercantile or trading business is derived from the purchase and sale of commodities and is ascertained from that group of accounts known as trading accounts, so, in like manner, the principal profit of a manufacturing or industrial business is derived from the manufacture and sale of commodities, the cost of manufacture being ascertained from that group of accounts known as manufacturing accounts. The cost of finished goods sold in a manufacturing business corresponds with the " cost of merchandise sold" in a trading business, the only difference being that in one case the concern makes the goods and in the other it buys them already made. Similarly, the gross trading profit shown by the trading accounts of a merchant corresponds with the gross profit from sales shown by the accounts of a manufacturing concern. 641. While there are marked similarities between trading and manufac- turing accounts, as indicated in the preceding paragraph, they differ in some im- portant respects owing to the great difference in the elements of cost entering into the manufacture of goods and the corresponding difference in the units of information desired. While the accounts of a small factory may be very simple, in large establishments, where every detail of cost and expense must be shown, elaborate systems must be installed which exemplify the highest expressions of scientific accountancy, and for that reason manufacturing accounts, cost systems, etc., are of special interest. ELEMENTS OF COST. 642. There are three principal elements of cost in manufacturing, namely : the cost of materials, the cost of labor, and the cost of manufacturing expenses. The items showing these costs are entered into corresponding accounts known as material accounts, labor accounts, and factory expense accounts. The items ELEMENTS OF COST 201 entering into each of these accounts may be further classified in separate accounts to any extent desired, in a manner similar to the classification of items in the prin- cipal and subsidiary accounts of a trading business. (Read If 134 to 139) 643. Materials. In a manufacturing sense, material is that of which any- thing is made. Raw material is material in its natural state, or nearly so, such as coal, cotton or wool. Many materials pass through several stages of manu- facture before they reach their final form in the finished product; for instance, iron ore is converted into metal by one process, into steel by another, and into its final form by a third and, not infrequently, by a fourth or fifth operation. Con- sequently, the finished product of one concern or factory or department may become the material of another; for instance, the finished product of the pig iron manufacturer becomes the material of the steel manufacturer, and his finished product, in turn, becomes the material of the engine builder or the tool maker, etc. 644. Labor. This is a most important element entering into the cost of manu- facture. It represents the cost of converting the material into the finished prod- uct, whether the labor is expended directly upon the material, in the operation of machines, or in other ways connected with the processes of manufacture. 645. Factory expenses, or "shop," or "manufacturing," expenses, as they are variously designated, include the cost of superintendence, incidental labor, supplies, rent, fuel and light, power, taxes on plant, insurance on plant, mainte- nance, repairs, renewals, depreciation, and such other items as enter into the cost of production. These expenses are, in a general way, similar to the general expenses of a trading business, but they include only those that relate to the particular shop or factory covered in the manufacturing accounts and not to the general expenses of the business, unless they are all included in factory expense, which would be permissible only in rare instances and under very unusual circumstances. (Read 1f3lO, 314, etc.) 646. To the manufacturer, a thorough understanding of the different ele- ments of cost entering into the manufacture of the goods he makes or produces is of the utmost importance, and since the accounts of a manufacturing concern are, in a large part, a record of these various costs, it is also important that the student of accounts should understand them and their relations to the various manufac- turing processes before he proceeds to a detailed study of these processes and of the various manufacturing accounts and records. This leads us to a considera- tion of cost accounting. 202 BOOKKEEPING AND ACCOUNTANCY COST ACCOUNTING. 647. Cost accounting refers to that department of accountancy which has for its purpose the ascertaining and recording of the actual cost of making things, i.e., the actual manufacturing cost of a given article or product. It is sometimes called "Costing," and when installed in connection with a particular concern it is generally referred to as a "cost system." 648. Cost accounting is perhaps the least understood of the many subjects relating to accountancy. It is also considered to be one of the most difficult subjects an accountant has to deal with, not because its general underlying principles and the objects to be obtained are so hard to understand, for they are quite simple, but rather because of the trouble experienced in applying these principles to meet the infinite variety of conditions found in connection with different manufacturing processes and establishments. A high order of profes- sional experience and skill is required to work out the details of a satisfactory cost system for a concern of any considerable size, where the manufacturing processes are at all complicated. Cost accounting is, therefore, given a some- what fuller explanation in this work than would otherwise be necessary, although the discussion is directed to the records and bookkeeping features of the subject rather than to those that relate to shop organization, shop man- agement, labor efficiency, cost installation, etc., which are subjects outside the main purpose of this text, although they are given some incidental attention. 649. It should be understood that cost accounting is not a system of book- keeping so much as a system of cost records and of methods to ascertain the actual cost of the material, labor, and expenses entering into the finished manufactured product. Cost books and records are separate and distinct from the regular, or commercial, account books of the concern, although the closer they are inter- woven and articulated with the various manufacturing accounts of the principal books the better the results flowing from the cost system installed are likely to be. It is, in fact, a study of "cost of production" as well as of cost accounts. 650. Cost-keeping, or cost finding, is frequently considered a specialty in factory management. While a cost-keeper should know accountancy, he may not rank high outside of his specialty. The ability to ascertain, analyze, and compare the facts and conditions of a particular factory or concern is the first requisite. The second is the ability to work out a practical cost system that will suit the facts and conditions as they exist, and give the "units of information" required for efficient management. COST ACCOUNTING 203 651. Modern commercial and industrial methods have made cost account- ing a necessity. The margin of profit between cost and selling price of standard commodities"has been narrowing steadily as our natural resources have been devel- oped and our trade and manufacturing conditions have become more clearly defined and settled. The consumer the man who buys is in the market to purchase as cheaply as possible; in fact, all other things being equal, he will invari- ably buy where he can get "the same goods for less money" or "more goods for the same money." The merchant, or trader the man who sells to the consumer and buys from the manufacturer or producer transmits this pressure of competi- tion for the lowest possible price back from the man who buys to the man who makes the goods. 652. The manufacturer the man who makes things must find his profit between the price for which he can sell his products and their "cost to make." He cannot fix his prices higher than the prices of other manufacturers for the same article. He must meet competition. If he would make a profit he must manu- facture as cheaply as his competitors, and if he can reduce his "cost to make" below the cost to make of his competitors, he can increase his profit to that extent, and still meet competition. 653. Here we are brought face to face with the necessity of cost accounting, i.e., a system of records and accounts that will show the actual cost of producing any given article or number cf articles through every process of manufacture, covering the entire period from the time materials are put in process and the labor is employed which will transform them into manufactured products, until the time the finished article is ready for sale and delivery, and, indeed, until the time when it is sold and delivered to the buyer. 654. What constitutes cost. The cost of an article, as already indicated, may be divided into three parts, namely: cost of material and labor, which are known as "direct charges," and cost of factory expenses, which are known as "indirect charges." (1) Cost of material includes cost of: (a) The raw article. (6) Completed parts purchased. (c) Partially completed parts purchased. (2) Cost of labor includes the cost of prodiictive labor directly employed in the manu- facturing processes, but does not include incidental labor about the factory or shop not employed directly in the manufacturing processes. (3) Cost of factory expenses ("burden") includes: (1) Rent and taxes of factory. (2) Depreciation and maintenance of plant, machinery and tools. 204 BOOKKEEPING AND ACCOUNTANCY (3) Motive power, lighting and heating. (4) Superintendence. (5) Unproductive labor, including wages of timekeepers, storekeepers, and those employed for other purposes, such, as cleaning factory, distributing and col- lecting tools, etc. (6) Interest on capital invested in materials, supplies, plant, machinery and tools. 654a. In addition to the cost of material, the cost of labor, and the cost of factory expenses, stated above, it is sometimes considered that some part of the administrative or "overhead" expenses should be included in the "cost to make." (1) Administrative expenses include: (1) Salaries of managers, clerks and directors. (2) Rent, taxes, etc., of show-rooms, and office and general office expenses. (3) Discounts, allowances, and bad debts. (4) Interest on capital other than that included under "factory expenses." (2) Factory expenses, or "burden," are always included in the "cost to make," i.e., the pro- duction cost of the article. Administrative expenses, on the other hand, are never included in the cost of production unless they contain items which are clearly manufacturing expenses. However, both administrative and selling expenses, with the profit, must be included in finding the selling price of the article. 655. A thorough understanding of the different elements of cost entering into the total cost of manufacturing and marketing a given article or line of goods is fundamental in the study and practice of cost accounting. The elements of cost are cumulative in their finding, beginning with the first, or pi"ime cost, to which other elements are added until, finally, the selling price of the finished product is determined. The primary elements of cost are invariably material and labor, although the proportions of each entering into different products may vary greatly. 656. Finding costs. The costs represented in material and labor are not hard to determine because they are represented by the actual cost of the materials used and the cost of direct labor as shown on the time cards and pay-roll. The costs of factory expenses, or "burden," and such administration expenses or other "overhead" charges as may be considered manufacturing expenses, are somewhat more difficult to determine and, particularly, to properly distribute over the various articles manufactured. , V 657. Factory expenses consist of all incidental expenses for indirect labor, supplies and material, and other items of expense necessary in operating the factory which are chargeable directly to the cost of manufacture. (1(645) These expenses are known as "burden," doubtless for the reason that they must be borne and provided for as a part of the factory cost of the articles produced. COST ACCOUNTING 205 658. Overhead expenses are those which are incurred in the administrative department of the concern but which have, in fact, increased the cost of produc- tion in the factory, works or plant, either in their management or in technical or clerical service rendered, although instead of being charged directly to factory expense, which is always preferable, are charged in the general or administrative expense accounts of the concern. These are known as "overhead'* expenses, doubtless because they represent a manufacturing cost over and above those included under the head of factory expense, or burden. 659. It is sometimes difficult to distinguish between what should properly be classed as administrative expenses and those which should properly be con- sidered as manufacturing expenses. An illustration is where part of the services of officers or office employes are given to the manufacturing department and part to the selling or financial departments. Another illustration relates to the proper account to be charged for drawings and patterns. 660. Just what overhead expenses should be included in "factory cost," or "works cost," or "cost of production," as it is variously designated, is a question about which there are differences of opinion. Some hold that all expenses out- side of those incurred in effecting sales and in the management of the financial affairs of the concern are necessarily incurred in connection with the manufactur- ing processes and that they should, therefore, be included in the manufacturing costs in ascertaining the "factory," or "works" cost, or the "cost of production." This view is opposed by the argument that it might yery easily be carried to the extreme of including a large part of the administrative or other general expenses in factory expense, which would, in fact, capitalize them by including them in the cost of the goods manufactured, as shown in the finished goods account, and would thus show them as assets in the final statements of the business instead of expenses chargeable against income. 661. Others hold that manufacturing costs should include only those that are incurred in the factory or works proper, and that those incurred in connection with the administration or financial departments of the business, even when including the cost of technical or clerical service rendered to the factory, should in no way be considered as factory expenses and, therefore, should not be included among the elements of cost of production chargeable to orders, jobs or contracts. The point at which the line is drawn between factory and other expenses by those who hold this view is illustrated in a concern having its plant in the country and its commercial office in the city, where only the expenses of the former would be included in factory cost, the expenses of the latter being classed as expenses of conducting the business that, in a bookkeeping sense, should be charged against income. 206 BOOKKEEPING AND ACCOUNTANCY 662. There is general agreement, however, that the best practice is to charge all expenses that are classed as factory expenses directly to that account at the time the entry is made, which will avoid any later question as to their proper disposition and will eliminate all questionable items from the adminis- trative or general expense accounts, so that these accounts will thei clearly repre- sent balances which should be charged against income and should appear only in the trading and profit and loss statement. 663. A careful consideration of these views would seem to indicate that the line between factory costs and administrative and other costs should be drawn at that point which would include as manufacturing expenses only thost items that are clearly a direct element of cost in the production of the manufactured article, no matter in what account they may be found. In any event, what should be considered manufacturing costs and what should constitute administrative and other expenses, and the place at which the former should end and the latter begin, must be decided separately for each establishment in which a cost system is installed, either by the owners or by the accountant. (11752) 664. The cost formula given below clearly shows the various elements of cost entering into the finished product, from the prime cost to selling price. It agrees substantially with the cost formulas prepared by a number of the leading cost specialists, which are generally accepted as being as nearly accurate as they can be made. The elements of cost may be thoroughly understood from a study of this formula and the graphic illustrations showing cost elements which follow, particularly if the accompanying explanations are carefully considered. COST FORMULA. (1) Cost of Material -f Direct Labor = First or Prime Cost. (2) Prime Cost + Factory Expense, or "burden," = Factory Cost, or Cost of Production. (3), Factory Cost + General and Administration Expenses, or "Overhead," = Total Cost. (4) Total Cost + Selling Expense and Profit = Selling Price. 665. While "prime cost," "factory cost," and "total cost" are terms com- monly used and accepted, there are other terms used to express the same costs which are preferred by some writers. There is general agreement as to what should be included as first or prime cost, but there is some difference of opinion as to what should be included under "factory cost" and "total cost," and as to what propor- tion, if any, of administrative and general expenses should be included as factory costs, as has already been explained in 1(660, 661. COST ACCOUNTING 207 666. EXPLANATION SHOWING THE RELATION BETWEEN THE ELEMENTS OF COST IN THE FORMULA AND THE MANUFACTURING ACCOUNTS IN THE GENERAL LEDGER. a. The first, or prime cost is made up of the cost of material and direct labor, and corre- sponds exactly with the items charged to materials in process and productive labor accounts (T[711a, 716a) These items are shown on the shop cards or in the job ledger at the time when th- order, job or contract is completed. (1J750, 741o) b. Factory cost represents the prime cost, plus manufacturing expense, or "burden.' (H719) Theitemsof factory expense are indicated in H645, 734a, 6. The items referred to ar< those of the factory or works only and not those of the office or general establishment. The?'- factory costs, when distributed, agree exactly with the items credited to the contra manuff turing expense account. (1f722c) c. Total cost equals factory cost, plus such general, administrative or other "overhead" expenses, etc., as may be charged to the various orders, jobs or contracts. The items included in the "total cost," or "total cost to make," correspond exactly with those charged to finished goods account. (^f741a) d. The selling price equals the total cost, plus such percentages or other proportions of that cost as are added for selling expenses and for the profit to be made on the goods sold. Selling expenses are not and should never be considered as manufacturing expenses, and should never be included in the production cost of goods manufactured. "Selling price" exactly corresponds to the amount credited to sales count. (1f745) c. The selling expense account of a manuf acturing business corresponds exactly with the same account for a trading business. (f2G4 to 277) It is a profit and loss account and, like other similar accounts, must be deducted from the gross income shown by the trading statement before the net profit can be ascertained. 667. The cost formula following ^[664 may be further illustrated by the following diagram, in which it will be noted that 100% represents the "total cost," the percentages below representing the proportions of the different elements znteriner into the total cost and those above representing the additions to find the seilirg price after providing for selling expenses and profit. 208 BOOKKEEPING AND ACCOUNTANCY ANOTHER COST FORMULA. 668. The following formula is described as " Analysis of Sale Price of a Man- ufactured Article."* In this formula it will be seen that there is some difference in the terms used to express the various costs as they are cumulated, "shop charge" being substituted for factory expense, or burden, and "general establishment charge" being substituted for administrative and general expenses, or over- head. In like manner, "works cost" and "inclusive costs" are substituted for factory costs and total costs. Sailing Price $505 Inclusive or No. 3 Cost $420- -Torts or No. 2 Cost $400- (Prime or tfo. 1 Cost $265- General Material TCagea Shop Charge Establishment Profit $125 $140 $135 Charge $85 This analysis divides the cost of production into three divisions : First The bare cost of material and wages, which is termed prime cost, or "No. 1 cost." Second Prune cost, plus the expenses of production incurredin passing through the shops, which is termed works cost, or "No. 2 cost." Third Works cost, plus the expenses of the commercial management and selling organi- zation, which is termed inclusive cost, or "No. 3 cost." The sales price, less inclusive cost, equals the profit on the order. This division of costs agrees with the theory expressed in 1[661, which would, of course, eliminate any part of the general expenses from cost of production. Note: Other good books for the student of accountancy are: "Industrial Plants, Their Arrangement and Construction," by Charles Day. "The Complete Cost-keeper," by H. S. Arnold. "The Factory Manager," by H. S. Arnold. "The Depreciation of Factories," by Ewing Matheson. "Bookkeeping for Accountant Students," by L- R. Dicksee. "Modern Accounting," by H. il. Hatfield. "Eaapsnee Burden," by A. Hamilton Church. ADVANTAGES OP A COST SYSTEM 209 SOME OF THE ADVANTAGES OF A COST SYSTEM. 669. When the actual cost of producing a given article or a number of arti- cles or a certain line of goods is known, the manufacturer is in a much better posi- tion to manage his business intelligently, either in purchasing materials, in employing labor or in the production of manufactured goods, than he would be with- out that information. While finding the actual cost of manufacture is the most important object of any cost system, there are many other advantages that are of equal, and frequently of greater importance in the ultimate results produced. Some of the advantages of a cost system are as follows: 1. To know the exact cost of the materials entering into each manufactured article, order or job, and to have all material purchased and used correctly accounted for, so that the balance shown by the materials account may agree with the inventory value of the materials in the store- room. 2. To know the amount and the wage value of tune spent on each article, operation or order, and to know the degree of efficiency of each workman so that those who are high in effi- ciency may be rewarded and those who are low may be dispensed with; and, particularly, to assign tasks to each workman in proportion to his skill and ability to perform them well and efficiently. 3. To know the relative cost of production by the use of improved machines over old and less efficient types, and to know the cost per hour or day of operating each machine separately or in groups, departments or producing centers. 4. To know the actual cost of "burden" expenses of the factory or shop, or of "over- head" expenses of the office or administrative department, and of depreciation which should be included in the cost of manufacture and distributed over the product. 5. To know the location, the condition and the advancement of each unfinished article, order or contract, at any given time while in the process of manufacture. 6. To know by running book inventories, supported by controlling accounts, how much of each kind of material, supplies, and finished goods is on hand, so that, with the smallest invest- ment of capital, orders may be placed in right quantities and at proper times to meet all require- ments, and to prove, these accounts at stated intervals by actual inventories of stock on hand. 7. To show on manufacturing, trading and profit and loss statements or on statements supplementing them, all essential elements of cost and production in whatever detail they are desired. 8. To make possible the preparation of statistical and other statements, so arranged that the information contained therein may be compared with similar statements of other fiscal periods to ascertain: (a) increase or decrease of total output; (6) increase or decrease of monthly output; (c) increase or decrease of idle time; (d) increase or decrease of labor efficiency and of machinery efficiency; (e) increase or decrease of cost oi production per order, job or 210 BOOKKEEPING AND ACCOUNTANCY contract or per any other convenient unit of comparison; (/) increase or decrease of selling expenses, of administration expenses, of gross profit and of net profit; (c/) relative efficiency and cost of different classes of labor. 9. To have such results available as will disclose defects in organization or administration, o that they may be rectified. 10. To know the productive value of every unit or factor available for use in the factory or plant, so that the exact cost of each item entering into the manufacture of any given article or product, and its factory cost, may be correctly and accurately ascertained in estimating the coat and selling price of goods called for in prospective orders, jobs or contracts. 11. To know the percentages or amounts which must be added to factory cost to covet overhead and other expenses necessary to produce and market the goods at a profit, called for in estimating on prospective orders, jobs or contracts, or otherwise. 12. To have information at hand that will provide a basis for calculating the allowances which should be made for unexpected contingencies and losses in estimating the cost of goods called for in prospective orders, jobs or contracts. 669a. Thus it will be seen that an efficient cost system enables the manu- facturer to decrease costs and increase production and profits in many ways which would otherwise be impossible; such as: 1. To reduce the cost of and waste in material and time used. 2. To increase labor production and secure higher efficiency in workmen by assigning maximum tasks which they are willing and competent to perform. 3. To reduce cost and increase production by the use of improved machinery. 4. To reduce expenses in factory or office by increasing the efficiency of employees and dispensing with unnecessary labor and inefficient service. 5. To know the maximum capacity of the factory or plant in a given process, group, depart- ment or producing center for a given time, that work may be so distributed as to maintain the factory or plant, as a whole, at the highest point of productive efficiency. 6. To establish wage systems that will secure to the diligent the proper rewards for indus- try and that will encourage and stimulate workmen to perfect themselves in ability and produc- ing capacity. 7. To know the goods which may be manufactured and sold at the largest profit, and to know those goods which cannot be manufactured and sold at a fair profit, so that the sales of the former may be increased and those of the latter diminished or discontinued. 8. To estimate accurately and expeditiously on specifications of prospective orders or contracts. ADVANTAGES OF A COST SYSTEM 211 670. Many advantages other than those enumerated follow the introduc- tion of well-administered cost systems, although they vary somewhat in impor- tance, depending upon the condition and circumstances of the business. The extent to which increased efficiency in labor, machinery, operation and output is secured by the introduction of a cost system determines, in a large measure, the extent of its usefulness and value in a manufacturing concern. 671. It is not the purpose of cost accounting to show what a given order, job or contract should cost or to show its estimated cost or to show any cost other than the actual cost after it is completed; i.e., the purpose is to show the exact cost of each article made, and, through the various subsidiary and controlling accounts, what the actual results of the manufacturing processes have been. A comparison between the estimated cost when the order, job or contract was accepted, and the actual cost when it is completed, will show any inaccuracies in the estimate, and will give substantial information for making future estimates. 672. The efficiency of a cost system depends almost wholly upon the organi- zation back of it and how the system is planned, installed and carried out. The best cost systems are usually those which have small beginnings and are gradually developed and perfected until they fully meet the particular requirements for which they are intended. In planning a cost system, care should be taken to provide for the practical requirements rather than the theoretical requirements of the case, and to avoid the 'creation of a system that will be expensive to install or operate. It is impossible to formulate or construct a single system of cost accounting that will meet the requirements of every line of business; indeed, a special system must be planned for each particular concern, as no two establish- ments are likely to present for consideration the same conditions and facts. 673. Before attempting to formulate a cost system for any particular con- cern, it is first necessary to make a careful study and survey of the- plant or factory and its organization, and of all the circumstances surrounding it. How* ever, as the purpose of this book is to give consideration to the accounting features of cost systems rather than to the devising of cost systems or the study of shop organization, management, labor efficiency, etc., these topics receive only inci- dental attention. 212 BOOKKEEPING AND ACCOUNTANCY WAGE SYSTEMS. 674. Time is one of the principal and most expensive elements of cost in manufacturing. As labor is one of the elements of prime cost, some discussion of wages is necessary. There are various wage systems in common use, such as the day rate, piece-work rate, differential rate, premium, bonus, profit-sharing, stock distribution or some combination of these systems. The best "system to use is determined by the conditions surrounding the particular establishment in which it is to be employed. An understanding of these systems is important to the student of accounts, principally because, in many instances, they form the basis of computation for the distribution of factory expenses, or burden. The day rate. This is perhaps the commonest method of paying wages. Under this method each workman is paid a certain price for each day's or hour's labor, depending upon his skill and experience. Piecework. Under this method, each workman is paid a certain price for the production of a certain article or part. He is paid for what he does and no more. It has many advan- tages, but in its practical operation it has certain deficiencies that, not infrequently, make it objectionable. Differential rate. This is the piece-work method, modified by an application of the time rate to the work. By this plan the workman is paid "a higher price for quick time and per- fect work, and a lower price for slow time and' imperfect work." This system is more nearly ideal in its operation than either the uay-rate or the piece-work plan. The premium plan. This method differs from piece work by paying a premium for the com- pletion of a certain task in less time than the average time allotted for its performance. The bonus plan. This is, practically, a combination of the differential and premium plans, in that it offers ' 'an increase in the hourly wages for the time actually spent, the rate, itself, depending upon the per cent of time gained." Profit-sharing and stock distribution. These are held out as ideal methods of increasing production and establishing the best relations between employer and employee by having each workman share in the profits in addition to his regular wages. There are various methods suggested for accomplishing this result, but as this plan has not beetfadopted in many instances, its actual value as a wage system has not been fully determined. Full descriptions of these and other wage systems are found in the following books, which may be referred to with profit: "Work, Wages and Profits," by H. L. Gantt. "Factory Organization and Costs," by J. L. Nicholson. "Profit-Making Management," by Charles U. Carpenter. "Efficiency as a Basis for Operation and Wages," by Harrington Emerson. DISTRIBUTION OF INDIRECT EXPENSES , DISTRIBUTION OF INDIRECT EXPENSES. 675. The factory cost of an article, as previously stated, is made up of three elements of cost material, labor and factory expenses, material and labor being known as direct costs, while factory expenses are known as indirect costs or charges. 676 The accurate distribution of factory expenses ("burden" and "over- head") among the different orders, jobs or contracts, so that each article manu- factured may be charged with its actual cost, presents perhaps the most difficult problem as well as one of the most important with which the cost accountant has to deal, and its difficulty is increased in proportion to the number of the kinds and varieties of goods manufactured. (H756) 677. The fixing of a correct basis of distribution or as nearly an exactly correct basis as may be possible, which will connect and identify every item of cost with the particular order, job or contract to which it belongs, so that the actual cost of producing each article may be definitely known, is fundamental in cost accounting. This must be found in some unit of measurement that will most nearly assign to each article the exact manufacturing expense which properly belongs to it. If this unit of measurement is uncertain or variable in its appli- cation, the cost system must fail to accomplish its most important purpose from the fact that it will not certainly tell the truth, no matter how efficient it may be in other directions. 678. Three distinct units of measurement have been used, either singly or in some combination of them, as the basis of distributing factory costs They are "wages value," "wages tune," and "machine time." Wages value is the total cost of direct labor for a given period. Wages time is the total number of hours direct labor is employed for a given period. Machine time is the number of hours a given machine or process is in operation within a specified period. 679. Methods of distributing burden and overhead. A number of different methods are used, based upon one or more of these units of measurement, each one doubtless having some advantages over the other under certain condi- tions. Some are very simple in their practical operation, while others are more complex and intricate. Unfortunately, the simpler methods are seldom accurate under usual manufacturing conditions, while, on the other hand, manufacturers are slow to adopt the more exact and scientific methods because of the greater expense required in their practical operation and maintenance. Several of these methods will now be briefly discussed. Extended discussions may be found in the following publications, from which some of the statements in this chapter are taken: "Proper Distribution of Expense Burden," by A. Hamilton Church. "Production Factors," by A. Hamilton Church. 214 BOOKKEEPING AND ACCOUNTANCY 680. Direct labor cost method. This method of distributing burden and overhead (manufacturing) expenses is based on the theory that the product increases in value in proportion to the cost of labor entering into it, and that the greater the amount of labor involved in the process of manufacture the greater the expense required to supervise the labor and to conduct the factory, works or shop, and that, consequently, the burden should be distributed in the pro- portion the labor employed on a given order, job or contract bears to the total wages paid for the period of time. This method, by reason of its simplicity, is the one most commonly used although it is very inaccurate under most condi- tions and is, therefore, likely oo gradually disappear as better methods are adopted. The rate to be used in distributing trie burden by this method is found by divid- ing the total amount of estimated manufacturing expenses for the period by the total cost of the direct labor for the same period of time. \H720) Illustration: Supposing the total estimated factory expense, or burden, is $780, and the total wages, $1200, the rate per cent for distributing the burden is $780 -f- $1200 = 65%, i.e., 65% of the value of the labor charged to an order should be added to cover the cost of burden. Thus, an order showing cost of material, $50, cost of direct labor, $60, would' have added to it 65% of $60, or $39 (f722c), giving a total of $149 as the total factory cost. When an equal percentage has been added to all the orders on which the $1200 for labor has been charged for the month, it will absorb and take up the total charge against factory expenses of $780. 681. Direct labor hours method. This method is similar to the direct labor cost method except that the number of productive hours is used as the basis of calculation instead of the total amount of direct wages, i. e., the amount of indirect expenses is divided by hours instead of dollars. The rate per hour to be used is found by dividing the total estimated manufacturing expenses by the num- ber of productive labor hours for the same period of time. Both the labor cost and labor hour method give an average result instead of a direct assignment of the exact cost to the article produced, and for this reason they are both objec- tionable. Illustration: Supposing the $1200, or the cost of labor, in the preceding illustration, represented 3200 labor hours, then the rate is found by dividing $800 by 3200, which equals twenty-five cents per labor hour to be added for burden. If 155 labor hours were expended on the preceding job, the amount to be added for burden would be .25 X 155 = $38.75, making the total cost of the order $148.75. 682. Direct labor and material method. This method is considered to be more accurate than either of the methods previously described, when the material cost is greater than the labor cost. The rate to be used is found by dividing the total estimated factory expenses by the total cost of the material and labor con- sumed for the same period. DISTRIBUTION OF INDIRECT EXPENSES 215 Illustration: If the material used for the month cost $1100, the direct labor cost $750, and the total factory expenses for the month were $975, that amount divided by $1850 would equal 50%, or the rate. If the labor and material on a given order amounted to $116, 50% of that amount, or $58, should be added to cover expense burden. 683. Machine rate method. This method is advocated by quite a number of cost specialists. It is intended to diminish, as much as possible, indirect fac- tory expenses that, under the preceding methods, must be prorated on a more or less arbitrary basis, and to charge them directly to the articles produced ; but the method is limited, in the opinion of some writers, to those factories or shops where the majority of operations are machine processes. The plan of procedure under this method provides for charging the labor and all burden or overhead expenses directly to a process or machine, in such a way as to show the total cost per hour or unit c f measure of operating the machine or process. This method is substantially as follows: 1. All expenses which can possibly be charged to machines or processes are so charged. This includes indirect labor, supplies, interest, floor space, depreciation, etc., and sometimes superintendence and other general factory expenses are included. It is this step that consti- tutes the essential essence of this method. 2. The indirect expenses (other than the above) are then prorated and distributed over the machines or processes. 3. Combining the charges of one and two, the total machine rate is determined, which includes all items of cost but material and direct labor. The rate to be used in distributing the indirect expenses is found by dividing their amount by the total number of operating hours or other unit of measure for the same period of time. (a) To find the cost of any article is t*hen a simple process. The number of hours a given order, job or contract is operated on at each machine or process, multiplied by the machine rate for that process ; gives the different process costs. The sum of these, or the total process cost, plus the material and direct labor cost, gives the total factory cost. Illustration: If the work on a given ordSr was operated on at machine No. 1, for twelve hours, and the rate was thirty cents an hour, the process cost at that machine is $3.60. If five hours were required at machine No. 2, on which the rate was forty cents an hour, the process cost at that machine is $2.00. If the work required twenty-four hours at machine No. 3, at the rate of e'ight cents, the charge would be $1.92. Total process or factory cost, $7.52. (6) The machine rate method would give well-nigh accurate results if all the machines and other processes were in continuous operation, but .it fails to take account of the idle time when part of the machines or processes are not in operation. This is the fatal weakness of the method, as it leaves the proper disposition of those expenses which are continuous in connection with each producing factor unprovided for, with the consequent certainty that accuracy in the distribution of costs has not been attained. 216 BOOKKEEPING AND ACCOUNTANCY 684. Scientific machine rate and supplementary rate method. This is a method which has been devised to overcome the deficiencies and inaccuracies of the other methods described in the preceding paragraphs. In this method, labor value and labor time are almost entirely eliminated as units of measurement in the distribution of expense burden, while, like the machine rate method, it utilizes the principle of machine time as the unit of measurement, but it goes much further by providing for the proper distribution of idle time. It regards the shop or factory as a~~collection of small "production centers," each differing from the other in the cost to operate, but with certain common connecting bonds. By a production center is meant either a machine or a bench at which work is done or it may be an open floor space used for different purposes. These are also designated as "productive factors." a. Factory expenses, under this plan, instead of being considered as one lump sum, are kept separate, each expense being subdivided and prorated to the various factors of production in the exact proportion that each factor derives benefit from the expense. For instance, rent is subdivided and charged to each productive factor in proportion to the floor space it occupies, and so with other items of expense, that is, each production center, or factor is charged with the cost of the different expense elements which enter into the service it renders in production. 6. These elements of cost consist of the rent for the space, power, light, her. (1]705a) For cost of all materials, including trans- " Accounts Payable," Cr. portation and other charges necessary to place the materials in the stock-room ready for use. . b. When materials are taken from the stock-room on requisition, for use in the work-shop, the following accounts are debited and credited in the transfer outward journal ( 11748) : "Materials in Process," Dr. (1f711a) For the cost price of all materials re- "Materials" Cr. (l|706c) ceived from the stock-room. c. When unused materials are returned to the stock-room, the following accounts are debited and credited in the transfer inward journal (1J749) : "Materials," Dr. H7056) For unused material returned to the "Materials in Process," Cr. (1(7126) stockroom, at cost price. d. When the daily, weekly or monthly pay-roll is made up, the accounts debited and cred- ited from the pay-roll, time book or a list of the time cards, are as follows : "Labor," Dr. (1f716a) For direct labor. "Factory Expense," Dr. (H734a) For indirect labor. "Cash," Cr. (or) When paid in cash. "Vouchers Payable," Cr. (or) When the voucher system is used and voucher is issued for pay-roll. "Pay-Roll" Cr. When such an account is kept for pur- pose described in If563. NOTE. The proper account to be credited in connection with the pay-roll depends upon the system of accounts followed. THE COST METHOD OF MANUFACTURING ACCOUNTS 237 e. When orders, jobs or contracts are completed and the finished goods are ready for sale or have been placed in wa^en/mse, and ^ie burden and overhead expenses have been pro- rated and distributed on factory cofst cards or job ledger, and the total cost of production, or "cost to ma,ke," has been determined, the following accounts are debited and credited in the finished goods journal (^[750): "Finished Goods," Dr. (1f741a) For the cost of materials, direct labor, "Materials in Process," Cr. (H712c) and of burden and overhead charges en- " Labor," Cr. (H7176) tering into the total cost of production. "Manufacturing," or "Factors Ex- pense" Cr. (H722c) /. When manufactured goods are sold, the following accounts are debited an^l credited: "Accounts Receivable," Dr. For the selling price of the goods sold. "Sales," Cr. g. When the cost of the goods sold is determined at the end of the month, the following accounts are debited and credited in the stock deliveries journal (1f751): "Cost of Sales," Dr. (H745) For the cost of the goods sold. "Finished Goods," Cr. (17426) h. When a "cost of sales" account is not kept, sales account is debited in the foregoing transaction instead of "cost of sales" account. (TT745) 753a In addition to the routine entries outlined in the preceding paragraphs, there are a number of other en tries, which may be made necessary when there is a departure from the usual routine in the manufacturing processes; for instance, it is not unusual in manufacturing estab- lishments, during dull seasons or when work is slack in any department, to partly manufacture or complete stock parts or materials ahead of the time when they are required for the comple- tion of articles, by doing such machine or other work upon them as opportunity will permit. When this is done, an order is prepared, the materials are requisitioned, at cost price, from the stock-room, and the manufacturing process, whatever it may be, proceeds exactly as though they were to be at once completed, the productive labor and burden being charged as usual. When the work is carried as far as possible or until it is found necessary to discontinue it, the cost cards are made up for whatever work has been accomplished, and the new cost price deter- mined, when the materials or parts are returned to the stock-room. When this is done, the entry shown in ^ 753e would be made, at the new cost price, except that materials account would be debited instead of finished goods account, and the entry, of course, would be made in the general journal instead of in the finished goods journal. (6) Another instance is where finished parts or materials in the stock -room are sold as in the case of automobile or other machine parts. Wh'le the article would be credited to sales account at selling price, it must be credited to materials account at cost price, which would require a general journal entry, debiting cost of goods sold account and crediting materials account to adjust. (c) A third illustration is where finished parts or articles that have been charged to fin- ished goods account and placed in the sales-room or warehouse, are returned to the work -shop to be used for the completion of some other article; for instance, where finished valves, oil cups or the like are used in the completion-of an engine in process of building. In such cases, materials in process should be debited and finished goods credited, at the total factory cost of the article, through the general journal or through a special journal kept for that purpose. Other transfers of materials or products in various stages of manufacture, outside of the usual routine, may require corresponding entries, which may be easily determined by a consideration of the accounts involved. 238 BOOKKEEPING AND ACCOUNTANCY 754. Inventories of manufacturing accounts. Separate inventors are required of materials, (^]706e) materials, in process, (f712c) labor, (^]717c) manu- facturing expenses, (^[722e) factory expenses, (H735/) and finished goods. (1]742c) prior to the preparation of the manufacturing statement. These inven- tories are invariably taken at cost price. a. The materials inventory consists of a list of the materials on hand in the stock, or stores room, taken at cost price, which must agree with the accounts in the stock, or stores ledger or on cards. Where purchases of the same article are made at different prices, the average price must be ascertained or separate accounts for different prices may be opened. b. The materials in process inventory is made up from the cost cards or from the job ledger for each of the orders, jobs or contracts which are uncompleted. Where the materials were purchased at different times at different prices, the average price for the materials in each order, job or contract must be ascertained, or separate accounts may be kept with the same items at different prices. c. The labor inventory consists of the direct labor on uncompleted orders, jobs or con- tracts, made up from the cost cards or job ledger. d. The manufacturing expense inventory consists of all manufacturing expenses yet to be charged to work in process. When manufacturing expenses are distributed on a percentage basis, this inventory is found by calculating the manufacturing expenses that have accrued on the uncompleted work in process. (Read ^723 ; then read H724) . If manufacturing expenses are distributed through machine, productive factor or productive center time, the inven- tory would include any productive hours that have not been charged on the cost cards or in the job ledger, and any idle machine hours if idle time has not been included in the supplementary rate. A separate record should be kept of idle machine hours, which, taken in connection with the results shown by the manufacturing account, would give a complete analysis of manufac- turing expenses and shop, or works, efficiency. e. Factory expense inventory is similar to the ordinary expense inventory. (H464-474c) These inventories, like the other manufacturing account inventories should be treated as diracted in rule 172. /. Finished goods inventory is in every way similar to merchandise inventory, described in 1T169, except that it is always taken at cost price, whereas, if there has been any depreciation or change in value, it should be disposed of as instructed in MANUFACTURING STATEMENTS 239 MANUFACTURING STATEMENTS. 755. Four principal statements are usually prepared at the close of each fiscal period from the books of a manufacturing business: the manufacturing statement, to show the cost of production of goods manufactured during the year or other fiscal period; the trading statement, to show the gross trading profit or the gross trading loss from sales for the period (^[234); the profit and loss state- ment, to show the net profit or the net loss for the period and its disposition at the close of the period (^[437); and the statement of resources and liabilities, or balance sheet, for the period (^[487). The first of these statements is peculiar to the manufacturing business; the last three are in every way similar to those of a trading business, which are fully explained in previous chapters. 756. The form of the manufacturing statement is determined, to some extent, by the classification of the accounts in the general ledger, which is also true of the results shown in the final trial balance from which the statement is prepared. When the department method of accounts is followed, the final trial balance supplies most of the data for a very comprehensive proof statement show- ing the disposition of the various cost elements in the manufacturing processes. When the cost method of accounts is followed, the trial balance and the accom- panying statement are usually much briefer, as the various cost elements are fully accounted for, proven and disposed of in the current control accounts, although the manufacturing statement may be made as complete as desired by going to the ledger accounts for supplementary information. 756a. The difference in results shown in the trial balances of two groups of manufacturing accounts, both made up from the same series of transactions, one group kept by the department method and the other group by the cost method, is strikingly illustrated in the trial balances shown in illustrations 103 and 108, and the manufacturing statements made up from each. These differences are noted in the explanations showing the reconciliation between them. 757. To show cost elements and their disposition in detail, manufacturing statements should be prepared in two parts, the first part to show the prime cost of the goods manufactured or partly manufactured for the period, the second part to show the factory cost, or cost of production, of the goods manufactured for the period, corresponding with the first two items in the cost formula, 11664. Part 1 is made up from those accounts which show cost of materials and of direct labor, and of any other items that enter into the prime cost of the goods manufac- tured or partly manufactured. Part 2 is made up from those accounts which show the cost of the manufacturing expenses (burden and overhead), and of any other items which, added to prime cost, 3nter into the total cost of production of the goods manufactured. 240 BOOKKEEPING AND ACCOUNTANCY FORMULA FOR MANUFACTURING STATEMENT PART 1, showing prime cost. 758.' Elements of cost for period consist of: a. Cost of materials on hand at the begin- ning of period, as shown by inventory or by balance of materials account. (1 707) b. Cost of partly manufactured goods on hand at the beginning of period, includ- ing cost of materials and direct labor (prime cost), as shown by inventories; or, when the cost method of accounts is followed, by balances of "materials in process" and "productive labor" ac- counts for the previous period. (If 713, 718) c. Cost of purchases for the period, less returns and allowances, as shown by the material accounts when kept under either the department or cost method. (H705o) d. Cost of productive labor (direct labor) for the period, as shown by the labor account. (H 716a) 759. Disposition of costs shown in: e. Cost of goods manufactured during period, including cost of material and direct labor (prime cost), as shown by the material and labor accounts; or, when the cost method of accounts is followed, as shown by credits to the "materials in process" (1f 712c) and "productive labor" (f 7176) accounts, the contra of which is charged to fin ished goods account. /. Cost of partly manufactured goods oi hand at the close of the period, valued at prime cost, as shown by unfinished orders, jobs or contracts; or, when the cost method of accounts is followed, by the sum of the balances of "materials in process" (If 713) and ''productive labor" accounts (prime cost). (If 718) g. Cost of materials on hand at the close of the period, shown by the inventory; or, when the cost method oi accounts is followed, by the balance of the mate- rials account. (If 707) PART 2, showing cost of production. 760. Elements of cost consist of: A. Cost of manufacturing expenses at beginning of period, as shown by inven- tory; or, when the cost method of ac- counts is followed, by the balance of manufacturing expense account at the beginning of period. (f723) i. Cost of goods manufactured during the period, as described in item "e ' above (prune cost). j. Cost of manufacturing expenses for the period, as shown by the manufac- turing expense account or accounts for the period, (f 721a, 6) 761. Disposition of costs shown in: k. Cost of manufacturing expenses on partly manufactured goods, at the close of the period, as shown by the balance of manufacturing expense account or accounts. (If 723) I. Cost of goods manufactured during the period, at total cost of production, az shown by finished cost sheets or orders; or, when the cost method of accounts is followed, by the amount charged to finished goods account for the period. (H 741o) MANUFACTURING STATEMENTS 762. The elements of cost included in a complete manufacturing statement for a given period may be clearly understood from the formula opposite, in which the items are shown in the position and order in which they should appear in the statement. It will be observed that a statement prepared after this formula will show not only the various elements of cost entering into the total cost of production, but also a proof of the correct distribution of these costs by account- ing for them in the completed and partly manufactured goods for the period, and in the proven balances shown by the control accounts. 763. A final trial balance, taken from a set of books in which the manu- facturing accounts are kept by the department method (1f687), is shown in illus- tration 103. The manufacturing accounts are indicated by the letter "M" in the margin. ILLUSTRATION 103 TRIAL BALANCE, EECBMBER 31, 19 TOED IIPG. CO. Cash - par C. B. 10200 00 Cash - petty 200 00 II Materials and supplies j 3800 00 If Material in process 2700 00 M Labor in process s Inventories, Jan. 1, 19 1400 00 Manufacturing expenses 650 00 Finished goods 7000 00 Accounts Receivable 17500 00 Machinery 29000 00 Small Tools 1800 00 Office furniture and fixtures 500 00 Store Fixtures 500 00 Accrued Taxes 100 00 Accrued Pay-roll 1200 00 Accounts Payable 6000 00 Surplus 8200 00 Reserve for Uncollectable Accounts 350 00 Reserve for Depreciation on Machinery, etc. 1500 00 Capital Stock - Preferred 250 shares at $100 25000 00 Capital Stock - Concon 250 " " 25000 00 11 Materials Purchased 53000 00 M Labor 34000 00 Sales, less returns, allowances & discounts 116200 00 Manufacturing Expenses 12000 00 Selling Expenses 5000 00 Administrative Expenses 4100 00 =^ 183550 00 183550 00 764. Inventories. The inventories at the close of the period, December 31, are as follows: materials and supplies, $8500; materials in process, $4200; labor in process, $1750; manufacturing expenses, $1480; finished goods, $9420. 242 llXUBTRATIOK 104 BOOKKEEPING AND ACCOUNTANCY STATEMBKT FOR TEAR HITDIKG PECSMBER 31, 19 Prime Coat. 7*7* 7*7 INVENTORIES, Jan. 1, 19 , Materials and supplies at cost f Materials in process - partly mfg'd goods t Labor in process - " PURCHASES OF UATCRIALS and other manufacturing supplies during period, including inward freight and express- age, less returns, allowances, discounts, etc. PRODUCTIVE LABOR for period Production Coat. ^CANUFACTURING EXPENSES of preceding period applicable to partly manufactured goods PRIME COST of goods manufactured during period, brought dotyn MANUFACTURING EXPENSES during period: - Rent of factory 2200 Taxes of factory 200 Stationery and supplies 100 Insurance on materials and machinery 500 Superintendence 1500 Wages of foreman and factory clerks 2400 Wages of firemen, engineers and oilers 2500 Fuel and lighting 500 Repairs and renewals on machinery 600 Depreciation on machinery 1500 2700 1400 3600 4100 53000 34000 94900 650 60450 12000 93300 765. Manufacturing statement department method of accounts. The statement in illustration 104 is made up from the trial balance, illustration 103, and the inventories at the close of the period. The American, or standard form of statement is shown in the illustration. The items in detail, entering into the total manufacturing expenses as shown on the statement, were found by an analy- sis of the manufacturing expense account. The same is true of the items making up the total selling expenses and the total administrative expenses shown in illustrations 105 and 106. 766. Preparation of the manufacturing statement when manufacturing accounts are kept by the department method. Explanation: Notice that Part 1 of the statement shows prime cosf, and that Part 2 shows cos of production, in agreement with the formula for manufacturing statement. (1f664) Part 1. (1) Inventories, January 1, 19 , consisting of three items, are, inventories at the close of the last preceding fiscal period, taken from the trial balance. (If 174) (2) Purchases of materials are shown by the debit balance of materials account in the trial balance. (3) Productive labor is shown by the debit balance of the labor account in the trial balance. MANUFACTURING STATEMENTS THS TOED MAKUFACTURIHG CO., PITTSBUBS, PA. 248 PRIME COST (materials and labor) of goods manufactured during parted, carried down ^ / ISVEHTORIES, Doo. 31, 19 , Materials and supplies, at cost Materials In process - partly rafg'd goods Labor in process - MABDFACTOTITO EBOTSES applicable to partly manufactured goods PEODOCTIOH COST of goods manufactured during period, carri to trading stateaent 4200 1750 80450 6500 5950 94900 1480 91820 93300 (4) Prime cos is the difference between the debit items showing cost of material and productive labor, and the credit items showing the inventories at the close of the period, i.e., it represents the cost of the material and labor entering into the goods manufactured during the period. (5) Inventories, December 81, 19 , consisting of three items, are the inven- tories at the close of the present fiscal period. (H174) After this item is entered, Part 1 of the statement should be footed and ruled, as shown in the illustration. Part 2. (6) Manufacturing expenses during preceding period, the first item on the debit side of Part 2, is the inventory of manufacturing expense account at the close of the last preceding fiscal period, as shown in the trial balance. (7) Prime cost is the first item on the credit side of Part 1 brought down. (8) Manufacturing expenses for the period are found in the debit balance of manufacturing expense account in the trial balance, the various items being found by an analysis of that account. (9) Manufacturing expenses, the first item on the credit side, is the amount of the inventory of these expenses at the close of the present fiscal period. (10) The production cost of the goods manufactured during the period is the difference between the sum of the debit and the credit items, which completes Part 2 of the statement. The production cost, represented in the last credit item, is the connecting link between the manufacturing and the trading statement, that item being shown as the second item on the debit side of the trad ing state- ment. 244 ILLUSTRATION 105 BOOKKEEPING AND ACCOUNTANCY TRADING STATEMENT FOR YEAR ENDING DECEUHSR 31, 19 INVENTORY, Deo. 31, 19 , Manufactured goods on hand at close of preceding: period GOODS MANUFACTURED during period, per manufacturing statement Total cost of manufactured product Leas INVENTORY manufactured goods on hand, at close of this period, Dec. 31, 19 , Cost of goods sold Gross trading profit carried down SELLING AND DISTRIBUTING EXPENSES, Freight outward Cocsnission for selling Salesmen's salaries Wages of shippers and packers Insurance on stock, eta. Traveling expenses Supplies Advertising Heat and light Rent show-room Storage, - outside warehouse Depreciation on fixtures NET TRADING PROFIT carried to profit and loss statement 100 20C 2500 600 50 1230 50 100 1C 100 50 10 7000 91820 98820 9420 89400 26800 116200 5000 767. Trading statement. This statement is similar in all essential partic- ulars to the trading statement of a mercantile business. (1(240) It is shown in illustration 105. The statement of resources and liabilities is shown in illus- tration 107. ILLUSTRATION 106 PROFIT AND LOSS STATEMENT FOR YfiAR ENDING DECEMBER 31, 19 ADMINISTRATIVE EXPENSES Rent of offices 100 Insurance on furniture & fixtures 18 Taxes - proportion 50 Interest on loans 30 Officers' salaries 2000 Clerks' salaries 1000 Audit fee 200 Stationery and office supplies 50 Heat and light 100 Repairs, office furniture 60 Reserve for doubtful accounts 400 Depreciation on furniture 92 4100 NET PROFIT for period, carried down 17700 21800 DIVIDEND Preferred stock, $25000, at 758 1750 Comoon stock, $25000, at 10$ 2500 4250 SURPLUS PROFITS carried down 13450 17750 Surplus, Dec. 31, 19 , as shown on balance sheet 21650 21650 MANUFACTURING STATEMENTS THE TOKD MAMTFACTURIHG CO., PITTSEURG, PA. 245 Sales - less returns, allowances and discounts Gross trading profit bro't down 11620C 116200 26800 2680C 768. Profit and loss statement. This statement, shown in illustration 106, while similar to the profit and loss statement explained in ^[435-445 is divided into three parts, the first showing the net profit for the period, the second showing the distribution of the net profits for the period, and the third showing the undivided profits, or surplus, of the business at the close of the period. THE TOED UABUFACTURIHO CO. , PITTSBURG, PA. RET TRADING PROFIT from trading statement BET PROFIT bro't doira SURPLUS PROFIT, surplus a/o, Jan. 1, 19 SURPLUS profit for period, bro't 21600 21BOO 17700 8200 13450 216gp 246 ILLUSTRATION 107 BOOKKEEPING AND ACCOUNTANCY ST4.TECSJT OP RESOURCES AHD LIABILITIES, DECEMBER 31, 19 Cash in office Cash in bank Inventories, - Materials in stock llaterials in process Labor on materials in process Manufacturing expenses Finished goods in stock Accounts receivable Less reserve for uncollectable accounts Total current resources (assets) Machinery Less reserve for depreciation Small tools Office furniture and fixtures Store fixtures Total resources 200 10200 9500 4200 1750 1460 9420 17500 350 29000 1500 500 500 10400 25350 17150 52900 27500 1800 _1000 63200 ILLUSTRATION 108 FTSAL TRIAL BALAHCE, DECEMBER 31, 19 . THE TODD HFO. CO: Cash - per C. B. 10200 Cash - petty 200 Materials 8500 Materials in Process 4200 Productive Labor 1750 Manufacturing Expense 1480 Finished Goods 9420 Accounts Receivable 17500 Machinery 290 OC Small Tools 1800 Office Furniture 4 Fixtures 500 Store Fixtures 500 Accrued Taxes 100 Accrued Pay-roll 1200 Accounts Payable 6000 Surplus 6200 Reserve for Uncollectable Accounts (contra in admr. ex. a/c) 350 Reserve for Depreciation on Machinery, etc. (contra in Hfg. Exp. & Factory Exp. ) 1500 Capital Stock Preferred - 250 shares at $100 25000 Capital Stock Common - 250 " " 100 2500C Cost of Sales 8940C Sales 116200 Selling Expense 5000 Administrative Expense 410C - 183550 18355C 769. The final trial balance, taken from a set of books in which the manu- facturing accounts are kept by the cost method (^[689), is shown in illustration 108. The amounts were made up from exactly the same transactions that entered into the accounts shown in the trial balance in illustration 103. It will be noted that the trial balance under the cost method is considerably shorter, and that the balances shown by the manufacturing accounts differ from those MANUFACTURING STATEMENTS THE TODD lIAflUFACTOKING CO., PITTSBOTG, PA. 247 Aocrued taxes, - estimated Accrued labor Accounts payable Total current liabilities Dividends declared Preferred stock, $25000, at 1% Connon " 25000, " lo Total liabilities Capital stock issued Preferred Connon General Profit and Loss account Surplus, Jan. 1, 19 , D0. 31, 19 . 1750 2500 10< 1200 600C 730C 425C 25000 25000 1155C 50000 21650 6200 13450 6320C ' ' shown in the trial balance under the department method. When both methods are thoroughly understood, however, it is not difficult to reconcile the manufac- turing accounts of one trial balance with those of the other, as is explained in TI771. It should also be noted that while the balances of the materials, materials in process, productive labor, manufacturing expense, and finished goods accounts in illustration 108 show the inventory value of those accounts at the close of the present fiscal period, the balances shown by similar accounts in illustration 103, under the department method of accounts, show the inventory values at ths close of the last preceding fiscal period. 770. An interesting exhibit of the manufacturing accounts under the cost method may be had by opening each account with the inventories shown in the trial balance, illustration 103, and posting the journal entries, shown in illustration 109, which represent in totals the entries made during the year in the various cost journals. It will be seen that the balances shown by these accounts at the close of the period agree with the balances shown in trial balance, illustration 108. ANALYSIS SHOWING AGREEMENT OP MANUFACTURING ACCOUNTS IN TRIAL BALANCE, ILLUSTRATION 108, WITH SIMILAR ACCOUNTS IN TRIAL BALANCE, ILLUSTRATION 103. 771 . This analysis explains the essential differences between the cost and the department methods of accounts. It shows also that while the results are different in each corresponding account, they are, in fact, harmonious, each being correct under the method employed for keeping it. 248 BOOKKEEPING AND ACCOUNTANCY IU.CSTRATION 109 SERIES OP EHTR1E3 SHOtflffO AGGREGATE AUOOTTS DEBITED AHD CREDITED 7k,. KAHUFACTTOITO ACCOUNTS FOR THS YEAR, PER THE COST METHOD. TO 747 Materials Purchases 53000 Aocou.it B Payable 53000 746 Materials In Process Requisitions 50600 Materials 50600 749 Materials Returned to stores 2300 Materials in Process 2300 ProductiYe Labor Pay-roll from cash book 34000 Cash 34000 . Manufacturing Expenses Estimate for year, per 12000 Factory Expenses general journal 12000 -750 Finished Goods 91820 Materials in Process 46800 Productive Labor 33650 Manufacturing Expense 11370 751 Cost of Sales General Journal 89400 Finished Goods 89400 ILLUSTRATION 110 (a) Materials account. This account, illustration 110, is debited, first, with the balance brought down from the last preceding fiscal period, December 31, $3800. This amount corresponds with the amount shown as the inventory of materials and supplies in trial balance, illustration 103. The materials account is then charged with the materials purchased for the period, $53000 (5f705a), and with the materials returned from work in process, $2300. (^[705&) It is credited with the amount of material requisitioned for work in process during the period, $50600 (^]706c), the balance of the account, $8500, being the amount shown on trial balance, illustration 302 (^[707) MANUFACTURING STATEMENTS 248 ILLUSTRATION 111 a/ vfTPt GO 7? tt-20t, (6) Materials in process account. The balanoe in this account, $2700, illustration 111, agrees with the item for that account in trial balance, illustration 103. It is then charged with all goods requisitioned from the materials account for the period. (If 71 la) The account is credited for any materials returned to the store-room and charged back to the materials account (7126), and for the amount of material used in finished orders, jobs or contracts, at cost. (712c) The balance of the account shows the cost of the material in the uncompleted work in process, $4200, being the amount shown on trial balance, illustration 108. (11713) ILLUSTRATION 113 /f/-co -VvjUwvJLffv^ ff (c) Productive labor. The balance brought down in this account is $1400, agreeing with the inventory of labor in process in trial balance, illustration 103. The account is then charged with direct labor for the period (^[716a), and is credited with the direct labor expended in goods manufactured for the period (H7176), the balance of the account, $1750, agreeing with trial balance, illus- tration 108. (H718) ILLUSTRATION 113 f \\ 250 BOOKKEEPING AND ACCOUNTANCY (d) Manufacturing expense. On trial balance, illustration 103, $850 is shown as the amount of the inventory for this account, brought down from the previous period, which agrees with illustration 113. It is then charged with the estimated manufacturing expenses, $12000. (H721a, 6) It is credited for thi expenses distributed in the goods manufactured (^[722c), the balance, $1480, agreeing with the item in trial balance, illustration 108. (H723) ILLUSTRATION 114 /M <7ZS-2.fi (e) Finished goods account shows a balance brought down of $7000, corresponding with the inventory in trial balance, illustration 103. It is charged with $91820, the cost of the goods manufactured during the period. (^[741a) It is credited for the -cost of the goods sold during the period, $89400 (^7426), the balance of the account, $9420, agreeing with trial balance, illustration 108. (11743) 772. A careful study of these ledger accounts and the references given, will show that all the elements of cost included in the manufacturing statement, made up from the manufacturing accounts kept by the department method, illustration 103, have been included, proven and disposed of in the manufacturing accounts kept by the cost method, the final results being shown in the balances of the accounts and in the debit of $91820 to finished goods account, the connect- ing item between the group of manufacturing accounts and the group of selling accounts being the cost of the goods sold, $89400, which is the total" credit to finished goods account for the period. 773. Manufacturing statement cost method of accounts. When the manufacturing accounts are kept by the cost method, the manufacturing state- ment shown in illustration 104 may be prepared, but the accounts in the ledger must be referred to for part of the information necessary, as follows: Parti. (1) Inventories, January 1, 19 , instead of being taken from the trial balance, illustration 103, are found in the inventory balances of the materials, materials in process, and productive labor accounts, brought down from the preceding fiscal period, January 1, as shown in the accounts in illustrations 110-114. MANUFACTURING STATEMENTS 251 (2) Purchases of materials, $53000, is the sum of the purchases for the period shown on the debit side of the materials account, exclusive of the items for materials returned from work in process and the balance of the account at the beginning of the period. See illustration 110. (3) Productive labor. $34000, is shown by the debit footing of productive labor account, exclusive of the inventory at the beginning of the period. (4) Prime cost of goods manufactured, $80450, is the sum of the credit footing of materials in process account less items of materials returned to stock- room, $46800, and the credit footing of productive labor account, $33650. (5) Inventories, December 81, 19 , are shown by the balances of the materi- als, materials in process, and productive labor accounts, as shown in the trial balance, illustration 108. These balances equal the inventory value, at cost price of the materials in stock, materials in process of manufacture, and produc- tive labor charged to work in process, (If 707, 713, 718) This completes Part 1 of the manufacturing statement, under the cost method, and the footings of the two sides of the statement must be equal, i.e., all of the costs charged on the debit side of the statement are accounted for on the credit side of the statement, the balarces being supported by inventories, which are again proven by the various subordinate factory books and journals, such as the materials ledger, etc. Part 2 (6) Manufacturing expenses during preceding period, the first item on the debit side of Part 2, is the balance of the manufacturing expense account brought down from the preceding fiscal period, as shown in that account in illustration 113. (7) Prime cost of goods manufactured during the period is the amount shown in item 1 on the credit side of Part 1 of the statement, brought down. (See 1f 773 (5) ). (8) Manufacturing expenses for the period are shown by the debit footing of manufacturing expense account, exclusive of the inventory of the preceding period, brought down January 1. (9) Manufacturing expenses, the first item on the credit side of Part 2, is the inventory value of these expenses at the close of the present fiscal period, shown by the balance of manufacturing expense account. (If 723) (10) The production cost of goods manufactured during the period $91820 is the debit footing of finished goods account, exclusive of the balance of the account for the preceding fiscal period, brought down January 1. It is the amount charged to finished goods account during the period from the finished goods journal and equals the sum of the credits to materials in process ($46800), productive labor ($33650), and manufacturing expenses ($11370). (1f7l2c, 7176, 722c) 262 BOOKKEEPING AND ACCOUNTANCY 774. Manufacturing accounts, under the cost method, are self-proving. On the debit side they show the costs of material, labor and manufacturing expenses; on the credit side they show the disposition of these costs through the various manufacturing processes until the final result, shown in the total cost of produc- tion, is reached, for which finished goods account is debited. (U741a) The balance shown by each account is also self-proving, as it must agree with the inventories and the results shown by the various supplementary cost books and records, such as the materials and stock ledgers, cost cards, sheets, and summa- ries. For this reason, the manufacturing statement is frequently omitted, the "cost of merchandise sold" being the connecting item between the manufactur- ing and the trading accounts, as shown in illustration 114. . It will be noticed that the trading and profit and loss statement, illustration 115, is in report form. It may be prepared in the standard form, as shown in illustrations 105, 106. ILLUSTRATION 115 TRADING AND PROFIT & LOSS STATEMENT, DECEMBER 31, 19 Gross Sales Leas returns, allowances & discounts Net Sales Less cost of merchandise sold Gross trading profit for period Less Selling expenses, viz., Freight outward Corarnlssions Salesmen's salaries Wages shippers and packers Insurance on stock Traveling expenses Supplies Advertising Gas, fuel and light Rent Storage (outside warehouse) Depreciation on Fixtures Net Trading profit for period Administrative expenses, - Rent (proportion) Insurance on fixtures Taxes (proportion) Int. on temp, loan Officers' salaries Salaries of office clerks Audit fee Stationery & office supplies Gas, fuel and lighting (proportion) Repairs - office fixtures Unoollectable accounts (Charge for contra to reserve) Depreciation on fixtures Set profit for period Dividend declared, - Preferred stock, $25000, at 1% Coianon " 25000, " 10% Balance to Surplus a/o 116500 300 100 200 2500 600 50 1230 50 100 10 100 50 10 100 18 50 30 2000 1000 200 50 100 60 400 92 1750 2500 116200 89400 26800 5000 21800 4100 17700 4250 13450 MANUFACTURING STATEMENTS 253 775. A statement of manufacturing operations may be prepared to accom- pany the preceding trading and profit and loss statement, if desired. By refer- ring to the ledger accounts, illustrations 110-114, it will be seen that this state- ment is nothing more than a statement in report form of the facts shown by those accounts. ILLUSTRATION 116 STATEMEHT 07 MAEOTACTPRIIC OPERATIONS MR TEAR EKDIHG IBCEHBER 31, 19_ THE TODD MFG. CO. . PITTSBOBG. PA. MATERIALS A/C Inventory and supplies, Jan. 1, 19 . Purchases during period Ilateri&lB requisitioned for work in process Leas materials returned to stock Cost of materials transferred to work in process, during period Balance a/c - Materials on hand, per inventory MATERIALS IH PROCESS A/C Inventory materials in process partly manu- factured, Jan. 1, 19 , Materials requisitioned during period, less returns Less Cost of materials in the completed product of the period Balance a/c - Bateriais in process at close of the period PRODUCTIVE LABOR A/C Inventory of labor on materials- in proces, partly manufactured Jan. 1, 19 , Labor on completed and partly manufactured goods for the period Less Labor expended on completed goods Balance a/c - Labor on uncompleted work in process, at close of period IIAHUPACTURIBG 2XPEHSE A/C Inventory of expenses on goods in process, partly manufactured Jan. 1, 19 , Manufacturing expenses for period Less Mfg. expenses charged to completed goods Balance a/o - Expenses on uncompleted work la process, at close of period PIIISHED GOODS A/C Inventory, Jan. 1, 19 , Cost of goods manufactured during period 'Materials 46800 , Labor 33650 Itfg. Expenses 11370 Less - Cost of goods sold during the period, carried to trading statement Balance - Inventory on hand Deo- 31, 19 , 3800 55000 50600 2300 2700 48300 1400 34000 850 12000 7000 91820 56800 48300 8500 51000 46800 _4200 35400 35650 1750 12850 11370 98820 89400 9420 254 BOOKKEEPING AND ACCOUNTANCY FORMS OF COST RECORDS, REPORTS, BOOKS, ACCOUNTS, STATEMENTS, Ere. 776 . These forms may be designed in great variety, and for many purposes. Those shown in the following illustrations are general in character, and are \ntended to offer suggestions for forms that could be used for the purposes named, lather than to be considered as exact models, since they would likely have to be changed considerably, in size and descriptive matter, to meet the requirements of a particular cost system. The various journals receiving entries from these forms are frequently ruled to correspond. Such of the forms -as can be conveniently printed and made out in copying ink, may be copied in the appropriate journals made up of copy paper, from which abstracts, or recapitulations, may be made up at the close of each month. 117 ORDER Date 19_ . Ho . Make to r ; Addres B Date Wanted Date Completed Here follows description of article, with instructions, drawings, etc. Material Keg. No. Routed by. Pot In process Shop order Ho. Illustration 117. This is a suggestion for the form of an order, issued by the office to the superintendent of the factory or works for the making of a certain article or goods. It is usu- ally accompanied by a requisition for the materials, and not infrequently by drawings, blue- prints, detailed instructions and, where works are thoroughly organized, by a routine, or pro- cess sheet, indicating exactly, in detail, the various processes to be followed and the productive factors to be employed, from the time the order is received in the works until the finished goods are completed. Illustration 118. This is a suggestion for a requisition blank, which is made out in the office, usually in triplicate, one copy going to the store, or stock-keeper, another following the goods to the work-shop, the third being retained in the office, where it is entered in the requisi- tion journal. (V- 748) MANUFACTURING STATEMENTS 255 ILLUSTRATION 118 KEQUISITIOH FOHH. Beq. Ho. Date Storekeeper - Delivery account of Order Bomber Stock Number Quantity Particulars Cost Amount ~~ ' _,_ _,^_ -N^^m^' ~s_^, Delivered by Siened Beceived above Ent'd Mat. Stock Ledg Order charged, Cost B Ent'd Heq. Journal, p . , pa/?e ec. aee ILLUSTRATION 119 Return Ko MATERIALS RETUPJfED. Storekeeper - Credit returned material account of- Order 1,'umber Stock Kumber Quantity Particulars Cost Amount ^~^ \ *- , . ^^-^~*~ v^~ i Store keopt Returned I Ent. Raw \ Order crec Ent. Tranz >r receipt Sinned >y lat. Stock Lc lited. Coat F >. In. Jour. , d. . paee lee. page Illustration 119, This is a suggestion for a blank which is made out when materials are returned from the work-shop to the stock-room. It is entered in the transfer inward journal. (H. 749) The items and the amounts in this, as well as in the requisition form, shown above, are entered in the stock ledger. Illustration 120 shows the form of a stock card, where the card system is used, or the rulings of a materials ledger. Not infrequently the ordinary form of ledger is used. Macy prefer the loose-leaf form of ledger for this purpose. 256 ILLUSTRATION 120 BOOKKEEPING AND ACCOUNTANCY STOCK CAM) Raw Material Article Classification Ko. Maximum Minimum Location Eeeeived Delivered Balance Date Sheet Quantity Price Amount No. Date] Sheet Quantity Price Amount No. Date Quantity Price Amount ILLUSTRATION 121 DAILY TIME TICKET department Date ClOQ Kaco k Ho. OefiirpatlnTi Boom Order Ko. Kind Operation Quantity Time Bate Amount Quantity 0. Z. Price 0. K. Amount 0. K. ILLUSTRATION 122 Kaehine Ho. MACHIKE TIME TICKET Operator Articl Time b Total Chg'd 9 Bgun Finished hime H'rly rate Amt. $ by Goat sheet Eo. Detail Date Ope ration Remarks No. hrs. , .- > -* \^^^. Illustrations 121 and 122. These are simple forms, which explain themselves. The daily time ticket shows the time of the workman for the day. It may be made in the form of a weekly tune statement. The machine time ticket is used to record the daily work performed by each machine, and should check against the order or job cards following each article through the factory. The pay-roll is made up from the daily time tickets. THE VOUCHER SYSTEM 257 ILLUSTRATION 123 Coat of COST SHEET For Address Order Bo. Tfete Issued Completed Wiled Materials Productive Labor Manufacturing Expenses Date Reg. Ho. Quantity Amount Date Ticket Ho. hr's Bate Amount Ho. Date Factor Ho. Time Rate Aajoxuzt r i LJI i-i i - T i :xa i _ r SUHKAPT Cost Estimated Increase Decrease How Accounted For Haterlals Productive Labor yfg. Expenses Total Fac. Coat Selling Ezp. Profit Selling Price Correct Coat fJIV. Examined Approved M. Illustration 18$. Cost sheets are usually kept in the office, but a cost card, ruled like the form of the cost sheet shown above the summary, usually follows each order, j ob or contract through the factory. This job card, as it is usually called, is sent to the office daily, and it is from this card that the cost sheet is made up. When bound they are called job ledgers. When the work is completed, the summary is filled out and proper entries are made in the finished goods journal (1(750), which completes the record of the manufacturing process. The illus- tration shows only one of many different forms of cost sheets and of job cards, which vary accord- ing to the requirements of the shop in which they are used. Frequently they are bound in loose leaf ledger form. It should be noted that in all the illustrations of forms, no attempt has been made to show the proper width of columns or maintain uniformity in the spaces, that being determined in the forms by the size of the headings. THE VOUCHER SYSTEM 777. This is a name given to a method of recording purchase transac- tions, whereby a separate account with each person from whom a purchase is made becomes unnecessary, the aggregate total of such accounts being carried in an accounts payable, or vouchers payable, account, which in every particular corre- sponds with the accounts payable account described in ^[50, illustration 9. 258 ILLUSTRATION 134 BOOKKEEPING AND ACCOUNTANCY VOUCHER Dat* Vo. Ho. Kaae Addrosa Materials Dr. Product 1 TO Labor Dr. Selling Expons* Advertising Dr. Other Expense Dr. . N^_ /-^^ J^x r _^ ~^~*~ ^ ^~ 778. The advantages of the voucher system are so many that it has been adapted to meet the requirements of all lines of business. It is particularly use- ful in distributing costs in department accounts, cost accounts, supplementary expense accounts, and, in fact, all classes of accounts where considerable detail is desired. It may be used with almost equal facility whether a cash or credit business is conducted. 779. A voucher, in the ordinary business sense, is a name that is applied to any approved paper or document which is accepted as a truthful exhibit of business transactions, such as receipts, paid notes, acceptances and checks, certi- fied bills, invoices, etc. A voucher is also termed a "warranty of title." As applied to the voucher system of accounts, it refers to a printed form attached to or relating to bills purchased, which contains a statement certifying to the cor- rectness of the bills and the purpose for which the amount called for in the voucher is contracted. ILLUSTRATION 125 , Pittaburff. Pa. . 19 Todd Manufacturing Co., To Date Description Amount -"VV/'N/V -^> i~ -*~_^*^ 11 ; -nr ^~^~r~ Appro v id Pres, E-ramined Mgr. THE VOUCHER SYSTEM REGISTSB 268 780. Vouchers are prepared in a great variety of forms. In some forms, the check issued in payment of the voucher is included as part of it, while in other forms the check is omitted which, under ordinary conditions, is preferable, as voucher accounts may be paid by note or in other ways, as well as by check. 781 . Illustration 125 shows the open voucher or "folder" as it is sometimes called. Illustration 126 shows the back of the same voucher folded, with debit accounts indicated. 782 . Vouchers are recorded in a vouchers payable book, or vouchers regis- ter. The form of this book varies, to conform with the classification of accounts in the general ledger, and usually contains a separate column for each account that is likely to be debited, with an additional column to receive items for which a separate column is not provided. Illustration 124 shows the form of a vouchers payable book, designed to receive the entries of a manufacturing business con- ducting a cost system of accounts, with separate col- umns for the various cost and expense accounts called for in the trial balance shown in illustration 108. The footings of these columns are posted hi the general ledg- er to the debit of the accounts named, at the end of each month, while the total footing of the vouchers pay- able column is posted to the credit of vouchers payable account. The vouchers payable account is debited at the end of each month from the cash book, notes paya- ble book or other books receiving entries for payments of vouchers, in each of which a separate column should be kept to receive such items. The balance of the vouchers payable account in the general ledger shows the balance owing on unpaid vouchers, i.e., bills that have been vouchered and recorded, but not paid. Vouch Da MB er No. t 19 _ Paid by * 1UT2RIALS V PROE. LABOR. . - . _ . SELLING SXP: Advertising Ctber Exp. mains. EO>._ - - - - - - TOOLS & 1IACH. OTHEB ACGTS. Total - - -- ADDITIONAL REFERENCES FOR THE MERCHANTS' CORPORATION SET. NOTE: These references are taken from that part of the Complete Text of Rowe's Bookkeeping and Accountancy not included in the Advanced Text. If you are using the Complete Text it is unnecessary to refer -here. T[ 36c. Debit persons in their accounts for all money paid or loaned to them on account, or paid by us to others at their request. ^| 370. Credit persons in their accounts for all checks, money or other cash received from them on account, or paid by them to others at our request. Tf 184. If for any reason a separate account for "freight in" is kept, it will show (1) the cost of freight, express and drayage charges paid on goods pur- chased, (2) the amount (if any) of these charges rebated and returned (over- charges, mistakes in rating, etc.), and (3) from these the net increase of cost to the purchases account in the trading statement is ascertained, which is shown by the difference between the two sides of the account, which should always show a debit balance. ^[ 191. After goods are received there are two classes of items which enter into the cost of handling the goods while in our possession (i.e., up to the time they are ready for delivery to customers or on board cars) which add to the cost of purchases, (1) those showing the cost of boxes, cases, crates, packing materials, shipping tickets, and other items used in preparing the goods for shipment, and (2) those showing the cost of the labor employed. Separate accounts are usually kept although both classes of items may be included in one account under the heading of "Warehouse Expense," in which case the details. may be shown to whatever extent required on an analysis sheet, or they may be charged directly to the purchases account. When separate accounts are kept they may be desig- nated as warehouse supplies and warehouse labor. 1[ 192. Warehouse Supplies Account. The object of this account is to show the cost of shipping materials of every description used in preparing the goods for market up to the time they are ready for delivery, which increases the cost of the merchandise sold in the trading statement. 260 ADDITIONAL REFERENCES FOR MERCHANTS' CORPORATION SET 261 T[ 193. Rule for Debiting and Crediting Warehouse Supplies Account. Debit the account for the cost of all materials used in preparing goods for market up to the time they are ready for delivery. Credit the account for any deductions or rebates from the cost, or for the value of materials taken from the account. 1[ 21 8a. Do purchase discounts decrease the cost of purchases and thus increase the gross trading profit, which would class them as trading profits to be shown in the trading statement, or (6) are they an income derived from having sufficient capital to discount bills, which would class them as a capital income to be shown in the profit and loss statement? NOTE. The Howard & Winters Co. consider that purchase discounts is an income from capital, because they have sufficient capital invested to discount all bills for goods purchased, and treat the account as a profit and loss account. They consider sales discounts as a deduc- tion from sales in the trading statement. See page 23 of the budget. T[ 2256. When considered as a profit and loss account showing an increase in the net profits, after the profit and loss statement has been prepared, the pur- chase discounts account is closed by a journal entry made up from the items appearing in the profit and loss statement. If 235. The trading statement when properly made shows the total cost of purchases and also the cost of merchandise sold on the debit side against the total or gross sales and the net returns from sales on the other side. ^[ 251. Profit and loss accounts are those accounts which show the sources of the various expenses and incomes of every description which result from con- ducting a business. They all have the effect of increasing or diminishing the capital of the concern. j[ 264. Selling Expense Accounts. All selling expenses may be entered in one account under an appropriate title, such as "Sales Expense" or "Selling Expense." When the various selling expenses are to be shown separately in the profit and loss statement, they may be classified to whatever extent desired by distributing them on an analysis sheet. If 266. Rule for Debiting and Crediting Selling Expense Accounts. Debit selling expense account for costs; credit for returns. ![ 268t. Debit selling expense accounts under an appropriate title for outward freight, express and drayage charges. 262 BOOKKEEPING AND ACCOUNTANCY 1 272. Separate accounts may be kept with any or all of the various selling expenses if so desired. When separate accounts are kept the titles of the accounts is determined by the kind of expense. If 310. An expense is the cost of any use or service from which no definite permanent value is derived; the cost of anything that is used up in conducting a business. General expenses consist of all expense items which are not included in the sales, administrative, manufacturing or other special expense accounts, such as the cost of rent, fuel, light, taxes, insurance, and miscellaneous items of similar character. Tf 312. Rule for Debiting and Crediting General Expense Accounts. Debit general expense accounts for costs: credit for returns. If 392e. Credit real estate expense and income account under its appropriate title for all returns in the way of rents, sales of products or other items from the property. If 445. Comparisons of the facts shown in the profit and loss statement are usually made on a percentage basis. The percentages are found as follows: (a) The total selling expense divided by the gross trading profit will give the percentage of the gross trading profit required to meet the selling expenses. (6) The total administrative expense divided by the gross trading profit will give the percentage of the gross trading profit required to meet administrative expenses. (c) The total general expense divided by the gross trading profit will give the percentage of the gross trading profit required to meet general expenses. (d) The percentage of the gross profit required to meet any other expenses may be found in the same manner. (e) The total selling expense divided by the cost of the merchandise sold will give the percentage of the cost price which must be added to meet selling expenses. The percentage to be added to the cost price of the merchandise sold to meet administrative or any other expenses may be found in the same manner. These percentages are useful in fixing the selling prices of goods. NOTE. These percentages must not be confused with the percentages on capital. If 464. Inventories. The merchandise inventory is a statement or schedule of merchandise on hand or in stock. This inventory is the only inventory to be ADDITIONAL REFERENCES FOR MERCHANTS' CORPORATION SET 263 included in the principal inventory account, which is a trading account and affects the trading statement. U 465. Other inventories consist of (a) all material, supplies or other prop- erty on hand that has been charged to a trading or a profit and loss account and that has not been used up or otherwise disposed of in the fiscal period in which it was purchased, and (b) of interest, taxes, rents, commissions, or other expenses and incomes which have accrued at the close of the fiscal period, but which are not entered on the books and frequently are not due. For this reason this class of inventories are known as non-ledger inventories. f 465a. Real estate, stocks, bonds, machinery, furniture, fixtures, materials and supplies which are included in the various ledger accounts showing the original cost of the property on hand, may be inventoried when there is a considerable increase or decrease between the original cost value and the present market or selling value of the property, if it is desired to include such property at its present value in a statement of the resources of a business. T[ 4656. When property on hand is inventoried above or below its original cost value, the difference, if a loss, should be debited to a "reserve for depreciation" account; if a gain, to a "reserve for appreciation" account. An owner, if an indi- vidual, can do as he pleases in regard to increasing or decreasing the inventory value of the property, so can partners providing they agree, but it should be noted that a corporation cannot declare a dividend legally from a profit of this kind unless the property is sold and the profit actually realized. 1f 466. The object of taking inventories of property included in the cost of purchases (the merchandise inventory) and of materials and supplies (trading and profit and loss accounts) is to eliminate from the accounts representing these costs those items which do not enter into the cost of the goods sold or of the materials and supplies used up during the fiscal period in which they were purchased. The object of taking non-ledger inventories is just the opposite, the purpose being to include them in the accounts they affect which already appear in the ledger without them, so that in both instances the total resources and liabilities, losses and gains, net profits and losses, etc., may be accurately ascertained and shown in the various statements made up at the close of the fiscal period. *[f 466a. All inventories affecting profit and loss accounts should be avoided as far as possible by holding the books open until all items belonging to the fiscal period represented are entered in the usual way and included in the final trial balance taken preparatory to making up the various statements. Every book- keeper or accountant who has had any extended experience knows however, that 264 BOOKKEEPING AND ACCOUNTANCY this is almost impossible in a business of any magnitude, and that for many such items the easiest method to dispose of them is to treat them as inventories. H 467. All inventories of property on hand or of debts owing to us are resources; all debts owing to others are liabilities. H 468. Non-ledger resource and liability inventories relate principally to profit and loss accounts showing expenses and incomes. When an expense account is sub-divided into separate accounts, each item in the inventory affects the account in which it was originally charged. Tf 468a. Resource inventories affecting profit and loss accounts consist of (1) the cost value of any material, supplies, or other property on hand (not used up) at the clo. e of the fiscal period, which was charged to a profit and loss account, (a) the unexpired value of any use or service at the close of the fiscal period which was charged to a profit and loss account and (3) accrued interest, rent, and com- missions, etc., owing from others and not entered at the close of the fiscal period. TI 4686. Liability inventories affecting profit and loss accounts consist of (1) unpaid salaries, commissions, traveling expenses, wages, freight, express or drayage bills, rent, or any other unpaid expense incurred in and not paid or entered at the close of the fiscal period, and(2) accrued interest, rent, taxes, commissions, etc. owing to others and not entered at the close of the fiscal period. Tf 468c. Separate accounts should be kept, one for sundry resource inven- tories in which all such inventories may be grouped, the account affected being indicated in the explanation column, and another for sundry liability inventories, the different accounts affected being similarly indicated. Separate accounts for each inventory taken can be opened, if it is so desired. 1f 469 and ^ 470. Rules for Debiting and Crediting Resource Inventories Affecting Profit and Loss Accounts. Debit, by journal entry, sundry resource inventories under one or separate headings, at the close of each fiscal period, for the cost value of all inventories on hand, and credit the profit and loss account to which the items were charged. Credit, by journal entry, sundry resource inventories under the proper head- ing, at the beginning or close of the next fiscal period, for all inventories debited to this account at the close of the last preceding fiscal period, and debit each account which was credited at that time. H 472 and ^ 473. Rule for Debiting and Crediting Liability Inventories Affecting Profit and Loss Accounts. Debit, by journal entry, sundry liability ADDITIONAL REFERENCES FOR MERCHANTS' CORPORATION SET 265 inventories, under the proper heading at the beginning or close of the next fiscal period, for all inventories credited to this account at the close of the last preceding fiscal period, and debit each account which was credited at that time. Credit, by journal entry, sundry liability inventories under one or separate headings at the close of each fiscal period, for the amount owed for expenses which have accrued, and which have not been entered on the books, debiting the proper accounts. SHIPMENT ACCOUNTS. H 503. The record of a shipment is kept in the books of the consignor under the title of "Shipment." ^ 504. There are two general methods of keeping shipment accounts. One is to open a separate account for each shipment, adding the name of the party to whom the shipment is made, for instance, " Shipment to Wm. F. Day & Sons, Chicago." Where more than one shipment is made to the same party, they may be numbered as No. 1, No. 2, etc. Another method is to open a general "goods on consignment" account, to which all the items relating to the various shipments are credited and debited, with a separate account with each shipment entered as a memorandum account in a special book kept for that purpose. The last method does not differ from the first method, except that it shows in one account the same results that would be shown in a number of accounts under the first method. T[ 505. The object is to ascertain the amount gained or lost on our different shipments of goods to others for sale on commission. When account sales are received for but part of the goods shipped, in closing the shipment account those remaining unsold in the hands of the consignee are treated as an inventory balance, under the designation "Goods on consignment," exactly as in a merchandise account, until an account sales for the remainder of the shipment is received. Tf 506. When goods are shipped on consignment, they are usually entered by the shipper on the invoice of shipment at cost price, although sometimes the market or selling price is given. Not infrequently in such lines of business as those conducted by stockmen, dairymen, fruit growers and gardeners, where the cost price of the goods shipped is not definitely known, no orices whatever are given on the invoice of shipment. Full details of the practices common among shippers and commission merchants are given in the commission set accompanying this work. H 506a. It is not unusual, particularly when only occasional shipments are made, to omit opening a separate ledger account for them. Instead a memor- 2(H> BOOKKEEPING AND ACCOUNTANCY anduhi record of each shipment is made in a separate shipment book kept for that purpose. The record is a practical reproduction of the invoice of shipment. When the account sales is received the proceeds are credited to sales account, the same as a regular sale. At the same time a record of the proceeds is entered in the shipment book, which will then show the shipment closed. The loss or gain on each shipment can be ascertained, if desired. When this method is followed, the value of the goods for which account sales have not been received must be added to the inventory at the time of closing the books, being designated as "goods on consignment." This method is not recommended, as it is liable to lead to confusion and inaccuracies in the trading statement, RULE FOR DEBITING AND CREDITING SHIPMENT ACCOUNTS. 507. Debit shipment accounts for costs: credit for returns. 507a. Debit the shipment, under an appropriate title, for all costs. 5076. Credit the shipment, under an appropriate title, for all returns. 508. The various applications of the rule are as follows: 509. Debit shipments, For the invoice (generally the cost) value of the goods shipped. For all charges, such as drayage, insur- ance, freight prepaid, etc. For drafts drawn on us or for cash ad- vanced by us on account of the ship- ment. 511. Observe that in every instance the account is debited for the cost of any- thing of value relating to the shipment. ^ 510. Credit shipments, d. For all drafts drawn by us or other ad- vances made to us on account of the shipment. e. For all returns (proceeds) when ac- count sales are received. /. For all goods returned for which the shipment had been previously debited, g. For insurance received on goods dam- aged or destroyed. ^[ 512. Observe that in every instance the account is credited for the returns from anything of value relating to the shipment. ^[ 513. It will be observed that a shipment account is similar to a personal account in many respects. It is debited when the agent is the receiver of any- thing of value from us and is credited when he is the giver of anything of value to us. The difference between the two sides of the account, however, shows a loss or a gain to us, instead of a resource or liability as in a personal account. Tf 514. Acting on the principle that the consignee is responsible for all goods consigned to him until an account sales has been received or a settlement ADDITIONAL REFERENCES FOR MERCHANTS* CORPORATION SET 267 made, many bookkeepers follow the practice of charging the personal account of the consignee with the value of the shipment and charges until an account sales with returns is received, when the personal account of the consignee is credited to close, with the difference transferred to the profit and loss account or to a separate account under an appropriate title, such as "Shipment Gains & Losses." For occasional shipments this method is approved. To CLOSE SHIPMENT ACCOUNT. Tf 515. The difference between the two sides of a shipment account, before an account sales has been received and returns (proceeds) credited, will show a balance which is a resource; after an account sales has been received for all the goods shipped and the proceeds credited to the account, the difference will show a gain or a loss a gain if the credit side is the larger, a loss if the debit side is the larger. 1[ 516. If an account sales is received before all the goods are sold, and the shipment account is credited for the returns (proceeds) shown by the account sales for that portion of the goods which has been sold, the difference between the two sides of the account, after the account is credited "by inventory" for the value of the goods remaining unsold in the hands of the consignee, will show the gain or the loss on the goods sold and reported in the account sales. The inventory is considered as a sundry resource inventory described in Tf 468a, the shipment account being credited for the amount. 1[ 517. To close. After the trading statement has been prepared, ship- ment accounts are closed by a journal entry made up from the trading statement. When the closing item for any shipment account has been posted, which should balance the account, rule the closing lines in red ink and enter the footings in black ink. CONSIGNMENT ACCOUNTS. 1[ 518. Consignment accounts (or "commission sales" as they are called by most commission merchants) differ in several important particulars from shipment accounts. When an agent receives goods to sell on commission, he does not in any sense buy them, and when he expends money upon them in paying the freight, drayage or other charges, and debits the consignment, he does so, it is true, with the idea that the property received is "good for it," and with the expectation that he will get his money back from the proceeds of sales, but nevertheless with 268 BOOKKEEPING AND ACCOUNTANCY a knowledge of the fact that the consignor (shipper) is personally responsible to him (the agent) for all such expenditures and also his charges (commission, etc.) for selling. On the other hand, the consignor looks to the consignee (agent) as being personally responsible to him for the proper care of the goods while in his possession, as well as for any proceeds that the shipment may return to him. If 519. A change takes place, however, in the relations existing between the consignee and the consignor the moment the goods are sold. Prior to that time the consignee is not responsible for the value of the goods, nor could he be held responsible for any loss that might occur so long as he exercises ordinary diligence in their care; but the moment the goods are sold, the consignee becomes directly indebted and is personally responsible to the consignor for the value of the goods sold after his charges have been deducted. Even if he sells the goods on credit and the party to whom he sells should fail, he is still held responsible to the consignor. He may, however, deduct a certain percentage for taking such risk, unless the consignor instructed him to sell for cash only, 1f 520. Consignment accounts, therefore, in reality closely resemble per- sonal accounts. When the consignment is debited, the consignor would be debited if he received the value direct from the consignee, and when the consignment is credited, the consignor would be credited if he gave the consignee the value direct. The consignment account, therefore, represents the consignor. 11 521. Consignment accounts are not debited for the value of the goods received but only (a) for outlays made on account of consignments, such as freight, drayage, advances, etc., (6) when account sales are rendered for commissions, or other charges deducted, and (c) for the net proceeds. The account is credited for all sales. 1f 522. Consignment accounts are kept under a designating title, such as "6. B. Wharton's Consignment, Columbus, O." and if different consignments are received from the same party, they should be numbered consecutively. In com- mission houses it is usually the custom to number all consignments in the order received and thereafter to refer to each consignment by number. f 522a. Those who make a specialty of selling goods on commission are known as "commission merchants." When they sell stocks, bonds and other securities, they are called "brokers." ADDITIONAL REFERENCES FOR MERCHANTS CORPORATION SET 269 RULE FOR DEBITING AND CREDITING CONSIGNMENT ACCOUNTS. 523. Debit consignment accounts for costs: credit for returns. 523a. Debit the consignment under an appropriate title for all costs. 5236. Credit the consignment, under an appropriate title for all returns. 524. The various applications of the rule are as follows : Tf 525. Debit consignments, a. At the time received, for all charges paid such as freight, dray age, etc. 6. When on hand, for all charges of coop- erage, boxing, bagging, repacking, ad- vertising, or other outlays necessary for the preservation of or for effecting the sale of goods. c. For all goods returned to us after hav- ing been sold and credited to the con- signment, and for shortage, damage or overcharge claims allowed on goods previously sold. d. For all drafts accepted or paid, or for other advances made on account of the consignment. e. When account sales are rendered, for our charges, such as commissions, in- surance, storage, guarantee, etc. /. For the consignor's proceeds remitted with the account sales or credited to his personal account. ^f 527. Observe that in every instance the account is debited for the cost to the consignor of all outlays, advances, etc., made on account of the consignment by the consignee, and for his charges and for the proceeds remitted or credited to the consignor. If 526. Credit consignments, g. For all sales of goods belonging to them. h. For all rebates for overcharges on freight, drayage, etc., or for other charges rebated, previously debited to the account. i. When the charges exceed the total sales, for the amount to close the account (owed by the consignor). 528. Observe that in every instance the account is credited for the returns from sales, allowances, etc., received by the consignee for the account of the consignment. 1f 529. In a regular commission business, consignment accounts are kept in special books and, therefore, do not appear separately in the ledger. In some systems of commission accounting, controlling accounts are kept in the general ledger. The latest and best methods in commission accounting are fully explained in the regular commission set accompanying this text. 270 BOOKKEEPING AND ACCOUNTANCY To CLOSE CONSIGNMENT ACCOUNTS. H 530. The object is to ascertain the amount of the consignor's proceeds and the consignee's compensation, such as commissions, storage, guarantee, etc. H 531. Before closing it is customary (1) to prepare the account sales, (2) then to make the proper entries for the charges, etc., and for the net proceeds, after which the proceeds are remitted or credited to the consignor. H 532. To prepare the account sales. From the consignment account it is customary to make out the account-sales as follows: (a) fill out the heading of the account-sales; (6) from the credit side of the consignment account enter the amount of sales, referring, if necessary, to the books of original entry for the items; (c) from the debit side of the account enter the amount of the charges already paid; (d) calculate and enter on the account-sales the charges for commission, insurance, storage, guarantee, etc.; (e) deduct the total charges from the total sales, which will give the proceeds belonging to the consignor. If 533. To close. When the account sales has been prepared, it will be observed that the entries for the sales and for the freight and other charges al- ready paid*have been made in the books, and the only entries that remain to be made are for the commission and other charges, and for the proceeds, which are not determined until the account sales is prepared. Therefore, to close the ac- count, make the proper entry for the charges not yet entered, and for the proceeds if they are to be credited to the consignor's account. If the proceeds are to be remitted, write the check or note or other paper for the proper amount and make the proper entries for the same. When these are posted, the consignment account should balance, when the proper closing lines and footings should be entered. COMMISSION" ACCOUNT. H 534. Commission is a percentage charged by commission merchants, agents, or brokers for services in buying and selling merchandise, real estate, stocks, bonds, mortgages, insurance, or other forms of property. This account is, therefore, a service account. It is debited for the cost of all commission services received (which we .pay for) and credited for the returns from all commission services given. When commissions from various sources are to be shown sepa- rately in the profit and loss statement, they may be classified to whatever extent desired by distributing them on an analysis sheet. ADDITIONAL REFERENCES FOR MERCHANTS' CORPORATION SET 271 RULE FOR DEBITING AND CREDITING COMMISSION ACCOUNTS. T[ 535. Debit commission accounts for costs: credit for returns. ^ 536. Debit commission account, under ^f 537. Credit commission account, under the proper heading, the proper heading, a. For the value of all commission services c. For the value of all commission services earned and unpaid, owed to us by oth- earned and unpaid, owed to others by ers at the beginning of business. us at the beginning of business. b. For the value of commission services d. For the value of commission services received from others and paid for by us given to others for which they pay us or credited to them. or we debit them. ^[ 538. Observe that in every instance the ![ 539. Observe that in every instance the account is debited for the cost of com- account is credited for the returns from mission services received. commission services given. Tf 540. The difference between the two sides of a commission account shows a loss when the debit side is the larger and a gain when the credit side is the larger. ^[ 541. To close. After the profit and loss statement has been prepared, commission accounts are closed by a journal entry made up from the profit and loss statement. When the closing item to a commission account has been posted, which should balance the account, rule the closing lines in red ink, and enter the footings in black ink. ^f 549. Stocks and bonds. A general account may be kept under this title, or a separate account may be kept with each kind of stocks or bonds purchased such as "Penna. R. R. Stock," or "U. S. Bonds." The account is debited for all costs and credited for all returns, and is kept exactly like property investment accounts, a separate expense and income account being kept for any outlays or returns in the shape of taxes, dividends, interest, etc. ^f 5546. When the purchaser is an individual or firm, the account is usu- ally credited at the close of each fiscal period for such proportion of the amount debited as may be determined upon by the owners, v/hich should be charged to profit and loss and should appear as a separate item, in the profit and loss statement. ^f 554c. The difference shown by a good-will account is considered as a fixed resource (asset), since its value is fixed and it cannot be used us working capital. Good-will is taxable in some states. It should appear in the statement of resources and liabilities. If treated as indicated in ^ 554b, the account will 272 BOOKKEEPING AND ACCOUNTANCY eventually disappear; and it is generally preferred by business men that it should be wiped off the books as soon as possible, certainly as soon as the good-will of the old concern can fairly be considered as being merged into the new concern. Tf 556. Agents' accounts. The method of keeping these accounts varies, depending upon the contract made with the agent. In case his duties are limited to those of a salesman or " drummer, " his account is not different from an ordinary personal account, being debited for all cash or goods advanced to him and credited for the amount of his expenses as per his expense bills, and also for his salary or commission at stated intervals. In this case the account shows what he owes or what is owed to him, and the balance is, therefore, a resource or a liability. If, however, he acts as a resident agent in another city and goods are shipped in his care, it is the best practice to open a separate account for-the goods, which is in every way kept and closed like a shipment account, as described in j[ 503, ^f 515 etc. 1f 557. Reserve,' surplus and undivided profits accounts. These are accounts which are usually opened in the books of stock companies or corporations to show the amount of the annual profits which have been retained in the working capital of the business for special purposes and not distributed among the stock- holders. Such accounts usually show credit balances. ^[ 557a. Reserve account, setting apart a sufficient amount of the profits to meet any contingent expense or loss of the business, may be opened to offset charges against profits, such as bad debts, depreciation, etc. A reserve account is credited for the amount of the profits set apart for the particular purpose indi- cated in the title of the account. It is debited for such sums as are necessary to meet the purpose for which the profits were reserved. ^f 5576. Surplus and undivided profits are practically synonymous ac- counts, both showing profits belonging to the owners which have not been dis- tributed. Surplus account, however, is generally understood to represent that part of the profits which has been set apart as a permanent addition to the working capital. Undivided profits account generally represents that part of the net profits which is " left over " after the different sums for the various reserve, dividend , surplus and other accounts have been set apart and deducted. Surplus and un- divided profits accounts are credited for the amounts of the profits set apart for the purpose indicated in the title of the account. They are debited when the purposes for which they were opened have been accomplished. If 558. Sinking and redemption funds, etc. "A fund" may be created for a number of purposes, among them, (1) to liquidate a known existing liability, I ADDITIONAL REFERENCES FOR MERCHANTS' CORPORATION SET 273 such as bonded indebtedness, (2) to provide an available or quick asset to meet a specific future obligation, such as plant renewal or betterment, and (3) to pro- vide against any embarrassing contingency or unexpected losses. These funds are usually taken out of the cash assets of the business, and may be deposited in a separate bank account or converted into interest-bearing securities or other form ,of property which will earn an income, or they may be transferred to a trustee or other agent who shall invest them in such securities or make such dis- position of them as is required by the agreement with the trustee or agent. Two classes of accounts a*re required for the proper record of such funds, one class representing the profits set part for the creation of these funds, which are known as fund reserve accounts. These accounts are similar to those described in f 557a, except that they include in their titles the name of the corresponding fund account to which they belong. The other class shows the investment or disposition of these funds (the actual cash or equivalent) which are known as sinking or redemp- tion fund accounts, of which several accounts may be required to show the trans- actions in relation to a single sinking or redemption fund. In large corporations a separate set of bookg is usually kept to contain the sinking fund accounts. In both classes of accounts, the identity of the fund to which such accounts belong should be indicated in the title, such as "Sinking Fund Reserve," "Redemption Fund Reserve," "Bonds in Sinking Fund," "Sinking Fund Trustee," etc. It should be remembered that the reserve accounts show the amount of the profits that has been set apart for the creation of the fund, \vhile the fund accounts show the investment or disposition that has been made of the fund; consequently, they are contra accounts, one offsetting the other in purpose, although they may differ in the amounts shown in each account at a given time. Hence, reserve accounts usually show credit balances, while fund accounts usually show debit balances. ^[ 559. Bonus accounts. Frequently in organizing the affairs of corpor- ations it is necessary to offer a bonus to secure the services of promoters, effect sales of stock, or secure a franchise or a charter. In such cases a bonus account is opened, which is debited for the value of all such bonuses allowed. This account is similar to good-will and leasehold accounts. A certain proportion of the amount charged to the account should be closed off into profit and loss at the close of each fiscal period, until the account is finally wiped out and closed. ^[ 560. Patent and coypright accounts. These accounts are kept under two conditions. (1) When a patent or copyright is purchased, the account, under an appropri- ate title, is debited for the cost of the patent or copyright. When all or any part of the patent or copyright is sold or otherwise disposed of, the account is credited at the cost value of what is sold, i.e., for the original price charged to the account. 274 BOOKKEEPING AND ACCOUNTANCY It must be remembered, however, that both patents and copyrights eventually expire as determined by law, and that, consequently, their value is decreased year by year. The account should, therefore, be credited annually for the proportion- ate part of the cost which has been eliminated by the passage of time. The amount of such decrease, when credited to the investment account, is debited to the income account, or to a separate account, or, in the absence of these, to profit and ioss account. Preferably, such amounts should appear as separate items in the profit and loss statement. (2) When only the right or privilege is secured to manufacture or sell an article under a copyright or a patent upon payment of a percentage or royalty, the account is kept for the purpose of showing the cost of the royalties paid. This cost is, therefore, a part of the cost of the article manufactured or sold, and, con- sequently, properly belongs to the trading statement. A separate account may be kept under an appropriate title, or the royalties paid may be charged directly to the principal account showing the cost of the goods manufactured or sold. If 561. Dividend account. This is an account opened in the books of corporations and stock companies when profits are to be divided among the stock- holders. A separate account is generally opened for each dividend declared, as "Dividend No. 1," "Dividend No. 2," and is kept for the purpose of showing the amount of each dividend declared and also to show the amount of the different dividends that have been paid to stockholders. ADDITIONAL REFERENCES FOR COST ACCOUNTANCY SET 275 The following paragraphs contained in the complete text of Rowe's Book- keeping and Accountancy but not in the Cost Set text are referred to in the Cost Accountancy for Manufacturing Set. Refer to this page for references below paragraph 617 if the complete text is not used. ^[ 331. Debit insurance account for costs, credit for returns. Tf 299. Debit administration expense for costs; credit for returns. ^[ 301c. Debit administration expense for office supplies, stationery, post- age, telephone and telegram charges. T[ 33. Debit the receiver : credit the giver. H 157. Debit sales account for costs : credit for returns. ^ 266. Debit selling expense accounts for costs : credit for returns. ^[ 268c. Debit selling expense accounts for outward freight, express and dray age charges. Tf 391b. Debit real estate expense and income accounts for taxes, insurance, interest, and other similar charges on the property for the fiscal period. ^ 334b. Credit insurance account for the proportion of the expired premium value of insurance which has expired in the month or fiscal period covered by the trial balance or by the profit and loss statement in which it is to appear. INDEX Accounting, Cost, defined 202 Advantages of a Cost System 209 Board of Directors, defined 194 Burden, defined .'.... 204 Burden, Distribution of 213 Capital Stock. 193 Corporations 193 Corporation Accounts _. 196 Corporations and Partnerships, Differ- encebetween ' 195 Cost Accounting 202 Cost, Elements of 200 Cost Formula 206, 208 Cost Method of Manufacturing Accounts 223 Cost of Production, defined 200, 206 Cost of Sales Account 234 Cost Records, etc., Forms of 254 Cost System, Advantages of 209 Department Method of Manufacturing Accounts 221 Difference between Partnerships and Corporations 195 Distribution of Indirect Expenses 213 Distribution of Manufacturing Expenses 213 Distribution of Burden 213 Elements of Cost 200 Expenses, Manufacturing 228 Factors Expense Account 228 Factory Expenses 201, 204, 231 Factory Expense Account 232 Final Trial Balance. 241, 246 Finished Goods Account 233, 250 Finished Goods Journal 235 Forms of Cost Records, etc 254 Formula for Manufacturing Statement. 240 Indirect Expenses, Distribution of 213 Invoice Journal . 234 Labor 201 Labor Account 227 Ledger, Materials 225 Ledger, Stock 225 Ledger, Stores 225 Manufacturing Accounts 200, 230 Manufacturing Accounts, Cost Method. . 223 Manufacturing Accounts, Department Method 221 Manufacturing Expenses 201, 228 Manufacturing Expenses, Distribution of 213 Manufacturing Expense Account. . . 228, 249 Manufacturing Expense Estimate Book. 235 Manufacturing Statements 239-253 Manufacturing Statement, Formula for. 240 Materials 201 Materials Account 225, 248 Materials in Process Account 226, 249 Materials Ledger 225 Overhead Expenses, defined 205 Overhead Expenses, Distribution of. ... 213 Partnerships and Corporations, Differ- ence between 195 Pay Roll 222, 227 President, defined 194 Production Cost 200-206 Production Factor or Center 216 Productive Labor Account. ....... 227, 249 Profit and Loss Statements 214, 245 Purchases Journal 234 Requisition Journal 235 Secretary, defined 194 Shop expenses 201 Statements 239 Manufacturing 239-253 Profit and Loss 244 Resources and Liabilities > 246 Trading 244 Trading and Profit and Loss 252 277 278 INDEX Stockholders 194 Transfer Outward Journal I 235 Stock Certificate 194 Treasurer, defined 194 Stock Deliveries Journal 235 Treasury Stock, defined 194 Stock Ledger 225 Treasury Stock Account 197 Stores Ledger 225 Trial Balances 241, 246 Subscription Account 197 Voucher System 257 Time Cards or Tickets 222, 227 Trading Statements 244 Wage Systems 212 Transfer Inward Journal 235 Work in Process, defined 226 UNIVERSITY OF CALIFORNIA LIBRARY Los Angeles This book is DUE on the last date stamped below. FEB27 Form L9-32m-8,'58(5876s4)444 Library Graduate School of Business Administration University of California y ji r+f* "I f\f, *~> A r^oH-i-P^-\ vn n o UCLA-GSM Library HF5635R79bo L 005 041 238 6 SOUTHERN BRANCH, UNIVERSITY OF CALIFORNIA, LIBRARY, UOS ANGELES. CALIF.