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 This book is DUE on last date stamped below 
 
 SOUTHERN BRAi 
 
 UNIVERSITY of CALIFORNIA 
 LIBRARY 
 
 LOS ANGELES, CALIF.
 
 MANUFACTURING 
 COSTS AND ACCOUNTS
 
 
 \Mq Qraw-Jj ill Book (h Ine. 
 
 PUBLISHERS OF BOOKS FOIO 
 
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 MANUFACTURING 
 
 COSTS AND ACCOUNTS 
 
 BY 
 A. HAMILTON CHURCH 
 
 AUTHOR OF "THE PROPER DISTRIBUTION OP THE EXPENSI 
 
 BURDEN," "PRODUCTION FACTORS," "THE SCIENCE 
 
 AND PRACTICE OF MANAGEMENT," ETC. 
 
 First Edition 
 Seventh Impression 
 
 McGRAW-HILL BOOK COMPANY, Inc. 
 
 NEW YORK: 239 WEST 39TH STREET 
 
 LONDON: 6 & 8 BOUVERIE ST., E. C. 4 
 
 1917 
 
 40055
 
 Copyright, 1917, by the 
 McGraw-Hill Book Company, Inc. 
 
 r II H M A !• I. K PI X fl T <> H K PA
 
 ZH- 
 
 PREFACE 
 
 While many excellent treatises exist on Cost Accounting, 
 there is none, as far as I know, that can be placed in the hands 
 of a student for the purpose of gradually introducing him to the 
 underlying principles on which manufacturing accounting of all 
 kinds must rest. 
 st The subject is so vast, and the side issues so numerous that to 
 £} compile a treatise that shall not be, on the one hand, quite un- 
 ^ wieldly, or on the other, quite inadequate, is a very difficult 
 ifltask. The temptation to elaborate minor points is constantly 
 J present, and in doing so the main thread of the subject is apt to 
 if be interrupted. It has seemed more important to present a com- 
 ** paratively simple view of the general structure of cost accounts 
 than to attempt the detailed description of specific systems, on 
 * which in fact many adequate volumes are already in existence. 
 V At the same time, the peculiar position of the cost accountant 
 ' had to be kept in mind. The cost man is rarely an accountant 
 ^jin the full sense of that word. He lives in a world of detail, 
 and is apt to undervalue the broader groupings that alone in- 
 terest, as a rule, the general accountant. It has been attempted 
 tin the present work to show the cost accountant the relation of 
 \ his work to the general accounts. Further, the peculiar value of 
 \ detail to the technical arm has been emphasized with a view to 
 exhibit to the general accountant a viewpoint that he sometimes 
 misses. 
 
 The aim of this book is, therefore, somewhat different from 
 that of existing works. The why and wherefore of cost account- 
 ing is its peculiar field, and it is hoped that armed with this fun- 
 damental information the student will have no difficulty in apply- 
 ing his reading to the particular problems he may meet. 
 
 The Author.
 
 
 CONTENTS 
 
 Preface v 
 
 PART I 
 
 GENERAL OUTLINE OF MANUFACTURING ACCOUNTS 
 
 Chap. Page 
 
 I. Purchasing— Production — Marketing 1 
 
 II. The Mechanism of Accounting 12 
 
 III. The Mechanism of Cost Accounting 25 
 
 IV. Mechanism for Connecting Cost with Product 37 
 
 V. Costing on Method A 44 
 
 VI. Costing on Method B 56 
 
 VII. Costing on Method C 66 
 
 VIII. The Final Stage of Costs 81 
 
 IX. Waste & Spoilage. Scrap. Byproducts 86 
 
 X. Auxiliary Equipment — Designs, Patterns, Molds, Jigs, etc. . . 96 
 
 XL Sales and Selling Expense 100 
 
 XII. Summarizing the Results of a Business Period 109 
 
 XIII. Recapitulation 118 
 
 PART II 
 COST ACCOUNTING 
 
 I. The General Diagram 123 
 
 II. Purchase Orders 132 
 
 III. Recording Purchase Expenditures 146 
 
 IV. Purchases not Immediately Chargeable — Stores 156 
 
 V. Stores (Continued) 167 
 
 VI. Stores (Continued) — Continuous Inventory 183 
 
 VII. Purchases not Immediately Chargeable— Buildings and Plant. 191 
 
 VIII. Rents, Taxes, Insurance, etc 207 
 
 IX. Time and Pay 216 
 
 X. Works Expense, and Administrative Expense 234 
 
 XL General View of the Foregoing Operations 237 
 
 XII. Orders — Service or Standing Orders 242 
 
 XIII. Orders— Production Orders 255 
 
 XIV. Cost Sheets and Burden 272 
 
 XV. Costing 279 
 
 XVI. Departments 284 
 
 XVII. Costing on Method A (Department Hour-cost Method) ... 287 
 
 XVIII. Costing on Method B (Hourly Burden or Percentage Plan) . . 312 
 
 XIX. Costing on Method C (Scientific Machine Rate Plan) .... 340 
 
 XX. Costing on Method C (Determining the Machine Rate) . . . 355 
 
 vii
 
 vm CONTENTS 
 
 Chap. Page 
 
 XXI. Costing on Method C (Control of Factors) 371 
 
 XXII. Collecting Departmental Costs 377 
 
 XXIII. Final Remarks on Costing 387 
 
 XXIV. The Inclusion of Interest in Cost 392 
 
 PART III 
 FACTORY REPORTS AND RETURNS 
 
 I. The Nature of Reports and Returns 397 
 
 II. Reports and Returns for the Foreman . . . 405 
 
 III. Reports and Returns for the Superintendent 418 
 
 IV. Reports and Returns for the Executive 434
 
 MANUFACTURING COSTS 
 AND ACCOUNTS 
 
 PART I 
 
 GENERAL OUTLINE OF MANUFACTURING 
 ACCOUNTS 
 
 CHAPTER I 
 PURCHASING— PRODUCTION— MARKETING 
 
 Manufacturing is the art of making changes in the condition 
 of material by the application of labor and machinery. These 
 changes may affect either the form, the substance or composition, 
 or the dimension of the material operated on, or all these together. 
 To begin with we must always have material in some shape or 
 other. Often we require more than one kind of material. 
 Alteration in the status or condition of material is the essential 
 fact in manufacturing, and cost accounting has for its aim the 
 ascertaining of the cost of these alterations. All expenditure 
 within the factory that does not contribute in some way to the 
 alteration of the status or condition of material is wasted expendi- 
 ture. The more advanced methods of accounting are able to 
 distinguish between expenditure that is wasted in this way, and 
 expenditure that has actually and usefully contributed to pro- 
 ductive processes. 
 
 The different kinds of changes in material usually met with are 
 the following: 
 
 1. The material remains unchanged in substance, nothing 
 being added to or taken away from it, except possibly waste 
 particles. The original material is only changed in form or 
 dimension. 
 
 2. It may be split up as it proceeds, and various byproducts 
 taken from it. 
 
 1
 
 MAN I ~!\\< TURING COSTS AND ACCOUNTS 
 
 3. It may be added to as it proceeds, and combined with new 
 material or other forms of the same material. 
 
 In tracing the cost of changes in material, the accounting will 
 obviously be complex or simple, according to the amount of 
 detail that we wish to record. If, for example, we only wish to 
 ascertain the cost of the whole series of changes, disregarding the 
 cost of each intermediate stage, it will be fairly simple. But 
 in proportion as we begin to look for the cost of the intermediate 
 changes, it will become complex. The final stage of complexity 
 ■ lied when we require to find the cost of every change, how- 
 ever slight, in the status of every piece of material that goes into 
 the product. This ultimate development is represented in many 
 varieties of engineering cost accounts. 
 
 It was pointed out above that these changes in the status of 
 materia] were wrought by the application of labor and of 
 machinery. Included in the term "labor" is every kind of 
 human activity, both mental and manual. Skill and experience 
 are, of course, as much part of the cause of the changes in material 
 as the actual physical labor of operating machines or handling 
 product. 
 
 Before we commence a manufacturing business we have noth- 
 ing but cash, or a bank balance which is the equivalent of cash. 
 Our first act in setting up an industry is, therefore, purchase, 
 and by purchase we acquire: 
 
 1. Buildings, machinery and equipment. 
 
 2. The services of officials, managers, operatives and laborers. 
 Outside cooperation, such as insurance, rent of land or 
 
 premises, taxes, professional service, etc. 
 ■1. Material. 
 
 Having acquired these things and services, we proceed to 
 
 organize them in such a way thai material is continually changing 
 
 la or condition — continually progressing from the raw 
 
 to the finished stage. Having arrived at the finished stage, 
 
 U| - h tead of the original raw material, something quite 
 
 milar in either form, Bubstance or dimension. This new 
 
 thing i- our salable product. Commonly also, we have certain 
 
 ich a- spoiled or discarded material which may or may 
 
 not have a market value, and we may also have expended money 
 
 not used. The latter have no value at all. 
 
 I in an accounting viewpoint, therefore, manufacturing 
 
 ■nine divisions, viz.:
 
 PURCHASING— PRODUCTION— MARKETING 3 
 
 Expenditure on purchases — equipment, labor, material, service. 
 
 Transformation of material into salable product. 
 
 Marketing salable product. 
 
 These prime divisions must be preserved in all manufacturing 
 accounting schemes. In practical language they are briefly 
 classified as: 
 
 P URCHASING-PROD UCTION— SALES 
 
 I. PURCHASING 
 
 In considering purchases and their relation to costs, we come 
 at once to a division of great practical importance. Purchases 
 may be divided into three main classes: 
 
 1. Those of which the value depends on their being used at 
 once, and become a dead loss if not so used. 
 
 2. Those which can be stored for a reasonable time without 
 deterioration, and can be taken out of stores and used at any 
 moment they are wanted. 
 
 3. Those of which the value slowly diminishes, more quickly 
 if they are used, less quickly if they are not used. 
 
 In the first class all labor must be included. Unless there 
 is employment for a man, any wages he is paid are a dead loss. 
 Labor cannot be stored in the slightest degree. Rent and taxes 
 are in the same class. Rent of an office that is not being used is 
 obviously an irrecoverable loss. Every kind of purchase of which 
 the value is measured by time, must necessarily be put to use 
 before the time paid for has elapsed, or the payment has no eco- 
 nomic value at all. 
 
 In the second class belong all ordinary raw materials. Most 
 material is capable of reasonable storage. If it deteriorates it 
 then becomes waste, in proportion to the amount of deteriora- 
 tion. It does not pass to any other class. 
 
 The third class is a most important one, embracing as it does, 
 nearly all capital investment — buildings, machinery, equipment, 
 tools. The value of any of these does not depend on immediate 
 use, as does that of labor. The value of a building, or a lathe or 
 a crane does not vanish within a week or a month if unused. 
 But on the other hand, from the moment of erection in the shop, 
 a lathe or crane begins to lose value, even though it is not being 
 called on to do work. 
 
 This classification is a rough one, though useful to remember.
 
 4 MANUFAi TURING COSTS AND ACCOUNTS 
 
 The division between 2 and 3 is somewhat arbitrary when the 
 smaller articles are in question, and is based on practical con- 
 siderations chiefly. Theoretically many kinds of material would 
 deteriorate if stored for a number of years, but practically this 
 never happens in a well-managed plant. If material is subject to 
 deterioration then, of course, it would not usually be purchased 
 save in such quantities as were wanted for immediate use. For 
 all practical purposes, therefore, we may say that material likely 
 to be found in the stores of a well-managed plant is not subject 
 in deterioration. 
 
 Small tools, such as files, occupy the border line between 
 Classes 2 and 3. As long as they are in the stores, properly 
 jtacked and cared for, they cannot be regarded as subject to 
 deterioration. As soon, however, as they are issued to the shops 
 they pass to the third class, and become subject to a quickly 
 diminishing value. 
 
 This brings us face to face with an important feature of the 
 third -lass of purchase. All such items do not diminish in value 
 at the same rate. As soon as a file is put into use, it diminishes in 
 value in a visible and obvious way. But a solid stone or steel 
 and concrete building has a much more extended career of use- 
 fulness. A file may last a few days in regular use; a good building 
 may still be serviceable in 50 or even 100 years under favorable 
 circumstances. 
 
 Between these extreme limits practical experience has dis- 
 covered ;1 whole range of differences in the useful life of equipment. 
 This slowly diminishing value of capital investment in industrial 
 buildings, equipment and tools is called "depreciation," and is 
 an important element in cost as will be seen later (see Chap. III). 
 Briefly, however, we may say that each class of purchase in Class 
 3 ha- ita own rate of diminishing value, or depreciation, and 
 this is the basis on which the original purchase price is charged to 
 
 I rom the foregoing it will be seen that purchase is an initial 
 
 transaction, wholly separate from costing. To keep an account 
 
 of purchases, however accurately, throws no light on cost. 
 
 Thia i- because all purchases do not pass at once into manufactur- 
 
 Dperations, but are, as it were, held up for longer or shorter 
 
 period-, before they are made use of. Referring again to the 
 
 of purchases mentioned above, we find that: 
 
 Purchases in < lass 1 must be immediately transferred to cost
 
 PURCHASING— PRODUCTION— MARKETING 5 
 
 (which, by the way, may be either manufacturing or selling cost) 
 because they can under no circumstances be stored. 
 
 Purchases in Class 2 are not necessarily, nor usually, trans- 
 ferred to cost at once. They consist of materials which may be 
 purchased today for use a week or a month hence, or longer. 
 Their purchase price must be charged to cost only when they are 
 actually used, and not before. 
 
 Purchases in Class 3, consisting of buildings, equipment, 
 machinery and tools, are of such a nature that they are slowly 
 used up only in the processes of manufacture. But as they are 
 used up in the end (and also tend to get out of date, and become of 
 diminished value on that account) it is evident that their pur- 
 chase price must be charged to cost on some reasonable basis 
 which takes into account this peculiarity of slow consumption. 
 This is usually effected by a depreciation charge based on their 
 expected life. Thus if a machine is expected to last 20 years or 
 say 1,000 weeks, then Hooo °f its purchase price may be 
 charged to cost every week. 
 
 Another plan is to connect the life of the item with the quantity 
 of product it is expected to handle before it is worn out. Thus, 
 if a melting furnace costs $1,200 and experience has shown that 
 it will melt 600 tons of metal before it is worn out, then 3^500 
 of the purchase price is added to the cost of every ton melted. 
 The choice of one of these methods will depend on circumstances 
 that cannot be discussed here. The main point to observe now 
 is that the purchase price of items in Class 3 is transferred to cost 
 little by little, the rate of transfer depending on the class of item, 
 and the experience of practical men as to its probable life. 
 
 II. PRODUCTION 
 
 In every working period, say for convenience, a month, there 
 will be (if the foregoing classification is observed) a transfer of 
 purchases to production and selling made up of the following 
 principal items: 
 
 Wages and salaries paid during the month. 
 
 Rents, taxes, insurance and other "outside" items. 
 
 Materials actually used during month. 
 
 Reasonable charges for building, equipment, etc. Deprecia- 
 tion. 
 
 When these items are added together they represent the total
 
 6 MANUFACTURING COSTS AND ACCOUNTS 
 
 cost of production and selling for the month. If now the 
 product is of such a character thai the same amount of work in 
 process (i.e., work begun but not finished) is in the shop at all 
 times, or if it is of such a nature that each month's work can be 
 cleared up, leaving nothing in an incomplete condition and if 
 each month's output is sold during the month, then we have here 
 all that the commercial accountant requires to know about cost. 
 For he will be able to put these elements of cost on one side, 
 and selling price on the other, the difference between being profit 
 for the month. Thus: 
 
 Wages and salaries, rents, 
 
 taxes, etc. 
 Materials used. 
 Depreciation. 
 Balance: Profit. 
 
 Hale price of product. 
 
 Fig. 1. -Statement of cost, sale price and profit. 
 
 Note. — The items on the left of the statement will include expenditure on 
 production and also on selling. 
 
 But aii account of this kind, even though it accurately records 
 the facts about what is a very simple transaction, is not yet a 
 cost account in the proper sense. The cost accountant is con- 
 cerned not with the profits of the business, but with the result of 
 expenditure on production. The above statement does not 
 distinguish between cost of making and cost of selling. If there 
 is more than one kind of product it throws no light on which is the 
 mosl profitable to manufacture or the easiest to sell. It is merely 
 a commercial result, true as far as it goes, but not going very far. 
 
 At the very leasl the cost accountant will desire to distinguish 
 between the cost of making and the cost of selling. He will 
 wanl to know the cosl of making product A separately from the 
 cosl of making producl I!, lie may desire to know much more 
 than this. He may wish to ascertain jusl in what way the money 
 hae been expended in the making of the product, how much on 
 this process and how much on that. He may desire to ascertain 
 the value of and the reasons for waste. All these things are 
 problems of cosl accounting, and their use is found not in ascer- 
 taining broad commercial results, but in throwing light on 
 manufacturing details, and providing the technical men with
 
 PURCHASING— PROD UCTION— MARKETING 7 
 
 data by which they can study how to reduce cost and increase 
 output. 
 
 The first step toward cost accounting is to separate the expen- 
 diture on production from that on selling. 
 
 Having isolated cost of production, the next step is to look 
 about for some means of connecting the transferred purchase 
 figures thus isolated with the quantity of salable product produced 
 in the month. This may be quite easy or altogether impossible 
 to arrive at by any arithmetical process. It will be quite easy, 
 if, for example, some uniform product such as one width, grade 
 and substance of paper has been the only thing produced in 
 the period. All that is necessary in that case is to ascertain the 
 number of yards (or, if preferred, pounds) of such product thai 
 has been made, and to divide the total yards or pounds into 
 the total expenditure on production. The quotient will be the 
 cost per single pound or yard. 
 
 If, however, the product is not of a uniform character — if, 
 for example, it happens to have been 1,000 kettles, 10 tons of 
 flat-irons, 5,000 lb. of brass hooks, and 3,000 military shovels — 
 then it is impossible to obtain any arithmetical relation between 
 the total of cost of production, and the output of product. 
 
 It is true that if all product were to be weighed, and by this 
 means an output of say 40 tons of product were established, it 
 would be arithmetically possible to divide the total cost by 40 
 and so ascertain a cost per pound of product as before. But such 
 a figure would be meaningless. It would depend on the ac- 
 cidental proportion of each article on the occasion in question. 
 Exactly the same articles, making the same total weight, but 
 mixed in different proportions of each, would, on the next occa- 
 sion of costing, give rise to a wholly different cost figure per pound. 
 An attempt to ascertain cost in this way would, therefore, be 
 worse than useless, it would be misleading. 
 
 The cost accountant who had only data as to total expenditure 
 on production before him would be utterly baffled to find the cost 
 of his various products unless he went into greater detail. If he 
 were asked to state the cost of a kettle, or of a pound of brass 
 hooks, he could give no reply. Similarly in the case of the 
 paper output just referred to, although he could state the cost per 
 pound of the finished product, if he were asked how much of the 
 cost represented power, how much operative labor, and how much 
 supervision, he could not reply. If it were discovered that
 
 8 MANUFACTURING COSTS AND ACCOUNTS 
 
 another mill were producing more cheaply, and even if the details 
 of its cost were known, he could throw no light on the question 
 "Why are our costs higher than those of the other mill?" He 
 could not tell whether they were higher all round, or whether 
 some special efficiency in some one direction was responsible for 
 the lower cost of the other mill. 
 
 Faced with this problem, it is easily realized that merely to 
 ascertain the ingoings and outgoings of a factory or of a shop is 
 not cost accounting. It is only commercial accounting, useful 
 for general bookkeeping, but useless for any technical purpose. 
 
 Another kind of difficulty might also present itself. If the 
 nature of the business were such that the "work in process" 
 (i.e., work begun but not finished, and, therefore, lying in the shop 
 in a half-finished condition) fluctuated considerably, so that it 
 might be higher at the end of one month than at the end of 
 another, then even the broad result, shown in Fig. 1, would fail 
 in accuracy. For if all that went in did not come out, or if in a 
 subsequent month, more came out than went in, and both of 
 these cases would occur in such a business, then it is clear that 
 the relation between cost and selling price is no longer a simple 
 and direct one, but that profit will be affected by the degree to 
 which unfinished work remains in the shop each month. Further, 
 it would be impossible to arrive at a satisfactory unit cost (per 
 pound or yard) of product, since we can no longer divide the cost 
 of what went in by amount actually produced, because the latter 
 is in all stages of completion, and an indeterminate quantity of 
 it was also partly produced by expenditure in a previous month. 
 
 In practice, this difficulty is overcome, where there are no 
 proper cost accounts, by what is called stock-taking. The ad- 
 vantage of a monthly balance sheet must, of course, be foregone, 
 for Btock-taking is too costly and disturbing an operation to be 
 carried out frequently. Every 6 or 12 months a list or "in- 
 ventory" is taken of all work in process, and a value assigned to 
 the items on a more or less correct basis. The accountant is 
 Hum able to introduce the value so ascertained on the right side 
 of the statement, Fig. 1, so that he has on one side the cost of 
 operating the business, and on the other the results, namely, 
 sale- a1 -ale price, ami some; unfinished work at supposed cost 
 price. The balance, profit, is taken out as before. This old- 
 fashioned method of bookkeeping — it cannot be called ac- 
 counting ie si ill in use. It is, of course, utterly out-of-date.
 
 PURCHASING— PRODUCTION— MARKETING 9 
 
 Cost accounting has taken its rise from the necessity that exists 
 in modern business to know more than broad commercial results. 
 The difference between cost systems is not so much due to the 
 difference between industries, as in the very varying degree in 
 which technical detail is valuable in different industries. In 
 some industries, the product is of so simple and uniform a charac- 
 ter, and the operations so unvaried, that elaborate anafysis of cost 
 would have but small technical value. In other cases, the 
 reverse of these conditions obtains. In some industries selling 
 prices could not be safely fixed without the close observation of 
 cost as regards the smallest detail of production. In others analy- 
 sis of cost is necessary to keep production up to the high-water 
 mark of efficiency. But in all these instances, cost keeping can 
 begin only when the prime divisions of purchase, production 
 and selling or marketing have already been made. Cost account- 
 ing depends for its success on the analysis and isolation of dis- 
 similar items, and determination of their exact relation to the 
 changes wrought in material. 
 
 III. MARKETING THE PRODUCT 
 
 The cost of a product should be its cost at the factory gate. 
 As soon as an article is finished, and turned over to the warehouse 
 to be stored there against future sale, or to be shipped at once to 
 a customer, the factory has no part or lot in its future. Produc- 
 tion cost should, therefore, be separated rigorously from the cost 
 of marketing the product. 
 
 The efficiency of manufacturing and the efficiency of selling 
 have no relation to one another. Efficiency may be high in 
 one and low in the other. Extremely efficient manufacturing 
 may be discounted by extravagant or inefficient methods of 
 marketing. On the other hand, skilful marketing may offset 
 an unduly high cost or poor grade of production. 
 
 The word " marketing'' has been used here in place of the more 
 usual word selling, because in truth marketing is a more compre- 
 hensive term. In foreign trade, especially, the selling of product 
 — making a sale — is by no means the end of the story. Market- 
 ing includes (besides the act of selling, and the publicity, travel- 
 ing and other expenditure leading up to the sale) the important 
 questions of suitable and careful packing, shipping, shepherding 
 the consignment among the pitfals of foreign custom regulations,
 
 10 MANUFACTURING COSTS AND ACCOUNTS 
 
 and arranging for payment on terms and through channels which 
 in some cases may be quite roundabout. Marketing does not 
 end until the money has been received and the customer known 
 to be satisfied. It thus includes what is known as the credit 
 department of businesses. 
 
 None of these expenditures can properly be charged against 
 production. It makes no difference to the factory whether a bale 
 of goods, or a consignment of product of any kind, is consumed 
 in the home city, or in Maine or Texas or Oregon — or whether it 
 finds its way ultimately to the interior of China or Brazil. But 
 to the marketing department it makes a great deal of difference, 
 particularly in the amount of trouble and outlay involved in 
 completing the transaction after the sale is made. This depart- 
 ment should, therefore, bear the burden of its own transactions. 
 
 The subject of the cost of marketing has received but little 
 attention, yet it is a very important one. Where a plant makes 
 several different products, where it sells in different markets, 
 where it has a variety of means on which it relies to effect sales, 
 where some of its transactions involve constant watchfulness to 
 prevent loss from bad debts, and other transactions are free from 
 this drawback — in all such cases the importance of good market- 
 ing accounts becomes pronounced. Just as there are many 
 factors which it is necessary to analyze and take into account 
 if we would obtain an intelligent idea as to the way our money 
 is being spent on production, so in the cases just enumerated 
 there are several factors that affect our cost of marketing un- 
 equally as regards portions of our total sales. And just as some 
 shop expense is found, on analysis, to be incurred by one class 
 of product or one order in greater degree than another, so if 
 proper marketing accounts are kept, it will be found that certain 
 expenses bear more heavily on one product or one customer's 
 order than on another product or order. Knowledge of these 
 musl obviously affect our selling, and in fact our whole 
 business policy. 
 
 If we consider the marketing or, as it is commonly though 
 perhaps unfortunately called, the selling department, as an 
 independent corporation (as is sometimes actually the case) 
 and if we regard it as buying finished goods from the factory at 
 mhI thai all its operations thereafter are just those 
 of a wholesale merchant, we shall have adopted the proper view of 
 the true relations between the selling department and the
 
 PURCHASING— PRODUCTION— MARKETING 1 1 
 
 factory, and the consequent sharp division to be drawn between 
 them in setting up a system of accounts. 
 
 IV. DIVISIBLE EXPENSES 
 
 There are certain expenditures that will occur to everyone 
 as having no natural classification either as factory or selling 
 expense. Examples of such items are the president's salary, the 
 upkeep and salary list and expenses of the main office, etc. 
 There are usually a number of such items. 
 
 The existence of these items does not affect the principle of 
 division already laid down. They arise from the fact that the 
 work of such officials is sometimes devoted to matters relating 
 to purchasing, sometimes to production, and sometimes to 
 selling and marketing. Analysis will frequently show, with 
 comparative ease and accuracy, what proportion of the item 
 is chargeable to one or other of the divisions. In other cases, as, 
 for example, that of the president and the higher executive 
 officials, a somewhat arbitrary determination has to be made, 
 but if this is done with care after discussion of all the circum- 
 stances, a division can be made that does substantial justice, 
 and allots to each department a fair share of the expense in 
 proportion to benefits received by each.
 
 CHAPTER II 
 THE MECHANISM OF ACCOUNTING 
 
 All business transactions are in essence the transformation of 
 cash into something else and its return to the condition of cash 
 again. In simple buying and selling we begin by having a 
 stock of cash; we exchange this cash for goods of some kind; and 
 then we sell the goods for cash again. If our business is suc- 
 cessful our sale will return the original amount paid for the 
 goods plus an increase of the total sum involved which will be 
 our profit. We have here two transformations, first of cash 
 into goods, then of goods into cash. 
 
 No business is really as simple as this. It costs money to do 
 business. In other words all businesses have expenses — rent, 
 postage, stationery, car-fares — at the very least. But this 
 means that the transformations of cash will be correspondingly 
 complex. We begin with a stock of cash, as before. But only 
 part of it is transformed into goods for sale. Other portions 
 arc transformed into rent, into letter-paper, bill-heads, business 
 cards and envelopes, into postage stamps, and into car-fares. 
 When our goods are sold we have to get a price large enough to 
 replace the original goods, to pay for the rent, stationery, stamps 
 and fares, and still leave a surplus or profit. 
 
 The object of accounting is to enable us, either at wide intervals, 
 or frequently, to find out what is the present condition of our 
 original stock of cash, which in business language is termed our 
 capital. Bookkeeping is the mechanism by which we are 
 placed in a position to observe how we stand. Accounting is 
 the interpretation of the results presented by bookkeeping. 
 
 Tin- mechanism by which the results of any business whether 
 Large or small are brought to a focus is a very simple one. Per- 
 haps from this very simplicity it is not grasped by everyone as 
 it should be The elements of bookkeeping, of which we are 
 now going to speak, should, therefore, be mastered by everyone 
 who aspires to understand manufacturing accounts. 
 
 This mechanism, or we might almost say, these tools of the 
 accountant are four: 
 
 12
 
 THE MECHANISM OF ACCOUNTING 13 
 
 1. Books of original entry, in which transactions are recorded. 
 These transactions are always of the nature of transformations, 
 such as cash into goods or services; goods and services into 
 work in process; work in process into finished and salable goods; 
 salable goods into sales on credit; sales on credit into cash 
 received; and so on. 
 
 2. Journals. — These are frequently combined with books of 
 original entry, and serve to indicate the destination of the 
 transactions summarized in them; such as cash received by check, 
 which is credited to the persons paying it, and charged against 
 Bank, and so forth. 
 
 3. Ledger Accounts. — The nature of a ledger account should 
 be thoroughly studied because it has a somewhat abstract sig- 
 nificance in many cases. Some ledger accounts are simple 
 enough, such as, for example, the cash account. We may view 
 it as two columns of figures. That on the left sums up all 
 the cash we have paid into the till. That on the right sums up 
 all that we have taken out of the till. If at any time we add 
 up both columns, the "balance," or difference between them, 
 will represent obviously the amount of cash left in the till. 
 Such an account is a real account. It represents actual, tangible 
 property. Any balance that remains in it must necessarily 
 always be on one side, because it is impossible that more cash 
 can be paid out than has come in. 
 
 All ledger accounts, however, are not of this simple and obvious 
 character. They do not always represent tangible assets or 
 property. This arises from the nature of double-entry book- 
 keeping which demands that every transaction be entered twice, 
 corresponding to both sides of the transformation involved. 
 Every transformation involves considering "what it was," and 
 also "what it has become." And both these facts must be repre- 
 sented in ledger accounts. 
 
 Thus, to take the simplest case above, we begin with a balance 
 of cash in one ledger account, and this is balanced by a corre- 
 sponding item of capital in another ledger account. Whatever 
 transformations we effect in the form of cash, the value of these 
 must always balance with the entry of capital, until we have 
 either made a profit (which is an addition to capital) or a loss 
 (which means that our capital has diminished). 
 
 When we buy goods, the transformation must be recorded in 
 both its aspects: (1) Cash must be credited; (2) Goods must be
 
 14 
 
 MANUFACTURING costs AND ACCOUNTS 
 
 charged. If we have spent all our cash in buying goods, the 
 "balance" in the ledger account for Cash will be wiped out by the 
 credit. And the ledger account for Goods will contain an equal 
 value, which will balance the entry in Capital account as before. 
 These transactions are not easy to follow in words unless one 
 is familiar with the subject. And when more detailed and intri- 
 cate mailers have to be traced, great familiarity will not always 
 prevent errors. It is, therefore, highly desirable to use symbols 
 in tracing accounting schemes, and the system to be followed in 
 this work will now be explained, and the above simple cases 
 worked out on it. 
 
 When commencing business we charge Cash Account 
 
 with the $1000 cash we possess, and at the same time 
 credit our own Capital Account, or Selves with an equal 
 amount. Capital Account represents Ownership, and 
 Cash Account the property owned. Through all business 
 changes Ownership and Property must always be kept 
 equal, or balanced'.' 
 
 Capita] Cash Goods 
 
 BaL CrlOOO BaL DrlOOO 
 
 Fig. 2. — Diagram representing ledger accounts before starting business. 
 
 A ledger account is conveniently symbolized by means of a 
 circle divided vertically so as to represent the debit and credit 
 sides. A circle is selected to distinguish ledger accounts readily 
 from all olhcr books and blanks, which must necessarily be drawn 
 as rectangles owing to their variety of size, shape and lettering. 
 Fi^. 2, therefore, symbolizes the state of affairs in the simplest 
 case spoken of above, wherein we commence with $1,000 cash. 
 In opening the books, our proprietorship in the cash is represented 
 by an entry of $1,000 to the credit of selves, or in other words to 
 the credit of Capital account. 
 
 Thifi Lb because the underlying principle of double-entry book- 
 
 balance between proprietorship on the one hand 
 
 and goods or property od 1 he o1 her. As we shall see in the simple
 
 THE MECHANISM OF ACCOUNTING 
 
 15 
 
 cases to be discussed, this balance is always maintained, however 
 various the changes or transformations that take place in our 
 property. If we abstract the balances in the above accounts 
 they form a Balance Sheet thus: 
 
 Assets 
 
 Cash in hand, $1,000. 
 
 Capital and liability 
 
 Capital, $1,000. 
 
 We will now suppose that we part with some of our cash and 
 receive goods in exchange. We have now to introduce into our 
 diagram a new feature, namely, a book in which transactions are 
 recorded. In modern practice such books of original entry are 
 
 Cash Journal 
 
 Note: 
 
 Ownership remains as 
 before, but property is 
 now of two kinds, viz 
 cash and goods. 
 
 Note: 
 
 Only the total of transactions 
 in the journal is used for posting 
 purposes. There might for Instance 
 have been 40 transactions averaging 
 20 dollars each, or 800 transactions 
 averaging one dollar during the 
 month. The journal thus collects 
 
 amounts, and the total of these 
 
 amounts is posted ad 
 
 Cash 
 CrlOOO Bal.=Dr200 
 
 Fig. 3. — Diagram showing simple case of goods purchased for casb. The 
 balances below the ledger accounts are those remaining after the entries 
 have been made. 
 
 Note: Plain lines = debits or charges. Dotted lines = credits. 
 
 when possible made into "journals" or posting mediums also, 
 so that certain frequent classes of transactions can be totalled 
 separately and posted in a lump sum to the ledger accounts 
 affected. The alternative to this is, of course, separate posting 
 of each item. Arranging original books of entry as journals is, 
 therefore, a labor-saving device of an important character. 
 
 Figure 3 represents a very elementary form of this kind. 
 As only one transformation is concerned, namely, Cash into 
 Goods, only one column is required to record the amounts. 
 WTien we have purchased $800 worth of goods for $800 cash, and 
 have recorded the transactions, the results will be as shown in
 
 16 MANUFACTURING COSTS AND ACCOUNTS
 
 THE MECHANISM OF ACCOUNTING 17 
 
 Fig. 3. The book of original entry shows the total of the transac- 
 tions (S800) and from the column recording this two lines start, 
 one dotted, which represents a credit, and one plain, which repre- 
 sents a charge or debit. Cash account is thereby shown to be 
 credited with $800 and Goods account is shown to be debited 
 with $800. Starting at the posting medium or journal, and 
 following the lines we can see just what accounts are reached and 
 affected by the transactions recorded in the journal. In this case 
 the whole matter is very simple but in the course of this book we 
 shall find the use of this kind of symbolizing very useful to explain 
 complicated transactions. Its principle, should, therefore be 
 thoroughly mastered by the reader at this stage. 
 
 The transactions shown in Fig. 3 can now be subjected to the 
 test of a Balance Sheet, thus: 
 
 Assets Capital and liabilities 
 
 Cash in hand, $200 
 
 Goods in hand, $800 Capital, $1,000 
 
 $1,000 $1,000 
 
 From this we see that our transformation of cash into goods 
 has not affected the balance between capital or proprietorship 
 and assets or property. The only difference is that our capital 
 is now represented by two kinds of property instead of one, but 
 the totals of Property accounts equal Capital account just the 
 same. We must now extend the system to the representation 
 of the second simple case mentioned above, in which cash is paid 
 out not only for goods, but also for certain business expenses. 
 Fig. 4 shows the extension of the symbolization to cover this case. 
 
 In this figure the journal is shown at an advanced stage of 
 development. On the left side the items are recorded and their 
 amounts. On the right side a series of columns is provided, 
 each of which is devoted to collecting the amounts relating to one 
 class of transaction. In entering up a transaction the amount is 
 first entered on the left-hand column, and then "allocated" 
 to one or other of the columns on the right. Allocation means 
 determining to what account the item is properly chargeable. 
 In practice, of course, the headings of the columns would be 
 selected to represent the more frequent classes of transactions, 
 and each such column would have many entries in it. Infrequent 
 allocations are placed in a spare column at the right hand, and 
 are separately posted to the ledger accounts affected. 
 
 2
 
 18 MA A" L FACTURING COSTS AND ACCOUNTS 
 
 The journal records a total payment of $910 cash, which is 
 accordingly credited to Cash account. Now as the total alloca- 
 tions must always equal the left-hand column, we shall expect 
 to find various accounts charged with items equal in total to 
 Following the plain lines we find that this is actually so. 
 has been charged to Goods and smaller amounts to Rent, Sta- 
 tionery, Postage and Traveling, making $910 in all. 
 
 All these transformations of cash having been recorded and 
 completed, the next question is whether our assets are still 
 equal to our capital. Before answering this question, certain 
 peculiarities of the new ledger accounts — Rent, Stationery, 
 Postage and Traveling — must be considered. 
 
 We have seen that Cash and Goods are both "real" accounts, 
 that is, they represent actual tangible property. But none of 
 these new accounts represent anything in our possession. We 
 have paid the rent to the landlord, have used up the stationery, 
 have put the postage stamps on our letters, and the traveling 
 money has been dropped into the boxes of the street cars. 
 Obviously, therefore, the balances in these accounts do not 
 represent property. In other words they do not represent any- 
 thing real. For this reason such accounts are usually called 
 nominal accounts. But if they do not represent anything real, 
 how can we set them against capital to preserve our Balance 
 Sheet as before? 
 
 As a purely bookkeeping proposition we cannot do so. If 
 we list the assets and capital as before, the result would be as 
 follows: 
 
 Assets Capital and liabilities 
 
 Cash in hand, $90 
 
 Goods in hand, $800 Capital, $1,000 
 
 $890 $1,000 
 
 Obviously this will not do. The Balance Sheet no longer 
 balances, and the reason is that on the face of the transactions 
 we have lost money. We have incurred expenses for doing 
 business, bul as yet our business has only consisted in buying 
 goods. We have sold nothing. Therefore, to restore equality 
 iri our Balance Sheet we should have to put a new line on the 
 left-hand side of the sheet, thus: 
 
 Loss, $110. 
 
 Willi this item included, the sheet would balance as before.
 
 THE MECHANISM OF ACCOUNTING 19 
 
 The practical effect of the item would be to wipe out $110 
 of our capital and reduce it to $890, the amount now represented 
 by property. 
 
 This is the bookkeeping viewpoint. The accounting view- 
 point might be quite different, and this illustrates the difference 
 between bookkeeping and accounting. The accountant would 
 consider all the circumstances of the case. The figures might 
 for instance represent the first month's transactions *of a new 
 firm, and in such a case it would not be practically true that 
 capital had been lost. The balances in the nominal accounts 
 might be looked at in the light of expenditure that would 
 speedily bring results, and, therefore, need to be held up or "sus- 
 pended" for a time. Cases like this frequently occur, as for 
 instance when a large sum has been paid out for "goodwill" 
 which is held up and only liquidated by degrees. Another 
 example may be found in heavy expenditure on an advertizing 
 campaign, part of which is suspended and spread over future 
 months. Naturally, decisions as to what may be legitimately 
 held up in this way require mature experience, for otherwise 
 great danger is involved. 
 
 Supposing, however, that it is decided to "suspend" the 
 expenditure represented by the balances in the nominal accounts 
 for the present, then the form of the Balance Sheet would be as 
 under: 
 
 Assets Capital and liabilities 
 
 Cash in hand, $90 
 
 Goods in hand, $800 Capital, $1,000 
 
 Suspended expense, $110 
 
 $1,000 $1,000 
 
 This restores the equation in the Balance Sheet, but at the 
 price of introducing fictitious assets into it, which is only justi- 
 fiable if the benefit of the expenditure represented by such 
 entry is legitimately chargeable to future transactions. 
 
 This simple case may be expanded one degree further. We 
 will assume that in the month following some goods were sold 
 for cash at a profit. This involves an entirely new element in 
 our transactions. Hitherto all transformations have been 
 equal. So much cash was transformed into an equal value of 
 goods, or of stationery or postage stamps. Now, however, we 
 sell $200 worth of goods, and in return receive, not $200 cash,
 
 20 MANUFACTURING COSTS AND ACCOUNTS 
 
 but $400 cash. In other words we have made a gross profit 
 (that is a profit from which the expenses of doing business are 
 not yet deducted) of $200. It is desirable, therefore, to arrange 
 our ledger accounts so that this item of gross profit is isolated, and 
 can be seen separately. 
 
 Figure 5 shows the mechanism necessary. The ledger accounts 
 are the same as in the last example (Fig. 4) and the transactions 
 are assumed to be those of the period immediately following 
 the Balance Sheet which was prepared showing "suspended" 
 expenses amounting to $110. The book of original entry 
 i- termed the Sales Journal. Its peculiarity is that each item 
 is entered from two aspects, that is, in two values. First, it 
 is entered from the viewpoint of its cost at which it stands in 
 t lie ( loods account. Secondly, it is entered from the viewpoint of 
 the price it has fetched, or its sale price. Briefly, this may be 
 summed up as an entry of "What we gave for it," and another 
 entry of "What we got for it." Each of these entries must be 
 charged and credited to ledger accounts. Having made the 
 entries and totalled all of them for the period, we proceed to 
 post the totals to ledger accounts, just as we did in the case of 
 the Cash Journal. 
 
 Taking the total of cost of goods first, as we have taken these 
 items out of our stock of goods, we credit Goods account with 
 their value. As we have parted with them to a purchaser, we 
 charge Sales account with the same value. 
 
 Taking the total of sales at sale price next, as we have received 
 cash to the full value, namely $400, and have put it in the till, 
 we charge Cash with that amount. As this money has come 
 from the purchaser we credit Sales account with the same 
 value. These credits and charges can be very clearly followed 
 on the diagram — dotted lines being credits and plain lines charges 
 or debits. 
 
 When all these entries to ledger accounts are made and the 
 accounts themselves balanced off, we should be in a position 
 to prepare another Balance Sheet. As, however, we have now a 
 complete cycle of transactions to consider, some of them being 
 profit and some being expenses brought forward from the 
 previous period, it will be preferable to consolidate the accounts, 
 or rather their balances, so as to deduct the expenses from the 
 gross profit-, and so ascertain net profit, thus making the state- 
 ment in the Balance Sheet much clearer.
 
 THE MECHANISM OF ACCOUNTING 
 
 21 
 
 02 <£ 
 
 >*0 8 
 > © 
 
 CO 
 CO 
 
 o ^,
 
 22 MANUFACTURING COSTS AND ACCOUNTS 
 The Trading account is prepared as under: 
 
 TRADING ACCOUNT FOR MONTH OF 
 
 Dr. Cr. 
 
 To Expense accounts, viz.. By Sales account: 
 
 Rent $50 Gross profit $200 
 
 Stationery $30 
 
 Postage $10 
 
 Traveling $20 
 
 Net profit $90 
 
 $200 
 
 It may assist the student to show the process of crediting and 
 charging involved in preparing such a Trading account. Fig. 6 
 shows a Closing Journal which is the source of the transactions. 
 First, the group of Expense accounts are individually credited 
 with the amount standing against each, and then the total for 
 the whole group is charged to Trading account. Similarly, the 
 balance in Sales account ($200, see Fig. 5) is charged to that 
 account and credited to Trading. This, of course, has the effect 
 of simple transfer of all the items dealt with, from one account to 
 another. All the debit balances in the Expense accounts shown 
 in Fig. 5 are now transferred to the debit side of Trading account. 
 In the same way, the credit balance of $200 which stood in Sales 
 account is now transferred to the credit side of Trading account. 
 The balances in the expense accounts and in Sales accounts are, 
 therefore, wiped out completely. 
 
 The transactions of the Closing Journal are not transformations 
 of real things into a new form. They merely serve to rearrange 
 certain of the nominal accounts and consolidate them. All 
 the property of the firm is still represented by the real accounts, 
 viz., Cash and Goods. The nominal accounts simply serve to 
 explain why those quantities of real property exist as they are. 
 In the last Balance Sheet, ( 'ash and ( loods were less than might 
 be expected, and the nominal accounts for expense, being ad- 
 mitted to the Balance Sheet, explained the shortage. Similarly, 
 in the balance now to be prepared, based on Fig. 6, though all 
 the Expense accounts have disappeared, we have a nominal ac- 
 count, namely Trading, which will explain why we have more 
 capital now than we had at the last Balance Sheet.
 
 THE MECHANISM OF ACCOUNTING 
 
 23
 
 24 MANUFACTURING COSTS AND ACCOUNTS 
 
 Balance Sheet 
 
 Assets Capital and liabilities 
 
 Cash in hand, $490 Capital, $1,000 
 
 Goods in hand, $600 Surplus, $90 (from Tdg. A/c) 
 
 $1,090 $1,090 
 
 This " surplus " is, of course, our net profit. In this simple case 
 it may be mentally checked by remembering that our gross profit 
 was $200, and our expenses (brought forward from the last 
 Balance Sheet as "suspended") were $110. Deducting $110 
 from $200 we have $90, the amount of the net profit on the whole 
 period. 
 
 These elementary exhibits have been introduced for the pur- 
 pose of familiarizing the reader with the outlines of the mechan- 
 ism or bookkeeping. Books of original entry arranged as 
 journals or posting mediums, ledger accounts, and the Balance 
 Sheet comprise the whole art and mystery. If it be remembered 
 that every transaction, without exception, has two aspects, 
 namely its original condition and its new condition (as, for 
 example, when cash is transformed into goods) and, therefore, 
 that every transaction must go through three bookkeeping stages: 
 
 1. It must be recorded as a transaction. 
 
 2. It must be debited or charged to some account. 
 
 3. It must be credited to some other account. 
 
 — if these very simple facts are kept in mind, then considerable 
 progress will have been made toward mastery of the principles 
 on which all accounting rests.
 
 CHAPTER III 
 THE MECHANISM OF COST ACCOUNTING 
 
 The simple arrangements for keeping track of the results of 
 buying and selling described in the last chapter would require 
 supplementing in any business of importance by mechanism to 
 keep track of credit transactions. Instead of sales resulting in 
 an immediate return of cash, they merely result in indebtedness 
 on the part of individual customers. At a later stage, this in- 
 debtedness is transformed into actual cash, namely, when the 
 customer pays his account. Clearly, therefore, we should have 
 to provide an intermediate account, or rather set of accounts 
 (one for each customer) in between Sales and Cash. This 
 is usually done by providing a Sold Ledger containing customers' 
 accounts, to which are charged sales at sale price, or indebtedness. 
 When the customer pays, his ledger account is credited, and 
 Cash charged with the amount of the payment. 
 
 This device of an account placed in an intermediate position 
 to other accounts, so as to take care of peculiar circumstances in 
 certain transactions is an important one. All business transac- 
 tion, as we have seen, form a regular series: 
 
 Cash — purchases — sales — cash. 
 
 When we intercalate a sold ledger into this series it becomes: 
 
 Cash — purchases — sales — indebtedness — cash. 
 
 Now when we come to consider manufacturing businesses it will 
 be evident, from what was said in Chap. I, that a new term must be 
 placed midway in this series, after purchases and before sales, to 
 represent the changes in the condition of materials that are brought 
 about by manufacturing operations. The series would then become : 
 
 Cash — purchases — factory operations — sales — indebtedness — cash. 
 
 It is this new intermediate term that we have to discuss in this 
 chapter. 
 
 Manufacturing accounts are far more complex than those of a 
 simple merchant business. Not only is there, as a rule, a con- 
 siderably greater variety of purchases, but in many industries to 
 follow the history of the combination of these purchases into 
 
 25
 
 26 MANUFACTURING COSTS AND ACCOUNTS 
 
 product, taxes the art of the bookkeeper, and the science of the 
 accountant to the full. This is because manufacturing consists 
 not only in the direct application of labor to material — though 
 this is the obvious and popular conception of manufacturing — 
 but also in the setting up of a whole series of special organizations, 
 of which the services, though applied to produce changes in 
 material, have rarely any real quantitative relation to the goods 
 produced by their aid. 
 
 As a simple illustration we may take the power house, which 
 has to be established, maintained and operated in most plants 
 of importance. Now the cost of producing power does not vary 
 directly as the quantity of power consumed. A considerable 
 reduction in the demand may not lead to any noticeable reduc- 
 tion in the expense of producing and delivering power to the shops. 
 The same remark applies to other services set up by the manu- 
 facturer for the purpose of ministering to actual production — 
 they have no direct ratio to production — their expense does not 
 fall as production falls, nor does it rise as production rises, at 
 any rate not in proportion to production itself. 
 
 Of course, much the same might be said of certain of the 
 expenses of a merchant business. Rent of premises, for example, 
 remains the same when the merchant is full of business, as when 
 he is waiting for orders that do not come. This is true. But 
 in most manufacturing businesses the expenses of this class are 
 not only very numerous and very varied, but they form a large 
 proportion of the total activity of the plant. It is this fact that 
 gives complexity not only to the bookkeeping mechanism of 
 manufacturing accounts, but also makes their account/' ig 
 interpretation difficult. 
 
 In the first chapter we saw that purchases, in regard to a 
 manufacturing business, are not all chargeable at once to manu- 
 facturing operations. Those of which the value is measured 
 by time, such as wages and salaries, are, of course, so charged, 
 period by period. Material and supplies on the other hand are 
 only charged as they are used or consumed. And the im- 
 portant class of purchases represented by equipment and build- 
 ings, machinery, etc., are charged to Manufacturing in a special 
 and peculiar way, namely, by what is termed depreciation, which 
 is really an arbitrary determination expressing the rate at which 
 the equipment is supposed to be used up in carrying out manu- 
 facturing operations.
 
 THE MECHANISM OF COST ACCOUNTING 27 
 
 In setting up manufacturing accounts our first care will be, 
 therefore, to provide mechanism so that each of these kinds of 
 charges for things purchased shall reach manufacturing account 
 at the proper time. In other words, before we consider manu- 
 facturing operations themselves we must take measures to 
 assemble the elements of cost in all their various forms, making 
 sure that the right amount of each belonging to a given period 
 is charged, so that each financial period bears its own share of 
 the expenditure incurred. 
 
 It is most desirable, at this stage, that the reader shall get 
 rid of any preconceptions he may have as to what is termed 
 "capital investment" in buildings, machinery, equipment, etc. 
 Many persons look on this as something apart from the ordinary 
 nature of things purchased. The long life of a building or a 
 heavy machine and the mystery that sometimes surrounds the 
 question of what is termed depreciation, seem to lift these items 
 into a class by themselves. Though this is true to a certain 
 extent it is important to remember that when we buy a build- 
 ing or a machine it is only a purchase of something that is used 
 up in the process of manufacture just like a gallon of oil or a ton 
 of coal is used up. The only difference is that the consumption 
 is an invisible one, since it is so slow that our daily contact with 
 these articles does not enable us to perceive any reduction in 
 their value. 
 
 But if a visitor to a plant just erected were to go away, and 
 be absent for 10 or 15 years, he would on returning to it (if he 
 had a good memory of what he observed at first) quite readily 
 see that deterioration had taken place. And if instead of 15 he 
 stayed away 30 or 40 years, he would find on his return that the 
 hand of time had lain heavily on this apparently imperishable 
 capital investment. He would not only observe deterioration, 
 but almost certainly considerable changes in the equipment — 
 newer types of machines would have been substituted for some 
 of those he knew. The buildings would almost certainly strike 
 him as old-fashioned and not up to modern standards, and he 
 would observe probably that some of them had been altered 
 and patched. In short, observation of so-called capital invest- 
 ment items at considerable intervals of time would disclose that, 
 just like any other purchased article, they were being used up 
 in the course of manufacturing operations. 
 
 It follows from this that depreciation is not a fancy or arti-
 
 28 MANUFACTURING COSTS AND ACCOUNTS 
 
 Cash Account 
 
 Plant, 
 Buildings 
 and Equipment 
 
 Advertizing 
 and Catalogues 
 
 Traveling Exp. 
 of Salesmen 
 
 Fig. 7.— Principal classes of purchases in a manufacturing business. 
 Note: Charges may be made to any ledger account from either journal if 
 necessary.
 
 THE MECHANISM OF COST ACCOUNTING 29 
 
 ficial idea, but that it is the nearest approximation we can make 
 to a very ordinary fact — the fact of consumption of an article 
 by using it. And, therefore, if we are to obtain the true cost of 
 manufacture of our product, the value of our equipment that 
 we use up daily, monthly and yearly must be included in that 
 cost, just as the cost of using up a file or a pound of grease must 
 find its place in cost, and for exactly the same reason. In 
 assembling our components of cost, a charge for the slowly dissi- 
 pating purchase price of buildings and equipment must be 
 carefully determined and regularly made. The amount of such 
 charge and the basis on which it is calculated need not be dis- 
 cussed until later. We must assume here that such a charge 
 can be calculated, and provide the mechanism for assembling 
 it along with the other components of cost. 
 
 Figure 7 shows the first stage in assembling the components 
 of cost. This diagram is not, of course, exhaustive. It shows 
 only some of the more important and interesting classes of 
 purchase, and these are, for convenience, grouped more closely 
 than they would be in practice. A single ledger account, for 
 instance, is given for Plant, Buildings and Equipment. In 
 practice, several separate ledger accounts would be used for 
 such items, and the same remark applies to some of the others. 
 The principle involved can, however, be better examined by 
 taking a few important groups. 
 
 This principle is a simple one. Two books of original entry 
 are shown. One of these, the Purchase Journal, represents 
 purchases on credit; the other, the Cash Journal, represents 
 purchases for cash. In the first case the total for the month, 
 $1,300 is credited to sundry supply firms, and represents our 
 indebtedness to them, to be discharged by payment of cash at 
 some convenient future date. The allocations of this sum 
 are summarized in the various allocation columns and charged 
 to the respective ledger accounts as shown. 
 
 The same procedure is followed in the case of the Cash Journal, 
 with the exception that credit is made to Cash account — as the 
 money has been paid out directly, such purchases not having been 
 made on credit. 
 
 The issult of these transactions is that we now have a series 
 of accounts that show the present form of the purchases we 
 have made during the month. Some of these accounts will be
 
 30 
 
 MAM 7 •'. W 77 'RING COSTS A ND A CCO UNTS 
 
 observed to have balances in them, which have been brought 
 down from previous months. It is very important to under- 
 stand why some have balances and some not. The accounts 
 that contain balances are those representing forms of purchase 
 
 Depreciation Journal 
 
 Sundry 
 Expenses 
 
 Salesmen'i 
 Traveling | 
 Expenses 
 
 Fig. 8. — Credits to accounts shown in Fig. 7. Purchase transferred, as con- 
 sumed, to Factory and to Selling Dept, respectively. 
 
 which do not go immediately and directly to costs (or to sales 
 expense) but are held up in an intermediate state while only 
 the proper amount chargeable to one month's business is taken 
 out of the total each month.
 
 THE MECHANISM OF COST ACCOUNTING 31 
 
 The first of such accounts is Plant, Buildings and Equipment. 
 The balance brought forward represents the value of these items 
 at the end of the previous month, after that month's depreciation 
 had been deducted and charged to manufacturing. The new 
 total $7,000 + $300 = $7,300 will presently, as we shall see, 
 be subject to a credit for the current month's depreciation, and 
 a new balance will be carried forward. 
 
 The second such account is Materials and Supplies. A balance 
 of $1,300 is brought forward, and this represents what was left 
 in stores after the previous month's actual consumption had 
 been deducted and charged to manufacturing. To this we have 
 added $800 making a new total of $2,100, and this will presently 
 be subject to a credit for materials consumed in the current 
 month, leaving a new balance to go forward. 
 
 The third such account is Rent, Taxes, Insurance and similar 
 items. Though this is not, like the foregoing, a property account, 
 but an expense account, still it is a kind of purchase that needs 
 measuring out, month by month in definite amounts, quite 
 irrespective of the actual amounts that may have been invoiced 
 in any period. Thus it may be customary to have bills rendered 
 for such times every 6 months, or even annually, but we must 
 not, therefore, charge Production with the whole sum so invoiced 
 at once. The total yearly expenditure on such items must 
 be determined, and Production charged with one-twelfth of the 
 total amount. The balance of $70 in this account represents 
 items billed to us, but not yet charged to production. After 
 adding the new amount $50 we have a total of $120, from which 
 presently we shall deduct the proper monthly charge and carry 
 the balance forward. 1 
 
 The Stationery and Supplies, and Advertising and Catalogues 
 are obviously of the same character as Materials and Supplies 
 already mentioned. The balances in these accounts represent 
 property in hand, and not yet issued for consumption. 
 
 On the other hand, Wages and Salaries, being payable for the 
 current month's work, are chargeable at once, without any portion 
 being held back or. suspended. Sundry Expenses, and Traveling 
 
 1 Sometimes the regulation of items like rent, etc., is effected by passing 
 "proforma" invoices through the Purchase Journal for the actual month's 
 proportion. Credit is made to the personal account of the landlord, etc. 
 The practice is not a good one.
 
 32 MANUFACTURING COSTS AND ACCOUNTS 
 
 Expenses of Salesmen are similarly chargeable against current 
 month's work. 
 
 The principal items of purchase are now assembled in ledger 
 accounts, ready for allocation to the places they belong. To 
 do this a new set of journals comes into play, serving to analyze 
 and guide the analyzed amounts to their proper destination. 
 The mechanism for this step is shown by Fig. 8. 
 
 It will have been noted, however, that the arrangements 
 just described are merely an extension of the simple purchase 
 mechanism described in the last chapter. All that we have done 
 so far is to sort out our purchases into certain broad groupings, 
 corresponding to peculiarities that it is important to keep in mind. 
 We have collected items that we are going to charge at once to 
 Production, such as Factory Wages, in one account, items that we 
 are going to charge at once to Selling Expense, such as Traveling 
 Expenses, in another account, and we have also provided separate 
 accounts for such items as are only passed to Production as con- 
 sumed, such as Materials, Equipment, Rents, etc., or only passed 
 to Selling Expenses as consumed, such as Advertising and 
 Catalogues. 
 
 So far we have merely made a preliminary classification of 
 purchases, we have not yet intercalated into the series any new 
 variety of mechanism, or in other words we have not yet attained 
 the position of being able to do any costing. We are still at the 
 stage : 
 
 Cash — Purchases — 
 
 only we have introduced into the system a greater variety of 
 purchases and have correspondingly developed our system of 
 ledger accounts to record them. 
 
 Before leaving the question of purchases, attention may be 
 called to the fact that in some businesses, notably machine 
 shops and engineering works, a not inconsiderable portion of both 
 equipment and materials is made in the factory itself. New 
 machines, tools, parts made in quantities for future use, patterns, 
 molds, jigs and foundry flasks, are commonly made in such plants, 
 and from a bookkeeping point of view may be regarded as pur- 
 chases from selves, instead of from an outside supplier. In fact, 
 invoices might be passed through the Purchases Journal, charging 
 the Equipment or other account concerned and crediting produc- 
 tion, instead of crediting an outside supply house. It is.
 
 THE MECHANISM OF COST ACCOUNTING 33 
 
 however, better practice to employ a special journal for this 
 purpose, so that this class of transaction can be viewed separately. 
 For our present purpose, however, we need not consider purchases 
 from selves, since in many plants no such transaction occurs, and 
 where it does, the procedure is exactly similar to that adopted for 
 transactions with outside firms, except that Production is cred- 
 ited instead of a supplying firm. 
 
 Having assembled purchases in a series of accounts, the next 
 stage is to consider each of these separately, and ask whether 
 we have all the data necessary for charging each item up to its 
 next destination, and crediting the ledger account accordingly. 
 On examining the accounts we see that only in the case of three 
 accounts: namely, Factory Wages and Salaries; Advertising and 
 Catalogues; and Salesman's Traveling Expense, are we sure of 
 the destination " of the purchase in question. Both the latter 
 are obviously matters of marketing the product and have nothing 
 to do with manufacture. We need not concern ourselves further 
 with the amounts in these two accounts, but will leave them as 
 they are until we take up the question of Sales Expense. 
 
 The remaining accounts tell us nothing. We do not know 
 how much of each is to be charged to Production and how much if 
 any is to be charged to Selling Expense. This can be determined 
 only by obtaining further data. 
 
 Such data are forthcoming by means of a new set of journals, 
 which carry the analysis or classification of purchases to the 
 point that what is chargeable to Production is, once for all, 
 separated from what is chargeable to Selling Expense. And 
 when this stage is completed all the expenditure on Production 
 will be segregated, as well as all the expenditure on Selling. 
 In particular the nature of the manufacturing cost problem will 
 then begin to shape itself before us. 1 
 
 Figure 8 shows the further steps necessary to transfer the items 
 of purchase assembled in Fig. 7 to ledger accounts representing 
 respectively Sales Expense and Factory Cost. The ledger ac- 
 counts shown on the left are the same as those shown on the right 
 
 1 In practice a somewhat shorter path is followed than that indicated 
 here, in the case of some of the items. But the detailed method here de- 
 scribed is selected because it demonstrates very clearly the nature of the 
 operations that are necessary to collect and analyze purchases into the 
 two groups of Production and Selling Expense. The shorter methods 
 followed in practice are the same in principle, but more difficult for the 
 beginner to follow. They are described in Part II. 
 3
 
 34 MANUFACTURING COSTS AND ACCOUNTS 
 
 of Fig. 7. The first account containing the charges for purchase of 
 buildings and equipment is dealt with by means of a Depreciation 
 Journal. The entries in this journal are based on a grouping of 
 Buildings and Equipment according to their uses, so that all the 
 items used for the purpose of manufacture are in one group and 
 all those used for the purposes of storing finished goods and 
 selling are in another. The depreciation rates for each group are 
 thus ascertained separately, and one-twelfth of the annual total 
 charged through this journal to Sales Department and Factory 
 respectively. 
 
 The whole question of calculating depreciation charges and 
 grouping the items must be left till a later chapter. All that need 
 be considered now is that it is feasible to so separate and charge 
 the depreciation rates. The result of the operation is that we 
 now have two accounts (on the right hand of diagram) containing 
 charges for Factory Depreciation and Sales Department Depre- 
 ciation respectively, while a credit for the total of these two 
 amounts is made to the Buildings and Equipment account. 
 
 The next account to be dealt with is that for Materials and 
 Supplies. As these are kept in stores, the journal which records 
 their issue to the factory or to the sales department, is called 
 the Stores Issues Journal. Each item is entered and priced 
 out as issued, and allocated to one or other of the columns 
 shown. When the whole month's transactions are complete, 
 the totals are added, and the grand total of issues credited to 
 Materials and Supplies account. The individual totals of issues 
 to factory and sales department respectively are charged to the 
 two accounts shown on the right hand. By this operation we 
 have credited Materials for everything that has been taken out 
 of stores and have charged either Factory or Sales Department 
 with the proportion used by each. In practice the issues to 
 sales department are comparatively trifling. 
 
 Other accounts: viz., Rents, etc.; Stationery, etc.; Wages and 
 Salaries not belonging to Factory; Sundry Expenses, have 
 now to be considered. These are called Administrative Expense, 
 because some part of each belongs to a class of expenditure that 
 is of a generally administrative nature, such as the upkeep of 
 the general office, salaries of the higher officials, etc. The divi- 
 sion of these items between the two active departments, namely 
 Sales and Factory, is a matter of careful determination and 
 adjustment, the basis of which must be left to a later chapter. It
 
 THE MECHANISM OF COST ACCOUNTING 35 
 
 is sufficient to note here that such a division can be made, so 
 that all expenses of this class can be allocated either to Sales or 
 Factory. As in the case of Depreciation, one-twelfth of the 
 annual amount of items like rent, insurance, etc., is entered on 
 
 Buildings / \ 
 
 and (6725 I 
 
 Equipment \ / 
 
 Materials 
 
 and 
 
 Supplies 
 
 Rents, Taxes / \ 
 
 and I 80 J 
 
 Insurance V / 
 
 Accounts Representing 
 
 Balance of Purchases 
 
 on Hand after Deducting 
 
 Current Months Consumption 
 
 Advertizing,/ \ 
 
 and ( 350 ] 
 
 Catalogue \ / 
 
 Salesmen f \ 
 
 Traveling I 40 ) 
 
 Expenses V / 
 
 Sales Dept, 
 Depreciation 60 
 
 Accounts Chargeable 
 to Selling Dept. 
 
 Factory 
 Depreciation 
 
 
 
 Factory / \ 
 
 Wages and ( 140 ° ) 
 
 Salaries V / 
 
 Factory / \ 
 900 
 
 Stores Issues \ / 
 
 KLy 
 
 Accounts Chargeable 
 to Factory 
 
 Fig. 9. — Accounts shown in Fig. S after all journal entries have been com- 
 pleted. There are three groups, viz.: Balances left in Purchases accounts 
 as shown in Figs. 7 and 8, and Balances in the new accounts pertaining to 
 Selling Dept. and Factory respectively. 
 
 the journal, and credited to the different accounts concerned, and 
 the totals charged to Factory Administrative Expense, and Sales 
 Administrative Expense respectively, as shown by the diagram. 
 Stationery is charged according to consumption and the other 
 items according to actual amounts expended.
 
 3G MANUFACTURING COSTS AND ACCOUNTS 
 
 The only accounts not dealt with on the right hand of the 
 diagram are Advertising, etc.; Factory Wages, etc.; and Sales- 
 men's Expenses. No journalizing is necessary for these at this 
 stage, since their destination is sufficiently indicated. Ad- 
 vertising and Catalogues obviously belongs to Sales Department; 
 Factory Wages to Factory; and Salesmen's Expenses to Sales 
 Department. 
 
 Figure 9 shows the stage at which we have now arrived, 
 after all the charges and credits have been made and the accounts 
 balanced off. It will be seen that there are now three groups of 
 accounts. The first group contains: 
 
 Balance of buildings and equipment on hand at month end. 
 
 Balance of materials and supplies on hand at month end. 
 
 Balance representing amount of payments for rent, insurance, 
 etc., not yet due to be charged to Factory or Sales. 
 
 Balance representing stationery on hand unused, at month end. 
 
 Three of these accounts represent property on hand, and the 
 other represents "held up" expense as already explained. 
 
 The next group of accounts comprises those which are charge- 
 able to Sales Department. These will be considered later. 
 
 The third group of accounts comprises those chargeable to 
 Factory, namely: 
 
 Factory depreciation. 
 
 Factory wages and salaries (brought from left hand of Fi^,. 
 8 without journalizing). 
 
 Factory stores issues. 
 
 Factory share of administrative expenses. 
 
 These last four accounts are the components of factory 
 cost. They represent what has gone into the factory. Our 
 next task will be to see how the product which results can be 
 connected with these components of cost so that we can price out 
 each delivery of product and so be able to credit Production with 
 the factory cost of all the articles produced.
 
 CHAPTER IV 
 
 MECHANISM FOR CONNECTING COST WITH 
 PRODUCT 
 
 The essential feature of cost accounting is the connection of the 
 expenditure incurred in manufacturing, with individual quantities 
 or items of product. As we have seen in the last chapter, the 
 first step in manufacturing accounts is to assemble all com- 
 ponents of cost chargeable in one month, and to charge them 
 to certain ledger accounts. The next step is to clear these 
 particular accounts and charge them to Manufacturing account. 
 This provides us with definite information as to what has gone 
 into the factory, and it will be obvious that the final step is to 
 provide data that will enable us to say what has come out of the 
 factory. 
 
 As the factory exists for making product, and as product 
 comes out of the factory, the data we require must be based 
 on the quantity of product delivered out of the factory. We 
 must, therefore, establish a connection between dollars of cost 
 and weight, length, number or individual pieces of product. 
 
 When we have done this, and not before, can we make the 
 necessary credit to Manufacturing account for the work ac- 
 complished by the factory in the month. 
 
 We are now approaching the most interesting and at the 
 same time the most difficult problems with which we have to 
 deal. Hitherto what we have done is, in principle, common to 
 all kinds of manufacturing business. It has consisted in isolating 
 from other items just those charges which have been incurred 
 for the sake of production. This must always be done, what- 
 ever the kind of business with which we are dealing. But from 
 now onward the mechanism we set up will depend entirely on 
 the nature of the business and the degree to which detail is 
 desirable. 
 
 As there are hundreds of types of manufacturing business it 
 is obviously impossible to attempt to provide specific description 
 of the mechanism suitable for each. Fortunately, however, the 
 elements or components of cost are comparatively few, and they 
 
 37
 
 38 MANUFACTURING COSTS AND ACCOUNTS 
 
 can be combined with product only in a limited number of 
 wa}'S. Consequently instead of having to consider innumerable 
 kinds of business, we can confine our attention to a few types of 
 cost methods. These few methods cover the principles on which 
 all cost accounts in any kind of business must necessarily be 
 based. 
 
 There are, to begin with, two broad types of cost methods — 
 non-departmental and departmental. Only very simple kinds of 
 business can be handled on the non-departmental plan. The 
 large majority of plants contain such diversified kinds of opera- 
 tions that correct costing is possible only by isolating each main 
 class of operation, calling it a department and costing it by itself. 
 But, for example, a firm confining itself to machine-printing for 
 the trade by the aid of a set of machines all about the same 
 size and capacity, or a dyeworks handling one class of goods, or s 
 jobbing founds doing only hand-molding — all these are examples 
 of simple businesses Avhich contain only one department, and 
 therefore belong to the non-departmental type. 
 
 But if the machine-printing firm set up a composing room, or 
 a linotype shop; or if the foundry added a machine shop to its 
 business, then departmentalization would become necessary. 
 Generally speaking, most firms carry on several different types of 
 production simultaneously, even though the same product is 
 carried through all of them, and wherever this condition exists 
 departmentalization is necessary. It is also desirable when, as 
 for example in engineering works, certain machines are grouped 
 together for a special purpose, even though other departments 
 may contain exactly similar machines. 
 
 Though non-departmental accounts present the simplest case, 
 they need hardly be treated as a separate description of cost 
 accounts, because after all, the non-departmental type is really a 
 case of a business with one department. There is no difference 
 in the methods applied within the shops between a business 
 having but one department and a single department of a more 
 complex business. With the proviso that it is kept in mind that 
 some types of business have only one department, we may pro- 
 ceed to consider the remaining features of cost accounting. 
 
 Just as we allocated current purchases between the factory 
 and the sales department, so to begin with we make an allocation 
 of factory cos( elements to various departments, if there is more 
 than one. All the factory cost elements are thus allocated. The
 
 CONNECTING COST WITH PRODUCT 
 
 39 
 
 Factory Share 
 
 of 
 
 Administration 
 
 Expense 
 
 Wages and Salaries 
 
 Share of Ad. Exp 
 
 ALL EAST DEPT. SOUTH DEPT. Y< EST DEPT. 
 
 FACTOEY DEPTS. 
 
 Fig. 10. — Departmentalization of cost elements. 
 Note: Journalising would be effected by subdivided columns in journals 
 chown in Fig. 8.
 
 40 MANUFACTURING COSTS AND ACCOUNTS 
 
 result is that instead of one general factory cost elements group 
 of accounts as shown in Fig. 9, we have now a set of separate 
 departmental cost element accounts as shown by Fig. 10. 
 
 Figure 9 represents in fact the cost element as arranged for a 
 single or non-departmental business. If the business were or- 
 ganized in departments, then the journalizing made in Fig. 8 
 would be extended to allocate the elements at once into depart- 
 mental groups instead of into a single factory group. For this 
 reason Fig. 10 shows no journals. The three departmental 
 groups of accounts may be considered as derived directly from 
 Fig. 8, by means of additional columns in the journals there shown. 
 
 We have now arranged our cost elements in three groups cor- 
 responding to as many departments engaged in turning out prod- 
 uct. For all practical purposes each department is a separate 
 factory, and we can arrange our cost mechanism to suit the par- 
 ticular type of work done in it, quite irrespective of the cost 
 mechanisms which may be suitable for the other departments. 
 To begin with, therefore, it will be desirable to know what different 
 kinds of cost mechanisms are available, and in what the difference 
 between them consists. 
 
 Material entering into product presents no special difficulty. 
 It is charged direct to the unit quantity of product selected for 
 costing, whatever that may be. Material entering into product 
 is frequently called direct material. 
 
 The remaining components of cost are depreciation; the de- 
 partment's share of administrative expense; stores and supplies 
 not entering into product, but used up on maintenance or repair; 
 and wages and salaries. 1 The latter item, as will be seen pres- 
 ently, frequently requires further analysis. It is made up of two 
 different classes of item — wages and salaries of persons not process 
 workers and wages of operatives who are engaged on process 
 work on product. The latter operatives are spoken of as direct 
 labor, and their wages are called direct wages, meaning that they 
 are, in many cases, chargeable direct to unit quantity of product, 
 same as material. 
 
 If we analyze Wages and Salaries account in this way we 
 divide it into two portions, viz.: 
 
 1. Direct labor (or direct wages). 
 
 2. Expense labor (or expense wages), sometimes called in- 
 
 1 This assemblage of cost components is not exhaustive, but may be 
 re^nnled as a typical example.
 
 CONNECTING COST WITH PRODUCT 41 
 
 direct labor or indirect wages. This latter class is simply what 
 is left after deducting direct labor. By whatever term it is called 
 it really means "not-direct" labor. 
 
 We shall see immediately that this distinction is of great 
 importance, since the main varieties of cost system hinge on 
 the manner in which direct labor and direct material on the one 
 hand, and all the remaining elements of cost, on the other, are 
 applied to product. 
 
 The components of cost will now stand as follows: 
 
 1. Material entering to product (direct material). 
 
 2. Direct labor. 
 
 3. Administrative expense. 
 
 4. Stores and supplies (indirect material). 
 
 5. Expense wages and salaries (indirect wages, etc.). 
 
 6. Depreciation. 
 
 These last four items form a group by themselves, and this group 
 bears various names, such as overhead, expense, burden, etc. We 
 shall generally refer to it as expense. 
 
 The elements of cost are now consolidated into three groups, 
 namely : 
 
 1. Direct material. 
 
 2. Direct labor. 
 
 3. Expense (made up of items 3, 4, 5 and 6, above). 
 
 The art of costing consists in connecting these items with unit 
 quantity of product. Direct material being always charged 
 straight to unit quantity we are left face to face with: 
 
 1. Direct labor. 
 
 2. Expense. 
 
 and our problem is how to apply these to product, so that on 
 taking up a piece of the latter we can say what it has cost. 
 
 There are three main conditions governing the selection of an 
 appropriate cost system, viz. : 
 
 The method in which direct labor and expense are applied to the 
 product. 
 
 The unit quantity of product selected for costing. 
 
 The degree of detail required in the costing of this unit quantity. 
 
 Each of these main conditions is itself subject to variation, thus: 
 
 METHODS OF CHARGING DIRECT LABOR AND EXPENSE 
 
 (A) Direct labor and expense are merged and averaged, and 
 charged to unit quantity of product on a time basis.
 
 42 MANUFACTURING COSTS AND ACCOUNTS 
 
 (B) Direct labor is charged to unit quantity on a time basis. 
 Expense is averaged and charged as a percentage on direct 
 wages, or on the time taken by direct labor (hourly burden or 
 percentage method). 
 
 (C) Direct labor is charged to unit quantity, and expense 
 is similarly charged by means of a machine rate, both on a time 
 basis (scientific machine rent method). 
 
 SELECTION OF UNIT QUANTITY OF PRODUCT 
 
 (d) Unit is the whole output of one class of product. 
 
 (e) Unit is less than the whole output, but a definite quantity, 
 such as 500 lb. or yards, or a lot of 100 articles. But the unit is 
 still for a complete article, without distinction as to cost of sep- 
 arate parts, if any. 
 
 (/) Unit is the individual piece or part, or a lot of say 100 
 similar pieces or parts. (Engineering cost type. No sub- 
 division of unit quantity possible beyond this.) 
 
 AMOUNT OF DETAIL IN COST OF UNIT QUANTITY 
 
 (g) No detail. All processes within the department lumped 
 together in a single total. 
 
 (h) Each process costed separately. (An unbroken series of 
 processes may be grouped and considered as one process.) 
 
 It will be seen from the foregoing that there are no less than 
 eight conditions governing the selection of a costing method. 
 In order to make their relative bearing clearer they may be 
 stated as follows: 
 
 There are three methods of charging labor and expense to product. 
 
 There are three degrees of subdivision of the unit quantities to 
 which cost is to be applied. 
 
 There are two degrees of detail in regard to the departmental 
 cost of whatever unit quantity is selected. 
 
 The great complexity of cost accounting is due to necessity of 
 selecting the most correct method of charging labor and expense 
 and the most appropriate degree of subdivision of unit quantity, 
 :uid of detail, in any given set of circumstances. 
 
 Expense Arising Within the Department. — In practice, 
 indirect material and indirect labor take their rise partly within 
 the department itself. The wages of laborers and cleaners, and
 
 CONNECTISd COST WITH PRODUCT 13 
 
 the cost of supplies, such as oil and waste, are familiar examples. 
 In the discussion of methods of costing now about to be entered 
 on, it will be assumed that such items have already been sep- 
 arated from the cost of direct production, and assembled 
 separately. 
 
 By making this assumption the necessity of describing the 
 mechanism for making this separation is avoided at this stage, 
 and as it has no significance whatever as regards the ultimate 
 destination of the indirect material and the indirect labor, there 
 is no disadvantage in omitting it. 
 
 In machine shops and engineering works, where the operative 
 labor is of such a character that it may be used for making re- 
 pairs, the days work of any operative may include both direct 
 production and indirect labor. These must be sorted apart in 
 every case, before anything else is done, but after such sorting 
 is accomplished we have precisely the condition of affairs here 
 assumed, namely, that all direct labor is in one account and all 
 indirect labor in another. The mechanism for doing this does 
 not affect the main argument, and acquaintance with it may 
 well be postponed until a general acquaintance with the broad 
 outline of cost accounting has been made. It is fully dealt with 
 in the second portion of this work.
 
 CHAPTER V 
 COSTING ON METHOD A 
 
 The most convenient way to attack the subject of cost 
 mechanisms will be by taking each of the three Methods A, 
 B, and C by which labor and expense are connected with out- 
 put and discussing it separately. "We therefore begin with: 
 
 Method A: Labor and Expense Merged and Averaged. — The 
 merging of direct labor with expense is only possible under 
 certain conditions. If in a department we have several machines 
 a, a, a, a (Fig. 11), each of which can be used indifferently for making 
 the product, and if the wages of the operators of these machines 
 are identical, or so very similar that the difference may be ig- 
 nored, then it is obvious that any one hour of operative labor 
 
 
 \ 
 
 i 
 
 
 \ 
 
 / 
 
 
 \ 
 
 / 
 
 
 \ 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 a 
 
 
 a 
 
 
 a 
 
 
 a 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 \ 
 
 f 
 
 
 \ 
 
 ' 
 
 
 i 
 
 ' 
 
 
 ' 
 
 ' 
 
 
 Fig. 11. — A department having four archives, each identical. Such a de- 
 partment is said to have four "simple" streams of product. 
 
 is worth exactly the same as any other hour, and no object is gained 
 by charging it as a separate item to Product. In a soap-boiling 
 room, for example, the operators may be at work now on 
 one kettle and now on another, and as long as they are paid 
 day wages, it is obvious that it is a matter of indifference which 
 kettle they are working on. Similarly in an envelope-folding 
 department, if we have ten machines and say eight operatives, 
 each operative being assignable to any machine, and each being 
 paid the same wages, then an hour's work at any machine will 
 be the same as an hour's work at any other machine. 
 
 If the work is performed by gangs or groups of men, then there 
 may be different rates of wages within the group (e.g., a foreman), 
 but as long as the total wages of the group are always the same, 
 they may be shifted about from one machine a to another 
 
 44
 
 COSTING ON METHOD A 
 
 45 
 
 machine a just as though they were one man, without dis- 
 turbing the principle that one hour's labor is as good as another 
 hour's labor. 
 
 The principle may be extended to cover cases where there is a 
 slight difference of wages among operators, as for instance where 
 length of service is rewarded by increased wages, provided that 
 there is no permanent connection between certain kinds of work 
 and certain duties. Where labor is fluid, and the work as it comes 
 along is assignable to any operative, then the conditions for merg- 
 ing labor and expense exist. 
 
 
 \ 
 
 / 
 
 
 \ 
 
 / 
 
 
 v 
 
 
 
 
 
 
 
 
 
 
 
 
 a 
 
 
 a 
 
 
 a 
 
 
 
 
 
 
 
 
 
 
 
 
 
 b 
 
 
 b 
 
 
 b 
 
 
 
 
 
 
 
 
 
 
 
 
 
 c 
 
 
 c 
 
 
 c 
 
 
 
 
 
 
 
 
 
 
 
 
 
 d 
 
 
 d 
 
 
 d 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ' 
 
 ' 
 
 
 ' 
 
 ' 
 
 
 ' 
 
 r 
 
 
 Fig. 12. — A department having three sets of four machines each. Each 
 series, a, b, c, d is a continuous process, and identical with the other two. 
 Such a department is said to have three compound streams of product. 
 
 When operatives are paid by piecework Method A is inapplic- 
 able. 
 
 It may happen that product goes through a series of processes 
 in the department, and that each stage has a different rate of 
 wages. Fig. 12 illustrates a shop in which product passes 
 through three stages a, b, c and d. Now the operative at a 
 may be paid one rate, at b, another rate, and similarly for c 
 and d. Provided that the total wages a -\- b -\- c -\- d in each 
 series are the same, then merging is proper. Or to put it another 
 w&y, if all a operatives are paid at one rate, all b operatives at 
 another, and similarly for c and d operatives, and particularly 
 if all a operatives are interchangeable, and also all 6, c and d
 
 46 MANUFACTURING COSTS AND ACCOUNTS 
 
 operatives are also interchangeable each in his own class, the same 
 conditions exist, Of course, it is assumed that all product follows 
 the entire series of processes a, b, c and d, in every case. 
 
 "EAST" DEPT. 
 
 ( 260 260 T 
 Depreciation 
 
 
 Cost Sheet 
 
 Direct Mat'l 
 
 Direct Wages 
 
 Expense: 
 
 Deprec. 
 
 lG.STolbs Ind. Wages 
 
 @S Cents Ind.Mat'l 
 
 Adin.Exp. 
 
 Total 
 
 1X.U 
 
 Manufacturing or Cost 
 Journal 
 
 Finished Work. 
 Journal 
 
 Dept'l 
 
 Finished Work 
 
 Account 
 
 Indirect Material 
 
 x" Balance Brought and Carried Forward 
 / ~\ s-'' anJ Work in Process 
 
 ( *\ 
 
 I 60 60 ) 
 
 Share of 
 Admin. Expenses 
 
 Fig. 13.— Costing on Method A (single product). The ledger ac- 
 counts on the left are those of the "East" Department in Fig. 10, but 
 Wages and Material accounts have been further journalized into "Direct" 
 and Indirect. 
 
 A department arranged like Fig. 11 is termed a shop having 
 four simple streams of product, and one like Fig. 12 is termed a 
 shop having three compound streams of product. In the former
 
 COSTING ON METHOD A 47 
 
 case each machine a is a producing unit. In the latter case 
 each series of machines a, b, c and d, forms a producing unit. 
 
 Simple and compound groups of machines cannot coexist in 
 the same department, nor can the compound groups differ 
 among themselves; otherwise incorrect costs will result. 
 
 Figure 13 represents the ledger accounts belonging to the 
 "East" Department (see Fig. 10) with the exception that the 
 accounts for Materials and for Wages and Salaries have been 
 subdivided into Direct and Indirect in each case, for the reasons 
 just given. This subdivision, by the way, would be made 
 through the original journal entries in Fig. 8, all the necessary 
 splitting up into departments and special accounts for each 
 department being really done at one operation. It has been 
 thought better, however, to gradually develop the matter stage 
 by stage instead of presenting the reader with a complex jour- 
 nalization at the beginning. 
 
 The departmental accounts shown in Fig. 13 may be grouped 
 as follows: 
 
 Direct Material. Chargeable direct to unit quantity of 
 product, as mentioned above. 
 
 Direct Labor. 
 
 Expense accounts, viz.: 
 Depreciation. 
 Indirect Wages. 
 Indirect Material. 
 Administration Expense. 
 
 We have now to find some way of charging Direct Labor and 
 Expense to Product. 
 
 Single Product Costs on Whole Output. — In this case the unit 
 quantity of product is the whole of the output. Of course, it will 
 at once suggest itself that no costing of the whole output can be 
 made unless the output is homogeneous. If it were made up of 
 brass kettles and fire-irons, for instance, to cost the output either 
 by weight, or by number of articles, would be meaningless. 
 
 To cost an output as a whole, it must be homogeneous. 
 
 Such a product would be yarn in a spinning room, or envelopes 
 of one size and make passing through an envelope-folding de- 
 partment by the million, or soap in a soap-boiling room, or any 
 product which is either continuous and possesses no parts, or 
 of which each piece is like every other piece. 
 
 If we have such a product, we must still have some unit by
 
 48 MANUFACTURING COSTS AND ACCOUNTS 
 
 which to cost it. It must be measureablc, weighable or count- 
 able. Then we can express the whole product of the department 
 for one month as so many thousand gallons, yards, pounds or 
 thousands, and then if we divide the total departmental cost 
 by this figure, and add Direct Material, we arrive at the depart- 
 mental cost per gallon, yard, pound or per thousand. It will 
 be noticed also, that though not specifically mentioned, a time 
 busts is implied. In this case the time basis is one month, 
 which is the same period of time as covered by our journalizing. 
 For this reason the time question does not obtrude itself, but it is 
 there just the same, as we shall see immediately that we come to 
 consider the case wdien tw r o or more products have to be costed 
 on the basis of the whole output of each. 
 
 To ascertain the cost of a single homogeneous product for one 
 month a Cost Sheet is made out as follows: 
 
 Cost of direct material $300 22 per cent. 
 
 Cost of manufacture, viz.: 
 
 Direct wages 540 40 per cent. 
 
 Expense, viz.: 
 
 Depreciation 260 1934 per cent. 
 
 Indirect wages 120 9 per cent. 
 
 Indirect material 70 5^ per cent. 
 
 Administration expenses 60 4>£ per cent. 
 
 Total cost of product $1,350 100 per cent. 
 
 Divide by quantity made, viz., 16,875 lb.; Cost per pound, 8 cts. 
 
 Note. — Frequently each of the components of cost is expressed as a 
 per cent, of total cost per pound as well as in money. This is for con- 
 venience in comparing monthly figures. 
 
 In many cases, of course, there would be no direct material 
 to be considered in the work of a department. In the case of an 
 envelope-folding department, for example, the department 
 would receive the blanks already cut to shape and gummed, and 
 the cost of its operations would merely be a process cost. But 
 this process cost would, just the same, be expressed as cost of 
 folding envelopes per 1,000. Whether or not direct material 
 eni era into the work of the department makes no difference what- 
 ever in the method of costing. The form of the above Cost 
 account, for instance, would be just the same, omitting the first 
 line. The cost would be expressed per pound of the quantity 
 handled.
 
 COSTING ON METHOD A 49 
 
 This Cost account is now made the source for crediting the 
 departmental cost element accounts, and charging the depart- 
 mental Manufacturing account. A Cost or Manufacturing Jour- 
 nal is made use of, as shown in Fig. 13. It will be noticed that 
 there is already a balance standing to the debit of Manufactur- 
 ing account. This represents work in process carried forward 
 monthly, and it is assumed that this balance remains constant 
 from month to month. In some cases no balance remains, 
 a machine printing shop, for example, or other shops doing 
 process work only, no direct material being charged to Cost. 
 
 Only one more step is necessary and that is the crediting of 
 Manufacturing account and the charging of Finished Work 
 account with the value of product delivered to the next depart- 
 ment or to warehouse. The Finished Work Journal takes care 
 of this. The total in it is necessarily, in this case, the same 
 as that in the Manufacturing Journal, because the month's 
 product is dealt with as a whole. Fig. 13 shows the course of 
 the entries. The costing operations are now complete for the 
 month. 
 
 This is the simplest kind of cost keeping possible. It is 
 limited in application to the conditions mentioned, namely 
 a homogeneous product, passing regularly through exactly the 
 same operations every time. 
 
 Two or More Products Costed on the Whole Output of Each. — 
 If there are two or more kinds of product, each going through 
 exactly the same steps of manufacture, the total cost of each 
 will be proportionate to the output of each, provided that the 
 rate of production of each kind is strictly the same. If one 
 kind takes longer than another to pass through the series of 
 operations in the shop then the cost of each kind will not be 
 proportionate to output. 
 
 This is so important a point that it must be thoroughly under- 
 stood. All costing is based on a measurement of time. In the 
 simplest case above mentioned, when we assemble the elements 
 of cost (excluding material entering into product), what we have 
 really assembled is the cost of manufacturing capacity for a 
 certain period of time, actually a month. Another way of 
 expressing the same fact is by saying that it is the cost of manu- 
 facturing capacity for 200 hr. (if we assume that there are 200 
 hr. in the working month) multiplied by the number of streams
 
 50 MANUFACTURING COSTS AND ACCOUNTS 
 
 of product going through the shop. 1 From this it follows that 
 every hour of this manufacturing capacity has its price. If we 
 are dealing with a single uniform product, we may safely assume 
 that one hour's production is like another hour's production, 
 or at any rate if it is not it should be. We could, therefore, 
 have expressed our cost in the example just given in this form: 
 
 Total cost of department, 81,050 
 
 Hours in month, 200 X 10 streams of product, 2,000 hr. 
 
 Cost per process-hour, 52>£ cts. 
 
 Total process-hours on product, 2,000 
 
 Cost of product, 2,000 X 52 J £ cts $1,050 
 
 Add direct material 300 
 
 81,350 
 Cost per pound (10,875 lb.) 8 cts. 
 
 This, of course, would be a roundabout way of arriving at the 
 cost compared with the other method, yet it has a practical value 
 for estimating purposes. If we know the cost of the hour's 
 work of a machine or series of machines (stream of product) 
 and can estimate how many hours' work are involved in a job 
 on which we are bidding, we obtain a close figure. A modi- 
 fication of such a method is widely used in the printing trade. 
 
 Now if we have, not one uniform product, but two or more 
 similar but not identical products, we cannot say that 1,000 
 lb. of A and 500 lbs. of B have cost $100 and $50 respectively 
 out of a total cost of $150, for 1,500 hr. work, unless we are sure 
 that A actually took 1,000 hr. and B 500 hr. For if we were to 
 find afterwards that A took 1,200 hr. and B 300 hr., then the 
 actual cost of A would have been $120 and of B $30. Yet this 
 method of basing cost on proportional output is not uncommon, 
 although it is utterly erroneous save in the exceptional case 
 that the time occupied is in exact proportion to the output 
 of each. 
 
 When there are two or more products, therefore, passing 
 the same shop, the question of time recording comes into play 
 save in the few instances where we are sure that each product 
 has the same rate of production as any other. A concrete 
 case would be the envelope-folding department of a stationery 
 
 1 By "streams of product" is meant the series of processes followed by 
 the product. Two or more such streams may be proceeding simultaneously, 
 see Fig. 12.
 
 COSTING ON METHOD A 51 
 
 works. Here we have a number of machines of about the same 
 character, operated by girls of about the same skill and wage, 
 and although any machine could not be used for any job, the 
 rate of production and the operating cost of all machines in- 
 cluding operator is much the same. If now we have, during 
 a month, 20 different kinds of envelopes to fold, in lots varying 
 from 1,000 to 50,000 substantially exact costing will be found 
 by ascertaining the cost of a process-hour, and recording the 
 total number of hours worked on each kind of envelope by all 
 the machines. 
 
 The process-hour in this case is the individual machine-hour, 
 since each machine completes the whole process (compare Fig. 
 11). The total number of hours worked by all machines is, 
 therefore, divided into the total cost of running the department, 
 including direct labor, and the resulting figure is obviously the 
 cost of one hour's work of one machine. 
 
 If, on the other hand, the process work done on the envelopes 
 were accomplished by sets (of say three machines) then we should 
 treat three machines as one producing unit (compare Fig. 12). 
 Thus if the department contained 30 machines, each of which 
 accomplished the whole process, then the monthly cost of run- 
 ning the department would be divided by 30. But if the 30 
 machines were arranged in 10 groups of three machines, and 
 each envelope had to pass through a set of three machines before 
 it was finished, then the cost of running the department would 
 be divided by 10. Using the phrase adopted above, we might 
 say that in the former case there were 30 simple streams of 
 product passing through the shop, and in the latter case 10 
 compound streams. It is the number of distinct groups of 
 processes, of streams of product, not the actual number of 
 machines, that is the divisor. 
 
 In costing several products on Method A, the necessity for 
 recording what proportion of the total working time of the depart- 
 ment has been taken up by each product, and the corresponding 
 necessity for calculating, first the cost of the process-hour, 
 and then the cost of the output of each product separately, 
 makes the use of additional mechanism necessary. Fig. 14 
 shows this mechanism developed from Fig. 13, but carried in this 
 instance to the point of making separate charges to Finished 
 Work for three separate products, called X, Y, and Z. 
 
 The Time Record summarizes the work of the various machines,
 
 52 MANUFACTURING COSTS AND ACCOUNTS 
 
 and groups the process-hours worked on X, Y, and Z, showing 
 totals of 1,000, 400 and GOO hr. respectively, out of a depart- 
 mental total of 2,000 process-hours. Each of these totals for 
 X, Y, and Z is entered on the Cost Sheets, of which there is one 
 
 Time Record 
 
 Cost of Process Hour 
 
 
 Tutal 
 
 Hrs. 
 
 X 
 
 11 
 
 z 
 
 Hrs or 
 
 
 
 
 
 Prod X 
 
 1000 
 
 1000 
 
 
 
 V 
 
 400 
 
 
 wo 
 
 
 e 
 
 COO 
 
 
 
 GOO 
 
 Totals 
 
 2000 
 
 1000 
 
 too 
 
 COO 
 
 Direct Labor 
 Expense:— 
 
 2000 Hrs. 
 = 5h'Cts, 
 
 Depreciation 
 Ind. Wages 
 Ind.Mat'l 
 Admin. Exp. 
 
 Total 
 
 Cost Sheet 
 
 Cost Sheet 
 
 Cost Sheet 
 
 Prod, x 
 Direct Mat'l 
 
 1000 HrsfgJi^Ct's. 
 
 150 
 525 
 
 |8«7Lbs.= 8Cts.| 
 
 Total Cost 
 
 G75 
 
 Prod, y 
 Direct Mat'l 
 
 400Hrs(J?!52?^C'ts. 
 
 75 
 210 
 
 |l218Lbs. = 6?iCts.| 
 
 Total Cost 
 
 2b5 
 
 Prod, z 
 Direct Mat'l 
 
 600Hr6@52M'Cts. 
 
 75 
 
 315 
 
 [4210Lbs.= 9KCts.j 
 
 Total Cost 
 
 380 
 
 Manufacturing Cost Journal 
 
 Finished Work Journal 
 
 'east" DEPT 
 
 (260 260 ] 
 Depreciation 
 ( 540 540 J 
 
 Direct \\ ayes 
 
 ( 120 120 j 
 
 Ind. ffases 
 
 ( 300 300 ) 
 Direct Mat'l 
 (70 70 ) 
 Indirect Mat'l 
 
 (60 60 ] 
 
 vi> 
 
 Share of Adinin 
 Expense 
 
 Balance ol 
 Work in Process 
 
 Dept. Manufacturing 
 Accounts 
 
 Fig. 1 L— Costing on Method A (two or more products). Total depart- 
 mental cost divided between products in ratio of Time occupied by each. 
 This gives throe different rates per lb. Simple division of total costs by respec- 
 tive weights of products would give false costs in this case. 
 
 for each product. The departmental total of 2,000 hr. is entered 
 on the Cost of "Process-hour" Sheet. 
 
 On this latter sheet are then entered all the components of 
 cosl which are chargeable to the department except direct ma- 
 terial. ( I >irect material is often entered direct on separate Cost 
 
 
 
 
 
 
 
 
 Musi 
 Agree 
 
 ivith 
 
 Total of 
 
 Cost 
 
 BheetsX 
 
 o 
 H 
 
 — 
 3 
 
 > 
 
 T3 
 
 Q 
 
 3 
 
 T3 
 
 p, 
 a 
 
 
 *T350 
 
 260 
 
 5 10 
 
 121.1 
 
 300 
 
 70 
 
 CO 
 
 1 j i i i i I 
 I I I I < 
 
 I J ! I ! L_J 
 
 Dept.Finished Work Accounts
 
 COSTING ON METHOD A 53 
 
 Sheets.) The total of departmental cost thus found, $1,050, 
 is then divided by the total process-hours, as shown by Time Re- 
 cord, and the result is the cost of a process-hour, viz., h x /± cts. 
 This figure is then entered on the cost sheets, so that the value 
 of time on each product can be extended. 
 
 One Cost Sheet is used for each separate product. On it are 
 entered, first the cost of direct material; secondly, the process- 
 hours on the product, from Time Record, and the cost of process- 
 hour, from the other sheet. The extension is then made, showing 
 $525 for product X; $210 for F; and $315 for Z. Each sheet 
 is then totalled, so as to show total cost of the whole amount of 
 product. This total cost is then divided by the weight in 
 pounds of the output (or yards, gallons, thousands, etc.) giving 
 the cost per pound. 
 
 The total of all the cost sheets together must agree with the 
 Cost Journal total, from which debits and credits are made 
 exactly as in Fig. 13. 
 
 In order to clear Manufacturing account, and to charge the 
 Finished Work accounts for products X, Y, and Z, respectively, 
 the total cost of each is entered in the Finished Work Journal and 
 allocated to the proper column. Manufacturing account is then 
 credited and Product X account charged with its total, and 
 the same with the other product accounts. 
 
 Study of Fig. 14 will enable all these changes to be understood 
 without effort. In this diagram, however, a slightly different 
 method of showing the credits and charges made from the 
 journals is employed. Instead of a line being drawn from each 
 column of the journal to the corresponding ledger account, all 
 credits are consolidated in one dotted line, and charges in one 
 solid line for each journal. These branch off afterward to the 
 respective ledger accounts. This method is used to avoid the 
 multiplicity of lines otherwise necessary, and will readily be 
 understood by the reader who has followed the detailed method 
 used in previous diagrams. 
 
 Attention may be drawn to the fact that in the example 
 given, an attempt to find the separate cost of each of three prod- 
 ucts by simply dividing departmental cost among them in pro- 
 portion to output of each would give rise to false figures. The main 
 product X will be seen to have the same cost per pound as the 
 whole product in Fig. 13. But the products X and Z are re- 
 spectively higher and lower than the average price of 8 cts.,
 
 54 MANUFACTURING COSTS AND ACCOUNTS 
 
 which would be forthcoming if cost were taken out on the 
 proportionate basis. This is because the rate of production of 
 
 Y and Z, instead of being the same as that of X, w r as in fact 
 respectively slow r er and faster. This has resulted in a difference 
 of cost per pound as between the three products amounting to a 
 considerable divergence from average cost. While X is 8 cts., 
 
 Y falls to 6% cts. and Z rises to 9J4 cts. 
 
 Costing by Lots on Method A. — This is really an inversion of 
 the last method. Instead of taking a w T hole month's product 
 and then ascertaining the weight cr quantity of it, w^e specify the 
 weight or quantity, and ascertain how long it has taken to make 
 it. The first step is to ascertain the cost of the process-hour, 
 as in the example, Fig. 14. But the time record, instead of taking 
 note simply of differences in product, must concern itself with 
 differences in lots. This implies that the lots must be identified 
 in some way and this requirement brings us to a new and very 
 important part of the mechanism of costing, namely, orders. 
 
 Orders are the mechanism by which cost is grouped with 
 particular items or lots of product. In the two cases just de- 
 scribed orders are unnecessary, but they might be used, and in 
 fact the scope of orders may be best understood if we begin with 
 simple cases like these. 
 
 Where we have onfy one product, which we cost every month, 
 we might charge the monthly total to an order number. If, 
 for example, each month's production received a separate order 
 number, and the Cost Sheet on Fig. 13 were to be headed with 
 such a number, then on filing such cost sheets numerically, 
 any month's production could be referred to by the order number. 
 Instead of asking for costs for June, 1915, we might ask for the 
 cost of Order No. 84. 
 
 Where two or more products are in question, each product 
 might have its own series of orders, such as A'84, F84, Z84, etc. 
 In such a case each of the cost sheets shown on Fig. 14 would be 
 headed by its appropriate order number. The Time Record, 
 instead of recording time by the name of the product, would then 
 record it by the order number representing each product for the 
 current month. 
 
 These possible instances are given to show that order numbers 
 can be made to represent cither the whole output for a period, or 
 the whole of several different outputs. We have now to con- 
 sider the case of less than a whole output, i.e., instead of having
 
 COSTING ON METHOD A 55 
 
 only one order per month, we may have several, each represent- 
 ing definite quantities of the total product. 
 
 The introduction of orders also produces a fresh complication 
 in that, instead of each month's output being costed without re- 
 mainder, it will generally happen that some orders will be un- 
 finished at the month end. 
 
 To begin with, the case of a department manufacturing a single 
 kind of product may be considered. Orders may be issued for 
 lots of product, based either on weights, quantities, numbers, etc. 
 In shoe factories lots of two, three or four dozen pairs are not 
 uncommon. But orders may vary from single articles to any 
 number in a lot. 
 
 The mechanism is exactly the same as that shown in Fig. 14, 
 except that all charging is now to order numbers. If the differ- 
 ent products X, Y, and Z, in Fig. 14 are considered as different 
 quantities of the same product, the cost sheets will show the 
 cost of each lot. There will be, of course, just as many cost sheets 
 as there are order numbers, and the totals on them must agree 
 with the total in the Cost Journals by means of which the credits 
 to the cost components accounts and the charge to Manufactur- 
 ing account are made. 
 
 Only completed orders are entered on the Finished Work Journal. 
 The total in this journal is then credited to Manufacturing ac- 
 count and charged to Finished Work account. Since only 
 completed orders are thus entered, it is obvious that the credit 
 to Manufacturing account will not agree with the charge to 
 that account. This implies that a balance will always stand 
 in that account, and this balance will vary from month to month. 
 Such balance represents, of course, the work done on orders 
 which have not yet been completed and entered to Finished 
 Goods Journal. 
 
 Costing by Individual Parts on Method A. — Practically, this 
 case never occurs. Method A is usually applied to homogeneous 
 products, which can be divided by quantity or number so as to 
 allow of orders for specific lots, but such a product rarely has 
 component parts capable of individual costing. Nevertheless, 
 if required, an order could be issued for a single part, if such 
 existed, and the separate cost of such a part thus obtained.
 
 CHAPTER VI 
 COSTING ON METHOD B 
 
 Whenever degrees of skill exist as between individual opera- 
 tives, recognized by differences in wages, or where piecework 
 or bonus methods of renumeration are in vogue, then Method 
 A cannot be applied, since it is based on the idea that any- 
 operative is interchangeable with any other operative, of the 
 same duty, for all accounting purposes. When, therefore, 
 we have different rates of wages for doing the same class of work, 
 or what is the same thing, unequal earnings in the same time 
 owing to the introduction of piecework or bonus, then it becomes 
 necessary to make a new treatment of the components of cost, 
 as follows: 
 
 Direct material. Charged direct to order number. 
 
 Direct labor. Charged direct to order number. 
 
 Expense. Charged to order number either by: 
 
 1. Averaging it and charging to Orders in proportion to direct 
 labor or labor hours, or by: 
 
 2. Connecting it with the use of machines and charging to 
 Orders by an hourly rate. 
 
 It is the first of these methods of dealing with expense that is 
 the peculiar feature of Method B, which we shall now discuss. 
 
 Method B : Direct Labor Charged to Order, Expense Averaged 
 and Charged in Proportion to Direct Labor. — This method, 
 which is the most widespread of all methods of costing, has the 
 disadvantage of being exceedingly incorrect save in particular 
 circumstances. The only case in which the averaging of expense 
 by means of percentages is correct is when all the machines are 
 of the same cost, occupy the same space, take about the same 
 power, entail about the same supervision, make about the same 
 call on the shop transport service (cranes, handling, etc.). 
 These conditions do exist in the case of departments such as 
 those described under Method A, where any machine or group 
 of machines can be used indifferently for product, but as soon 
 as machines begin to differ among themselves, the method 
 
 56
 
 COSTING ON METHOD B 57 
 
 now to be described is only approximate. It correctly records 
 direct material and direct labor against each order, but it only 
 correctly records expense against each order when machines are 
 all about the same size, cost and character. If expense is very 
 small compared with labor and material then no great harm 
 is done, but unfortunately, this method, on account of its 
 "simplicity" is commonly applied in shops where expense may 
 be anywhere from 90 to 150 per cent, of direct wages, to the great 
 detriment of true results. 
 
 It has two varieties : one in which expense is charged to Orders 
 in proportion to the amount of direct wages on each; the other,, 
 supposed to be more accurate, but really not much more so 
 save under special conditions, charges expense to Orders on the 
 basis of the number of direct labor hours on each. 
 
 The form in which results are obtained, i.e., whether by the 
 whole output of each of several products, or by lots of individual 
 articles, depends upon the manner in which orders are made 
 out. Two or more separate kinds of product can be costed 
 as a whole, by issuing one order for each class of product. Thus 
 if we are making brass kettles and candlesticks, an order would 
 be issued for the monthly output of kettles and one for the 
 monthly output of candlesticks. But where Method B is in use, 
 it is more usual to issue orders for definite lots, say for lots of 
 100 kettles and 200 candlesticks. It is also possible to treat 
 one or more products as a whole, and other products by lots. 
 Thus in addition to having orders running for 100 kettles and 
 200 candlesticks we might have another order running for the 
 whole month's output of fire-irons. In the latter case, of course, 
 the number of articles actually produced in the month would 
 have to be ascertained and used as the basis for ascertaining 
 their cost per hundred or per pound, whichever way we desired 
 to express the cost. 
 
 By the plan of charging costs to order numbers, we may in 
 fact, obtain costs of any quantity of any product, such quantity 
 varying from the whole month's output of one product, down 
 to lots of any quantity, even a single article. But it should 
 be remembered that if an order is made out to cost the whole 
 output of a product, or for very large lots which may require 
 the whole month or even more than a month to complete, no 
 light is shown on any intermediate variations in the cost of 
 production, nor, in practice, can such information be subse-
 
 58 MANUFACTURING COSTS AND ACCOUNTS 
 
 quently obtained. By making out orders for small lots, the 
 cost of one such lot can be compared with the cost of a similar 
 lot made at another time, and thus a close control over the 
 efficiency of production maintained. 
 
 
 Expense or Burden Journal 
 
 D. Labor 
 
 
 c 
 
 
 _• 
 
 a 
 
 540 
 
 - 
 
 d 
 
 60 
 
 d 
 
 rt 
 
 H 
 
 Expense 
 
 o 
 
 o> 
 
 £ 
 
 3 
 
 a 
 
 
 
 
 
 
 96H% 
 
 
 
 d 
 
 
 - 
 
 
 
 a 
 
 M 
 
 
 <i 
 
 
 510 
 
 260 
 
 120 
 
 70 
 
 CO 
 
 1 ATN 
 
 I 510 510 J 
 
 vlx 
 
 i 
 
 Dept'l I 
 Expense I 
 
 Cost Sheet 
 
 Operators Time Record of 
 Process Hours and Wages 
 
 r 
 
 Order 
 
 371 
 
 etc 
 
 10100 
 ISO 
 
 
 UOilSOP 
 
 r 
 
 Ordei 
 372 
 etc 
 
 1 
 20 
 
 W. 
 ISO 
 
 
 
 
 Time Charges to Order Numbers are 
 Posted to Cost Sheets 
 
 J 
 
 Cost Sheet 
 
 No.37l]ltem 
 
 \Y. 
 
 B. 
 
 u. 
 
 D.ilatl 50 
 
 
 
 50 
 
 D.LabotlOO 
 
 100 
 
 
 
 Exp. i 
 
 76% ) 
 
 94 
 
 
 94 
 
 
 Total 
 
 244 
 
 1.JU 
 
 yi 
 
 50 
 
 No.372[ltem 
 
 \v. 
 
 E. 
 
 M. 
 
 D/Matl. 60 
 
 
 
 GO 
 
 D.LabdrlJO 
 
 150 
 
 
 
 Exp. J 142 
 76%! 
 
 
 142 
 
 
 Total 
 
 352 
 
 150 
 
 112 
 
 GO 
 
 Cost Sheet Listed In Cost Journal 
 
 Manufacturing Cost Journal 
 
 Finished Work Journal 
 
 Direct Mat' 
 
 Ind.Mat'l. 
 
 
 7) 
 
 
 ,_• 
 
 
 
 o 
 
 o 
 
 
 c. 
 
 A 
 
 £ 
 
 a 
 
 a 
 
 AS 
 
 
 43 
 
 0, 
 
 
 d^ 
 
 
 
 
 
 
 u 
 
 
 w 
 
 
 
 O 
 
 O 
 
 
 A 
 
 H 
 
 371 
 
 100 
 
 9"4 
 
 50 
 
 
 372 
 
 150 
 
 142 
 
 60 
 
 352 
 
 Others not 
 
 290 
 
 274 
 
 190 
 
 754 
 
 
 
 
 
 
 Total 
 
 540 
 
 510 
 
 300 
 
 1350 
 
 
 
 ._L_ 
 
 J_ 
 
 _l 
 
 
 Finished 
 
 Cost Sheet 
 
 Listed 
 
 
 
 
 
 
 o 
 
 o 
 
 
 
 a 
 
 'A 
 
 •a 
 
 o 
 
 n 
 
 a 
 o 
 
 a 
 
 (4 
 
 
 ■3U 
 
 A 
 
 tal 
 
 5 
 
 o 
 H 
 
 371 
 
 100 
 
 94 
 
 50 
 
 244 
 
 Others not 
 
 330 
 
 310 
 
 200 
 
 
 shown 
 
 
 
 
 
 Total 
 
 430 
 
 404 
 
 250 
 
 10S4 
 
 Balance 
 Brought 
 Forward 
 
 Dept. Mfg._Acc.t 
 
 ^Balance to 
 Next Month 
 Note: Some orders will 
 be unfinihscd at month end 
 and remain In llfg. acct. 
 complete. - Dept. Fin. Work Acct. 
 
 I 1084 I 
 
 »d V J 
 
 .until ^-—1 
 
 Fig. 
 
 —Costing on Method B. Direct labor charged to order numbers. 
 Expense averaged and pro-rated over Direct labor. 
 
 Note: An order number may represent the whole output of one product, 
 or definite lots or quantities of product. 
 
 For the purposes of the accountant, the larger the quantities 
 of product dealt with in one order the simpler and easier is 
 his work. But the manufacturer uses costs for other purposes 
 than accounting, and control of efficiency is one of them. The
 
 COSTING ON METHOD B 50 
 
 selection of the unit quantity, and therefore the form of order, 
 is not a matter which rests wholly with the accountant. On the 
 other hand, the device of issuing lot orders is indicated whenever 
 the lots vary slightly among themselves, as for example in lots 
 of shoes or of switch parts, each lot representing a special pattern 
 slightly differing from the previous one, or from the standard 
 pattern made in bulk on a whole product order. 
 
 However the orders are subdivided into lots the important 
 point to observe is that the whole field of production in any 
 department is occupied by work on orders of one kind or other. 
 This being the case, it follows that under Method B, where opera- 
 tive labor is charged direct to order numbers, each operative 
 will have to charge all of his time to one or more orders. In Fig. 
 15, therefore, which exhibits the method of costing on Method 
 B, the first stage is that of the operatives' Time Sheets, on which 
 the whole of his working time is allocated to one or other of 
 the various orders running in the department. This time, 
 when extended into money value, is posted to the corresponding 
 Cost Sheets, each of which represents a single order number. 
 
 Direct material used on an order is also posted to the corre- 
 sponding Cost Sheet. We have then all the components of the 
 cost of each order, except expense. 
 
 Expense, it will be remembered, is aggregated and charged 
 to order numbers either as a percentage on direct labor or 
 as an hourly charge for each process-hour. Before this can be 
 done, the whole amount of expense must be ascertained, and 
 its ratio to the whole amount of operatives' wages (i.e. direct 
 labor) worked out. Or if the hourly plan is to be followed, 
 the total number of process-hours worked must be found, and 
 divided into the expense total in order to ascertain the hourly 
 "burden." 
 
 The Expense or Burden Journal serves to collect expense into 
 one total and also to credit Depreciation, Indirect Wages, Indirect 
 Material, and other departmental expense ledger accounts. The 
 total is charged to a new account, viz., Departmental Expense 
 or Burden. It is the total now standing to the debit of this 
 latter account that has to be prorated over direct labor or 
 charged to costs on the basis of an hourly burden rate. 
 
 To ascertain the amount of direct labor or of process-hours in 
 the Cost Sheets, they are listed in series. This is conveniently 
 done in the Manufacturing Cost Journal, since we shall then be
 
 60 MANUFACTURING COSTS AND ACCOUNTS 
 
 able to use the totals for charging and crediting ledger accounts 
 as well as prorating expense. The particulars entered areas 
 follows: 
 
 Order No. Direct Wages. Expense. Direct Mail. Total. The 
 column headed expense is left blank at first entry, since we 
 have as yet nothing to put in it. When all the Cost Sheets have 
 been entered and the wages column totaled and agreed with the 
 balance in the Direct Wages ledger account, and when the same 
 has been done for direct material, we are then ready to fill out 
 the blank expense column by calculating what portion of expense 
 is chargeable against each order number. 
 
 As the total of expense in §510 and the total of direct wages is 
 $540, this can be expressed by saying that expense is 943^ 
 per cent, of direct wages. Consequently, if we take the first 
 entry shown, namely Order No. 371 with a direct wages charge 
 of §100, then we ma}' enter the blank expense column with 94}^ 
 per cent, of this, or say $94, as the amount of expense properly 
 chargeable against Order 371. The next entry is Order 372, 
 with a direct labor charge of $150. 94^ per cent, of this is 
 $142, which we accordinglyenter as the expense charge against 
 ( >rder 371. And so with the remaining orders. 
 
 When all the order numbers have been thus treated, the 
 total of the expense column will be $510, or in other words, all 
 the expense will have been successfully prorated over direct 
 wages on orders. 
 
 The Cost Journal being now totaled up, postings to ledger 
 accounts may be made. Credits are: Direct Wages $540, 
 Departmental Expense $510, Direct Material $300; while 
 on the other hand, a charge is made to Departmental Manu- 
 facturing account of $1,350, which represents the total depart- 
 mental cost of all the orders for the month, including direct 
 wages, direct material, and each order's percentage of the 
 expense. 
 
 It will be noticed that the effect of all these operations, namely 
 a charge to Manufacturing account of $1,350 is precisely the same 
 as was obtained in Fig. 14. Commencing w r ith the same cost 
 elements we have arrived at the same results. This is, of course, 
 inevitable, since SI, 350 represents the total work of the depart- 
 ment in producing goods. But, on the other hand, the manner 
 in which this total is divided among the cost accounts is wholly 
 different. In the former case material was charged direct, and
 
 COSTING ON METHOD B 61 
 
 all wages and other expenses merged in one total and charged 
 out to Orders on a basis of the cost of a process-hour. In the 
 latter case material is also charged direct, but so are direct 
 wages, and the remaining expense is charged in proportion to 
 wages. 
 
 Costs of a particular order under these two methods (A and B) 
 will be the same only if the amount of wages earned by the 
 operative in 1 hr. are equal, as well as the number of hours. 
 The average value of an hour was shown to be about 5^4 cts. 
 on Method A, and this remains the same on Method B, though 
 now split up into two parts, viz. : the hour of direct wages, and the 
 hour of expense; but these two together necessarily make up 
 the total hour at 5}^ cts. as before. But we must now suppose 
 that a certain order was worked on piecework. In this case the 
 hour of direct wages would no longer be worth only 2.7 cts., 
 but perhaps 3 or 3^ cts., and as expense is prorated in pro- 
 portion to direct wages, then the rate of expense per hour would, 
 for that order, rise also. The same would happen if instead of 
 all operatives doing the same class of work being paid alike, 
 there existed different degrees of skill among them, which differ- 
 ences of skill were recognized by differences in wage rates. An 
 hour's work of the higher-paid operative would cost more than 
 2.7 cts., and on the other hand some of the operatives would 
 probably be below the former average and their hour's work 
 would cost less than 2.7 cts. 
 
 All this can be summed up by saying that though in the 
 instances exhibited, the total output of the shop has cost the same, 
 yet as regards individual orders some are above and some below 
 the cost found by Method A, simply because that was an average 
 cost. Method A would be correct, and Method B would give 
 no different results in costing orders provided that the condition 
 postulated for the application of Method A were present. But 
 if they were not present, and if different wage rates were paid in 
 the shop, or different rates of earnings were possible owing to 
 some piecework or bonus arrangement, then Method A would not 
 give correct results, but Method B would give much nearer re- 
 sults. That is, Method B would be correct as to direct labor and 
 direct material, but would still probably not be exact as to 
 expense. 
 
 Little need be said as to the variation of Method B already 
 mentioned, wherein the expense is prorated to Orders not on the
 
 62 MANUFACTURING COSTS AND ACCOUNTS 
 
 basis of direct wages, but on the bases of process-hours. The 
 only additional mechanism necessary to apply this variation 
 would be the provision of columns alongside the direct wages 
 columns, both in the Cost Sheets and the Cost Journal, in which 
 columns would be entered the number of hours worked by the 
 operative of each order. The total expense for the department 
 would then be divided by the total process-hours as shown by 
 totaling the new column in the Cost Journal, and the value of 
 a process-hour in terms of expense thus found. In the case 
 exhibit it would be $510, 2,000 hr., 2}4 cts. per hour. Then 
 each entry in the Cost Journal would be extended at this rate, and 
 the expense entered in the proper column as before. Under some 
 conditions this method would bring slightly more correct results 
 than the other, particularly where the system of piecework was 
 in use. But it does not remove any of the objections to the use 
 of Method B mentioned at the beginning of this chapter. 
 
 So far we have considered only the costing of orders. That 
 is to say that the arrangements hitherto described provide the 
 cost of an order as a whole, without considering whether it is 
 made up of a single part or several parts. We can, however, 
 on Method B in either of its variations, do more than this. Sup- 
 pose that an order is for sets of fire-irons, each set consisting of 
 poker, tongs and fire-shovel. Then if we issue an order for 5,000 
 sets, we shall get the cost in a lump sum without detail. But 
 by the additional device of component numbers or part numbers, 
 we can get the record in as great detail as we desire. 
 
 If the order number for the 5,000 sets is No. 378, then we may 
 call 378/1 pokers, 378/2 tongs and 378/3 fire-shovels. If now, 
 the operatives charge their time accordingly, we shall be able 
 at some convenient time to collect all the items charged to 378/1 
 and so ascertain separately the cost of 5,000 pokers. The process 
 is, of course, repeated with regard to /2 and /3. 
 
 Further, suppose that in making pokers in the department 
 under discussion, they went through three separate processes, 
 it will not be difficult to analyze the time record so as to dis- 
 close how much of the cost was due to say, filing, grinding and 
 polishing respectively. The actual mechanism for doing this 
 need not be described now, but it will easily be seen that if we 
 know what work each individual man is doing, all the data for 
 such an analysis are present. The cost of Order No. 378 could, 
 therefore, now be presented in the following shape:
 
 COSTING ON METHOD B 63 
 
 Cost of Order No. 378 for 5,000 Sets Fire-irons 
 
 
 Dir. labor 
 
 Expense 
 
 Dir. mat'] 
 
 Total 
 
 
 378/1 for 5,000 pokers: 
 
 Filing 
 
 Grinding 
 
 Polishing 
 
 120 96 
 130 104 
 200 160 
 
 
 216 
 234 
 360 
 
 
 Total for 378/1 
 
 450 
 
 360 
 
 
 810 
 
 Each 16^ cts. 
 
 378/2 for 5,000 pairs 
 tongs : 
 
 Filing 
 
 Grinding. . . . 
 
 140 
 150 
 300 
 
 112 
 120 
 240 
 
 
 252 
 270 
 540 
 
 
 Polishing 
 
 
 Total for 378/2 
 
 590 
 
 472 
 
 
 1,062 
 
 Each21^cts. 
 
 378/3 for 5, 000 shovels: 
 
 Grinding 
 
 Polishing 
 
 90 
 500 
 
 72 
 400 
 
 
 162 
 900 
 
 
 Total for 378/3 
 
 590 
 
 472 
 
 
 1,062 
 
 Each 21 yi cts. 
 
 Grand total for 378 . . . 
 
 1,630 
 
 1,304 
 
 
 2,934 
 
 58% cts. per 
 set 
 
 Expense rate = 80 per cent, of direct wages. No material charged. 
 
 In this example it is assumed that no material is chargeable 
 by this department, but that process work, namely, filing, grind- 
 ing and polishing is done by it on blanks received from another 
 department. The total cost of the order is $2,934, equal to 
 58% cts. per set of articles. By the analysis shown, however, 
 we see that the pokers cost 16^ cts. each, the tongs 21^ cts. 
 each and the shovels also 21^ cts. each. On examining the 
 detail of the last figures we observe that though the total proc- 
 ess-cost of each is the same, it is very differently made up. 
 Tongs have three processes and shovels only two, and we see 
 that the polishing process in the case of shovels forms a very 
 important item of cost. 
 
 This table is already a very detailed statement of the cost 
 of Order 378, but we can extract yet further information from 
 the figures:
 
 64 MA N I FA ( ' TURING COSTS AND ACCOUNTS 
 
 Process-cost of pokers: 
 
 Filing 4.32 cts. each 
 
 Grinding 4.68 cts. each 
 
 Polishing 7.20 cts. each 
 
 Process-cost of tongs: 
 
 Filing 5.04 cts. each 
 
 Grinding 5 . 40 cts. each 
 
 Polishing 10.80 cts. each 
 
 Process-cost of shovels : 
 
 Grinding 3.24 cts. each 
 
 Polishing 21.24 cts. each 
 
 Further than this it is not possible to go under ordinary 
 circumstances. Yet it is obvious that other information might 
 be desired. For example, a poker has three portions, the knob, 
 the stem and the iron or prod. We might find it advantageous 
 to know what it cost us for process work on each of these portions 
 separately. This could be done without much difficulty if 
 the operative were instructed to note the part he was working on, 
 so that he would record his time as on "Order 378/1, Polishing, 
 Knob," and so forth. 
 
 It will be readily understood that all this detail has very little 
 necessity for commercial accounting purposes. If the fire-irons 
 are always sold in unbroken sets of poker, tongs and fire-shovel, 
 thou the accountant would have no interest in knowing any 
 detail at all. The figure of $2,934 for 5,000 sets would alone 
 interest him, since from this he obtains the cost per set, and so 
 is able to credit Manufacturing account with finished work. 
 Later on he will also require the same cost per set for sales 
 purposes, but at no point will he be interested in the cost of 
 pokers, tongs and shovels separately, still less in the process 
 costs of grinding, filing, etc. 
 
 The value of such detail is, however, very great to those who 
 are responsible for manufacturing operations, and a frequent 
 source of the friction that arises over cost systems is the inability 
 of the acountant to perceive the importance of such detail to 
 others, and particularly of the importance of providing it with 
 exceeding promptness. Technical detail of this kind is next to 
 valueless if not available for discussion while the circumstances 
 are fresh in everyone's mind. 
 
 We have now to consider the crediting of Manufacturing
 
 COSTING ON METHOD B 65 
 
 account with the value at cost of finished work. The Cost 
 Sheets now provide the data by which the cost of any finished 
 order is ascertained. As each order is finished it is entered in 
 the Finished Work Journal (see Fig. 15) and the total of all 
 finished orders for the month credited to Manufacturing account 
 and charged to Finished Work account. It is sometimes thought 
 well to rule the ledger accounts for manufacturing and finished 
 work with columns for direct labor, direct material and expense. 
 In this case postings from both the Cost Journal and the Finished 
 Goods Journal are made in the same form. 
 
 Only one Finished Work account is shown in Fig. 15, though 
 more than one can be used if it is desired to keep two or more 
 lines of product distinct. Generally, where several lines of 
 product are running at one time, an account for each separate 
 line of product is desirable. 
 
 When orders are introduced for definite quantities it will 
 almost inevitably happen that some of them will be unfinished 
 at the month end, and will consequently not be transferred to 
 Finished Work account. This implies that there will be a balance 
 in Manufacturing account of a varying amount at each month 
 end. This balance will be represented by Cost Sheets still 
 in hand in the department and the balance should be checked 
 with the total of Cost Sheets remaining on hand. 
 
 When one of the orders represented by such Cost Sheets is 
 completed, it will of course be charged to Finished Work, credited 
 to Manufacturing account, and withdrawn from the current 
 file of orders in hand, just in the same way as if it had been 
 finished during the month in which it had first been put in hand.
 
 CHAPTER VII 
 COSTING ON METHOD C 
 
 The two methods of costing hitherto discussed are both depend- 
 ent on averaging at some point. In Method A all elements of 
 departmental cost (excluding direct material) are thrown into 
 one sum, and then spread over product on the basis of an aver- 
 age cost — either an average monthly cost or an average hourly 
 cost as the case may be. In Method B while direct material 
 and direct labor are both charged to the actual items of product 
 to which they naturally belong, expense on the other hand is 
 thrown into one lump sum and averaged over all product on one 
 of two bases. Sometimes this basis is a simple percentage dis- 
 tribution of expense in proportion to the amount of direct labor 
 already charged to the product, and sometimes the average cost 
 of an expense-hour is calculated, and expense is charged to Prod- 
 uct according to the number of process-hours involved in its 
 production. 
 
 "We may sum up these two methods by saying that in the first, 
 both labor and expense are averaged over product on a time basis, 
 and that in the second, expense is averaged over product on a time 
 basis. It becomes evident that a third method is desirable, 
 namely one in which no averaging at all is made use of, but both 
 labor and expense should be charged to Production exactly as and 
 when incurred by each order or process. Such a method was 
 worked out by the author in 1901, and is known as the "Scientific 
 Machine Rate" method. It will now be discussed as: 
 
 Method C : Material, Labor and Expense all Charged Direct to 
 Product, As and When Incurred. — The mechanism for charging 
 direct material and direct labor to Orders is the same in this 
 method as in Method B. The special feature of Method C is in 
 its treatment of the various items of expense, and the way in 
 which charges for expense elements are made to Orders, on the 
 one hand, and to an undistributed expense account on the other. 
 For a valuable feature of the production factor and machine rate 
 method is the power it furnishes of distinguishing between 
 
 66
 
 COSTING ON METHOD C 67 
 
 expense actually and usefully applied to production, and expense 
 that is wasted and contributes nothing to production, owing to 
 part of the departmental equipment being idle. 
 
 The principle on which Method C is founded is a simple one. 
 Expense is incurred for the purpose of running the machines or 
 other production centers of the department, because manufac- 
 turing consists of two main actions : first, the application of opera- 
 tive (direct) labor to product; and secondly, the application of 
 equipment, supervision, etc., by aid of which such direct labor 
 is applied to product. No labor works on product with its 
 hands alone, always tools, and in modern manufacturing 
 machines are generally employed. In some cases, even, and these 
 are increasing in number every da} r , the role of labor is subsidiary 
 to the role of the machine — that is to say that labor does not con- 
 tribute any special skill or experience, but acts rather as an access- 
 ory to the machine, as in the instance of automatic machines of 
 various classes. 
 
 But if expense is incurred for the purpose of running machines, 
 there ought to be some connection between its amount and the duty 
 of any given machine. A simple illustration is that of power. 
 The whole charge to the department for power is obviously 
 connected intimately with the power-using capacity of the 
 individual machines. Now if all the machines consume the 
 same amount of power, then it is obvious that a uniform or 
 average hourly rate for power might be made to all product, on 
 whatever machine it happened to be processed. But if, on the 
 other hand, it should happen that all machines do not consume 
 the same amount of power, but that some consume say 12 hp. 
 per hour, and others only }4 hp., then an average charge for 
 power becomes misleading. Here then is an example where the 
 averaging of an expense detail leads to very incorrect results, 
 while at the same time the way to rectify this incorrectness is 
 pointed out. Instead of making an average charge for power, 
 it would be desirable to ascertain what is the hourly consumption 
 of each machine and then charge Orders with the power actually 
 used in working on them. 
 
 Thus, if one order is processed at a machine taking 12 hp. 
 per hour, at a cost of say 2 cts. per horsepower, then if the work 
 has taken 3 hr. we have a legitimate charge against that order of 
 12 X 2 X 3 = 72 cts. And if another order has been processed 
 on a machine taking only ^ hp. per hour, and the work has
 
 68 MANUFACTURING COSTS AND ACCOUNTS 
 
 taken 3 hr. also, then we have 0.5 X 2 X 3 = 3 cts. — no in- 
 considerable difference in the cost of the work for power 
 alone. 
 
 Under the percentage method (B) both these orders would have 
 been charged alike with an average cost for power (included and 
 disguised in the expense total) which might have been at 
 the rate of 5 cts. an hour for any machine. This would give 
 for the first order 5 X 3 = 15 cts. cost for power, etc., and for the 
 second order 5 X 3 = 15 cts. for power also. In the first 
 case the charge would be 57 cts. too little, and in the second case 
 12 cts. too much. 
 
 Of course, on Method B no separate charge is made for power, 
 which is merged in the conglomeration of items that go to make 
 up expense, but if an analysis were made of such expense we 
 should find it made up of a number of items, including power, 
 which were distributed and averaged over product on just such 
 an unsatisfactory plan as that here exhibited. The peculiarity 
 of Method C is that it discards the usual classification of the 
 cost components into direct material, direct labor and expense or 
 burden, and in place of expense it substitutes production factors 
 (of which power is one) and ascertains with considerable exactness 
 the connection of each of these factors with the cost of running 
 individual machines. The demonstration just made of the erro- 
 neous results arising from the averaging method as applied to 
 power could be, if space permitted, extended to show that other 
 factors were subject to the same errors when included in a lump 
 sum of expense and averaged. 
 
 In the three methods of costing (A, B and C) there are three 
 stages of inquiry and answer as to the direct charges made to 
 Product. In the first method (A) we ask: 
 
 What is this direct material used for? and the answer is given 
 that more of it is used for one kind of product or one order and 
 less for another kind of product or another order. 
 
 In the second method (B) we extend the range of our inquiries, 
 and ask two questions: 
 
 What is this direct material used for? 
 
 What is this direct labor used for? 
 the answer to both queries being the same, namely, that 
 more of each item is used for this order and less for that, or 
 more for this product and less for that. 
 
 In the third method (C) we extend the range of our inquiries
 
 COSTING ON METHOD C 69 
 
 still further, and this time take in the whole of the components 
 of departmental cost. We ask three questions: 
 
 What is this direct material used for? 
 
 What is this direct labor used far.' 
 
 What is this expense incurred for? 
 and the answer to all three queries is the same, namely, thai all 
 three of the items have individual relations to each order. Further 
 we are enabled to state that, under given conditions, certain por- 
 tions of the expense have relation to no order at all, or in other 
 words have not entered into production, but have been wasted. 
 
 It will be readily understood that Method C, involving as it 
 does a careful tracing of the incidence of every different class of 
 expense, is by no means so "simple" to set up as the other two 
 methods. The simplicity of all three methods is, in fact, in in- 
 verse proportion to their accuracy when we apply them to com- 
 plex conditions. There are cases in which both A and B give 
 accurate results, but when machinery of varying capacity comes 
 into use in an industry, and orders may be worked on now by 
 large, expensive and high-power machines and again by small, 
 cheap and low-power machines, then the conditions themselves 
 are complex. Complex conditions necessarily involve complex 
 solutions if we are really to get accurate results, and not merely 
 inaccurate averages. In point of working, when once the system 
 is set up, there is not much difference between B and C, especially 
 where the hourly-burden variety of B is used for comparison. 
 
 Figure 16 exhibits the mechanism necessary to establish 
 Method C. Fig. 17 shows the routine working of this method in 
 costing orders. It will be noticed that while Fig. 16 is entirely 
 different to anything yet considered, Fig. 17 on the other hand 
 differs but little from previous figures illustrating the working of 
 methods A and B. It will, of course, be understood that in this 
 chapter no attempt is made to detail the methods by which 
 the analysis of the various factors is carried out in practice, 
 but only to show the general outline of the principles involved 
 The practical application of the method will be dealt with in the 
 second portion of this work. 
 
 To begin with we have, as before, certain accounts which 
 contain the whole of the cost components chargeable against 
 the department. We exclude consideration of direct material 
 and direct labor, since these are charged to individual orders, 
 and confine ourselves to understanding how expense is so handled
 
 71 ) M A A I /■■. \CT URING COSTS A ND A CCO UN TS 
 
 that it finds itself finally charged to individual orders in the 
 amount which each order has logically and actually incurred. 
 
 The principle of standardization comes into play at this point. 
 Our charges to Product are made through hourly machine rates, 
 but these rates are standard rates, which represent the cost of 
 running the machine for 1 hr. under standard and favorable con- 
 ditions. This is a matter that does not arise from any particular 
 month's accounts, but is determined on a basis of estimate as to 
 how the normal expenditure of the shop, (when the shop is run- 
 ning full time) divided into factors, contributes to the running 
 of each machine. 
 
 In Fig. 16 a very general idea is given of the method by which 
 machine rates are determined. First, all the normal expense 
 of the department is tabulated, and analyzed into production 
 factors. Then a list of machines is made, and each production 
 factor is allocated between the different machines on appropriate 
 bases. The total found allocated against each machine when 
 all the production factors have been dealt with, is the individual 
 cost of running machines. This amount, divided by the number 
 of working hours in the period for which the calculation has been 
 made (usually machine rates are based on one year's expense) 
 gives an hourly machine rate, which is the amount that is charge- 
 able to Orders for the use of the machine (Fig. 1QA). 
 
 The machine rates are so adjusted that when all the 
 machines are working "full" time, then all the expense charge- 
 able against the department is distributed over the orders that 
 have been worked on. But it will readily occur to everyone that 
 in the course of a month, it may not have been possible to keep 
 all the machines full of work. In some cases this is inevitable, 
 as for example, such machines as are subsidiary to others, and 
 have an output greater than any possible use for it. In such 
 cases "full" time is considered to be the normal time of use of 
 such machines. For example, if we have a subsidiary machine, 
 such as an envelope gummer, serving six folding machines, 
 and of such a capacity that to keep all the folding ma chines full 
 of work, it need only be run 75 per cent, of the working time 
 of the department, then the "full" time of such a machine is 
 fixed at 75 per cent, of the "full" time of 1 he folding machines that 
 it serves. Of course, should at any time, more folding machines 
 be installed, the "full" time of the gumming machine would be 
 increase! 1 j >i < iportionally.
 
 COSTING ON METHOD C 71 
 
 In other cases, this principle of curtailing the "full" time 
 of a machine does not apply. If we have 30 milling machines, 
 and during a slack period six of them are idle, that is a totally 
 different matter. The whole 30 could be used it" we had work for 
 them. It might even happen that there was really enough 
 work in the shop, but that owing to bad planning one-fifth of 
 the "full" time of the 30 machines was left unused. Both these 
 latter cases are similar in effect. They imply wasted opportuni- 
 ties. But neglect or inability to employ opportunity to the full 
 should not be visited on the work actually performed. In other- 
 words, the cost of idle machines should be separated from the process- 
 cost of work. 
 
 This is a most important matter from the viewpoint of esti- 
 mating. Suppose we have a job that takes the "full" time of three 
 of our milling machines for a month, and let us assume that the 
 hourly machine rate of each of these particular milling machines 
 is 25 cts. an hour, and further that the working hours are 200 a 
 month. Then the actual process-cost 1 of doing the work is: 
 
 3 X 0.25 X 200 = $150. 
 
 Now supposing that by some unfortunate circumstance we could 
 provide no other work at all in the shop, and that all other ma- 
 chines were closed down. Let us suppose that the 27 milling ma- 
 chines not occupied on the above order, absorbed at various 
 hourly machine rates when working "full" time, $1,080. What 
 was the cost of doing the work on the three machines that were 
 busy? 
 
 Is it $150 or is it $150 + $1,080 = $1,230? 
 
 On the percentage method (B) the latter is the answer that 
 would be given. On that method, all the expense is discharged 
 on to the jobs that have been actually worked. If only three 
 machines had been at work, then the orders worked on at those 
 three machines would have to bear the burden of the whole 
 expense of the shop. From the merely accounting viewpoint 
 that is a sufficiently good answer, since the $1,080 has to be taken 
 out of Manufacturing account somehow, and the easiest way 
 to get it out is to let it cling to the skirts of whatever work 
 has been executed in the shop. In one sense it does represent 
 
 1 Direct material and labor are excluded from this discussion in order to 
 bring out the facts as to expense into clear relief.
 
 72 MANUFACTl 'RING COSTS AND ACCOUNTS 
 
 the cost of manufacture of the department output. The money 
 SI, 230 has been spent, and only three machines' output has re- 
 sulted. This output has, therefore, "cost" $1,230. 
 
 The practical fallacy underlying this method is exhibited by 
 the question, "By whom should this cost be borne?" 
 
 Obviously it is not the customer who has lost the money which 
 has been wasted through the fact that we have not enough work 
 to fill the shops. He will not expect to pay more because we 
 have been commercially unlucky or inefficient. If more work of 
 the same class is offered to us while our shops are still in the same 
 condition, would it be wise to quote $1,230 for the work? The 
 answer is obvious. If we did so, we should lose the order. 
 
 On Method B, there is no way out of this dilemma, because 
 it is not possible by that method to arrange any accurate division 
 between expense legitimately incurred on a particular job and that 
 portion of the percentage which is due to idle machines. It has 
 been suggested that a "normal" or "minimum" percentage 
 might be set up and used for estimating purposes, but this is 
 only possible when conditions obtain under which Method B 
 is in itself a correct costing method. To apply the principle of 
 a "normal" percentage rate to all work indiscriminately would 
 be fallacious, unless all machines were of the same size, value 
 and power consumption. 
 
 It is evident that the correct answer to the question is that 
 the increased "cost" must be borne by the firm itself. It must 
 be deducted in the end, and by some convenient mechanism, 
 from the firm's own profit. This is, of course, what happens 
 if we leave it in cost, and that is why accountants look with so 
 much favor on the plan. By putting into cost of an order the 
 wasted expense that has been incurred in a shop, Profit is auto- 
 matically reduced without anyfurther attention from theaccount- 
 ant. Unfortunately, however, it is the wrong profit that is 
 thus reduced, and orders that are in reality very profitable 
 may }><■ made to show a narrow margin of profit or even a loss. 
 
 When several machines in a shop stand idle, it is not the profit 
 of any particular order that should be reduced, but the general 
 profit of the whole business, or at utmost the profit of the depart- 
 ment in which the loss was incurred, if the business is organized 
 on a basis of profit-making department.-. 
 
 Method (' enables this to be effected. The cost of doing the 
 job above mentioned will always be $150, whether the shop
 
 COSTING ON METHOD C 73 
 
 is busy or slack. Consequently we always know what to bid on 
 similar work. The question then arises, What becomes of the 
 SI, 080 which has been wasted through the unfortunate fact 
 that we have had insufficient work to fill the shop? 
 
 There are two ways of disposing of it. Either way deducts 
 it from profit in the end. It may be charged at once to Profit 
 and Loss account and thus deducted directly from profit, or we 
 may do something which brings up the individual cost to a 
 figure similar in form to that which would be reached on Method 
 B, viz., by striking a ratio between the actual expense cost of 
 jobs and the total of wasted expense, thus: 
 
 Legitimate expense on work 
 
 Wasted expense 1,080 
 
 Total $1,230 
 
 Wasted expense = 600 per cent, on cost of work. 
 
 Having ascertained what percentage to add to the legitimate 
 cost of the work in order to absorb the whole of the department 
 expense, we may proceed to prorate over actual jobs so as to 
 show cost in two divisions, namely: 
 
 Cost of job $180 
 
 600 per cent, on cost of job 1,080 
 
 Total cost of job $1,230 
 
 In order to give a clearer idea of this method in its full bearing 
 on the cost of orders we will assume that the $180 work is really 
 made up of three distinct orders, costing respectively, for machine 
 rates, $60, $90 and $30. It will be assumed that this is merely 
 a machining job for a customer and, therefore, that there is no 
 charge to be made for direct material. Direct labor is day work, 
 and is respectively $50, $75 and $25 for each job. The total 
 expense for the shop is as before $1,230. 
 
 Costs may then be stated as follows: 
 
 Order 678 Order 679 Order 680 Total 
 
 Direct labor $50 $75 $25 $150 
 
 Machine rates , . 60 90 30 180 
 
 True cost of work $110 $165 $55 $330
 
 74 MANUFACTURING COSTS AND ACCOUNTS 
 
 Undistributed expense Sl,080 = 600 per cent, on expense 
 distributed to jobs through machine rates. This is called 
 "Supplementary Rate." 
 
 Supplementary rate on above jobs $300 $540 $180 $1,080 
 
 Apparent shop cost $470 $705 $235 $1,410 
 
 Xow it will be clear that (neglecting selling expense) a fair 
 profit on the orders would be made by charging: 
 
 Sale price $147 $220 $73 
 
 Real profit 25 per cent. 25 per cent. 25 per cent. on sale price 
 
 Apparent loss $323 $485 $162 
 
 This is, of course, an exaggerated case, but for that very 
 reason shows the importance of keeping undistributed or wasted 
 expense clear from the cost of orders. 
 
 It will be seen that by this method we have two costs for 
 each order, namely: 
 
 True shop cost of doing the work. 
 
 Apparent shop cost of the order. 
 The latter cost is true cost plus a percentage to represent a 
 proportionate share of the wasted manufacturing capacity that has 
 been incurred in the shop owing to the fact that there was not 
 enough work to keep all the machines employed. 
 
 In the case cited such apparent cost has no real value at all. 
 It is so obviously fictitious that no one would be inclined to 
 regard it seriously for a moment. But if instead of three 
 machines being at work and 27 idle, 27 machines were at work 
 and only three idle, the difference between true and apparent 
 cost would not be so striking, and there would in fact be nothing 
 on the face of the figures to show their falsity. Yet they would 
 still be false and misleading, if we took apparent cost as a basis 
 for bidding on work. 
 
 It may be asked what is the purpose in distributing the wasted 
 expense over orders in this way. First, it is a concession to those 
 accountants who desire to get rid of all shop expense onto product 
 as they have been accustomed; secondly, there is a certain 
 amount of danger of establishing a precedent to the effect that 
 departmental expense can be written off to Profit and Loss; 
 thirdly, there is a distinct advantage in having the whole story 
 told in respect to each order, viz., its true shop cost and the in-
 
 COSTING ON METHOD C 
 
 75 
 
 crease on this which is due to failure to keep machines supplied 
 with work. Because it must not be forgotten that this supple- 
 mentary rate is due to idle machines whatever the cause. In 
 most cases the cause will be want of work, but it might quite 
 easily be want of management, and inefficiency in distributing 
 what work was actually in the shop. For this latter reason 
 alone it is undesirable to make a practice of writing off undistrib- 
 uted expense to Profit and Loss. Such a condition should be 
 called to attention all along the line, not hidden away. By 
 making a supplementary distribution to Orders, the fact of 
 wasted expense is kept prominently before everyone. At the 
 
 ITEM 
 
 TOTAL 
 
 BLDG.'S 
 
 POWER 
 
 STORES 
 TBAN8. 
 
 SCP. 
 
 ORQ'N 
 
 MACH. 
 
 Depreciation 
 
 
 
 
 
 
 
 Repairs 
 
 
 
 
 
 
 
 Cleaning 
 
 
 
 
 
 
 Storekeeping 
 
 
 
 
 
 
 Cranemen &c 
 
 
 
 
 
 
 
 Supervision 
 
 
 
 
 
 
 
 Clerks 
 
 
 
 
 
 
 
 
 Stationery 
 
 
 
 
 
 
 
 
 Messengers 
 
 
 
 
 
 
 
 
 Light & Heat 
 
 
 
 
 
 
 
 
 Power etc 
 
 
 
 
 
 
 
 
 TOTALS 
 
 
 
 
 
 
 
 
 Fig. 16. — Analysis of expense into production factors. 
 
 same the true cost of the work is also shown, and it is clearly seen 
 whether the individual order was profitable or not, even though 
 the slackness of business should have overwhelmed that profit 
 by a general loss due to expense that has been wasted. This 
 question is further discussed in Chap. XIX ( Part II). 
 
 Figure 16 shows an outline of the mechanism by which machine 
 rates are settled. To begin with, all the expense legitimately 
 chargeable to the department for a certain period, usually one 
 year, is listed in considerable detail Then item by item, the 
 question is asked, "For what is this expense incurred?" Thus, 
 for example, when the item of depreciation is under discussion 
 it will be found that part of it is due to the capital invested in
 
 70 MANUFACTURING costs AND ACCOUNTS 
 
 buildings, part to that invested in power transmission gear, 
 motors, etc., in the shop, part to investment in cranes, stores 
 fittings, scales, etc., and the remainder, probably, all to the 
 productive machinery itself. The amounts chargeable against 
 these several divisions or "production factors" having been 
 calculated, the columns are entered up accordingly. 
 
 Other items of expense are dealt with in a similar way. In 
 practice it will be found that every legitimate item of depart- 
 mental expense will be chargeable in an exact amount to one 
 or other of the production factors, after a little investigation. 
 "When all the items of expense have been thus allocated, the 
 columns are totaled, and the yearly charge for each production 
 factor is then known. 
 
 The next step is to ascertain what amount of each factor 
 
 FACTOR 
 
 BASIS OF 
 DISTRIBUTION 
 
 TOTAL 
 
 MACHINE8 
 
 
 
 
 
 
 
 
 
 Buildings 
 
 Space 
 
 
 
 
 
 
 
 
 
 
 
 Power 
 
 H.P.used 
 
 
 
 
 
 
 
 
 
 
 
 Stores Tpt, 
 
 by use 
 
 
 
 
 
 
 
 
 
 
 
 Supervision 
 
 as incurred 
 
 
 
 
 
 
 
 
 
 
 
 Organization 
 
 Equal 
 
 
 
 
 
 
 
 
 
 
 
 Machines 
 
 Individual 
 
 
 
 
 
 
 
 
 
 
 
 
 TOTAL 
 
 
 
 
 
 
 
 
 
 
 
 
 HOURLY RATE 
 
 
 
 
 
 
 
 
 
 
 Fig. 16A. — Analysis of production factors into individual machine rates. 
 
 is chargeable to individual machines. To begin with certain 
 data with regard to each machine are accumulated, viz. : 
 
 The working space it occupies. 
 
 The horsepower it consumes. 
 
 What cranes or other transport appliances serve it. 
 
 How is it grouped as regards supervision. 
 
 Its capital or investment value (purchase and installation 
 price). 
 
 On these data as bases the distribution of 1 lie amounts collected 
 under each production factor can then proceed. 
 
 1. The buildings factor, including all expense for the upkeep 
 and maintenance of the building, and its lighting, heating, 
 • leaning and repair, is reduced to a square foot basis. Thus, 
 if the buildings factor is §4,000 and there are 2,000 sq. ft. in 
 use by machines in the department, then the space charge
 
 COSTING ON METHOD C 77 
 
 is $2 per square foot. As the number of square feet working 
 space occupied by each machine is known, the charge againsl 
 individual machines for buildings factor is easily calculated. 
 
 2. The power factor is similarly allocated on the basis of the 
 horsepower consumed by each machine. 
 
 3. The stores-transport factor is allocated by finding out 
 which machines call on which cranes or other transporl ap- 
 pliances, and adjusting their charges accordingly. A charge 
 for storekeeping and yard service to each machine according 
 to the character of the work it handles can also be made. 
 
 4. The supervision factor is allocated to machines on a per 
 capita basis, unless certain machines have sub-foremen over 
 them, in which case such machines are, of course, charged with 
 the cost of such supervision, as well as bearing their share of 
 the general supervision. 
 
 5. The organization factor, including cost of clerical work, 
 stationery, messengers and so forth, is allocated to machines 
 on a per capita basis, unless there is special reason to load it 
 on certain machines more than on others owing to the character 
 of the work they perform, such as special lines of product 
 requiring greater fuss and attention on the part of the organiza- 
 tion staff. 
 
 6. The machinery factor is allocated on the capital investment 
 value of each machine. It includes depreciation, repairs and 
 cost of oiling and keeping machines in working order. The 
 depreciation charge is based, of course, on the proper deprecia- 
 tion rate for that particular kind of machine, the repair charge 
 on experience or judgment as to probable repairs on the aver- 
 age, and the maintenance charge on a set allowance for waste, 
 oil, etc. 
 
 When all the production factors have been allocated among 
 machines in this way, the total charge against each is divided 
 by the working hours for the year, with the result that an hourly 
 machine rate appears, which is the price to be charged against 
 all orders for the use of the machine. 
 
 The foregoing is, necessarily a very brief sketch of the 
 mechanism that is necessary to determine machine rates on 
 Method C. More definite particulars will be given in Chaps. 
 XIX and XX in the second part of this book. Sufficient, however, 
 has been said to show the broad principle on which the method 
 is based. It is that every item of expense, save and except
 
 78 MANUFACTURING COSTS AND ACCOUNTS 
 
 direct labor and direct material, can be logically connected 
 with the working hours of productive machines. On a former 
 page it was suggested that "if expense is incurred for the purpose 
 of running machines, there ought to be some connection between 
 its amount and the duty of any machine." From what has 
 just been described, it will have been seen that in actual fact 
 there is such a connection and that by carefully considering 
 the aim and end of each class of expense it is possible to find 
 its money value. It will also be understood that when all the 
 machines are working full time, then all the expense will be ab- 
 sorbed by Orders through the device of charging machine rates 
 for the use of the machines themselves. 
 
 Such charges are in effect rents. In some industries, as for 
 example, the shoe manufacturing trade, productive machines 
 are actually rented by manufacturers instead of being purchased 
 by them. When the rent paid for such machines includes the 
 cost of repair and maintenance by the renters, then the rent so paid 
 is almost identical with the productive machinery factor above, 
 save, of course, that it will include an item representing profit 
 to the owner. If now, in such an industry, the manufacturer 
 buys his power from corporation mains, then the charge made 
 to him closely represents the power factor described above. If 
 now he were to rent premises for his work, and such rents were 
 to include free lighting and heating, then the rent so paid would 
 closely agree with the building factor above described. The 
 factors remaining are, of course, necessarily part of the local 
 expenses of the business and could not very well be represented 
 by a rent paid to an outsider. 
 
 It will be seen, therefore, that this is no fanciful analysis of ex- 
 pense, but that it is merely the reduction of all expense to natu- 
 ral groupings, which are practically rents paid by the shop for 
 certain definite kinds of services rendered. Once these factors 
 are perceived and their money value ascertained, their further 
 application to individual machines requires no labored argument 
 to show its practical value. 
 
 The costing of product on Method C (Fig. 17) is on very similar 
 lines to the percentage method shown in Fig. 15. The only 
 differences are these: 
 
 The time on each order is taken as before, but not only direct 
 wages but also machine charges are figured on the Time Sheet. 
 Cost Sheets are charged accordingly. When the Cost Sheets
 
 COSTING ON METHOD C 
 
 79 
 
 are listed in the Cost Journal, the total of the machine rates is 
 ascertained and credited to the Departmental Expense account. 
 Unless all the machines have been working full time, this credit 
 
 Expense or Burden Journal 
 
 Operators and Machine 
 Time Sheet 
 
 (■2C0 260 J 
 
 510 2G0 120 70 CO 
 
 Cost Sheet 37G 
 
 Item 1 Amt. 
 
 "W. 
 
 U.K. 
 
 Mat'lJ bup. 
 
 D.Mtl 60 
 
 
 
 CO 
 
 
 D.Lbr 100 
 
 100 
 
 
 
 
 M.Rntts 125 
 
 
 125 
 
 
 
 Supp. 
 
 21 
 
 
 
 
 21 
 
 
 306 
 
 100 
 
 1^5 
 
 60 
 
 21 
 
 < >r.i.-r 
 
 Hrs. 
 
 Wu.-.-i 
 
 M.IUI 
 
 376 
 377 
 
 5 
 6 
 
 1.00 
 1.20 
 
 1.25 
 1.50 
 
 
 11 
 
 2.20 
 
 2.75 
 
 Time Sheet Entries 
 Posted to Cost Sheet 
 
 Cost Sheet 377 
 
 Item |Amt, 
 
 w. 
 
 M-IUMnt'lHup. 
 
 D.Mtl 70 
 
 
 
 70 
 
 
 D.Lbr 120 
 
 120 
 
 
 
 
 M.Kate 150 
 
 
 150 
 
 
 
 Supp. 
 
 26 
 
 
 
 
 26 
 
 
 3C6 
 
 l'JU 
 
 i:,u 
 
 70 
 
 JC 
 
 Cost Sheet Listed In Cost Journal 
 
 Finished Work Journal 
 
 376 
 etc 
 
 306 
 660 
 
 9CC 410 345 150 CI 
 
 I 966 j 
 
 Balance to Next Month 
 Represent Unfinished 
 Orders 
 Dept. Mfg Acct. Dept. Fin. Work Acct. 
 
 Fig. 17. — Costing on Method C. Direct labor charged to order numbers. 
 Expense charged to order numbers through machine rates. Undistributed 
 expense (due to idle machines or wasted manufacturing capacity) prorated 
 o\ er orders as supplementary rate. 
 
 will not suffice to wipe out all the amount standing against 
 that account, but a balance will be left, representing undis- 
 tributed expense (i.e. expense that has not been distributed to 
 Orders by means of machine rates). The ratio between this
 
 si) MANUFACTURING COSTS AND ACCOUNTS 
 
 undistributed balance and the total of machine rates is then 
 ascertained, and prorated over all orders in the Cost Journal in 
 the column headed "Supplementary Rate." This prorating is, 
 of course, also transferred to the Cost Sheets when made. In 
 all other respects the two methods are identical in their manner 
 of working, as will be seen by comparing the diagram Fig. 17 
 with that of the percentage method, Fig. 15.
 
 CHAPTER VI II 
 THE FINAL STAGE OF COSTS 
 
 In the preceding chapters we have discussed the three prin- 
 cipal methods of taking out departmental costs. In most 
 cases, however, businesses consist of more than one department, 
 and consequently there must be provided some mechanism for 
 unifying or combining the various departmental costs so that 
 the complete cost of a product or of an order can be ascertained. 
 
 There are two ways of effecting this, and the selection depends 
 on the nature of the work. The first method is indicated where 
 the work done by departments forms a regular series, so that, 
 commencing with the direct material, each department performs 
 some operation on it and forwards it to the next department. In 
 such a case the finished cost of one department may be con- 
 sidered as the direct material cost of the next department. 1 
 When the work has passed through the whole series of departments, 
 the final cost will obviously be the complete cost of the original 
 raw material, plus all the work done on it by the successive 
 departmental operations. 
 
 If there is no such regular sequence of work as this, then 
 another method of unifying or combining departmental costs 
 must be adopted. When, for example, sundry departments 
 turn out portions of work which are then forwarded to a central 
 point to be assembled or put together (machine building affords 
 a good example) or when work passes successively, but not will) 
 unfailing uniformity, through several departments, then it 
 becomes necessary to provide a mechanism for collecting the 
 various departmental costs belonging to a given order, so that 
 the complete cost of the order may be known. 
 
 If we regard the matter from the viewpoint of orders, we see 
 that until the whole order is finally completed and passed into 
 
 1 As for example, the product of a foundry, i.e., castings, becomes the raw- 
 material of the machine shop. The method should only be adopted in a 
 case similar to this, viz., where the product as made is both directly pur- 
 chaseable and directly salable at that stage. 
 6 81
 
 82 MANUFACTURING COSTS AND ACCOUNTS 
 
 warehouse, the cost of the order at any month end may be scat- 
 tered through several departments, and may represent portions 
 of the order in various stages of completion. As long, however, 
 as each department is charging its work to the same order 
 number, it is evident that the whole cost of the order will at some 
 time or other be capable of unification or collection into one total. 
 
 This, on the other hand, is hardly sufficient. We must provide 
 methods of ascertaining, at any given moment, what is the con- 
 dition of the order, and how much money has already been 
 expended on it. Further, when the last operation has been 
 performed on it, we should be able to cost the whole order 
 promptly, without the necessity for consulting departmental 
 accounts for that purpose. 
 
 In the previous chapters, the cost of production in each depart- 
 ment was charged to a departmental Manufacturing account, 
 and the amounts in this account were represented by Cost Sheets, 
 in themselves representing orders. If there was at any moment 
 $5,000 in Manufacturing account, then also there would be $5,000 
 on the Cost Sheets. Then as the work of the department on any 
 order was completed the Cost Sheet was withdrawn, and entered on 
 a Finished Work Journal, and by this means credited to Manu- 
 facturing account and charged to a departmental Finished 
 Work account. When this is done, the department has no 
 farther interest in that order. 
 
 While it was desirable to exhibit the clearance of orders out 
 of departments in that way, for purposes of illustration, depart- 
 mental Finished Work accounts, would be, in practice, of very 
 little service. The balance in the departmental Manufacturing 
 account is, of course, of great significance, since it shows what 
 amount of money is locked up in the shape of work in process. 
 But the balance in a departmental Finished Work account tells 
 us nothing of significance. When an order is entered there it is 
 already beyond the range of the department. Instead, there- 
 fore, of setting up as many Finished Work accounts as there are 
 departments, it will be both simpler and more significant to charge 
 all finished work from the departmental Finished Work Journal to 
 a general Finished Work account embracing all departments. 
 This is obviously simpler, and it is more significant because we 
 have now one total for all work that has passed through depart- 
 ments. The balance in such an account will be represented by 
 all the finished Cost Sheets from all departments.
 
 THE FINAL STAGE OF COSTS 83 
 
 Any given order that is in course of manufacture, therefore, 
 is represented by Cost Sheets in two places: 
 
 1. In the departments, the corresponding cost being contained 
 in the Manufacturing accounts of the different departments 
 concerned. 
 
 2. In the cost office, the corresponding cost being contained in 
 the general Finished Work account. 
 
 Now as soon as the final department has done its work on 
 the order, and has passed the last Cost Sheet through its Finished 
 Work Journal, then all the Cost Sheets will be in the cost office, 
 and all the corresponding cost will be contained in the Finished 
 Work account. By collecting Cost Sheets, we ascertain the 
 entire cost of the order from first to last. 
 
 It may be asked why it is necessary to take the cost of an un- 
 completed order out of the departmental Manufacturing accounts 
 until such time as the order is finished in all departments. The 
 reason is that where we set up Manufacturing accounts for 
 each department, the balance in such accounts should show 
 with precision what is the value at cost of the unfinished work 
 in the department itself. It is then responsible for its own 
 shortcomings. But if the cost of work really finished were to 
 be left in the departmental account until other departments 
 had done their share of work on the order, then the balances in 
 the Manufacturing accounts would cease to have any real 
 significance. In such a case they might as well be consolidated 
 into one account, which would be a general Manufacturing 
 account for all departments together. 
 
 By the plan advocated we divide work in process into two 
 groups: (1) Work that has been completed by a department; 
 (2) work that is still passing through the shops, and as the 
 latter items are kept departmentally, we are able to ascertain 
 through which shops. In many instances the knowledge of 
 how much work was in process in this department as compared 
 with that department would be valuable, though from the 
 commercial accounting viewpoint it is not of great importance. 
 
 Figure 18 shows the general idea of the mechanism just 
 described. On the left we have four departmental Manufactur- 
 ing accounts. In department A, the work is still in process and 
 the Cost Sheet is, therefore, still in the department and has not 
 yet been entered on the Finished Work Journal. In depart- 
 ments B, C and D all work on that order has been completed.
 
 84 MANUFACTURING COSTS AND ACCOUNTS 
 
 The cost, as per Cost Sheets, has, therefore, been entered on the 
 respective Finished Work Journals, has been credited to the 
 respective Manufacturing accounts, and charged to the general 
 Finished Work account. The amounts thus transferred are 
 represented by Cost Sheets withdrawn from the departments. 
 
 The final stage of costs is the assembly or collection of all 
 the Cost Sheets belonging to a single order. In very many 
 
 Departmental Cost Sheets 
 Still in Dept. A 
 
 Order 3870 
 
 Departmental Cost Sheets 
 in Cost Office 
 
 Fin. Work Journal Dept. B 
 
 B 
 
 Order 3S70 
 
 190 
 
 
 C 
 Order 3S70 
 
 -1U 
 
 
 D 
 
 Order 3870 
 
 ID 
 
 Order 3870 
 
 Fin. Work Journal Dept. C 
 
 Order 3870 '210 
 
 Fin. Work Journal Dept. D 
 
 Order 3S70 40 
 
 Manufacturing 
 
 Accounts 
 (Departmental) 
 
 Fig. 18. — Showing four departments working on the same order. In 
 department A work is still in progress. In B, C, and D it is completed, and 
 its cost in these departments has been credited through the Finished Work 
 Journal to the Department Manufacturing account. It has also been 
 charged to the General Finished Work account. When department A's 
 cost is similarly transferred, the cost of the order as a whole will be complete, 
 and will all be represented in the General Finished Work account. 
 
 cases there is no material added in any department beyond the 
 first departmenl that starts the product. It is, therefore, fre- 
 quently possible to eliminate all reference to direct material 
 from the departmental accounts, leaving these to deal only 
 with direct labor and with expense, distributed by one of the 
 three methods described in previous chapters. In such case 
 direct material, instead of being charged to departments, and
 
 THE FINAL STACK OF COSTS 85 
 
 thence into costs will be charged direct from the Stores Issues 
 Journal (Fig. 8) to a Material Cost Sheet kept in the cost office, 
 and at the same time to Finished Work account. The latter 
 will then contain: (1) All labor and expense on work completed 
 by departments; (2) all direct material. It will readily be 
 understood that this latter method is a "short cut," as it elimi- 
 nates the passage of direct material through the intermediate 
 stage of departmental accounts, but brings it to the same place 
 in the end. 
 
 The final cost of an order will be: 
 
 1. Direct material. 
 
 2. Departmental direct labor. 
 
 3. Departmental expense. 
 
 When all these have been collected, and no more work remains 
 to be done, then the factory has no further interest in the order, 
 and our next step must be to provide mechanism to take the 
 cost of such finished orders out of the factory system of accounts, 
 and charge it to the selling system of accounts.
 
 CHAPTER IX 
 WASTE AND SPOILAGE. SCRAP. BYPRODUCTS 
 
 Nearly all manufacturing operations are accompanied by 
 waste and spoilage. The cause may be either inevitable or 
 accidental, but whatever the cause, these items present some 
 of the most annoying and complex problems with which the 
 cost accountant has to deal. 
 
 Waste is not quite the same thing as spoilage, though the 
 line is hard to define. Spoilage is always accidental, though 
 a certain percentage of spoilage may be inseparable from certain 
 kinds of work, e.g., castings. Waste on the other hand arises 
 out of the operations of manufacture itself, and though it can 
 be foreseen, its amount is generally a variable quantity. 
 
 A good example of waste is afforded by the process of cutting 
 shapes or blanks from sheets such as leather hides, cloth bales, 
 metal strips or sheets, rubber, celluloid sheets, etc. In such 
 cases there are produced out of a given sheet so many good and 
 usable blanks and so much waste, but just how much of each 
 depends on certain conditions. The skill of the operator, and 
 the condition of the hide or sheet will vary to a certain degree, 
 sufficiently so to make the output of blanks from a given number 
 of hides or sheets a varying quantity. 
 
 In other industries, waste occurs by reason of shrinkage 
 of material, by evaporation of moisture, by ejection of sediments, 
 scums, and so forth, at various stages of the work. 
 
 Spoilage means imperfect work. In this case there is nearly 
 always a loss of labor and expense as well as of material. In 
 a lot of 50 pieces it may happen that only 45 will ultimately 
 pass the inspector, the remainder having fallen by the way for 
 one reason or another. Breakage, imperfect work, use of un- 
 suitable material, faults and flaws in material are some of the 
 usual reasons. But if this spoilage occurs midway in the process 
 of producing the 50 pieces, then it is obvious that the time 
 spent on the production of the spoiled ones is rendered valueless. 
 
 There are two main ways of meeting this condition. Either 
 the whole cost of producing the lot is charged against the 45 
 
 86
 
 WASTE AND SPOILAGE 87 
 
 good pieces, with a credit for the scrap value of the material 
 thrown out; or, the missing parts may be "replaced" and the 
 cost of replacing them charged to a Spoiled Work account. 
 
 This brings us to another problem of the cost accountant, 
 namely, scrap. Scrap is in the nature of a byproduct of low 
 grade. The special feature of scrap is that it is produced in 
 the course of manufacture. The most familiar example of 
 scrap is that produced by metal cutting tools (turnings, chips, 
 filings). In the case of the blanks cut out of sheets, hides, etc. 
 referred to above, scrap is also produced, but this scrap is not 
 the waste there referred to. Such a process involves both scrap 
 and waste — scrap in all cases, waste when the material fails to 
 yield as many blanks as it would under favorable conditions. 
 The scrap is what is left after all the blanks have been cut out 
 of the sheet. 
 
 Waste has no market value. It represents either a failure 
 to produce standard efficiency, or a shrinkage in value. Scrap, 
 on the other hand, has generally a market value though this 
 may be small compared with the original cost of the material. 
 In some cases, of course, where the material itself is costly, 
 scrap is carefully collected. Brass and copper turnings, and 
 to a still greater extent, filings of precious metals such as silver 
 and gold, have a value unaffected by the form in which the 
 scrap exists. 
 
 Spoilage has value only in as far as the spoilt material can be 
 classed as scrap. All the rest is loss. Very great values may be 
 wiped out as spoilage by an unlucky accident. In an ordnance 
 factory a large gun approaching completion was relegated to the 
 scrap heap, through the workman in a moment of abstraction 
 picking up a wrong pair of calipers, and making a cut accordingly. 
 The gun lies on the scrap heap, carrying with it many thousands 
 of dollars expended on it in the long series of processes — melting, 
 casting ingots, forging, tempering, turning and boring that all 
 but brought it safely to the final stage. The scrap value of a 
 huge forging of this class is diminished by reason of the costly 
 nature of the work of cutting it up into manageable proportions. 
 
 It will be seen that waste, spoilage and scrap are three separate 
 things : 
 
 Waste is a loss of quantity of product, due to failure to extract 
 the most out of material, or to inevitable conditions of manu- 
 facture.
 
 88 MANUFACTURING COSTS AND ACCOUNTS 
 
 Spoilage is the destruction of material already in process, and 
 carries with it not only the value of the material spoiled, but also 
 all the labor and expense that has been expended on it up to the 
 time it was condemned. 
 
 Scrap is material of no use for the purpose that the original 
 material was used for. It may arise from spoilage, as in the case 
 cited above, but more usually it is a kind of byproduct such as 
 cotton-waste in cotton-spinning, sprues and gates in castings, 
 turnings and filings in metal working, the remnants of sheets 
 from which all the possible blanks have been cut or stamped, and 
 so forth. It should be noted that scrap from one industry is 
 frequently the raw material of another industry. When this 
 happens, higher prices can be obtained for such scrap than would 
 be possible otherwise. 
 
 The distinction between waste, spoilage and scrap is important 
 because their treatment from an accounting point of view is by 
 no means identical. 
 
 Waste usually implies that having paid so much for a given 
 length, weight or quantity of raw material, some of this disap- 
 pears in course of manufacture, either by inferior skill, or by 
 inevitable changes of condition, so that at the end of the series 
 of processes we have less material than we started with. Scrap 
 may or may not result from this loss. Once we admit that waste 
 is inevitable, or highly probable, then it follows that the chief 
 preoccupation of the accountant will be to observe whether it is, 
 in any given instance, greater or less than may be reasonably 
 expected. 
 
 This in turn opens the way to two distinct views as to regarding 
 an increased waste. If we have carefully worked out standards 
 of normal waste, then the excess on any particular occasion can 
 be ascribed to preventable causes. In that case we may take the 
 increased portion of cost out of the Cost Sheet (and, therefore, out 
 of Manufacturing account) and charge it to a special Wastes 
 account, leaving the actual cost of production of the order equiva- 
 lent to, or rather identical with standard cost. 
 
 The object of doing this is twofold. First, the amount of loss 
 due to preventable causes is ascertained separately and forms a 
 valuable guide to the technical efficiency of the shop; secondly, 
 standard cost is substituted for varying cost in as far as variation 
 in the amount of waste affects it. This is of value for commercial 
 reasons.
 
 WASTE AND SPOILAGE 89 
 
 If there is scrap produced that has a market value, and if 
 more of it is produced when waste is high than when it is normal, 
 then, theoretically, the excess of scrap should be credited to the 
 Wastes account. Unless, however, the scrap is really valuable 
 as in the case of brass, copper, or precious metal, this is not worth 
 doing. Scrap should, of course, be credited in all cases to Manu- 
 facture, but this is a question of excess scrap corresponding to 
 excess waste. 
 
 Spoilage is a much more complex affair to deal with than 
 simple waste, since it involves generally four elements: loss of 
 material; loss of labor and of expense on work done on the 
 material; deduction of residual or scrap value of the spoiled 
 material; replacement of the spoiled part, and proper disposal of 
 the cost of such replacement. 
 
 In foundry work there is a regular percentage of spoiled work, 
 which is usually fairly constant for one class or type of casting 
 in the same shop. As between different shops the widest varia- 
 tion exists as to what is regarded as a normal expectation of 
 spoiled or "bad" castings. The simplest way of dealing with 
 this particular case is to ignore the bad castings. That is to say 
 that if we pour 10 tons of metal from the cupola, and get 9 tons 
 of "good" and 1 ton of "bad" castings, then the cost of the 
 cupola charge and of the molding labor and expense is considered 
 to rest on the 9 tons of "good" castings. 
 
 This plan is simple, but cannot be applied in every case of 
 spoilage. In the case of a uniform product like iron castings 
 which are costed by the pound, it is possible to take the cost of 
 production on the one side and over against it place whatever 
 quantity of product good luck has actually produced. But in 
 other cases, as, for example, in machine shops, and all industries 
 where the product is discrete and not uniformly reducible to a 
 cost per pound, yard, etc., wholly different methods must be 
 employed. In such cases when a piece has been spoiled it has to 
 be replaced, and the farther it has progressed from its starting 
 point, the more loss there is incurred when it is spoiled. 
 
 If we have a lot of 50 pieces of brass, to be turned, bored, milled 
 and drilled, and if five fall out at the turning stage, four while 
 being bored, one while being milled, and two on final inspection 
 after the drilling has been done, then it will be obvious that a 
 complex condition exists. If we ignored the pieces that dropped 
 out, and simply considered the 39 that survived as the product
 
 90 MANUFACTURING COSTS AND ACCOUNTS 
 
 of the whole series of processes, the cost would have but little 
 significance, because it obviously depends on the particular 
 number of pieces dropping out at those particular stages. If we 
 had a second lot of 50 pieces, and six fell out while milling, and 
 five while drilling, there would be again 39 left, but an entirely 
 different cost would result because each piece that fell out carried 
 an average larger amount of labor and expense with it than on the 
 first occasion. It is evident, therefore, that the elimination plan 
 will not work satisfactorily in such cases. 
 
 It is unfortunately the truth that to devise a really exact plan 
 is very difficult. In the case of large lots, say 1,000 and upward, 
 it is fairly easy, but in the case of lots in small quantities the 
 processes on which last a long time, say several hours, it will be 
 evident that a good deal depends on the question at what part 
 of the process did the spoilage occur? Was it only just begun? 
 Or was it nearly or quite complete ? Or how far midway between 
 these extremes? In heavy engineering work this becomes a 
 question of some importance. 
 
 In practice the question is answered as near as possible. When 
 a piece is condemned, a "replacement" order is issued to make a 
 new piece up to the point at which the spoiled piece had reached. 
 This is roughly indicated, thus: 
 
 "Replace cutter-bar. Turn, bore, and mill 2 hr." When the 
 operator has gone thus far on the replacement order, he turns it 
 in, and resumes work on the original order number. By this 
 means the cost of replacing the spoiled part is ascertained with 
 fair accuracy. The cost of the replacement work is not charged 
 to the original order, but is charged to a special Spoiled Work 
 account. By this means the direct material for the replaced 
 part, the direct labor of turning, boring and 2 hr. of milling it, 
 with the expense or machine rates corresponding, are separated 
 from the original order. It only remains to deduct the scrap 
 value of the material of the spoiled part, and this is deducted 
 from the replacement order. 
 
 A complete dovetailing is thus effected. The replacement- 
 order cost is considered as representing the part that was origin- 
 ally spoiled, and the original cost of that part remains in the main 
 order. It is true that we have taken away the spoiled part from 
 the main order, but on the other hand we have given back a good 
 part at exactly the same stage of manufacture. The cost of the 
 misfortune is, therefore, all in the replacement order and that in
 
 WASTE AND SPOILAGE 93 
 
 consequence is entitled to be relieved by the value of the scrap 
 part. It is exactly the same as if the work on the replacement 
 order had resulted in turning, and boring the part, milling it 2 
 hr. and then spoiling it. 
 
 Scrap is an easier matter to deal with. There are only two ques- 
 tions to be considered: (1) What is its value? and (2) What 
 shall be credited with this value? The cause of the scrap must, 
 of course, be considered. Whenever possible, credit should be 
 to the order making the scrap. But this is rarely possible, save 
 in the case where we are costing by whole products. A scrap 
 coming from one kind of product should obviously not be credited 
 to any other nor to a mixed account. Failing credit to the order 
 we may endeavor to credit it to the material involved. Foundry 
 sprues and gates are an example of this procedure; they are 
 credited to the cupola "pour," and thus help to reduce the cost 
 of "good" castings. 
 
 In many cases, neither of these methods can be used, since 
 the scrap is no longer identifiable with any particular class of 
 material or with any particular order. The mixed turnings in 
 a machine shop are an example of scrap of a very general nature. 
 In such a case, credit for scrap may be made to Profit and Loss 
 account. It has frequently nothing to do with the particular 
 shop in which it happens to be made. It arises from material 
 and, therefore, becomes a byproduct giving rise to a very small 
 but general revenue. 
 
 The operations of a foundry exhibit all three classes — waste, 
 spoilage and scrap — in a very clear manner. To begin with a 
 certain weight of materials is put into the cupola, and part of this 
 never reappears. A shrinkage takes place that is wholly lost. The 
 remaining weight does reappear in the form of liquid metal. In 
 pouring the liquid metal into molds, three forms are produced: 
 "good" castings, which are product; "bad" castings which are 
 really spoilage; and "sprues and gates" which are necessarily 
 produced, but are of no use. These are to be regarded as a scrap 
 byproduct. 
 
 The way in which waste due to shrinkage is handled for 
 accounting purposes in this case is to ignore it. But all the same 
 its amount is noted, and reduced to a percentage which is regarded 
 as unsatisfactory if it exceeds a certain figure. By ignoring this 
 waste, we have:
 
 92 MANUFACTURING COSTS AND ACCOUNTS 
 
 10,480 lb. Cost of pig, fuel, 10,000 lb. of liquid iron. 
 
 etc. Waste (4.9 per cent.) 
 
 Cost of labor. 
 Expense. 
 
 thus ascertaining the cost of liquid iron actually forthcoming, 
 and ignoring that which has shrunk in process of melting. 
 
 This output of liquid iron is then charged to what results from 
 the pouring thus: 
 
 Cost of 10,000 lb. of liquid 
 iron. 
 
 8,000 lb. "good" castings. 
 1,000 1b. "bad" castings. 
 1,000 lb. sprues and gates. 
 
 The "bad" castings and the sprues and gates are credited at their 
 scrap value, leaving the "good" castings to bear the remaining 
 cost of the liquid iron. 
 
 In this case the spoilage is of such a nature that it has very 
 close relation to the product that was actually extracted from the 
 pouring. It is indistinguishable from it, since if "good" is more, 
 "bad" is less, and vice versa. It is just simply a pound of iron 
 in one form and not in another. It can be taken at once out of 
 the total, less any residual value it may have. Sprues and gates, 
 on the other hand, are scrap pure and simple, very similar to 
 machine turnings. They are not interchangeable in any way 
 with "good" castings. There might be none at all, without 
 increasing the "good" castings by a single pound. As a by- 
 product the only thing we have to consider with regard to them 
 is their scrap value, and to what they should be credited — ob- 
 viously to the liquid iron from which they came. When this is 
 done, cost of production is clear of them. 
 
 To sum up the problems afforded by waste, spoilage and scrap, 
 we ma}' say that: 
 
 Waste is something that disappears, or else fails to appear. 
 In the former case, what remains is usually considered as product, 
 and its weight or amount is taken as the basis of cost. In the 
 latter case (instanced by cutting blanks out of sheets) the pos- 
 sible minimum may be taken as standard, and any increased unit 
 cost beyond this considered as preventable waste, and so charged. 
 Or the amount actually realized may be made the basis of cost. 
 
 Spoilage is something thai is destroyed after having been 
 worked on. It usually implies loss of labor and expense as well 
 as of material. The methods of handling it are various, but the
 
 WASTE AND SPOILAGE 93 
 
 general principle to be observed is, if replaceable, that the cost 
 of replacing up to the stage at which the original spoilage oc- 
 curred shall be charged to a Spoiled Work account. If not 
 replaceable, then usually the loss must fall upon the actual 
 quantity of product that remains, less any scrap value that the 
 spoiled material may have. This procedure, of course, increases 
 the cost of the product that survives, and is only justifiable if 
 it is of a very uniform character as in the case of castings cited 
 above. 
 
 Scrap is a byproduct arising from process work, or is the result 
 of spoilage. In either case, a value must be put on it, and this 
 value must be credited to the source from which the scrap actually 
 and not apparently, flows, if this source is discoverable. Other- 
 wise it must be treated as a credit to Profit and Loss. 
 
 Byproducts. — In some cases, notably in those industries that 
 depend on chemical changes in their material, part of the material 
 is rejected from the main process at certain stages. If such 
 "reject" has no commercial value, it is simply waste. As 
 already explained, it disappears, and is of no further importance 
 from the cost viewpoint. On the other hand, it may have a 
 considerable commercial value. In soap-making, for example, 
 during the process of mixing and boiling the ingredients, sundry 
 rejections take place, some of these being run to the sewer as of 
 no commercial value, but others are collected for the purpose of 
 recovering one of the byproducts arising from the chemical 
 changes that have taken place, namely glycerine. 
 
 Glycerine is not directly given off in a pure state from the 
 soap-kettles. What is drawn off is a sweet and salty water that 
 becomes the raw material of a fresh set of processes, ending in the 
 recovery of so much salt, and so much pure glycerine. 
 
 In cases of this kind it will be evident that a credit must be made 
 to Manufacturing account, for the value of the byproduct re- 
 covered, less, of course, the cost of recovery. In some cases it is 
 possible to determine in advance the quantity of byproduct that 
 exists in the raw material. The amount of glycerine in tallow, 
 for example, can be thus determined. This gives the option of 
 two methods of procedure. We may either charge the whole 
 cost of the tallow to Soap-manufacturing account and subse- 
 quently credit the latter with the value of glycerine recovered, or 
 we can charge the glycerine content at once to Byproduct ac- 
 count, and the remainder to Soap-manufacturing. In the latter
 
 94 MANUFACTURING COSTS AND ACCOUNTS 
 
 case, of course, no further credit to Manufacturing account is 
 necessary as far as the glycerine byproduct is concerned. 
 
 Mention has been made of a salty constituent of the liquid 
 material drawn off from the kettles. This may be used to illus- 
 trate another feature of chemical manufacture, rarely met with in 
 other industries. The salt is actually recovered by the same 
 series of processes that recover the glycerine. But it is not a 
 byproduct because it does not arise from the original raw materials 
 used for manufacture. It is added during the boiling processes, 
 but is not intended to remain in the product. It merely serves 
 to promote chemical changes, itself being practically unaltered. 
 When it is recovered, therefore, it is used over again. 
 
 If the quantities used and those recovered are constant, it is 
 clear that cost is not affected. The salt is merely carried round 
 and round, dissolved at this stage and reappearing as a solid at a 
 later stage. But if, as is usually the case, there is a leakage, and 
 all the salt does not reappear, part of it escaping recovery, then 
 Manufacturing account must be charged with new salt introduced. 
 
 It will be seen that the treatment of byproducts is practically 
 the same as that of scrap. The main difference lies in the fact 
 that most byproducts are subject to further processes and 
 treatment before they assume commercial form. Two considera- 
 tions have, therefore, to be kept in view: (1) crediting the Manu- 
 facturing account with the value of the reject; (2) keeping costs 
 of the further processes necessary to put the byproduct in com- 
 mercial form. Byproduct recovery is, of course, handled as a 
 separate department, for which the raw material is the liquid or 
 solid reject thrown out of the main process. 
 
 The question of what price to put on the reject is a very delicate 
 one. This is the value at which credit is made to Manufacturing 
 account, and charged to Byproduct account. It is evident that 
 three bases of charge exist in some cases, two always. These 
 are: (1) Manufacturing account can be credited with the sale 
 price of the byproduct, less cost of recovery. In this case no 
 profit can be shown by the byproduct department. (2) No 
 price, or a merely nominal price can be placed on the reject, 
 which is equivalent to making a present of its raw material to the 
 byproduct department, and enabling it to show a profit. Of 
 course, in this case the cost of the main product is increased pro- 
 portionately. This method is clearly impracticable in most 
 instances since it would make the main product unsalably high.
 
 WASTE AND SPOILAGE 95 
 
 (3) When the amount of the byproduct content in the original 
 raw material can be calculated (as in the case of glycerine in 
 tallow just mentioned) then a fair price can be put on the reject, 
 based on the relative weight of the materials as divided between 
 main and byproduct. 
 
 Thus if we buy a ton of something, at a cost of $50, and by 
 analysis or other means we are able to say that ultimately 44 per 
 cent, will find its way into main product and 56 per cent, into 
 byproduct, then it is obvious that $22 and $28 are the respective 
 sums to be charged to main and byproduct Manufacturing 
 accounts, for each ton of raw material purchased. Both main and 
 byproducts are then on their own merits, and each will be able to 
 show its own profits, unaffected by the others transactions. Of 
 course, in such cases, careful record must be kept to ensure that 
 the raw material does actually divide up in the proportion fore- 
 casted by the analysis.
 
 CHAPTER X 
 
 AUXILIARY EQUIPMENT— DESIGNS, PATTERNS, MOLDS, 
 
 JIGS, ETC. 
 
 In considering the manufacturing process in its general aspect, 
 we have hitherto considered what might be called straight-line 
 manufacturing, in which the turning out of salable product 
 (including byproduct) is the only preoccupation of the manu- 
 facturer. The larger bulk of industry is of this character. But on 
 the other hand, some of the most important industries, including 
 the great engineering group in most of its branches, have to face 
 a problem of a wholly different character to any yet discussed. 
 Before they can proceed with the straight-line manufacture of 
 their product, they have to provide intermediate appliances, 
 sometimes of a very costly character, which may be considered 
 as auxiliary equipment specialized to the point of only furnishing 
 facilities for making one article, or perhaps usable for only one 
 order. 
 
 From what has been already said, in previous chapters, with 
 regard to the manner in which the cost of anything can be ob- 
 tained (provided that a special order has been issued to which 
 all direct material, direct labor, and expense are chargeable) it 
 will readily be understood that the difficult nature of this problem 
 of auxiliary equipment does not lie in the ascertainment of the 
 cost of such equipment. The making of a drawing in the drafting 
 department, of a pattern in (lie pattern shop, or of a mold or jig 
 in the machine shop is neither more nor less difficult than the 
 costing of a salable article. In fact any one of such articles 
 might be made in the shops for sale to a customer without in any 
 way changing the met hod of costing applicable to the case. 
 
 .Moreover, to show that it is not the cost of such articles that 
 provides the difficulty of the problem, we may take the case of a 
 business (and such actually exist) where such articles are not 
 produced inside the plant at all, but are purchased from the 
 outside. The problem is not in the least simplified by this 
 procedure. 
 
 96
 
 AUXILIARY EQUIPMENT 07 
 
 The difficulty arises in the fact that such auxiliary equip- 
 ment has, for the most part, an indeterminate life. Thai is 
 to say, when we either make or purchase a pattern, mold, or 
 jig, it is in very many cases an almost impossible task to deter- 
 mine how often it will be used, how many articles in which it 
 will ultimately be auxiliary in production, or in extreme cases, 
 whether after the initial use for a specific job, it will ever be 
 used again. 
 
 If we had an order for 100 articles, and to produce such articles 
 it were necessary to make or purchase a pattern, a mold, and 
 two or three jigs, and if we were sure that we should never get 
 a similar order, then the problem would be simple. We should 
 simply charge all this auxiliary equipment up to the order 
 itself, since all these things would need to be paid for out of 
 the profit realized on the order. Their subsequent relegation to 
 scrap would only interest us, in as far as there was any residual 
 value in the materials. This value, when ascertained, we should, 
 of course, credit to the order. 
 
 But if we obtain such an order, or still more if we are bidding 
 on such an order, and are not at all certain whether it may not 
 be followed by duplicate orders at a later date if we are successful 
 in getting the first one, then ample room for indecision exists. 
 If we charge to the estimated cost all the auxiliary appliances 
 necessary, it may be that we shall not get the order at all. 
 This will certainly follow if someone who already holds the 
 trade is bidding against us, because he will certainly not be 
 adding the cost of all the auxiliary appliances to every 100 
 articles he delivers. On the other hand, if we go on the theory 
 that our auxiliary appliances, when made, will serve for the 
 reproduction of 5,000 articles before they are worn out, and if, 
 for that reason, we only add one-fiftieth of their cost to our bid, 
 we shall make a fair price, and may succeed in getting the 
 business. But in that case, if we do not subsequently receive 
 orders, from time to time, that will ultimately amount to 5,000 
 articles, we shall be losing money equal in amount to the un- 
 expended value in the appliances left on our hands. 
 
 This is the difficulty which presents itself in most cases of 
 auxiliary equipment. The more specialized it is, the more 
 doubtful is the solution. In some cases, where the appliance 
 is used for the production of a kind of product that is in itself 
 the raw material of a subsequent process, the difficulty is very
 
 98 MANUFACTURING COSTS AND ACCOUNTS 
 
 considerably diminished, since in this case, it is generally possible 
 to make a more or less accurate forecast, barring accidents and 
 unforeseen contingencies, of the probable life of the auxiliary 
 item. In making steel ingots, for example, the molds used are 
 often very large and costly, but the life of an ingot mold, that 
 is the number of tons that it will produce before being relegated 
 to scrap is fairly well ascertainable. Consequently, we are 
 enabled to make a tonnage charge for the use of such auxiliary 
 appliances as ingot molds that thus becomes part of the cost of 
 the steel itself. 
 
 In cases of this kind, the calculation of a basis of charge 
 for the use of the mold is not a matter for the accountant. It 
 is a purely technical matter, depending on a knowledge of the 
 facts. But if such knowledge is non-existent, then it may fall to 
 the accountant to institute such records as will later furnish a 
 basis of fact for a decision. Such a record is not, however, part 
 of the accounting system proper. 
 
 We need not pursue the subject into greater detail. The 
 general bearing of the problem is all that it is necessary to 
 observe. This may be summed up as follows: 
 
 In certain industries auxiliary equipment (the things that 
 help to make other things) is necessary. Its peculiar feature is 
 that it is not general in application like machines, for these 
 are used on one order after another indifferently, but auxiliary 
 equipment is special. This specialization varies in "degree down 
 to cases in which the auxiliary appliance can be used for one 
 specific article alone, and this may mean for one order or its sub- 
 sequent duplicates, if any. As there is in many cases no positive 
 information on the life of the appliance — that is, the number of 
 times it will be used — the utmost caution must be taken in 
 dealing with such auxiliary appliances. The safe plan is to 
 charge thorn up to orders as soon as possible, provided that the 
 order will bear the strain. 
 
 In all industries where orders are turned out by the use of 
 auxiliary appliances specially made for them, the final cost 
 of the order as disclosed by the Cost Sheet should show what has 
 been expended for new auxiliary appliances in connection with 
 it, even though only a portion of this expense (or none of it) 
 has been charged up to the order. 
 
 Wherever auxiliary appliances such as patterns, molds and 
 jigs accumulate, frequent scrutiny of their book value should
 
 AUXILIARY EQUIPMENT 99 
 
 be made, so that no undue inflation of assets arises from the 
 presence of items that have as a matter of fact no certain future 
 use. 
 
 From the accounting viewpoint, the cost of all such auxiliary 
 appliances, whether purchased or made in the plant itself, 
 should be charged to special accounts as soon as they are com- 
 pleted. Thus we may have an account for patterns, one for 
 molds, one for jigs, etc. Then, whatever portion of the ex- 
 penditure on such items can be charged to specific orders should 
 be so charged, and credited to the account. The remainder should 
 be written down periodically on some basis to be settled after 
 due consideration of all the facts. Where there are several 
 lines of product which are being costed separately, then the 
 auxiliary appliances should be classified in ledger accounts 
 in the same way, thus patterns for product A, jigs for product 
 C, etc. Loss on auxiliary appliances, through non-use, can by 
 this means be confined to the line of product that has incurred it.
 
 CHAPTER XI 
 SALES AND SELLING EXPENSE 
 
 It cannot be too strongly emphasized that the cost of manu- 
 facturing a product and the cost of selling it, are wholly distinct, 
 and have no relation to one another whatever. 
 
 In many industries this is fairly obvious. In a large concern 
 the factory may be in one place and the selling department in 
 another, so that there is a physical separation of the two classes 
 of effort. But in other industries, part of the factory organiza- 
 tion is at times mixed up in selling operations, as in the case of 
 a drafting room that prepares sketches or designs for submission 
 by the selling department to a probable customer. Or men may 
 be detached from the shops for demonstrating purposes, or to 
 remedy defects that have developed when the goods were already 
 in possession of the customer. In such cases there is an apparent 
 connection between the works and the selling organization, and 
 their relative spheres are not so clearly defined. 
 
 Further, there is always a class of expense which appears 
 to be common both to the factory and the sales department. 
 The salaries of the president, directors, and perhaps of a general 
 manager, the clerks, stationery, lighting and heating of the 
 general offices, the expenditure of postage, and petty expenses — 
 all these seem of a very general nature, and not pertaining 
 decidedly either to factory or selling necessities. Even when 
 a city office attends to the selling, and is thus physically separated 
 from the factory, these apparently common expenses may exist, 
 and in addition, the purchasing agent, who obviously exists 
 for the sake of the factory, may form part of the city office 
 organization. 
 
 A little consideration will serve to show, however, that the 
 cases are exceedingly rare when anyone of these officials is engaged 
 at the same moment on business pertaining to the factory and to 
 the selling department. In fact it is practically impossible that 
 this should be so, for the two classes of transaction cannot meet. 
 It would seem, therefore, that the apparently common nature of 
 the expense is accidental, and arises from the fact that managers 
 
 100
 
 SALES AND SELLING EXPENSE 101 
 
 and clerks divide their attention between factory and selling 
 matters, in much the same way as men in the shops divide their 
 attention between orders. And the solution of the difficulty is 
 to provide some mechanism whereby the I Lme devoted to factory 
 business is separated from that devoted to selling business. 
 
 In the case of the president and the administrative officers 
 there is indeed more room for indecision than in the case of roul ine 
 workers. Correspondents, clerks and bookkeepers do definite; 
 work, which is capable of close classification, but the higher 
 officials have large matters to deal with embracing the welfare 
 of the business as a whole. In their case, therefore, a somewhat 
 arbitrary classification of their activity will have to be made. 
 
 In the cases cited in the second paragraph above, where depart- 
 ments of the factory extend assistance to the selling arm, the 
 charging of such activity to that arm is a simple matter of book- 
 keeping, provided the exact significance of each class of transac- 
 tion is determined. 
 
 The first step, therefore, in organizing the mechanism of sales 
 and selling expense is to provide a series of accounts to which all 
 such expense can be charged. In addition to these then; will be 
 accounts containing what might be called the raw material of 
 sales, namely, the accounts which contain the quantity and cost 
 of the various descriptions of product as turned over by the 
 factory for sale. 
 
 In Fig. 8 (Chap. Ill), typical selling expense accounts were 
 enumerated as under: 
 
 Advertizing and Catalogues. 
 
 Salesman's Traveling Expense. 
 
 Depreciation. 
 
 Stores Used. 
 
 Selling Department Share of administrative expense: 
 Rent, insurance, etc. 
 Stationery. 
 Salaries. 
 Sundry Expense. 
 
 These accounts are not exhaustive, and in practice might be 
 subdivided to a greater extent than shown, but unless a rigid 
 analysis of expense items is to be undertaken for the purpose of 
 determining how each such item was concerned in the selling 
 of individual lines of product, as will be discussed later, there is 
 no absolute necessity for having finely subdivided accounts. If
 
 102 MANUFACTURING COSTS AND ACCOUNTS 
 
 all selling expense is to be merged in one total and spread evenly 
 over sales of all classes, then a few general accounts will serve 
 the purpose. 
 
 Having thus collected all the items of selling expense and of 
 cost of salable goods, the next step is to consider the work of the 
 selling department with a view to determine whether all the 
 different kinds of product are sold with the same selling effort, 
 that is, at the same selling cost, or whether certain kinds of 
 product really take more effort to sell, that is, cost more to sell 
 than others. 
 
 If we find that it is the fact that some products do take more 
 effort to sell than other kinds, then the next step is to analyze 
 our sales expense in such a way as to determine, if possible, how 
 much more one product costs to sell than another. In other 
 words, we seek to express the ascertained fact that products differ 
 in their call on the selling expense, in dollars and cents. 
 
 When the incidence of selling expense on the various products 
 has been ascertained, we are then in a position to charge each 
 product only with that portion of the selling expense that it may 
 reasonably have been judged to have incurred. In the case of 
 each product we shall then have the following data: 
 
 1. Factory cost of product. 
 
 2. Add cost of selling this product, giving total cost of the 
 product, sold. 
 
 3. Deduct from selling price of product, giving profit on this 
 class of product. 
 
 Ascertaining Gross Profit on Separate Classes of Product.— If our 
 investigations go to show that no class of product absorbs more 
 selling energy or expense than any other, then the problem is sim- 
 plified. We need not go to the trouble of analyzing our selling ex- 
 pense to determine which items have been incurred in the effort to 
 sell this product and which to sell that. All that we need to do is 
 to total all the selling expense and distribute it to the different prod- 
 uct in proportion to the sales made of each class. In other words, we 
 shall charge our selling expense as so much per cent, on the dollar 
 of sales, irrespective of whether the goods sold were kettles, tongs 
 or fire-irons. In a large number of industries this simple method 
 of charging selling expense will provide substantially satisfactory 
 results. In other cases it would seriously mislead, and give rise 
 to wholly erroneous impressions as to the real profitableness of 
 the different lines of product.
 
 SALES AND SELLING EXPENSE 
 
 103 
 
 Figure 19 illustrates this simple method of dealing with selling 
 expense. Three different products A, 11 and C are shown 
 but as each of them is treated alike, operations on B and C 
 are omitted from the diagram. 
 
 /(2000 1300 \ 
 Product A I 
 
 ^\ I 1000 J 
 
 Product B 
 
 i/T\ 
 
 « \f 2000 1 
 
 Product C 
 
 Sales Journal 
 
 Share of A dmin 
 
 I 60 60 1 | 
 
 Stores used 
 
 I 500 500 ) 
 
 Adytg.and Catalogue 
 
 I 240 240 I I Le 8 al Expense 
 \ J | Special Expense 
 
 Revenue from 
 
 Sources other than 
 
 Trading 
 
 Traveling Expense 
 
 Fig. 19. — Selling expense distribution. 
 Note: Selling expense assumed to bear uniformly on all products. 
 
 The Sales Journal is ruled with double columns, providing 
 for separate entry of transactions relating to the three products. 
 Each sale is entered in the usual way, in the order of com- 
 pletion. Both the cost price at which the article stands in the
 
 104 MANUFACTURING COSTS AND ACCOUNTS 
 
 Stock account, and the sale price payable by the customer are 
 entered against each sale. At the month end, the columns are 
 totalled, and charged and credited as follows: 
 
 The total of the sale price column is charged to the Control 
 account in the Sales Ledger. (The amounts of each sale are 
 also, of course, individually posted to the customers individual ac- 
 counts in the same ledger.) It is also credited to Product A Sales 
 account. Then .the total of the cost price column is credited 
 to Product A Stock account, and charged to Product A Sales ac- 
 count. These transactions can easily be followed on the diagram. 
 
 By these postings we have taken out the "goods sold" from 
 the Stock account (at cost price) and have charged them to 
 the customer at sale price. The difference between cost and sale 
 price, which represents gross profit on this class of product sold 
 during the month, is found to be indicated in the Sales account, be- 
 cause we charged that with cost and credited it with sale price, 
 consequently the balance must show the difference or gross profit. 
 
 We have next to deduct the expense of selling from this gross 
 profit. The selling expense components having been already 
 collected in the Selling Expense accounts (at the left of diagram) , 
 we list these in a Closing Journal. We also enter in the same 
 journal an item representing the balance, or gross profit, in 
 each of the product Sales accounts (only one shown, viz., product 
 A). The various Expense accounts are then credited and 
 their grand total of expense charged to Trading account. The 
 second item on the journal, charges Sales accounts with the 
 balances standing in them (gross profits) and credits Trading 
 account with similar amounts, i.e., it transfers the balances in 
 Sales accounts to Trading account. 
 
 By doing this we have assembled all the gross profits made on 
 products A, B and C in the Trading account, and against these 
 profits have placed the total of selling expense incurred in the 
 period. As a result the balance in Trading account will now 
 show the net profit on trading. 
 
 A third entry in the Closing Journal now transfers this trading 
 profit to Profit and Loss account, where it may be supplemented 
 by other items of revenue, such as rents from workman's cot- 
 , income from investments, etc., and over against this in- 
 clusive revenue may be set special expenses, such as the writing 
 down of goodwill, legal expenses, or any other items that cannot 
 be regarded as the outcome either of manufacturing or selling.
 
 SALES AND SELLING EXl'LXSK 105 
 
 It will be observed that though the gross profit on each prod- 
 uct was ascertained separately, when it comes to ascertaining 
 net profit, the three products were consolidated, and selling 
 expense set against the total. Of course, it would be possible 
 to have three separate Trading accounts, and divide up the 
 expense between each in proportion to the amount of sales in 
 each account. But in this case, as each class of product is 
 assumed to take the same amount of selling effort, the rate of 
 profit on each product will necessarily be the same, and nothing 
 would be served by keeping separate Trading accounts for 
 each product. Every $100 worth of profit, whether made on 
 A, B or C, will be diminished by the same percentage of ex- 
 pense. In other words, the difference of profitableness between 
 the three profits lies in the gross profit made on each, and the 
 expense of selling bears equally on each class alike. 
 
 This is by no means always actually the case. In many 
 industries the expense of selling bears much more heavily on 
 one class of product than on another. Under such circumstances 
 the above mechanism is inadequate. Separate Trading accounts 
 must not only be kept for each product, but the selling expense 
 itself must be subjected to close analysis to determine a basis 
 on which to divide it up between the different Trading accounts. 
 This type of business must now be considered. 
 
 Ascertaining Trading Profit Separately for Different Classes 
 of Product. — The first step must necessarily be the determination 
 of the difference between one product and another in regard 
 to the selling expense incurred by each. If, for example, we 
 are making a product like tool-steel, of a class that is used 
 exclusively by machine shops, and are also making another class 
 of steel used only by edge-tool makers, and if we are selling both 
 these products direct to consumers (i.e., not to merchants who 
 purchase both kinds from us), then it is not difficult to see 
 that if we advertize in trade papers that appeal only to machine 
 shops, and if we rely on circularizing to get our business from 
 the edge-tool makers, then we have here two classes of selling 
 expense, one of which is wholly confined to the first product, and 
 the other to the second product. If again, we have one traveling 
 man who devotes his whole time to calling on machine shops and 
 another who calls on edge-tool plants only, then we have a 
 fresh class of expense divisible between the two products so that 
 each gets what it rightfully incurs. And if it should happen that
 
 106 MANUFACTURING COSTS AND ACCOUNTS 
 
 one of these products was sold among a class of small users of 
 no great financial stability, so that a higher percentage of bad 
 debts was incurred in the sales of this product than of the other, 
 then again it would be manifestly unjust to allow the latter 
 product to bear any of the loss due to the peculiar circum- 
 stances attending our transactions in the other. 
 
 These examples could be multiplied, but sufficient have 
 been given to show the principle involved. Every item of 
 selling expense must be scrutinized with a view to asking, "Is 
 this expense incurred for the sale of any particular class of 
 product?" If it is, then it must be included in the total charge- 
 able against transactions in that product. When all the various 
 items have been analyzed in this way there will always be a 
 residuum that cannot be so analyzed, such, for example, as the 
 salary of the sales manager. Such items must be allocated by 
 judgment. It will not always do to distribute them in pro- 
 portion to sales of the different products, since it might very well 
 happen, for example, that a high-priced manager might be 
 engaged to give most of his time to develop business in one 
 special product, which it was considered desirable to push. 
 If this were the case, then that special product must be loaded 
 with more than its proportionate share of the manager's salary. 
 
 As Selling accounts are not within the scope of this work, and 
 can only be briefly considered, we need only take note here that 
 the apportionment of selling expense unequally between products 
 can be done by suitable methods of analysis, and confine our 
 attention at this point to the way in which it affects the 
 accounting mechanism. 
 
 The arrangements shown in Fig. 19 will not be affected up to 
 and including the transactions in the Product Sales accounts, one 
 of which is provided for each separate class of product. Beyond 
 this point new arrangements are necessary. 
 
 As many separate Trading accounts will be required as there are 
 separate Product Sales accounts. The balances in the latter 
 instead of being transferred to a common Trading account as 
 shown in Fig. 19 are each transferred to an individual Trading 
 account (A, B, or C). This procedure assembles the gross profits 
 on each line of product in a separate ledger account in order that 
 the individual amount of selling expense pertaining to A, thai 
 pertaining to B and that pertaining to C may be placed over 
 against the individual gross profits of A, B and C.
 
 SALES AND SELLING' EXPENSE 
 
 107 
 
 We thus obtain the individual net profits on A, B and C. 
 These individual net profits are then transferred to a common 
 Profit and Loss account, just as shown in Fig. 19. 
 
 All that remains to be explained is how the individual items of 
 selling expense pertaining to A, B and C are charged to these 
 individual Trading accounts. This is done by means of a special 
 journal which takes the place of the transactions shown in the 
 first five lines of the Closing Journal in Fig. 19, assisted by a 
 greater subdivision of Selling Expense accounts than there shown. 
 
 The theoretical form of this Expense Journal would be some- 
 thing like Fig. 20. Each item of selling expense represented by a 
 separate ledger account would be analyzed here, being credited 
 in one sum to the Expense account, and allocated on whatever 
 basis had been fixed for that item between A, B and C. When all 
 the items had been dealt with in this way the total of column A 
 
 SALES EXPENSE JOURNAL 
 
 CR. 
 
 EXPENSE ITEM 
 
 A 
 
 B 
 
 C 
 
 
 
 
 
 
 
 
 
 TOTALS 
 
 
 
 
 Fig. 20. 
 
 -Journal for distributing Sales Expense between three classes of 
 product. 
 
 would be charged to the new individual Trading account .4, 
 and so with the other columns (to B and C, respectively). 
 
 A very close idea of the real profits obtained on each line of 
 product, both gross and net, would result if the analysis of ex- 
 pense were carried out with reasonable attention and skill. 
 
 Basing Selling Expense on the Production Hour. — In some 
 businesses, notably the printing trade, where goods are not made 
 for stock, but for immediate delivery to the customer, it is not 
 unusual to reduce selling expense to one sum and then divide 
 this sum by the number of hours worked by the plant, so as to 
 obtain what is termed a "selling-hour" or "sold-hour." It is 
 usually worked in connection with costing Method A. 
 
 If we have a shop turning out a simple product or process, such 
 as printing impressions on paper, then, under the conditions 
 suitable for Method A, we can express the cost of process work in 
 that shop by saying that it cost so much (say $1) per hour. If a 
 certain order has taken 3 hr., then its shop or departmental cost
 
 108 MANUFACTURING COSTS AND ACCOUNTS 
 
 is $3. The advocates of the sold-hour method then proceed to 
 argue that if during a certain period, say a month, the cost of 
 selling has been say $100 and the department has worked 200 
 hr., then the cost of selling the product of the shop is 50 cts. per 
 hour. Adding this to the departmental production cost we have 
 $1.00 + $0.50 = $1.50, which is the cost of the product sold. 
 
 Such a method of procedure is extremely fallacious except 
 under conditions when Method A is a correct method of costing, 
 and in addition where selling transactions were very uniform in 
 character. As will readily be seen it is an averaging method, all 
 expenses both within and without the shops being reduced to an 
 average cost per hour. It is therefore subject to the objections 
 to all averaging methods, namely, that they are incorrect just in 
 proportion as actual conditions are not uniform. For a small 
 jobbing business where orders are sought day by day by one or 
 more town travelers, and do not greatly differ in amount, such a 
 system gives sufficiently close results. But for plants of con- 
 siderable size, with a varied description of equipment and of 
 output it cannot be recommended. 
 
 Grouping of Sales Otherwise than by Products. — Though the 
 analysis of sales belongs rather to commercial than to manu- 
 facturing accounting, it may be well to point out that if the cost 
 and sale price of each individual transaction be known, it is pos- 
 sible to group these transactions in any grouping we please. The 
 most called for will undoubtedly be territorial grouping. Each 
 of the Sales accounts may, for example, be subdivided into City 
 and Country, into Domestic and Foreign (if an oversea business 
 is transacted), into Eastern, Southern and Western Territory, 
 into individual State groups, and so forth. In a large business 
 this is highly desirable, as it facilitates the division of posting 
 between several bookkeepers. To do this, separate Sales Jour- 
 nals are kept corresponding to groups of divisions, or alterna- 
 tively, instead of allocating sales to different product columns, 
 they may be allocated to different territorial columns. 
 
 By an intelligent grouping of data, the most valuable in- 
 formation on the course of business is obtained as a byproduct of 
 the actual accounting. Decrease or increase in the volume of 
 sales in the aggregate can be rapidly traced down to the sources, 
 so that answers to the questions, "In what line of product" 
 and ' In what localities" is the increase or decrease taking place? 
 are forthcoming without research.
 
 CHAPTER XII 
 SUMMARIZING THE RESULTS OF A BUSINESS PERIOD 
 
 In the previous chapter the accounting mechanism was carried 
 to the point of ascertaining the net trading profit on the business 
 as a whole, or alternatively, the separate trading profits on two 
 or more individual lines of product. We have now to consider 
 the final mechanism by which the condition of the whole business 
 is exhibited at the end of a period, and contrasted with the 
 performances of past periods, and also sometimes with previous 
 expectations as to what would happen in the period itself. 
 
 In reviewing the changes that have taken place in a given 
 period, say a month, we may regard the matter from two points of 
 view: First, the fact that the Trading account or accounts 
 exhibit a balance on the credit side, which is profit; secondly, 
 the nature of the transformations that have taken place in the 
 various forms of our property — cash having progressed through 
 the stage of purchases, materials, manufacturing operations, 
 product, sales, and so back to cash again. 
 
 This cycle of changes, however, is never complete as a whole. 
 We begin the first period of our business with cash only, it is 
 true, but at no subsequent period do we ever find ourselves 
 in possession of cash alone, unless indeed the business is sold. 
 Always at the end of a period, our property which once was cash, 
 is present in a variety of forms: buildings, machinery, store of 
 materials, work in process, stock of finished goods, debts owing 
 to us, and some cash. This being the case it is also obviously true 
 that at the beginning of any period after the initial period, our 
 property is similarly represented by value in a variety of forms. 
 
 In order to fully understand the situation, therefore, it is 
 necessary for us to consider the forms of our property at the 
 beginning of a period and contrast them with the forms it has 
 assumed at the close of the period, in order that the story told 
 by the Trading account may not only be seen in all its bearings, 
 but also proved to be true. 
 
 For in order that a certain sum, say $4,000, which is declared 
 by the Trading account to represent profit for the period, shall 
 
 109
 
 110 MANUFACTURING COSTS AND ACCOUNTS 
 
 be accepted as being really profit, we have first to make sure that 
 our property during the period has, in actual fact, been increased 
 by $4,000. This increase will hardly ever be found in cash alone. 
 It will generally be found in an increased value of other things 
 as well, such as debts owing to us, stock of finished goods, stock 
 of raw materials, or other kinds of property. The increases 
 in all these forms of property taken together, must equal the 
 $4,000 declared by the Trading account to be profit. 
 
 But our scrutiny of the forms in which our property exists at 
 the end of the period must be directed to something beyond 
 simple verification of the amount of increase. We must pay some 
 attention to the nature of the increase, or in other words to the 
 kind of property that has increased in value, because as a practical 
 matter of business it is necessary to prevent our property passing, 
 to too great a degree, into " fixed" forms, which will not be 
 realizable in cash at the proper season. 
 
 For example, on comparing our property today with its status 
 at the beginning of the period, we might find that much of the 
 increase was in raw materials, or in equipment, or that an 
 ominously large portion of it was in debts owing to us which 
 showed no signs of moving toward payment, in other words in 
 doubtful or bad debts. This state of affairs would discount our 
 satisfaction at the fact that the Trading account showed a profit 
 of $4,000, because the possibility of getting that profit in the 
 form of cash (which is the ultimate aim of any business whatever) 
 was more remote than might appear at first sight. 
 
 In order, therefore, that the manufacturer shall have a firm 
 grasp of what has happened in his business during the period, he 
 should be presented with the following data, as promptly as 
 possible after the close of each month: 
 
 Abstract of the Purchase Ledger transactions. 
 
 Abstract of the Sold Ledger transactions. 
 
 Abstract of the Storekeeping transactions. 
 
 Abstract of the Equipment transactions. 
 
 Abstract of the Work in Process transactions. 
 
 Abstract of the Finished Stock transactions. 
 
 All these accounts represent movements of certain kinds of 
 property, and their balances at the end of the period represent 
 the present value of each kind. 1 In addition to these property 
 accounts, he should have: 
 
 1 Purchase ledger balances are, of course, liability, i.e., negative property.
 
 SUMMARIZING THE RESULTS 111 
 
 Sales accounts. 
 
 Trading accounts. 
 
 Profit and Loss accounts. 
 
 Then, with the exception of cash, the balance of which is gener- 
 ally known from day to day, he will have all the principal items 
 before him that need watching and comparing. The balances of 
 these and some minor ones will also be listed so that all the 
 property is placed on one side and all the liabilities on the other. 
 This arrangement is called a Balance Sheet, and its essential 
 feature is that when all liabilities and all assets have been listed, 
 the two sides will exactly balance when the amount of profit 
 shown in Profit and Loss account is placed in its proper position 
 on the sheet. This balancing vouches for the correctness of the 
 figures claimed to be profit. 
 
 Mechanism should be provided for the comparison, period by 
 period, of each of these items with those of past periods. Graphic 
 representation of the rise and fall of balances is also very desirable. 
 
 In regard to each of the sets of transactions mentioned above, 
 the data supplied will embrace the following points: 
 
 1. What was the amount at the beginning of the period? 
 
 2. What has been added during the period? 
 
 3. What has been taken out during the period? 
 
 4. What is the amount at the end of the period? 
 
 By arranging this information (which is, of course, merely the 
 recapitulation of the charges, credits and balances of ledger 
 entries) in vertical columns, we are enabled to place each period's 
 data side by side so that changes can be readily followed and their 
 amounts compared. 
 
 Figure 21 shows the form in which information as to the various 
 property accounts may be presented. In each case the status 
 of the account at the beginning of the month, the total of charges 
 that have been made to it, the total of credits it has received, 
 and its consequent new status at the end of the month are stated. 
 When such a form is filled out to the extent of several columns 
 (months) a considerable amount of comparative information is 
 disclosed by running the finger along the horizontal items. 
 
 In Fig. 22 is shown a form which performs the same office for 
 the Sales and Trading accounts. In this case a merged Trading 
 account is shown. If, however, the net trading profit on two or 
 more separate lines of profit were required, separate Trading 
 accounts would be provided as explained on a previous page.
 
 112 MANUFACTURING COSTS AND ACCOUNTS 
 
 Purchase Ledger (Accounts Payable) 
 
 Jah. Feb. Mar. 
 
 Apr. 
 
 May 
 
 June 
 
 Accounts Paid 
 Discounts taken 
 BALANCE FORWARI 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Bal.from Last Month 
 Purchases this Month 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 Sold Ledger (Accounts Receivable) 
 
 Jan. Feb. Mar. 
 
 Bal.from Last Month 
 Sales this Month 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Accounts Received 
 Discounts Allowed 
 BALANCE FOEWABI 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Storekeeping 
 
 Bal.from Last Month 
 Stores & Mtl's Purcha 
 
 ied 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Stores & Mtl's Issued 
 BALANCE FOEWABI 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Buildings, Equipment &c 
 
 Jan. 
 
 Apr. 
 
 Bal.from Last Month 
 Added this Month 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Depreciation this Month 
 BALANCE FORWARD 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 Work in Process 
 
 Bal.from Last Month 
 Direct Material 
 Direct Labor 
 Expense Burden 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Delivered to Warehous 
 BALANCE FOEWABI 
 
 ' 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 Finished, Stock Acct. (One for each Line of Product) 
 
 Jan. Feb. Mur. Apr. May 
 
 Bal.from Last Month 
 Delivered from Factor 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Sales at Cost 
 BALANCE FOEWABI 
 
 i 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Fig. 21. — Form showing movements of assets and liabilities, month by 
 
 month.
 
 SUMMARIZINa THE RESULTS 
 
 113 
 
 Beneath each of these forms a scries of statistical data could 
 be recorded if required. Thus the Sales accounts could be 
 reduced to: 
 
 Gross profit per ton, bale, or pound sold. 
 
 Average size of order. 
 
 Average gross profit per order. 
 
 Sales Account, Product A 
 
 Jan. Feb. 
 
 Apr. 
 
 May 
 
 June 
 
 Arnt.of Sales at Cost 
 Bal^GROSS PROFIT 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Sales at Sale Price 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 Sales Account, 
 
 Product B 
 
 Jan. Feb. 
 
 Mar. 
 
 Apr. 
 
 May 
 
 Juno 
 
 Amt of Sales at Cost 
 Bal.=GROSS PROFIT 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Sales at Sale Price | 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 Sales Account, Product C 
 
 Jan. Feb. 
 
 Apr. 
 
 Amt of Sales at Cost 
 BaI.=GROSS PROFIT 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Sales at Sale Price 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Trading Account (All Products) 
 
 Jan. Feb. Mar. 
 
 Apr. 
 
 May 
 
 Sales Expense, Viz:- 
 Salaries and Wages , 
 Office Expenses 
 Traveling Exp. 
 Etc. Etc. 
 Bal.=NET PROFIT 
 
 
 
 < 
 
 
 
 
 Total 
 
 
 
 
 
 
 Gross Profit on A. 
 
 B 
 
 C 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Fig. 22. — Comparative monthly statement of gross profits in three lines of 
 product, and total net profit. 
 
 If separate Trading accounts for each line of product were 
 provided for the reasons already discussed, similar information 
 could be worked out for net profits, thus: 
 
 Net profit per ton, bale, or pound sold. 
 
 Average net profit per order. 
 
 Such figures would have very little purpose if gotten out for a
 
 114 MANUFACTURING COSTS AND ACCOUNTS 
 
 single month only, but if worked out over a series of months, and 
 arranged in columnar form, so that variations from month to 
 month were easily comparable, information would be furnished 
 as to the trend of trade, and whether it was maintaining or 
 changing its character, that would be very useful. 
 
 These forms complete the strictly manufacturing and trading 
 transactions of the business, but we have yet to collect other items 
 of revenue not proceeding from trading, and against them we have 
 
 Profit & Loss Account 
 
 Jan. 
 
 Mar. 
 
 Apr. 
 
 May 
 
 Legal Expenses 
 Goodwill Written Off 
 Fire Loss Written Off 
 Bal. = SURPLUS 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Net Profit for Tdg.Acct 
 Revenue from Invest'i 
 Other Revenue 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Balance Sheet 
 
 Apr. 
 
 May 
 
 Casb in Hand and Bank 
 Accounts Receivable 
 Stores & Materials 
 Work in Process 
 Unsold Fin. Stock 
 Buildings, Plant &c 
 Investments 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Accounts Payable 
 
 Capital Account 
 
 SURPLUS 
 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 
 Fig. 23. — Comparative monthly profit and loss account and balance sheet. 
 
 to set such special expenses as must be met from the profits of the 
 business, and are not fairly chargeable either to manufacturing 
 or selling expense. Examples of these are the cost of litigation, 
 the reduction of goodwill or patent-rights, the writing down of 
 fire losses not covered by insurance and so forth. 
 
 Figure 23 gives the form for assembling these items month 
 by month, for comparative purposes. The revenue from 
 trading and the amounts written off from one month to another 
 are clearly visible. So also is the net result of all, namely, the
 
 SUMMARIZING THE RESULTS 115 
 
 surplus. This is the amount by which, after every possible de- 
 duction has been made, our total possessions have been in- 
 creased. Whether or not we elect to regard it as divisible 
 profit depends upon circumstances, and particularly upon the 
 status of the different varieties of our property. As a final 
 means of determining our policy towards surplus, we list all 
 our assets and liabilities in two divisions. To the liability side 
 we add our Capital account, which represents the liability of the 
 business to its owners, as explained in Chap. II. Having thus 
 listed all our Property accounts on one side, and our Liability ac- 
 counts including Capital account on the other, we add them up, 
 and on extracting the difference between them, it should exactly 
 equal (if our books have been correctly kept) the surplus shown 
 in the Profit and Loss account. By placing this item at the 
 foot on the liability side, an exact balance is obtained, and the 
 Balance Sheet balances, thus proving the correctness of our 
 results. 
 
 The reason why surplus is placed on the liability side of the 
 Balance Sheet merits some attention. It is placed there, of 
 course, because it is only there that it will assist a balance, 
 but this reason, though a good one, does not explain why surplus 
 is a liability. 
 
 The answer will be found in the principle that all accounting 
 is based on the difference between ownership and property. 
 It is true that we know it to be profit since that fact is proved by 
 its origin, which we have traced from gross profit on sales, 
 through net profit on trading to surplus on profit anil loss. But 
 we should still be obliged to do the same thing -even though we 
 had no accounts at all to help us discover the origin of the 
 surplus. 
 
 Consider what the Balance Sheet is. It is not a record of 
 what has happened in between dates. It is a record of quan- 
 tities and values of property at a certain date. Now in listing 
 our property and setting against it all our liabilities, which 
 latter are divided into liabilities to outside parties (accounts 
 payable) and liability to the owners of the business (Capital 
 account), we find that we have more property than we have 
 liabilities. We do not need the books to tell us this, since we 
 can arrive at the value of our property by count and valuation, 
 in other words, by a stock-taking. It is more convenient and 
 infinitely more speedy to take it from the books, but if necessity
 
 116 MANUFACTURING COSTS AND ACCOUNTS 
 
 arises it can be obtained otherwise. Whichever way it is ob- 
 tained we should still find that there was a difference between 
 assets and liabilities, and that, as a matter of fact, there was a 
 surplus of assets over the liabilities set down. 
 
 In other words our property has increased since we last 
 observed it. 
 
 But from the principles laid down, property must always be 
 represented by ownership. Therefore, as we know that no 
 one outside the business has any claims on it (all such claims 
 having been already listed as accounts payable) it follows 
 that it must be owned inside the business, and as Capital account 
 represents inside ownership, therefore, it is an item of exactly 
 the same class as Capital account. Instead, however, of placing 
 it at once with capital, we keep it as a separate item, and express 
 its true status by placing it alongside capital. It thus rep- 
 resents a surplus of property in existence but not represented 
 elswhere as capital. 
 
 Surplus is the ownership of surplus property. It is not 
 property in itself, since that is all listed on the assets side of 
 the Balance Sheet. It can, therefore, only represent ownership 
 in that portion of the property not already earmarked as owned, 
 by appearing in the Capital account. 
 
 Many persons are quite confused over such matters as the 
 nature of surplus, and the meaning of capital. That is be- 
 cause capital as the symbol of ownership is commonly mixed up 
 with its appropriation to individuals through shares, stocks 
 and bonds.. The latter are, however, merely devices for settling 
 the distribution of ownership among individuals. The confusion 
 is made denser by the existence of financial expedients like 
 bonds, which appear to create various kinds of capital. From 
 one standpoint they do, since the owner of a bond does not 
 stand in the same light as regards ownership of the property 
 of the business as does a stockholder. But actually there is 
 only ownership on the one side and property on the other, 
 though for convenience this ownership is split up, and given to 
 individuals in unequal degree and in unequal amount. Still, 
 when all the different kinds of capital are added up, they form 
 simply a general total of ownership which is, or should be, 
 represented by an equivalent in property. 
 
 With these financial details we have nothing to do save as 
 in tin' present instance where they may be invoked to throw
 
 SUMMARIZING THE RESULTS 117 
 
 light on an obscure point. Strictly speaking Manufacturing 
 accounts should end at the factory gate. The disposal of 
 product is not peculiarly a manufacturing activity. Of course, 
 product must be sold, but there is no peculiarity about the sale 
 of product by the manufacturer. That portion of his business is 
 exactly the same as the business of any merchant who purchases 
 goods at wholesale and sells them again. Therefore, in the 
 foregoing resume" of manufacturing accounts a good deal has 
 been ignored — as, for instance, bill transactions — that may 
 loom large in the selling department of a manufacturing busi- 
 ness. Such matters are purely commercial, and for information 
 respecting them some authority on commercial accounting should 
 be consulted.
 
 CHAPTER XIII 
 RECAPITULATION 
 
 The entire cycle of manufacturing accounting has now been 
 traced. Beginning with the simplest transactions and their 
 record in ledger accounts, an outline has been given of all the more 
 prominent operations of purchase, manufacture and sale, as these 
 are reflected by accounting methods. The object has been to 
 introduce the reader gradually to the numerous subdivisions and 
 classifications necessary, and to show how these are eventually 
 consolidated again into a few heads and the accuracy of results 
 vouched for by the Balance Sheet. 
 
 The beginning of the cycle has been shown to be purchase. 
 
 Purchased items, including wages, salaries, materials, and so 
 forth, are first subject to an analysis which divides them into two 
 classes — manufacturing and selling. An intermediate class, such 
 as certain salaries and office expenses, have to be divided between 
 manufacturing and selling on an arbitrary basis, after careful 
 examination of the situation. 
 
 Some of the items purchased go at once into manufacturing; 
 others are held up in storage until actually wanted for manu- 
 facturing purposes; others again are chargeable to manufacturing 
 by very small but continuous increments (depreciation). 
 
 That portion of the purchased items that is charged to manu- 
 facturing, has in its turn, to undergo separation into classes. 
 First we have direct material, i.e., material which actually goes 
 into and becomes part of salable product; next we have direct 
 labor, i. e., labor which is directly applied to causing changes in 
 product itself, mostly by the aid of machines and tools; lastly we 
 have what is termed expense, or indirect expense, or burden, which 
 is in fact nothing but a remainder — what is left after deducting 
 direct material and direct labor f,rom the total of all items charge- 
 able to Production. 
 
 These three elements of cost, direct material, direct labor, and 
 expense have to be connected with definite quantities or with 
 individual items of product, and this is the actual sphere of cost 
 
 118
 
 RECAPITULA TION 1 19 
 
 accounting. The principal differences between cost systems lie 
 in the methods adopted to connect these elements with product. 
 
 Direct material is always charged to Product, either to the 
 whole quantity of product turned out in a shop during a month, 
 or to some lesser unit quantity or lot. 
 
 Direct labor and expense, on the other hand, are applied to 
 product in three main ways, which have been arbitrarily called, 
 in the foregoing chapters, Method A, Method B and Method C. 
 In each of these varieties, costing is applied either to whole out- 
 put of one product, or of several products, or to lesser units desig- 
 nated by order numbers. In some instances costing is carried 
 as far as the individual part, and to each process on such part. 
 
 On Method A direct labor and expense are thrown together and 
 charged to Product on some time basis, which may be the whole 
 month, or alternatively, may be an hour. The latter plan fur- 
 nishes an average hourly cost, for any work done in the shop, and 
 can, therefore, be applied to any quantity of product large or small. 
 Where less than the whole of a product is costed, the lots are 
 designated by order numbers, and charges are made to these 
 order numbers based on the time they have been worked on. 
 Method A though correct enough in those cases to which can be 
 applied has a very narrow range of application. 
 
 Method B differs from Method A in its handling of direct labor. 
 On this method, direct labor is charged direct to Product, either 
 the whole product for the month, or any less quantity, designated 
 by order numbers. Each order is charged with the actual wages 
 of the operative, according to the time he has spent on such 
 order. The expense, on the other hand, is reduced to an hourly 
 average rate, as in Method A and charged to Orders on the basis 
 of the time that each order has been worked on by direct labor, 
 or alternatively, the total of expense is set against the total of 
 direct wages, and their percentage ascertained. Then every 
 item of direct labor on an order is increased by the amount of this 
 percentage. This is termed "prorating" expense over direct 
 wages. On this method every order will have, as its cost: (1) 
 Direct material; (2) direct labor; (3) expense based either on an 
 hourly rate, or on a percentage of direct labor. 
 
 Method C. The three methods of costing are, in fact, three 
 degrees of definiteness in the charging of direct labor and expense 
 to Product. In Method A both are averaged and reduced to a 
 single charge per period, which may be a whole month, but is more
 
 120 MANUFACTURING COSTS AND ACCOUNTS 
 
 commonly an hour. In Method B we eliminate the averaging 
 as regards direct labor, but retain it as regards expense. In 
 Method C the averaging method disappears altogether, and each 
 order is charged with an exact quantity of expense which analysis 
 shows is its rightful share. On Method C expense is subject to 
 a thorough analysis, instead of being thrown together into one 
 sum. Each item is scrutinized from the viewpoint of "What 
 has it been expended for?" and in practice it is found that all 
 items can be grouped in a few groups representing certain indirect 
 services to production. This being ascertained, the next step 
 is to ascertain how much each order is benefited by these indirect 
 services, and the answer is found by considering that each service 
 is really a service rendered to a machine. By calculating the 
 total of all services chargeable to a particular machine, we are 
 enabled to make an hourly charge for the use of the machine, 
 just as we make an hourly charge to Product for the use of a man. 
 
 This at once brings up a totally new problem. If expense is 
 thus charged to Orders on a basis of machine rates, it follows that 
 if a machine is idle part of the time, the case is exactly equivalent 
 to paying a man wages and allowing him to stand about idle. 
 In other words, waste or loss is incurred. Method C enables this 
 loss due to idleness of machines to be calculated in a money 
 equivalent. As each machine has its hourly rate, all machine 
 time that has been consumed in working on orders can be totalled. 
 When this total is deducted from the total charge for expense to 
 the shop, the difference represents wasted expense. It represents 
 the cost of manufacturing capacity that has not been used. 
 
 In some cases this amount can be charged off to Profit and Loss. 
 In most cases, however, it is better to prorate it over the actual 
 machine charges to each order, as a "supplementary rate." 
 Whichever plan is adopted, its significance remains the same. 
 It is not cost of production, but cost of unused capacity to 
 produce. 
 
 The true manufacturing cost of an order is ascertained by 
 Method C under all conditions of slackness or pressure in the shop. 
 Neither of the other methods can do this. As each of them is 
 dependent at some point on averaging, their manufacturing cost 
 necessarily goes up as work falls off. On Method C the actual cost 
 of manufacturing remains the same at all times, accompanied by 
 a supplementary amount that rises or falls according as all the 
 manufacturing capacity of the shop is being wasted or utilized.
 
 RECAPITULATION 12 1 
 
 When the cost of work on an order in one or more depart- 
 ments has been found by one of the foregoing three methods, 
 then, in most cases, there remains the task of collecting all the 
 departmental costs and identifying them with a particular manu- 
 facturing or customer's order. As each department finishes its 
 share of the work, it is credited with the cost value of what it 
 has done, and a Finished Work account is charged. When all the 
 departments have completed their share of work on an order, the 
 cost of the latter is credited to Finished Work account and is 
 charged to a Warehouse, or Finished Goods account. This 
 completes the cycle of purely manufacturing accounting. What 
 remains has to do with the marketing and selling of the finished 
 product. 
 
 The subject of wastes, spoilages, scrap and byproducts, and 
 also that of auxiliary equipment such as patterns, molds, etc., 
 were briefly discussed. These are complications that may arise 
 under any method of costing, but their presence or absence has 
 no bearing on the principles hitherto discussed. They are simply 
 details, troublesome to handle in practice, because of the neces- 
 sity of tracking down all their ramifications, which often are very 
 complex. 
 
 In regard to the accounting necessary to ascertain the profits 
 on the marketing of product, methods of analyzing selling ex- 
 pense, and of that portion of the administration expense that is 
 chargeable to the selling department, were described. Where 
 possible, selling expense should be analyzed in all cases where 
 different lines of product are handled, particularly if different 
 methods of marketing them are in vogue. The method of 
 ascertaining gross profit on each separate line of product was 
 shown, and the further developments necessary if, by analysis of 
 selling expense, the net profit on each separate line was also to be 
 ascertained. 
 
 When this has been accomplished, the cycle purchase — manu- 
 facture—sale has been completed. It only remains to consider 
 the arrangements necessary to draw together the results of a 
 month's operations, so as to show the present status of each kind 
 of property we possess, and thus verify the trading profits as 
 disclosed by the accounts of the selling department. 
 
 A series of reports were suggested, designed to provide the 
 management with a complete summary of the principal trans- 
 actions that had taken place during the month, issuing in a com-
 
 122 MANUFACTURING COSTS AND ACCOUNTS 
 
 plete Balance Sheet, showing the amounts sunk in the various 
 assets, the liabilities, the capital and the surplus. This last 
 amount represents the degree to which net assets have been in- 
 creased by the manufacturing and selling operations of the period, 
 added to any other items of revenue that may have accrued from 
 non-trading sources. 
 
 In Part II of this work the actual operations will be considered 
 in greater detail, and specimen blanks and rulings given. In 
 Part III the subject of factory reports and returns, and the 
 circumstances under which they are required, and by whom, 
 will be discussed.
 
 PART 1 1 
 COST ACCOUNTING 
 
 CHAPTER I 
 THE GENERAL DIAGRAM 
 
 The object of this book is to provide the reader with an 
 insight into the principles underlying manufacturing accounting. 
 To do this effectively it has been necessary to confine the treat- 
 ment strictly to the subject of accounting, which is a wholly 
 distinct matter from administration though it touches it at vari- 
 ous points. What is called the "system" in an industrial plant 
 is commonly made up of several different series of organizations, 
 amongst which that of accounting is only one. 
 
 Accounting has primarily to do with the recording and com- 
 parison of money values. It analyzes the different classes of 
 expenditure, records and observes their combinations during the 
 process of manufacture, ascertains the cost of grouped auxiliary 
 activities such as, for example, the power plant, determines the 
 relations of these auxiliary activities to the main activity of 
 producing goods, and finally sums up the result of the whole 
 process in the form of costs — each item of finished goods being 
 connected as closely as possible with the actual cost which has 
 been incurred in making it. 
 
 In the first part of this book a general idea has been given of the 
 division of manufacturing accounting into three sections, namely, 
 buying, manufacturing or production, and selling. Now both 
 buying and selling exist in all commercial transactions, and 
 are not therefore specially to be identified with manufacturing 
 activities. Our attention must therefore be directed chiefly 
 to the middle one of these three divisions, namely, production. 
 The accounting of this division is usually referred to as manu- 
 facturing costs, or more briefly, cost accounting. The chief dif- 
 ferences between the various methods of cost accounting which 
 we shall describe, resides in the amount of subdivision or detail 
 
 123
 
 124 MANUFACTURING COSTS AND ACCOUNTS 
 
 required in the result and also in the way in which indirect ex- 
 pense, or as it is commonly called, burden, is applied to the vari- 
 ous orders or jobs. 
 
 When we consider the very large variety of industries that 
 exist, it will be evident that it is impossible to discuss them all, 
 since to do so would mean not one, but many volumes. On the 
 other hand, as we are dealing with the subject of manufacturing 
 accounts in general, and endeavoring to throw light upon the 
 principles upon which they are arranged, it will be equally evident 
 that the selection of any particular industry as an example would 
 give a very inadequate treatment of the subject. It happens, 
 however, that though there is great variety in detail, the object 
 sought, and the general methods of treatment, are much the same 
 in all industries. For instance, though in a locomotive shop and 
 a knitting mill the wording and design of the various blanks will 
 obviously be entirely different, still there is a great similarity in 
 the accounting aim which each of these industries is seeking, 
 namely, the detail cost of certain processes and operations. 
 Though the processes or operations may be of quite a different 
 nature and be known by entirely different names, still the general 
 result aimed at is much the same. The accountant, therefore, 
 does not require an initial knowledge of the innumerable details 
 of a great variety of industries, provided he has a good grasp on 
 the methods by which values are analyzed and combined, and the 
 result of operations tabulated, so as to be able to apply these 
 methods to any industry with which he is called on to deal. 
 
 In the present work, therefore, we shall discuss the general 
 framework of ledger accounts which is common to nearly all 
 kinds of manufacturing business, and shall present blanks and 
 forms which are typical rather than specific; and we shall 
 endeavor to explain what is the general object of the blank or 
 account, and its relation to the general system of manufacturing 
 accounts, in such :i way that the possibility of adaptations to suit 
 particular circumstances, will not present insuperable difficulty. 
 
 In the general diagram (see folding page at end of book) a 
 general view of the more essential features of a system of cost 
 accounts is shown. It should be explained that this particular 
 diagram is based on what is known as the percentage method of 
 applying burden (Method B). This has been selected, not be- 
 cause it is considered that this system is the best, but because of 
 all systems of dealing with expense burden, it is the most usually
 
 THE GENERAL DIAGRAM 125 
 
 employed, and will be most familiar to the generality of readers. 
 Further, as it is a very simple method of handling burden, it is for 
 that reason very suitable to be considered in a preliminary survey 
 of the field of cost accounting. 
 
 In its most abstract form, cost accounting may be considered 
 as the record of the process of ebb and flow of quantities and 
 values from the first stage of purchase to the last stage of finished 
 goods. Near the left-hand side of the general diagram will be 
 observed two columns of symbols representing ledger accounts. 
 Into these accounts there is perpetually flowing a series of quanti- 
 ties and values, emanating from the Purchases and Cash Journals 
 These quantities and values may be regarded as a flowing tide 
 running into the reservoirs represented by the ledger accounts. 
 On the right-hand side of these accounts the field of production is 
 situated. Here we have two principal journals, namely, the 
 Burden Journal and the Manufacturing Journal, which serve to 
 discharge the reservoirs represented by the two columns of ledger 
 accounts and to transfer the quantities and values contained 
 therein to new reservoirs, namely, Burden account and Manu- 
 facturing account respectively. The amount accumulated in 
 the Burden account is itself later transferred to Manufacturing 
 account by medium of a special column in the Manufacturing 
 Journal. This journal, therefore, serves two purposes: first, to 
 transfer several items from the main ledger accounts to Manu- 
 facturing accounts; and, secondly, to transfer burden from the 
 Burden account to Manufacturing account. 
 
 So far we have a flood tide flowing from the Purchases Journal 
 and the Cash Journal and piling itself up in reservoirs of the 
 left-hand ledger accounts (which will usually be called in this 
 book the "main" accounts), then we have an ebb tide flowing 
 away from these ledger accounts by the channel of the two 
 journals just mentioned, and piling itself up in the Burden 
 account and the Manufacturing account respectively. A further 
 transaction is the ebbing of the tide from the Burden account and 
 its piling up in the Manufacturing account, which now, there- 
 fore, accumulates all of the amounts that have flowed away from 
 the main ledger accounts. 
 
 Simply to observe the amount of this ebb and flow is in general 
 not sufficient for the purposes of the accountant. A peculiarity 
 of cost accounting is that it requires to connect the amounts piling 
 up in Manufacturing account with 'particular lots of goods. The
 
 126 MANUFACTURING COSTS AND ACCOUNTS 
 
 mechanism for effecting this connection is found — first, in the 
 series of production orders 1 and component orders by which we 
 identify or label specific items of work and their subdivisions; 
 and secondly, in the mechanism for charging definite items of 
 workmen's time, and definite values of stores and materials 
 issued to particular order numbers or job numbers. When the 
 transactions of a period, such as a month, are completed, the 
 whole of the expenditure in the shops, both on burden and on 
 direct manufacturing, should be represented by a number of 
 items entered on Cost Sheets, each of which Cost Sheets represents 
 a particular production order or component number. The difference 
 between various systems of manufacturing accounts lies, almost 
 wholly, in the way in which particular lots of goods — represented 
 or identified by production orders and components — are con- 
 nected with burden on the one hand and direct manufacturing 
 cost on the other. 
 
 As each Cost Sheet represents the time, material and burden 
 which has been incurred in manufacturing the article represented 
 by that component order number, and as every dollar in the 
 Manufacturing account must be represented on one or other of these 
 sheets, it will be evident that upon the completion of a component, 
 we may withdraw one of these sheets, and find upon it the entire 
 cost of that component to date. It then becomes a simple matter 
 to enter the value thus arrived at on a new journal, which is the 
 medium for withdrawing the amount from the Manufacturing 
 account and placing it in a Finished Components account. We 
 have thus again an ebbing away from the Manufacturing account 
 and a piling up in a Finished Components account, representing 
 a fresh stage of our transaction. 
 
 If a production order consists of 20 components, each com- 
 ponent order representing a process, or a number of processes, 
 on a particular part or component, then on the completion of all 
 the component orders contained in the production order, we may 
 collect all the Cost Sheets, and having aggregated them, the total 
 cost of the production order itself is made known. This cost will 
 be associated with a definite quantity of goods, which may be 
 
 1 In this work a production order is considered to be the order issued for 
 the manufacture of a definite quantity of product. Component orders are 
 subdivisions of production orders. In some industries no subdivision is 
 required. Component orders are then unnecessary. Component orders 
 are sometimes called Part orders or Job orders.
 
 THE GENERAL DIAGRAM 127 
 
 either a single built-up article such as a machine, or it may be a 
 million pieces of one kind. Having collected all the components 
 on a production order, we are ready to transfer them from the 
 Finished Components account to a Finished Goods account. 
 This is done by means of another journal called the Finished 
 Goods Journal. The total cost of a production order (i.e., the 
 total cost of all its constituent parts) is entered on this journal 
 which serves as a medium to withdraw values from the Finished 
 Jobs account and transfer them to the Finished Goods account. 
 This represents the final stage in manufacturing cost proper. 
 All that is left is the question of sale of the goods so produced and 
 the selling expense thereby incurred. 
 
 If there are several lines of product, that is, several different 
 classes of goods being manufactured at one time, it is convenient 
 to have several Finished Goods accounts, each one correspond- 
 ing with a particular class of product. This being so, and it 
 being remembered a Cost Sheet, or Sheets, exists for every dollar 
 recorded in these accounts, it will be understood that when a 
 sale is effected, the cost price of that sale can be very readily 
 ascertained. This, of course, means that the gross profit on such 
 a sale is easily ascertained. To ascertain the gross profit for a 
 period, say a month, we may make use of a Sales Journal which 
 has two columns, in one of which the cost price, and in the other 
 of which the sale price, is affixed to each transaction. Totalling 
 these columns will show at once the gross profit that had been 
 made in any given period. Frequently, however, this simple 
 method is not considered desirable, inasmuch as it gives too much 
 publicity to facts which would thus be too widely known. To 
 avoid this publicity two journals are made use of, one containing 
 the cost price and the other containing the sale price, the record 
 of transactions being duplicated in each. This, however, is a 
 matter of detail. 
 
 If there were no expenditure entailed in making sales, this 
 disclosure of gross profit would, of course, give all the informa- 
 tion necessary, but as a matter of fact, selling is usually a very 
 costly operation. It involves not only a great amount, but a 
 great variety of expenditure. Where there are several classes 
 of product it can be easily understood that some of this ex- 
 penditure will be incurred more for the sake of one product 
 than for the sake of another. In other words, the incidence of 
 expenditure on products will not be equal. It is, therefore,
 
 128 MANUFACTURING COSTS AND ACCOUNTS 
 
 necessary to set up a mechanism which will enable us to as- 
 certain as nearly as possible what expenditure belongs to what 
 product. 
 
 Though this cannot be done with precise accuracy in many 
 cases, still it can often be effected in a way that is worth while, 
 and as a result we are able to charge the different classes of 
 product with the respective shares of expenditure which it is 
 judged may have properly incurred. The alternative to this is 
 to prorate selling expense evenly over sales without reference 
 to the classes of product dealt with. The object of doing this 
 is, of course, to enable us to ascertain net profits with regards 
 to each different class of product we are selling. When cost of 
 manufacture and cost of selling have been deducted from sale 
 price, then there is nothing left but profit, provided our alloca- 
 tions have been correctly made. 
 
 The whole course of the ebb and flow of manufacturing activity 
 is now visible. There was a constant flood tide toward the 
 purchase reservoirs. From these reservoirs there is a constant 
 ebb toward the shops, with the result that values are constantly 
 being piled up in a new reservoir of parts in process of manu- 
 facture. A third stage is where there is an ebb from the reser- 
 voir of parts in the process of manufacture and a flowing tide 
 toward the reservoir of parts completed. Then again there is 
 a transfer from this reservoir of parts completed to a reservoir 
 of orders completed, and finally a constant emptying of the 
 reservoir of orders completed and a piling up in the accounts of 
 sales of goods. This ends the chain of productive activities, 
 but, of course, there remains the question of the amounts re- 
 ceived by reason of the sale of the goods, and then division into 
 classes of goods, in each of which gross and net profit must be 
 ascertained. 
 
 Hitherto we have spoken of a simple, direct industry. In 
 many cases, however, the process of manufacture is neither 
 simple nor direct. Before we can manufacture goods, it is very 
 frequently necessary to make extensive preparations and to 
 construct a variety of auxiliary appliances, such as patterns, 
 molds, jigs, fixtures, templets, etc., the cost of which must be 
 kept quite; distinct from that of the goods themselves. As 
 has been shown in Part I, this necessitates finding and disposing 
 of the cost of such auxiliary appliances, which often presents 
 perplexing problems for the accountant. If, when we accept
 
 THE GENERAL DIAGRAM 129 
 
 an order for goods, we know that the same goods will never be 
 required again then it is obvious that the cost of all the auxiliary 
 apparatus and appliances must be recovered in the sale price of 
 the goods. In such cases, although the cost of such auxiliary 
 appliances should be ascertained separately, it must be con- 
 sidered as part of the cost of production and should be charged 
 later against the sale price. But this is rarely the case. It 
 more frequently happens that when we put in hand a pattern or 
 jig, it is with the expectation of a future use for it, quite apart 
 from the immediate order in hand. Whole classes of such 
 appliances, moreover, are entirely secondary in their nature and 
 do not go directly into the cost of product, or of any particular 
 order at all. Such, for example, are the molds used in casting 
 steel ingots. The ingot is only an intermediate product. It 
 is not salable, or at any rate it is not commonly sold, but 
 when made, an ingot may be charged ultimately to any one of 
 several different classes of goods or orders. So that when we 
 cast the ingot, we are not prepared to say what its ultimate 
 destination will be. Much less then are we able to say when we 
 put in hand the manufacture of a mold, what will be the ulti- 
 mate destination of the ingots that may be cast in it. In such 
 cases the Cost Sheet of the ingot must bear part of the cost 
 of making the mold; and just how much the amount of this 
 charge should be is sometimes a difficult question to determine. 
 It depends, obviously, on the use which will be made of the 
 mold, that is, of its useful life and this cannot always be predicted. 
 
 A less formidable problem is afforded by the question of special 
 forms of wage remuneration, such as piecework, premium or 
 bonus. Though piecework may be regarded as in the nature 
 of a contract with the man at a certain price for so many articles, 
 it may also be regarded as a case in which we pay the man his 
 ordinary wages while he is doing the work and then on the 
 completion of it we pay a bonus or difference between his day 
 work earnings and the total amount of his contract. Where 
 burden is based upon time, it is necessary to ascertain the 
 number of hours taken by the man on the work, whether it is 
 daywork or piecework. In such cases, therefore, the piecework 
 balance must be regarded as an additional payment paid to the 
 man over and above his ordinary day's wages, and some mech- 
 anism has to be set up to bring this balance into the Cost Sheet. 
 
 While the prime function of cost accounting is to find cost, it
 
 130 MANUFACTURING COSTS AND ACCOUNTS 
 
 has also a secondary aspect which is of great importance. The 
 administrative success of manufacturing depends largely on 
 prompt information as «to what is 'going on from hour to hour, 
 or at any rate, from day to day in the shops. Though the 
 ultimate object of cost accounting is to ascertain the cost of 
 finished goods and to record this cost in Cost Sheets, it is 
 almost equally important, from an administrative point of view, 
 to keep in close touch with the various processes of ebb and 
 flow, already mentioned, and to observe closely the condition 
 of the various reservoirs, or ledger accounts, at frequent inter- 
 vals. Moreover, as the nature of the information required by 
 the administration is frequently rather different to that re- 
 quired by the accountant, greater subdivision of information is 
 required than that afforded by the ledger accounts themselves. 
 This demand is met by what are termed "reports," which are 
 prepared from day to day, or in some cases, weekly or monthly, 
 and may be regarded in many cases as a kind of cross-classifica- 
 tion of the information which otherwise would have to be 
 extracted from the ledger accounts themselves. Generally 
 speaking, the nearer the user of the reports is to the prime 
 transactions, namely, the expenditure of wages and the issue of 
 material (that is to say, the nearer he is to the shops) the more 
 important is it that information of this kind should be furnished 
 promptly and at frequent intervals. The shop foreman is 
 surrounded by a multitude of details and if anything has to be 
 brought to his notice so that he may make use of it intelligently, 
 it must be red hot. On the other hand, the superintendent and 
 the higher officials are needing, not so much the small details 
 as general tendencies and broad results. Information for 
 their use, therefore, requires to be gathered and presented at 
 longer intervals, so that a better perspective of the whole course 
 of operation is afforded. 
 
 In addition, therefore, to the general scheme of accounting 
 shown in the general diagram, a secondary scheme of reports 
 has also to be set up. This secondary scheme is generally of a 
 much more individual character than the general scheme of 
 accounting, that is to say that in the nature of the reports 
 which are afforded to the executives, one business differs from 
 another much more than in the case of the general accounting 
 scheme. The system of reports, in other words, is more or 
 less peculiar to the business and depends, in fact, considerably on
 
 THE GENERAL DIAGRAM L31 
 
 the point of view of the executives and the way in which they 
 are accustomed to look at the facts of production. 
 
 Though strictly speaking, manufacturing accounts should 
 begin with the receipt of the invoice, or other document repre- 
 senting the purchase of goods or services, a preliminary chapter 
 on ordering and purchasing has been given, because of the impor- 
 tance of recognizing purchase, in every case, the origination of 
 the manufacturing process. Purchase, however, is a study in 
 itself, and several excellent works have been written dealing with 
 this branch of activity. It has only been introduced here to 
 give an idea of its relation to the general subject of costs.
 
 CHAPTER U 
 
 PURCHASE ORDERS 
 
 The routine of purchasing extends from the first discovery of 
 the want of the goods or articles to their receipt, storage, pay- 
 ment and entry in ledger accounts. As was explained in the 
 first portion of this work, manufacturing consists of a cycle of 
 operations which may be briefly summarized as: 
 
 PURCHASE— MANUFACTURE— SALES 
 
 Purchase is, therefore, the gate by which everything enters the 
 business, whether materials, equipment or labor; or services of 
 various kinds, such as advertizing, insurance, etc., rendered 
 either to the manufacturing or the selling division of the under- 
 taking. We must not, therefore, fall into the error of regarding 
 purchasing as having to do only with the ordering of stores and 
 materials for current use, though in fact such transactions form 
 usually the largest part of purchasing activities. 
 
 The principal elements of a purchase are the following: 
 
 1. Specification of what is wanted. 
 
 2. Requisition for a specific quantity. 
 
 3. Official sanction for the purchase. 
 
 4. Obtaining bids, with or without samples or guarantees. 
 
 5. Accepting bid, and ordering. 
 
 6. Receipt of purchase, with or without examination or test. 
 
 7. Checking, passing, and paying invoice. 
 
 8. Entry of purchase invoice in appropriate journal. 
 
 In addition to these main stages, some of which may be omitted 
 in certain classes of purchase, though always implied, various 
 mechanisms must be set up for facilitating the checking, tracing 
 and control of transactions so that they may be conducted with 
 the minimum of labor and confusion. 
 
 Specification. — The modern tendency to replace rule of thumb 
 in management by foresight and exact measurement has de- 
 veloped the use of specification. Generally speaking this may be 
 
 132
 
 PURCHASE ORDERS L33 
 
 defined as a clear idea, reduced to writing, of what it is we wish 
 to purchase. In some cases this has always been customary. 
 If we are about to write insurance, for example, a detailed state- 
 ment of the nature and value of what we propose to insure is 
 absolutely necessary. A lease, or a deed transferring ownership 
 of land are also examples of very definite specifications. In 
 contracting for the erection of a building, specifications have 
 always held a prominent and necessary place. In purchasing 
 machinery, the specification may be simply the catalogue de- 
 scription of the machine furnished by the maker, or may be 
 extended to comprise definite guarantees as to performance, 
 power-consumption, etc. 
 
 Most of these cases are concerned with the expenditure of 
 considerable amounts at infrequent intervals, but after all the 
 success or failure of a business is much more likely to depend on 
 successful purchase applied to the two great main st reams — labor 
 and material — which flow continuously through the plant, 
 because inefficiency here is recurrent and cumulative. In 
 modern plants, therefore, specification is applied as far as possible 
 to everything that is purchased, and not merely to large and 
 infrequent items. 
 
 In American Machinist for Feb. 29, 1912, is a very suggestive 
 paper contributed by Mr. Henry Williams, Naval Constructor, 
 U. S. N., describing some remarkable results obtained by the 
 adoption of specifications for purchases, based on previous study 
 of the purpose for which the supplies were required. Tool steel, 
 which is purchased in 50-ton lots, was reduced 15 cts. per pound, 
 "with the net result that a little better quality is secured now, at 
 a very considerable saving." Applied to varnish, a more 
 suitable quality was obtained at a reduction in price in many 
 cases approaching one-half that formerly paid. Many thousand 
 dollars were saved annually by careful specifications of shellac. 
 One and a quarter cents a pound on 800,000 lb. were saved on the 
 purchase of "white zinc." 
 
 In private businesses the figures might be less imposing but 
 equally significant. Specification is especially desirable in regard 
 to staple material, such as pig iron in the case of a foundry, where 
 the efficiency of manufacture may be seriously affected by un- 
 known variations in the quality. Coal, again, is an article of very 
 variable composition, and modern firms find it advisable to make 
 their contracts on a basis of "calorific values," that is, on the actual
 
 134 MANUFACTURING COSTS AND ACCOUNTS 
 
 amount of heat units as ascertained by analysis, instead of trust- 
 ing to trial and error to point the way to a satisfactory fuel. 
 
 One of the results that are reached by a careful review of 
 the whole field of buying and its reduction as far as possible to 
 a series of specifications is that of standardization. The fewer 
 the varieties of materials that it is necessary to purchase, the 
 larger, as a rule, will be the quantities that can be contracted 
 for at one time and the lower the bids securablc. By standard- 
 izing material and by arranging that designers shall give first 
 preference to the use of standard varieties and sizes of material, 
 a long chain of economies is set up. Fewer transactions in 
 requisitioning, bidding, ordering, checking and bookkeeping are 
 involved, less complex arrangements for storekeeping, and 
 greater simplicity all round are the consequences of a judicious 
 standardization of material, instead of leaving the designer to 
 introduce new sizes and varieties capriciously without a thought 
 whether they are really essential to the work in hand. 
 
 In some kind of businesses, of course, these remarks do not 
 apply. The choice of material is strictly conditioned by the 
 nature of the product. Whatever new varieties of material are 
 introduced are called for by the customer. Again in other 
 businesses the perpetual search after novelty makes new varieties 
 of material welcome rather than the reverse. But in most 
 engineering types of business, where product is made up of a 
 large number of parts with screws, nuts, bolts, handwheels, 
 levers and such like common accessories, standardization may 
 play a very important part in the economy of production. Also 
 the use of materials which are already commercially standard- 
 ize* 1, instead of slight variations from them, which variations 
 have little or no technical efficiency, is an equally important 
 trial ter. 
 
 The wording of specifications is a matter calling for great 
 care and precision. In many cases a knowledge of trade customs 
 in regard to the item specified is necessary, it being a not un- 
 common practice for goods to be sold as dozens, gallons, tons 
 and so forth when really the quantities are somewhat higher 
 or lower than appears on the face. Wherever possible, the 
 principle of limits or margins as to composition or dimension, 
 between which variation is permissible should be adopted. If 
 samples or test pieces are required, the conditions under which 
 these are to be drawn from the bulk should be specified. Wher-
 
 PURCHASE ORDERS L35 
 
 ever any definite public standard exists, such, for example, as 
 the standard engineering specifications, these should be adopted 
 rather than any small variation from them, because what is 
 in general demand can usually be procured at a cheaper rate 
 than any individual requirement. 
 
 It must be kept in mind that the object of a specification ia 
 not to obtain the highest grade product, at the lowest possible 
 price; but to obtain exactly that grade of product that can be 
 
 GENERAL MANUFACTURING CO. 
 
 "WORKVILLE N.Y. 
 
 SPECIFICATION 
 
 No Date 
 
 For 
 
 This Specification Consists of Sheets 
 
 Body of Specification Written here 
 
 The material must pass the following tests 
 which will be applied by us on the delivery 
 of each consignment. 
 
 Fig. 24. — Standard specification blank. 
 
 most economically used, at the lowest price. This frequentty 
 necessitates experiment to discover what is the lowest-grade 
 product that can be profitably used. In Mr. Williams' article, 
 above referred to, he mentions several cases in which experi- 
 ment showed that the superior brands of certain articles pre- 
 viously used were in fact wasted, inasmuch as their high qualities 
 w r ere not being called on in the uses to which they were being 
 put. By substituting a lower grade, and rigidly specifying the 
 requirements, it w T as found possible to save considerable sums 
 without the slightest sacrifice of efficiency.
 
 136 MANUFACTURING COSTS AND ACCOUNTS 
 
 
 
 
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 When the acceptance of material 
 is dependent on its passing specific 
 chemical or mechanical tests on 
 delivery, this fact should be clearly 
 brought out, and the tests detailed 
 without ambiguity so that no dis- 
 pute may arise in case of rejection. 
 
 Standard specifications should be 
 made on uniformly sized sheets 
 (Fig. 24) each specification being 
 given a reference number and date, 
 thus : 
 
 " Specification No. 5,467, dated Aug. 
 7, 1915, for Lacker," 
 
 and may be manifolded, or printed, 
 and kept in vertical files, so that 
 copies may be forthcoming without 
 delay when bids are desired. Where 
 a specification covers two or more 
 sheets, they should be bound by a 
 strong eyelet in the top left-hand 
 corner, and the number of sheets 
 contained in the specification stated 
 on the first sheet under the title. 
 Each specification should, of course, 
 bear the printed title and address 
 of the firm. Where a number of 
 specifications are in use, a Speci- 
 fication Register (Fig. 25) should 
 be set up. This may be in loose- 
 leaf form, each page being devoted 
 to one variety of specification. 
 Thus, if several specifications for 
 different kinds of lacker are extant, 
 one page will beheaded "Lackers" 
 followed by the serial number and 
 dates of all such specifications, with 
 such additional descriptions as may 
 be desirable for identification. 
 Superseded specifications would be 
 ruled off in the register in red ink,
 
 PURCHASE ORDERS 137 
 
 and all the outstanding copies removed from the files. A 
 Serial Register is also desirable and can be made by binding 
 all specifications as they are issued in numerical order, thus 
 forming an official record of the whole series. A superseded 
 specification would not, of course, be withdrawn from this 
 register, but merely marked "Superseded" and reference given 
 to the new serial number by which it is superseded. 
 
 The accountant has usually very little to do with specification, 
 it being obviously a purely technical matter outside his ex- 
 perience. But where it is adopted, it falls to him to see that 
 due arrangements are made for the verification of deliveries as 
 being in accord with specification before payment is made for 
 the goods. 
 
 Purchase Requisitions. — While specifications are concerned 
 with quality of articles purchased, purchase requisitions have 
 to do chiefly with quantity. The one indicates what kind of an 
 article is required and the other how much of it. If, therefore, 
 a standard specification already exists, it is only necessary to 
 refer to it by number and date on the requisition, and add the 
 quantity considered to be required, and then the purchasing 
 agent has all the data necessary for him to proceed. 
 
 Modern practice is reducing the purchase requisition to more 
 of a routine affair than formerly. At one time the quantity of 
 supplies carried was a matter of accident, and the quantity req- 
 uisitioned on any occasion was a matter of haphazard judg- 
 ment. Therefore, it is generally recommended in old textbooks 
 that every requisition be passed on by the manager. Nowadays 
 the quantity of each kind of stores that is to be kept in hand is 
 usually worked out in advance, and consequently the amount 
 to be ordered on each occasion of replenishment is worked out 
 also. This reduces the requisition in most cases to a mere 
 notification to the purchasing agent that certain items of stores 
 have fallen below the minimum limit. 
 
 Purchase requisitions may be for materials that are produced 
 in the plant as well as for articles purchased outside. In this 
 case, the quantity to be ordered from the shops is also in most 
 cases a matter of previously settled routine. 
 
 In some cases purchase requisitions will not be for standard 
 materials, but for some special article required for a particular 
 customer's order, or for a repair or other special work being 
 carried out on the equipment itself. In this case the purchasing
 
 138 MANUFACTURING COSTS AND ACCOUNTS 
 
 agent must satisfy himself that no more has been asked for than 
 is really required for the purposes of the order or repair. 
 
 In a well-planned system the minimum quantities of each 
 article carried in stock will have been fixed with due regard to the 
 normal time required to obtain delivery of a further supply. 
 Where the article is a stock one, and can be obtained from several 
 sources, a very small minimum can be fixed without risk. But 
 where time of delivery is doubtful, a larger margin should be 
 allowed. In both these cases the purchasing agent will proceed 
 in a routine manner. But in the case of special material being 
 required for a customer's order, or any other purpose that is not 
 immediately pressing and urgent, the requisition should state 
 the date at which it will be wanted. Without this information 
 the order might be placed with a firm which, though otherwise 
 preferable, was really unsuitable by reason of a reputation for 
 not keeping to promises of delivery. 
 
 Purchase requisitions may in some cases be very urgent, as, 
 for examples, in breakdowns, or where by failure of the system 
 some important matter has been overlooked at the last moment. 
 In such cases routine must be sacrificed, and everything done to 
 get the goods into the plant with the least possible delay — all 
 routine observances being completed after the delivery. 
 
 The sources from which purchase requisitions may arise are 
 many. As regards ordinary standard stores and materials they 
 will originate in the stores department. In the case of special 
 material required for a customer's order they should be originated 
 by the first person who is in a position to discover the want. In 
 some businesses this will be on the receipt and "dissection" of 
 a customer's order. In other cases, as in an engineering plant, 
 the making up of a "bill of material" will be the point at which 
 the fact of special material being required will first disclose itself. 
 In the case of urgent repair work, they may originate from the 
 foreman in charge of the job. They may also come from the 
 selling depart menl , calling for printed matter, special advertizing, 
 and so forth. In large businesses there may be a separate official 
 for the keeping of stationery, and office supplies, who requisitions 
 for his own wants. This last case may be regarded, however, 
 as a storekeeping transaction. Requisitions may also be for new 
 equipment and may be originated by the manager or works engi- 
 neer. In this case it may happen that the agent is directed to 
 obtain some specific patented article, or to confine his inquiries
 
 rruciiAsi: oiwehk 
 
 139 
 
 to certain specified firms. This is equivalent to making a special 
 specification to cover the particular case. 
 
 In a very large plant the principal difficulty arising from 
 purchase requisitions is that of overlapping, or duplicate requi- 
 sition. One department may apply for material which exists 
 already in plentiful supply in another portion of the same plant. 
 With a proper system of storekeeping this danger is eliminated, 
 but in the absence of such a system it is a failure of very common 
 
 Date 
 
 PURCHASE REQUISITION 
 
 From 
 
 Quantity- 
 Article 
 
 Date Required 
 Advise Mr 
 
 on delivery 
 
 Required for_ 
 
 .Bids Invited * Date_ 
 
 Purchase Order No._ 
 
 issued to 
 
 Date. 
 
 Originated by 
 
 Approved by 
 
 * Spaces provided on back for names of firms 
 
 from whom bids have been Invited 
 
 FlG, 26. — Purchase Requisition. 
 
 occurrence. The proper place to eliminate this defect is in the 
 storekeeping department, that is to say by centralized control of 
 all stores. 
 
 Purchase. — Requisition blanks (Fig. 2G) are very simple, being 
 mainly memoranda stating the kind and number of the article 
 required. But as there is a difference in their treatment, as 
 indicated above, it will be well to have them of three colors: 
 (1) for ordinary requisitions based on minimum balance of stores
 
 140 MANUFACTURING COSTS AND ACCOUNTS 
 
 being reached; (2) for materials of a special nature that must be 
 delivered by a definite, but future date; and (3) rush requisitions, 
 in which the material is wanted immediately, and all routine 
 must be put on one side to obtain its instant delivery. 
 
 Purchase requisitions should be made in triplicate, one copy 
 being retained by the originator, and two being forwarded to the 
 agent. When the agent issues a purchase order, the date, number 
 and firm are endorsed on the requisition, and one copy stamped 
 and returned to the originator, to signify to him that the goods 
 are on order, and to enable him to make inquiry if they do not 
 come in to time. This copy should be filed by the originator in 
 a tickler, according to date of delivery. The copy retained by 
 the purchase agent is used first to keep a memorandum of firms 
 invited to bid, and when a bid has been accepted, to record 
 the purchase order number, date and name of firm. It is then 
 filed under the name of the originator. 
 
 Obtaining Bids and Issuing Orders. — In many, perhaps most 
 cases, it will not be necessary for the purchase agent to invite 
 bids. He will already have at hand all the data necessary for 
 decision as to whom the order is to be given. Though this is 
 not a matter of accounting, it may be desirable to indicate the 
 nature of the mechanism that should be set up for this purpose. 
 Purchasing depends for its success primarily on knowledge of the 
 market, using that term in its broadest sense. It also depends 
 on an intimate knowledge of the storekeeping organization of the 
 plant, and a comprehensive grasp of the whole purchasing situa- 
 tion, particularly as to the way in which orders may be given out 
 so as to obtain the maximum benefit from the volume of business 
 done. For, though there is no sentiment in business, yet a firm 
 that is continually changing its sources of supply, loses the advan- 
 tages which accrue when a supplier regards an account as steady 
 and regular and worth an effort to keep. In purchasing, it is 
 not always a matter of price, within reasonable limits, that should 
 determine the destination of an order. Firms that have a repu- 
 tation for keeping promises of delivery, who exercise care in 
 packing, who give prompt satisfaction to complaints, and in 
 some cases, who are indulgent as to credit, may be more satis- 
 factory to deal with in the long run, than one that quotes cut 
 prices accompanied by an indifferent service in other respects. 
 To secure the full advantage of trade it must to some extent 
 be regular, and this consideration will influence the degree to
 
 PURCHASE ORDERS I 1 1 
 
 which the practice of seeking bids on every possible occasion is 
 exercised. 
 
 In some businesses, particularly those of an engineering char- 
 acter, the variety of purchases is very great. It is, therefore, 
 necessary for the purchase agent to classify and index all available 
 information, and to keep good records of bids received, so that 
 there may be no loss of time in searching for prices and descrip- 
 tions when an order is to be given out. The information to be 
 indexed thus divides itself into two main classes: (1) trade 
 literature; (2) bids and correspondence with supplying firms. 
 
 The indexing and classification of trade literature is com- 
 plicated by the manner in which a large portion of it is issued. 
 Notwithstanding all the agitation that has taken place at different 
 times to standardize the sizes of catalogues and booklets very 
 little uniformity has as yet been reached in this respect. The 
 idea that a trade catalogue must possess strong individuality 
 shows great persistence, and it is not at all certain that it is not 
 to some extent justified. But from the viewpoint of the indexer 
 it is an unqualified nuisance, especially when a number of different 
 lines of manufacture are included in one more or less portly and 
 handsomely bound volume. 
 
 Where the space can be provided, it is probable that no better 
 arrangement can be found than open bookshelves, for the carry- 
 ing of trade catalogues. Volumes will stand upright, and 
 pamphlets and booklets can be either placed on filing boxes 
 (transfer or magazine cases) or they can be roughly sorted into 
 sizes and made into a volume by clips. The grouping of cata- 
 logues must depend on the number carried, and also on the variety 
 of subjects covered. In a large collection covering a wide range 
 of subjects, shelves may be apportioned to subjects; thus one shelf 
 may be devoted to "machine tools" or "paints, varnishes and 
 stains." Catalogues of a general nature may either be cut up 
 and rebound in sections, if they are of sufficient importance, or 
 shelves may be set apart for "general" catalogues, and at each 
 individual shelf a reference card may be placed referring the 
 inquirer to the "general" shelf, and indicating page and name of 
 catalogue in which, for example, some information or "machine 
 tools" or "paints, varnishes and stains" may be found. Of 
 course the reference would be specific, thus: 
 
 Gear-cutting Machines. See General Catalogues, Smith and Granger, 
 page 34.
 
 142 MANUFACTURING COSTS AND ACCOUNTS 
 
 Where this plan can be adopted it is to be preferred to more 
 elaborate arrangements. The only catalogues that require to 
 be indexed are the "general" ones. Of course such a division 
 would not be of much use to a stranger, but to anyone regularly 
 working with the catalogues, and who makes a business of 
 carefully looking through every new one that is added to the 
 library, it would prove serviceable. 
 
 In some cases a catalogue devoted almost entirely to one class 
 of article will contain a few pages given up to others in a wholly 
 different class. In this case, the catalogue should be placed 
 in the group to which the main contents refer, and the other 
 pages taken out and placed in the magazine case of the shelves to 
 which they refer. Or, if it is desired not to mutilate the catalogue, 
 then a plain leaf bearing a reference as above mentioned may be 
 placed in the magazine cases, or the reference card at the shelf 
 may be endorsed to show the locality of the main catalogue, 
 thus: 
 
 Aluminum Paint. See Metals and Alloys Catalogues, Wilson, page 23. 
 
 A little care and ingenuity will make this method of handling 
 trade catalogues quite satisfactory. The main precaution to be 
 taken is the indexing of articles which are not of the same kind as 
 the group under which the catalogue is kept. As each catalogue 
 is received, a label bearing the date, and stating the group under 
 which it is to be kept, should be placed at the top right-hand 
 corner. This helps to ensure that it will be replaced on the right 
 shelf when it is returned after use. When a new catalogue is 
 received any previous catalogue that is superseded by it should 
 be withdrawn from the shelves. 
 
 Where a more elaborate method is desired, card-indexing may 
 be resorted to. Cards will be kept for each firm, giving location 
 of each catalogue (which may be arranged either according to 
 alphabetical order of firm name, or numerically) and also for 
 specific articles. On the article card, the name of each firm 
 making or supplying that article with reference to the page and 
 catalogue is entered. Each card thus forms a list of all the firms 
 to whom inquiries or invitations to bid may be addressed when 
 the article is being purchased. 
 
 The second division of information required by the purchasing 
 agent is that which has been obtained through correspondence 
 with the firms themselves. This, being perfectly definite, is
 
 PURCHASE ORDERS 143 
 
 easily indexed. A card will be kept for each article, and the 
 name of the successful firm and their price will be entered when- 
 ever a bid is accepted. A corresponding card for each firm 
 invited to bid is also desirable, and a useful feature will be the 
 entry of each bid received from the firm, with their price and also 
 the successful price. By this means the general position of a 
 firm on competing bids is registered, and firms that arc habitually 
 out of the running may be, in time, eliminated from the list. 
 
 Purchasing agents who have to buy staple commodities 
 subject to variation of the market, as for instance, col Ion, or pig 
 iron, must of course possess much higher qualifications than 
 those who merely purchase ordinary supplies. A thorough 
 knowledge of the sources of production, and of the influences 
 tending to alter market price, must be combined with an inti- 
 mate knowledge of the resources of the plant, its prospects of 
 future business, the general state of credit and other important 
 questions, so that long-term contracts can be entered into with 
 safety and profit. 
 
 The use of a special blank for inviting bids saves unnecessary 
 typewriting of phrases which are common to all bids. The 
 information given on this blank should disclose to the bidder all 
 the data by which it is expected he will be bound in the event 
 of his bid being accepted. The principal items are: place of 
 delivery; date goods are required, or alternatively, date at which 
 bidder promises delivery; stipulations as to payment of freight; 
 terms of account, e.g., 30 days net.; as to charge for packing cases 
 and containers; latest date at which bid can be considered. 
 Figure 27 provides a suggestion for an Inquiry Blank of this kind. 
 The paper used should be sufficiently thin to allow of several 
 copies being manifolded at one time. 
 
 In some cases, bids will be invited on the basis of samples, 
 either inclosed with the inquiry, or open to the inspection of 
 bidders at some stated place. In the latter case the place, and 
 the hours at which the samples may be inspected should be men- 
 tioned in making the inquiry. Sometimes the bid will be in- 
 vited on the basis of a guarantee of some kind, and the terms of 
 this should be very fully disclosed. When bids are invited on 
 specification, the inquiry should state the number or quantity of 
 the articles, and the conditions of delivery, etc., and a copy of the 
 specification attached to the inquiry. 
 
 When all bids are in, and one of them has been decided on as
 
 144 }f. 1 N I '/•'. 1 ( ' TURING COSTS AND ACCOUNTS 
 
 acceptable, it will promote good feeling if the courtesy of an advice 
 of rejection is extended to the unsuccessful bidders. This may 
 take the form of a printed postcard, bearing the words, "We 
 
 desire to thank you for your bid on , and to inform you 
 
 that the order has now been placed." A notification of this 
 kind clears up uncertainty, prevents unnecessary follow-up 
 efforts, and saves the time both of the firms bidding and also of 
 the purchasing agent making the inquiry. 
 
 Having accepted a bid, the next step is to issue a purchase 
 
 GENERAL MANUFACTURING CO. 
 WORKVILLE. N.Y. 
 
 19 
 
 INQUIRY 
 
 JTq_ 
 
 Please Quote your Price on the following 
 
 General Mfg. Co. 
 
 Conditions 
 
 Delivery Fob. 
 
 Terms 30 Days Net 
 Cases or Containers to be Credited on Return 
 Delivery Required by 
 
 -This Inquiry will be Closed on 
 
 Fig. 27. — Blank for inviting bids. 
 
 order for the goods to be delivered. The purchase order should 
 repeat the conditions as to delivery, terms, etc., stated on the 
 inquiry, and in addition specify the distinguishing marks or 
 stencils to appear on packages. The purchase order, therefore, 
 will be a blank very similar to Fig. 28. The portion below the 
 signature does not appear on the copy sent to the supply firm. 
 
 As it is desirable that the receiving department shall be 
 advised of approaching deliveries, and also be able to identify 
 them when they come in, it is advisable to manifold the purchase 
 order (omitting any price figures that may appear on it) and for-
 
 PURCHASE ORDERS 
 
 L45 
 
 ward the copy to the receiving clerk. He will file it in a tickler 
 a day or so ahead of expected delivery, and will thus be in a 
 position to identify the consignment on arrival. 
 
 There are, of course, other classes of purchases than those of 
 goods. Services of all kinds payable in salaries and wages, and 
 such items as insurance, rent, taxes and so forth, are just as 
 much purchases as are pig iron, machinery, or oil and waste. 
 But it would be unnecessary to discuss the routine pertaining to 
 such transactions, except indeed as to the conditions under which 
 
 GENERAL MANUFACTURING CO 
 WOKKVIXLE. N.Y. 
 
 PURCHASE ORDER NO. 
 
 To 
 
 Deliver the goods mentioned below not 
 later than F.O.B. 
 
 Mark Packages- 
 Price 
 
 JTerms 
 
 The above Order No. to Appear on Your Invoice 
 Signature 
 
 Order Acknowleged . 
 Promised for 
 
 Delivery Urged 
 Goods Delivered 
 Invoice Passed _ 
 
 Account 
 Chargeble 
 
 Fig. 28. — Purchase Order. 
 
 labor is employed, which will be dealt with in a later chapter. 
 The outline of purchasing routine just given belongs rather to 
 the subject of organization than that of accounting proper, for 
 as will be noticed, no question of accounts has yet arisen. The 
 routine of purchasing is, in fact, much the same for a manufac- 
 turing business as for any other, and has only been enlarged on 
 here since it sets in motion all subsequent activities, and is there- 
 fore an appropriate introduction to the subject of manufacturing 
 accounts. 
 
 ro
 
 CHAPTER III 
 RECORDING PURCHASE EXPENDITURES 
 
 Having briefly discussed in the previous chapter the principal 
 precautions to be taken in making purchases, we now enter on the 
 subject matter of manufacturing accounts, inasmuch as for 
 everything purchased, that is, for every expenditure, there must 
 be documentary evidence of some kind, and this forms the start- 
 ing point of a series of entries to be made in the accounts of the 
 business. 
 
 Everything purchased has to be paid for eventually, but not 
 necessarily at the moment of purchase. That is to say, purchases 
 may be of two kinds, as regards terms of payment: (1) the pur- 
 chase may be for cash; (2) the purchase may be on credit. There 
 is also a third class of transaction, when purchases are paid for at 
 once, not in cash, but by a credit instrument, called a note or bill. 
 This is, in fact, a deferred cash payment, but as the handling of 
 bills or notes is a part of general accounting, and is a subject 
 by itself it will not be discussed here. 
 
 Each of these two classes of transactions is recorded in different 
 journals. Cash purchases are recorded in the Cash Journal, 
 purchases on credit in the Purchases Journal. A variant of the 
 latter, widely used in the United States, is known as the Voucher 
 Record, which is intended to avoid the necessity of further posting 
 of the transactions to a purchases ledger. This will be dealt 
 with later. 
 
 The object of each of these two journals, in fact of all journals, 
 is very similar. They serve to make a list of the transactions 
 in sufficient detail for their subsequent identification, with the 
 money value of each transaction appended, so that at the end of 
 a financial period, say a month, we have a complete list of a 
 particular class of transactions. This information having been 
 accumulated in as much detail as is necessary for the given pur- 
 pose, we are enabled to charge each of the transactions to one set 
 of accounts and credit it to another set of accounts, or in the 
 simplest case, we may merely make a total of the entire set of 
 
 146
 
 RECORDING PURCHASE EXPENDITURES 147 
 
 transactions and charge this total to one 
 account and credit it to another. In 
 general, however, several accounts are 
 involved, and in order to handle these 
 transactions conveniently, it is usual to 
 make a number of separate columns in 
 the journal, each column representing 
 some account in regard to which the 
 transactions are expected to be fairly 
 numerous. By writing the amounts in 
 the proper columns, we are enabled at 
 the end of the period to add up these 
 columns, find the totals, and charge or 
 credit these totals to the accounts ef- 
 fected, thus avoiding the trouble of post- 
 ing every separate transaction, item by 
 item. In the Cash and the Purchases 
 Journals, now in question, we have ex- 
 cellent illustrations of this mechanism 
 of journalizing. In the case of the Pur- 
 chase Journal every item has to be 
 credited to the personal account of a 
 creditor, and the total of these transac- 
 tions at the end of the period is also 
 posted to the credit of a Creditor's 
 Control account. With regard to the 
 charges to be made from this journal, 
 these fall under a number of heads and 
 though the heads themselves may vary 
 in different businesses and require more 
 subdivision in some than in others, some 
 such division as shown in Fig. 2Q will in 
 general be necessary. 
 
 The first three columns of the Purchase 
 Journal, as shown in Fig. 29, are devoted 
 to the written description of the item, 
 that is to say, to the date of the transac- 
 tion, the firm from whom the goods or 
 services were purchased, a brief descrip- 
 tion of the items, sufficient for identi- 
 fication, and the price paid or invoice 
 
 1 
 
 < 
 
 
 i 
 
 
 o 
 u 
 
 < 
 
 
 I 
 
 
 i 
 
 IX. 
 
 
 
 
 
 
 a 
 
 o 
 
 (55 
 
 
 1 
 
 
 a 
 
 e c 
 s & 
 
 P 
 
 m 
 
 
 
 
 
 c^ 
 
 
 
 
 
 - 
 
 
 
 
 
 Works 
 Exp. 
 
 
 
 
 
 Selling 
 Exp. 
 
 
 
 
 
 
 
 1 
 
 
 o 
 
 'o 
 
 > 
 s 
 
 < 
 
 
 
 
 "o 
 
 
 
 
 1 
 
 
 
 
 £ 
 
 
 
 
 rt 
 
 
 ; 
 
 
 fe
 
 148 MANUFACTURING COSTS AND ACCOUNTS 
 
 value of the transaction. The remaining columns serve for the 
 allocation of charges. In the particular ruling shown, we have 
 in the first column, an opportunity to segregate all those charges 
 which pertain to the selling department. In the second column 
 are sundry items chargeable to the factory but not assignable to 
 a particular department at the moment. In the next three 
 columns, we have accommodation for expense charges against 
 departments 1, 2, and 3, respectively. The stores allocation 
 column is a very important one. In this column are charged all 
 stores and materials purchased whatever their subsequent des- 
 tination may be. In the next column items like rent, taxes and 
 insurance are charged, then a column is devoted to purchases 
 of plant, new equipment, and such like additions to value. 
 Finally we have a sundry accounts column, space being provided 
 for the name of the account to be charged and for the amount. 
 This column is used for charges to accounts which do not occur 
 frequently. In fact, the whole idea of providing columns is to 
 take up transactions which do occur frequently. They are simply 
 for the purpose of saving time in posting. There is no advantage 
 in a large number of columns, but a positive disadvantage on 
 account of the unwieldy size of the book, and such columns should 
 be therefore confined to classes of transactions which do occur 
 with reasonable frequency. As these will vary in business to busi- 
 ness it is obviously impossible to give more than a general idea 
 of the classifications usually to be met with in manufacturing. 
 Thus, for example, in some businesses it might be necessary or 
 desirable to split up the stores column into several columns. It 
 might be thought advisable to have separate columns for fuel, for 
 pig iron, for brass or for any other special product which was 
 purchased frequently and required to be recorded separately 
 from the general total of stores and material purchased. In 
 the same way the selling expense column might be subdivided 
 into traveling expenses, advertizing, etc., according to the 
 necessities of the business. Under the head of general expense 
 we might have subdivisions such, for example, as a special column 
 for postages and telegrams, but all these matters do not involve 
 any principle, but are rather dictated by convenience. It is not 
 necessary for us, therefore, to do more than generally note their 
 possibilities. 
 
 At the end of the financial period, say monthly, all these columns 
 are totalled. The total of the first or invoice column is carried
 
 RECORDING PURCHASE EXPENDITURES 149 
 
 to the credit of a Creditor's Ledger 
 (Accounts Payable) Control account. 
 It will also be understood that each 
 item is posted separately to the credit 
 of the personal account of a creditor, 
 and the total of such individual 
 credits will, of course, equal the total 
 of the column which has been carried 
 to the Control account. With regard 
 to the allocation columns, all of these 
 except the last one on the right-hand 
 side will be totalled and these totals 
 carried to the debit of the various ac- 
 counts affected. In the case of the 
 column on the right-hand side headed 
 "Sundry Accounts," a recapitulation 
 must be made of the different items, 
 that is to say, all those chargeable to 
 one account must be collected to- 
 gether and the total charged to the 
 account in question, then the same 
 process is followed with the other 
 items. In other words the total at 
 the foot of the sundries column has to 
 be split up into several subtotals each 
 of which is charged to its proper 
 account. 
 
 At the end of the month when all 
 entries in the book are completed, and 
 all columns have been totalled, a 
 check on the accuracy of the work is 
 obtained by observing that the totals 
 of all the allocation columns, includ- 
 ing that of the right-hand column 
 for sundry accounts, is equal to the 
 total in the invoice column. This 
 shows that all our charges are equal to 
 all our credits and the book is, there- 
 fore, self-balancing in this respect. 
 
 A variant of the Purchases Journal 
 is frequently made use of. This is 
 
 ■v O 
 
 C <J 
 3 O 
 
 Amt. 
 
 
 
 Plant 
 
 
 
 
 Rent 
 
 
 
 
 
 M i 1 
 
 s 
 
 3 
 
 
 
 Department 
 Expense 
 
 to 
 
 
 
 CN 
 
 
 
 
 
 
 i-H 
 
 
 
 | 
 
 
 Works 
 Exp. 
 
 
 
 
 
 
 Selling 
 Exp. 
 
 
 
 
 
 
 
 
 
 )j 
 
 E 
 < 
 
 
 
 
 g 
 
 o 
 
 
 
 
 
 E 
 
 H 
 
 
 
 
 
 
 u 
 
 o 
 
 '5 
 
 > 
 
 "3 
 Oh 
 
 
 
 
 -3 
 U 
 
 Q 
 
 
 
 I 
 
 
 •ojvi jgqonoA 
 
 
 
 
 
 -
 
 150 MANUFACTURING COSTS AND ACCOUNTS 
 
 called the Voucher Register and is shown in Fig. 30. Its rul- 
 ing is practically identical with that of the Purchases Journal, 
 with the exception that no provision is made for posting individ- 
 ual items to creditors' accounts. The theory of this book is 
 that all transactions are settled in cash closely following on the 
 purchase. A serial number is given to the vouchers or invoices 
 received and columns are provided, not only for the date of in- 
 voice, but also for the date of payment by the firm. Inspection 
 of the register thus discloses at any time the invoices remaining 
 unpaid. In order to obtain a check on this amount it is advisable 
 to set up an account corresponding to the Creditor's Control 
 account and which may be termed Accounts Payable. This 
 should be credited with the total of all invoices in the sixth 
 column headed, "Amount," and as invoices are paid through the 
 Cash Journal, this account should be charged with the amount 
 of the payment. The balance in the account at the end of the 
 month should correspond to the total of all the unpaid items in 
 the Voucher Register. Though the Voucher Register is an ex- 
 cellent labor-saving device, where accounts are paid promptly, it 
 is a source of much confusion if credit is taken on a considerable 
 scale. Unless, therefore, accounts can be settled promptly on 
 receipt, it will save much confusion to employ a regular Purchases 
 Journal with individual accounts for each creditor. Unques- 
 tionably in any large business the financial arrangements should 
 be such that accounts are settled promptly. One of the claims 
 made for the Voucher Register is that it forces the necessity of 
 such prompt payment and thereby secures discounts on purchases 
 which would otherwise be lost. 
 
 We have now to consider transactions in which cash is paid 
 immediately and we have also to consider receipts of cash. Both 
 these transactions are dealt with in what is called a Cash Journal. 
 The left-hand side of such a journal, shown in Fig. 31, deals with 
 receipts, and the right-hand side with payments. As the princi- 
 pal source of receipts is from sales, the allocation columns by 
 which credits are given to the persons from whom cash is received, 
 are divided into two sets, one dealing with sold ledger accounts and 
 the other dealing with sundry accounts. The date, the source, 
 and the item, with the amount, are first entered and then the 
 amount is also set out in one of these two allocation columns. 
 If it is a check received from a customer it is entered in the sold 
 ledger accounts column which is threefold: First, we have a
 
 RECORDING PURCHASE EXPENDITURES 151 
 
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 Works 
 
 Exp. 
 
 
 
 
 
 X 
 
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 152 MANUFACTURING COSTS AND ACCOUNTS 
 
 column for the folio number of the individual customer; secondly, 
 we have a column for the amount of the check; thirdly, we have a 
 column for the discount taken by the customer — the total of 
 these last two columns being, of course, equal to the amount of 
 his indebtedness to us. All other receipts are entered in the 
 sundry receipts column, which contains space for entering the 
 name of the account, the folio, and the amount. At the end 
 of the month all these columns are totalled. The total of the 
 column headed, "Amount Received," is charged to Cash ac- 
 count. The totals in the two columns under the head of sold 
 ledger accounts are charged to a Sold Ledger Control account. 
 The individual items in the sundries column are collected 
 together in the same way as described for the sundries column in 
 the Purchases Journal and posted to the credit of the accounts 
 concerned. In addition to this, each separate item appearing 
 under the head of sold ledger accounts is credited to the individual 
 account of the customer, these individual credits being, of course, 
 equal in amount to the total credited to the Control account. 
 The totals of the two allocation columns (omitting discounts) 
 should, of course, balance the total in amount received column, 
 thus establishing a proof of the correctness of the transactions. 
 The total in the discount column is credited to a Discounts 
 Allowed account. 
 
 The right-hand side of the Cash Journal deals with cash pay- 
 ments. Spaces are provided for the date, check number, the 
 person to whom paid, nature of the item, and the amount. 
 The rest of the page is devoted to the allocations. The first 
 principal group of payments will undoubtedly be those for goods 
 purchased. We have, therefore, a triple column headed "Bought 
 Ledger," giving a space for the folio, the amount, and discount 
 taken. Next we have a column headed "Selling Expense," 
 followed by one for "Works Expense." Separate columns are 
 also provided for salaries and wages, one for rents, insurance and 
 taxes. In some cases it is advisable to have a column for stores, 
 wherein small cash purchases may be directly charged to Store 
 account. Finally, as usual, we have a sundries column. These 
 may be regarded as usual allocations in a manufacturing business, 
 but, of course, will be varied according to individual necessities. 
 We may now take a general view of what is intended to be 
 effected by the Purchases Journal and the Cash Journal. The 
 latter is, of course, really two journals, one dealing with cash
 
 RECORDING PURCHASE EXPENDITURES L53 
 
 receipts, and one with cash payments. It is only for convenience 
 that they are combined in one book and it will be obvious that 
 the two classes of transactions have very little to do with one 
 another. Generally, however, provision is made for ascertain- 
 ing the cash balance at the foot of each page, so that it may be 
 made known in a moment without delay, but for all other 
 purposes the two halves of this journal may be considered as 
 separate books. We need only, at the present moment, to con- 
 sider that side of the Cash Journal which relates to payments. 
 The general purpose, then, of the Purchases Journal and the 
 Cash Payments Journal is, in the first place, to acknowledge the 
 source of the purchase and to credit either cash or some individ- 
 ual supplier, and on the other hand to charge the items thus 
 acquired to one of several different accounts corresponding to 
 the natural divisions of the business. At the beginning of the 
 month we shall have had a supply of cash in hand, and at the 
 end of the month part of this cash will have been transmuted 
 into other things represented by the allocations in the Cash 
 Payments Journal, and we shall also have received credit from 
 various supplying firms, and the credit so received will have 
 been transmuted into other things as shown by the allocations 
 in the Purchases Journal. It will appear then that our cash has 
 decreased, and our credit, that is to say our liability, increased. 
 We may regard this matter as virtually a decrease in cash, 
 because later on it will have to be met by a payment of cash. 
 For theoretical purposes, therefore, we may say that cash has 
 been transmuted into a number of other things, services and 
 goods, and we will now proceed to trace these various allocations 
 into their ledger accounts. On reference to the general diagram, 
 a double column of ledger accounts will be seen near the left- 
 hand side. For the most part these represent the different 
 expenditures which have been made at the expense of cash. 
 Thus, we have to begin with, "Stores Account," which as we 
 have seen, may receive a charge, either from Cash Journal or 
 Purchases Journal. Next, we have "Plant Account" which 
 may receive an occasional charge through Purchases Journal. 
 The third account is headed "Patterns, Jigs, Etc." This is 
 rarely charged from outside sources, except in the rare case of a 
 pattern or jig having been purchased from outside. The next 
 two accounts, "Depreciation," and "Interest," are nominal 
 accounts and do not represent anything in the nature of pur-
 
 154 MANUFACTURING COSTS AND ACCOUNTS 
 
 chase; we may, therefore, leave their consideration to a later 
 period. "Rents Account" may also be charged either from 
 Cash Journal or Purchases Journal. This account is merely 
 typical of a number of separate accounts which would in the 
 ordinary course be set up for such items as rent, different kinds 
 of insurance, taxes, etc. In order to avoid unnecessary com- 
 plications, one account has been made as representative of the 
 entire 1 class. 
 
 Now all these ledger accounts have in the diagram been 
 placed in one group by themselves because there is a certain 
 peculiarity about them. The charges made to them month by 
 month, are not necessarily, or even usually, expended on manu- 
 facture during that same month. This means that each of these 
 accounts will have a balance in it at the end of the month, 
 representing the difference between what has been put in through 
 Cash and Purchases Journals, and what has been taken out for 
 purposes of manufacturing. 
 
 All ledger accounts in the right-hand group, on the other hand 
 (except Interest) , deal with items of such a nature that they are 
 passed at once into manufacturing month by month, and, there- 
 fore, do not have any balance remaining in them. The Works 
 Wages account, and the Works Salaries account are charged 
 from the Cash Journal. The Works Expense account may be 
 charged from either of the journals. Spoilage account, on the 
 other hand, is not chargeable, usually, from either of these 
 journals, but from another source about which we shall speak 
 later. In addition to the ledger accounts shown in this double 
 column, there are also other accounts which are charged to 
 Selling Expense. The total effect of these transactions is that 
 we have diminished our Cash account, or have incurred liability 
 which will ultimately lead to the diminishing of that account, and 
 we have piled up values received in one or other of a number of 
 accounts which are named according to the class of purchase 
 we have made. So far we have not dealt with any manufacturing 
 operations and have merely paved the way by preliminary 
 classifications of purchases in ledger accounts which classifica- 
 tions represent the subsequent uses of the articles purchased. 
 A fresh set of transactions which will lead to the withdrawal of 
 values from all these accounts and their combination in new 
 form, either in the interests of selling or of manufacturing, 
 has now to be considered.
 
 RECORDING PURCHASE EXPENDITURES 
 
 Reference has been mentioned more than once to the fact that 
 the accounts shown here are merely intended to be typical. 
 They will in most cases require amplification and more par- 
 ticularly will require subdivision, as for example, in the case of 
 Rents account, already just mentioned. Plant account also is 
 normally subdivided into a number of differenl plant and equip- 
 ment accounts. For example, buildings, machinery, tools, 
 power plant, transportation appliances, office equipment, etc., 
 will all have separate ledger accounts. But this is merely a 
 matter of convenience, and not a difference in principle. Our 
 purpose will be served if we consider the Plant account as typical 
 of a class of accounts. It may be subdivided to any extent that 
 is found necessary for any particular business. On the other 
 hand, there is no manufacturing business in which the Plant 
 account will be wholly absent and the same remark applies to 
 all the other accounts presented here. When the Cash and 
 Purchases Journals have been balanced up and all the postings 
 made, the first stage in manufacturing accounting has been 
 completed. This is by far the simplest stage, and except in 
 as far as the title of the accounts themselves are peculiar to 
 manufacturing, there is nothing special about this part of the 
 accounting scheme that is not common to all businesses which 
 begin by purchasing. Special peculiarities of manufacturing 
 accounting will be found, on the other hand, to commence 
 with the employment of the values which have been heaped up 
 in the ledger accounts just discussed. 
 
 In the ensuing chapters the groups of ledger accounts con- 
 cerned with manufacturing operations will be considered. Those 
 which are concerned with selling expense are outside the scope 
 of cost accounting and have been briefly dealt, with in Part I 
 in such a way as to show their relation to the general scheme of 
 accounts.
 
 CHAPTER IV 
 
 PURCHASES NOT IMMEDIATELY CHARGEABLE- 
 STORES 
 
 It has been pointed out that while some purchases are charge- 
 able immediately to production, as for example, the purchase of 
 labor in all its forms, others on the contrary are not so chargeable. 
 This may arise either from the transaction being a purchase in 
 bulk, for storage, of articles that will gradually be used and 
 charged only at the time of using, or it may arise from the nature 
 of the thing purchased, as for example, a new building, or a large 
 and powerful machine. It will be quite evident that a purchase 
 of 10 tons of copper, when the average monthly consumption is 
 only 1 ton, cannot be properly charged against the current month's 
 production when it happens to be received, and still less can the 
 purchase of a machine which will probably last for 15 or 20 
 years, be charged either against the current month or even the 
 current year in which the purchase happens to be made. 
 
 In all cases where purchases are not immediately chargeable 
 to production, it is necessary to set up mechanism for charging 
 out a proper amount in each current period, and also for ascer- 
 taining the balance left on hand at the end of each such period. 
 This balance is, of course, an asset, and the amount of it must 
 appear in the Balance Sheet if correct accounting is to be realized. 
 
 I. STORES 
 
 The first group of purchases which we shall consider under this 
 head of "purchases not immediately chargeable" is that com- 
 monly called "stores." This is a somewhat indefinite term, 
 being sometimes confined to mere supplies such as oil or waste, 
 and sometimes extended to all consumable articles which, at 
 some time or other will be charged to the shops, either for direct 
 manufacture or for service purposes. It is used in this work in 
 the latter souse. The dividing line between stores and certain 
 classes of tools and equipment is rather fine. A file is usually 
 
 156
 
 PURCHASES NOT IMMEDIATELY CHARGE ABU. L57 
 
 considered as stores, and so are the blades of a hack saw. But 
 the hack saw itself, even though its total cost may be far below 
 the value of some single transactions in stoics, is considered as 
 equipment. The division is, however, quite clear in practice. 
 Stores are charged when used. They are not subject to depre- 
 ciation, and are not charged out by means of a depreciation rate. 
 Items of equipment are never charged out as a whole, but always 
 by means of a depreciation rate. The significance of this dis- 
 tinction will be understood later, when the meaning of deprecia- 
 tion has been explained. 
 
 Storekeeping is a complex process, since it involves not only a 
 very large number of transactions, but each of these transact ions 
 is in itself manifold, and though not all of them become the 
 subject of accounting, most of them must collectively or indi- 
 vidually be reflected in the accounts. For the most part stores 
 are purchased in bulk, and their receipt must be accompanied 
 with a scrutiny to determine whether the delivery is strictly in 
 conformity with the terms of the order, and in some cases with 
 specification. The price has to be verified, the quantity vouched 
 for, the cost of freight ascertained and combined with the price 
 for accounting purposes, and then the stores themselves have to 
 be allotted a definite space, a definite reference number or symbol, 
 and a stores item ledger card appropriated to that particular 
 class of goods. All these transactions have reference only to the 
 receipt of stores. Their distribution to the shops and the ques- 
 tion of balances on hand form entirely new series of transactions. 
 
 In order to issue stores to the shops, the storekeeper requires 
 written authority, which not only is his voucher for parting with 
 the goods, but furnishes the necessary data for the proper charg- 
 ing of the item to the purpose (represented by an "order") 
 for which it has been consumed. The quantity involved is, of 
 course, also recorded, and then the item has to be priced out so 
 that the proper amount ma}" be credited to Stores account and 
 charged to the right division of production. It will be obvious 
 that in the majority of cases stores issue transactions will be 
 much more numerous, though for smaller amounts, than stores 
 receipts. 
 
 Each different kind of stores, and in a large plant these will 
 sometimes run into many thousands, usually requires a separate 
 accounting both as to receipt and issue. A ledger card is there- 
 fore appropriated to each such kind or article, and the first entry
 
 158 MANUFACTURING COSTS AND ACCOUNTS 
 
 on it, as mentioned above, is that recording the receipt in bulk, 
 and in some cases the cost of freight is also included. Later 
 entries will record the different quantities issued to the shops, and 
 also the order numbers to which they have been issued. At the 
 close of each day, or week, or month, as may be desired, a balance 
 may be struck on each of these ledger cards, and the balance 
 shown, as regards quantity, should correspond with the actual 
 quantity of that item actually and physically in the storehouse. 
 In modern plants, a number of such comparisons between the 
 quantity as shown by the ledger card and the quantity as ascer- 
 tained by count or weighing are carried out every day. This is 
 termed a "perpetual inventory." The term is not a good one. 
 "Continuous inventory" would more nearly describe both the 
 purpose and method of the work. 
 
 The principal ledger account concerned with stores is that 
 shown on the general diagram as "Stores account." This, 
 however, is merely intended as representative of a group of ac- 
 counts, which though all Stores accounts, are for convenience 
 allotted to particular classes of stores in some cases. Thus, for 
 example, we may have several special accounts for brass, copper, 
 pig iron, sulphuric acid, dyes, cotton, or whatever goods are 
 bought with sufficient frequency or in sufficient quantity to make 
 it worth while to provide a special ledger account for them and 
 one general Stores account for all other kinds of stores. On the 
 other hand, there is no absolute necessity for such subdivision 
 of the Stores account. It is simply a matter of convenience, 
 and where such subdivisions are not in use then a general ac- 
 count to be entitled Stores account or more properly Stores 
 Control account will serve every purpose of the most rigid 
 accounting. 
 
 When a Stores Control account is used, then it generally be- 
 comes desirable to have a number of strictly subsidiary accounts 
 in which detail can be grouped as and when required, and this 
 subdivision can be carried to any desired extent, until we have, 
 as in some engineering businesses, thousands of such subsidiary 
 Stores accounts. In the present work such accounts will be 
 termed Stores Item accounts to indicate that they are subsidiary 
 in character and merely represent the itemized detail of the 
 transactions reflected in the Stores Control account. 
 
 If we have 100 transactions, say, for example, purchases of 100 
 different kinds of stores, and if we list these in a Purchase Journal,
 
 PURCHASES NOT IMMEDIATELY CHARGE. 1 BLE 159 
 
 then, as shown in the previous chapter, it is a simple matter to :i<l< I 
 all these amounts together, and charge them in one sum to a 
 Stores account. Similarly if we have a list of another 100 trans- 
 actions representing issues of stores to the shops, and li^f these 
 in a suitable journal, then it is an equally simple matter to add 
 all the amounts together and credit them in one sum to Stores 
 account. Now when this has been done, if we take out the bal- 
 ance in Stores account, it obviously should agree with the actual 
 balance of stores physically remaining in the storehouse. For 
 many accounting purposes this is all that is necessary, provided 
 that a "stock-taking" or inventory is made at regular periods to 
 ensure that agreement between what should be in stores as shown 
 by the account, and what actually is there as ascertained by count 
 or weighing really does exist. 
 
 But under such an arrangement, if we find at the end of a 
 period that our stores balance is $50,000, that does not tell us 
 what quantity and value of the different kinds of stores we carry 
 still remain in the storehouse. It gives no itemized detail. 
 To obviate this inconvenience, the division of Stores account into 
 several accounts is frequently desirable, as mentioned above 1 , but 
 this subdivision cannot be carried very far in the general ledger 
 without becoming unwieldy. It will serve if we have say half a 
 dozen important lines of stores, and 50 or 100 kinds that do not 
 amount to very much. We can then provide separate stores 
 accounts for the former, and one general account for the latter. 
 But where our stores transactions are both numerous and range 
 over a large number of different kinds of material, then it be- 
 comes advisable to employ the device of a General Stores control 
 account, to which everything is charged and credited in lump 
 sums, and a card ledger of Item accounts, to which the individual 
 transactions are charged and credited. 
 
 The distinction between a Stores account, or several Stores 
 accounts in the General Ledger, and one Stores Control account 
 in the General Ledger controlling a number of Stores Item ac- 
 counts in a card ledger, should be thoroughly grasped. In the 
 former case each of the accounts ranks the same, and trans- 
 actions must be subdivided before posting to the General Ledger 
 at all. But when this posting is done, it is final. No further 
 detail is available anywhere. Where a Control account is 
 employed, all transactions can be listed and posted in one 
 (monthly) total to the debit of the account, and similarly to its
 
 160 MANUFACTURING COSTS AND ACCOUNTS 
 
 credit. But in this latter case the individual transactions must 
 themselves be posted, item by item, to the Item Ledger Cards, 
 so that we have not merely the balance of stores in hand as shown 
 by the Control account, but also we have the balance of each 
 individual kind of goods on hand as shown by the Item Cards. 
 
 These Item Cards represent the different kinds of stores we 
 carry. It must not be supposed, however, that, where Item 
 Cards are in use, it is necessary to have a card for every single 
 variety of stores. A card for miscellaneous or general stores can 
 be set up, and everything charged and credited to this that is 
 not represented by a special card. Thus if we have 1000 kinds 
 of stores, we may have say 200 specially allotted cards for the 
 200 most important classes of goods, and lump all the rest 
 together as miscellaneous. This is a matter for judgment in the 
 individual case, but generally speaking it is far better to have a 
 separate card for each variety of stores, as this minimizes the 
 chance of error, and, when the ledger is once opened, does not 
 increase the work as much as might be thought at first sight. 
 
 At any given moment the balances of all the Item Ledger 
 Cards should equal the balance in the Stores Control account. 
 No charge or credit must be made to the Control account that is 
 not made also to one or other of the Item Card accounts. The 
 Stores Control account lies in the main stream of the accounting 
 system, while the Item accounts are merely explanatory of the 
 lump sum entries in the Control account. It will be inferred, 
 therefore, that from a purely accounting point of view thej r are 
 not essential, and in fact their value is almost entirely an ad- 
 ministrative one. They provide a control over stores, permitting 
 frequent verification of balances in hand, signalling the con- 
 sumption of stores below a given minimum, and permitting in 
 some cases a considerable amount of planning in advance of the 
 purchase requirements, so that the demands of the shops take 
 nobody by surprise. 
 
 In a fully developed stores system, a Stores Item Ledger Card 
 will be assigned to each different kind of goods used by the plant. 
 These may run into the thousands, and it will therefore be 
 evident that the physical arrangement of the cards and the 
 physical arrangement of the storehouse must be brought into line. 
 The grouping of the cards must be similar to the grouping of the 
 goods as stored. And as it is more convenient and much quicker 
 to pick out cards by numbers than by names, a carefully worked
 
 PURCHASES NOT IMMEDIATELY CHARGEABLE L61 
 
 out system of symbolizing and numbering stores is essential to the 
 smooth working of the plan. 
 
 The creation of a symbol system is not the business of the 
 accountant, inasmuch as symbols are a kind of shorthand that 
 depends for its usefulness on purely technical considerations. 
 Their possibilities will vary with each kind of manufacture, and 
 they are found in practice in all stages of simplicity or complexity. 
 In setting up a Card Item Ledger, however, the guiding factor 
 will be accessibility, particularly to those items that are handled 
 most frequently. While in a general way the arrangement of the 
 cards must follow the symbol numbering system in use, the cards 
 most in demand can be separately and conveniently placed, or 
 alternatively can be distinguished by tabs or other signs so as to 
 be readily identified. 
 
 If we assume the case of a new plant, the working of the 
 Stores Item Ledger can be readily understood. As each consign- 
 ment of goods is received with the corresponding invoice, it 
 has a definite bin, rack, or other receptacle assigned to it, and 
 at the same time a distinguishing symbol number. A card is then 
 headed with the description of the goods and with this same 
 symbol. The weight or quantity of the consignment and the 
 purchase price are then entered on the card, and a price per unit 
 quantity figured. At the end of a week, if no stores have yet been 
 issued, the total found by adding all the card entries on an adding 
 machine will necessarily equal the total of all invoices received 
 for stores as disclosed by the amount charged against the Stores 
 Control account. In other words, these Item Cards are the sub- 
 division or explanation of the Control account total. 
 
 In the second week we will suppose that purchases have 
 ceased and that issues have begun. Every issue will require 
 pricing out at the current issue price found on the Item Card, 
 and all transactions being listed, and their total amount credited 
 to the Stores Control account, and further each transaction being 
 individually credited on the proper Item Card, it follows that if 
 we add all the credits on the Item Cards on an adding machine 
 they must equal the total amount credited to the Stores Control 
 account. It follows, from this and the foregoing paragraph, that 
 as the charges on the cards are equal to the charges in the 
 Control account and the credits on the cards are also equal to the 
 credit in the Control account, then the balances of all the cards, 
 if added on an adding machine must equal the balance in the 
 11
 
 162 MANUFACTVIUNC COSTS AND ACCOUNTS 
 
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 PURCHASES NOT IMMEDIATELY CJIAECEABLE 1 re- 
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 is $50,000, the cards will explain how this balance is made up — so 
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 much in 1-in. hexagon nuts, and so forth. 
 
 Figure 32 represents a typical Stores Item Ledger Card. 
 In posting to this card, the date and order number are entered 
 in the column headed "Transactions," the quantity and amount 
 of the transaction, if a receipt of material, being entered in the 
 left-hand column, and if an issue, in the right-hand column. 
 To begin with, the original or initial receipt of the item is entered 
 under "Receipts," and its quantity and amount also entered in 
 the column headed "Balance." Then, as each issue is entered 
 under "Issues," its quantity and amount is also deducted from the 
 figures in the balance column and the new balance substituted. 
 Similarly any fresh receipt of material is entered under receipts 
 and its quantity and amount added to the figures in the balance 
 column. By this means a running or continuous balance is 
 kept, the object of which is to ensure that the stock of that 
 particular item of stores shall not fall below a certain minimum 
 level which has been determined in advance. At the top of each 
 card will be entered both the minimum stock that should be 
 always in hand, and also the proper quantity to be requisitioned 
 when the minimum is approached. By this means unexpected 
 shortages are obviated, and on the other hand, excessive stocks 
 are also obviated, since both the minimum and the quantity to 
 be requisitioned for replenishment are both specified. 
 
 At the right hand of the card a column headed "Current Price 
 for Issues" will be observed. To begin with, this will be calcu- 
 lated on the purchase price of the goods, plus freight charges 
 where these are important enough to be posted to the account. 
 No further entry will be necessary in tlyis column until a fresh 
 receipt of goods has been entered, and only then if this fresh 
 consignment bears a different 'price from the earlier one. When this 
 happens, the entry is carried out as usual and the balance entered 
 in the balance column. A new price is then calculated by 
 dividing the total quantity in hand into the total amount or 
 value in hand. The resulting figure is then set in the price 
 column, and all future issues made at that price. 
 
 Figure 33 represents a more advanced form of Stores Item 
 Ledger Card, in which provision is made, not only for keeping 
 account of actual receipts and issues as they occur, but also for
 
 164 MANUFACTURING COSTS AND ACCOUNTS 
 
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 PURCHASES NOT IMMEDIATELY CHARGEABLE 165 
 
 registering quantities on order from supply firms, and quantities 
 appropriated to production orders already received, but for which 
 the goods have not yet been drawn out of stores. It will be seen, 
 of course, that these additional facilities are not matters of 
 accounting, but are purely of administrative interest. Never- 
 theless, as the practice of looking ahead in this way is making 
 rapid strides, it is as well that this additional function of the 
 Item Ledger Card should be discussed. 
 
 The middle portion of the card is exactly similar to that just 
 described and is used in precisely the same way. It takes care 
 of actual movements of stores inward and outward. The 
 division on the left hand headed " Orders" is intended to keep tab 
 on orders sent to supply firms for the item, and on deliveries 
 made on account of such orders. When a purchase order is 
 sent out, the date and order number are entered in the columns 
 provided, and the quantity is also entered in the left-hand 
 column of those headed "On Order." When a delivery is made 
 the quantity is crossed off. If on the other hand, only a partial 
 delivery is made, then the original quantity is crossed off, but 
 the balance yet undelivered is placed in the next column to thc 
 right. Thus if 100 articles are ordered, and only 75 delivered, 
 the 100 is crossed off, and 25 put in the next column. A glance 
 at this division of the card, therefore, shows exactly what quantities 
 are still to come in, and also the date and number of the order. 
 
 This information is chiefly useful when read in connection with 
 the division on the right of the card, headed "Appropriations." 
 The object of this is to record future demands due to production 
 orders on the item, so that when the balance actually on hand is 
 considered, and the balance of undelivered goods on purchase 
 orders also taken into account, the storekeeper can see whether 
 it is necessary to requisition for further supplies of the item, 
 without waiting for the minimum to be actually realized. Thus, 
 if there is a balance of 40 articles on hand, and production orders 
 are received and entered in the appropriations columns calling 
 for 70 articles in the near future, it will be obvious that immediate 
 steps should be taken to increase the stock. But on the other 
 hand, if the orders column shows that a purchase order for 100 
 articles has been recently given out and that 75 articles have yet 
 to be delivered on that order, then it is obvious that the situation 
 is pretty safe. It is, of course, understood that as an issue is made 
 on any of the production orders entered in the appropriation
 
 1(36 MANUFACTURING COSTS AND ACCOUNTS 
 
 columns, the original quantity is struck out and the new figure 
 representing unissued balance substituted, just as in the case of 
 orders, above described. By this means the appropriation 
 columns show the balance of quantities appropriated to produc- 
 tion orders but not yet issued, just as the order columns showed 
 the balance of quantities on purchase order, but not yet delivered. 
 
 This advanced variety of Stores Item Ledger Card cannot be 
 employed unless the administrative system of the plant is highly 
 developed. It implies some kind of planning department in 
 which each production order is dissected and a "bill of material" 
 made out before actual manufacturing operations are commenced. 
 Unless a mechanism of this kind exists the simpler form of ledger 
 card should be employed. 
 
 Having now shown how each different kind of stores is, or can 
 be, represented by an individual Stores Item Ledger Card, which 
 will disclose at any time the exact amount of such item that 
 should be on hand, we may now proceed to discuss the regular 
 routine of storekeeping, commencing with the receipt of goods.
 
 CHAPTER V 
 
 STORES {Continued) 
 
 The operations of storekeeping begin, naturally, with the 
 receipt of goods. The position of the storekeeper is somewhat 
 similar to that of a banker. He is responsible for what he receives 
 and this responsibility continues until he has issued it against a 
 proper authority or voucher. It is obvious, therefore, that his 
 duties will commence with a careful record of what he receives, 
 and he must also ensure that what he actually receives coin- 
 cides with what he is supposed to receive, i.e., deliveries must be 
 in strict conformity with orders and specifications. 
 
 The mechanism by which such conformity is insured will 
 vary in different plants and industries. The checking of weights 
 and quantities, the inspection of quality, the verifying of con- 
 formity to specification (which may in some cases involve 
 chemical or mechanical tests) are not matters of accounting. 
 We must assume, therefore, that each consignment is subjected 
 to all necessary scrutiny in these respects, and that on being 
 found acceptable, it is a proper subject for entry in the account- 
 ing system. 
 
 The principal operations involved in recording a receipt of 
 stores are these: 
 
 Recording the quantity and description. 
 
 Checking with the order. 
 
 Checking with the invoice. 
 
 Checking the invoice. 
 
 Entering invoice in Purchase or Voucher Journal. 
 
 Entering description and price in Stores Received Book. 
 
 Posting each item to Stores Item Ledger Cards. 
 
 Posting total of stores purchases for month to Stores Control 
 account. 
 
 The diagram Fig. 34 shows the principal blanks and books 
 used in connection with stores accounting. The Stores Control 
 account and its subsidiary Stores Item Ledger Cards are placed in 
 the center of the diagram. The forms on the left have to do 
 
 167
 
 168 MANUFACTURING COSTS AND ACCOUNTS 
 
 
 
 
 
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 STORES L69 
 
 with charges to Stores accounts and those on the right to crediting 
 the same accounts. 
 
 On receipt of a consignment, the first accounting step is to 
 compare the quantity and description with the copy of pur- 
 chase order which will be on file. If this is correct, a "Goods 
 Received Note" (Fig. 35) is made out in duplicate. One copy 
 is forwarded to the general office, and one remains on file. The 
 copy sent to the office awaits the arrival of the priced invoice 
 and is attached thereto if in order. The invoice is then checked 
 up with the purchase order, as to quantity, description and price, 
 extensions are checked, and the invoice certified as correct. The 
 first step in actual accounting is then made by entering the 
 invoice on the Purchases or Voucher Journal, and allocating the 
 amount to the stores column. At the month end the total in 
 this column is carried to the debit of the Stores Control account 
 as shown in the diagram. 
 
 The individual items of stores received have now to be charged 
 to the individual Stores Item Ledger Cards. We have already 
 the quantity and description of each item on the Goods Re- 
 ceived Notes duplicate retained by the receiving clerk. But 
 so far the storekeeper, or the bookkeeper in charge of the Stores 
 Item Ledger, has no knowledge of the price to be entered against 
 each consignment. To convey this information to him various 
 methods may be adopted. One way is to require invoices in 
 duplicate from the supplying firm. One copy of these, after 
 certification, is passed to the Item Ledger keeper for his use. 
 
 A less elaborate method is to pass the invoices themselves 
 to the Item Ledger keeper, after they have been entered on 
 the Purchases Journal. They are returned to the office after 
 the necessary entries have been made from them. A somewhat 
 better plan is to make use of the copy of the Goods Received 
 Note that was attached to the invoice. After the latter has 
 been certified, the price is marked on the note in the space pro- 
 vided, and the note itself detached and sent to the Item Ledger 
 keeper who then has before him all the necessary data for his 
 entries. And he can sort these notes into any order that will 
 facilitate his work. 
 
 Whichever of these methods is employed, the entries should 
 first be made in a Goods Received Book (Fig. 36). This pro- 
 vides columns for date, goods received note number, supply 
 firm name, purchase order number, description of item, stores
 
 170 MANUFACTURING COSTS AND ACCOUNTS 
 
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 STORES 
 
 171 
 
 reference number, quantity, price, two columns for 
 
 and ledger card respectively, and 
 
 amount. This book is the official 
 
 record of goods received. It is the 
 
 official source for charges to the Item 
 
 Ledgers, and regulates the work of the 
 
 stores bookkeeping in other ways. 
 
 Assuming that the certified and 
 priced Goods Received Note method 
 is that employed, the ledger keeper 
 begins by sorting his notes into groups 
 according to the classes of goods. He 
 then turns to the index of Stores 
 Reference Numbers, which is a clas- 
 sified list of all the different stores 
 carried, with their reference symbols 
 attached (described under Issue Price 
 Register, below). These symbols he 
 marks on the notes. He is then 
 ready to begin making his entries. 
 All the entries indicated by the above 
 columns in the Stores Received Book 
 will be easily understood, with the ex- 
 ception of the column headed "Price 
 Register." This is only used if the 
 new consignment alters, in any case, 
 the issue price of the item, as will be 
 explained later. 
 
 Having entered all his notes and 
 endorsed them as entered by means 
 of a rubber stamp or otherwise, these 
 notes should then be sorted back in 
 numerical order, so as to ensure thai 
 no notes have been missed in the 
 course of their various handlings. 
 Missing numbers should be traced 
 and every consignment of goods thus 
 accounted for in the Stores Received 
 Book. 
 
 The next step is to post, item by 
 item, all the entries in the Stores 
 
 price register 
 
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 172 MANUFACTURING COSTS AND ACCOUNTS 
 
 Received Book to the proper ledger card, as indicated by 
 the symbol number. As it is easy to make errors in such 
 numbers, the precaution should be taken of verification by 
 observing the name of the item on the card at the time of making 
 the charge. As each item is posted, the new balance is taken out 
 as described above, and if the new purchase price is different 
 from the former issue price, a new issue price must be calculated 
 and entered in the column provided. This new issue prico 
 must also be entered in the price register column in the Goods 
 Received Book, so that the price may be recorded on the Issue 
 Price Register as will be described presently. As the posting 
 of each item is completed a check mark is placed in the column 
 head "Ledger Card" to indicate that it has been dealt with. 
 
 When all these operations are completed, the ledger cards 
 will be up to date as far as receipts are concerned. Nothing 
 further can be done until the month end, when the following 
 agreement must be made: 
 
 The total of the stores column in the Purchase or Voucher Journal 
 must be agreed with the total of the amount column in the Stores 
 Received Book. If any discrepancy exists it signifies that the 
 Stores Control account and the Stores Item Ledger accounts 
 will not agree if tested, and such discrepancy must, of course, be 
 hunted down and rectified. 
 
 We have now to consider the other side of the diagram (Fig. 
 34) . This has to do with the issues of stores, and the mechanism 
 whereby Stores Control account on the one hand is credited 
 with the total issues of stores for the month, and the Item 
 Ledger Cards, on the other hand, credited with the individual 
 issues of stores items as they occur. It has already been stated 
 that before parting with any item of stores, the storekeeper 
 requires some authority or voucher, just as a banker requires a 
 written order or check. In practice, however, such authority 
 varies in character, and does not always take the shape of a 
 specific written order for each issue. 
 
 The difference between system and "red tape" lies in the more 
 perfect adaptation to circumstance of the former. Red tape is 
 in fact due to a kind of mental inertia that refuses to recognize 
 differences where they exist, and attempts to apply general 
 solutions to problems that are really different. A carefully de- 
 signed system on the contrary is based on a full appreciation of 
 consequences. It gives due weight to the relative importance
 
 STORES 173 
 
 of things. If, therefore, it is to be recognized as a general prin- 
 ciple that the storekeeper shall have authority for each dis- 
 bursement of stores, that does not necessarily imply that a 
 separate written order shall be forthcoming for the issue of a 
 pencil, for replenishment of an oil-can, or for a pad of scratch- 
 paper. 
 
 Authority to the storekeeper to disburse goods will generally 
 take two forms. First, authority in the form of standing orders, 
 which permit regular supplies of oil, waste, files, stationery and 
 other current supplies, to be issued without the formality of 
 written vouchers, control being based upon observation of the 
 amount of such issues at regular periods. Secondly, authority 
 in the form of written requisitions or vouchers, which specify the 
 articles required, and the order number to which they are to be 
 charged. 
 
 These latter requisitions, again, may take various forms. 
 In some businesses by far the larger part of the stores that will 
 be required on a given production order can be determined in 
 advance with close precision. In such cases, the authority to the 
 storekeeper takes the form of a specification or "bill of material" 
 enumerating all the items that are required for each order. It 
 is from such bills of material that the appropriation columns in 
 the Stores Item Ledger described in the last chapter, are filled 
 out. When this method is in use, all that is necessary to complete 
 the system as far as the storekeeper is concerned, is some mechan- 
 ism by which the signature of the person who actually draws out 
 each item from stores can be recorded against each such item. 
 
 In other cases, either because the administrative system of 
 the plant is not sufficiently advanced, or on account of the nature 
 of the business, requisitions are made on the storekeeper only as 
 and when the necessity for the item is discovered. Such requisi- 
 tions must come from someone having recognized authority to 
 make them, just as a banker will only honor checks on a corpora- 
 tion's account from officers who have received formal authority 
 to sign them. Here again there is frequently an opportunity for 
 red tape, namely, by so arranging that the person signing shall 
 have only a perfunctory interest in the matter, as where a busy 
 foreman has to countersign an order for a few bolts. It is far 
 better to issue the bolts to the man using them, on his own 
 application, leaving it to the foreman to hold the man responsible 
 for any misuse of the privilege, which an exact system of stores
 
 174 MANUFACTURING COSTS AND ACCOUNTS 
 
 accounting could not fail to bring to light sooner or later. On 
 the other hand, if the foreman has few enough men under him, 
 so that he is in close touch with the detail of every man's work, 
 then the requisitioning of stores may be confined to him. 
 
 The details of such arrangements will vary with each plant 
 considered. Generally speaking, however, articles of the nature 
 of regular supplies that do not enter directly into production 
 orders will be handled most satisfactorily by standing orders 
 for regular quantities, while all material entering into production 
 directly must be authorized by either bills of material or indi- 
 vidual requisitions or vouchers. ' In all cases the following 
 elements will be necessary to a proper stores issue transaction: 
 
 Authority. 
 
 Kind of stores. 
 
 Quantity or weight. 
 
 Order number to which chargeable. 
 
 Signature of person taking away. 
 
 , Stores Requisition 
 
 
 DeDt. No. 
 
 
 
 Qty. 
 
 Description 
 
 Charge to 
 
 Price 
 
 
 
 
 
 
 
 — 1 F 1 " 
 
 Issued 
 By 
 
 Received 
 Bv 
 
 y 
 
 Dnt»> 
 
 
 1 wrc-iiiun 
 
 Fig. 37. — Stores Issues Note. 
 
 Figure 37 represents a Stores Requisition embodying these 
 elements. Such blanks will be useful for all the ordinary trans- 
 actions of issue. For stores issued on standing orders, a rough 
 issues book can be kept in which columns are assigned for each 
 of the above elements, omitting the first. As regards issues 
 made on bills of material the procedure will vary according to the 
 way in which the issues are made. When it is the practice to 
 assemble all the items on a bill of material, and issue them in one 
 lot at one time, the transaction is completed by signature of the 
 bill by the person taking away the goods. Where, on the other 
 hand, the issues are made at different times, it is perhaps simpler 
 in the end to fill out a requisition for each issue, which can be 
 .signed by the drawer — a note of the requisition number being
 
 STORES 175 
 
 made on the bill of material, thus avoiding the possibility of 
 
 duplicate withdrawal. 
 
 The essential features of an issue transaction, from the store- 
 keeper's viewpoint, are the obtaining of a record which shall clear 
 his responsibility, and at the same time form the basis of pricing, 
 so that the necessary accounting entries of the transaction may 
 be effected. After issue of the goods he will be in possession of 
 rough memoranda, either in a Standing Order Issue Book, or 
 in the shape of signed bills of material and requisitions, indicat- 
 ing quantities and descriptions of stores issued, and the next step 
 is to ascertain the money value of these transactions, or in other 
 words, to price them out. 
 
 The pricing out of stores is always a troublesome matter on 
 account of the great variety of kinds and sizes usually involved. 
 Every article, though differing only minutely from another, as 
 for example a series of nuts and bolts or wood-screws, has an 
 individual price, and to make matters worse such prices in many 
 cases are not stationary, but will vary with each new consign- 
 ment of goods received. It is probable that greater inexactness 
 creeps in at the pricing stage than at all other stages of store- 
 keeping. Arrangements for identifying items, and ascteraining 
 their correct issue price, demand therefore somewhat careful 
 consideration. 
 
 In the previous chapter the manner in which the receipt of a 
 consignment of goods at a new purchase price is entered on the 
 Stores Item Ledger Card, and a new issue price calculated, was 
 described. When transactions are few, this record will suffice, 
 as the ledger card may be turned up, the current issue price ascer- 
 tained, and the necessary entries made all at one time. Gener- 
 ally speaking, however, this simple procedure is impracticable. 
 The ledger keeper will be too busy to attend to both pricing and 
 posting and a separate pricing mechanism must be set up. 
 
 Figure 38 represents a convenient form of Issue Price Register. 
 This is in the form of a "Rand" index, which consists of slips of 
 paper enclosed in flat transparent celluloid tubes, each such slip 
 and tube being independent of the others, and the slips, or any 
 of them, can be pushed up and down in the frame as required. 
 It follows that a new slip can be inserted at any point between 
 any two existing slips, so that, if the slips are arranged in alpha- 
 betical order or by sizes, any new item can be inserted in its 
 proper place. Just as a card index is in essence a book with
 
 176 MANUFACTURING COSTS AND ACCOUNTS 
 
 removable leaves (and the loose-leaf derivative of the card index 
 is actually a book with removable leaves) so the "Rand" 
 index is a leaf with removable lines. Its advantage over a card 
 index is that each leaf can be run down with the eye, exactly as a 
 dictionary or a directory, saving a great deal of time in turning- 
 over cards to find the required item. If, for example, we have 
 one leaf devoted to "wood-screws," then all the range of sizes 
 (up to about 80) are displayed before the eye, and the required 
 size and its price can be picked out more quickly than by any 
 other method of indexing. Also, should a new size of screw make 
 its appearance in stores, a new slip bearing its data can be placed 
 in exactly the correct sequence, according to the manner in which 
 the reference has been arranged. 
 
 It will be easy to understand that a number of "Rand "index 
 leaves, with their line slips, can be arranged so that any item of 
 
 Class of Item. 
 
 "V 
 
 Ref. 
 No 
 
 Item. 
 
 Size or other 
 Identification 
 
 Changes in Issue Price 
 
 Issue 
 Price 
 
 Fig. 38. — Issue Price Register (Rand index type). 
 
 stores can be found in short order. The leaves being classified 
 by kinds of goods, form not only a pricing index but also a loca- 
 tion index to the contents of the stores, if the stores reference 
 numbers are a guide to the location, as they should be. 
 
 The column ruling of the slips will usually provide the follow- 
 ing data: 
 
 Name of item. 
 
 Size, or other identification. 
 
 Stores reference number. 
 
 Current price. 
 
 In addition to the ruling on each slip, each leaf will have a tab 
 at the top or side, specifying the class of stores dealt with on such 
 leaf. Examples of such tab headings are: "Wood-screws," "Forg- 
 ings," "Brass castings," "Dyes," "Oils," "Files," etc. 
 
 Supposing such an index to be compiled at the first starting of a
 
 STORES 177 
 
 plant, it will be evident that arrangements must be made, first, 
 for the regular and systematic addition of new varieties of stores, 
 and secondly, for the regular alteration of issue prices, whenever, 
 by the reduced or increased price of new consignments, the 
 former issue prices are no longer correct. Such an arrangement 
 was provided by means of a special column in the < roods Received 
 Book (see above) headed "Price Register." The use of this 
 column will now be explained. 
 
 When, in posting from the Goods Received Book to the Stores 
 Item Cards, it is found that a new issue price is involved, this is 
 worked out and entered in the price column on the card, as 
 described above, and also entered in the "Price Register" column 
 in the Goods Received Book. The same procedure is followed if 
 the item is a new kind of stores requiring a new Stores Item Card 
 to be made out for it. Only in the latter case, an indication, 
 such as the letter "N" is placed alongside the price, to show that 
 a new price slip must be made out for the item. A glance down 
 this column in the Goods Received Book will show the pricing 
 clerk exactly what price slips have to be altered, and what new- 
 ones are necessary. The data can be kept up to date in this way 
 with a minimum of trouble. 
 
 The first step in accounting for stores issues is, then, the 
 pricing out of the items issued and the affixing of the symbol 
 number, if this is not already done. The next step is to compile 
 an official Stores Issues Book, which bears the same relation to 
 the credit side of the Stores Item Ledger Cards as the Stores 
 Received Book does to their debit side. The information to be 
 provided for in this book will naturally be the same as that on the 
 Stores Requisition Notes. 
 
 As the number of transactions of stores issues is commonly 
 much greater than that of goods received, it is desirable to 
 economize work as much as possible. To this end it is advisable 
 to post to the Item Ledger Cards from the original documents, 
 and make summaries in the Stores Issues Book only by groups of 
 items or by departments as may be found convenient. But as it 
 is most important that the total in the Stores Issue Book should 
 coincide with the actual credits to the card ledger, special pre- 
 cautions must be taken. 
 
 As soon as all the stores requisitions have been priced out, 
 
 they should be added on an adding machine to ascertain the total 
 
 amount involved. They should also be consecutively numbered 
 12
 
 1 7S MANUFACTURING COSTS AND A('( '<)l 'NTS 
 
 by a numbering stamp. The amount and the first and last 
 numbers having been temporarily entered in the Stores Issues 
 Book, the notes may be handed to the card ledger keeper for 
 posting to his cards. As he does this he should stamp each Note 
 to that effect. Whatever documents are handed to him should 
 be treated in the same way, i.e., some of the documents may be 
 Stores Requisition Notes, others Bills of Materials, and others 
 again the pages of the rough book kept for recording issues against 
 Standing Orders. They should all be consecutively numbered 
 and all included in the total. When he has entered all on his 
 ledger cards, they are returned to the clerk in charge of the Stores 
 Issues Book, and his first step is to see that all the numbers are 
 
 Total 
 Stores Issued Date SViPPt No ,? or ? 
 
 Sheet 
 
 
 Order No. 
 
 Dept, 
 
 Description 
 
 Number 
 
 $ 
 
 Job No. 
 
 Weight 
 
 Order No. 
 
 Dept. 
 
 Description 
 
 Number 
 
 $ 
 
 Job No. 
 
 Weight 
 
 Order No. 
 
 Dept. 
 
 Description 
 
 Number 
 
 $ 
 
 Job No. 
 
 Weight 
 
 
 
 
 Fig. 39. — Stores Issue Record (sectional type). 
 
 returned, and that the total amount is accounted for. He then 
 can proceed with entering up the Stores Issues Book. 
 
 The grouping of the items of stores issues in this book will 
 depend upon the arrangement of the plant in the first place, and 
 secondly, on the nature of the monthly returns that are expected 
 by the administration. Stores issued on standing orders will 
 form one group, those of production orders another group. Both 
 these classes may be subdivided in various ways. Then in some 
 plants a distinction will be made between departments, all the 
 items issued to one department being entered separately from 
 those in other departments. These distinctions will be dis- 
 cussed at a later stage, it being sufficient to note now that the 
 whole of the stores issues must be entered in either one or several 
 totals in the Stores Issues Book.
 
 STORES 17'.- 
 
 Figure 39 represents a simple form of Stores Issues record, 
 suitable for a small plant or a repair shop. As each issue of 
 stores is made, whether on standing or production orders, the 
 quantity, description, order number, department, etc., are 
 entered on one of the "sections" between the heavy black lines. 
 Only one item is entered on one section. As each sheet is filled 
 out, it is turned over to the pricing clerk to be priced, and the 
 symbol number added, and at the end of the day or other con- 
 venient period, each sheet is added and the total amount entered 
 on the stub at the top. All the stubs being aggregated, a tem- 
 porary total is entered on the Stores Issues Book and the sheets 
 are then passed under a knife (a cutting machine such as is used 
 for photographic prints answers very well) and cut across at the 
 heavy black lines. Each item is thus set free so that it can be 
 sorted into any grouping desired. 
 
 The sections are first sorted in this way into groups represent- 
 ing standing orders and production orders respectively, and then 
 any further subdivision by departments or series of order numbers 
 is made by further sorting, and the final groups of sections are 
 then aggregated on an adding machine and their amounts entered 
 on the Stores Issued Book (Fig. 39A). The total of such groups 
 must of course agree with the total of the stubs temporarily 
 entered as above described. 
 
 The sections are then ready for the use of the Item Ledger 
 clerk, who, in his turn, sorts them into whatever grouping is 
 most convenient for him, and proceeds to post them to credit of 
 his ledger cards. 
 
 Where many transactions have to be posted daily to a Card 
 Item Ledger, and balances taken out, the work will be facilitated 
 by using a keyboard arithmometer calculating machine of the 
 "positive" type, such as the Monroe. The old balance is struck 
 on the keyboard and transferred by a turn of the handle to the 
 arithmometer dials, the quantity and amount of the issue or 
 receipt is then struck on the keyboard, and a right- or left-hand 
 turn of the handle either adds or deducts the figures, leaving the 
 new balance visible in the dials. The importance of correct 
 calculation of balances makes the use of a machine advisable 
 where such balances are being taken out hour after hour. 
 
 The result of the transactions as to stores issues above de- 
 scribed may now be seen as a whole. First, we shall have a 
 complete itemized record of each issue in the form of notes,
 
 180 MANUFACTURING COSTS AND ACCOUNTS 
 
 
 
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 STORES 181 
 
 bills of material, rough issue book, or perhaps of the "sections" 
 just described. The actual form is of very little consequence 
 provided it fulfils the conditions laid down as essential. This 
 record is then priced out and the proper stores reference symbol 
 number affixed, if this has not already been done, and the whole 
 of the items are then summarized in one or more groups and 
 entered in a Stores Issues Book. Each item is also credited 
 individually to the Item Ledger Card as indicated by the symbol 
 number. We have therefore a number of individual credits on 
 the cards and a total of these credits in the column of the Stores 
 Issues Book. The next step is to verify this amount in some 
 way, and to observe how it agrees with a crc< 1 i t made from another 
 source to the Stores Control account. Before this can be under- 
 stood some little explanation is necessary. 
 
 The object of recording each issue of stores in detail is not 
 only for storekeeping purposes. It is also necessary for ascer- 
 taining manufacturing cost. The standing orders above referred 
 to, for example, represent various classes of expense such as re- 
 pairs, cleaning and maintaining machinery, running the pow r er 
 plant, etc., that do not go directly into any production order. 
 It is necessary to ascertain the value and nature of stores issued 
 against each of these kinds of expense. The standing orders are 
 arranged so that such expense can be grouped intelligibly. 
 
 Similarly with regard to production orders. These are issued 
 for the purpose of keeping the expenditure on each such order 
 distinct from that on the others. Therefore even though no 
 Stores Item Ledger were kept, it is still necessary to record and 
 price out every item issued from stores so that its value may be 
 entered on Cost Sheets. Every order, whether standing or pro- 
 duction, has its own individual Cost Sheet. 
 
 Further than to note their existence and their purpose we have 
 nothing to do with Cost Sheets at the present moment. It is 
 necessary, however, to state that all the documents used by 
 the card ledger clerk for entering up his credits (i.e., Notes, bills 
 of material, sections, etc.) are also used subsequently by the cost 
 clerk for the purpose of making charges to his Cost Sheets. The 
 items have been taken out of stores, and they have been put into 
 manufacturing. So far the blanks and books described have had 
 to do only with the former set of transactions. The way in which 
 Cost Sheets are arranged and charged will be discussed later. 
 
 It is sufficient to say here that they are so charged and that
 
 182 MANUFACTURING COSTS AND ACCOUNTS 
 
 every item of stores issued is represented by an entry on one or 
 another of the Cost Sheets. Consequently if we make a list of 
 the stores values charged to Cost Sheets during any period, that 
 list can be, and is, used as the official source of crediting Stores 
 Control account and charging manufacturing accounts of various 
 kinds with the value of stores consumed. It is this total that 
 must be checked with the total in the Stores Issue Book, to ensure 
 that all the credits to Item Cards when aggregated equal the 
 credit made from manufacturing to Stores Control account. 
 
 The diagram of stores receipts and issues, Fig. 34, shows 
 the relation of the different books and blanks involved. The 
 Stores Issues Note (or its equivalent in other form) is connected 
 by a double line with the price record, and by single lines with 
 the Stores Issues Book on the one hand, and with the Cost Sheets 
 on the other. From the Stores Issues Book lines are drawn to 
 the credit side of the Item Cards, because theoretically such 
 credits are made from the Stores Issues Book, though to econo- 
 mize work they are usually made direct from the original docu- 
 ment and only a summary entered in the Stores Issues Book. 
 It will be seen therefore that the story of the stores issues as told 
 by the Item Ledger Cards will be the same as that told by the 
 Cost Sheets, only the transactions will be classified in an entirely 
 different way, namely, according to kinds of stores in the one 
 case, and according to order numbers (that is to say according 
 to the uses made of the stores) in the other. 
 
 It will also be understood that if we list the entries on the Cost 
 Sheets which have reference to stores issues during say a month, 
 the amount ought to agree with the summaries in the Stores 
 Issues Book for the same period. This listing is effected in a 
 journal, or rather in two journals, one relating to standing orders 
 (or burden) and the oilier relating to production orders. And 
 from these journals, only one of which is shown in the diagram, 
 a credit is made to Stores Control account, which credit must be 
 agreed with the total of stores issued as shown by the Stores Issue 
 Book.
 
 CHAPTER VI 
 STORES (Continued)— CONTINUOUS INVENTORY 
 
 The whole c} r cle of stores transactions has now been de- 
 scribed. As regards the main stream of accounting it is very 
 simple, as will be seen from an inspection of the diagram, Fig. 34. 
 The invoice, representing a purchase of stores, is entered on the 
 Purchases or Voucher Journal, and this ultimately credited to 
 the supply firm (or to Accounts Payable) and charged to Stores 
 Control account. The Stores Issue Note representing an issue 
 of stores is entered on a Cost Sheet, and the current charges to 
 this Cost Sheet being entered in a Manufacturing Journal at 
 the end of the month, the value of the issue is ultimately credited 
 to Stores Control account and charged to one of the manufactur- 
 ing accounts. At any given moment there will be a balance in 
 Stores Control account representing the value of stores on hand 
 and not yet issued. 
 
 In some businesses this is all that is done to control store- 
 keeping. In other businesses more than this is felt to be nec- 
 essary, and in that case a set of subsidiary Stores Item accounts 
 are set up and charged and credited in the manner described 
 above. The balances in these Item Ledger Cards if added 
 together will equal the amount of the balance in Stores Control 
 account at any moment. 
 
 It has also been explained that one object of keeping Item 
 Cards is to enable watch to be kept on the replenishment of 
 stores, and in some cases, the planning of supply some distance 
 ahead is also effected by using space on each card for a record of 
 purchase orders given out, and appropriations to production 
 orders. 
 
 Lastly, the employment of Item Cards enables the trouble- 
 some and costly process of periodical "stock-taking" to be 
 eliminated. In place of the general upset involved in stock- 
 taking, a regular routine is set up called a "perpetual" or 
 "continuous" inventory which may now be briefly described. 
 
 As the balance of each item of stores that is supposed to be 
 
 183
 
 184 MANUFACTURING COSTS AND ACCOUNTS 
 
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 day — a fresh balance being 
 made after every new re- 
 ceipt or issue — it will be 
 obvious that it is a simple 
 matter to verify the accuracy 
 of such balance by simply 
 counting or weighing the ar- 
 ticles in question. If then 
 matters are so arranged that 
 the items most frequently 
 used, and those of which the 
 unit value is high (such as 
 brass or copper) are verified 
 at frequent intervals, and 
 the less important materials 
 less frequently several valu- 
 able results are attained. In 
 the first place, the physical 
 verification is more likely to 
 be correctly made than when 
 done under the pressure and 
 scramble of a general stock- 
 taking. Secondly, the fact 
 that frequent comparison of 
 actual stocks with their book 
 amounts is made has a satis- 
 factory influence on the men 
 who are responsible for issues, 
 and makes them more care- 
 ful to see that proper record 
 is made of every transaction, 
 and that nothing is given out 
 without a record. Thirdly, 
 expensive mechanical appli- 
 ances for weighing and count- 
 ing, that greatly reduce the 
 amount of the work and in- 
 crease its accuracy, can be 
 employed, since a large num- 
 ber of such operations are 
 not being carried on simul-
 
 CONTINUOUS INVENTORY 185 
 
 taneously. Finally, stronger confidence is felt in the accounting 
 when it is known to be supported by a continuous verification 
 of this kind. 
 
 The system of continuous inventory should be carefully 
 planned in advance. The whole of the stores should be reviewed 
 and scheduled so that the stocktakers give the right amount and 
 frequency of attention to the important items. And systematic 
 record of discrepancies must be made, not only because they 
 must be adjusted in the books, but also to ascertain where and 
 why errors occur with greatest frequency. 
 
 Figure 40 shows a suitable form of Continuous Inventory 
 Report. The principal provisions are: symbol number; de- 
 scription of item, size, etc.; quantity and amount of balance on 
 hand as shown by the Item Ledger Card; quantity and amount 
 of articles actually on hand as found by survey; and two further 
 columns to take care of the difference between ledger and survey 
 values, one being for all cases in which a surplus is found, that 
 is to say, where more articles exist in the storehouse than are 
 indicated by the Item Card, and the other for all cases where a 
 deficit is found, that is, where fewer articles are found by the 
 survey than indicated by the Item Card. 
 
 The question of the disposal of discrepancies is a matter of 
 some difficulty, since it is not obvious at this stage how they 
 have originated. Of course if a discrepancy is serious in amount, 
 whether of the nature of a surplus or a deficiency, every effort 
 must be made to trace it, and discover how the error has been 
 brought about. But minor errors will certainly be found 
 and though each of these may be inconsiderable, and moreover 
 some being deficits and some surpluses, will tend to cancel out, 
 still it is obvious that they must be dealt with somehow in the 
 accounts in a systematic way. 
 
 If, on taking an inventory of a particular item, it is found that 
 there is a deficiency, say only 50 articles worth $10 where the 
 Item Ledger Card shows an expected balance of 80 articles 
 this discrepancy may have arisen from one of several causes. 
 First, it may have been due to a failure to post a credit from the 
 Stores Issues Note to the Item Ledger Card. Or it may have 
 been due to the articles having been taken out of stores with- 
 out any record being made of their issue. Or such a record may 
 have been made, but lost. This loss may have taken place 
 (in the absence of proper precautions as described above) alter
 
 186 MANUFACTURING COSTS AND ACCOUNTS 
 
 entry was made on the Stores Issues Book, and before entry 
 on the ledger card. 
 
 Now some of these errors are confined to the Stores Item 
 Ledger and some have a wider effect. A mere failure to post 
 an entry would be rectified by making a belated entry after 
 survey had shown the discrepancy to exist. But if an issue has 
 been made without any record, then Stores Control account, 
 Cost Sheets, and Stores Issue Book will all be wrong, as well as 
 the Stores Item Ledger itself. If a record was lost between the 
 Stores Issues Book and the ledger clerk, this would have the 
 effect of a failure to post, and could be rectified in the same way, 
 but if the documents are used by the cost clerk after the ledger 
 clerk, then Cost Sheets would be in error also. 
 
 If it is possible to add the balances on all the cards on an add- 
 ing machine at the end of each month, and check the total 
 so obtained with the total in Stores Control account, and this 
 can readily be done if the number of cards is not too great, then 
 we divide errors at once into tw r o classes — errors of posting and 
 failures to record issues. Discrepancy between the total in the 
 Control account and the aggregate total of all the cards is 
 obviously a bookkeeping error, but if these agree, and dis- 
 crepancies are found between the item card balance and actual 
 survey, these latter will be due to either failure to record issues 
 or to incorrect record of issues. 
 
 With knowledge of the correctness of the card totals, rectifica- 
 tion of discrepancies can be made on a surer basis. If during 
 a month a net shortage of stores amounting to $50 is discovered 
 by survey, this amount is really chargeable to Manufacturing, 
 since it represents items that should have been charged out but 
 have not. As it will probably be impossible to ascertain to 
 what order number it ought to have been charged (unless any 
 individual item is considerable) all we can do with it is to charge 
 it to Works Expense, by which means it will ultimately be dis- 
 tributed over Production in the shape of burden. This can be 
 done by a journal entry each month. 
 
 On the other hand, if a comparison of the totals of all the 
 cards with the balance in Stores Control account reveals a 
 larger balance in the item cards than in the Control account, this 
 discrepancy is not chargeable against anything, because the 
 Control account balance is the true accounting balance, and 
 the Item Cards are mere memoranda which have failed to tally
 
 CONTINUOUS INVENTORY 187 
 
 with the official account. In general such a discrepancy will 
 mean failure to post one or more stores issue items, though, of 
 course, it may also imply a simple clerical error either in entry 
 or calculation of balances. If such errors persist, the remedy 
 is more careful posting and in particular, verification after each 
 set of postings of the amounts so posted, and the resulting 
 balances. This is troublesome and takes time, but on the 
 other hand incorrect records are worse than useless. 
 
 The simplest way of verifying postings of stores issues is 'to 
 enter them in batches of say 50 at a time. First the total charges 
 on the 50 notes are added on a machine. Then the postings are 
 made, the former balances being noted on a long slip of paper. 
 The new T balances are made, entered on the card, and also on the 
 slip of paper alongside the previous balance. When all the 50 
 entries have been completed, the old balances on the slip are 
 added up, and the original total of charges added to this amount. 
 The two together will equal the total of the new balances. If a 
 discrepancy appears, the list is cut in half, and the additions made 
 on each half. This will confine the error to one of 25 entries, 
 which can then be compared until the faulty one is discovered. 
 Generally speaking the idea is to confine possible error to small 
 groups of entries and clear up the verification of each group before 
 proceeding. 
 
 This question of errors in Stores Item Ledgers and discrep- 
 ancies with surveys has been discussed at some length because not 
 infrequently, a system of the kind is installed and subsequently 
 abandoned as unworkable owing to the discouraging amount 
 of errors and discrepancies constantly coming to light. And of 
 as has been pointed out, such errors may mean several things, 
 may come from various sources, and demand different methods 
 of rectification. But the discouragement experienced from the 
 high percentage of discrepancies would be largely obviated if it 
 was felt that the balances on the Item Cards were at least to be 
 depended on from the bookkeeping viewpoint. This can come 
 about only by monthly comparison of the total balances in the 
 Item Cards with the balance in the Stores Control account, and 
 in general a perfect agreement between these can only be secured 
 by a system of verifying postings as they are made, as just 
 described. 
 
 But if we are sure of the correctness of our cards, and that they 
 really represent all the recorded transactions, thou the field is
 
 188 MANUFACTURING COSTS AND ACCOUNTS 
 
 narrowed down considerably if surveys disclose considerable dis- 
 crepancies. For as pointed out above, such discrepancies can 
 only arise from carelessness in making issue records, either in 
 the way of issuing stores without any record at all, or from in- 
 correct records as to kinds and amounts. This being the case, 
 the proper remedy is obvious and is not difficult to apply. 
 
 There is, however, another possible error in Stores records 
 of an even more subtle character, easy to make and very diffi- 
 cult to detect. This is an error in pricing. If, in pricing out a 
 Stores Issue Note, for, say 15 articles, the unit price is read as 
 18 cts. instead of 23 cts., or if a wrong extension is made, the 
 error is fundamental, and goes through the whole stream of 
 accounting with very little chance of detection, unless Stores 
 Items Cards are in use, and not very readily even then. 
 
 The only way in which such an error could be discovered, 
 unless by accident, would be at the moment of entering a new 
 consignment of stores received, and the averaging out of a new 
 issue price. It would only then be discovered if the new price 
 looked suspicious to the ledger clerk. It is therefore desirable to 
 have all issue pricing checked carefully before proceeding to make 
 use of the figures, as in no other way can errors be detected with 
 certainty, and even if detected at a later stage it would involve 
 too much trouble to set them right unless the individual amounts 
 were considerable. Moreover, such attempts at rectification 
 after the event are apt to lead to immense confusion, as unless 
 altered at every stage of their career (as for instance on the Stores 
 Issue Note, in the summary total in the Stores Issue Book, on 
 the Item Cards, and on the Cost Sheets) it would simply mean 
 that balances are upset, with probably a long search before the 
 cause was found. 
 
 In all the foregoing discussion of the routine of recording 
 receipts and issues of stores, it has been taken for granted that 
 goods are invariably coming in, and stores invariably going out. 
 As a matter of practice this is not always so. Goods are some- 
 times returned to the suppliers, and stores issued are sometimes 
 returned from the shops. As regards the former class of trans- 
 action, this will not, in most cases, affect the accounting, since 
 such rejections are commonly made before the invoice has been 
 accepted, or any record made of the receipt. But as regards issues, 
 this is not so. Returns of surplus material into stores, which 
 has been taken out but not all used for a given piece of work,
 
 CONTINUOUS INVENTORY 189 
 
 are of not infrequent occurrence in some cases. Such transac- 
 tions can, if not too many, be dealt with in the ordinary journals 
 and Received and Issue Books, by making the entries in red ink, 
 thereby signifying that the usual charges and credits are reversed. 
 Postings can then be made accordingly. But in large plants it 
 is sometimes desirable to keep separate journals and receipt and 
 issue books for such purposes. 
 
 Such books would be: Purchases Returned Journal ; Goods Re- 
 turned Book on the purchases side; and Stores Returned Book 
 on the issues side. Goods Returned Notes and Stores Returned 
 Notes would also be provided. The relations of these various 
 books and documents will be obvious without further description, 
 especially on studying the diagram, Fig. 34, as they simply reverse 
 the operations which have been fully described above. It will, 
 of course, be understood that no entries will be made in these books 
 except to reverse charges or credits that have already been made. 
 Thus if a consignment of goods has been received, but not 
 accepted in any way, or any entry made regarding it, it is obvious 
 that it does not require taking out of the records by a reverse 
 operation. But where such books are provided it is usual to 
 enter all transactions as they occur, so that, for example, an in- 
 voice would be passed through, and record of its rejection made in 
 the Purchase Returned Journal. Whether or not this elaboration 
 is necessary or desirable depends upon local circumstances. 
 
 In the absence of a proper mechanism for recording return of 
 surplus stores, however, the bad practice frequently obtains of 
 issuing certain kinds of stores on memorandum, such for example 
 as a piece of bar steel, from which a piece has to be cut. Then 
 when the steel is returned, the net weight used is made the basis 
 of a stores issue note, and passed forward in the usual way. This 
 may not be for some time afterward, and the transaction may 
 be forgotten or the memorandum mislaid. It is, therefore, better 
 to have a proper mechanism for returns into stores, each trans- 
 action being thus recorded at the time it happens, with a probable 
 minimizing of errors. As stores returns are much more frequent 
 as a general rule than returns of goods purchased, the method of 
 red ink credits can very well be used for the latter, even when the 
 former is provided for by special Stores Return Notes and 
 corresponding Stores Returned Book. 
 
 Stores chargeable to Selling Expense. In most cases there will 
 be a small proportion of items issued by stores each month to the
 
 190 MANUFACTURING COSTS AND ACCOUNTS 
 
 selling department. A special column is provided in the Stores 
 Issues Book for the record of such items. The total of this column 
 forms the authority for an entry in the Selling Expense Journal, 
 and does not affect the factory accounts at all.
 
 CHAPTEB VII 
 
 PURCHASES NOT IMMEDIATELY CHARGEABLE- 
 BUILDINGS AND PLANT 
 
 While stores may be defined as the materials with or on which 
 we carry out the operations of manufacture, plant may be defined 
 as the devices by which such operations are effected. Though 
 buildings arc of sufficient importance to be classified by themselves, 
 they are really a variety of plant, and in some instances, as in 
 the case of ovens, furnaces, hearths, etc., it is difficult to draw a 
 hard and fast line between them. In the general diagram, there- 
 fore, the general term "plant" is used as representative of a 
 class of purchases, wholly different from stores in the main, 
 since they are not immediately consumed or used up, or changed 
 in the course of their employment, and hence cannot be charged 
 to any particular order or use. 
 
 In practice, plant is usually subdivided into buildings, ma- 
 chinery, power plant, electric equipment, cranes and transporting 
 appliances, transmission gear, permanent and perishable tools, 
 factory fixtures, office appliances, and so forth. Most of these 
 items enter the accounting system by means of purchase, though 
 this is by no means always the case. Factory fixtures and tools 
 are quite as often made by the firm itself as they are purchased. 
 
 There is also, in many industries, another variety of plant, 
 usually made or constructed by the firm itself, though sometimes 
 purchased from outside. This may be described as auxiliary 
 equipment, such as patterns, molds, dies, jigs, machine fixtures, 
 shoe lasts, printing rolls, and in general all such articles as are 
 of the nature of special equipment of which the use is confined to 
 the production of one kind of article, and is of no use for other 
 kinds. 
 
 From an accounting viewpoint the peculiar and distinguishing 
 feature of plant is that it is chargeable against Production 
 by what is termed depreciation, that is by a regular amount pro- 
 portionate to the expected useful life of the plant item. Though 
 this amount is usually calculated on a time basis, as for instance 
 
 191
 
 192 MANUFACTURING COSTS AND ACCOUNTS 
 
 in the case of a building costing $20,000, and expected to last 40 
 years, the annual charge against Production will be $500; yet such 
 charges are sometimes calculated on other bases. A furnace for 
 example may cost $4,000, and have an expected output, before 
 it has to be rebuilt, of 8,000 tons, in which case a charge against 
 Production can be based on the anticipated tonnage, instead of 
 the expected years or months of life. The cost of the furnace 
 would thus be charged to Production at the rate of 50 cts. per ton. 
 
 From these instances it will be seen that a depreciation charge 
 is not a definite or hard and fast thing like the purchase price of 
 a pound of brass rod. Though the original cost of the item of 
 plant is always known with as much precision as the cost of the 
 rod, when it comes to charging Production, or in other words 
 making an issue price, there is a great difference between stores 
 and plant. The brass rod is weighed, issued, and used up there 
 and then, and the issue price of a pound is prorated from its 
 cost price per ton. But when we buy a machine for $500, we do 
 not cut bits off it and issue them against specific jobs. We 
 cannot say that this or that job has used up $5 worth of the 
 original value of the machine. We are really obliged to make a 
 guess at the amount by which the value of the machine has been 
 diminished or used up on account of its use on a particular job. 
 And though this guess may be refined, and based on experience, 
 it is nevertheless true that all depreciation rates are very approxi- 
 mate in their nature, and liable to be affected by causes quite 
 unforeseen at the time the rate was first estimated and fixed. 
 
 For example, the useful life of a machine depends to a great 
 extent on the manner in which it is used, and on the practice of 
 the shop with regard to cleaning, caring for and maintaining its 
 machines. It also depends on the degree of intensity to which it 
 is worked, whether for 8, 16 or 24 hr. per day. If habitually 
 overstrained its life is shortened, to say nothing of possible ac- 
 cidents which may permanently enfeeble its constitution. 
 
 Nor is this all. Even though a machine is used fairly and 
 uniformly as contemplated when the rate of depreciation was 
 fixed there is another influence that may shorten its period of 
 usefulness in an unexpected way. The progress of the technical 
 art in which it is employed may develop more efficient machines 
 for doing the same work, so that it becomes advisable to scrap it 
 long before it is worn out. The machine becomes obsolete, and 
 loss of value from this cause is called "obsolescence."
 
 B UILDINGS A ND PLANT 1 ! 13 
 
 Again, unless the machine is of a very generalized type, such 
 as an engineer's lathe, another type of misfortune may overtake 
 it. If it is a machine that can be used only for certain definite 
 kinds of work or some special article, as for example many of 
 the machines used in automobile and bicjycle manufacture, 
 it may happen that changes in demand, or in style, make the 
 manufacture of that special article no longer profitable. In 
 this case, unless the machine can be transformed for another use, 
 it is a dead loss. 
 
 All these remarks apply to plant and equipment in general, but 
 they apply with much greater force to what has been termed 
 auxiliary equipment, patterns, jigs, molds, and all that class 
 of articles which are used to make other things with, and can 
 only as a rule be used for making one specific thing. This 
 class of equipment provides some of the most troublesome 
 problems that the manufacturing accountant has to deal with, 
 because the element of uncertainty becomes greater in propor- 
 tion to the degree of specialization of the equipment. 
 
 In those industries that are dependent on the changes of 
 fashion, as for example in the manufacture of shoes, wherein the 
 cost of lasts will sometimes bear an appreciable relation to the cost 
 of manufacture, and in the engineering industries where complex 
 patterns and jigs are necessary, necessitating high-priced work- 
 manship and some of the most accurate work that is known to 
 industry, the difference between profit and loss may reside in a 
 correct solution of the charging of auxiliary equipment to pro- 
 duction on a proper basis. But the selection of a just basis for 
 charges is a very difficult matter, as not infrequently the future* 
 demand for the product for which the auxiliary equipment is 
 made cannot be foreseen with any approach to accuracy. And 
 the dilemma is this; if we assume too small a future demand and 
 throw all the cost of the auxiliary equipment on this, the increase 
 of cost thus brought about may handicap the soiling possibilities; 
 or, on the other hand, if we overestimate the demand, and make a 
 lower charge to production accordingly, it may happen that when 
 demand has ceased, the auxiliary equipment is not all paid for by 
 being charged out into cost, and a loss is thereby incurred that is 
 not recoverable in any way, and may in fact wipe out a large frac- 
 tion of the profits supposed to have been made by the manu- 
 facture of the product. 
 
 From the foregoing it will be understood that depreciation 
 
 13
 
 194 MANUFACTURING COSTS AND ACCOUNTS 
 
 rates on buildings, plant and equipment vary among them- 
 selves. A building which lasts 50 or 70 years and a pattern 
 expected to be used for a dozen articles only, will obviously be 
 charged to Production at very different percentages of their 
 original cost. And between these limits practical experience has 
 worked out a range of customary depreciation rates for most of 
 the items of plant and equipment used in modern industries, and 
 though it cannot be said that different authorities exhibit any too 
 close an agreement on these rates, still there is a considerable 
 amount of experience available in fixing them. Moreover, the 
 problem is simplified from the accountant's standpoint by the 
 fact that such rates are usually applied uniformly to whole classes 
 of equipment, on the principle of average. In general the ac- 
 countant will not fix these rates, since the problems involved are 
 of a technical nature, and his interest in them is confined to ar- 
 ranging the mechanism of charging them to Production. Never- 
 theless, when it comes to the apportionment of charges for 
 auxiliary equipment, a watchful attitude on his part as regards 
 the effect of whatever rates have been fixed in wiping out the 
 original cost of such equipment with sufficient rapidity may be 
 very valuable indeed. 
 
 Once the question of depreciation rates has been settled, and 
 the rates have been fixed, the accounting of buildings, plant and 
 equipment can be considered a simple problem. It is usual to 
 provide ledger accounts for these items, and a separate account 
 for the monthly amounts charged for depreciation, the latter 
 being journalized half yearly or yearly, and so transferred to 
 credit of the various plant accounts. 
 
 The diagram, Fig. 41, shows the general relation of Plant 
 accounts to Purchasing on the one side and to Manufacturing on 
 the other. In the center of the diagram a Plant account is 
 shown, which as in the similar diagram for Stores, may be taken 
 as representative of a Control account. The small circles below 
 represent the Plant Ledger Item Cards, which correspond in 
 function to the Stores Item Ledger Cards previously described. 
 That is to say that they are the subdivisions of the balance at 
 any time existing in the Control account. The journal on the 
 left side is the medium for charging Plant accounts, and on 
 the right the method of crediting depreciation to the Plant ac- 
 counts is also shown. 
 
 Items purchased are charged to Plant accounts through the
 
 BUILDIXas AM) I'l.WI 
 
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 196 MANUFACTURING COSTS AND ACCOUNTS 
 
 special column in the Purchases Journal (or Voucher Record 
 Journal) and are credited to the supply firm or to Accounts Pay- 
 able, as explained in the chapter on Purchases. Another jour- 
 nal (not shown) is a special one, and takes the place of the Pur- 
 chase Journal in those cases in which items of plant or equipment 
 have been made in the shops instead of being purchased from 
 outside. Each such item is entered and the total for the month 
 credited to Manufacturing account instead of to a supply firm. 
 The charges to Plant accounts are made in exactly the same way 
 as those from the Purchase Journal. It may be regarded as a 
 journal dealing with "purchases from selves." The items could 
 in fact, in a small plant, be passed through the regular Purchase 
 Journal if a special column were provided on the credit side so 
 that credits to Manufacturing account were thus separated from 
 those arising from actual purchase. 
 
 The other side of the diagram requires more explanation. It 
 has already been explained that the cost of plant is not charged 
 directly to Manufacturing, but through the medium of what is 
 called a depreciation rate. As each class of plant requires a 
 different rate, it is necessary to set up some mechanism whereby 
 the total depreciation for each such class for a year can be cal- 
 culated and can be allocated in the proper amount to the various 
 departments of the factory. The Depreciation Schedule (see 
 below for a detailed description) is arranged to perform this 
 function, and by its means entries are made in the Burden Journal 
 of the proper amount due to each department. At a later stage 
 than that with which we are now dealing, these depreciation 
 figures are charged to Production on some selected basis, and 
 credited to Depreciation account. 
 
 The credit balance in this latter account is, of course, a set-off 
 against the cost of plant as it stands in the Plant ledgers. If 
 the value of plant as shown by the Control account is $50,000, 
 and the amount of depreciation credited the first month is $500, 
 then it is obvious that our plant is only worth $49,500. But 
 it is not necessary to perform the clerical work of crediting each 
 individual Plant Item Card each month with the amount of de- 
 preciation thus charged to Manufacturing. The Depreciation 
 account is, therefore, intercalated in between Burden Journal 
 and Plant account. It serves to receive and store up credits 
 on account of depreciation until such time as it is convenient to 
 transfer the items to the credit of Plant. This may be done yearly
 
 BUILDIXCS AND PLANT 197 
 
 or half yearly according to the financial period of the firm's ac- 
 counts. When it is done, Depreciation account is, of course, 
 clear, and the various Plant Item accounts, as well as the Con- 
 trol account, have diminished balances by just the amount 
 so transferred. 
 
 The cycle of operations regarding plant will now be quite clear. 
 First, we have a ledger account or accounts which are Control 
 accounts for the principal divisions of our plant. These, for 
 example, may be titled, Buildings, Machinery, Power Plant, 
 and so forth, and each of them will have a particular section 
 of the Plant Item Ledger Cards devoted to that class of equip- 
 ment. The balances on all the cards in any one section will 
 agree at all times with the balance in the Control account pertain- 
 ing to it. No charge or credit must be made to any Item Card 
 without the corresponding Control account being also charged or 
 credited at the same time. But while the Item Cards are charged 
 with individual transactions the Control accounts are charged 
 only with monthly totals of such transactions. 
 
 The mechanism of charging the Plant accounts is simple. 
 Charges have two sources, one arising from purchases from out- 
 side firms, the other arising from transfers from the shops (pur- 
 chases from selves). 
 
 Credits to plant accounts, except in the exceptional case of 
 plant being sold, in w^hich case a special entry would be made in 
 the General Journal to cover the transaction, are made by means 
 of depreciation rates. These rates are calculated by means of 
 a Depreciation Schedule, and entered on a Burden Journal, of 
 which the use will be described later. This journal credits De- 
 preciation account each month. At some convenient season, 
 usually the end of the firm's financial period, these credits are 
 transferred to the various Plant accounts. This completes the 
 cycle. 
 
 We have now to consider in more detail some of the blanks and 
 books by which these transactions are carried out. The central 
 feature of the system is necessarily the Plant Item Card Ledger 
 (Figs. 42 and 42A). As in the case of the Stores Item Card, this 
 is usually so arranged as to afford facilities for information not 
 pertaining strictly to the main line of accounting, but of great 
 value from the administrative point of view. The form suggested 
 in this figure provides for the following data: 
 
 1. Ledger account, with columns for charges, credits and
 
 198 MANUFACTURING COSTS AND ACCOUNTS 
 
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 balance. The cost of the original purchase, with any added 
 items for freight, installation, etc., is posted from Purchase 
 Journal to the column headed "Debits." The annual credit for 
 depreciation transferred from Depreciation account is posted 
 from the General Journal to the column headed "Credits." The 
 balance column shows the present value of the machine. Should 
 the machine be sold the amount will be journalized in the general 
 journal, and posted to the credits column, thus eliminating all 
 balance. In most cases this will entail a loss, since it is hardly to 
 be expected that the price obtained will be equal to the existing 
 book value of the item. The difference will be taken care of in 
 the journal entry, being carried to Profit and Loss. Thus if the 
 book value of the item is $509 and it is sold for $200, the journal 
 entries will be as follows: 
 
 Cr. Machinery account (and item card) $500 
 
 Dr. John Jones (purchaser) 200 
 
 Dr. Profit and Loss (loss on sale) 300 
 
 Until the machine is sold, however, its present value (at 
 the end of each financial period, after all depreciations have 
 been credited) will appear on the card, and the total of all 
 such balances in any given section of the Item Ledger will agree 
 with the balance in the corresponding Control account. 
 
 2. Idle Time Record. This will be found immediately 
 above the ledger account. It consists of spaces in which the 
 number of hours in which the machine has been standing idle 
 and unused during a month is entered. 
 
 3. The face of the card is headed with a series of numbers, 
 each of which represents a different class of equipment and 
 each of which should be represented in a separate Control account. 
 Thus, section 1 may mean buildings; section 2, power plant, 
 etc. Tabs or signals are affixed to the top of the card, making 
 a cross-index by classes of equipment. 
 
 4. The next space on the card is for the purpose of registering 
 data about the machine: condensed description of it, name of 
 maker, date bought, and, for purposes of depreciation, the 
 estimated years of useful life, and the depreciation rate which it 
 has been decided to apply to it. 
 
 5. The remainder of the card is given up to a record of the 
 repairs and their cost, which may be necessary during the 
 life of the machine. This record, though in terms of cost, is
 
 200 MANUFACTURING COSTS AND ACCOUNTS 
 
 only a memorandum and is in no sense a part of the accounting 
 scheme. It merely serves to record the frequency and cost of 
 repairs, so that a general idea of the behavior of the machine 
 may be gathered by the technical men concerned. It is not 
 at all necessary that this information should be collected on the 
 same card as the real accounting items. In fact, for reasons of 
 accessibility in large plants it may often be better to make it 
 into a separate record. The principle is not thereby affected. 
 
 The serial number of the item should appear at the top right- 
 hand corner of the face of the card. These serial numbers are 
 allotted to each machine as installed, and are usually painted in a 
 conspicuous place on the machine itself. A system of number- 
 ing items of equipment is of the greatest possible service in many 
 directions if properly carried out, but unless so carried out may 
 become a positive nuisance and source of confusion. There are 
 several ways in which the series of numbers can be arranged. 
 The choice of a system will depend on what we wish to do, or in 
 other words, in what way we wish to make use of the numbers. 
 
 Their prime use is to identify the machine with its record 
 on the Card Item Ledger, wherein the original cost, makers, 
 name and so forth can be traced — information of the utmost 
 importance to have at hand in case of destruction of a shop by 
 fire. Where technical data are posted to the ledger card as 
 suggested above, quick reference to the right card is also necessary. 
 But as machines and equipment generally are grouped according 
 to the necessities of the shops, and cards are grouped according 
 to the necessities of the accountant, it is not always easy to 
 devise a system of numbering and arrangement of cards that 
 will .meet all demands on it without too much cross-reference 
 and clerical work in keeping up indexes. 
 
 Generally speaking it is desirable to have a division by classes 
 of Plant (corresponding to the Control accounts) and also by 
 location of machines. It is frequently desired also to make 
 the symbol number indicate what kind of machine, such as 
 lathe, planer, etc., is in question. The value of incorporating 
 this latter information in the symbol number is doubtful, and 
 even when provided has but limited use. The main use of 
 symbol numbers is this: "Given the number of a machine, where 
 is the card referring to it?" A simple consecutive numbering 
 of each item as installed would meet this case were it not for the 
 necessity for grouping the cards for accounting purposes in
 
 BUILDINGS AND I 'LA NT 201 
 
 particular ways. For example, it is necessary to be able to 
 identify at sight all the cards belonging to particular classes of 
 equipment and therefore to particular Control accounts. Next, 
 we require to have a division of the cards by departments, or 
 in other words, by location of the item, and this latter arrange- 
 ment must be sufficiently flexible to allow of frequent transfers 
 of items from one department to another when machinery, 
 motors, etc., are moved about the plant, as usually happens. 
 
 Perhaps the simplest way of meeting the problem is by 
 allotting a letter to each class of equipment, and serially number- 
 ing each new item of that class as it is installed. We shall thus 
 have as many series of numbers running as there are classes of 
 equipment. A serial register will be kept for each of these 
 series, and a number, once allotted to an item, say a motor or a 
 lathe, will always be identified with that item as long as it remains 
 in the plant. Then, to identify the item with a department, it 
 will be well to assign numbers to departments, and add the 
 departmental number to the above symbol. Thus if electric 
 equipment is class E, and a new motor is installed and the next 
 vacant number on the register is 345, that motor will henceforth 
 be known as E345. If now it is located in department 7, the 
 symbol will read E345/7. If later it is transferred to depart- 
 ment 8, it will read E345/8. On the motor itself only the 
 symbol E345 will be painted, since it will be obvious to anyone 
 repairing it, for example, that it is in department 7 or 8 as the 
 case may be. Further should it be retired from active ser- 
 vice temporarily and placed in stores, the symbol will read 
 E345/Stores which will at once signal that it is temporarily 
 out of use. 
 
 The arrangement of the Item Ledger Cards will be as follows: 
 Each card will be tabbed with its class letter, say E, as described 
 above. All the cards for one department will be grouped to- 
 gether in serial order irrespective of their class letter. Then if 
 it is desired to find E345/7, we shall turn to group 7 in the card 
 ledger, turn up serial number 345, and if there are more than 
 one of this number, reference to the tabs will serve to separate 
 the one desired with a minimum of trouble. 
 
 By this means we can at any time ascertain the total value of 
 plant of any class in any department, or of any class by itself, 
 or of any department by itself as desired, and we can also 
 promptly identify any item by its reference number. Further
 
 202 MANUFACTURING < OSTS AND ACCOUNTS 
 
 if the departmental number is omitted from the symbol by 
 
 mischance, it is not a difficult matter to look for E345 in one 
 
 group after another, say three, four, or even ten groups, till it 
 
 ind. This is a much easier matter than to identify a machine 
 
 of which the number has been changed without record of the 
 
 change being made, as is not infrequently the case where a system 
 
 of numbering is adopted requiring fresh numbering at each 
 
 transfer from one department to another. By this plan, also, 
 
 xes for the purpose of cross-classification are not 
 
 ■ . although, if desired, lists of equipment by sub- 
 
 compiled. Thus machinery can be subdivided 
 
 laners. shapers, etc As the symbol number of an 
 
 is never changed, this entry has to be made only once, 
 
 namely, when the item is installed. 
 
 The < Jard Item Ledger having been set up, and all the different 
 - of plant and equipment posted from the journals, it will 
 id. lit that if all the balances on the cards belonging to class 
 segregated on an adding machine, they should agree with 
 the total balance in Control account for electric equipment. 
 .it may be considered advisable to subdivide the 
 rol account tie] >art mentally, so that the total of class E for 
 each department is shown separately. This is easily done by 
 iding a ledger page with several columns, each such column 
 ting a department. If this arrangement is adopted, 
 then the balance in each such subdivision should agree with the 
 E irds by their departmental classifications. The arrange- 
 ment is obviously convenient for many purposes, in localizing 
 error-, for example, bul it has the disadvantage that every trans- 
 • an item of equipment from one department to another will 
 require adjustment in the control account, by transfer of the 
 value of the item from one column to another, with a consequent 
 rectificat ion of balani i 
 
 The principal object for which classifications of plant and 
 
 equipment are required from the accounting viewpoint is for the 
 
 eel allocation of depreciation to departments. To do this 
 
 imething more than a ledger account is required, and 
 
 ell to keep the latter as simple as possible 
 
 without departmental columns. The mechanism by which the 
 
 plant i- plotti to exhibit its relation to departments 
 
 on the. on.- hand and to depreciation rat.- on the other is termed a 
 
 •ion Schedule, Fig. 13 (see also diagram, Fig. 41).
 
 MILDIXCS AND PLANT 
 
 203 
 
 One sheet of such a schedule is devoted to one class of equip 
 ment, say electric equipment. The 
 various items of equipment are listed 
 in serial order on the sheet, together 
 with their book value, which is entered 
 in the column headed "Total" under 
 the subheading "Cost." Against each 
 item is placed its depreciation rate, 
 and the yearly amount of the depre- 
 ciation calculated and entered in the 
 next column. The remaining col- 
 umns, headed "Department 1," etc., 
 are for the purpose of distributing 
 the depreciation to the departments 
 in which the items are located. If, 
 for example, a certain item is valued 
 at $500 with a depreciation rate of 
 2% P er cent, this will mean a yearly 
 charge to manufacturing of $12.50, 
 which is entered accordingly in the 
 third column under "Total." Now 
 if this item is located in department 
 2, the following entries are made in 
 the department 2 columns: First, 
 the book value is entered; next, the 
 yearly depreciation charge; and then, 
 one-twelfth of this amount (or one- 
 thirteenth where the plan of 4-week 
 months is in use). When all the 
 items have been thus distributed to 
 departments the following agreements 
 are made: (1) The totals of all de- 
 partmental columns headed "Cost" 
 should equal the total of "Cost" in 
 the total column. By this means we 
 obtain a summary of the cost of equip- 
 ment for each department. (2) The 
 totals of all departmental columns 
 headed "Yearly Depreciation" should 
 equal the same item in total column. 
 This shows the annual charge for de- 
 
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 204 MANUFACTURING ( OSTS AND ACCOUNTS 
 
 preciation to bo borne by each department. (3) The totals of 
 all department columns headed "Monthly Depreciation" should 
 equal, when multiplied by 12 or 13 as the case may be, the 
 I of yearly depreciation in the total columns. 
 I practice, a shorter method than the above may be em- 
 ployed, if no considerable movements of equipment between 
 departments is likely to take place during the financial year. 
 The ledger cards having been departmentalized as explained 
 above, each class of equipment may be taken separately (picked 
 out by the tabs), divided into as many groups as there are different 
 rates of depreciation concerned, and each set of cards bearing the 
 same depreciation rate aggregated and entered as one item on the 
 ,-iai ion Schedule. Thus, if class E, totalling $50,000 is 
 really made up of 820,000 rated at 3 per cent., $15,000 rated at 
 4 per cent, and si 5.000 rated at 5 per cent., we may enter these 
 items in three lines on the schedule thus: 
 
 Cost Rate Vrly. Dep. 
 
 - dry items $20,000 3 per cent. $600 
 
 Ditto 15,000 4 per cent. 600 
 
 Ditto 15,000 5 per cent. 750 
 
 Total for class E.... $50,000 $1,950 
 
 Next, by sorting our cards into sub-groups according to 
 departmental location, we can ascertain how much of the equip- 
 ment belonging to the 3 per cent, group is located in department 
 1. how much in department 2 and so forth. These amounts, and 
 their yearly depreciation are then entered in the departmental 
 column- a- before. 
 
 The short method has exactly the same result as the longer one, 
 and the sheets are balanced in the same way, but, of course, the 
 advantage of having a tabular statement or inventory of the plant 
 ami equipment of each class i- sacrificed. Which method should 
 lected will depend on circumstances. In some methods of 
 costinj Method C in Chap. XX) a somewhat detailed 
 
 analysis of equipment i- necessary, ami in that case it can be 
 made on the Depreciation Schedule quite conveniently. In 
 other methode a- long :i . ., correct summary by departments is 
 made that ifi all that i- necessary for accounting purposes. 
 
 Wh'-n all the schedules have been made out and a recapitu- 
 lation taken, it i- evident that we shall be in possession of the 
 yearly and also the monthly amounts which are to be charged 
 against manufacturing in each department. With the way in
 
 BUILDINGS AND PLANT 205 
 
 which these figures are used we have nothing to do at present, 
 except to note that each month certain Burden Journals will be 
 the sources whence a credit for the amounts indicated by the 
 schedule will be made to Plant and Equipment. This credit is 
 not, however, in practice made monthly to the Plant accounts. 
 To do so would involve too much labor. On reference to the 
 diagram (Fig. 41) it will be seen that the credit received from the 
 manufacturing department is made to a Depreciation account, 
 month by month, and this credit must be agreed with the amount 
 as indicated by the Depreciation Schedule. At the end of the 
 financial period, whether yearly or half yearly, the amount stand- 
 ing to the credit of Depreciation account is transferred to the 
 credit of sundry Plant Control accounts and to the individual 
 Item Cards. 
 
 The way in which this operation is effected is by a virtual 
 reversal of the process of compiling the Depreciation Schedule. 
 As each monthly credit from manufacturing was agreed with the 
 monthly total of the schedule, it follows that the yearly total 
 of credits in Depreciation account will agree with the total of the 
 schedule. If, then, the schedule has been made up on the 
 itemized plan, each card can be individually credited by its aid. 
 If on the group total plan, then the Item Cards must be sorted by 
 classes and departments and depreciation rates, and individual 
 credits made on each by aid of a calculating machine, the total 
 of each sub-group being agreed with the group total on the 
 schedule before proceeding to the next group. This process, 
 though intricate to describe, is really very simple and rapid if 
 properly carried out. When it is done, and the corresponding 
 credits made to the Control accounts, the new balances on the 
 cards will equal the old balances less the amount transferred from 
 Depreciation account — in other words, the cards and Control 
 accounts will now show the new and depreciated value of the 
 plant after the year's operations have been completed. This 
 new value will be the basis of preparation of a Depreciation 
 Schedule for the following year. 
 
 The whole of the principal operations by which plant items 
 are recorded, and by which they are credited with depreciation 
 having now been exhibited, it only remains to consider how far 
 unexpected happenings may affect the charging of depreciation. 
 Rearrangements of machinery do not, of course, affect the depart- 
 mental allocation of depreciation unless plant items are trans-
 
 206 MANUFACTURING COSTS AND ACCOUNTS 
 
 1 from one department to another. The three occasions 
 on which the depreciation schedule is subject to serious disturb- 
 ance are: (1) Transfers from one department to another; (2) 
 new items purchased or made by selves; (3) items condemned 
 and withdrawn from active service. Theoretically any one of 
 these changes should be at once taken into account, but in 
 such a continual upset of the schedule is not necessary. 
 Small changes need not be taken into consideration until the end 
 of the financial period, unless they happen to embrace items of 
 equipment of which the depreciation rate is very high, say, 7}4 
 1 per cent. Of course, if rearrangements have been made on 
 Qsiderable scale, or new plant has been introduced so as to 
 modify manufacturing processes, then immediate; notice should 
 ken of it. In such rases the best procedure is to close out the 
 account of the departments affected by transferring the deprecia- 
 tion already accrued, and making a fresh schedule in which the 
 new arrangements are reflected. But the mere purchase of one 
 or two new machines of an ordinary kind, or the simple exchange 
 of machines between departments may be ignored until the end 
 of the period, or at any rate until some future time when it 
 becomes convenient to transfer accrued depreciation to the item 
 and control account- concerned. 
 
 Dej ■, chargeable to the administrative and selling 
 
 departments. A certain proportion of the total depreciation 
 will naturally be chargeable to the selling department on account 
 
 ce buildings, equipment, warehouses, tools, etc. used by that 
 department. A special column is, therefore, provided in the 
 
 ciaiion Schedule to lake care of such amounts, and the 
 total of thifl column is made the authority for an entry in the 
 Selling Expense Journal, whereby Selling Expense is charged and 
 
 iciation account credited, just as Factory Burden is charged 
 and Depreciation credited as shown above. This charge to 
 Selling Expense need not detain us further. It does not come 
 into the factory accounts proper, but is handled as described in 
 Ch. XI, bar! |. 
 
 Depreciation on buildings and equipment (office furniture and 
 machinery I by the higher officials, and the general 
 
 office -usually falling under the heading of administrative 
 expense will be prorated on the schedule between selling and 
 rtmenl on Bome approved basis contingent on the 
 particular circumstan
 
 CHAPTER VIII 
 RENTS, TAXES, INSURANCE, ETC. 
 
 So far we have been considering the purchase and disposal 
 of actual tangible articles, stores, buildings, machinery and 
 equipment which can be seen and handled, weighed and counted, 
 or otherwise identified at any moment. We have now to consider 
 a new class of purchase, namely, purchase of service. 
 
 Service may be purchased in various forms. Thus the salary 
 of the president is a payment for service, so is the wage of a 
 laborer. A lawyer's bill is also a claim for payment for service, 
 an auditor's fee is a charge for service, even though in these two 
 last cases the payments are made to persons not enrolled on the 
 books of the organization. Generally speaking any payment 
 that is made for something that cannot be touched or handled is 
 for the most part a payment for service of some kind. The 
 particular kinds of service to be considered in this chapter are 
 rents, taxes and insurance. 
 
 While most kinds of services are not paid for until rendered, 
 it is not infrequently the case that some or all of the services 
 just mentioned are paid for in advance. In other cases, as for 
 example, employers' liability, the main part of the service may be 
 paid for in advance, subject to an adjustment at the end of the 
 period covered, which adjustment may either be of the nature of 
 an increase in the charge or a reduction. It will be seen, there- 
 fore, that this class of purchases presents somewhat different 
 problems from those previously discussed, and requires somewhat 
 different arrangements to control it. 
 
 On the general diagram only one typical account is shown as 
 representative of the whole class. But in practice, rent, taxes, 
 water rate, and the different classes of insurance may have 
 separate ledger accounts. This is merely a matter of convenience 
 and involves no principle. 
 
 Two principal considerations exist in relation to this class of 
 purchases. First some mechanism must be set up to "hold up" 
 or more properly speaking hold "in suspense" such payments as 
 have been made, but for which the service has not yet been 
 
 207
 
 MANUFAi TURING < QSTS AND ACCOUNTS 
 
 rendered, and secondly for charging to Manufacturing month 
 
 lonth, the proper amounts, allocated by departments, that 
 
 1 as having accrued within the month. This 
 
 as that while a regular monthly amount is to be charged to 
 
 manufacturing departments, the actual payment, or accepted 
 
 liability, may be entered in the ledger at any time during the 
 
 Thus we may pay rent every 3 months in advance, or 
 
 once a year in advance, or we may receive a bill for 
 
 and enter it in Purchase Journal without paying it, but 
 
 whatever procedure these transactions follow, the regular 
 
 monthly charge for the services covered by them must be made to 
 
 Manufacturing and allocated to departments quite irrespective 
 
 of either billing or payment. 
 
 The allocation of such charges to departments necessarily 
 implies a basis for calculating such charge. Hitherto in the 
 pure! have considered, the physical existence of the item 
 
 a sufficient guide to its relation to the accounts. But we 
 are now dealing with intangible values, and it is, therefore, neces- 
 sary to set up some arbitrary basis on which they may be dis- 
 tributed. No single basis will commonly suffice for all this 
 of charges. But, on the other hand, the selection of a 
 suitable basis and the calculations involved are of a simple char- 
 r so that substantial accuracy in their allocation to depart- 
 ments can be attained without too much labor. 
 
 In the case of rent much will depend on what is actually paid 
 
 for under this head. If, for example, we are leasing a piece of 
 
 land, then the area occupied by the various departments will 
 
 be a convenient basis. On the other hand, if we are leasing a 
 
 complete factory, buildings and all, then consideration will have 
 
 given not only to the area of land occupied, but also to the 
 
 : the buildings used by each department. We shall 
 
 in this latter case to calculate true rent, compounded of a 
 
 charge for both land and buildings, just as if, being owners, we 
 
 wished to it each of the buildings to separate tenants. 
 
 There Le also the further complication, common in many 
 countries, in which a lease has been purchased. That is to 
 i large sum has been paid down for possession of the premises 
 or the land, subjecl to a further annual payment of rent until 
 the end of the term for which the lease has been granted. In 
 this case provision must be made for amortization of the lease, 
 the Bum bo paid down must be treated on the lines
 
 RENTS, TAXES, INSURANCE, ETC. 209 
 
 of depreciation of a machine, and so much charged off each 
 year so that when the lease expires its entire cost has been 
 reduced to nothing. The real meaning of a transaction like 
 this is that instead of paying a high rent each year for say 50 
 years, a considerable sum is paid over on taking possession, 
 and then a small rent paid every year instead of a high rent. 
 
 The precise way in which the basis will be arranged will 
 depend, therefore, on the nature of the payment. In any 
 case, the aim will be to so allocate the total rent charge among 
 departments that each bears a fair proportion of the total. 
 Taxes will be allocated in the same way. 
 
 Fire insurance is sometimes distributable on more than 
 one basis. There may be a separate rate of insurance for build- 
 ings and for equipment and stock. In this case, building in- 
 surance will be prorated on a basis of building value in each 
 department, while the other variety will be distributed on a 
 basis of values contained in the buildings. 
 
 Employers' liability insurance will generally be allocated to 
 departments on a basis of the number of employees or on the 
 average pay-roll. In a few cases, a department may bear a 
 higher rate, owing to specially hazardous employment. In 
 this case, of course, the premiums paid will be segregated and 
 applied to that department alone, such department being omitted 
 from the general prorating of the remainder of the insurance 
 charge. 
 
 The diagram, Fig. 44, shows the general scheme of treatment 
 of this class of purchase. The ledger accounts in the center of 
 the diagram are merely representative of the class. There 
 may be several such accounts dealing with separate but similar 
 items of expense. In each case the account is charged from 
 Purchase or Voucher Journal (or in cases where cash is paid in 
 advance, from Cash Journal) the landlord's or the insurance 
 company's account (or cash) being credited. The crediting 
 of the ledger accounts is effected in a very similar manner to the 
 crediting of Plant Ledger accounts, namely, by the aid of a 
 Distribution Schedule which is used to assemble the items and 
 indicate their distribution to departments on a yearly basis. 
 Then one-twelfth or one-thirteenth of the amount chargeable 
 to each department is entered on the Manufacturing Burden 
 Journal and thereby charged to production and credited to the 
 Rents, etc., Ledger accounts concerned. 
 
 14
 
 210 MANUFACTURING COSTS AND ACCOUNTS 
 
 \< the credits to the ledger accounts are made each month on 
 the principle of dividing the annual charge into monthly amounts, 
 and as, on the other hand, the charges to these accounts may be 
 
 made in one or more sums ; .i any period of the year, and may 
 be in the nature either of ordinary purchases, or of payments in 
 advance, it will I., evident thai the balances in these accounts
 
 RENTS, TAXES, INSURANCE, ETC 211 
 
 are of a wholly different significance to those already considered 
 in the case of stores or plant. The latter balances are always 
 in the nature of values of tangible property remaining on hand. 
 They are always on the debit side, since it is impossible to credit 
 an account of this kind with more than it contains. We either 
 have stores or we do not have them. In the former case the 
 ledger will have a balance to its debit, in the latter case it will 
 have no balance at all. 
 
 In the class of accounts we are now considering balances 
 may occur on either side of a ledger account at various times, 
 and it is advisable to fully understand the significance of this 
 phenomenon. If, for example, we take the case of rent payable 
 every 3 months, but not in advance. Then at the end of the 
 first month, the Rents account will receive a credit from Manu- 
 facturing for the monthly amount calculated on the Rents 
 Schedule and charged through Burden Journal as explained 
 above. There will be no corresponding debit from any source, 
 so that Rents account will contain a credit balance. The same 
 thing will happen the next month, only the balance will, of 
 course, now be larger. The third month, however, while a 
 new credit is received from Manufacturing, a debit is also re- 
 ceived through Cash or Purchases Journal representing the bill 
 for the whole quarter's rent. This will equal the three credits 
 received from Manufacturing, so that at the end of this third 
 month, there will be no balance at all in the Rents Ledger 
 account. 
 
 Now if the rent was payable in advance, exactly the reverse 
 behavior of balances would be observable. The first month there 
 would be a large balance on the debit side, the second month 
 this would be smaller, and at the end of the third month there 
 would be no balance at all. How then are we to regard these 
 balances in either case? 
 
 Technically speaking, the first case is an example of a Reserve 
 account and the second of a Suspense account. The first balance 
 is a reserve against a future known liability, and the second is 
 an amount already paid out and considered to be held in sus- 
 pense against a future known call on the service it represents. 
 This explanation, however, may not be very clear to the student 
 not familiar with accounting terminology, and it maybe desirable, 
 therefore, to examine the matter more closely. 
 
 To take the second case first — our proceedings are very
 
 212 MANUFACTURING COSTS AND ACCOUNTS 
 
 similar to those described in relation to the charging out of 
 3. To begin with there is a debit balance in the ledger 
 account, representing rent paid, just as there might be a balance 
 in a particular stores account representing brass purchased. 
 And in both cases we credit the account with the amount con- 
 sumed i nou ili by month. In the case of the brass by actual 
 weight and handling. In the case of the rent by calculation of 
 what 1 month's rent, will amount to. In either case what is 
 hit in the account will be a debit balance representing the 
 amount unconsumed. In either case what is left in the account 
 will be an asset. There will be actual property in brass, and 
 actual property in a right to enjoy service. In the one case 
 we have unexpended material, in the other unexpended service. 
 There is no difference in point of value between the two classes of 
 except that one is salable supposing the plant to go out of 
 business and the other is not. As long as the plant is a going 
 m, both are equally valuable. 
 Nevertheless, there is an obvious risk involved in paying for 
 qo1 yet rendered, and, therefore, such payments though 
 ssarily considered as assets, are viewed by the accountant 
 in a special way. The balances are considered as being as it were, 
 p, and not available except at a future date. Such accounts, 
 • fore, as contain balances of this kind, are termed "Sus- 
 pense" accounts. 
 
 We may now consider the firstof the two cases. Here we have 
 no balance in the account to begin with. On the other hand, we 
 begin to make credits to it, without having anything to draw on. 
 evidenl that some kind of fictitious transaction is implied 
 totally unlike anything we have met hitherto. In 
 the c -mil ;i transaction would be meaningless. We 
 
 could not credil a brass account for brass that had no existence. 
 Similarly we could not credit depreciation to a plant account 
 that was a blank Bheet of paper. What is it then that we do when 
 we credil a blank Ledger page with a monthly amount represent- 
 ing rent ? 
 
 What we are doing is to provide against the future. We cannot 
 use bra-- without having brass, we cannot depreciate a machine 
 without having a machine, but we can enjoy service without 
 paying for it. If we know the value of the service we are enjoy- 
 ing and '-.in put a puce on ii, then although it has not been 
 paid for actually, we can enter tins amount month by month, on
 
 RENTS, TAXES, INSURANCE, ETC. 213 
 
 a blank ledger page, so that when the time comes to pay for the 
 period that has expired, the amount involved will have already 
 been charged out against Manufacturing, just as though payment 
 had been made month by month. Technically this is called 
 setting up a "reserve" against a future known liability. 
 
 Such a balance is not, of course, an asset. It does not represent 
 anything of the nature of property. In the other class of balance 
 discussed above, what was represented was an actual purchase — 
 a purchase in advance of immediate needs, but still an acquisition. 
 In the present case the figures entered on the credit side of the 
 ledger page are merely intelligent anticipations of a purchase 
 that will presently be made, the purchase in question being of 
 such a nature that it can be enjoyed before any charge for it 
 appears in the accounts. 
 
 It is quite true that from one aspect, the purchase of service 
 is already completed when a contract for it is made. But while 
 this is true from an administrative viewpoint, from an account- 
 ing viewpoint everything begins with the receipt, acceptance 
 and entry of the invoice or bill on the journal. No charge to any 
 account can be made until this stage is reached. Consequently 
 we have to regard the transaction now under discussion as one in 
 which the enjoyment of service takes place in advance of pay- 
 ment or accepted liability for it. This being the case, our present 
 transaction signifies that we have charged to Manufacturing 
 on the one hand, and credited to future liability on the other a 
 calculated amount, which amount will presently be set against 
 an actual payment on the liability in such a way that no balance 
 will be left. To set up a credit balance in this way is called mak- 
 ing a "reserve," and as it is obvious that in essence it represents 
 a payment that will ultimately have to be made out of cash, it is 
 not an asset, but a liability. When by payment of the accrued 
 amount the balance is wiped out, cash is correspondingly depleted. 
 
 Services then, which are paid for in advance, and charged out 
 to Manufacturing by monthly installments, give rise to ledger 
 balances which are in the nature of assets, and are termed sus- 
 pense balances. Services paid for at intervals after they have 
 been enjoyed and credited at monthly intervals by Manufacturing 
 give rise to ledger balances which are in the nature of liabilities 
 and are termed reserve balances. 
 
 The Distribution Schedule (Fig. 45) by which rents, taxes, 
 water rents, insurance and so forth are charged to manufacturing
 
 214 MANUFACTURING COSTS AXJ) ACCOUNTS 
 
 
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 RENTS, TAXES, INSURANCE, ETC. 215 
 
 departments provides columns for the total amount to be dis- 
 tributed annually, and also columns for each department. 
 In each case the basis of distribution is entered, and the amount 
 prorated over the departments according to the share of the basic 
 figures shown against each. Thus if rent is payable on land area, 
 the total basis may be 100,000 sq. yd., of which department 1 
 will occupy 30,000; department 2, 7,000; department 3, 16,000 
 and so on. The annual charge against each department is then 
 entered in the columns provided, and one-twelfth or one-thirteenth 
 of this amount placed in the "monthly amount" columns. Ver- 
 tical addition of these latter columns shows the amount charge- 
 able against each department each month. The Distribution 
 Schedule is not a journal, but merely serves to tabulate and 
 calculate the monthly charges which are then entered on the 
 Manufacturing Burden Journal of which we shall speak later. 
 From this journal credits are made to the Rents, etc., Ledger ac- 
 counts and charges to Production account. 
 
 Rents, taxes, etc., chargeable to selling department. As in 
 the case of depreciation, a certain proportion of rents, etc. is 
 chargeable to the selling department. The amount so chargeable 
 is entered on the special column provided in the Rents Schedule, 
 and forms the authority for a journal entry crediting the various 
 Rents, etc. accounts and charging Selling Expense. Such items 
 are thus separated from the factory accounts proper, and are 
 handled as indicated in Chap. XI, Part. I.
 
 CHAPTER IX 
 TIME AND PAY 
 
 in the last chapter we considered the accounting of purchased 
 service- rendered by firms or persons outside the plant. We have 
 now to consider services rendered by employees of the plant, 
 including both salaried officers and wage-earners. The subject 
 of time and pay, as in the case of all other purchases, falls into 
 two divisions, corresponding to the debit and credit side of the 
 ledger accounts, viz., Wages account and Salaries account. 
 First we have to consider the source and mechanism of entries 
 to the i lei iii of the account, and then the way in which credits are 
 made, and what corresponding charges to other accounts are 
 ssary. In other words we have to ascertain the amount 
 payable to each individual, and also the nature of the service he 
 has rendered for the payment, and to what account such service 
 i- chargeable. 
 
 The subjeel of time and pay is complicated by the number 
 ofdifferenl bases on which earnings are computed. First, we have 
 simple time, as in the case of salaried men, or day wage-earners. 
 Secondly, we have simple piecework, in which so much is paid 
 for each piece completed, quite independently of the time taken. 
 Thirdly, we have the various bonus and premium systems, based 
 for the mosl pari on day wages, but with additional payments 
 proportionate to the saving of time from a standard allowance. 
 Fourthly, any or all of these systems may be used, and in addi- 
 tion extra bonuses or rewards may be earned for departmental 
 efficiency; and finally, extra payments may be made on some 
 profit-sharing basis, dependent on the result of the business 
 during a financial period. 
 
 The mechanism for the computation of the amount payable to 
 
 each employee, also, i- sometimes clear and distinct from the 
 
 mechanism for computing the allocation or charging of earnings 
 
 ' accounts, bul on the other hand the two mechan- 
 
 are frequently combined. And the method of charging 
 
 earnings Is intimately connected with the problem of 
 
 216
 
 TIME AND PAY 217 
 
 orders, and these again depend on the type of cost system that is 
 in use. 
 
 In this chapter we shall confine our attention as far as possible 
 to operations connected with the debit side of the Wages and 
 Salaries account, leaving till later the operations concerned with 
 crediting such account and the corresponding charging to Manu- 
 facturing. This is in conformity with the manner in which other 
 classes of purchase have been treated in previous chapters. 
 
 The principal document in which particulars of the amounts 
 to be paid out are entered is termed the pay-roll. This bears the 
 same relation to purchases of service as the bill or invoice does to 
 purchases of stores, plant or exterior service. It is the prime 
 authority for payment, and its correct compilation is, therefore, 
 a matter of great importance. The pay-roll is commonly 
 divided into two separate books, one dealing with the wage- 
 earners and minor officials, the other dealing with the higher 
 officials. This latter is usually called the Salaries Book. The 
 distinction is only a matter of convenience. From the accounting 
 viewpoint the two books are on exactly the same footing, and in 
 small plants the pay-roll itself sometimes contains both sets of 
 payments. 
 
 The pay-roll is not a book of original record in many cases, 
 though in small plants it sometimes is. The original record is the 
 "Gate" record, namely, the document on which is recorded the 
 times at which the employees enter and leave the plant. In other 
 cases the pay-roll is made up from the shop or departmental rec- 
 ords, usually cards or slips that are filled out to show how the 
 time has been used on or distributed to orders. 
 
 To describe all the various devices that are in use and the differ- 
 ent methods that are employed in securing gate time and time on 
 orders would require many chapters. Such a discussion would 
 also be unprofitable, inasmuch as, in the author's opinion there 
 is very little to choose between the various methods — accuracy 
 depending much more on the way in which they are carried out 
 than on the employment of any specific combination of cards 
 forms, clocks, etc. In this chapter, therefore, attention will be 
 given rather to the essential ends to be reached than to particular 
 ways of reaching them. But as some mechanism must be intro- 
 duced for the sake of illustration, the very simplest and most 
 elementary will be selected for that purpose, as the underlying 
 principles will be more clearly demonstrated in that way. And to
 
 2 1 S MA N I FA CTl r RING ( OSTS AND ACCOUN TS 
 
 o with it will be assumed that payment on a simple time basis, 
 thai is daywork, is alone employed in the plant. 
 
 Gate 
 Time 
 Record 
 
 TT 
 
 New 
 
 Man 
 
 New 
 Rate 
 
 Pay Roll 
 
 
 
 — 
 
 CJ 
 
 CO 
 
 
 
 +1 
 
 
 
 
 
 a 
 
 
 
 
 0. 
 
 <u 
 
 
 
 
 (V 
 
 c 
 
 a 
 >> 
 
 
 
 
 to 
 
 u 
 
 
 
 
 c 
 
 
 
 
 
 
 
 
 
 
 
 a 
 
 
 
 
 w 
 
 In 
 
 
 
 Pay RoU Recap. 
 
 Salaries Book 
 
 
 
 — 
 
 CnI 
 
 CO 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Q 
 
 
 
 
 
 
 bo 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 -j 
 
 n 
 
 
 
 
 w 
 
 Uh 
 
 
 
 ->- Salaries 
 
 -*■ Wages 
 
 "X< 
 
 To 
 Selling 
 Expense 
 
 Transfer 
 
 7 
 
 Wage 
 
 Rate 
 
 Register 
 
 ' ■' 46. I >iagram of time and pay (daywork). 
 
 The diagram I jlt. 16 Bhows the principal books and blanks 
 concerned with the record and accounting of time and pay on
 
 TIME AND PAY 
 
 219 
 
 the day work plan. The first and most important consideration is 
 to obtain a trustworthy record of the time actually worked by 
 each employee. While, as stated above, it is possible to obtain 
 this information from the shop records where great care is taken 
 in the recording of the latter, it is the author's opinion that, owing 
 to the peculiar nature of the transactions involved, and the many 
 temptations to fraud constantly present, it is in all cases desirable 
 to provide a wholly independent gate time mechanism for the 
 computation of earnings. Then where careful shop records are 
 also available, the agreement of the two records will form the best 
 safeguard against both accidental and intentional errors. 
 
 The cycle begins with the identification of the man. On 
 engagement each employee will be assigned a check number or 
 clock number, which serves to designate as a rule his department 
 or type of labor as the case may be. 
 
 Pay Roll 
 Gate 
 
 New Employe 
 
 Wage Register 
 
 Name 
 Dept. 
 Trade 
 
 
 
 
 
 CMp.cM Nn, 
 
 
 Rnto 
 
 
 
 Began 
 Work 
 
 Hi 
 
 
 
 
 rar 
 
 
 
 
 
 Fig. 47. — Advice of engagement. 
 
 On the engagement of a new employee the first step is to fill out 
 the blank, Fig. 47, in which the name, the department, the check 
 number, the trade and the rate of the new employee are entered. 
 This is signed by the foreman or other person entrusted with the 
 engagement of new employees. The day and hour at which he 
 began work is also entered. This advice note is then forwarded 
 to the gate office where a record is made of the new number. The 
 note is then forwarded to the pay-roll office for entry on the 
 pay-roll. 
 
 There are various methods of registering the in and out time 
 of employees as they pass the gate. The method now most 
 usually adopted is that of the clock system. Each employee is 
 allotted a card, which cards are kept in racks, so numbered that 
 the employee can immediately pick out his card in passing the 
 rack, without any delay. To record his time the man takes out 
 his card and inserts it in a slot in the clock frame, pulls a lever,
 
 MANUFACTURING COSTS AND ACCOUNTS 
 
 and thereby obtains a stamped entry of the actual time at which 
 he passes the clock, lie then places the card in a similar rack on 
 the other side of the dock, as indicated by the numbers arranged 
 on the rack. This procedure is gone through each time he enters 
 or leaves the plant. The principal objects aimed at in instituting 
 stem of gate time keeping are these: First, to ascertain the 
 hour and minute at which each employee enters and leaves the 
 premises. Secondly, to distinguish those who are late from those 
 who have arrived punctually. Thirdly, to record absentees. In 
 different plants the method of handling late attendance varies, 
 i ses as soon as the whistle blows, further access to the 
 
 clocks is shut off and the men are required to wait for a given time, 
 , or ' _> hr., before they are allowed to record their time and 
 the clock. In other cases the men are allowed to pass 
 i he dock at all times, but are not credited for their attendance 
 until the J t or }-'i hr. has elapsed.. These measures are ob- 
 viously adopted for the sake of discipline and from the accounting 
 point of view the main thing to be observed is, that whatever 
 mechanism is set up shall clearly distinguish between late arrivals 
 and punctual arrivals. One way of doing this is by the use of a 
 dock which prints late arrivals in a different colored ink. This 
 - the time of the gatekeeper in going over the cards, inasmuch 
 as where entries appear in black ink, he knows that the full time 
 lias been made, without the necessity of referring to individual 
 entries. On the other hand, where colored figures appear, they 
 call attention to the necessity for scrutinizing them and ascertain- 
 ing her the man is to be penalized or not, or to what extent 
 he is to be penalized. 
 
 The method of making a gate time record will vary in different 
 Where a daily system of time and cost keeping. is in use 
 a simple list of the absentees and late arrivals will be sufficient. 
 A printed form can be used, listing all the Qumbers current in the 
 various departments, and against these numbers a check mark 
 may be placed if the man has made full time for the day, and 
 where he has failed to do this, the actual number of hours he has 
 mad'- should be substituted for the check mark. In the case of 
 absence, the word "absent" will be written against his check 
 number. Where, on the other hand, pay-rolls and costs are 
 made u]) only weekly then it is usual to make use of a book in 
 which a column is provided for each day of the week and the 
 various entries jusl mentioned are made day by day opposite the
 
 TIME AND PAY 221 
 
 man's check number. Then at the end of the week the total 
 time that he has made is aggregated and placed in a total column. 
 
 The use of mechanical appliances for recording gate time in 
 place of the old-fashioned check system, must not give rise to a 
 false security. No clock system is positively proof against fraud. 
 It is essential to have a timekeeper whose integrity may be relied 
 on and whose duty it is to watch the men as they make their 
 entries at the clock. Otherwise, several kinds of fraud may be 
 perpetrated. For example: One man may take down and 
 stamp two or three cards, or in the case of those clocks which 
 record late arrivals in colored ink, the private use of colored 
 carbon paper by the men has been known to transform late 
 arrivals into punctual arrivals, as far as the color went. If the 
 records are to be accurate the making of them must be supervised 
 regularly, and if this is done the temptation to beat the clock will 
 not so readily arise because a safe opportunity will be lacking. 
 
 From an administrative point of view it is desirable that the 
 timekeeper should prepare lists of late arrivals and absentees, 
 for the use of the management. In this way the men who are 
 habitually late can be picked out and admonished. It is also 
 desirable to furnish the foreman with the names and numbers of 
 absentees as soon as the usual period of grace, say }4 or 34 hr., 
 has elapsed, in order that he may make provision to carry out the 
 work of the absentees. From the accounting viewpoint, how- 
 ever, the principal thing which is sought to be affected by the 
 institution of gate time is the ascertainment of the amount due 
 to each man, day by day. Fig. 48 shows a blank suitable for 
 recording gate time where information is only required to be 
 summarized weekly. It contains columns for the department, 
 check number, and name of man and also columns for each day 
 of the week, subdivided into ordinary and overtime. In these 
 columns the number of hours worked are entered. Next come 
 summary columns for aggregating the ordinary time, and extend- 
 ing it into wages, and also for aggregating overtime, and extend- 
 ing it into wages. The final column shows the amount payable 
 to the man. 
 
 The gate time entries thus recorded must now be entered on a 
 pay-roll. Fig. 49 represents a pay-roll suitable for weekly 
 entries. This is, in effect, a copy of the gate timekeeper's record, 
 with the exception that the daily entries of time are omitted, only 
 the total of hours and ordinary wages and the total of hours
 
 222 M. \ N 1 7'. 1 ( TURING COSTS AND ACCOUNTS 
 
 o £ 
 
 B 
 
 -- 
 
 Total 
 Payable 
 
 
 ( 
 
 
 03 
 
 
 
 _o 
 
 o 
 
 a 
 
 ■d 
 a 
 Q 
 
 "3 
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 w 
 
 
 
 T-t 
 
 
 
 
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 Bonu3 
 Earned 
 
 
 
 
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 >a to 
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 u 
 
 
 
 
 
 
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 c £ 
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 S g 
 
 1 
 
 
 No. 

 
 TIME AND PAY 223 
 
 and overtime are entered opposite each man's name. Additional 
 columns are also provided for the addition of bonus earned, which 
 is, of course, a matter entirely independent of time and, therefore, 
 it does not enter into the gatekeeper's record. Further, columns 
 are provided for deductions, which may be for various purposes 
 which need not now be further discussed. The total earnings, 
 less the total deductions, form the total payable, a column for 
 which is provided on the extreme right hand of the sheet. 
 
 We have now to consider a more advanced form of time and 
 cost keeping in which records are made each day of the man's 
 gate time, this being agreed, day by day, with the account of his 
 work in the shops as shown by a Time Sheet or set of Time Cards. 
 In such a system the gate time is used mainly as a check upon the 
 accuracy of the Time Card. These latter form the official source 
 of all entries. While these cards and method of their com- 
 pilation will be dealt with later, it will be necessary to state at this 
 point that a record is made up in the shops showing what each 
 man has done during the day, that is to say the orders on which 
 he has worked, and the time he has devoted to each order. As 
 regards any particular man there may be only one card, supposing 
 that he has been working only on one job all day, or there may 
 be half a dozen cards representing the allocation of his time to 
 half a dozen different jobs. Each morning the previous day's 
 cards are received by the pay clerk, and put through a series of 
 operations, including verification of the actual hours worked, its 
 extension into money against each order worked upon, the total- 
 ing of the amount of money earned, and the recording of the latter 
 in a daily pay-roll. The object of this procedure is to obtain an 
 exact agreement between the pay-roll totals and the different 
 allocations to orders. It also enables the exact cost, day by day, 
 of each order to be ascertained, and various cost classifications 
 set up, such as the division of time into productive and non- 
 productive, the total amount allocated to repairs, the expenditure 
 on indirect labor, and various similar items, which information, 
 if promptly ascertained each day, is of great importance to the 
 management officials. 
 
 The first duty of the pay clerk upon receiving the men's cards 
 will be to aggregate the hours worked on an adding machine, and 
 compare the total so accounted for, with the gate time as shown 
 by the timekeeper's returns. Any discrepancy must be imme- 
 diately inquired into. For the most part such discrepancies will
 
 22 1 MA X I 'I A CTl h'lXG COSTS AND ACCOUNTS 
 
 arise on the matter of late attendance, odd quarters and half 
 hours being frequently credited to the man where the gate time 
 disallows them. On first introducing such a system, errors of 
 this kind will be found frequently, but with steady persistence in 
 running down each such error, day by day, as it is found, and 
 interviewing the persons concerned in a tactful manner, a very 
 few weeks will suffice to produce a high degree of agreement 
 between gate time and shop time as shown by the cards. 
 
 Having made this agreement, and having found that each 
 
 man's time, as shown by his cards, actually agrees with the time 
 
 own by the timekeeper's record, the pay-roll clerk then 
 
 proceeds to extend this time into money. To do this he must 
 
 have, of course, an up-to-date and convenient form of record of the 
 
 Check 
 No 
 
 Name 
 
 Trade 
 
 Rate 
 
 Deduc 
 Items 
 
 "0. — Wage Rate Register (Rand index). The slips can be withdrawn or 
 inserted at any place. 
 
 Date AddecL 
 
 -Withdrawn 
 
 50A. — Back of one of above slips showing date record, 
 slips are filed alphabetically in reserve file. 
 
 Withdrawn 
 
 men's rates. Such a record is shown in Fig. 50. The record is 
 made in a Eland index, which is a frame holding slips of card- 
 board (or papei in celluloid tubes) which can be inserted in any 
 ord.r and withdrawn for alteration or substitution at any moment 
 without disarranging the rest of the record. The face of the slips 
 will contain spaces for check number, name of man, trade, rate, 
 and a further column for noting that his total pay is subject to 
 deduction of some kind or other, such as, for instance, where the 
 employer collects club money, etc. The various leaves of the 
 index , -.-in be 80 arranged that one or more leaves is devoted to 
 each department. In r^-li leaf the numbers will run, of course, 
 serially, bo that when the pay clerk receives a pile of cards, from 
 any particular departmenl and has sorted these into men's
 
 TIME AND PA V 225 
 
 numbers, and has checked each man's time with the clock, he 
 can then turn without loss of time to the wage rate register and 
 ascertain the man's rate. Each Shop Card or Time Card is then 
 extended at this rate, and the cards are then ready to enter on the 
 pay-roll. 
 
 The operation of reckoning wages is a simple one if proper 
 arrangements are provided. There are many schemes for cal- 
 culating wage rates but most of them are somewhat complex. 
 The simplest method is to have a "ready reckoner" Fig. 51 and as 
 printed reckoners are not easily to be found it may be advisable 
 for the firm to construct its own. The ready reckoner blank, 
 Fig. 51, is printed as shown in the illustration and the various 
 money amounts are intended to be entered by hand. One such 
 sheet is allotted to a particular rate and this rate may be so 
 much per week, or month, or so much per hour, as desired. It 
 will be seen that the sheet provides spaces for the money amount, 
 or money value of }/i hr., and so by quarters of an hour up to 
 12 hr. Two columns are provided, one for ordinary day time 
 and the other for overtime. This enables overtime calculations 
 to be made by simple reference to the sheet. In dealing with 
 each man's cards, therefore, the corresponding sheet to his rate 
 is turned up. The amounts chargeable to each order are rapidly 
 entered on the cards by reference to the ready reckoner and then, 
 as a check on the accuracy of the extension, the total amount of 
 time represented by all the cards, is also extended into money 
 and checked with the total of the various allocations as shown on 
 the cards themselves. Thus, if there are five cards and the man 
 has worked in all 8 hr., at 20 cts. an hour, making the total 
 payable of $1.60, then all the cards must aggregate exactly 
 $1.60. This is by no means a matter of course, inasmuch as 
 the work on one or more orders or jobs may have involved 
 reckoning }^ hr., in which case there may be a discrepancy be- 
 tween the aggregate of all the cards and the total per ready reck- 
 oner of 1 or more cents. It is most important that this discrep- 
 ancy should be eliminated at this stage. The total due to the 
 man should be reckoned upon the full amount of time, that is to 
 say the 8 hr. that he has worked, and, if any discrepancy exists 
 it should be eliminated by altering the amount on one of the 
 cards to the extent of a cent or so in order to bring the total of 
 the cards to agreement with the total per reckoner. The 
 necessity for this must be understood. After the entry on the 
 
 15
 
 MANl I'M TI WING COSTS AND ACCOUNTS 
 
 
 
 
 
 RATE 
 
 
 
 
 HUS. 
 
 ORD'Y. 
 
 OVERTIME 
 
 HRS. 
 
 ORD'Y. 
 
 OVERTIME 
 
 
 
 
 
 
 6H 
 
 
 
 
 
 1 | 
 
 
 
 
 
 6V 2 
 
 
 
 
 
 • 
 
 
 
 63^ 
 
 
 
 
 
 1 
 
 
 
 
 7 
 
 
 
 
 
 1 
 
 
 
 
 
 714 
 
 
 
 
 
 
 
 
 
 
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 1 3 4 
 
 
 
 
 
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 8 
 
 
 
 
 
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 21 2 
 
 
 
 
 
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 03/. 
 
 — •> 
 
 
 
 
 834 
 
 
 
 
 
 3 
 
 
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 3H 
 
 
 
 
 
 9M 
 
 
 
 
 
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 M* 
 
 
 
 
 
 3% 
 
 
 
 
 
 9?4 
 
 
 
 
 
 1 
 
 
 
 10 
 
 
 
 
 
 414 
 
 
 
 
 
 1014 
 
 
 
 
 
 
 
 
 
 101/ 2 
 
 
 
 
 
 ■1\ 
 
 103^ 
 
 
 
 
 
 5 
 
 
 
 
 
 11 
 
 
 
 
 
 5'4 
 
 
 
 
 
 11 >4 
 
 
 
 
 51/ 2 
 
 
 
 
 
 IH/2 
 
 
 
 
 
 1 
 
 
 
 
 113^ 
 
 
 
 
 
 6 
 
 12 
 
 
 
 
 
 51. -Blank for "Ready Reckoner.'
 
 TIME AND PAY 227 
 
 pay-roll of the total amount payable to the men, the cards them- 
 selves will be passed on to the cost department, and at a sub- 
 sequent stage an agreement between the pay-roll for any period 
 and the costs for any period will have to be made. Now, if 
 discrepancies between the total time per pay-roll and the allo- 
 cated time per cards are left, these will mount up in a short while 
 to quite a considerable sum, and render it impossible to get any 
 satisfactory agreement between cost and pay-roll. 
 
 The total amount of each man's earnings for the day having 
 been found and agreed with the small pile of cards which repre- 
 sents his day's work, the aforesaid earnings must now be entered 
 upon a pay-roll. The blank, Fig. 52, represents a form of pay- 
 roll suitable for use in this way. Each vertical column repre- 
 sents the record of one man for one week. Some of the horizontal 
 columns represent the days of the week, as will be seen by 
 reference to the figure and each of these horizontal columns is 
 divided into two portions by a thin line. The vertical columns 
 are also divided into two portions. This means that four little 
 squares are provided against each day of the week and for each 
 man. The upper pair of each set of squares is intended for the 
 record of the ordinary hours and the ordinary wages. The 
 lower set of squares is intended for the record of overtime hours 
 and overtime wages. It is recommended that these latter 
 figures be inserted in colored ink. At the foot of the columns 
 spaces are provided for totaling, first, the ordinary time, secondly, 
 the overtime, also for any bonus to be paid, leading to a grand 
 total of earnings for the week. Then comes a space for de- 
 ductions, and a further space for the total net amount payable 
 to each man. Cross-totaling of each horizontal column gives 
 the total payable for the day, and as one or more sheets of such 
 a pay-roll are identified with particular departments, it is 
 a very easy matter to obtain the total payable in each depart- 
 ment each day. This is necessary for agreement with cost 
 figures later on. 
 
 It will be seen by the foregoing that we have ascertained the 
 money value of each man's time for each day; that we have 
 agreed this money value with the money value charged against 
 each of the orders on which he has worked as shown by the 
 shop cards; and, that we have entered this daily amount to his 
 credit in a pay-roll, distinguishing between overtime and ordi- 
 nary time. The cross-totaling of this pay-roll gives us the
 
 228 MANUFACTURING COSTS AND ACCOUNTS
 
 TIME AND PAY 229 
 
 total amount chargeable to each department each day, and if 
 necessary this may be subdivided into overtime and ordinary time. 
 The vertical totalling of the pay-roll gives us the total earnings 
 of the man for the week. All these totals are in agreement. 
 We have, therefore, laid a secure foundation for our costing 
 operations at a later date. By handling the time daily we are 
 enabled to track down any errors immediately they occur, and 
 while they are fresh in every one's mind. As the Shop Cards 
 have been extended into money it will be seen later that prompt 
 information of various kinds can be afforded to the management. 
 
 In other words we have cleared up each day's work as we go 
 along, and it follows from this that the operations of making 
 out the pay-roll at the end of the pay period are confined to 
 simple addition of the amounts already entered. Each day's 
 time having been checked with the gate, no further check is 
 necessary. Moreover, as the time credited to each man is 
 shown on the pay-roll, if any dispute arises the matter can be 
 traced to the particular day on which the discrepancy occurs, 
 with great ease. It is, of course, understood that in all cases 
 of dispute between the workman and the firm the clock time is 
 to be taken as authoritative. 
 
 So far we have only considered the question of day wages. 
 In a large number of plants, however, some system of payment 
 by results will be found in use. The system adopted may be 
 that of straight piecework, in which a given price is paid for an 
 article or so many articles as completed by the man, or it may be 
 some of the more complicated systems of premium or bonus are 
 employed. From the point of view of the pay-roll, however, 
 we have only two things to consider. First, the authority for 
 entering an amount on the pay-roll to the particular man, and 
 secondly, how far verification can be applied to the item. It is 
 evident that our system of checking by means of gate time will 
 not apply here. The man's earnings are obviously quite in- 
 dependent of the time that he may spend on the work Never- 
 theless it is an excellent plan to have all men, whether day 
 workers or piece workers, registered at the gate in the same 
 manner. In some cases the calculation of burden is dependent 
 upon the number of hours the men work. In all cases it is 
 most advantageous for the management to know the relation 
 between the time actually spent on the job, and the hours 
 worked by the man. But from a purely accounting point of
 
 230 MA VUFAt TURING COSTS AND ACCOUNTS 
 
 view there is no relation between gate time and bonus or piece- 
 work earnings. We shall, therefore, have to depend on some 
 other source for the verification of amounts alleged to be due to 
 particular men. 
 
 This is sometimes a matter of difficulty. The calculations 
 of piecework earnings is a somewhat technical matter. In other 
 . where list prices are in use and the kind of work does not 
 vary greatly, it is not a difficult matter to provide the pay-roll 
 clerk with a set of the piecework prices and thus enable him to 
 check up the extensions, and not only the extensions but the 
 correctness of the price placed against each item. Two factors 
 are obviously involved: First, the number of pieces or quantity 
 of work done; and secondly, the price to be paid for each piece or 
 sel of pieces. The first of these items is more difficult of verifica- 
 tion than the second in some plants. Where articles are made and 
 turned into stores the storekeeper's record of the quantity re- 
 1. and for which he is responsible, may be taken as a 
 means of checking the statement of the piece record. But in 
 many shops the work passes from one man to another. Prices 
 are subject to deductions for imperfect and spoiled w r ork. Lots 
 which start out complete in number become diminished in the 
 course of their passage through the shop, so that the piece workers 
 towards the end of the passage are working on a less number than 
 at the beginning. It is obvious that no simple mechanism 
 can be described for diking care of conditions like these. 
 
 It is, therefore, sufficient to point out here that whatever records 
 are presented to the pay clerk as his authority for entering an 
 amount to the credit of a man on the pay-roll should be subject 
 to some system of verification by him or for him. With this 
 proviso duly applied there is nothing special about the treatment 
 of piecework in a pay-roll such as that just described. The 
 amount earned by the man each day on finished contracts is 
 entered precisely the same as if it were daywork, except that, of 
 course, no hours appear againsl each entry. It is advisable that 
 piecework, also, be entered in a specially colored ink and its 
 amount brougb.1 oul in departmental totals separately from that 
 of day time and overtime. The word "piecework" as used here 
 includes all kind- of payments by results except departmental 
 bonuses or group bonuses, which are extra earnings made to men 
 ial efficiency which has been brought about by their 
 united effort. Such bonuses are usually calculated at intervals
 
 TIME AND PAY 
 
 231 
 
 of a month. They should then be entered on the line devoted 
 to "Bonus" is the pay-roll. All other bonuses such as those 
 arising out of premium systems or bonus systems, will be treated 
 as ordinary piecework and entered as just described. 
 
 In many cases indeed, especially where jobs last a considerable 
 time, it is not an unusual practice to credit men with their day 
 wages in the ordinary way, and then, upon the completion of the 
 job, reckon up the difference between the day wages so received, 
 and the piece or contract price of the work, and credit them with 
 the difference. This is called a piecework balance, or premium 
 balance. It is entered in exactly the same way as if it were a 
 straight price for the work done. From many points of view 
 this method of settling piecework earnings is preferable to the 
 more common practice of ignoring the daywork earnings and 
 
 Pay Roll 
 Gate 
 
 Transfer 
 
 Wage 
 
 Eegister 
 
 
 
 Old Dept. 
 
 New Dept. 
 
 Check No. 
 
 Check No, 
 
 "Rate 
 
 Rate 
 
 TrnHp 
 
 Trade 
 
 
 
 
 D.-ite 
 
 
 
 at 
 
 Hour 
 
 
 
 
 
 
 
 
 Fig. 53. — Advice of transfer to another department. 
 
 making entries only on the completion of the piecework. Whether 
 or not it can be adopted depends very largely, however, on the 
 kind of work being clone at the plant. 
 
 Minor arrangements to facilitate the work of the pay clerk in- 
 clude notification when a man is transferred from one department 
 to another, and also when a man has had his rate changed or ad- 
 vanced. Fig. 53 represents an advice of transfer giving all data 
 necessary to enable alterations to be made on the pay-roll and in 
 the wage register. Fig. 54 shows a blank also suitable for chang- 
 ing rate. Such changes of rate should only be made at the end of 
 pay periods. The practice of changing the rate suddenly in the 
 middle of the week is a very confusing one and there is no real 
 necessity for it. 
 
 It is the usual practice to keep a record of each workman's 
 changes of rate and other data concerning his employment.
 
 MANUFAi TURING COSTS AND ACCOUNTS 
 
 netimes very elaborate, but a convenient and suffi- 
 ciently comprehensive record for most purposes will be found in 
 Fig. 55. The lower part of the card is, of course, not filled out 
 unless the workman leaves or is discharged. "When this happens, 
 
 Change of Rate 
 
 Check No. 
 
 
 
 to take effect in next Pay Period 
 
 Foreman 
 
 
 Fig. 54. — Advice of change of wage rate. 
 
 the card is taken out of the current file and placed in a "Former 
 Employees" file in alphabetical order. The use of the card will 
 be easily understood from examination of the wording. 
 
 The diagram, Fig. 4(3, may now be referred to, in order that the 
 whole cycle of operations with regard to time and pay may be 
 
 Name 
 
 Check 
 Xo. 
 
 Trade 
 
 Address 
 
 Date Started 
 
 
 1 Date Left 
 
 
 
 Kate 
 
 Date 
 
 Rate 
 
 Date Rate 
 
 Date 
 
 Rate 
 
 Date 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Record 
 Time- Keeping- 
 
 Honesty 
 
 Industry 
 
 -Sobriety 
 
 __Intelligence_ 
 
 
 55. — Workman's record card. 
 
 ie. Though nothing has been said about the 
 
 readily understood that this is nothing 
 
 subdivision of the pay-roll made for convenience. In 
 
 the Salaries Book are controlled by 
 
 those in the pay-roll. But as changes
 
 TIME AND PAY 233 
 
 in the salaried staff are infrequent, no elaborate mechanism is 
 necessary to keep the entries in this book up-to-date, as regards 
 transfers, changes of rate, etc. 
 
 In regard to the earnings of shop employees we have seen that 
 entries arise from gate time, or from shop records (Time Sheets 
 or Time Cards) agreed with gate time, or from shop records 
 of piecework or premium earnings. The entries in the pay-roll 
 may be made weekly, or daily. In the latter case, daily agree- 
 ments are made with the shop records before entry, so as to ensure 
 that the basis of pay and of cost is the same. The amounts due 
 to each man are cross-totalled so that the amount paid in each 
 department is also ascertained daily. 
 
 When the pay-roll is completed, it forms the official authority 
 for the payment of the money. It thus corresponds to the bill 
 or invoice in the other forms of purchase transactions previously 
 considered (purchase of stores, of plant, etc.). The Salaries 
 Book is correspondingly the official authority for the payment of 
 salaries. Consequently the totals as shown by these two books 
 are entered on the Cash Journal, and credited to Cash on the one 
 hand and respectively to Wages account and to Salaries account 
 on the other. All the mechanism above described is set up to 
 bring about this result correctly. 
 
 At the end of the month we shall have sundry weekly debits in 
 these two accounts, just as we had sundry debits in Stores 
 and Plant accounts. These are charges to Manufacturing in 
 essence, and as all charges to Manufacturing are credited through 
 the cost system, or more specifically through either Manufacturing 
 or Burden Journals, the manner in which these credits are made 
 may be conveniently postponed for the present. 
 
 In the case of salaries there will be, and in the case of weekly 
 wages there may be a certain number of employees whose time, 
 in whole or in part, is chargeable to Selling Department. Such 
 amounts are indicated on the Salaries Book and pay-roll and are 
 charged in the Cash Journal to the selling expense column. 
 They are thus diverted at the beginning from salaries and wages 
 pertaining to manufacturing operations, and we need not consider 
 them further.
 
 THAPTER X 
 WORKS EXPENSE, AND ADMINISTRATIVE EXPENSE 
 
 Purchased items chargeable against works expense are usually 
 
 neither many nor important. Most of the expenditure coming 
 under this classification arises within the shops from the use of 
 material and the application of labor, and is, therefore, charged 
 through costs and not through the purchasing mechanism. 
 
 Inasmuch as all tangible purchases are chargeable in the first 
 place t<> Stores account, and all labor and service within the plant 
 i- chargeable either to Wages or Salaries account, it will be 
 evident that any purchases classified as works expense must be 
 in the nature of services rendered by outsiders. Unless such 
 items as power from electric mains, or gas from a gas undertaking 
 aie purchased from outside, purchases on works expense will be 
 confined to sundries such as postage stamps, telephone charges, 
 rams, and such freight and carriage charges as are not 
 absorl »able 1 y st < >res. Repairs carried out by outside firms would 
 also be included under works expense, even though such repairs 
 included the supply of new parts. If, however, such new parts 
 I rilled separately, care would have to be taken that they were 
 not included in or confused with stoics. In the majority of 
 . bills for repair work would include the supply of parts for 
 repair in a general total even though they were separately 
 itemized. Such general total would be a works expense. 
 
 Invoices or bills for an item of works expense are entered in 
 the ('ash Journal, or Purchases Journal as the case may be, 
 Cash or Accounts Payable being credited, and Works Expense 
 int being charged. The columns headed department 
 expense in Purchases Journal are not used unless we have several 
 Works Expense accounts, one for each department. 
 
 The credit to Work- Expense account coined from the Manu- 
 facturing Burden Journal, ami the way in which items of works 
 expense are analyzed and charged to various departments will 
 
 be deall with under t hat head. 
 
 Normally there will he no balance remaining in the Works 
 
 234
 
 WORKS EXPENSE 235 
 
 Expense account at the month end. But it may happen occa- 
 sionally that where a large sum has been expended in a given 
 month, or what amounts to the same thing, a large bill has been 
 received or paid in a given month, for contract work in repairing 
 buildings, part of the amount may be held up for distribution 
 in later months. Thus if a bill for $1,000 has been received, 
 it may be considered desirable to charge this amount to Manu- 
 facturing Burden in say 10 monthly installments of $100 each. 
 In this case the credit received each month from Burden Journal 
 will be only for $100, leaving at the end of the first month a 
 balance of $900, at the end of the second month $800 and so 
 forth. The presence of this balance converts the Works Expense 
 account into a suspense account representing a payment made of 
 which the benefit has not yet accrued. It will thus appear as an 
 asset on the Monthly Balance Sheet, though, of course, it is so 
 only in a qualified sense. Usually, however, such an item would 
 be journalized to a special suspense account temporarily opened 
 for the purpose. 
 
 Administrative Expense. — In all plants there will be a certain 
 class of expense that is mixed in character, and not obviously 
 divisible between selling expense and factory expense. The 
 salaries of the president, vice-presidents and higher officers of 
 the corporation, partners' salaries in a private firm, salaries of 
 correspondence clerks and bookkeepers, depreciation of office 
 buildings, equipment, furniture and fixtures, stationery, phone 
 charges, etc. It is frequently the practice to assemble such items 
 in an Administrative Expenses account, as was indicated in Chap. 
 Ill (Part I) and then to prorate this, by means of a journal entry, 
 between factory and selling expense. Provided that, when doing 
 so, the bearing of each item on the division is considered, this is 
 a good way of meeting the difficulty. But as the division has to 
 be made at some time or other, and as it is important that no 
 general percentage be applied to the diverse items making up the 
 total, it is perhaps just as well to make the division at the time 
 the first entries are made regarding the respective items in the 
 books of account. Thus when entering salaries in the Cash 
 Journal, it is a simple matter to fix a percentage on which such 
 salaries should be charged to Selling Expense and Factory 
 Expense respectively. When considering depreciation in the 
 Depreciation Schedule, it is not difficult to arrange that deprecia- 
 tion on items mentioned above is prorated between Selling
 
 236 MANUFACTURING COSTS AND ACCOUNTS 
 
 Expense and Factory Office Expense to begin with. Rents, 
 - and insurance are dealt with in the Rents, etc. Schedule. 
 And so on. If each separate class of mixed expense is dealt with 
 in this way, and is divided on its own individual percentage, fixed 
 after consideration of the relative bearing of selling and factory 
 if the item in question, closer accuracy is likely to result than 
 if all such charges are massed in one total, and this total roughly 
 divided betweeD selling and factory on an arbitrary basis. 
 
 The familiar heading "administrative expense" will not, 
 therefore, appear in the accounts now to be discussed. It is 
 assumed that mixed items are separated into factory and selling 
 expense at the first time of their entry in the books, and conse- 
 quently do not require a massing or distributing in any formal 
 "1- special account or journal.
 
 CHAPTER XI 
 GENERAL VIEW OF THE FOREGOING OPERATIONS 
 
 All the operations described hitherto are antecedent to actual 
 manufacture. Beginning with receipt of a bill or invoice or, 
 with a payment of cash, and ignoring for the present all such 
 transactions as are incurred on behalf of the selling department of 
 the business, we have seen how each class of purchase, by means 
 of appropriate columns in the Cash and Purchases Journals, is 
 steered, so to speak, into its own particular ledger account. Thus 
 we have on the debit side of these accounts, a continual piling up 
 of amounts representing purchases of stores, plant and equip- 
 ment, auxiliary equipment, labor (in the form of wages and sal- 
 aries), service (in the form of rents, insurance, taxes, etc.), and 
 of minor services assembled under the head of works expense. 
 
 On reference to the general diagram, the typical accounts repre- 
 senting these classes of transactions will be seen in two columns, 
 the journals on the left hand providing the mechanism for 
 charging the ledger accounts, and the blanks immediately on the 
 right providing the mechanism for measuring out the amounts 
 chargeable to Production in each financial period, say monthly. 
 
 Thus we have the Stores Issue Book, which contains the 
 summary of the transactions relating to the issue of stores and 
 materials; the Pay-roll Allocation Summary which summarizes 
 the amounts earned by and payable to each worker (a Salaries 
 Book being a usual subdivision of the pay-roll, but not an es- 
 sential one); the Depreciation Schedule which is a medium for 
 calculating how much of the original value of the buildings, 
 plant, tools and other equipment has been used up by reason of 
 manufacturing activity during the period; and other schedules 
 for calculating the incidence of regularly recurring purchased 
 services, such as insurance, rents, taxes, etc. These mechanisms 
 are not journals. They merely serve to collect, or in some 
 cases to calculate, the data for journalizing. 
 
 We have now to consider how the amounts piled up in the above- 
 mention ledger accounts are credited with the amounts charge- 
 
 237
 
 MANUFACTURING COSTS AND ACCOUNTS 
 
 able to Production in the given period, and we shall find that a 
 prime distinction is made between two classes of such expenditure, 
 
 thing like one-half of it being considered as burden, and the 
 remainder as the direct expense of production. All the former 
 class is dealt with through the Burden Journal, which credits the 
 foregoing ledger accounts on the one hand, and charges various 
 manufacturing departments (in departmental Burden accounts) 
 with their due share of burden. All the latter class is dealt with 
 by means of a .Manufacturing Journal, or rather by a series of 
 Manufacturing Journals, one for each productive department, 
 which credit Stores, Wages and "Works Expense accounts with 
 the amounts directly chargeable against Production, and charges 
 Departmental Manufacturing account. The latter journal also 
 s as the medium by which burden is distributed over production 
 orders, so that in addition to the above-mentioned credits, the 
 departmental Burden accounts are also credited, and Depart- 
 mental Manufacturing account charged. These operations can 
 be readily followed on the general diagram, even without the 
 detailed explanation which will be given in the following chapters. 
 A- we are now about to enter upon the transactions of manu- 
 facturing proper, and as the form of these transactions, that is to 
 say, the allocations and subdivisions of expenditure, is dependent 
 upon the way in which orders are issued, the nature and 
 purpose of orders will be considered first. It is a cardinal rule of 
 manufacturing accounting that no expenditure shall take place 
 save in virtue of an order, which is equivalent to saying that 
 every item of expenditure in the plant, whether in the shape of 
 stores, Labor, or service of any kind, must be charged to an 
 order number. Then, as every order number is represented 
 by a Cost Sheel (or set of Cost Sheets) it will follow that 
 the whole of i he expendil ure in a given period, say a month, will be 
 represented somewhere or other by entries on Cost Sheets. Now- 
 all the < "~i Sheets pertaining to direct production are assembled 
 and listed in the Manufacturing Journal, and those pertaining 
 to overhead expense or burden are assembled and listed in the 
 Burden Journal, consequently when a ledger account, such as 
 
 -. ha- been credited from Burden Journal and also from 
 Manufacturing Journal, ihc amount so credited will agree with 
 the total stores issues for t he month. Agreements of this kind, as 
 will be seen later, provide a guarantee of the correctness of the 
 very numerous I ransact ions u hich are recorded on the Cost Sheets.
 
 GENERAL VIEW OF THE FOREGOING OPERA TIONS 239 
 
 In connection with the chapters that follow the student should 
 keep in mind (1) that no expenditure can be credited to the ledger 
 accounts unless it appears somewhere on a Cost Sheet; (2) that 
 every Cost Sheet represents an order number; (3) that labor is 
 employed and stores are issued only in virtue of an existing order. 
 It will be seen, therefore, that the order sets everything in 
 motion within the plant. To its corresponding Cost Sheet the 
 expenditure on the order is charged. And at the end of the 
 month these Cost Sheets arc listed and summarized, and grouped 
 in various ways, but primarily into the two great divisions of 
 burden and production. Finally burden is distributed or pro- 
 rated over the Cost Sheets representing production orders, so 
 that Manufacturing account finally is charged with an amount 
 equal to all the credits that have been made to the ten ledger 
 accounts shown on the left hand of the general diagram. This 
 account, therefore, shows the cost of manufacture for the month, 
 if we neglect the balance from the previous month, and if no credits 
 have yet been made for finished work withdrawn from the shops. 
 
 The total of all the production Cost Sheets at any month end 
 must agree with the balance in Manufacturing account, inasmuch 
 as they form the detail of that balance, much in the same way as the 
 Stores Item Ledger Cards were regarded as the detail of the Stores 
 Control account. Manufacturing account may be regarded as a 
 Control account of work in process, and the various Production 
 Order Cost Sheets may be regarded as subsidiary Item Ledger 
 Cards. 
 
 One further explanation may be given at this stage with regard 
 to burden. One of the objects of Burden Journal is to allocate 
 burden to departments, but these are not necessarily all produc- 
 tive departments. If, for example, in the example shown 
 in the general diagram, we consider that department 1 is the power 
 plant, then it will be understood why that department is shown as 
 "prorated" over the remaining departments 2 and 3. The fact 
 is that though it is important to ascertain the whole cost of 
 running that department separately, it is in itself an expense, or 
 in other words it is not a productive department. Its whole cost 
 must, therefore, be absorbed by the actual productive depart- 
 ments on some basis — which basis in the case of the power plant 
 would be the amount of power considered to be taken by each of 
 the productive departments. Two-thirds might, for example, 
 be taken by department 2 and one-third by department 3. The
 
 240 MANUFACTURING COSTS AND ACCOUNTS 
 
 whole cost of department 1 would, therefore, be prorated between 
 2 and 3 in that proportion. Thus the amount standing in the 
 column devoted to department 1 is extinguished. Of course, a 
 similar result would be attained by charging a ledger account 
 with the cost of department 1 and then crediting it with the 
 two-thirds absorbed by department 2 and the one-third absorbed 
 by department 3. But such a ledger account is not really neces- 
 sary, since it would never under any circumstances contain a 
 balai 
 
 Further, il may occur to the reader that some work might be 
 going on in the plant, which though of the nature of an expense, 
 it was not convenient to charge out to any particular department 
 in the month in which it occurred. Thus, for example, a very 
 extensive repair of a building by the firm's own men might be 
 proceeding. How would such expenditure be held up, and dis- 
 tributed over future months by installments? Although incurred 
 fin- the benefit of department 3, it would not be chargeable all at 
 cure to thai department. It would be held up by the simple 
 means of charging it to a "Suspense" account, instead of to the 
 Department 3 Burden account. Alongside Department 3 
 Burden account, we should have a second account labelled Depart- 
 ment 3 Burden Suspense account. The amount in this account 
 could be charged in any way desired to the Burden account, 
 month by month, by an entry through the General Journal. 
 
 Items Chargeable to Selling Expense. — It should be understood 
 that almost any kind of purchase whether of material or service 
 may require dividing between the factory and the selling depart- 
 ment. Thus certain pay-roll items, and certain stores issue 
 items may be chargeable to Selling Department, and a certain 
 proportion of depreciation (on buildings and equipment used by 
 the selling department I, and of rents, insurance, etc., will require 
 allocating each month to the same department. Further sundry 
 items like stationery, office salaries, postages, telephone rents, 
 .. will also be divisible between factory and selling. 
 
 In the firsl part of this book, (see Chap. Ill, Part I) special 
 journal- were shown for the allocation of this class of item, but 
 in practice thi isually unnecessary. The division between 
 
 selling and factory lias to be made somewhere, it is true, but the 
 formality of a special journal or journals is superseded by the 
 addition of columns to the Pay-roll Summary, the Stores Issues 
 the Depreciation and Fonts Schedules, etc., so that the
 
 GENERAL VIEW OF THE FOREGOING OPERA TIONS 241 
 
 amounts chargeable against Selling are separated from those 
 chargeable to Factory at the very commencement. Then we 
 have left items like salaries, and office expenses which are mixed 
 in character, that is to say that certain expenses such as salaries 
 of the higher officials, can be divided between Selling and Factory 
 only on some arbitrary basis. This basis must be carefully 
 thought out and fixed by authority, and the division can then be 
 made month by month in the proportion authorized, at the first 
 time of entry. Thus, salaries will be allocated between selling 
 and factory in the Cash Journal; telephone rents, postages and 
 minor expenses will be as far as possible tabulated, and the 
 relative use of them by selling and factory recorded, but there will 
 be in most cases, a residuum which can be allocated only on an 
 arbitrary basis. This will be done in the Cash Journal, or in the 
 Purchases Journal as the case may be, at the time of first record 
 of the transactions. 
 
 The alternative to this procedure is to charge all such mixed 
 items to a General Expense account, and then allocate the various 
 items between factory and selling by means of a special journal, 
 as shown in Fig. 8 (Part I). Though perhaps the most logical 
 and systematic way to handle the problem of mixed expense, the 
 assistance it affords is more apparent than real, as long as care is 
 taken to see that the various items of this character have actually 
 been split up in the various books of first entry as described above. 
 
 It is, of course, important to insure that all items reaching the 
 Works Expense account, are really works expense, and do not 
 contain any proportion of what should be selling expense. By 
 throwing all doubtful items into a General Expense account 
 and thus splitting this up, a certain amount of increase in safety 
 is attained, but except in special cases should not be necessary. 
 
 10
 
 CHAPTER XII 
 ORDERS- SERVICE OR STANDING ORDERS 
 
 The object of setting up a manufacturing plant is to make 
 Is or otherwise turn out salable product. But very little 
 acquaintance with factory work demonstrates that a considerable 
 amount of activity is constantly going on that has no direct 
 relation to the making of anything salable. We may observe, 
 for example, men cleaning windows, sweeping floors, arranging 
 stores on shelves, shovelling coal, stoking furnaces, repairing 
 machines, buildings, and tools, running errands, and a hundred 
 other varieties of occupation for which obviously no customer is 
 tr« dnir to pay directly. 
 
 But a1 the same time it is well to keep in mind that all these 
 occupations have to be paid for by the customers of the firm 
 indirectly, since the only revenue of a manufacturing plant 
 (in its manufacturing capacity) is the various sums which are 
 paid to it by customers in return for product purchased by them. 
 
 1 >n the other hand, when we sec a man working at a machine 
 on material that we recognize as part of salable product, when we 
 see him turning a bolt thai we know is part of the steel traps that 
 11, or when we observe him working a loom on which is being 
 ! some of the cloth which we sell, then there is no difficulty 
 in understanding thai pari of the price received from the customer 
 will go directly to pay the wages of men so occupied. 
 
 1 appears then that the revenue of our plant as received from 
 the customers in return for product furnished to them must be 
 applied first, in paying for the raw material of which our product 
 consists, and also for the wages of men who have directly worked 
 up this raw material, and secondly, part of this revenue must 
 be applied to paying for coal consumed in our power plant, for 
 oil and waste consumed in our shops, for lumber consumed in 
 making patterns,for brass and steel consumed in making templets 
 and jigs, for the wear and tear (depreciation) on our buildings, 
 plant ::• d equipment, and also for the wages of our power-plant 
 staff, ol our pattern makers and tool makers, cleaners, laborers, 
 foremen, superintendents, clerks, and so forth. 
 
 242
 
 ORDERS—SERVICE OR STANDING ORDERS 243 
 
 The first class of expenditure is called direct or productive 
 expense, the second class is called indirect, unproductive expense, 
 or shortly — burden. The distinction between the two classes 
 of expenditure is perhaps unduly accented by the use of these 
 terms, which imply that one kind of expense is in some way more 
 useful or legitimate than the other. In a well-managed plant 
 on the contrary there is no difference between the value of the 
 direct expenditure and that of the indirect expenditure. The 
 only difference is that the former can be measured directly and 
 simply in relation to the quantity of work carried out in a given 
 time, and the latter requires more complex methods of measure- 
 ment and connection with quantity of product. 
 
 Every man and every dollar of expenditure ranked as pertain- 
 ing to indirect expense or burden is really performing service. 
 And in a well-managed plant every item of such service will be 
 indispensable service, and, therefore, as necessary to the productive 
 process as is the work of the men at the looms or vats or machine 
 tools, who are working directly on salable product. As a matter 
 of fact all the miscellaneous activities usually found throughout 
 a plant can be reduced to a few well-marked groups of service, 
 so that the apparently heterogeneous character of indirect 
 expense is not so marked as it often appears. 
 
 Now, it will be evident that in a plant of any size some mechan- 
 ism must be set up to indicate to the men what work is required 
 and what portion of it has been assigned to them, and further 
 some additional mechanism must be established so that the time 
 they spend on the work, the material they use on it, and the 
 cost both of labor and material, may be recorded against each 
 job or lot of work done. And further still, to this record of labor 
 and material must be added certain other expenses, such as 
 depreciation, rent, insurance; a share of the cost of supervision; 
 a share of the cost of the organization of timekeepers, clerks, 
 stenographers, correspondents and so forth. These necessities 
 imply first an order system and secondly a cost system. The 
 two are so closely connected that it is difficult to consider one 
 without at the same time considering the other. 
 
 The prime rule in regard to orders is that no work may be 
 undertaken, and no expenditure within the shops incurred, save 
 by virtue of a numbered order. 
 
 The second rule in regard to orders is that no wages can 
 be paid and no stores issued save as against a record of the
 
 MANUFACTURING COSTS AND ACCOUNTS 
 
 order numbers to which work and such material is properly 
 chargeable. 
 
 The third rule in regard to orders is that every expenditure 
 for the purpose of carrying out an order must be recorded on a 
 such Cost Sheet being individual to that order and 
 containing nothing but expenditure upon that order. 
 
 Now, as has already been pointed out, orders fall into two 
 principal classes. < toe class is that of Production Orders, and 
 the second that of Service Orders. The former deal with those 
 sses performed on the material which, later, is to be sold 
 -oduct, and the latter deal wuth all other expenditures, 
 liven this classification is subject to exceptions. There are some 
 operations so little identifiable with particular lots of work, that 
 though performed on material that is strictly salable material, 
 yet the operations are more of the nature of service than of direct 
 hiction. Such, for example, will be the operations of anneal- 
 ing, varnishing in vats, tempering, and generally any operation 
 in which a number of separate lots of goods belonging to separate 
 orders are worked on at the same time and in a uniform way. 
 ' renerally speaking, however, Production Orders are those issued 
 for performing work directly on salable material, and Service 
 
 < frders comprise all other work. 
 
 In large plants, and in most machine shops, the term salable 
 material needs to be used with qualification. Such shops make 
 things for their own use, usually tools, jigs, patterns, etc.; but 
 sometimes actual machines. A firm will also sometimes under- 
 take building operations on its own behalf. Therefore, a Produc- 
 tion Order may embrace work done on material salable either to 
 an outside customer or to the firm itself. In this case the firm 
 is its own customer, but that does not affect the distinction 
 already drawn. It only extends its scope a little. Usually, 
 however, orders of this class are not referred to as Production 
 
 < Orders, bu1 as Plant < Orders, or by some similar term to indicate 
 that they are for the firm's own benefit. In the present work they 
 will usually be termed Plant Addition Orders. 
 
 In considering orders it will be convenient to begin with 
 
 i vim: Production Orders to follow later. One 
 
 >n for this nut hod of attacking the subject is that ultimately 
 
 all the expenditur< 3i rvice Orders has to be apportioned in 
 
 some way or other to the Production Orders. There are several 
 
 of doing tin.-, and these are known as the various methods of
 
 ORDERS— SERVICE OR STANDING ORDERS 245 
 
 burden distribution. We need not note more than their existence 
 at this stage. From what has been said already it will be readily 
 understood that the reason for distributing all the cost of Service 
 Orders over the various Production Orders is that only the latter 
 Jetch money. They alone represent salable product, and, there- 
 fore, in order that service may be paid for, it must at some time 
 or other be transferred to and included in the cost of salable prod- 
 uct, so that the price asked for the latter is sufficient to cover not 
 only the direct cost of the product but also its share of service. 
 
 One of the great sources of business failure is neglect of cost 
 of service. Where no proper accounting system is in operation 
 to ensure that cost of salable goods does actually include cost of 
 service in addition to direct cost of production, the cost of service 
 is frequently guessed at, and not infrequently underestimated, 
 with a resulting loss on sale. 
 
 Service Orders are of two kinds: Standing Orders and 
 Special Service Orders. 
 
 Standing Orders cover all the usual routine service operations. 
 Special Service Orders are issued where some unusual operation 
 must be undertaken, such as the general repair of a machine or 
 overhaul of a building. The distinction between the two classes 
 of Service Order is usually one of magnitude. The limit varies 
 in different plants, but is usually based on an understanding that 
 any repair or other service work likely to amount to more than 
 a certain sum, say $20, must be authorized by a Special Service 
 Order, which must be issued or signed by some authorized person. 
 In all other respects the two classes of Service Order are identical. 
 
 Standing Orders are so named because they are permanent. 
 That is to say that they represent a classification of the usual 
 kinds of service, and to each item of this classification a permanent 
 order number is affixed, so that, for example, if the letter Q is 
 assigned as a prefix distinguishing Standing Orders, Q35, may 
 represent building repairs, Q36, machine repairs and so forth. 
 These numbers do not change. Each has a Cost Sheet appro- 
 priated to it, and the costs thus ascertained are charged into 
 Burden account at the end of each month, leaving the sheet blank 
 to receive the detail of the next month's expenditure. In this 
 way though the numbers never change, yet virtually each month's 
 expense is isolated without difficulty. On the other hand, the 
 system of Standing Orders ensures that expenditure on service 
 is recorded in the same way month after month, so that accurate
 
 246 MANUFACTURING costs AND ACCOUNTS 
 
 comparisons can be made as to the expenditure, in very consider- 
 able detail, and with a minimum of trouble. 
 
 The object of setting up Standing Orders is to record expendi- 
 ture cu service so that the record is significant. It is of no use to 
 record figures unless they mean something. Now, when we 
 have a great variety of expenditure, as in the case of a manu- 
 facturing plant, we must be able to distinguish between the 
 various uses of the service performed, or the figures will have 
 little significance. If, for example, we know that in a given 
 mouth s.">. tKK) has been spent on repairs, this tells us something, 
 but it' we think the figure too high we have no means of finding 
 out the location of the excess. If, however, our Standing Orders, 
 id of merely providing one item for repairs, had provided 
 rate items for building repair, machine repair, repairs to 
 fixtures, tool repairs, and so forth, we should be able to lay our 
 :• on the division in which the increase had occurred. And 
 if a further subdivision had been provided, so that each depart- 
 iii. -nt had a set of Standing Orders for its own expense, we should 
 be able to trace the increased expenditure on, say, machine 
 repair, to the particular department in which it had been incurred. 
 And this localization of the increase would be made with prac- 
 tically no more work than would be involved in providing the 
 bare information that repairs as a whole had cost $5,600. 
 
 The setting up of a system of Standing Orders is, therefore, 
 a matter of considerable importance, and the degree of control 
 '" be attained over expenditure on service will depend largely 
 on the wise laying out of the Standing Order system. 
 
 Though in particular industries there may exist special kinds 
 of service expense, yet these will not commonly be important. 
 The functions underlying manufacturing activity are closely 
 similar in all industries, and some such scheme as will now be 
 described will apply to almost all plants. 
 
 It will have been understood from the foregoing chapters 
 that burden is made upof three elements: first, material consumed, 
 such as oil. waste, fuel. etc. — any material, in fact, that does not 
 form pari of the salable product; secondly, internal service, rep- 
 resented by wages and salaries; thirdly, outside service repre- 
 sented by charges for rent, insurance, taxes, etc. And it will be 
 remembered 'hat wear and tear on plant, buildings, machinery 
 and other equipment (which is really a slow consumption of 
 material) is, in practice, charged against manufacturing opera-
 
 ORDERS— SERVICE OR STANDING ORDERS 247 
 
 tions by means of a depreciation rate. In considering these 
 elements of expenditure for the purpose of arranging a set of 
 Standing Orders, it is obvious that one or more main classifica- 
 tions may be made, according as we look at the facts from one 
 or another viewpoint. 
 
 In laying out a Standing Order system so as to collect expense 
 in intelligible forms, the first and most obvious necessity is to 
 separate the expense pertaining to one department from that 
 pertaining to another. In other words we must "depart- 
 mentalize" expense. We must ascertain, as shown above, what 
 amount has been spent, say, on repairs, in each department. 
 But it is also desirable to be able to view expense from another 
 angle, and collect like classes of expense into similar groups in 
 each department. By aggregating these departmental groups, 
 we can then observe the total expenditure on any class for the 
 whole plant. Thus, to take a simple example, we may isolate 
 the cost of cleaning windows in each department by assigning a 
 Standing Order number to that particular form of activity. 
 This enables us to compare the cost of such work in department 
 1 with the same work in other departments. It also enables us, 
 by aggregating the cost in all departments, to view the cost of 
 window cleaning as a whole. Then should we receive a bid from 
 a window-cleaning company to do the work for the whole plant 
 at a fixed rate of remuneration we are enabled to see at once 
 whether such offer is advantageous or not. 
 
 Standing Orders, therefore, are provided in each department 
 to take care of all the different kinds of service activity found 
 in each such department. This may be done with any desired 
 degree of detail. But if each department is dealt with singly, 
 it might happen that comparison between one department and 
 another would be difficult. Therefore, it is usual to lay out a 
 scheme of numbers so that each hundred, for instance, represents 
 a department. Thus, numbers 100 to 199 may represent the 
 power plant, 200 to 299 the first operating department, say the 
 machine shop, 300 to 399 the second operating department, say 
 the foundry, and so forth. 
 
 Within each department, similar items are numbered similarly, 
 thus sweeping and cleaning may be 108 in the power plant, 208 
 in the machine shop, 308 in the foundry, and so on. It is evident 
 that a cross-totaling of the 08 items will give us a total of cost 
 of sweeping and cleaning throughout the entire plant.
 
 248 MANUFACTURING COSTS AND ACCOUNTS 
 
 While this method gives useful information, it is desirable 
 that the detail items themselves shall be grouped in such a way 
 that the cost of certain large groups of service shall be known, 
 both within each department and in the aggregate. Thus, 
 for example, the group of expense connected with buildings, their 
 repair and maintenance, lighting and heating, is obviously a 
 clear-cut held of activity that should be separated from all 
 others. In the same way, the cost of keeping, storing, convey- 
 ing and handling material throughout the plant forms another 
 field of activity of a separate nature. The cost of supervision 
 is another such group. The cost of factory organization, that 
 is, of offices, clerks, office appliances, stationery, blanks and 
 books i- another. And finally, we have the cost of auxiliary 
 service departments such as the power plant, compressed-air or 
 hydraulic plants, etc., which must be first ascertained sep- 
 arately and then prorated on some adequate basis, to the pro- 
 duct ive departments making use of the power. 
 
 It is, therefore, not sufficient to simply list all the service 
 activities, and give them similar numbers in the various de- 
 partments (varying only as to the hundred figure). The items 
 themselves should be arranged in a certain order, so that, for 
 instance, nil the items relating to buildings are together, all those 
 relating to stores and transport of materials are also together 
 and so on. It may happen in some cases that certain depart- 
 ments have one or more items peculiar to themselves. A 
 foundry, for example, will have certain activities such as "chip- 
 ping" or "fettling" requiring separate listing. A power plant 
 will have other-, as, for example, "ash removal." And it may 
 further happen that some departments may lack activities 
 generally found in others, as, for example, a department having 
 no windows could not have an item relating either to the repair 
 or the cleaning of windows, but in general this will not affect 
 the scheme. Where activities are absent, the corresponding 
 number is simply omitted. On the other hand, where extra 
 activities an- in question, care must be taken not to omit them 
 in laving out the scheme, as otherwise no vacant space may 
 .n the series of numbers at the proper place, and we may 
 to resort to the inconvenience of using numbers like 106a, 
 etc. which would easily lead to confusion and error. 
 
 The groups into which items are collected are known as "pro- 
 duction factor-."' They are at leasl six in number, as follows:
 
 ORDERS— SER\ 'ICE OR STANDING ORDERS 249 
 
 Buildings (or space) factor. 
 
 Stores-transport factor. 
 
 Supervison factor. 
 
 Organization factor. 
 
 Power factor. 
 
 Productive machinery factor. 
 In some cases, as indicated above, there may be more factors than 
 these. There may be, for example, more than one kind of power 
 factor, and in the case of machine shops there may be a separate 
 tool room factor, the cost of which must be prorated to certain 
 of the productive departments just as the power factors have 
 ultimately to be prorated. 
 
 As we have nothing to do at this stage with the way in which 
 these items are charged to Production, but are only concerned 
 here with their collection in convenient form, it will be sufficient 
 to exhibit a skeleton scheme of Standing Orders, arranged 
 in the above-mentioned manner. Fig. 56 shows such a scheme, 
 which, of course, is intended to be merely suggestive. It will 
 require modification and addition according to the nature of 
 the business, and the particular local circumstances of the plant. 
 In general, however, it will be pretty widely applicable. 
 
 It should also be noted that an extension of the Standing Order 
 scheme may readily be made to indicate specific items of equip- 
 ment worked on in the way of repairing. Thus 560 represents 
 the repair of productive machinery in department 5. Now, as 
 each machine or piece of equipment should be numbered, as 
 explained in a former chapter, it is an easy matter, if machine 
 number 203 has been repaired, to write the Standing Order num- 
 ber thus ; 560/203. This not only identifies the class of work that 
 has been performed, namely, repairs to machinery, and the de- 
 partment in which it has been done, namely, department 5, but 
 also specifically identifies the machine so repaired, namely, No. 
 203. It should be mentioned here that the use of a decimal point 
 instead of a stroke, thus 560.203 is frequently recommended in 
 connection with schemes of this kind. There is no advantage 
 whatever in such a practice, and it tends to surround with an 
 appearance of mystery what is really very simple. To talk 
 about decimal points confuses many persons, whereas almost 
 anyone can grasp the idea that the Standing Order number must 
 be followed by the machine number, separated by a stroke.
 
 250 MANUFACTURING costs AND ACCOUNTS 
 
 u 
 
 u 
 
 - 
 
 of Expense 
 
 air 
 to 
 
 
 
 C3 
 -J "H 
 
 a. u 
 
 « % 
 
 o 
 
 ft. 
 
 Q o 
 
 D. 3 
 (3L| 
 
 O -3 
 
 a s 
 
 '-- - 
 
 U -rj 
 
 Q g 
 
 o 
 
 i 1 
 
 a - 
 
 3 
 
 
 Depreciation of Building tto :•: 
 
 100 
 
 200 
 
 300 
 
 400 
 
 500 
 
 BOO 
 
 700 
 
 800 
 
 01 
 
 I. iic;. Insurance on Bldgs ic :£ 
 
 101 
 
 201 
 
 301 
 
 401 
 
 501 
 
 001 
 
 7nl 
 
 801 
 
 02 
 
 Rejalrs to Buildlnr, Structure 
 
 102 
 
 202 
 
 302 
 
 402 
 
 502 
 
 002 
 
 702 
 
 302 
 
 03 
 
 Repair? to Building Equipment ^*: 
 
 103 
 
 203 
 
 303 
 
 4":: 
 
 503 
 
 003 
 
 703 
 
 803 
 
 04 
 
 Current for Lighting 
 
 1 14 
 
 204 
 
 304 
 
 404 
 
 504 
 
 004 
 
 704 
 
 804 
 
 05 
 
 Steam for lleatln: 
 
 105 
 
 205 
 
 305 
 
 403 
 
 505 
 
 B05 
 
 705 
 
 805 
 
 00 
 
 Painting L Kalsominlng 
 
 106 
 
 206 
 
 300 
 
 40G 
 
 506 
 
 GOG 
 
 700 
 
 80S 
 
 07 
 
 Cleaning Windows 
 
 107 
 
 207 
 
 307 
 
 407 
 
 507 
 
 607 
 
 707 
 
 M'7 
 
 03 
 
 Other Sweeping A Cleaning 
 
 103 
 
 208 
 
 308 
 
 403 
 
 508 
 
 G03 
 
 70S 
 
 SnS 
 
 
 Bondrj Supplies 
 
 100 
 
 200 
 
 300 
 
 400 
 
 509 
 
 009 
 
 709 
 
 809 
 
 t 
 
 o ; 
 
 :- B 
 
 a 2 
 
 - 
 
 2a 
 
 09 
 
 20 
 
 Depreciation On Cranes, Trucks, Fixtures io 
 
 
 
 320 
 
 
 520 
 
 020 
 
 720 
 
 820 
 
 . 
 
 Insurance on Ditto 
 
 
 
 321 
 
 
 521 
 
 621 
 
 721 
 
 821 
 
 22 
 
 Repairs to Ditto 
 
 
 322 
 
 
 522 
 
 622 
 
 722 
 
 822 
 
 27 
 
 Ware; of Crani-men & Handlers 
 
 
 
 327 
 
 
 527 
 
 027 
 
 727 
 
 827 
 
 23 
 
 Salaries Storekeepers & Storeclerks 
 
 
 
 328 
 
 
 
 
 
 
 
 6undrr Supplies 
 
 
 
 320 
 
 
 529 
 
 029 
 
 729 
 
 829 
 
 a 
 
 .- - 
 '-.I 
 
 30 
 
 Wages of Foreman 
 
 
 
 
 430 
 
 53G 
 
 G3G 
 
 736 
 
 830 
 
 37 
 
 Share of Adminis, Salaries 
 
 137 
 
 
 
 
 
 
 
 
 38 
 
 Salaries of Bupt h Production Staff 
 
 133 
 
 
 
 
 
 
 
 
 a 
 o 
 
 a •> 
 J2 £ 
 a 
 
 So 
 
 O 5 
 
 - 
 
 s 
 
 40 
 
 Depreciation on Office Equipment 
 
 140 
 
 240 
 
 340 
 
 140 
 
 
 
 
 
 41 
 
 Insurance '» " " 
 
 141 
 
 241 
 
 341 
 
 441 
 
 
 
 
 
 42 
 
 Repairs to •• " 
 
 142 
 
 242 
 
 342 
 
 442 
 
 
 
 
 
 44 
 
 Stationer;, Books & Blanks 
 
 144 
 
 244 
 
 344 
 
 444 
 
 
 
 
 
 45 
 
 Telephone, Telegrams & Postages 
 
 145 
 
 245 
 
 345 
 
 445 
 
 
 
 
 
 47 
 
 Wages of Messengers, Watcbuu-n 4c 
 
 147 
 
 247 
 
 347 
 
 
 
 
 
 
 43 
 
 Salaries of Clerks 
 
 143 
 
 243 
 
 348 
 
 
 
 
 
 
 40 
 
 Bun !rj Supplies 
 
 140 
 
 249 
 
 340 
 
 440 
 
 
 
 
 
 a | 
 
 - 
 
 50 
 
 Lon on Power Equipment 
 
 
 
 
 450 
 
 550 
 
 650 
 
 750 
 
 850 
 
 51 
 
 Insurance •• • * m 
 
 
 
 
 451 
 
 351 
 
 051 
 
 751 
 
 851 
 
 52 
 
 Repair: to Power Equipment In Power ; 
 
 
 
 
 452 
 
 
 
 
 
 53 
 
 »■ " " " elsewhere 
 
 
 
 553 
 
 053 
 
 753 
 
 853 
 
 54 
 
 Fuel 
 
 
 
 
 454 
 
 
 
 
 
 55 
 
 Feed Water 
 
 
 
 155 
 
 
 
 
 
 57 
 
 Waie. In Power Plant. Boilers 
 
 
 
 
 457 
 
 
 
 
 
 58 
 
 " Eurlncs tc 
 
 
 
 
 458 
 
 
 
 
 
 ' 1 
 
 cs, ft etc 
 
 
 
 450 
 
 539 
 
 650 
 
 750 
 
 859 
 
 J: b 
 
 00 
 
 Depredation on Martinet & Bcnehes 
 
 
 
 
 
 500 
 
 i,i, 
 
 7>," 
 
 ■Ml 
 
 t c = 
 
 01 
 
 1 ■ ' ■ e 
 
 
 
 
 
 501 
 
 601 
 
 701 
 
 861 
 
 02 Uremic 
 
 
 
 
 502 
 
 002 
 
 762 
 
 862 
 
 C'ulni I Oilier Machines, 
 
 
 
 
 
 503 
 
 663 
 
 7U3 
 
 i;:t 
 
 itlng, Ventilating A; Fire Equipment 
 o Standing O- : . rc given Che Item of Expense docs not usually ariso 
 
 J [Q. 56.— Principal iten iry Expense tabulated as 
 
 uding Orders".
 
 ORDERS— SERVICE OR STANDING ORDERS 251 
 
 Moreover, strokes are much less likely to become blurred or 
 erased than dots. 
 
 In engineering works the drafting room, and the tool room will 
 in general require separate extensions for their special activities, 
 both these departments, like the power department, being of the 
 nature of expense, and having ultimately to be prorated over 
 productive departments in order to extinguish their cost. All 
 departments that make nothing for sale, but are simply auxiliary 
 aids to productive work, will be dealt with along similar lines. 
 
 The Standing Order scheme has for its main object to collect 
 and classify all activity, and consequently all expenditure within 
 the factory that is not directly connected with actual work on 
 product. It is, therefore, often called indirect expense. In 
 many industries, this indirect expense, as collected through 
 Standing Orders, when added to certain other items such as 
 depreciation, rents, insurance, etc., forms more than half the 
 total shop cost of production. It forms, therefore, a very im- 
 portant element in the successful running of a shop, and as will 
 be seen later, an imperative necessity exists for ascertaining the 
 amount chargeable against each Standing Order number, each 
 day, and for promptly bringing it to the attention of the foreman 
 and others concerned in the arrangement of work. For this 
 reason whatever detailed subdivisions are made, should be made 
 in consultation with the technical force, so that the daily in- 
 formation to be extracted from costs will be of real service to the 
 shop officials, enabling them to exercise effective control over 
 expense. 
 
 In some cases as has already been pointed out, the Standing 
 Orders are limited in scope. This chiefly applies in the case of 
 repairs. Many establishments make it a rule to require a signed 
 special order before repair work of more than $20 in value is put 
 in hand. In such cases a special series of orders is sometimes made 
 use of, which may be simple numbered blanks, on which is written 
 particulars of the work to be done. One copy is kept by the 
 official authorizing the work, one sent to the cost department, 
 and one to the foreman supervising the job. When the job is 
 finished the cost department is advised, and the cost of the work 
 is then transferred to the proper Standing Order number. In 
 some cases it will suffice to issue the signed order, but to charge 
 the work to the usual Standing Order number. The only object 
 of a separate order is to ascertain the cost of the special job,
 
 252 MANUFACTURING COSTS AND ACCOUNTS 
 
 apart from the normal expense going against the order. In 
 engineering works, a separate order number series will in general 
 Ivisable. In other kinds of plant, identification of the 
 time and material on a special job will usually be possible without 
 recourse to this device. 
 
 In laying out a scheme of Standing Orders, then, the first 
 
 requisite is to assign a series of hundreds or it may be thousands 
 
 among 1 he different departments, so that say the 500 series repre- 
 
 - the "polishing" shop, or the "kettle" room, or the "wood 
 
 men1 or the "foundry" as the case may be, and then 
 
 to ascertain what activities are common to all departments. In 
 
 Group 
 
 Item of Expense 
 
 
 Dept. 
 9 
 
 Dept. 
 10 
 
 
 .'.ion on Equipment 
 
 ^)L 
 
 980 
 
 
 S 
 
 B - 
 u 
 
 a 
 
 ,, 
 
 ~~ (| 
 
 981 
 
 
 Repairs to 
 
 (7 
 
 982 
 
 
 Salaries of Engineers & Draftsmen 
 
 _]) 
 
 984 
 
 
 of Tracers, Printers &c 
 
 I! 
 
 985 
 
 
 i'rint & Pboto Supplies 
 
 \\ 
 
 9SG 
 
 
 Dra! . ;.:ies 
 
 [ 
 
 987 
 
 
 - 
 - 
 
 Depreciation on Equipment 
 
 3c 
 
 
 1090 
 
 Insurance on Equipment 
 
 U 
 
 
 1091 
 
 Bepairs to Equipment 
 
 _/) 
 
 
 1092 
 
 of Toolkeepers 
 
 ll 
 
 
 1093 
 
 Wages of Toolboys & Messengers 
 
 [j 
 
 
 10'JI 
 
 Tool Breakages 
 
 =]{== 
 
 
 1095 
 
 
 
 3C 
 
 
 
 
 \\ 
 
 
 
 E asion of Standing Order Chart to include special expenses of 
 drafting and tool rooms. 
 
 general these activities should be grouped by production factors, 
 Buch as the buildings (or space) factor, the stores-transport factor, 
 the power factor and so forth. Then having arranged these in 
 
 with suitably subdivided details, the numbers from 1 to 69 
 
 ed to them, so that when prefixed by the hundred figure 
 
 indicating the department, the particular activity, say building 
 
 r i" floor, will be Known ;is applying to that department. 
 
 Further, I hose depart ments which are auxiliary to the productive 
 
 departments, Buch as a tool room and whose activity is, therefore, 
 
 of the nature ol musi have their special activities 
 
 tabulated, and the numbers from 70 to 99 assigned to them.
 
 ORDERS— SERVICE OR STANDING ORDERS 253 
 
 By this means, if we see, for example, Standing Order No. 452, 
 we shall know at a glance that it refers to some special activity 
 in department 4, and as we know that department 4 is the power 
 house, we shall quickly be able to ascertain that, in fact, it means 
 labor employed on repairs to machinery in the power house. 
 In the same way we might have 1,093 representing some kind of 
 work in department 10, and if 10 were a tool room, further refer- 
 ence would disclose that 1,093 was labor of tool attendants, who 
 issue and receive tools from the tool stores. 
 
 If great subdivision were desired, more than 100 numbers would 
 be required for each shop. In such cases, rather than use the 
 numbers 100 to 299 for department 1, it is very much better to 
 allot each department a complete 1,000 numbers. Department 1 
 would then take the numbers 1,000 to 1,999, department 2, those 
 from 2,000 to 2,999 and so forth. Numbers cost nothing, while 
 the gain from having easily recognizable groups identified with 
 each shop is very great. 
 
 It must be understood that the Standing Orders applying to 
 productive departments collect only such items as are directly 
 chargeable to such departments. Thus, for example, there will 
 be in each productive department, Standing Orders representing 
 wages (see 523, 623, etc. in above table) chargeable against stores- 
 transport factor. These will represent the local cost of handling 
 stores and finished parts. In light industries these will be chiefly 
 wages of truckers, laborers and so forth. In heavy industries 
 they will represent the wages of cranemen. Additional numbers 
 serve to record the cost of repairing cranes, oil and supplies for 
 same. Also it may happen that subsidiary stores for half-finished 
 parts may be set up for the service of a particular department. 
 Such expense will be part of the Stores-transport Standing Orders 
 of that department. 
 
 But this will still leave a considerable amount of expense 
 chargeable against the , main stores department itself. This 
 expense will include the cost of upkeep of the building, wages 
 and salaries, stationery, repairs to fixtures, etc. These expenses 
 will be collected under a department classification, say, depart- 
 ment 3 in the table above. Similarly, the local expense of the 
 power plant will be collected under, say, department 1 in the table. 
 When all the expense of running such departments (which are 
 non-productive departments) must be prorated over the actual 
 productive departments.
 
 254 MANUFACTURING COSTS AND ACCOUNTS 
 
 In the case of power plant department this will be effected on 
 the basis of the amount of power judged (or measured) as being 
 y each productive department. In the case of other 
 non-productive departments, the prorating is made on some arbi- 
 trary percentage, which is fixed by the management after due 
 consideration of all the circumstances of the case. In some 
 plants, the expense of running the stores department is not pro- 
 
 ; to productive departments but is added as a percentage 
 hi the cost price of stores issued during the month. This is a 
 practice that is allowable in some cases, but needs to be adopted 
 with caution, especially where costly material is handled along- 
 side cheap material. The cost of handling the one is probably 
 in mosl cases no greater than that of handling the other, but this 
 method naturally tends to penalize the more expensive material 
 and lets the cheaper kind off too lightly. A case may be men- 
 tioned where a heavy steel casting that had never been in the 
 
 - .it all, but had passed from the delivery team direct to the 
 machine, had picked up a heavy stores charge, out of all propor- 
 tion to its merits, simply because it happened to have been made 
 of an expensive alloy for a special purpose. 
 
 The object of Standing Orders, therefore, is to collect items 
 of expense chargeable against all departments of the factory, 
 whether such departments are productive or non-productive 
 and then when all are collected, the amounts standing against the 
 non-productive departments are prorated on some approved basis 
 
 the productive departments. This applies whatever the clas- 
 sification adopted for the Standing Orders. It is not, of course, 
 essentia] to group the items by production factors as shown in 
 the table. But as, in general, the items must be collected in some 
 way or other, it is best to so arrange them that they are grouped 
 so thai the cosl of differenl kinds of service is isolated. That 
 thai the cost of maintaining and running buildings 
 i- a natural group thai should be kept separate, and so with the 
 
 : production factors.
 
 CHAPTER XIII 
 ORDERS— PRODUCTION ORDERS 
 
 Production Orders cover all activities performed on salable 
 material. Expense on Production Orders, whether of material 
 or labor is usually termed direct expense to distinguish it from 
 expenditure on Standing Orders, as explained in the previous 
 chapter. 
 
 Production Orders vary very much in character, according to 
 the type of industry. In some industries, the Production Order 
 system is elementary, perhaps two or three being issued in a 
 month. In other industries, notably all kinds of engineering 
 industries, the order system is elaborate and complex. It will 
 be well to consider the reason of these differences at the outset. 
 
 If our industry is a "continuous" one, such as paper-making or 
 soap-making, and if we have one chain of machines or depart- 
 ments, each performing some specific work on a perfectly uniform 
 product, then it is obvious that there is very little scope for an 
 order system. As Production Orders are a device for identifying 
 specific items of product, and as in this case one part of our prod- 
 uct is absolutely identical with every other part, there is no need 
 for any order system, unless, indeed, our statement of monthly 
 production were for convenience considered as an order, each 
 month's product being charged to a separate serial order number. 
 
 But if not one, but two, products were in question, say, for 
 example, two varieties of soap, and if our machines were now 
 occupied on one kind and now on another, then the desirability 
 of instituting an order system would make itself felt. To obtain 
 correct costs, it would be advisable to record the time occupied 
 by each batch of soap as it passed through the machines, so that, 
 the cost of operating could be divided between the two products in 
 proportion to the time occupied by each. And this cost divided 
 by the respective weights of soap produced on each order would 
 be the cost of the soap per pound. 
 
 The next case we may consider is one where the product is 
 uniform as regards substance, but individual as regards weight. 
 
 255
 
 MANUFACTURING COSTS AND ACCOUNTS 
 
 Such a case is observable in a foundry. The same mixture of 
 metal may be running all the time, but quite a number of different 
 articles may becasl from it. In such a case each individual batch 
 would be distinguished by a separate order number, and if the 
 produd on each order number were weighed, we should find the 
 cost of the order by simple division into the total cost of output of 
 the foundry for the day. 
 
 But it might also happen in the case of the foundry that more 
 than a difference of weight was involved as between one order and 
 another. It might happen that one kind of work required longer 
 to mold, perhaps also more skilled molding than another. Here 
 is an additional reason for identifying each separate kind of work 
 by an order number. The molders, instead of having their wages 
 thrown into a common fund of foundry cost, w r ould charge their 
 time directly to order numbers, so that the individual differences 
 -t of molding would be charged against each separate order. 
 
 Finally, we may consider the case of an engineering shop. 
 we may receive an order from a customer for a complete 
 machine. This machine may contain hundreds of separate parts. 
 These parts may originate in different ways. Some may be cast, 
 others forged from bar or bloom, some may be cut off from solid 
 rod, some may be made from sheet metal, while others again may 
 be formed of wire. And on each of these original pieces, all sorts 
 of operations may be performed. The casting or forging may be 
 drilled, milled, planed, slotted, turned, filed; the piece from the 
 rod may be worked up in an automatic machine, the sheet may be 
 spun or ] tressed into shape or punched and bent, the wire may be 
 coiled or straightened and so forth. 
 
 An endless variety of shapes and sizes of many kinds of 
 
 materials will be the results of the shop activities, and all these 
 
 - have then to be fitted together with great accuracy 
 
 and the resulting machine tried and tested out before the 
 
 tner'e order can be considered as complete. 
 
 Now. it would be quite possible to perform all this activity to 
 a single order number, without any subdivision. By that means 
 lould know the cost of the machine, and as we know what we 
 Bold il for, we should also know whether or not we had made 
 a profit. Bui supposing thai after all, it was found that we had 
 not made a profit, bul a loss instead. What should be done to 
 discover the reason for the loss? 
 
 ■ little could be done. The cost would be an inextricable
 
 ORDERS— PRODUCT I OX ORDERS 257 
 
 jumble of material of all kinds, and of operative labor of all kinds, 
 to say nothing of burden, 1 and no amount of study of it would 
 tell us anything definite or satisfactory. The need for a compre- 
 hensive and detailed system of Production Orders, enabling us to 
 ascertain the cost of each part or component of the machine, 
 would be forced on us. And probably we should not be satisfied 
 even with this. We should also require to know the separate 
 cost of each process or operation on each dissimilar piece. Thus, 
 if the baseplate were in question, we should want to know the 
 cost of the metal contained in it, the cost of molding, the total 
 foundry cost; the cost of planing, drilling the holes, slotting and 
 scraping the slides, and whatever other operations were performed 
 on the baseplate, each separately. Only by doing so, and by being 
 in a position to contrast such detail costs with the cost of similar 
 pieces done on a previous occasion could we conduct our business 
 intelligently and safely. 
 
 But in the case of such a machine, we should still want some 
 simple and effective method of viewing the cost of the detailed 
 processes and of the material used as a single group. In other 
 words though we want great detail, we also want the detail of 
 this order kept entirely separate from the detail of other orders. 
 Some method must, therefore, be devised of identifying the order 
 as a whole and also of identifying the details as well. 
 
 This is effected by issuing a Production Order for the whole 
 machine, and Job, Piece, or Component Orders for the individual 
 parts and processes. This nomenclature is by no means univer- 
 sally adopted. Sometimes the Production Order is called a 
 Work or Works Order. Component Orders are often called Part 
 Orders. But by whatever names they may be known, the rela- 
 tion of the subsidiary order to the main order is always the same. 
 The Production Order covers all the work of whatever kind, but 
 no specific work; the Component Order is the specific instruction 
 to someone to do specified kinds of work on a specified piece of 
 material. 
 
 It will be seen, therefore, that Production Orders are of two 
 kinds, those dealing with total lots, batches or outputs, known 
 as Production Orders, and those dealing with subdivisions of 
 such lots, batches or outputs, known as Component Orders, or 
 Part Orders. It also will be evident that not all industries 
 
 1 This is not an imaginary case. The writer has met engineering cost 
 records kept in exactly that way. 
 
 17
 
 258 MANUFAi TURING COSTS AND ACCOUNTS 
 
 require their Production Orders subdivided into Component 
 Orders, since detail such as is set up by Component Orders is 
 not always required. 
 
 There is also an intermediate class of Production Orders known 
 as Departmental Orders, which stand midway between Produc- 
 tion Orders and Component Orders. In many plants it is 
 considered necessary to manifold the whole or part of the Pro- 
 duction Order and to send the complete or partial instruc- 
 tions to all th<> separate departments concerned in the produc- 
 tion of that order. By partial instructions is meant that only 
 such details as interest particular departments are sent to those 
 departments. The complete Production Order is in fact dis- 
 ■', and the information conveyed on it is distributed among 
 the various departments concerned. The difference between a 
 1 )epartmental ( >rder and a Component Order is that the latter is 
 commonly confined to the work on one kind of component, 
 while a Depart mental Order may be concerned with many such 
 components, but only with those actually worked on within the 
 department. It will be understood, therefore, that Departmental 
 Orders, in many cases, require further splitting up into Com- 
 ponent < >rders so that production may be set in motion. 
 
 From the accounting viewpoint the main thing to be observed 
 i the system of issuing numbered Production, Department 
 and ( Jomponent Orders controls the form in which the cost data will 
 ultimately be obtained. With the form of orders as controlling 
 the efficiency of production we have nothing to do here. The 
 degree in which subdivision of labor is necessary is, of course, a 
 purely technical matter, bnt wherever labor is subdivided the 
 mtant should be ready and able to produce figures showing 
 the detail cosl of the subdivisions. 
 
 Fortunately, a very detailed order system does not imply a 
 correspondingly complex accounting. In cost work a great 
 amount of identification of individual work with particular jobs 
 and orders, is obtained as a byproduct as it were. Thus, for 
 pie, if we have five departments, and each Production Order 
 i- -plit up into live 1 )ep,i it mental Orders, it does not follow that 
 ■quire five separa of numbers for such orders. On 
 
 the contrary, if the number of the original Production Order is, 
 hen this same number will appear on each Depart- 
 mental Order, and time will be charged to it in each department, 
 without any confusion arising, because the records of time will
 
 ORDERS— PRODUCTION ORDERS 259 
 
 be made in such a way (as, for example, by each department hav- 
 ing a different colored Cost Sheet) that it will be evident at a 
 glance which department is concerned. Similarly, if we have a 
 Component or Part Order calling for several operations on the 
 part, it is not necessary to have a separate number for each 
 operation, as the nature of the time record will disclose what kind 
 of work is being done, so that it is easy to separate and classify 
 each operation, and obtain the cost of it, even though several 
 different operations have been charged to the same Component 
 Order number. 
 
 Production 
 
 Order No 
 
 
 Pnr 
 
 
 
 Shipping 
 
 Wanted hy 
 
 
 
 Customer 
 
 
 
 Their Order No 
 
 Date 
 
 
 Kill of Material 
 
 Job Schedule 
 
 Tool Schedule 
 
 Pattern-Schedule 
 
 
 
 Special Instructions 
 
 
 = — -=r ■ - = -r 
 
 
 Fig. 58. — Production Order (manifolded). 
 
 In general, therefore, we shall have two series of numbers to 
 take care of — one series pertaining to Production Orders and 
 Departmental Orders, and the othpr pertaining to Component 
 or Part Orders. Any desired amount of detail in cost can be 
 obtained from these two series. 
 
 Production Orders are frequently of two kinds, those arising 
 from orders received from customers, and those giving instruc- 
 tions for the manufacture of articles for stock. From the account- 
 ing viewpoint no difference in procedure is involved as between 
 these two classes of orders.
 
 260 MANUFACTURING COSTS AND ACCOUNTS 
 
 The form of Production Orders necessarily varies in different 
 industries. In some a few lines of information convey all there 
 is to be said about any order. In others a considerable amount 
 of written information has to be inserted. Fig. 58 shows one 
 form of Production Order, which can be used either for cus- 
 tomer's orders or for stock orders. In many plants all informa- 
 tion about the destination of the order is in fact suppressed on 
 the copies that go to the manufacturing departments, so that 
 the shops arc in ignorance whether they are working on customer's 
 or stock orders. 
 
 The essential elements of a Production Order are (1) informa- 
 tion as to the goods to be made. This information may be sim- 
 ple reference to some standard goods made by the firm, or it 
 may be a lengthy description and require supplementing by 
 elaborate specifications, blue prints and so forth. (2) The date 
 at which the goods are to leave the factory. (3) Spaces for en- 
 try of check marks signifying that the necessary Bill of Material 
 where such is in use) the necessary Part Orders, and the neces- 
 sary Tool Schedule (where special tools have to be made for the 
 work) and Pattern Schedule have been put in hand. (4) Partic- 
 ulars as to the customer, his order number, shipping instruc- 
 tions, etc., where the order is not for stock. (5) Space for special 
 notes and instinct ions, as, for example, where special attention 
 has to be paid to some point where satisfaction has failed to be 
 given on a previous occasion, or where some extra finish or other 
 unusual condition may lie emphasized. 
 
 The manifolding of Production Orders is a matter depending 
 on the internal organization of the plant, and its extent. One 
 copy is retained by the order clerk, one should be sent to the 
 accountanl . one to the shipping clerk or the warehouse clerk, 
 and other copies to the various departments concerned in making 
 the goods. Whether or not these latter are modified for each 
 department, so thai each foreman receives information only 
 aboul that portion of the order that concerns him (thus making 
 them into Departmental Orders) is a matter also depending on 
 the way in which the planl is organized. The chief thing to 
 observe from the accounting viewpoinl is that each Production 
 Order .-hall he numbered consecutively, and that if split up de- 
 part mentally, that each Departmental Order shall bear the 
 -aim- number as i he original order. 
 
 This i- secured by means of a Production Order Register (Fig.
 
 ORDERS— PRODUCTION ORDERS 
 
 261 
 
 59) in which a series of numbers are printed or stamped, and 
 each new order receives an assignment of the next vacant 
 number. Brief particulars of the order sufficient for identifica- 
 tion are then entered against the number, and columns are 
 frequently provided for date promised and date delivered, and 
 sale price. Where date columns are used, an additional column 
 as shown may be usefully provided, in which is entered the 
 difference between the promised date and the date of actual 
 delivery, this being the delay which has taken place. 
 
 Where production consists of standard processes, as in most 
 manufacturing industries not of an engineering character, 
 it is a common practice to have Production Orders prepared in 
 the form of printed slips (Fig. 60). From an accounting view- 
 point these present no special features, being merely labor- 
 saving devices rendered possible by the fact that all such work 
 goes through regular and invariable stages. The printed slip 
 
 Progressiv< 
 No. 
 
 Date 
 
 Customer 
 
 For 
 
 Date 
 Promised 
 
 Date 
 Delivered 
 
 a 
 
 a 
 
 Price 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fig. 59. — Progressive Number Register of Production Orders. 
 
 is frequently in coupon form, much like a long-distance rail- 
 road ticket, so that as the order progresses through the various 
 departments, one coupon after another is detached and sent 
 into the office having control of the course of production. In 
 this way the regular progress of the order is signalled, and any 
 order that is lagging behind can be looked up and urged forward. 
 The figure explains itself, save that the small squares contain 
 the dates at which the work should leave each department. Pro- 
 vision is also made for noting the falling out of the original number 
 of parts by spoilage, in order that provision may be made for 
 supplementary parts to be put in hand. But in many trades, 
 where special lots are put in hand for customers, it is understood 
 that whatever number comes through in the batch, having sur- 
 vived all the accidents of production, shall be accepted by the 
 customer as fulfilling his order. He does not, of course, pay for 
 the spoiled parts, but is invoiced on the basis of the number 
 actually shipped.
 
 262 MANUFACTURING COSTS AND ACCOUNTS 
 
 Order for 
 
 
 3161 
 
 
 
 
 
 POLISHING DEPT. 
 
 Man's \'n 
 
 
 3161 
 
 
 
 Spoiled 
 
 
 
 Inspected by 
 
 TEMPERING DEPT. 
 
 Man's No. 
 Tarts Received 
 
 
 
 3161 
 
 
 .Oven No. 
 Spoiled 
 
 
 Tarts Good 
 
 Inspected by 
 
 TURNING DEPT. 
 No 
 
 
 3161 
 
 
 
 Parts Received 
 Parts Good 
 
 Spoiled 
 
 
 Inspected by 
 
 DRILLING DEPT. 
 
 Man's Nn. 
 
 
 3161 
 
 
 Mach.No. 
 
 Parts Received 
 
 
 
 Parts Good 
 
 Inspected b 
 
 y 
 
 MATERIAL 
 
 
 3161 
 
 
 
 
 
 60. -Combined Production and Department Order for standardized 
 process work. 
 
 Component 
 Schedule 
 
 Production Ord 
 
 er No. 
 
 
 
 Customer 
 
 Their Order 
 
 Date 
 
 i 
 
 
 
 e of 
 
 Process 
 
 Component 
 Order No. 
 
 
 
 
 
 
 ^====^ 
 
 61. — Component Schedule for parts and processes.
 
 ORDERS— PROD UCTION ORD l-h'S 
 
 263 
 
 The foregoing (Fig. GO) is, of course, a Departmental Order, or 
 rather, set of Departmental Orders. But there is nothing to pre- 
 vent additional coupons being inserted, so thai two or more 
 coupons apply to a single department. 
 Thus, for example, there might happen 
 to be two distinct drilling processes, 
 each having its separate coupon. This 
 would be equivalent to the issue of 
 Component Orders for these separate 
 processes, but in standardized work 
 of this kind it is not usual to recog- 
 nize any smaller subdivision than the 
 department, even though the material 
 may pass through several machines in 
 any one department. In the example 
 given all time and material would be 
 charged against order 3,161, in what- 
 ever department the work was done. 
 
 We have now to consider those 
 cases in which considerable detail is 
 required in the costing of a Production 
 Order, involving the ascertainment of 
 cost of perhaps scores or hundreds of 
 parts, each or many of these parts 
 being subjected to more than one 
 process or operation. 
 
 In such cases, the best procedure is 
 to list all the separate parts on a Com- 
 ponent Schedule (Fig. 61). Against 
 each component, its name and the dif- 
 ferent processes or operations to be 
 performed on it are entered. When 
 the list is complete, numbers are as- 
 signed to each component from a 
 Component Order Assignment Reg- 
 ister (Fig. 62) which is a plain col- 
 umnar book, one column containing 
 
 progressive numbers from 1 to 9,999, and the other column be- 
 ing left blank for insertion of Production Order numbers. An 
 entire block of numbers is assigned to a particular Production 
 Order, corresponding to the number of components it com- 
 
 Component 
 Numbers 
 
 Assigned to 
 Prod.Order 
 
 K 1760 
 
 3290 
 
 K 1761 
 
 It 
 
 K 1762 
 
 <( 
 
 K 1763 
 
 < I 
 
 K 1764 
 
 3291 
 
 K 1765 
 
 << 
 
 K 1766 
 
 << 
 
 K 1767 
 
 «. 
 
 K 1768 
 
 <« 
 
 K 1769 
 
 <( 
 
 K 1770 
 
 a 
 
 K 1771 
 
 1 1 
 
 K 1772 
 
 3292 
 
 K 1773 
 
 it 
 
 K 1774 
 
 it 
 
 K 1775 
 
 lC 
 
 K 1776 
 
 >< 
 
 K 1777 
 
 i ( 
 
 K 1778 
 
 it 
 
 K 1779 
 
 3293 
 
 K 1780 
 
 it 
 
 Fig. 62.' — Component Order 
 Number Assignment Register.
 
 MANUFACTURING COSTS AND ACCOUNTS 
 
 Thus, in the example shown, Production Order 3,291 
 has a block of component numbers assigned to it, beginning with 
 1,764 and ending with 1,771. It is sometimes the practice to 
 run a Letter of the alphabet before each component number, such 
 letter changing with each hundred numbers. Thus numbers 1 
 to 99 would be prefixed by A, numbers 100 to 199 by B and so 
 forth. The object of this is to enable errors in numbers to be 
 ivered before accounting entries have been made. Thus if 
 an error in the component number Kl,768 were made, so that it 
 read Kl,968, the cost clerk would know at once that no such com- 
 bination existed, and that something was wrong. The same 
 would be true if K2,7G8 were written. There is no great impor- 
 tance in the idea, but it certainly assists in discovering and local- 
 izing errors in numbers before mischief is done. This, however, is 
 a mat ter t hat does not concern us at the present stage. 
 
 Component 
 Order 
 
 No. 
 
 
 ..Production Order_No 
 
 
 Pnrt. 
 
 
 
 J^tv 
 
 Operation 
 
 Man's Name 
 Machine No. 
 
 
 
 __No. 
 
 
 
 Date Due 
 
 
 
 
 
 
 Fig. 63. — Simple form of daywork Component Order. 
 
 The Component Schedule having been completed, it is a fre- 
 quent practice to make out a complete set of Component Orders 
 in advance One of these will be made for each operation on 
 each component, so that in some instances there will be two or 
 more such ( lomponeni Orders bearing the same component num- 
 d form for such an order is shown in Fig. 63. 
 The principal items to be tilled out are Production Order number, 
 component number, name of part, quantity required, nature of 
 the operation to be performed, and the date at which the com- 
 ponent should h: completed as far as the operation in 
 question is concerned. When the whole series of Component 
 Orders are completed, they are sorted out in departmental groups, 
 and forwarded either to a production department charged with 
 controlling the course of production, or to the various foremen 
 of depart ments. 
 
 1,1 ; of Component Orders, work on which is to be done
 
 ORDERS— PRODUCTION ORDERS 
 
 265 
 
 O l> 
 
 &"E 
 
 So 
 
 c ea 
 
 •2 S5 
 
 Sao 
 
 arto 
 
 O 3 S 
 
 £ SB M 
 
 on some piecework, premium or bonus plan, the form Fig. 04 may 
 be used. This is similar to 
 Fig. 63, except that addi- 
 tional space is provided, for 
 particulars of the time allow- 
 ance, or piecework price, the 
 earnings of premium or 
 bonus, and for a detachable 
 stub, on which the extra 
 earnings of the man may be 
 entered, certified, and 
 checked. This stub goes to 
 the pay-roll office and to the 
 cost clerk as will be described 
 in the chapters on Costing. 
 
 In practice there are a 
 number of different blanks 
 and methods of transmitting 
 orders to the departments 
 and the men, besides the 
 general types shown here. 
 In non-assembling indus- 
 tries, that is industries which 
 do not make one part of the 
 order in one place and an- 
 other portion in another 
 with the necessity for subse- 
 quent assembly and fitting 
 of the separate parts to- 
 gether to form the completed 
 article, it is not uncommon 
 to find what might be termed 
 a "waybill" or "follower" 
 system in use. The Waybill 
 or "Follower" is a Produc- 
 tion Order, in which the dif- 
 ferent steps of manufacture 
 are enumerated, and perhaps 
 the use of certain subsidiary 
 materials indicated, and the 
 document accompanies the 
 
 a a a 
 
 a ° =
 
 MANUFACTURING COSTS AND ACCOUNTS 
 
 goods from point to point through the shops, until completed. 
 Time is, of course, charged to the order number borne by the 
 Waybill itself. A good example of such a system of orders is 
 e found in printing plants, wherein the Production Order 
 blank is printed on the outside of an envelope, the envelope it- 
 self being occupied by the draft or "copy" belonging to the 
 mer. Space is provided on the Production Order blank 
 fur particulars as to material (paper stock) to be used, for in- 
 structions as to type and style of composition, for data as to the 
 kind and color of ink to be used, and other departmental infor- 
 tnation, including shipping instructions. 
 
 Such a Follower is, in fact, a combined Production and Depart- 
 mental Order similar in intent to that shown in Fig. 60. It has 
 exactly the same accounting validity. Indeed from the account- 
 ing viewpoint very little importance attaches to the physical 
 shape, or ruling of the order blanks, but much to the relation 
 between the components or processes, and the number and 
 quantity of goods to be made. For as was said above, the 
 order number series control the amount and nature of the detail 
 that can be provided by the cost accountant. 
 
 This is so important a matter that it will be well to discuss 
 it at some length. Production Orders represent definite quan- 
 tities of work. In cases where all work goes through unvarying 
 stages, it is evident that if we establish connection between any 
 of these stages and a Production Order number, ultimate detail 
 is attained without the necessity for any further complexity. 
 Thus, for example, if only one polishing process takes place on 
 each older, then a daily record of all orders on which polishing 
 has been done exhausts all the information to be obtained about 
 ing. A polishing charge against Production Order 5,674 
 ran only mean one thing. Similarly with all the other processes 
 in a fixed or standardized series. 
 
 But, on the other hand, if Production Order 5,674 contains 
 several parts or components, some or all of which are likely to 
 • the polishing process, then it will obviously not 
 exhaust the questions that may be asked if we only record so 
 many hours and dollar- against polishing on Order 5,674. For it 
 might be asked, 'how much was expended on polishing this com- 
 ■ t and how much on that?" To answer such an inquiry we 
 should h mechanism for identifying individual 
 
 kind- of components, or, in other words, in addition to a Produc-
 
 ORDERS— PRODUCTION ORDERS 267 
 
 tion Order series of numbers we must have a Component Order 
 series of numbers. 
 
 On the other hand, supposing the work of the polishing 
 department consisted of polishing handwheels and levers, no 
 other components ever reaching the department, then it is ob- 
 vious that unless we establish a firm connection between all the 
 components of a Production Order and the Production Order 
 number itself, we should be unable to say which hand wheel and 
 which lever belonged to any particular machine. We would get 
 to know the cost of polishing each and every one of such articles 
 that passed through the polishing shop, but we should not be able 
 to identify any of them with the finished and assembled machine 
 they were ultimately built into. This is equivalent to saying 
 that in all cases Component Orders are subdivisions of Produc- 
 tion Orders. Production Orders can exist without Component 
 Orders, but we cam\ot have the latter save as subdivisions of 
 the former. 
 
 Whether it is necessary to go the length of setting up a Com- 
 ponent Order mechanism will depend first on the nature of the 
 work. It does not follow that we must have Component Orders 
 because components exist in our product. It may easily happen, 
 as in shoemaking, that though there are several components, 
 the processes performed on each component are separate and dis- 
 tinct. The processes on one component are never applied to 
 another component. Thus no ambiguity arises. All work on a 
 lot is charged to a simple Production Order, but if required, the 
 cost of each process on each component can readily be sorted out 
 and ascertained separately. Component Orders are, therefore, 
 necessary only when a number of components go through like 
 processes. The classic example of this condition of affairs is the 
 engineering industry. Machine-shop manufacture includes com- 
 paratively few different kinds of processes, but often innumer- 
 able different components. The former may reach a score, the 
 latter may reach thousands. 
 
 Consequently, to say that Production Order 5,674 was charge- 
 able with 100 hr. and $25 cost for milling, would be indefinite 
 indeed. For it might happen that 20 separate parts or com- 
 ponents of Order 5,674 had passed through a milling operation. 
 Hence, we supplement the order series which gives us 5,674, 
 with another order series that gives us separate numbers for each 
 of the 20 components comprised in 5,674. Then the milling
 
 MAM FACTURING COSTS AND ACCOUNTS 
 
 machine operator will charge his time to Production Order 
 5,674, ( lomponent Order 2,359, and so forth. By this means the 
 ambiguity disappears. We know precisely what Production 
 ( >rder and what component of that Production Order is in ques- 
 tion, and this information exhausts the subject. If the milling 
 operator's time sheel Lists all the Production Orders, and all the 
 Component Orders he has worked on during the day, the whole 
 field of costing is covered as far as he is concerned. 
 
 Production Orders, then, control the cost of lots, and of all 
 processes on lots. (A lot may, of course, be simply one article, 
 or it may be a million articles.) If the article to be made consists 
 eparate parts or components, the Production Order will 
 -till control the costs satisfactorily unless any one process is 
 med on more than one kind of component. Then in order to 
 be able to ascertain process cost on individual kinds of com- 
 ponents, each of the latter must be distinguished by a number, 
 that is, Component Orders must be instituted. 
 
 Even this is not a hard and fast rule. It often happens that 
 some one process is of very general application, as for example; 
 tempering or annealing, dipping in varnish vats, and in some 
 instances, an operation like drilling. In such cases it is not an 
 infrequent practice to substitute a fixed charge based on quan- 
 tity or weight or number of articles handled, for a regular cost- 
 peration. Each Production Order thus receives a debit 
 for the services of the operation as a whole, components being 
 ignored. This, however, is a detail that need not divert our 
 lion. It is introduced only to show that sometimes the 
 occurrence of a process common to many components does not 
 necessarily give rise to a necessity for Component Orders. 
 
 It musl noi be forgotten, however, that orders control the issue 
 of materia] as well as the charging of time. In standardized 
 work, as in machine building, it is customary to originate instruc- 
 tions as to the issue of material by means of a Bill of Material, 
 : 65. One such bill is issued in connection with each Produc- 
 tion ( tnler. and as will be seen by the ruling, provision is made for 
 entering the Componenl Order number against each item 
 specified. This latter provision is, however, not necessary unless 
 Component Ordei ecessitated as described above. For, as 
 
 will be seen from inspei the bill, each component is issued 
 
 and priced separately, and as long as its name is fixed and not 
 subject to any ambiguity of description, its cost can be readily
 
 ORDERS— PROD UCTION ORDERS 
 
 269 
 
 identified after the issue details have been filled out by the 
 storekeeper. 
 
 In Fig. 60 it will also be noticed that the bottom coupon (the 
 first to be detached) is devoted to material. The order is first 
 sent to the storekeeper, who either issues the material there and 
 then, or orders it if not on hand, and when he issues it to the fore- 
 man of the drilling department, detaches the coupon and sends 
 it in to the production control clerk. At the same time he charges 
 up the material to the order number shown on the coupons. The 
 rest of the order accompanies the material into the shop. 
 
 The part played by the Production Order in regard to material 
 is, therefore, a simple one. Material is usually controlled by the 
 
 Bill of 
 Material 
 
 -Production Order No. 
 
 Customer — 
 Their Order 
 For 
 
 Dated. 
 
 Q'ty. 
 
 Component 
 Order No. 
 
 Material 
 Required 
 
 Ref.No. 
 
 Fig. 65. — Bill of Material and Stores Issues Record. 
 
 Production Order itself, or by a Bill of Material in conjunction 
 with it. In some cases, however, material is drawn out of 
 stores and charged to Component Orders, but this practice is 
 on the decline, being superseded by the far better method of 
 listing in advance all the material likely to be required on a given 
 Production Order, and getting this to the storekeeper at the 
 earliest possible moment, instead of waiting until presentation of 
 a Component Order, when it is often discovered that no material 
 of the kind is available. 
 
 In engineering work particularly, the making out of a Produc- 
 tion Order may involve the preparation and issue of certain 
 auxiliary orders at the same time. The Bill of Material has 
 already been mentioned. Of similar nature are the Tool Sched-
 
 270 MANUFACTURING < OSTS AND ACCOUNTS 
 
 ule and Pattern Schedules (see Fig. 58). These specify what 
 
 ial tools, jigs, dies, and fixtures are to be used in connection 
 
 with the order, and what patterns arc to be sent to the foundry 
 
 in connection with the casting of components. These operations 
 
 no accounting significance, unless, as will often happen, 
 
 iols, patterns, dies, etc., arc necessary, or patterns have 
 
 to be altered in some way to suit the specification of certain 
 
 compone] 
 
 In such cases (new tools and patterns) Plant Addition Orders 
 are necessary. In the case of altering patterns, the expense is 
 sometimes taken care of by a Standing Expense Order charge- 
 able against foundry operations generally, but sometimes sep- 
 arate record is made of such expense, and it is charged against 
 the Production Order for which it has been incurred. 
 
 PLANT ADDITION ORDER NO. 
 
 Signature, 
 
 For use on Trod. Order No. 
 
 Date Wanted Advise Mr. . 
 
 Charge Cost to Dept. Acct^ 
 
 Fig. 66. — Plant Addition Order. 
 
 • 
 Figure GG shows the essential features of a Plant Addition 
 < )rdcr, which is used for all addition to capital values, as well as 
 the making of new idols and patterns. Thus, new fixtures, 
 ions of all kinds, new machines, additions to existing build- 
 new wiring and piping and in general any new work for the 
 firm itself will be authorized by a Plant Additions Order. The 
 •i.d features of such an order are, a serial number which 
 will be obtained from a Plant Additions Orders Register very 
 similar to Fig. 59, space for particulars of the order, date wanted, 
 o to be advised when completed, department and account 
 chargeable, and, in n of new patterns, tools, etc., space 
 
 ndicating what Production Order has given rise to the neces- 
 sity for the new work. The order will be signed, stamped or 
 initialled by the party authorizing the work.
 
 ORDERS— PRODUCTION ORDERS 271 
 
 The activities set up by these Plant Addition Orders are treated 
 in exactly the same way, from the accounting viewpoint as 
 work on Production Orders. They are in fact Production Orders, 
 only the product is not sold, but charged up to the firm's own 
 Capital account. They represent work which it is more conveni- 
 ent for the plant to undertake on its own premises and with 
 its own men, than to purchase from outside firms. Therefore, 
 until the costs of such an order are completed, and it is ready for 
 crediting to Manufacturing account, it is treated exactly as if 
 it were a Production Order of the ordinary kind. What happens 
 to it on completion will appear in a later chapter.
 
 CHAPTER XIV 
 COST SHEETS AND BURDEN 
 
 The subject of Cost Sheets is so intimately connected with 
 that of orders, thai we must refer to it in a preliminary way at 
 this point, although, in fact, the sources of the entries to be made 
 tui these Cost Sheets, namely, the charges for material, time, 
 premium balances, depreciation, etc., have not yet been con- 
 sidered. These will be dealt with in succeeding chapters. 
 
 Just as orders cover the whole field of factory activity, inas- 
 much as nothing can be done in the factory save by authority 
 of an existing order, whether a Standing Order, a Production 
 Order, or a Plant Addition Order; so Cost Sheets cover the 
 whole field of the record of such activity. Every act undertaken 
 to carry out an order, whether in the way of consuming material 
 or of using up time, must be reflected in a Cost Sheet. 
 
 Every order number has a corresponding Cost Sheet. 
 
 This applies not only to Production Orders, Plant Addition 
 Orders and Component Orders, but also to Service Orders. 
 expenditure of wages, salaries and material in the shops 
 musl find its way to a Cost Sheet. 
 
 Reference to the general diagram will show that Cost Sheets 
 have different destinations according to their class. Cost Sheets 
 of Service Orders find their way, through Burden Journal into 
 Departmental Burden accounts, while Cost Sheets of Produc- 
 tion Orders (or of Component Orders collected under their 
 Production Order grouping) find their way to Manufacturing 
 mts through Manufacturing Journal, and Plant Addition 
 Order Co 31 ts find their way to Plant Additions account 
 through the Bame journal. 
 
 I urther it will be observed that production makes a credit 
 to Departmental Burden account, which credit really represents 
 an absorption of burden by individual Production Order Cost 
 Sheets on one or other of the methods of allocating burden that 
 will be described later. Ai this stage it is only necessary to note 
 that the total accumulated in Burden account each month is 
 
 272
 
 COST SHEETS AND BURDEh 273 
 
 distributed by fixed rules over all the Cost Sheets that represent 
 Production and Plant Addition Orders. 
 
 We have thus two great groups of Cost Sheets — those which 
 collect particulars of service or burden expenditure, and those 
 which collect particulars of cost of production and new plant. 
 These two classes of Cost Sheets are totally different in character 
 and aim. Service Cost Sheets represent Standing Orders, and 
 are consequently cleared or charged off at the end of each month, 
 though the Standing Order numbers remain alive and unaltered. 
 Production and Plant Cost Sheets on the other hand, remain 
 open and uncredited until completion of the work for which they 
 have been issued. Then they are withdrawn and the numbers 
 are not reissued. Thus they may last for two, three or any 
 number of months, and in each month will be charged with the 
 wages and material expended on them, and also with a propor- 
 tionate amount of burden. 
 
 It will be recognized, therefore, that Service Cost Sheets are 
 very simple affairs. They have but to provide for the collection, 
 daily or weekly, of certain items of wages and material, and at the 
 end of the month, the total of these items is charged off through 
 Burden Journal, leaving a clean slate for the next month's 
 items. 
 
 But on the other hand Production Orders (whether for salable 
 goods or for plant additions) require Cost Sheets that will take 
 care of wages and material expended on the order, and also take 
 care of the allocation of burden. Now as burden may be allo- 
 cated to Production on three wholly different methods, it follows 
 that there will be three distinct types of Production Cost Sheet 
 corresponding. 
 
 Moreover, there is the difference between Production Orders 
 and Component Orders to be taken care of. While the form of 
 their Cost Sheets is exactly the same, as might be expected, 
 since the latter represent small portions or subdivisions of the 
 former, still some mechanism has to be set up whereby all the 
 Component Orders pertaining to any one Production Order may 
 be summarized and presented in some convenient or logical 
 grouping, so that the entire cost of the Production Order is shown. 
 In other words, having found the cost of separate components 
 by means of Component Orders and Component Cost Sheets, 
 we must combine this information, so as to show the cost of the 
 whole. 
 
 18
 
 274 MANUFACTURING COSTS AND ACCOUNTS 
 
 From what has already been said about Production Orders, it 
 will be readily understood that any plant that has a simple 
 Production Order system, necessarily has a simple Cost Sheet 
 
 m. In a continuous industry, where the product is uniform 
 in character from month to month, and each Production Order 
 issuei I lit' whole manufacturing activity for a whole month, 
 
 then a single Cost Sheet to which are charged all the direct 
 wages and direct material for the month, is all that is necessary. 
 But even in this case, subdivision of service costs into their 
 several classes, as explained in a former chapter, is desirable in 
 order that comparison of one month with another along the 
 observable lines of expense may be made. The total of service 
 items is then chargeable to the single Production Order without 
 any particular method of allocation. 
 
 But when we have more than one Production Cost Sheet, then 
 the total of service items must be divided between the Production 
 Cost Sheets on some predetermined plan. If we have say, six 
 Production Orders running, then burden must be prorated over 
 all the six. This may be done in different ways, and it is the 
 existence of this necessity of distributing burden over Produc- 
 tion Cosl Sheets on some definite principle that makes all the 
 complication of cost keeping. As wall be seen in later chapters, 
 there are three well-defined ways of doing this, depending upon 
 the nature of the business to some extent, and the degree of 
 refinement and accuracy that is sought for. 
 
 So far we have spoken of burden as if it were wholly derived 
 from the expenditure of wages, salaries and material, w'hich are 
 charged out to ( !os1 Sheets representing Standing Orders. But 
 there are other items of importance that form part of burden. 
 
 rence to the general diagram will show that credits are made 
 from the Burden Journal to Depreciation, Rents, Taxes and 
 
 ranee, Works Expense, Spoilage and Interest accounts 
 
 rest, however, is an optional item, and the circumstances 
 under which it is chargeable will be considered in a separate 
 chapter. Ii may be ignored at the present stage of our 
 discussi< ■ 
 
 All these credits are made because equivalent charges have 
 been made to Standing Orders, by means of the schedules shown 
 in the diagram, or by special enl lies in the case of works expense 
 and spoilage. Thus there will be Standing Orders for depre- 
 ciation on buildings, and one such order number will be allotted
 
 COST SHEETS AND BURDEN 275 
 
 to each department. Similarly each department will have a set 
 of Standing Order numbers that will take care of monthly charges 
 for rent, taxes, insurance of one kind or another, special items of 
 works expense, the cost of spoiled work, etc. Thus alongside 
 the Standing Orders to which salaries, wages and material are 
 chargeable there will be other Standing Orders to which such 
 items as depreciation, etc. are chargeable. These tabulated, 
 calculated or scheduled charges will be made once a month, and 
 consequently a single entry on the corresponding Cost Sheet 
 will suffice for the whole month's accounting for that item. 
 And as such charges are immediately passed on to the Depart- 
 mental Burden accounts by means of Burden Journal, it is evi- 
 dent that the provision of a Cost Sheet for such items is a merely 
 formal matter, and in fact is frequently dispensed with, as will 
 be shown later. Nevertheless, theoretically all such items are 
 chargeable to a Standing Order Cost Sheet, and this Cost Sheet 
 is entered on Burden Journal precisely as the other kind of Stand- 
 ing Orders which collect items of salary, wages and material are 
 entered. There is no difference between them in principle. 
 
 Standing Order Cost Sheets, then, are the medium of collec- 
 tion of items of wages, salaries, material, and such items as 
 depreciation, etc. that have been found chargeable against 
 particular departments for particular services during the month. 
 When all such items are entered, they are totalled, and the total 
 charged out in Burden Journal against the department respon- 
 sible. Credits are also made through the Burden Journal for the 
 corresponding amount of wages, salary, material, depreciation, 
 etc., as shown by the general diagram. By this procedure the 
 Standing Order Cost Sheets are discharged of all contents, and 
 as far as that month's work is concerned are cancelled. 
 
 Production and Plant Addition Cost Sheets are the medium 
 by which items of wages and material directly identifiable with 
 work on such orders are collected. When all the items for the 
 month are so collected, and each sheet is totalled, some method 
 is found of prorating all the burden, which has been extracted 
 from the Standing Order Cost Sheets, over them. This share 
 of burden is then charged to each Cost Sheet. 
 
 The Cost Sheets are then entered in Manufacturing Journal, 
 and the current month's wages, material, and burden totals 
 being entered in the proper columns (see general diagram) 
 credits are made to Stores, Wages, Burden (and in some cases to
 
 276 MANUFACTURING COSTS AND ACCOUNTS 
 
 Work Expense account), and debits to Manufacturing account 
 for the total of Production Order costs, and to Plant Additions 
 Mint for the total of Plant Addition costs. 
 
 If we consider a plant at the end of its first month of opera- 
 tion, when nothing has yet been completed or taken out of the 
 shops, then it will be obvious that all the expenditure chargeable 
 to the factory has now arrived in the Manufacturing account and 
 the Plant Additions account. Or, if there were no plant additions 
 in hand, as would probably be the case in a large variety of in- 
 dustries, all such expenditure 1 would now be represented in Manu- 
 facturing account. For example, all expenditure on wages and 
 salaries, having been divided to begin with between Standing 
 rs and Production Orders, and all Standing Order cost having 
 transferred to Burden account, and then allocated over Produc- 
 tion Order Cast Shots, it follows that the latter now contain all 
 the expenditure on salaries and wages. Part of this will be direct, 
 and will bi own on the Production Order Cost Sheets as direct 
 wages, the remainder will be disguised as burden, of which a 
 share has been allotted to each order. But between direct wages 
 and burden, the whole of the charge against Factory for wages 
 and salaries will be found on the Production Order Cost Sheets. 
 
 Similarly, the transfer of all the other items of expenditure 
 could be traced, and the same would be found to be true. The 
 complete collection of Production Order Cost Sheets, therefore, 
 at the end of the month, contains the complete cost of production 
 for that month. And as this total is charged to Manufacturing 
 account by means of the entries on Manufacturing Journal, it 
 follows that Manufacturing account contains the whole cost of 
 rnph ted orders now in the plant. And the various Production 
 < >rder < !os1 Sheets are the detail of that total. 
 
 In other words, the balance in Manufacturing account at any 
 month end is an amount of which the detail items are to be 
 found on the Production Order Cosl Sheets. In a sense, Manu- 
 facturing accounl i- like a Control account, of which the Cost 
 Sheets are the Item accounts, similar to Stores Control account 
 and Stores ttem Cards, or Plant Control account and Plant 
 Iti'in ( lards. 
 
 The function of ( 'o.-t Sheets may now be summed up in a few 
 word-. Standing Order Sheds colled items of service expense, 
 including depreciatioi and by grouping these sheets in 
 
 departmental groups and entering them on a Burden Journal, we
 
 COST SHEETS AND BURDEN 277 
 
 are enabled to credit Wages, Stores, Depreciation, etc., accounts, 
 and debit Department Burden accounts. When this is done, the 
 Standing Order Cost Sheets are like a cleaned slate, and the same 
 order numbers are ready for the next month's items. 
 
 Production Order Cost Sheets collect items of direct labor and 
 direct material. They also collect a share of burden which is 
 allotted to them on some definite basis which will be considered 
 later. Being entered on Manufacturing Journal, the totals of 
 direct wages are credited to Wages account, the totals of direct 
 material to Stores account, and the totals of burden to Burden 
 account. Manufacturing account is then charged with the 
 aggregate, namely, direct wages, plus direct material, plus 
 burden. 
 
 Plant Addition Cost Sheets are dealt with in the same way as 
 Production Sheets, but are charged to a Plant Additions account 
 instead of a Manufacturing account. 
 
 The use of Standing Order Cost Sheets does not end with the 
 grouping of service cost into Departmental Burden accounts. 
 They are also tabulated for comparative purposes as will be seen 
 later. In fact the principal object of the subdivision of service 
 costs into so many items is for the purpose of tabulation and 
 comparison. This will be considered in a later chapter. 
 
 Production Order Cost Sheets go on accumulating direct wages, 
 direct material and burden each month, until the work they 
 represent has been completed and has passed out of the shop. 
 When this happens a credit to Manufacturing account equal to 
 the entire face value of the Cost Sheet takes place. Hence the 
 balance in Manufacturing account is at all times represented by 
 the pile of live Cost Sheets. Similarly the value of the work in 
 process in any department is equal to the balance in that depart- 
 ment's Manufacturing account. And the value of any particu- 
 lar item of such work is shown by the corresponding Production 
 Order Cost Sheet. Thus we have three things that are identified : 
 
 Actual work in process in shop. 
 
 Live Cost Sheets. 
 
 Balance in Manufacturing account. 
 
 The term Production Order Cost Sheets has been used largely 
 in this chapter to the exclusion of Component Order Cost Sheetss 
 But what is true of one is true of the other. Component Order, 
 being only subdivisions or fractions of a Production Order, their 
 treatment is exactly similar. From the point of view of work
 
 278 MANUFACTURING COSTS AND ACCOUNTS 
 
 ng through the shops, that is, of work in process, there is no 
 difference between one kind of order and the other. Both have 
 to be charged with direct wages, and direct material, both have 
 to participate in the distribution of burden, both have to be 
 charged to Manufacturing account. If it takes several Compo- 
 nent Orders to make up one Production Order, that is a matter 
 that has significance at a later stage, but does not affect the 
 Mt argument. Therefore, wherever Production Order has 
 been mentioned in this chapter, Component Order may be sub- 
 stituted for it without altering the complexion of the statements 
 made.
 
 CHAPTER XV 
 COSTING 
 
 In the foregoing chapters of Part II the various books, forms 
 and ledger accounts have been described that prepare the way 
 for costing operations. It has also been shown that all costing 
 operations are applied to orders, and that the mechanisms by 
 which costs are identified with particular orders are known as 
 Cost Sheets. 
 
 We have now to consider the forms, books and ledger accounts 
 concerned in the process of costing. And though three distinct 
 methods of costing are to be described, implying considerable 
 variation in the actual rulings of forms and blanks, still there 
 will be in general a very similar routine to be gone through, be- 
 cause the elements of cost are the same in all three methods of 
 applying cost to orders. These elements all arise in the same 
 way, and are indeed identical in all cases. They are the amounts 
 that have been heaped up in the ten ledger accounts on the left- 
 hand side of the general diagram. 
 
 In all varieties of costing the following mechanisms must be 
 set up: 
 
 1. Departmental Burden accounts, of which the subdivisions 
 are Standing Order Cost Sheets. This implies a method of 
 charging indirect material and indirect wages and items such 
 as depreciation, etc., expended on Standing Orders, first, and as 
 regards the totals, to Burden account; and secondly, as regards 
 the individual transactions, to Standing Order Cost Sheets. 
 These two sets of charges must, of course, agree, the latter being 
 only the subdivided detail of the former. 
 
 2. A method or plan by which departmental burden, so col- 
 lected in Burden account, can be distributed over and charged 
 to individual Production Order Cost Sheets on some approved 
 basis. The total so distributed must also be charged to Manu- 
 facturing account. This total and the aggregate of individual 
 charges to Production Order Cost Sheets must, of course, agree, 
 inasmuch as the latter are merely the subdivision of the former. 
 
 279
 
 280 MANUFACTURING COSTS AND ACCOUNTS 
 
 3. Departmental Manufacturing accounts, of which the sub- 
 divisions are Production Order Cost Sheets. This implies a 
 method of charging direct material, and direct wages first, and 
 as regards the totals, to Manufacturing account, and secondly 
 as regards the individual transactions, to Production Order 
 Cost Sheets. 
 
 4. In some cases, a separate class of Production Order called 
 Plant Addition Orders will be in use, but will be treated exactly 
 like Production Orders, except that the account to which they 
 are charged, and of which their Cost Sheets are a subdivision, is 
 termed Plant Additions Manufacturing account, or simply, Plant 
 Additions account. 
 
 When these mechanisms have been set up and operated, Pro- 
 duction Order Cost Sheets will contain the following: 
 
 Direct Wages expended on the order. 
 
 Direct material used on the order. 
 
 A share of the monthly expenditure on burden. 
 Manufacturing account will have been charged with: 
 
 Total of wages expended during the month on production. 
 
 Total of material expended during month on production. 
 
 Total of all other wages, material and expenses, such as 
 depreciation, etc., collected first in a Burden account and then 
 distributed over Production Order Cost Sheets. 
 
 In carrying out these operations, two journals are used, one 
 in which Standing Orders are listed, and the other in which 
 Production Orders (and Plant Addition Orders where in use) 
 are listed. These journals are the mediums by which the ten 
 ledger accounts shown at the left-hand side of the general 
 diagram are credited. At this point various agreements are 
 secured which prove the accuracy of the work up to the point 
 of entry on Cost Sheets. 
 
 The more important of these agreements are the following: 
 
 AGREEMENTS SECURED BY BURDEN JOURNAL 
 
 1. Total of stores issued to Standing Orders is agreed with 
 aggregate of individual charges of stores to Standing Order Cost 
 Sheets. 
 
 2. Total of li ries chargeable on pay-roll to Stand- 
 ing < Orders is agreed with aggregate of wages and salaries charged 
 to individual Standing Order Cost Sheets.
 
 COSTING 281 
 
 3. Total of amount shown by Depreciation Schedule as charge- 
 able against the department is agreed with aggregate of actual 
 amounts charged to Standing Order Cost Sheets. 
 
 4. Totals of amounts chargeable by other schedules is agreed 
 in the same way. 
 
 5. Any items chargeable in the nature of works expense to the 
 department are agreed in the same way. 
 
 6. Spoilage chargeable against the department and charged 
 to Standing Orders is agreed in the same way. 
 
 The Burden Journal is usually arranged so that a column is 
 provided for each department (see general diagram) but in some 
 cases a separate Burden Journal for each department may be 
 used, the columnar arrangement being merely for convenience. 
 
 7. Both sides of the journal must, of course, balance. All 
 the credits to the ten ledger accounts must balance all the charges 
 made to the Departmental Burden accounts. 
 
 These operations verify the correctness of the postings to the 
 Standing Order Cost Sheets, as far as total values are concerned 
 (they do not, of course, verify the posting being made to the cor- 
 rect individual Cost Sheet, but only that a posting of the proper 
 amount has been made to some Cost Sheet) and they ensure that 
 burden as charged in the Departmental Burden accounts is 
 equal in total to these postings on the one hand and to the total 
 of expenditure on the other. 
 
 AGREEMENTS SECURED BY MANUFACTURING JOURNAL 
 
 1. Total of stores issued as charged on Stores Issued Book is 
 agreed with aggregate of material posted to individual Produc- 
 tion Order Cost Sheets. 
 
 2. Total of direct wages as charged on pay-roll to Production 
 Orders is agreed with aggregate of wages posted to individual 
 Production Order Cost Sheets. 
 
 3. Total of departmental burden as indicated by Burden 
 account balance is agreed with aggregate of burden charged to 
 individual Production Order Cost Sheets. 
 
 4. In a few cases items of works expense, such as traveling 
 expense incurred for some productive purpose, may be charge- 
 able to a Production Order Cost Sheet. Such charges are 
 totalled and verified here. 
 
 5. Both sides of the journal must, of course, balance. Credits
 
 282 MANUFACTURING COSTS AND ACCOUNTS 
 
 to Stores account, Wages account, Works Expense account, and 
 Burden account must equal all the charges to Manufacturing 
 ar<i unit and Plant Additions Manufacturing account. Some- 
 times a special column is provided for charging spoilage (see 
 general diagram). 
 
 These operations ensure that all direct wages and direct 
 material have been charged to a Production Order Cost Sheet 
 (but they do not ensure that the correct individual sheet has been 
 1 and they ensure that the total of charges to Production 
 Order Cost Sheets on account of burden equals the amount 
 properly chargeable as shown by the Burden account. Similarly 
 for works expense items when they exist. 
 
 The work in the shops represented by Production Order Cost 
 Sheets lias now been costed. Each piece of work having been 
 put in hand by virtue of a Production Order number, and all 
 direct material and direct wages having been charged to that 
 number, and again, each such number having its own individual 
 Cost Sheet to which these material and wage transactions have 
 posted, it follows that the material and labor cost of each 
 piece of work has been recorded. And the extent of detail, that 
 is the size of the individual item of work so costed, will depend, 
 as was shown in the chapter on "Orders," on the way in which 
 the orders have been made out in the first case. In some cases 
 these orders will represent large and in other cases small lots. 
 Again, some Production Orders are subdivided into very small 
 each such lot being authorized by a Component Order, which 
 then takes the place in all costing operations, of the original 
 Production Order from which it is derived. The Production 
 
 < >rder then serves only as a device for collecting the cost of the 
 different components together at a later stage. 
 
 But in addition to direct wages and direct material, a dis- 
 tribution of burden has taken place over the various Production 
 
 < >rder C< - - (though nothing has yet been said of the basis 
 on which Buch distribution is undertaken), so that as a matter 
 of fact, our individual Production Order Cost Sheets now show 
 the total factory cost of production. That is, the product they 
 represent has been cot i< </. 
 
 In the ensuing chapter three ways of applying burden will be 
 described. Though two of them will differ outwardly in a con- 
 siderable degree from the process described in this chapter, still 
 in the main the principle will be the same, namely, that burden is
 
 COSTING 283 
 
 first ascertained, amassed or collected; secondly, it is distributed 
 in some way or other over Production Orders so that it ceases to 
 exist as a separate entity, or in other words, no balance is left 
 in Burden account. In the first variety of burden distribution 
 we shall consider direct wages are not charged to orders. All 
 wages are treated as burden, but direct material remains as a 
 direct charge to Production Orders. In the second variety, the 
 process described in this chapter will be followed very closely. 
 In the third variety, the measurement of burden applicable to 
 any particular Production Order is effected automatically by 
 means of a device known as a machine rate, but in all three of 
 them the student will do well to keep in mind the fundamental 
 process of costing as described here.
 
 CHAPTER XVI 
 DEPARTMENTS 
 
 Before passing to consider specific methods of costing it may 
 - well to define somewhat more formally, than has been done 
 hitherto, what is meant by a department. As usually employed 
 the term has a somewhat loose significance. It may mean a 
 building, and the different buildings or even floors of a plant may 
 be referred to as its departments. It may also mean a kind or 
 division of activity, as when, for example, we speak of the power 
 department, or, in non-engineering industries, the repair depart- 
 ment, the latter being commonly a machine shop forming the 
 headquarters of the repair staff. There is also a stores department 
 in most plants, and this may or may not be identified with a single 
 building. Then, again, different productive shops are called 
 departments, and it sometimes happens that more than one such 
 productive department is covered by the same roof. 
 
 It is necessary, therefore, to define the sense in which the term 
 is used in this work. Such terms as cash department, purchasing 
 depart iiieni , pay department have no other signification than to 
 indicate clerical work connected with cash, purchase and pay 
 ctively. Stores department where used means the whole 
 ;n of handling, pricing, receiving and issuing stores, and the 
 keeping of the records pertaining to them. It means in fact all 
 thai class of activity that is supervised by a storekeeper. 
 
 The cos! department similarly means all that activity presided 
 ■ »y a cos! accountant. 
 
 The power department includes all activity relating to the 
 ration and transmission of power, and commonly also of 
 heating and lidiiin.L r the premises. 
 
 All 1 li« :pense or service departments, and the cost of 
 
 conducting them finds its way to Standing Orders as explained 
 inChap.XIl Pari II i and ror laler becomes partof burden, 
 
 to be distributed over Production Orders. 
 
 Bui as will be oon as we discuss the question of the 
 
 methods of distributing burden, the latter must first be depart- 
 
 284
 
 DEPARTMENTS 285 
 
 mentalized, that is distributed to productive departments, before 
 it is distributed to the various Production Order Cost Sheets 
 representing work within those departments. It is, therefore, 
 necessary to define what a productive department really signifies. 
 
 A productive department may be defined as any homogeneous 
 group of productive activity. The division may be based on the 
 type of processes carried on in the plant, as, for example, the 
 cupolas of a foundry, the folding room of an envelope factory, 
 the kettle floor of a soap works, the tempering house of an armor 
 plant, the cutting room of a shoe factory, or the milling machine 
 department of an engineering shop. These are examples of 
 simple departments based on processes. But in other cases the 
 division into departments may be based on the nature of the 
 product rather than on the nature of the process. Thus we may 
 have an aeroplane department and a high-speed engine depart- 
 ment. But, in general, departments organized on the nature 
 of the product are in effect separate factories, and might them- 
 selves be divided up into process departments. 
 
 The more homogeneous the activity in a department, that is 
 to say the less variety in the kind of processes it employs, the 
 more perfect from a cost-keeping viewpoint is its departmental- 
 ization, and the simpler are the methods necessary to cost its 
 product. The more various sizes of machine, men at different 
 rates of wages, and different varieties of product are included 
 in one department the more complex and difficult will costing 
 become. 
 
 The aim, therefore, should be to split up productive activity 
 into as many departments as are naturally indicated by the nature 
 of the processes and product. And for this purpose it may often 
 be necessary to consider one building as containing several depart- 
 ments. This procedure, it is true, introduces troubles of its 
 own, as, for example, the cost of maintaining and repairing the 
 building, and depreciation on it, has to be divided between the 
 departments. But this can be done on a percentage basis fixed 
 once for all, while on the other hand the gain in clearness of per- 
 ception as to the cost of processes may be worth many times the 
 trouble involved. 
 
 Productive departments may be defined, therefore, as the natural 
 process divisions of the business. In many businesses depart- 
 ments and buildings or departments and floors will be coincident, 
 but it will often happen otherwise. The departments will then
 
 286 MANUFACTURING COSTS AND ACCOUNTS 
 
 have the appearance of being somewhat arbitrary and artificial, 
 but if the division is skilfully carried out, this will be the reverse 
 of the truth. Departments and the physical arrangement of 
 them in buildings should coincide, but for practical reasons it 
 cannot always be done. That should not prevent its being done 
 in the accounting.
 
 CHAPTER XVII 
 
 COSTING ON METHOD A (DEPARTMENT HOUR-COST 
 
 METHOD) 
 
 The general principles of costing by Method A have been 
 discussed in Part I, Chap. V. In the present chapter the 
 actual blanks and accounts necessary to practise the method 
 will be described. 
 
 There are two variants of this method, one in which the 
 division of cost between products, if there is more than one, is 
 on the basis of the relative output of each product; and the 
 other in which the division of cost is based on the time occupied 
 by each product in passing through the different stages of 
 manufacture. In the latter case Production Orders are usually 
 issued covering definite lots or batches of product. 
 
 As explained in the chapter above referred to, this method 
 of costing depends for its validity on there being no substantial 
 difference in wage rates between operatives engaged in any one 
 department. This being assumed, then it is obvious that no 
 advantage is gained by recording direct wages against each 
 Production Order, since each item would be alike, or in simple 
 proportion to time occupied on the job. And as burden is also 
 considered, on this method, to be distributable on a time basis, 
 it follows that direct wages and burden may be combined and 
 charged to orders on a time basis as a single item. The only 
 thing left to be identified with individual orders is direct material. 
 
 This means that if we have a manufacturing plant containing, 
 say five departments, then, material being charged to the order 
 directly, each of the five departments' work will be reduced 
 to single charges per hour, and the departmental cost of any 
 job is known when we know how many hours it has taken to 
 perform the work on it in each department. 
 
 The simplest case is where only one product is being turned 
 out, perfectly uniform in character. In this case our time 
 unit may be a month, and the departmental cost for the month 
 
 287
 
 MANUFACTURING COSTS AND ACCOUNTS 
 
 divided by the tonnage or other measure of product will give 
 us the departmental cost per ton or other unit. 
 
 The next simplest case is where two or more products are 
 
 being turned out, cadi of which is known to be produced at 
 
 same rate of production, in which case division of total cost 
 
 between the different products will obviously be in proportion to 
 
 the total output of each. 
 
 The third case is where two or more products are being turned 
 out, each of which has its own rate of production. This is a 
 more complex matter than the foregoing, since a record has to 
 be made of the time occupied by each product. The depart- 
 mental cost has then to be reduced to an hourly rate, and the 
 time taken by each product multiplied by this hourly rate in 
 order to find the value of the total time consumed each month 
 on each product. Then each product's total cost must be 
 divided by its tonnage, etc., so that a cost per pound, etc. may 
 be found. 
 
 A fourth case is where either one or several varieties of prod- 
 uct are put through in limited lots. In all the former cases 
 we have assumed a uniformity in each product so that any 
 fraction of it was indistinguishable from any other fraction, 
 several varieties of soap, for example. Now, however, we have 
 to deal with a case in which differences may exist between 
 1 latches of product, as for example, lots of articles differing 
 slightly from one another in their demands on the operative 
 work of the department. Production Orders are then issued 
 for each such batch or lot, and the time of operation is also 
 recorded. This time multiplied by the cost of the departmental 
 hour gives the departmental cost of the batch. 
 
 The simplicity of this method of costing is really not so 
 
 as it appears. The cost of product, it is true, is very 
 
 simple, being confined to a record (1) of the direct material 
 
 used "ii each Production Order, and (2) a record of the time 
 
 ■ by each order in each department. One of the great 
 
 advantages of the method is that if we can forecast the time 
 
 which should be taken to do any variety of departmental work, 
 
 multiplying this time by the cost of the departmental hour 
 
 idea, of the cost of the operation. For esti- 
 
 mating purposi - this is sod etimes very useful. 
 
 On the other hand, the necessity of recording cost of service 
 Mill remain-, and as service is made up of many small items it
 
 COSTING ON METHOD A 289 
 
 is still necessary to set up a cost mechanism to take care of it. 
 In small plants, it is true that even this is hardly necessary, 
 since only a few men will be engaged on service work, and no 
 elaborate record need be made for the purpose of controlling 
 their work. But if the plant is of any considerable size, the 
 adoption of a simple system of costing Production Orders does 
 not in the least obviate the necessity for closely watching ex- 
 penditure on service. Accuracy and facility of control must 
 not be sacrificed to simplicity, and apparent economy in the 
 making of cost records may be in reality highly wasteful, if it 
 enables small inefficiencies to slip by day after day, and month 
 after month. 
 
 It will be assumed, therefore, that the plant is not so small 
 that it can afford to neglect the control of service or burden 
 expenditure, and this implies that a cost system must be suf- 
 ficiently developed to record material and time on Standing 
 Orders in some detail, though as the industries to which this 
 method can be successfully applied are not in general so highly 
 organized as those of the engineering type, a somewhat simpler 
 and more elementary Standing Order system can usually be 
 adopted with safety. 
 
 In any cost method certain stages have to be gone through, 
 and these may be summarized as follows: 
 
 1. Distribution of material cost to Standing and Production 
 Orders. 
 
 2. Distribution of wages to Standing and Production Orders. 
 
 3. Collection of Standing Order costs and their distribution to 
 Departmental Burden. 
 
 4. Listing of Production Order costs, and distribution of 
 Departmental Burden over them. 
 
 5. Charging of Production Order costs plus burden to De- 
 partmental Manufacturing account, and crediting of the elements 
 of such cost to the ten ledger accounts on left-hand side of 
 general diagram. 
 
 Figure 67 (p. 310) is a general diagram for Method A. It re- 
 places the central part of the large folding general diagram, 
 which is arranged for Method B. In Fig. 67, the ten ledger ac- 
 counts are shown at the left-hand side as before, except that the 
 account for patterns has been omitted. The depreciation and 
 other schedules are also shown as before. The remainder of the 
 diagram is special to Method A and shows the whole course of 
 
 19
 
 290 MANUFACTURING COSTS AND ACCOUNTS 
 
 operations, from the crediting of the purchased items on the 
 left to the charging of Departmental Manufacturing accounts 
 on the right. 
 
 The crediting of Departmental Manufacturing accounts 
 with the values of finished product being the same whatever 
 method of costing is employed, will form the subject of a separate 
 chapter, after the three methods, A, B, andC have been described. 
 The Order System. — As all costing operations depend on the 
 way in which the order system has been laid out, it will be well 
 to begin by discussing Standing Orders and Production Orders. 
 Fig. 68 shows a suggested scheme of Standing Orders suitable 
 for plants using Method A. The grouping by production factors 
 mentioned in Chap. XII (Part II) has not been followed, though 
 t hi<, of course, is optional. In a large plant it might be advisable 
 to use it, but Method A is not often applied to large plants. 
 Three service departments are indicated, namely, one grouping 
 the office force, costs, pay, etc., the superintendent's staff, and 
 all production men, tracers, etc.; the second takes care of all 
 storekeeping officials, truckers and handlers, and so forth; the 
 third represents the power-plant men. These three departments 
 are obviously expense departments, and have to be prorated 
 some time or other over the productive departments in propor- 
 tion to the assumed call of the latter on their services. Three 
 productive departments, 4, 5, and 6, are also shown, with 
 Standing Order numbers arranged to collect the usual items of 
 expense in each such department. This scheme will, naturally, 
 need modifying in some particulars in many cases. 
 
 regards Production Orders, it is assumed that there is more 
 than one product passing through departments during the cost- 
 ing period. Consequently, a series of Production Orders is 
 required. These usually may very well be of the waybill or strip- 
 tick< Fig. 60) described in Chap. XIII (Part II). They 
 
 will hi- issued ami registered as described in that chapter. Such 
 Production Orders may represent either the month's production 
 of dim-rent kind- of product, or they may represent individual 
 of on" or Beveral kinds of product. If only one kind of 
 product of ;i homogeneous character was being made, then only 
 one m<h Production Order would lie required each month, to 
 
 .Me the cos! of the whole month's product. In that case, 
 of course, no actual order would be necessary, but a number 
 representing il might he used for office purposes.
 
 COSTING ON METHOD A 
 
 291 
 
 EXPENSE ITEM 
 
 o a 
 O "> 
 
 -a 
 
 U 
 
 o 
 
 V 
 
 O 
 Oh 
 
 -3 
 O 
 
 a-, 
 
 -a 
 o 
 
 •6 
 o 
 
 M 
 PL, 
 
 Depreciation 
 
 100 
 
 200 
 
 300 
 
 400 
 
 500 
 
 600 
 
 Insurance 
 
 101 
 
 201 
 
 301 
 
 401 
 
 501 
 
 601 
 
 Rents & Taxes 
 
 102 
 
 202 
 
 302 
 
 402 
 
 502 
 
 602 
 
 Buildings Repairs Labor 
 
 110 
 
 210 
 
 310 
 
 410 
 
 510 
 
 610 
 
 " •' Material 
 
 112 
 
 212 
 
 312 
 
 412 
 
 512 
 
 612 
 
 Machinery Repairs Labor 
 
 
 
 313 
 
 413 
 
 513 
 
 613 
 
 .» » Material 
 
 
 
 314 
 
 4l4 . 
 
 614 
 
 614 
 
 Other Repairs, Labor 
 
 115 
 
 215 
 
 315 
 
 415 
 
 515 
 
 615 
 
 " <> Material 
 
 116 
 
 216 
 
 316 
 
 416 
 
 516 
 
 616 
 
 Labor, Trucking & Handling 
 
 
 220 
 
 
 420 
 
 520 
 
 620 
 
 • i Cleaning & Laboring 
 
 121 
 
 221 
 
 321 
 
 421 
 
 521 
 
 621 
 
 • > Watchman etc 
 
 122 
 
 
 
 
 
 
 Sundry Supplies 
 
 123 
 
 223 
 
 328 
 
 423 
 
 523 
 
 623 
 
 Labor Power Staff 
 
 
 
 330 
 
 
 
 
 Fuel & Feed Water 
 
 
 
 331 
 
 
 
 
 Sundry Power Supplies 
 
 
 
 332 
 
 
 
 
 Salaries. Supt. & Prod. Staff 
 
 140 
 
 
 
 
 
 
 " Foremen 
 
 
 
 
 441 
 
 541 
 
 641 
 
 " Storekeeping 
 
 
 
 342 
 
 
 
 
 " All Office Men 
 
 143 
 
 
 
 
 
 
 Office Expense 
 
 144 
 
 
 
 
 
 
 Sundry Office Supplies 
 
 145 
 
 
 
 
 
 
 Sundry Works Expense 
 
 116 
 
 246 
 
 346 
 
 446 
 
 546 
 
 646 
 
 Spoilage & Wastes 
 
 
 
 
 450 
 
 550 
 
 550 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fig. 68. — Standing Orders.
 
 292 MANUFACTURING COSTS AND ACCOUNTS 
 
 Distribution of Material. — Material will be issued and charged 
 against Standing Orders and Production Orders as described in 
 Chap. IV (Part II). When required for Standing Orders it will 
 <ued against a Stores Requisition (Fig. 37) and when for a 
 Production Order it will be usually issued against a Bill of 
 Material, which is a list of stores required on any Production 
 Order. When the issues thus made are priced out they are 
 entered on a Stores Issues Book (Fig. 69) either in detail or 
 summary. Bills of Material will be, in general entered as one 
 item, while requisitions against Standing Orders will be entered 
 singly. The sectional form of Stores Issue Sheet (Fig. 39) will 
 not usually be necessary in costing on Method A as stores 
 transactions are few. Ordinary posting will serve all purposes. 
 
 When the Stores Issue Book is entered up, as regards the item, 
 quantity, price and value of the issue, an allocation is made to 
 
 Ref. 
 No. 
 
 Qty ? 
 
 Charge 
 
 to 
 
 Order No 
 
 Fuel &. 
 Feed 
 Water 
 
 8.0.331 
 
 finndrv Office 
 
 Sundry SuppUe8 
 Power | & 
 Supplies Stationery 
 S.O.332 I S. 0.145 
 
 Other 
 
 Standing 
 
 Orders 
 
 Direct 
 
 ilat'l.to 
 
 Prod. 
 
 Order 
 
 Fig. 69. — Stores Issues Book (Method A). 
 (The totals of columns SO. 331, 332 and 145 are charged direct on Burden 
 Journal without an intermediate cost sheet.) 
 
 one of several columns so as to indicate the destination of the 
 item. Fig. 69 shows a convenient form of Stores Issues Book. 
 Columns are provided for issues against Production Orders, also 
 against Standing Orders, but three special columns are also pro- 
 vided to take care of the allocations to Standing Orders 145, 331 
 and 332, representing power department and office department 
 respectively. The reason of this will be given later. 
 
 The document- from which Stores Issues Book has been written 
 up are thru available for posting to Cost Sheets. Every item 
 in the Production Order column must be posted to its proper 
 M.iiirial Sheet (Fig. 70). Every item in the column headed 
 " ' rther Standing < Orders" must be posted to the proper Standing 
 ( >rder ( lost Sheel 1 ig. 73), while the items in the three remaining 
 columns are dealt with later, as no Cost Sheets need be made 
 out for them. This, however, is merely a "short cut," and if 
 • hnred Cost Sheets can be made out for Standing Orders 145, 331
 
 COSTING ON METHOD A 
 
 293 
 
 and 332, in which case these columns would be omitted from the 
 book, and all Standing Order material posted to Cost Sheets in 
 the same manner. 
 
 When this operation has been carried out, the cost of all 
 material issued will have been posted to some Cost Sheet or other, 
 (except that chargeable against the three numbers just men- 
 tioned) and consequently if we were to list all our postings to 
 Cost Sheets, the total would equal the total of the issues of stores 
 for the period. In other words, we have now obtained a separate 
 account of stores issued against each Standing and Production 
 Order on which we are working at this time. Methods of verify- 
 ing that this is so, and for crediting Stores account with the 
 values thus withdrawn from stores, will be described presently. 
 
 For 
 
 PRODUCTION ORDER COST SHEET 
 Otv. 
 
 No 
 
 
 
 MATERIAL 
 
 Date 
 
 Item 
 
 Ref.No. 
 
 Qty. or Wt. 
 
 Price 
 
 Value 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ~ ^ 
 
 
 
 
 
 
 
 Total 
 
 
 Fig. 70. — Production Order Cost Sheet for material. 
 
 Distribution of Wages. — In Method A no complications with 
 piecework will occur, as the method is not correct if piecework 
 is employed. The principle of the method rests on uniformity 
 of wage rates within departments on equivalent processes, as 
 already explained, consequently no method of payment which 
 would make earnings unequal can be employed. Gate time, as 
 explained in Chap. IX (Part II) is, therefore, the foundation of the 
 pay-roll, and as under this method all operatives' time (men 
 engaged on process work) is charged to Burden account, and not 
 to Production Orders, we do not require any additional mechan- 
 ism for distributing wages to Orders save in the case of certain 
 men, mostly of the repair staff whose work may be directed now 
 to the benefit of one department and now of another. Such men,
 
 294 MANUFACTURING COSTS AND ACCOUNTS 
 
 0) m 
 
 
 
 / / 
 
 
 
 e -a 
 
 
 
 ( 
 
 
 
 o £ 
 
 
 
 
 
 
 (4 
 
 
 
 
 
 
 
 0) c 
 
 
 
 I \ 
 
 
 
 
 
 
 
 
 
 2 §• 
 
 
 
 
 
 
 W u 
 
 
 
 / / 
 
 
 
 M 
 
 
 
 / ( 
 
 
 
 4-> 
 
 
 
 \\ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 W 
 
 
 o 
 
 
 
 \ 
 
 
 
 <U 
 
 
 
 
 
 
 
 
 U 
 
 
 
 
 J 1 
 
 
 a 
 
 B 
 
 •l-J 
 
 
 
 ( 1 
 
 
 a 
 
 
 
 
 
 
 
 Ul 
 
 z 
 
 Q 
 
 
 
 1 / 
 
 
 
 
 *> 
 
 
 
 [ t~ 
 
 
 
 
 O-rH 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Q 
 
 
 
 ( 1 
 
 
 
 
 • 
 
 I \ 
 
 
 
 
 
 
 
 
 
 §■-8 2 
 
 
 
 \ \ 
 
 
 
 W Hi 
 
 
 
 
 
 
 
 
 ■J 
 
 
 
 
 
 
 
 
 tf«> 
 
 
 
 
 
 
 
 Ih 
 
 a 
 
 
 
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 \ \ 
 
 
 
 rt 
 
 S"° 
 
 
 
 
 
 
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 Q 
 
 
 
 
 
 
 Oi 
 
 
 
 
 J I 
 
 
 
 
 
 
 
 
 " , 
 
 
 m 
 
 
 +» 
 
 
 
 
 
 
 Q> 
 
 
 
 
 
 
 
 
 to 
 
 
 Q 
 
 
 
 
 
 
 rt 
 £ 
 
 
 
 
 
 
 
 
 u 
 
 
 
 
 
 
 
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 — - ) I 
 
 
 O o c 
 
 
 
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 G o rt 
 
 
 
 
 
 
 H35S 
 
 
 
 ) ) 
 
 
 
 
 / L 
 
 
 ted ?°N 
 
 
 
 
 
 
 uot;onpog 
 
 
 
 \\ 
 
 
 :.iv;^j 
 
 
 J 
 
 
 
 // 
 
 
 \ V 
 
 
 auicisis.ucpj / 
 
 
 •om B.trajg 1 
 
 .11 1 1 
 

 
 COSTING ON METHOD A 295 
 
 therefore, require time sheets; all the others are simply entered 
 on the pay-roll under I he routine givenin Chap. IX, and entries in 
 Burden Journal are made direct from the data given there. Fig. 
 71 shows a suitable pay-roll for Method A. This is arranged on 
 the weekly plan, since the nature of the work for which this 
 method can alone be used is usually that of steady progress of 
 large or even continuous lots, so that the necessity for quick and 
 prompt control of costs is rarely present. Of course, if desired, 
 a daily pay-roll like Fig. 52 can be employed, but in that case a 
 summary must be made somewhat in the form of Fig. 71 each 
 week. 
 
 With one exception, all wages are chargeable to Burden account 
 without further subdivision or classification. This exception is 
 the case of the repair men, laborers, etc., who may divide their 
 time between departments. Such men's wages are, therefore, all 
 allocated to the column headed " Time Sheet Men." Next comes 
 a column for power staff wages, then three columns to take care 
 of operatives' wages, each productive department being listed 
 separately. A salaries division is also shown, though this, of 
 course, can be arranged in a separate book if desired. Columns 
 are provided for superintendent and production staff, for the 
 foremen of the three productive departments, for storekeeping 
 staff, and for office staff. The remarks made as to Stores Issues 
 Book apply here also. Instead of having separate columns as 
 shown, each man's time could be posted to its proper Standing 
 Order number on a Cost Sheet, and in this case there would 
 only be four columns, namely, three for operative department 
 wages, and one for Time Sheet men, and each man would have 
 to use a Time Sheet, and these Time Sheets would be posted to 
 the Standing Orders. The method shown is a short cut justifiable 
 in view of what might be termed the comparatively sluggish 
 circulation of work in a plant likely to be organized on Method 
 A. Very detailed accounts are out of place in such a condition. 
 
 Repair men and laborers who divide their time between 
 departments will have Time Sheets like Fig. 72. These are 
 arranged for weekly return. In general this will be found 
 sufficient. The division of time between departments will be 
 only approximately correct, but this will depend a good deal 
 on the supervision exercised. A daily return of time distribution, 
 to be used in connection with a daily pay-roll, as will be de- 
 scribed in connection with Method B, can be used if desired, but
 
 296 MANUFACTURING COSTS AND ACCOUNTS 
 
 will not in general be worth the expense incurred where Method 
 A is in use. The Time Sheet when made up and checked against 
 gate time, is extended into money, which must agree exactly 
 with the amount entered on pay-roll. Each line of the Time 
 Sheet will represent a charge to be made against a Standing 
 Order, and consequently must be separately posted to Standing 
 Order Cost Sheets. When all postings have been made, the 
 result would be, if we listed all such postings, that all the w r ages 
 appearing under the column headed "Time Sheet Men" would 
 be charged up on one or other of the Standing Order Cost Sheets. 
 These postings, added to the amounts shown in the other allo- 
 cation columns of the pay-roll would then equal in amount the 
 
 Man's Name 
 
 
 
 
 w 
 
 R. 
 
 
 Man's Xo. 
 
 
 
 
 Standing 
 
 Order 
 
 Number 
 
 Work 
 
 Thu 
 
 Fri. 
 
 Sat. 
 
 Sun. 
 
 Mon 
 
 Tue 
 
 Wed 
 
 Hrs. 
 
 Wages. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ' 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fig. 72. — Time Sheet for men working on repairs and other standing orders 
 
 (Method A). 
 
 wages and salaries paid for the period. Methods of verifying 
 this and securing the proper credits to wages and salaries accounts 
 will be described presently. 
 
 Collecting Standing Order Costs and Charging Them to 
 Departmental Burden. — While Standing Order Cost Sheets 
 could be issued to cover all the Standing Order numbers shown 
 in Fig. 68, in practice this will not be necessary. Cost Sheets 
 will only be issued for such Standing Orders as are worked on by 
 Time Sheet men. that is to say, by men such as repair men and 
 Laborers, who divide their time between departments and 
 different kinds of work. All other Standing Orders are provided 
 for, either by the classifications in the Depreciation, etc., Sched- 
 ule- or by special columns in the Stores Issues and Wages Books.
 
 COSTING ON METHOD A 
 
 297 
 
 Fig. 73 shows a Standing Order Cost Sheet, providing columns 
 for material (as allocated to the column, "Other Standing 
 Orders" in Stores Issues Book); for wages (as allocated to the 
 column "Time Sheet Men" in pay-roll); and for works expense, 
 namely, sundry items which have been charged to Works Ex- 
 pense account, and which are chargeable against building repair 
 or some such item. As such items will be very few no special 
 mechanism is necessary to list them. They will be picked out 
 of the ledger account, and posted to Cost Sheets, until all the 
 items in the account are exhausted, except as provided below. 
 At the end of each month, the Cost Sheet will be totalled up, 
 and a fresh sheet bearing the same number opened to take care 
 of the next month's charges. 
 
 
 STANDING ORDER COST SHEET 
 Tiertt 
 
 Nn. 
 
 
 
 Date 
 
 Item 
 
 Mat'l. 
 
 Wages 
 
 Works 
 Exp. 
 
 Total 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fig. 73. — Cost Sheet for standing orders (Method A). 
 
 The Burden Journal, Fig. 74, is the medium by which credits 
 are made to the main ledger accounts on the left of the diagram, 
 and charges are made to the Productive Departments Burden 
 accounts. In this journal on Method A all the elements of 
 manufacturing cost are collected with the exception of direct 
 material, as it will be remembered that, on this method, opera- 
 tives wages are considered part of departmental burden. The 
 journal also provides a mechanism for prorating the cost of the 
 non-productive departments over the productive departments 
 on approved bases of allocation. 
 
 The sources of the various entries to be made on this journal 
 will be understood from an inspection of Fig. 74, in which 
 they are enumerated. Depreciation, rents, insurance, etc., will 
 be taken from the schedules, already divided into separate
 
 298 MANUFACTURING COSTS AND ACCOUNTS 
 
 U 
 
 O 
 
 
 u 
 
 S 
 
 o 
 C4 
 
 o 
 
 & 
 
 CO 
 
 5* 
 
 1 
 0. 
 C/3 
 
 Expense Item 
 
 
 
 Depreciation J 
 
 
 
 
 
 
 
 
 Insurance \ 
 
 
 
 
 
 
 
 
 Rents & Taxes \ 
 
 
 
 
 
 
 
 Building Repairs Labor / 
 
 
 
 
 
 
 
 " Material \ 
 
 \/ 
 
 
 
 Machinery Repairs Labor / 
 
 \/ 
 
 
 
 
 
 
 
 " ' " .' Material \ 
 
 
 
 
 • 
 
 
 
 
 Other Repairs Labor ^ 
 
 
 
 
 
 
 >> >> Material / 
 
 
 
 
 Labor, Trucking & Handling 
 
 
 
 Cleaning & Laboring \ 
 
 
 
 >• Watchmen etc. ( 
 
 
 
 
 
 
 
 Sundry Supplies \ 
 
 
 
 
 v/ 
 
 
 
 
 Labor Power Staff 
 
 
 
 
 
 
 
 Fuel & Feed Water 
 
 
 
 Sundry Power Supplies j 
 
 
 
 
 Salaries Supt. & Prod. Staff 
 
 
 
 " Foremen \ 
 
 
 
 Storekeeping j 
 
 
 
 All Office Men / 
 
 
 
 Office Expense / 
 
 
 Sundry Office Supplies 
 
 
 
 
 
 Sundry Works Expense 
 
 
 
 
 v/ 
 
 Spoilages & Waste 
 
 
 
 
 
 \ 
 
 
 
 Operatives Wages / 
 
 
 Totals to be Credited \ 
 
 'Left) 
 
 FlG. 74. — Burden 
 Note. — The check marks (vO indicate
 
 COSTING ON Ml.THOD A 
 
 299 
 
 
 
 
 Expense 
 Depts 
 
 Productive 
 Depts 
 
 ) irer 
 
 1 
 
 Office 
 
 & 
 Supt 
 
 2 
 Stores 
 
 3 
 
 Power 
 
 4 
 
 5 
 
 6 
 
 ) Schedule for Month 
 
 
 
 
 
 
 I Schedule for Month 
 
 
 
 
 
 
 
 Schedule for Month 
 
 
 
 
 
 
 / Service Cost Sheets 
 
 
 
 
 
 
 
 \ 
 
 , 
 
 
 
 
 
 
 
 ,. 
 
 
 
 
 
 
 
 
 
 ,. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 „ 
 
 
 
 
 
 
 
 
 „ 
 
 
 
 
 
 
 
 
 ] 
 
 
 
 
 
 
 
 
 ,. 
 
 
 
 
 
 
 
 
 \ ,, 
 
 
 
 
 
 
 
 
 / As Pay Roll A 
 
 location 
 
 
 
 
 
 
 
 
 As Stores Issues Book 
 
 
 
 
 
 
 
 
 .. 
 
 
 
 
 
 
 
 ( 
 
 As Pay Roll Allocation 
 
 
 
 
 
 
 
 \ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 „ 
 
 
 1 
 
 
 
 
 
 1 
 
 / As Charged in Wks. Exp. Acct. 
 
 
 
 
 
 
 
 
 As Stores Issues Book 
 
 
 
 
 
 
 
 
 As Charged in -Acct. 
 
 
 
 
 
 
 
 
 . As Charged in Acct. 
 
 
 
 
 
 
 
 1 >. >> •> 
 
 
 
 
 
 
 
 / As Pay Roll Allocation 
 
 X 
 
 X 
 
 >< 
 
 
 
 
 \ Prorating of Office &c 
 
 
 
 
 
 
 
 / Prorating of Stores 
 
 Dept. 
 
 
 \ Prorating of Power I 
 
 )ept. 
 
 
 
 
 Charge to P 
 
 roducti 
 
 ve De 
 
 ptS. 
 
 
 
 
 (Right) 
 
 Journal (Method A). 
 
 the usual allocations in credit columns.
 
 300 MANUFACTURING COSTS AND ACCOUNTS 
 
 charges against each of the six departments. Repairing and 
 laboring items will be taken from the Standing Order Cost 
 Sheets. Power staff labor will be taken from the proper column 
 in the pay-roll. Fuel, feed water and power supplies will be 
 found in the columns in Stores Issues Book appropriated to 
 those items. Various items of salaries will also be taken from 
 the respective columns in the pay-roll. Sundry office expense 
 will be taken from the entries in the Works Expense account, as 
 will also any special items chargeable against departments 
 and not covered either by Standing Order Cost Sheets or by the 
 above office expense time. Finally, spoilages and wastes will 
 be charged to the various departments that are chargeable with 
 them. The distribution of the total in Spoilages account will be, 
 in general, authorized by a memorandum from the superin- 
 tendent, classifying such charges and allotting the departmental 
 responsibility. The total covered by this memorandum will, 
 of course, agree with the balance in Spoilage account at the 
 month end. 
 
 On the left side of the Burden Journal, columns are provided 
 for collecting the credits to be made to the main ledger accounts. 
 On the right-hand side a column is provided for each of the 
 departments, and at the bottom of the three service or non- 
 productive department columns, a prorating arrangement will 
 be observed, by which each department's total can be distributed 
 over the productive departments. 
 
 It must, of course, be understood that separate ledger accounts 
 could be set up for collecting the departmental cost of non- 
 productive departments, and then the balances in these accounts 
 could be made the subject of journal entries so that each balance 
 was prorated over the three productive departments. In 
 most cases there is no advantage in this course, which entails 
 extra work without any corresponding advantage. Generally 
 speaking, there i< but little advantage in setting up a ledger 
 account unless it is expected to carry a balance at some time or 
 (.tier, or unless, as in the case of Works Wages account, Salaries 
 account, and Borne ethers, it represents some definite stage in the 
 gradual process of transforming cash and credit into finished 
 goods. Accounts are set up for depart mental burden in product- 
 lepartments because such burden is not always distributed 
 in full, or may even be over-distributed as we shall see presently. 
 The matter is, however, one of option and many accountants
 
 COSTING ON METHOD A 301 
 
 prefer to multiply ledger accounts rather than to shorten the 
 process of charges and credits by short-circuiting accounts that 
 have no balances in them. This is often due to a desire to 
 preserve a record of certain classes of transaction, as for ex- 
 ample, the totals of the expenditure in the three non-productive 
 departments shown in Fig. 74. But such records exist on the 
 face of the journal as indicated, and no additional security or 
 worth is attained by putting such items in and out of ledger 
 accounts each month. If unexpected varieties of charge are 
 feared, not foreseeable by the designer of such a journal, they 
 can be provided against by leaving a few blank lines, and a 
 blank column on the left-hand side of the journal, so that credits 
 may be made from it to any account, and any kind of item 
 entered on it and charged to any department. 
 
 The basis on which the non-productive department totals are 
 prorated over the productive departments will vary. The 
 power department total will be prorated on the estimated or 
 metered amount of power taken by each department. The 
 other i;wo non-productive departments will usually be pro- 
 rated on a basis of proportionate division, if, as is usual in 
 Method A, each department is a necessary and invariable link 
 in the chain of production. Such proportionate division will 
 be either on the basis of the number of operators in each de- 
 partment, or the number of unit processes. In any case the 
 division is quite arbitrary, but must be in proportion to the 
 total amount of work done by each department on the product as 
 a whole. Perhaps division on the basis of men employed in 
 each productive department is as fair as any. In plants organ- 
 ized for costing on Method A such expenses should bear a small 
 proportion to the rest of the productive department costs. 
 
 The last entry on the journal is that of operative wages in the 
 productive departments. This item is taken from the pay-roll, 
 and is added in to the productive department burden, as shown. 
 Consequently when the proratings have been made, and the 
 productive department columns have been added up, the cost 
 of manufacturing capacity in each department for one month 
 has been obtained. (It will be remembered that the direct 
 material on which this manufacturing capacity is exerted is 
 charged to the Production Orders.) 
 
 Before showing how cost of manufacturing capacity is identified 
 with particular Production Orders, the course of debits and credits
 
 302 MANUFACTURING COSTS AND ACCOUNTS 
 
 sel up through the Burden Journal must be traced. The general 
 diagram for Method A (Fig. 67) exhibits the relation of the journal 
 to the main ledger accounts on the one hand, and to Departmental 
 Burden accounts on the other. The sources of information 
 giving rise to entries on Burden Journal arc seen to be, first the 
 schedules, secondly the Standing Order Cost Sheets. Theoretic- 
 ally all the data in pay-roll and Stores Issues Book should be 
 entered on Standing Order Cost Sheets and not give rise to 
 journal ent ries directly. But as explained above, special columns 
 in these two books collect certain groups of data that are identified 
 with particular Standing Order numbers, and we are thus able 
 to short-circuit the intermediate step of the Cost Sheet except 
 in the case of men who do varied kinds of work during the pay 
 period, that is work on more than one Standing Order. 
 
 When the data provided by schedules, Cost Sheets and special 
 allocations in pay-roll and Stores Issue Book have been entered 
 on the journal, and small items like works expense and spoilages 
 all accounted for in one way or other, and the non-productive 
 department totals have been prorated over productive depart- 
 ts, we are then ready to make credits and charges. The 
 course of these will be shown by the dotted lines, which repre- 
 sent credits, and the double lines which represent charges. Single 
 lines represent data carried from one document to another, not 
 yet in ledger accounts. 
 
 The following agreements must exist at this stage, after 
 postings and pro-ratings have been made: 
 
 The aggregate of totals of the three productive departments on 
 the righl hand of journal must agree with the aggregate of totals 
 of all the credit columns on the left-hand side. 
 
 The total of store- column must agree with the aggregate of all 
 columns in Stores Issues Book except direct material. 
 
 The total of depreciation column must agree with the total 
 chargeable for tin- month against factory as shown by the 
 Depreciation Schedule. 
 
 The total of rents, insurance, ^'ic, must agree with the total 
 chargeable for the month against factory as shown by the Rents, 
 etc. Schedule. 
 
 The total of wages column must agree with the aggregate of all 
 columns in the pay-roll (grand total of the works pay-roll). 
 
 The total of the salaries column must agree with the grand total
 
 COSTING ON METHOD A 303 
 
 of the works salaries pay-roll. The two books arc shown as one 
 in the example given. 
 
 The total in works expense column must agree with the total 
 of all items in the balance of Works Expense account, less such 
 as are chargeable to Production Orders. This latter class of item 
 will rarely, and in many plants, never occur. 
 
 The total spoilages column must agree with the amount stand- 
 ing as a balance in Spoilages account. 
 
 Distributing Departmental Burden Over Production Order 
 Cost Sheets. — Having now obtained a total in Departmental 
 Burden accounts representing the cost of manufacturing capacity 
 of each department for the month, we have now to set up mechan- 
 ism for obtaining departmental costs of specific Production 
 Orders. 
 
 If there is only one product going through, then the depart- 
 mental burden will be the departmental cost of whatever quan- 
 tity of product has been made during the month. We have, 
 therefore, only to find out what quantity or weight was produced 
 and divide this into the cost to ascertain the cost per pound or 
 yard, as the case may be, in each department. The total cost 
 of manufacture will accordingly be as follows: 
 
 Cost of direct material 3 cts. per pound. 
 
 Cost of department 4 12 cts. per pound. 
 
 Cost of department 5 14 cts. per pound. 
 
 Cost of department 6 8 cts. per pound. 
 
 Factory cost of product 37 cts. per pound. 
 
 If two or more products are going through, which do not differ 
 in their rate of production, that is to say one product does not 
 require more time to pass through any process than any other 
 product, then departmental costs will be attained by dividing 
 them up between the different products in proportion to the 
 quantity or weight of the latter. 
 
 But if this condition does not exist, and if the various products 
 passing through do not take exactly the same time to pass through 
 each process, or if some processes are omitted in regard to certain 
 products, then it is clear that division of departmental cost 
 between products cannot be made on a basis of relative weight 
 or quantity. The element of time taken must be introduced. 
 The same thing must happen if, instead of costing product by the
 
 304 MANUFACTURING COSTS AND ACCOUNTS 
 
 whole production of each kind for a month, we desire to know the 
 cosl of individual lots. The time taken by each such lot must 
 obviously be ascertained, unless such lots are absolutely homo- 
 geneous and can be costed by weight, which will rarely be the 
 
 Production Orders will be issued for each item of which we 
 eto know the separate cost. Thus we may have one product 
 going through which is quite homogeneous, and can be costed 
 by weight, once we know what the whole month's production of 
 that particular product has cost. Then we may have another 
 kind, not so homogeneous, say a mixture which is varied accord- 
 ing to individual customer's requirements, thus necessitating 
 individual costing of direct material, and which requires a little 
 more grinding, sifting, precipitating, etc. than the standard 
 kind just mentioned. One single Production Order can be issued 
 for the whole month's production of the first product, and indi- 
 vidual Production Orders will be issue'd for the separate lots of 
 the second product. 
 
 Correspondingly, one Cost Sheet will record all the month's 
 (Hi the first product and as many Cost Sheets will be 
 required for costing the second product as there are separate lots 
 ^nii<T through. 
 
 The way in which direct material is charged to Production 
 Order Material Sheets (Fig. 70) has been described. All the 
 material used during the month on the first product will be 
 charged to one sheet. Material used on the second product will 
 be charged to the individual Production Order Material Sheets 
 as and when issued. 
 
 It now remains to ascertain the time taken by all work on 
 tin- first product, and also the time taken on individual lots of 
 the second product. Consequently a mechanism for ascertain- 
 ing time taken by each Production Order at each stage of process 
 work will be necessary. Fig. 75 shows a Time Record of Process 
 Work, in which space is provided for recording the Production 
 Order number and time of commencement and completion, and 
 total hours worked against each order and each day. Such a 
 1 may require considerable supervision to secure correctness, 
 being in fact subject to as many errors as workmen's time records, 
 which will be dealt with in a later chapter. 
 
 The total hours worked should agree with the actual working 
 hour.- of the department, and in the absence of any better check
 
 COSTING ON METHOD A 
 
 305 
 
 should be vouched for by the foreman. Where single operators 
 are engaged on process work, the addition of the operative's name 
 and clock number will enable the Time Record to be checked 
 up with the Gate Time Record, but as frequently in work of this 
 kind men work in groups, and late arrival of one or more in the 
 group does not necessarily stop the process, the matter of check- 
 ing the record must be left to the decision of those applying the 
 method in any particular case. It will suffice here to point out 
 the necessity for careful supervision, both as to hours assigned 
 to any order, and also to the correctness of the order numbers 
 themselves. Because the element of wage cost is absent in this 
 
 Process 
 
 I 
 
 )epartment 
 
 
 
 
 DntP 
 
 Production Order No. 
 
 Began 
 
 Finished 
 
 Hours 
 
 
 
 
 
 
 
 
 
 
 
 
 ^~^_ 
 
 
 
 
 
 
 
 
 Total Hours Worked 
 
 mmm 
 
 Fig. 75. — Departmental Process Time Record. 
 
 kind of record does not in the least reduce its importance, since 
 cost will ultimately be based on the figures appearing on it. 
 
 It must not be overlooked that in arranging the points at which 
 Time Records are set up, care must be taken that each process 
 has an equal labor value, i.e., employs the same number of 
 men. If a department contains three series of processes, each 
 series consisting of five machines and requiring a group of six 
 men to operate the five machines, then each of the three series 
 will require a separate Time Record. But should it happen that 
 certain product does not pass through the whole series of five 
 machines, then it will no longer be possible to adopt the group 
 method of arrangement, and each machine must have a separate 
 Time Record. The unit processes selected must comply with 
 two conditions: (1) they must be continuous, so that product 
 
 20
 
 Dcpt Cost 
 as Burden Acct. 
 
 Productive Hours 
 
 S 
 
 Cost of 
 Departmental Hour 
 
 > 
 
 306 MANUFACTURING COSTS AND ACCOUNTS 
 
 of any kind passing through one machine in a series passes 
 through all; alternatively to this, they must be separate machines 
 (2), an equal number of operators must be represented in each of 
 the unit groups. It follows from this that single machines and 
 be included in the same department, nor can series 
 be of unequal size. The principle of the method depends on the 
 
 averaging of factory expense 
 and of operative wages, con- 
 sequently the unit selected for 
 Time Record must contain 
 equal expenditure of wages, 
 which would not be the case 
 if, in the same department, 
 processes requiring a series of 
 
 , three operators were mingled 
 1 p.. i o. — Determination, ot value ot . . . 
 
 department hour. with processes requiring single 
 
 operators. 
 There is also to be considered the ease of a department, such as 
 a floor of mixing vats, where a gang of operators attend on say 
 a dozen vats, only some of which will, in general, be in operation 
 at any one time. Such a department can obviously only be 
 costed as one unit, and the cost of manufacturing capacity will 
 be the departmental burden as collected in Burden Journal. 
 But on what basis can this be distributed on products? If all 
 varieties of product take the same time in being mixed and manip- 
 ulated, then the volume or weight of each product will be the 
 of distribution. But if some kinds of product take more 
 time than others, and require more attention, mere volume or 
 weight would not be a true basis of distribution. The time that 
 each product took in passing through the department would have 
 to be recorded, and all these times added together being divided 
 into the total departmental cost would give the hourly cost to 
 be applied to individual orders. But even this would be incorrect 
 if, for example, mixtures remained in the vats for mere con- 
 venience of storage. It U obvious that such storage time has 
 nothing to do with use of manufacturing capacity and must be 
 eliminated. The true basis will, therefore, be the time actually 
 imed in process work. As soon as any mixture is matured 
 bo thai ii is ready for removal to the nexl department, the process 
 on that lot must be considered terminated. In this way the work 
 of the gang, though perhaps never at one time all working
 
 COSTING ON METHOD A 
 
 307 
 
 together on one vat, is averaged and diffused over all the vats in 
 work in strict proportion to the time they are under observation 
 and occupying the floor. 
 
 Figure 76 shows a blank useful for determining the value of the 
 department hour. The first line is filled out with department 
 cost as indicated by the balance in Burden account (as posted 
 from the departmental column in Burden Journal) ; the second 
 line is filled out with the total of department hours worked. This 
 figure is the aggregate of all the totals of Time Records during 
 the month. It represents the process-hours worked on unit 
 processes whether these are single machines or groups of machines, 
 or single operators and groups of operators. The third line in 
 the blank is for the figure obtained by dividing the productive 
 hours into the departmental cost, thus finding the cost of one 
 departmental hours work. 
 
 Fnr 
 
 PRODUCTION ORDER COST SHEET 
 Otv 
 
 N 
 
 T. 
 
 
 
 DEPARTMENT 
 
 
 
 Date or 
 Period 
 
 Process 
 
 Cost 
 
 Monthly Total 
 
 Hrs. 
 
 Value 
 
 Hrs. 
 
 Value 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Departmental Total Cost 
 
 
 
 
 Fig. 77. — Departmental Production Order Cost Sheet. 
 
 Having thus provided for a record of process-hours, the aggre- 
 gate of which forms the total of productive hours of the depart- 
 ment, and having divided this total into the departmental burden 
 for the month, and so obtained the average cost of one process- 
 hour, and having, moreover, made a record of the process-hours 
 against each Production Order worked on, the next step is to post 
 this latter record to the individual Production Order Costs Sheets, 
 and extend the money value of the hours so posted. Fig. 77 
 shows a Departmental Production Order Cost Sheet. Space is 
 provided for date, name of process, and hours worked as indicated 
 by the Time Records. A column is also provided for the money
 
 308 MANUFACTURING COSTS AND ACCOUNTS 
 
 value of these process-hours. As a Production Order may be 
 in work over the end of a month, columns are provide for the 
 totaling of each month's figures separately. 
 
 When all the Time Records have been posted to Production 
 Order Cost Sheets and extended at the departmental hourly 
 rate, then the aggregate of such extensions for the current month 
 on all the Production Order Cost Sheets should equal the total 
 standing in the Departmental Burden account. To secure this 
 agreement and to provide a mechanism for crediting the Depart- 
 mental Burden account and charging the Departmental Manu- 
 facturing account, a Departmental Manufacturing Journal, 
 (Fig. 78) is made use of. 
 
 MANUFACTURING _ 
 
 DFP'T 
 
 JOURNAL 
 
 Order Mo. 
 
 Hrs. 
 
 Dept.Cost 
 @ — Per Hour 
 
 Spoiled 
 Work 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ^=^^=^=^ 
 
 
 
 
 
 
 
 
 
 
 
 
 Totals 
 
 
 
 
 
 
 Fig. 78. — Department Manufacturing Journal (Method A). 
 
 Each current Production Order is listed herein, the total 
 process-hours standing against it, and the total cost of production 
 corresponding are then placed opposite the order number, and 
 tin.' whole being totalled up, we arrive at the total process-hours 
 for tli< i month, and also the total production cost for the month 
 in thai department. The total of hours should agree with the 
 similar total in Fig. 70 in all cases. 
 
 The total departmenl cost as listed in the journal is now 
 credited to Depart tnenl Burden account and charged to Depart- 
 ment Manufacturing account (see general diagram for Method A, 
 67). If all these operations have been carried out at the 
 time, namely at the end of the month, the Burden account 
 will be exactly credited, so that no balance is left in it. But as 
 will often happen it ia desired to withdraw particular Production
 
 COSTING ON METHOD A 
 
 309 
 
 Order Cost Sheets (because the orders are completed) during the 
 month, then the extension of time will necessarily be made 
 at the previous month's rate, and this may prove to be either 
 higher or lower than the actual rate for the month when ascer- 
 tained. In such cases the amounts listed in the journal, when 
 totalled, may prove to aggregate more or less than the total in 
 Burden account, thus leaving either a credit or debit balance in 
 the latter to go forward to the next month. In general this will 
 not signify, but if conditions are known to be changing, such as a 
 general falling off of orders, then it will be desirable to advance 
 the last month's rate to a higher figure if it is desired to make 
 use of it for costing and closing out particular Production Orders 
 before the close of the month. 
 
 Crediting Direct Material to Stores Account and Charging to 
 Manufacturing Account. — The departmental cost of production 
 has now been disposed of, as far as the present stage of the 
 accounting process is concerned. All the main ledger accounts 
 have received their proper credits, and the Whole of the values 
 represented by such credits have found their way on to Pro- 
 duction Order Cost Sheets, and these having been listed in 
 Manufacturing Journal, have 
 in turn found their way to 
 Departmental Manufactur- 
 ing account. Of course, the 
 main ledger accounts will not 
 be completely credited until 
 this procedure has been com- 
 pleted for all the productive 
 departments, and for direct 
 material, which virtually 
 ranks as a department in 
 this method. 
 
 The way in which direct 
 material is charged to special Material Cost Sheets, Fig. 70, one 
 such sheet for each Production Order, has been described above. 
 To transfer it to the debit of Manufacturing account a Material 
 Journal is employed, Fig. 79. This is simply a list of the cur- 
 rent Production Order Cost Sheets against each of which the 
 value of material issued during the current month is entered. 
 The total of all entries is obviously the value of material drawn 
 from stores on the one hand, and chargeable to production on 
 
 MATERIAL JOURNAL 
 
 Production Order No. 
 
 Cost 
 of M't'l. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total Material 
 
 
 Fig. 79. 
 
 -Production Order Material 
 Journal.
 
 310 MANUFACTURING COSTS AND ACCOUNTS 
 
 t; >- 
 
 
 
 
 
 
 Cost c 
 Ordc 
 
 
 
 Total 
 pt'l 
 
 
 
 
 
 CO 
 
 : 
 
 
 
 
 
 
 
 a 
 
 o 
 
 o 
 O 
 
 
 i III 
 
 | I 
 
 
 -J 
 
 Q 
 
 u 
 
 
 
 
 
 
 
 
 
 ~P, 
 
 
 JjYT 
 
 
 
 
 « s 
 
 
 
 
 O 
 
 o 
 
 
 
 I- 
 
 
 --> 
 
 
 ~ 
 
 the other. This total is, therefore, 
 agreed with the column in Stores 
 [ssues Book, Fig. 69, which carries 
 the allocation of stores issues to 
 direct material, and is then credited 
 to Stores account and charged to 
 Material in Process account. 
 
 The whole cycle of costing oper- 
 ations on Method A has now been 
 described, and the different steps 
 can be followed out by the reader 
 on the general diagram of Method 
 
 A, Fig. 07. All the credits made 
 to the main accounts on the left 
 are now represented by amounts 
 standing to the debit of Depart- 
 mental Manufacturing accounts 
 and to Material in Process account. 
 The detail of these debits is con- 
 tained in various Production Order 
 Cost Sheets and Production Order 
 Material Sheets. It follows that 
 when an order has passed through 
 all departments and has been com- 
 pleted, the finished factory cost of 
 such an order is readily found by 
 collecting together the Depart- 
 mental and the Material Cost 
 Sheets pertaining to it. The process 
 of crediting Manufacturing ac- 
 counts and Materia] in Process 
 accounts will, however, be left to a 
 later chapter, as it is independent 
 of the method of costing and is the 
 same for all methods whether A, 
 
 B, or C. 
 
 Order Register. — A variety of 
 Order Register specially suitable 
 for Method A is shown in Fig. 80. 
 If Time Records are posted daily 
 to Cost Sheets, and extended at
 
 ^ 
 
 ©-- 
 
 Pay Roll Distribution Summary _ 
 
 Stores Issues Book Summary 
 
 "S 
 
 £z;l 
 
 Sfi 
 
 B 
 
 5.7,' 
 
 1 
 
 1 1 
 
 
 Material in Process Acct. 
 
 Material Oiargfd 
 
 Flo. 07. — General diagram (Method A). 
 
 n
 
 COSTING ON METHOD A 311 
 
 the previous month's rate, then, if the strip-ticket system of Pro- 
 duction Orders, Fig. 60, is employed, departmental cost may be 
 figured and entered as fast as the strips are returned from the 
 various departments. In this way the Order Register becomes a 
 tracer, and the stage which any order has reached may be seen 
 by inspection of the register. If desired, the actual costing oper- 
 ation may be deferred till the month end, when the true current 
 departmental hour cost is known. In that case a simple check 
 mark may be placed in the hours column of each department as 
 each strip ticket is returned, thus preserving the tracer feature 
 of the blank, and postponing its cost record function till the 
 end of the month. 
 
 Spoiled Work. — It will have been noticed that the Depart- 
 mental Manufacturing Journal, Fig. 78, contains a column 
 headed "Spoiled Work." This is to contain the cost of supple- 
 mentary orders issued to replace spoiled parts (see Chap. IX, 
 Part I). Such orders are called Replacement Orders, and 
 work on them is chargeable, not to Departmental Manufacturing 
 account, but to Spoilage account, as is indicated on the general 
 diagram.
 
 CHAPTER XVI11 
 
 COSTING ON METHOD B (HOURLY BURDEN OR PER- 
 CENTAGE PLAN) 
 
 In costing on Method A described in the last chapter, it is 
 assumed that the rate of wages is uniform for all processes 
 throughout the departments, and that overhead expense or 
 burden bears uniformly on all such process units. This being 
 the case, wages and burden are thrown into one sum, and ex- 
 pressed as process-cost per hour in one figure. 
 
 In costing on Method B, now to be described, it is assumed 
 that unequal amounts of wages will be paid for 1 hr. work on 
 different processes, and this may arise from the wage rates 
 being in themselves different, or from some system of paying 
 by results, such as piecework, premium, or bonus being in 
 vogue, so that unequal sums are received by employees for 1 
 hr. work in the department. 
 
 But this assumption does not extend to overhead expense or 
 burden. It is still assumed, as regards burden, that it bears 
 equally on all processes throughout the department, or on all 
 men in proportion to their wages. Consequently burden is 
 distributed over production on one of two bases — either it is 
 reduced to what is known as an hourly burden, that is a charge 
 for burden for each hour worked in the department on pro- 
 ductive work, or it is reduced to a ratio or percentage of pro- 
 ductive wages. That is to say that if the burden for a given 
 department is $400 and 4,000 hr. have been worked on pro- 
 ductive work, the hourly burden is reckoned at 10 cts. an hour, 
 or alternatively, if the productive wages in the department were 
 $800, then the burden percentage is said to be 50 per cent. 
 
 This method of costing is very widely used at the present 
 time. In many cases it is quite correct, in some cases approxi- 
 mately correct, in others wholly incorrect. 
 
 It is correct in as far as the assumption made as to the uniform 
 bearing of overhead expense on all processes is true. In propor- 
 tion a£ the assumptioD tends to be divorced from the facts of pro- 
 
 312
 
 COSTING ON METHOD B 313 
 
 duction it becomes incorrect. It is necessary, therefore, to 
 consider what this assumption implies. 1 
 
 In a former chapter it was shown that burden is first of all 
 departmentalized before it is applied to costs. It was shown that 
 considerable pains are necessary before the amount of burden 
 applicable to each department is determined. We do not 
 ascertain the total of burden and then distribute it equally 
 between departments. On the contrary, attention is paid to the 
 amount of equipment each department contains, and the cost of 
 the building it occupies, and on these values such charges as 
 depreciation, rents, insurance, taxes, etc. (also interest where 
 this is included in cost) are apportioned. Similarly we collect 
 the internal expense of each department, such as its own repair- 
 ing, cleaning and laboring costs, separately. And in prorating 
 expense departments over productive departments some basis 
 is taken that implies measuring the cost of service as each depart- 
 ment has received it. Thus the power-plant cost is distributed 
 over productive departments in proportion to the power, light 
 and heat they have used. 
 
 Now departmentalizing is merely localizing expense to certain 
 groups of production centers. Departments are usually planned 
 so that they represent some distinct division of the productive 
 scheme which is so different from other divisions that it merits 
 being costed separately. Thus if we are making soap, the kettle- 
 floor costs are separated from the packing, mixing, boxing and 
 other departments. In engineering plants the foundry, the 
 machine shop, the grinding shop and the fitting floor will be made 
 into separate departments. All these departments, when mapped 
 out, will be charged with overhead expense service in proportion 
 as they have made use of it. 
 
 This is equivalent to saying that one group of production 
 centers (a production center being any place by and at which 
 work is done, such as a machine, a vat, a bench, etc.) does not 
 absorb the same amount of the different kinds of service which 
 we collect through Standing Orders as other groups. Each such 
 group, called a department, absorbs its own proper share. 
 
 Now this principle can be carried a step further. If in a given 
 
 1 Readers desiring to follow up the question of burden distribution in 
 greater detail than is possible in a general work are referred to the author's 
 special studies: "The Proper Distribution of the Expense Burden" (2nd 
 edition, 1913) and "Production Factors" (1910).
 
 314 MANUFACTURING COSTS AND ACCOUNTS 
 
 department, we have 20 production centers, we may very well 
 ask whether the burden assessed against the department is, 
 as a matter of fact, properly distributable equally between 
 them. Should each one of them bear one-twentieth of the total? 
 And when we remember that burden is really made up of a 
 number of wholly different kinds of charges, it may seem likely 
 that some of our production centers may enjoy certain kinds 
 of service, say for example, the power service, to a greater extent 
 than other centers. If, in short, some of them are large and costly 
 machines, using considerable power, covering considerable floor 
 space, using the services of expensive cranes, and so forth, while 
 others are small, cheap, light machines, then it will be obvious that 
 the distribution of burden within the department should be based 
 on some principle that will allocate it to the production centers 
 in proportion to the use each makes of the different kinds of 
 service. 
 
 If, therefore, there is a considerable difference between 
 machines, in cost, size, power consumption, use of transport 
 machinery and service, then the hourly burden or percentage plan 
 (Method B) is not correct. To employ it under these circum- 
 stances is pretty nearly as bad as it would be to divide the total 
 of all burden between departments in proportion to their num- 
 ber and not in proportion to their use of the various services of 
 which burden represents the aggregate cost. 
 
 This rule, however, must be applied with caution. If a 
 department consists of a series of machines through which all 
 product necessarily passes, then if some of the machines in the 
 chain are larger, etc., than the others, it will not prevent the use 
 of Methods A or B, because the whole chain of machines is con- 
 sidered as one machine. And if there were three or four such 
 chains of machines in a department, they would be virtually 
 similar production centers. But, on the other hand, the moment 
 the machines or set of machines used in one process in a depart- 
 ment call for service in different proportion to other machines 
 or sets of machines, then neither Method A nor Method B can 
 be considered as satisfactory methods of costing. 
 
 On the other hand, if a department contains, say, 50 milling 
 machines of practically the same size and make, then if all the 
 work is daywork and all operators are paid at the same rate, 
 Method A can be satisfactorily applied. If the same machines 
 are manned by operators working on a piecework or premium
 
 COSTING ON METHOD B 315 
 
 system, then Method B will be satisf actor y. But if a number of 
 machines of different sizes and kinds are in use, t lion Mot hod ( ' is 
 the only accurate method of costing. 
 
 Method B is also satisfactory for all hand industries or depart- 
 ments in which hand industries are carried on. By hand in- 
 dustries is meant those in which the machinery and equipment 
 employed by the workers is negligible. Cutting rooms, sheet- 
 metal shops, and the molding floors of most foundries may be 
 cited as examples. Other cases may be mentioned in which, 
 though machinery is employed, it is very incidental to the hand 
 skill, even though in some cases costly and consuming service. 
 Thus in a blacksmith shop, drop stamps and steam hammers, 
 hack saws, forges, etc., may be in use, but only intermittently. 
 They are rather aids or auxiliaries than actual production centers. 
 But, on the other hand, if such a shop were organized for con- 
 tinuous manufacture of some kind, so that certain machines were 
 kept steadily at work on production, that would alter the case. 
 Another case where Method B is sufficiently accurate is the repair 
 shop of a mill or other plant of a non-engineering character. The 
 machinery in such a shop is usually of a miscellaneous character, 
 and whether one machine or other is used on a particular job 
 depends on convenience. It is true that even in this case a 
 repair job requiring the services of a large planer should be visited 
 more heavily with burden than one requiring only benchwork 
 or the services of a light drill, but as repair machinery is rarely 
 kept in constant use, that is to say a considerable percentage 
 of machines is often idle, the ultimate result under either Method 
 (B or C) would be much the same, and therefore B, being the 
 simpler, would have the preference. 
 
 To sum up the foregoing arguments — Method B is indicated 
 where the assumptions on which it is based are true, namely 
 when the distribution of expense within departments is obviously 
 equal as between one production center and another. If, on the 
 other hand, a department contains a variety of machinery, some 
 taking more service in the way of power, space, transport facilities, 
 supervision, etc., than others, then Method C should be used. 
 
 In some cases a department that calls for Method C on account 
 of variety of machines, can be resolved into two or more depart- 
 ments, each sufficiently uniform in their equipment to justify 
 the employment of Method B. Departmentalization is the key 
 to accuracy in costing, and the peculiar merit of Method C is that
 
 316 MANUFACTURING COSTS AND ACCOUNTS 
 
 it carries the principle of departmentalization as far as the produc- 
 tion centers themselves, that is to say, to the ultimate limit pos- 
 sible. It is this that makes it the most accurate of all systems. 
 But as said above in other words, this ultimate simplicity is 
 already reached for practical purposes when a department con- 
 tains only machines of practically the same cost, size, and call 
 on service. When that is the case, further departmentalization 
 is unnecessary — Method A will give accurate results if wages are 
 uniform throughout the shop, and Method B will take its place 
 if wages or earnings per hour are not uniform. 
 
 Having now explained the circumstances under which Method 
 B is applicable, the practical working of the method can be 
 described. 
 
 The General Diagram. — The large folding diagram at the 
 end of this book represents a general scheme of cost accounts 
 on Method B. The left-hand portion of the diagram deals with 
 the distribution of purchases to the main ledger accounts (in- 
 dicated by circles) and has been fully covered in previous chap- 
 ters. The symbols above the large square represent the order 
 system, while those on the extreme right of the diagram deal 
 with the clearing of departmental accounts and the ultimate 
 charging to Finished Production Orders account. 
 
 The portion of the diagram within the large square represents 
 the cost system proper. The various sources of information 
 as to the elements of cost are: the schedules for depreciation, 
 rents, insurance, taxes, etc.; interest (which, however, being 
 optional in all costing methods will be dealt with separately in a 
 later chapter); and the summaries of pay-roll, Salaries Book, and 
 Stores Issues Book. 
 
 The method by which allocation of wages to Orders is effected 
 (namely, by Time Sheets and piecework earnings notes) and of 
 stores issues to Orders (by means of Stores Issue Sheets) is 
 displayed; and the Order Cost Sheets to which the items from 
 the foregoing are posted are shown immediately underneath. 
 Below these documents are shown the Burden Journal on the 
 I* H hand, and the Manufacturing Journal on the right hand. 
 The Burden Journal receives the data collected by the Standing 
 ( >rder ( losl Sleet-, and .-nine from the Depreciation, etc., Sched- 
 ule, and when all entries have been completed, becomes the 
 Bource from which arc made, first, credits to the main ledger 
 accounts; secondly, distribution of the service cost of non-
 
 COSTING ON METHOD B 317 
 
 productive departments to productive departments; and thirdly, 
 charges of the total of burden thus ascertained against pro- 
 ductive departments to a Departmental Burden account, one 
 for each department. 
 
 The Manufacturing Journal, one of which is used for each 
 productive department, lists the various Production Orders 
 (and in some plants Plant Addition Orders, which are merely 
 a special kind of Production Order), and then becomes the 
 medium, first, for distributing burden over Production Orders, 
 either on the hourly burden or the percentage method; secondly, 
 for crediting the department Burden account with the total 
 so distributed; thirdly, for charging Departmental Manu- 
 facturing account with the total of direct wages, direct material 
 and burden as listed in the journal. 
 
 The Order System. — While the Standing Order scheme 
 indicated for Method A can be applied in Method B the larger 
 scale of operations of plants suitable for organizing on Method 
 B makes it desirable that a more elaborate Standing Order 
 system, based on separating the costs of service into several 
 principal groups, called production factors, should be employed. 
 Moreover, should it be desired at any time to put the costing of 
 any department on Method C this arrangement of Standing 
 Orders, besides giving greater precision in the control of over- 
 head expense, will render the introduction of Method C much 
 easier. Fig. 56 in Chap. XII (Part II) shows a Standing Order 
 table, grouped by production factors, and arranged for four 
 non-productive and four productive departments. 
 
 It will be noticed that the main difference between this table 
 and that suggested for Method A lies in the greater subdivision 
 of items, and their assembly or grouping in divisions corre- 
 sponding to definite classes of expenditure. Thus the whole 
 field is divided up into: (1) expenses connected with buildings 
 and premises; (2) those connected with storage of material 
 and its handling and transporting from place to place, both 
 between departments and between machines or production 
 centers; (3) those connected with superintendence, including 
 the share of administrative salaries to be borne by the factory; 
 
 (4) those connected with the factory organization, including 
 share of the general office expense (depreciation, insurance, 
 stationery, books, phones and postages borne by the factory); 
 
 (5) those connected with the generation of power and its trans-
 
 318 MANUFACTURING COSTS AXD ACCOUNTS 
 
 mission to machines; (6) those connected with the productive 
 machinery itself, chiefly depreciation, insurance, and repair and 
 maintenance. All factory expense can be legitimately placed 
 in one or other of these groups, and each such group represents a 
 particular kind of service rendered to production and called 
 upon to a different degree by each department. 
 
 In Method B no special use is made of this grouping except 
 in the way of reports and returns in which the different factors 
 are given separate existence. This will, however, not be con- 
 sidered until the chapter on "Reports and Returns." But as 
 the data must be arranged in some form, and it makes no par- 
 t icular difference to this method, in what form they are arranged 
 so long as the allocation to departments is sufficiently detailed 
 and clear, it is just as well to adopt the production factor classi- 
 fication. Once arranged it implies no more work to collect the 
 data than if they were grouped in any other order. The table 
 given in Fig. 56 is, of course, only a suggestion. In many 
 plants modifications would be required, and in some it would 
 require amplifying, as for instance in an engineering works, where 
 tool rooms, compressed-air systems and other non-productive 
 depart ments exist. This was dealt with in Chap. XII (Part II). 
 
 In a large number of the plants employing Method B both 
 Production Orders and Component Orders will be necessary. 
 As explained in Chap. XIII (Part II) Component Orders are 
 sul 'divisions of Production Orders. When they are in use, the 
 Production Order number becomes merely a device for collecting 
 all the component costs belonging to a particular Production 
 Order; but it does not follow that such subdivision is necessary 
 in the case of every order. A given Production Order, for 
 example, might have only one Component Order to which all 
 work on the Production Order was charged. From this ele- 
 mentary stage, to a series of Component Orders giving the 
 very . amount of detail, is obviously a matter of arrange- 
 
 ment of the Component Orders at the commencement. In 
 this way, some costs may be obtained in great detail, while 
 others are obtained in less detail. When Component Orders 
 are m use at all it is best to give all work a Component Order, 
 even though only one such order is required on a given Pro- 
 duction Order. The way in which Production Orders and 
 Component Orders are registered and issued was discussed in 
 Chap. XIII (Part II).
 
 COSTING ON METHOD B 
 
 319 
 
 Cost Sheets.^Figure 81 shows a Standing Order Cost Sheet 
 arranged for collecting items of wages, material and sundries 
 chargeable against Standing Order numbers. Fig. 82 represents 
 a Cost Sheet which may be used for colle'cting items that do not 
 arise within the factory, but are obtained from the Schedules of 
 
 For 
 
 STANDING 
 
 ORDER COST 
 Dent. 
 
 SHEET 
 
 Mn 
 
 
 
 Date 
 
 Item 
 
 Hrs. 
 
 Wages 
 
 Mafl. 
 
 Wks. 
 Exp. 
 
 Total 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fig. 81.— Standing Order Cost Sheet. 
 
 Depreciation, etc. The use of these latter sheets is optional. 
 Entries from the schedules may be made direct to the Burden 
 Journal if preferred, but in case it is required to obtain a record 
 on Cost Sheets uniform with the other Standing Order costs, this 
 
 For 
 
 STANDII 
 
 >TG ORDER COST SHEET 
 f)ppt No. 
 
 
 
 
 Month 
 
 Deprcc. 
 
 Ins'ce 
 
 Rents 
 
 Taxes 
 
 
 Total 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fig. 82. — Standing Order Cost Sheet for items taken from Schedules. 
 
 intermediate stage of Cost Sheets for such items may be used. 
 Each of these Cost Sheets lasts one month. As soon as the last 
 item for the current month has been entered on a sheet, a new 
 sheet for that Standing Order is made out to take care of the 
 new month's items.
 
 320 MANUFACTURING COSTS AND ACCOUNTS 
 
 Figure 83 shows a Cost Sheet for Component Orders. As will 
 be seen, it is arranged for recording both labor and material. 
 In most plants using this method, it is customary, on account of 
 the number of parts in the product, to make the record of 
 material alongside that of labor, but of course there is no absolute 
 necessit y for this. Separate Material Cost Sheets could be issued 
 as in the case of Method A. In this case the Component Order 
 would be the same as that shown, except that the columns relat- 
 ing to material would be absent. When such separate Material 
 Cost Sheets are used the procedure with regard to them is the same 
 as already outlined for Method A. A separate Material Journal 
 is used — material in this case being regarded as a department. 
 
 Whether this plan can be adopted, and it possesses advantages 
 in the direction of simplicity when it can, will depend on the 
 nature of the work. In highly standardized work, such as repe- 
 tition machine building, where the exact quantity and nature of 
 material can be foreseen and tabulated, separate Material Cost 
 Sheets in connection with a "master schedule" of Production 
 Orders, as will be described in the chapter on clearing Manufac- 
 turing account, afford close control of material. But in non- 
 repetition work, it is safer to use the plan of charging all material 
 to the Component Order on which it is first issued. 
 
 Referring to Fig. 83, it will be noticed that the hours, labor, and 
 material sections are provided with columns headed "Monthly 
 Total." These are for the purpose of bringing out the total of 
 individual months separately, in case the Component Order is 
 being worked on, or remains in the department, over the end of a 
 month. The total of the first month's transactions are brought 
 out in the "monthly" column for entry on the journal. Next 
 month, only the items charged in that month will be so brought 
 out. The addition of the various monthly totals will of course 
 represent the cost of the item to date. The column headed 
 "burden," on the other hand, has no separate column for a 
 monthly lota], since it is in itself a monthly figure, calculated 
 cither <>n the monthly total of hours or of wages. It, therefore, 
 appears only once in any month. Works expense is also posted 
 in one sum monthly (if any such item happens to occur, as 
 when a man lias been sent outside the plant for some purpose 
 connected with the order) so that no separate column is required 
 for ascertaining its total in any month. 
 
 Works expense, however, might be incurred, as in the case just
 
 COSTING ON METHOD B 
 
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 322 MANUFACTURING COSTS AND ACCOUNTS 
 
 mentioned, in a way that prevented its association with any 
 particular component. In this case a special Component Order 
 should be issued, headed "Outside Expense" or similar title, 
 and all such expense charged to it, so that it will eventually come 
 through as part of the cost of the Production Order, though not 
 chargeable against any actual physical component. 
 
 In a plant where Component Orders were not necessary either 
 because detail cost was not desired, or because the work contains 
 no parts or subdivisions to which Component Orders could be 
 applied, the same blank would be applicable, except that, of 
 course, the words "Component Order Number" would be omitted. 
 
 The calculation of the burden amount is made after the 
 departmental accounts are closed for the month. But it may 
 often happen that it is required to close out the cost of an order 
 immediately it is completed. In this case, the burden figure used 
 in the previous month will be used as a basis of calculation, 
 whether on hours or wages, and the resulting calculation will be 
 entered in the monthly burden column. At the month end, this 
 figure will be entered in the Burden Journal along with the other 
 charges to the order, and must be considered as already dis- 
 tributed when the burden distribution is undertaken. If the 
 percentage or hourly burden proves to be higher or lower than 
 that used, the matter cannot be remedied if the costs of the order 
 have already been dealt with and made use of at further stages 
 of the accounting. In general, this will not matter as the dif- 
 ference between one month's burden percentage and another will 
 not be great. But if the cost was only wanted provisionally, that 
 is for estimating or other purpose of an informal character, then 
 the calculation may be made in pencil on the Cost Sheet, and ig- 
 nored when burden distribution is being made at end of the month. 
 
 The cost of a Production Order will be the sum total of the 
 separate costs of its components. But as departments arc con- 
 cerned only with components, the collection of ( 'omponent ( >rder 
 and their transfer to a Production Order Cost Sheet, or 
 Mash Schedule, is not made until after the last depart- 
 
 mental job has been completed. In machine works this will 
 'b«- the assembling or "lit, ting" departments operation. The 
 complete machine being assembled on a "Fitting Order" which 
 ranks preciselj as a Component Order, notwithstanding that the 
 work represented on it is not identified with any single component, 
 when tie tin- final work is completed, the whole set of
 
 COSTING ON METHOD B 323 
 
 Component Orders relating to the Production Order are tabu- 
 lated, and the aggregate cost of all of them is, of course, also the 
 cost of the Production Order. 
 
 Distribution of Material. — The original documents represent- 
 ing material drawn out of stores will be Stores Requisition Notes 
 or Bills of Material as described in Chap. V. (Part II). Where 
 Bills of Material are in use it will be preferable as a rule to treat 
 material as a department, that is to make out a Material Cost. 
 Sheet for each Production Order, instead of charging to indi- 
 vidual Component Orders. This method was described in con- 
 nection with Method A. In all other cases, and in any case as 
 regards Standing Orders, separate entries will be made on a 
 Stores Issues Book similar to Fig. 39. Daily allocations to the 
 different classes of orders and to departments will be also made 
 in a summary book similar to Fig. 39a. By this procedure, 
 separate totals are obtained for the three classes of orders in each 
 department. The items may then be entered on the different 
 Cost Sheets which will be arranged in groups corresponding to 
 the above-mentioned allocations. When any given group has 
 been entered up, the entries just made should be aggregated on 
 an adding machine and agreed with the total for that class of 
 orders and department as shown by the Stores Issues Summary. 
 By this means correct posting, as regards the amounts at any rate, 
 is assured as we go on. It is much better to spend a little time 
 at this stage to ensure correctness than to have errors to trace at 
 a later stage. 
 
 At the month end, the Stores Issues Summary Book will 
 be totaled up, and the amount chargeable against each de- 
 partment for material issued to each class of order will be found. 
 This figure must agree with the totals of Cost Sheets as they are 
 listed in the Burden and Manufacturing Journals, as will be 
 shown presently. It need hardly be pointed out that when the 
 entering up of Stores Issues on Cost Sheets is completed, the 
 Cost Sheets will now contain, in one place or another, items 
 aggregating in value to the whole of the Stores Issues for the 
 month. In other words, all material taken out of stores has 
 now been charged to some or other Cost Sheet, and therefore 
 to some or other order, whether Standing, Production or Plant 
 Addition. 
 
 Distribution of Wages. — In general, the daily system of record- 
 ing time and wages described in Chap. IX (Part II) will be used
 
 324 MANUFACTURING COSTS AND ACCOUNTS 
 
 in connection with Method B. The daily pay-roll, Fig. 52, 
 will be used in connection with some Time Sheet mechanism for 
 ascertaining how each man has divided his time between various 
 orders. 
 
 Not all men, however, will require Time Sheets. Only 
 those men who work on different orders, sometimes on one and 
 sometimes on another, will require them. Many men will be 
 engaged on permanent jobs which are chargeable against a 
 single Standing Order during the whole month. Such men's 
 wages can be charged not oftener than once a week to Cost 
 Shifts, if a special place on the pay-roll is devoted to them. 
 
 In all other cases Time Sheets or some equivalent mechanism 
 must be employed, in order to ascertain how the total earnings 
 of the man, as indicated by gate time, has been expended on 
 orders. It is not intended here to describe the innumerable 
 devices that have been designed for this purpose. Though 
 excellent for the purpose, and frequently great labor savers in 
 the computation of "elapsed time," that is, the time that has 
 elapsed between the hour of starting the job and that of finish- 
 ing it, they introduce no new principle in accounting, although 
 in some cases they provide a higher degree of precision and 
 accuracy than is commonly found without their use. But as 
 the principles involved can be more clearly shown by con- 
 sidering the use of an ordinary Time Sheet, that form of record 
 will be selected for description. It may be added in regard to 
 any other method, that it should provide the same information 
 and yield precisely the same results as that now to be described. 
 The method may be different and even superior, more prac- 
 tically accurate or easier, but the aim is the same. Moreover, 
 a Time Sheet method can be made absolutely accurate by a 
 hull' care, while on the other hand, the more automatic methods, 
 if negligently applied, may easily give inaccurate results. It 
 may be admitted, however, that the use of clock methods and 
 time stamps, particularly where these automatically calculate 
 "elapsed time," are a considerable help if proper arrangements 
 are made in joining them up to the system. 
 
 Figure M represents a type of Time Sheet that will illustrate 
 the requirements of any method adopted to secure a record 
 of the distribution of men's time to orders. The following in- 
 formation is provided for: 
 
 At the top a stub summarizes the days time and wages. %
 
 COSTING ON METHOD B 
 
 325 
 
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 326 MAN I /'. 1 CTURING COSTS AND ACCOUNTS 
 
 The sections below are separated from the stub and from 
 each other by very thick lines, so that at the proper moment 
 they may be cut up by a cutting machine in the same way as 
 described for the Stores Issue Sheets, Fig. 39, in Chap. V (Part II). 
 
 Each of these sections records the time spent on one job, 
 which may be work on a Standing Order or otherwise. Spaces 
 are provided to record: 
 
 * Order number. 
 
 * Component number. 
 
 * Man's number. 
 
 * Machine number. 
 
 * Nature of work. 
 
 * Time job commenced. 
 
 * Time job finished. 
 Hours taken. 
 Wages earned. 
 
 * Number of pieces good. 
 
 * Number of pieces bad. 
 
 If instead of being on daywork the man is employed on piece- 
 work, a space is provided for the piecework price. 
 
 At the end of the day the Time Sheet, filled out as to all the 
 items marked (*) above, is taken from the man, and next morn- 
 ing is put in hand for extension, verification and completion. 
 The routine of these operations has been fully described in 
 Chap. IX (Part II). It should, however, be explained that the 
 sections above shown (Fig. 85) which are afterward cut up for 
 sorting into order numbers, are equivalent to separate Time 
 Cards as used in most mechanical systems of time-cost keeping. 
 Such cards necessarily contain the same amount of information 
 ;i- the sections, but as a rule, nothing equivalent to the stub for 
 totaling the day's earnings is used. 
 
 When all these operations have been performed, the sections 
 are cut up and sorted to their order numbers, Standing Order 
 • a- Production Order as the case may be. The latter are then 
 sorted into their Component Orders, corresponding to individual 
 Component Cost Sheet-. Hours and wages, together with other 
 data as called for by the rulings, are then entered on the Cost 
 Sheets, until every section has been disposed of. 
 
 Tli. sectional Time Sheet, described is suitable for those 
 workers who keep their own Time Sheets. Repair men and 
 others whose movements are not very closely supervised may
 
 COSTING ON METHOD B 
 
 327 
 
 use such sheets satisfactorily, and the record will be probably as 
 accurate in this form as in any other. But as regards pro- 
 ductive workmen, it is generally recognized thai Time Sheets 
 or Cards should be kept for them and not by them. In some 
 plants this is effected by providing each sub-foreman or "gang 
 boss" with a telephonic communication to a cost clerk who 
 keeps all the Time Sheets or cards and makes the entries on 
 them according to the data telephoned to him. Where such a 
 system is in use, the section Time Sheets have advantages over 
 separate cards in that each man's record is consecutive and can 
 be picked out without hesitation. The day's items, also, are 
 together until verification, extension and entry on pay-roll is 
 completed. 
 
 Man 
 
 PIECEWORK STATEMENT 
 
 R. 
 
 
 Clnrlc Nn, 
 
 n< T t . W. 
 
 
 
 Prod. 
 
 Order 
 
 No 
 
 ■ 
 
 Com p. 
 
 Order 
 
 No 
 
 No. 
 
 of 
 
 Piece 
 
 Price 
 Each 
 
 Total 
 
 Piece 
 
 Earning 
 
 Day Time 
 
 Balance 
 Due 
 
 Hrs. 
 
 Wages 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 -^-—-^-^ 
 
 
 
 
 
 
 
 ====: 
 
 
 
 
 
 
 
 
 
 
 Totals 
 
 
 
 
 
 
 
 Fig. 85. — Weekly statement of pieceworker's earnings. 
 
 Where any of the various systems for paying men by results, 
 that is by piecework, premium or bonus, are in use, some addi- 
 tional mechanism must be provided for getting the balances due 
 to the men over and above their ordinary day wages into the 
 pay-roll on the one hand and into the Cost Sheets on the other. 
 The general precautions to be observed in dealing with premium, 
 etc., balances were discussed in Chap. IX (Part II). The first 
 necessity in any such system, as far as the accounting is con- 
 cerned, is the provision of an authority for the payment of the 
 extra earnings. Fig. 64 gives a suggestion for a form of Premium 
 Order useful in connection with the sectional Time Sheets above 
 described, inasmuch as the stub at the foot of the order can be
 
 328 MANUFACTURING COSTS AND ACCOUNTS 
 
 detached, after entry on a weekly statement of earnings individual 
 to the man in question, and then included with the day's Time 
 Sheets for entry on the pay-roll, and later passed to the cost 
 clerk for charging to Cost Sheets. 
 
 Figure 85 gives a specimen ruling for an individual earnings 
 record as applied to ordinary piecework, and Fig. 86 a similar 
 record arranged for Premium or bonus earnings. These blanks 
 are practically the only special arrangements necessary to bring 
 piecework or premium systems into the scheme of the general 
 accounting, but the remarks in Chap. IX (Part. II) as to veri- 
 fication of the authority and the amount of earnings should be 
 kept in mind. 
 
 After the pay-roll has been entered up from the Time Sheets 
 
 Man 
 
 Clock No. 
 
 PREMIUM EARNINGS STATEMENT 
 Dept. 
 
 W.E. 
 
 Prod. 
 Order 
 
 Comp 
 
 Order 
 
 No 
 
 Time 
 All'ce 
 
 Totals 
 
 Time 
 Taken 
 
 Time 
 Saved 
 
 Prem, 
 
 per Hour 
 
 Saved 
 
 Balance 
 Due 
 
 Fig. 86. — Weekly statement of premium worker's earnings. 
 
 and piecework, bonus or premium notes, the individual cards 
 (or the cut up Bed ions if the section Time Sheet is used) must be 
 sorted into three groups, namely, Standing Orders, Production 
 Orders and Plant Addition Orders, the amounts chargeable 
 against each departmenl being kept separate. The respective 
 totals arc t hen entered on a blank, Fig. 87, which thus shows the 
 distribution of wages to the i hree classes of orders in each depart- 
 menl separately. The total lor the day as entered on this blank 
 will, of course, be agreed exactly with the total for the day as 
 entered in the pay-roll. By this procedure the fact that every 
 cent shown on the pay-roll is represented on the Time Cards or 
 Section-, thus proving this step of the accounting. Further 
 menl will be made later to prove that all these items have,
 
 COSTING ON METHOD B 
 
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 330 MANUFACTURING COSTS AND ACCOUNTS 
 
 as a matter of fact, reached and been accurately recorded on 
 individual Cost Sheets. 
 
 COLLECTING STANDING ORDER COSTS AND CHARGING TO 
 
 BURDEN 
 
 When all the wages, material and sundry works expense items 
 for the month have been posted to the different classes of Cost 
 Sheets, the preparation of Burden Journal may commence. 
 Fig. SS shows such a journal arranged in conformity with the 
 scheme of Standing Orders as given in Fig. 56. The use of the 
 journal will be understood from inspection of the rulings. 
 Columns are provided for each of the non-productive and pro- 
 ductive departments, and alongside each column the Standing 
 < >rder numbers affecting each department are given. To 
 ascertain the total burden chargeable against each department, 
 the total of each Cost Sheet is entered opposite its Standing Order 
 number. When all the Standing Order number spaces are so 
 filled out the statement of burden will be complete. In many 
 , however, the items relating to depreciation, rents, insur- 
 ance, etc. which come from the schedules will be entered direct 
 on the Burden Journal, without passing through Cost Sheets. 
 This is simply a matter of convenience — a short cut — as obviously 
 there being only one entry each month for each of these items 
 it is hardly worth while to go through the formality of entering 
 them on ( Josts Sheets, to.be immediately closed and transferred 
 t o t he journal. Theoretically, however, they should be posted to 
 Cost Sheets, in accordance with the principle that each Standing 
 Order number is represented by its individual Cost Sheet. 
 
 When entering any group of Cost Sheets in the journal, as 
 i<>r instance the 02 group, "Repairs to Building Structure," 
 opportunity is taken to aggregate all wages, all material, and all 
 work- expense od the sheets and place it on the corresponding 
 line on the left hand of the journal, under the corresponding 
 columns. In this way each line of the journal provides charges 
 to departments on the riuht-hand side and credits to the main 
 j accounts on the other (compare general diagram). The 
 same procedure is gone through with regard to all other entries, 
 so that when all i he Standing Order Cost Sheets (and all the 
 entries from schedules) have been completed, and all columns 
 totalled, we have a complete story of credits to the main ledger
 
 COSTING OF METHOD B 331 
 
 accounts on the left side and a complete story of charges to 
 departments on the other. The credits are then made in due 
 course, and thus finally disposed of. 
 
 The right-hand side of the journal requires, however, a further 
 operation. The totals appearing against the non-productive 
 departments require to be prorated over the productive depart- 
 ments on the basis of the call on the service made by each pro- 
 ductive department. When this is done, then all the amounts 
 represented by credits will be balanced exactly by charges to the 
 productive departments. 
 
 This is exactly the same procedure as described in connec- 
 tion with Method A. And with the exception that in Method 
 A operative wages are included in burden, the ground covered 
 by the two journals is the same, only the journal suggested for 
 Method B is more highly developed, and goes into greater detail 
 with regard to the items of expense. 
 
 The following agreements will have to be made at this stage: 
 
 The total of Stores account credit column must agree with the 
 aggregate of all columns in the Stores Issues Summary (Fig. 39a) 
 relating to issues against Standing Orders. 
 
 The total of depreciation credit column must agree with the 
 total for the month shown as chargeable against the factory 
 in the Depreciation Schedule. The rents, etc. column must 
 similarly agree with the totals shown as chargeable in the Rents, 
 Insurance, etc. Schedule. 
 
 The total in the wages credit column must agree with all 
 columns in the Pay-roll Distribution Summary, Fig. 87, relating 
 to Standing Orders. The total in the salaries credit column must 
 agree with the amount chargeable for the month against factory, 
 unless salaries are included in Pay-roll Summary, in which case 
 this column will not be required. 
 
 The total in the works expense account credit column will be 
 agreed with such items in the Works Expense account as are 
 chargeable against Standing Orders. 
 
 The total in the Spoilage account credit column must agree 
 with balance in Spoilage account, the assessment of which against 
 productive departments will have been made by virtue of a 
 memorandum authorized by the superintendent. 
 
 All these agreements having been made, the correctness of the 
 data may be assumed. Finally, the cross-total of all credit 
 columns must be agreed with the cross-total of all productive
 
 332 MANUFACTURING COSTS AND ACCOUNTS 
 
 Or 
 
 Stores 
 Acct. 
 
 Cr. 
 
 Depreo. 
 
 Acct. 
 
 Cr. 
 
 RentsAc 
 Acct. 
 
 Cr. 
 ,.\Vks. 
 Acct. 
 
 Cr. 
 
 Salaries 
 Acct. 
 
 Cr. 
 \Vk9. 
 
 Exp. 
 Acct. 
 
 Cr. 
 
 Spoilage 
 Acct. 
 
 Cr. 
 
 Item of Expense \ 
 
 
 
 
 
 
 
 
 
 Depreciation of Buildings *c 1 
 
 
 
 
 
 
 
 
 Rents Insurance ic ■' 
 
 
 
 
 
 
 
 Repairs B'ldg Structure 1 
 
 
 
 
 
 
 " B'ldg Equipment i 
 
 
 
 1 
 
 
 
 
 
 Current for Lighting 
 
 
 
 
 
 
 
 
 Steam for Heating 
 
 
 
 
 
 
 
 Painting & Kalsomining | 
 
 
 
 
 
 
 
 Cleaning Windows 
 
 
 
 
 
 
 Other Sweeping & Cleaning | 
 
 
 
 
 
 
 8nndry Supplies \ 
 
 
 
 
 
 
 Deprec. Cranes. Trucks, Fixtures 
 
 
 
 
 
 
 
 
 Insurance Ditto 
 
 
 
 
 
 
 
 
 
 Repairs Ditto 
 
 
 
 
 
 
 
 Wages, Cranemen, Handlers 
 
 
 
 
 
 
 
 Salaries. Storekeeper, Clerks 
 
 
 
 
 
 
 Sundry Supplies 
 
 
 
 
 
 
 Wages of Foremen 
 
 
 
 
 
 
 
 Share of Administrative Sal. \ 
 
 
 
 
 
 
 
 Sal. Supt. & Prod Staff 
 
 
 1 
 
 
 
 
 
 Deprec'n Office Equipment 
 
 
 
 
 
 
 
 Insurance Ditto 
 
 
 
 
 
 
 
 Repairs Ditto 
 
 
 
 
 
 
 Stationery, Books, Blanks 
 
 
 
 
 
 
 
 
 Phones. Telegrams, Postages 
 
 
 
 
 
 
 
 
 
 Wages, Watchmen, Messengers 
 
 
 
 
 
 
 
 
 
 Salaries of Clerks 
 
 
 
 
 
 
 
 
 
 Sundry Supplies 
 
 
 
 
 
 
 
 
 
 Deprec'n Power Equipment 
 
 
 
 
 
 
 
 
 Insurance Ditto 
 
 
 
 
 
 
 Repairs, Ditto, in Power Plant I 
 
 
 
 
 
 
 
 
 " •> >> elsewhere 
 
 
 
 
 
 
 
 
 Fuel 
 
 
 
 
 
 
 
 Feed Water' 
 
 
 
 
 
 
 
 Wages in Power Plant, Boiler 
 
 
 
 
 
 
 
 • • >• •• " Engines &( 
 
 
 
 
 
 
 
 8undry Supplies, Oil etc 
 
 
 
 
 
 
 Deprec'n Machines & Benches 
 
 
 
 
 
 
 Insurance " » >• 
 
 
 
 
 
 
 Repairs n >> i> 1 
 
 
 
 
 
 
 Cleaning & Oiling ., •■ \ 
 
 Fig 88 Burden Journal \ 
 Collects all Factory Expense per Standing Orders and Schedules / 
 and Distributes Non-Productive Department Expense over Productive Depts. 
 
 Credits Ledger Accts.ivith all Expenditure on Manufacturing except / 
 
 Direct Material and Direct Wages 
 lUBI Mirked (*) In Total Column amy Uu entered direct from Schedules or Tbro.Cost 8heetB 1 
 
 Fig. 88. — Burden Journal
 
 COSTING ON METHOD B 
 
 333 
 
 
 Total 
 
 All 
 
 Depts 
 
 Dept.l 
 
 Supt.i 
 
 Prod. 
 
 Dept.2 
 Fact. 
 Offices 
 
 Dept.3 
 Stores 
 
 Dept.4 
 Power 
 Plant 
 
 Dept.5 
 Pro- 
 ductive 
 
 Dept.G 
 Pro- 
 ductive 
 
 Dept.7 
 Pro- 
 ductive 
 
 Dept.S 
 
 Pro- 
 
 ductive 
 
 
 * 
 
 100 
 
 
 200 
 
 
 300 
 
 
 400 
 
 
 E00 
 
 
 000 
 
 
 700 
 
 
 800 
 
 
 
 * 
 
 101 
 
 
 201 
 
 
 301 
 
 
 401 
 
 
 501 
 
 
 C01 
 
 
 701 
 
 
 801 
 
 
 
 
 102 
 
 
 202 
 
 
 302 
 
 
 402 
 
 
 502 
 
 
 602 
 
 
 702 
 
 
 802 
 
 
 
 
 10:1 
 
 
 203 
 
 
 303 
 
 
 403 
 
 
 503 
 
 
 603 
 
 
 703 
 
 
 803 
 
 
 
 
 101 
 
 
 204 
 
 
 304 
 
 
 404 
 
 
 504 
 
 
 604 
 
 
 704 
 
 
 804 
 
 
 
 
 105 
 
 
 205 
 
 
 305 
 
 
 405 
 
 
 505 
 
 
 605 
 
 
 705 
 
 
 805 
 
 
 
 
 106 
 
 
 206 
 
 
 306 
 
 
 40C 
 
 
 506 
 
 
 606 
 
 
 700 
 
 
 80fl 
 
 
 
 
 107 
 
 
 207 
 
 
 307 
 
 
 407 
 
 
 507 
 
 
 007 
 
 
 707 
 
 
 B07 
 
 
 
 
 108 
 
 
 208 
 
 
 308 
 
 
 403 
 
 
 508 
 
 
 608 
 
 
 708 
 
 
 808 
 
 
 
 
 109 
 
 
 •Jii'l 
 
 
 309 
 
 
 409 
 
 
 509 
 
 
 f.0'1 
 
 
 709 
 
 
 80' 1 
 
 
 
 * 
 
 
 
 
 
 320 
 
 
 
 
 520 
 
 
 620 
 
 
 720 
 
 
 8-20 
 
 
 
 * 
 
 
 
 
 
 321 
 
 
 
 
 521 
 
 
 621 
 
 
 721 
 
 
 S.'l 
 
 
 
 
 
 
 
 
 322 
 
 
 
 
 522 
 
 
 622 
 
 
 722 
 
 
 822 
 
 
 
 
 
 
 
 
 327 
 
 
 
 
 527 
 
 
 627 
 
 
 727 
 
 
 827 
 
 
 
 
 
 
 
 
 328 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 329 
 
 
 
 
 529 
 
 
 629 
 
 
 729 
 
 
 829 
 
 
 
 
 137 
 
 
 
 
 
 
 437 
 
 
 537 
 
 
 637 
 
 
 737 
 
 
 a37 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 138 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 * 
 
 140 
 
 
 240 
 
 
 340 
 
 
 440 
 
 
 540 
 
 
 641 
 
 
 740 
 
 
 840 
 
 
 
 * 
 
 141 
 
 
 241 
 
 
 341 
 
 
 441 
 
 
 541 
 
 
 041 
 
 
 741 
 
 
 841 
 
 
 
 
 142 
 
 
 242 
 
 
 342 
 
 
 442 
 
 
 542 
 
 
 642 
 
 
 742 
 
 
 842 
 
 
 
 
 144 
 
 
 244 
 
 
 344 
 
 
 444 
 
 
 544 
 
 
 644 
 
 
 744 
 
 
 844 
 
 
 
 
 145 
 
 
 245 
 
 
 345 
 
 
 445 
 
 
 545 
 
 
 645 
 
 
 745 
 
 
 845 
 
 
 
 
 147 
 
 
 247 
 
 
 347 
 
 
 447 
 
 
 547 
 
 
 647 
 
 
 747 
 
 
 847 
 
 
 
 
 148 
 
 
 248 
 
 
 348 
 
 
 448 
 
 
 548 
 
 
 648 
 
 
 748 
 
 
 848 
 
 
 
 
 149 
 
 
 249 
 
 
 349 
 
 
 449 
 
 
 549 
 
 
 649 
 
 
 749 
 
 
 849 
 
 
 
 * 
 
 
 
 
 
 
 
 450 
 
 
 550 
 
 
 650 
 
 
 750 
 
 
 850 
 
 
 
 * 
 
 
 
 
 
 
 
 451 
 
 
 551 
 
 
 651 
 
 
 751 
 
 
 851 
 
 
 
 
 
 
 
 
 
 
 452 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 553 
 
 
 653 
 
 
 753 
 
 
 653 
 
 
 
 
 
 
 
 
 
 
 454 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 455 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 457 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 458 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 459 
 
 
 559 
 
 
 659 
 
 
 759 
 
 
 859 
 
 
 
 * 
 
 
 
 
 
 
 
 
 
 560 
 
 
 660 
 
 
 760 
 
 
 860 
 
 
 
 * 
 
 
 
 
 
 
 
 
 
 561 
 
 
 661 
 
 
 761 
 
 
 861 
 
 
 
 
 
 
 
 
 
 
 
 
 502 
 
 
 662 
 
 
 762 
 
 
 B82 
 
 
 
 
 
 
 
 
 
 
 
 
 563 
 
 
 663 
 
 
 763 
 
 
 BBS 
 
 
 
 
 " 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ] Prorating of Dept.2 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 Prorating of Dept.3 
 
 
 
 
 
 
 
 
 
 
 
 
 ) Prorating of Dept.l 
 
 
 = 
 
 ------ 
 
 = 
 
 = 
 
 = 
 
 = 
 
 = 
 
 = 
 
 as per Details 
 jNote. These items(%4:)to b 
 
 below: Prorating Qt p ower 
 
 
 
 
 
 
 
 
 
 
 j. ., .. Lighting 
 
 
 
 
 
 
 
 
 
 omitted here if included ahove 
 ) * 
 
 % ., ft Heating 
 
 
 
 
 
 
 
 
 
 
 
 
 
 [ 
 
 
 
 
 
 
 
 
 
 
 
 (Method B).
 
 :;:;! MANUFACTURING COSTS AXD ACCOUNTS 
 
 pq 
 
 departments columns, when the operations on this journal are 
 
 completed. The main 
 ledger accounts will be 
 credited with their respective 
 credits, and the Depart- 
 mental Burden accounts will 
 be charged with the amounts 
 shown in the respective pro- 
 ductive department columns 
 (see general diagram). All 
 the expenditure of the fac- 
 tory on service has now been 
 allocated to productive de- 
 partments, and the elements 
 of this service, namely, wages, 
 materials, depreciation, etc., 
 have been duly credited to 
 the main ledger accounts. 
 
 Distributing Departmen- 
 tal Burden over Production 
 Order Cost Sheets. — Having 
 now ascertained the amount 
 of burden chargeable against 
 each productive department, 
 the next step is to list all the 
 Production Order Cost Sheets 
 (including Plant Addition 
 Cost Sheets) so that we may 
 distribute the proper share 
 of burden to each, in pro- 
 portion either to the pro- 
 ductive or direct wages ex- 
 pended on each, or (if that 
 plan is preferred) in propor- 
 tion to the productive hours 
 worked on each. The first 
 step is to provide a medium 
 for the listing. Such a 
 medium is the Depart- 
 mental Man ufacturing 
 Journal (Fig. 89), which 
 
 
 
 O . 
 
 
 
 
 
 
 OS 
 
 
 W 4-> 
 
 
 
 
 ) 1 
 
 
 
 
 
 a< 
 
 
 
 
 \ 
 
 
 
 
 
 OT 
 
 
 
 
 1 
 
 
 
 
 
 4-> 
 
 
 
 
 / 1 
 
 
 
 
 u 
 
 
 
 
 
 \\ 
 
 
 
 
 -5 
 J3 
 
 s 3 = 
 
 
 
 
 \ \ 
 
 
 
 
 U 
 
 P* -o 
 •a 
 
 
 
 
 1 ) 
 
 
 X 
 
 
 
 <1 
 
 
 
 
 // 
 
 
 j 
 
 
 
 
 
 
 
 -t-< 
 
 
 
 
 
 
 
 
 
 c 
 o 
 
 
 < 
 
 
 
 
 
 
 
 a 
 
 
 ^5 
 
 
 
 
 J 
 
 
 
 s-9 
 
 
 
 
 ) 
 
 
 
 
 C * 
 
 
 
 
 
 
 
 
 -o H 
 
 
 
 
 1 
 
 
 
 
 
 3 m 
 
 
 
 
 
 
 
 
 
 W-* 
 
 
 
 
 
 
 
 
 
 £ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 73 
 
 
 
 
 
 
 
 •— < 
 
 
 
 
 
 
 
 
 .-i 
 
 
 a) 
 
 
 
 
 
 
 a 
 
 
 rt 
 
 
 
 
 1 \ 
 
 
 3 
 
 w 
 
 3 
 
 
 
 
 \ 
 
 
 o 
 
 
 
 
 
 
 
 
 i-a 
 
 ~3 
 u 
 
 
 
 
 
 
 
 
 
 
 1-1 
 
 
 
 
 
 
 fcfl 
 
 u 
 
 C 
 
 
 
 
 ( 
 
 
 c 
 
 
 
 
 
 
 
 
 
 
 
 •a 
 
 
 
 
 
 
 'H 
 
 
 u 
 
 
 
 
 
 
 3 
 
 
 3 
 
 
 
 
 / 
 
 
 a 
 
 
 
 
 
 
 
 
 3 
 
 
 
 
 
 
 / 1 
 
 
 
 
 
 
 
 [ / 
 
 
 C 
 
 
 m 
 
 
 
 
 1 I 
 
 
 si 
 
 
 o 
 
 
 
 
 
 
 a 
 
 
 to 
 
 3 
 
 
 
 
 j 
 
 
 
 
 
 £ 
 
 
 
 
 
 
 
 
 1* 
 
 
 
 
 
 a 
 
 
 
 
 c J 3 ' 
 
 
 
 
 
 II 
 6° 
 
 
 
 
 
 
 
 
 
 
 
 
 *2 
 
 G 
 
 
 
 
 
 
 3 
 
 o 
 
 h 
 
 
 
 
 
 // 
 
 £ % ° 
 
 
 
 ^ » fc \ \ 
 
 a. i 
 
 Q £ o
 
 COSTING ON METHOD B 335 
 
 provides spaces for entering the individual Componenl Order 
 Cost Sheets, stating their respective Production Order and 
 Component Order numbers, the total hours worked in the 
 month on each one, the amount of wages charged against each 
 one, the value of the material charged against each one (if the 
 material is not dealt with separately by means of Material ( lost 
 Sheets as outlined above), and any items of works expense that 
 may be chargeable. Three total columns are also provided, 
 and the total of the costs after burden is added will be placed 
 in one of these three according to whether the order is for Pro- 
 duction, Plant Addition or is a Replacement (Spoilage) Order 
 (see Chap. IX, Part I). 
 
 When all the orders have been listed and totalled in columns, 
 certain agreements are necessary: 
 
 The total of wages column in the journal must agree with 
 the total of productive wages and plant addition wages as 
 shown for that department on the Pay-roll Distribution Sum- 
 mary (Fig. 87). 
 
 The total of material column in the journal must agree with 
 the totals of stores issued to Production Orders and Plant 
 Addition Orders in the Stores Issues Summary to that de- 
 partment (see Fig. 39a). 
 
 The total of works expense column in the journal must agree 
 with the. total of works expense items in the Works Expense 
 account chargeable against Production Orders (this will be a 
 very unusual occurrence). 
 
 When these agreements are effected, Wages account, Stores 
 account and Works Expense account will be credited with the 
 totals of the respective columns, so that all charges against direct 
 production will now have been credited to the main ledger 
 accounts, in the same way as the charges for indirect expense or 
 service were credited through the Burden Journal. All the 
 charges against factory will now, in fact, have been so credited. 
 
 The next step is to provide for the distribution of depart- 
 mental burden which has been collected in the Departmental 
 Burden account over Production Order and Plant Addition 
 Order Cost Sheets. This distribution may be effected on one 
 of two plans, either on the total productive hours as indicated 
 by totalling the "Hours" column of the journal, or on the total 
 productive wages as indicated by the total of the wages column. 
 Fig. 90 is a convenient blank for use with the first-mentioned
 
 33G MANUFACTURING COSTS AND ACCOUNTS 
 
 plan. The first line of the blank is filled out with an amount 
 equal to the balance in the Departmental Burden account, the 
 second line is filled out with the total productive hours worked 
 in the department, as just found by adding the "Hours" column, 
 and then by dividing the burden amount by the total hours we 
 find the burden cost of 1 hr., or, as it is usually expressed, the 
 "departmental hourly burden." 
 
 Having found this multiplier, the next step is to multiply 
 the hours set down against each individual order by it. The 
 resulting figure will be the departmental burden chargeable 
 against that order, and it is entered in the column headed 
 "Burden." When all orders have been thus treated, the 
 column headed "Burden" is totalled, and should obviously 
 equal exactly the amount standing as a balance in Departmental 
 
 Departmental Burden 
 
 s 
 
 Total Hours Worked 
 
 
 Dept'l Hourly Burden $ 
 
 Departmental Burden 
 
 $ 
 
 Total Productive Wages 
 
 $ 
 
 Dept'l Burden % 
 
 % 
 
 Fig. 00. — Determining ratio of bur- 
 den on hourly-burden plan. 
 
 Fig. 91. — Determining ratio of bur- 
 den on percentage plan. 
 
 Burden account, and this agreement having been made, Burden 
 acouni is credited with the amount. 
 
 Bach line of the journal is then cross-totalled, so that the 
 amounts for: 
 
 Wages 
 
 Burden 
 
 Material 
 
 Works expense 
 standing against each order number are aggregated. The total of 
 these is then placed either in Manufacturing account column, if 
 the order i- a Production Order; or in Plant Additions account 
 column, if the order is a Plant Additions Order; or in Spoilage 
 account column, if the order is a Replacement Order. Each of 
 these columns is i hen totalled. 
 
 A final agreement must then be made. The aggregate of 
 the four credit columns headed wages, burden, material, sundry 
 work- expense, must rith the aggregate of the three
 
 COSTING ON METHOD B 337 
 
 debit columns, Manufacturing account, Plant Additions account 
 and Spoilage account. This being effected, these three ledger 
 accounts are charged with the totals of the respective columns, 
 and the round of operations on Manufacturing Journal is then 
 complete. 
 
 All the charges against factory of whatever kind, will now 
 have found their place in one of these three accounts, and the 
 detail of such amounts will be represented by the individual Cost 
 Sheets. It should be explained, however, that the items cal- 
 culated as burden against each individual order, are posted to 
 the corresponding Cost Sheets (Fig. 83) as soon as the total 
 has been agreed with the balance in Burden account. Every 
 item of expenditure made by the factory, including such charges 
 as depreciation, etc., are now represented, in one form or other, 
 on the Production (and Plant Addition Cost Sheets) that is to 
 say, either as direct wages, direct material, direct works expense 
 (negligible in importance) or as burden. Certain of these 
 Production Order Cost Sheets will, however, represent work 
 that has become valueless for some reason or other, and thus 
 is chargeable against Spoilage account. The others remain as 
 good assets, and form the detail as just mentioned of the Manu- 
 facturing account and (if there is one) of the Plant Additions 
 account. 
 
 If the percentage method of distributing burden is employed 
 instead of the hourly burden plan, all the foregoing is unchanged, 
 except that a blank like Fig. 91 is used for determining the 
 basis of distribution. The total of departmental burden is, as 
 before, placed in the upper space on the blank, but immediately 
 below, instead of the total productive hours, the total productive 
 wages is inserted. The ratio between such wages total and the 
 burden total is then found and expressed as a percentage. Thus 
 if wages are $400 and burden is $300 we say that burden is 75 
 per cent, of wages. If wages are the same but burden is $600, 
 burden is called 150 per cent, of wages. This percentage figure 
 is applied as a multiplier to each individual order just as the 
 hourly value was applied, and the resulting figure is set down in 
 the burden column and posted to the Cost Sheet in precisely the 
 same way 
 
 Some authorities consider the hourly burden plan a great 
 improvement over the percentage plan, but as usually employed 
 the present writer does not consider there is any great difference 
 
 22
 
 338 MANUFACTURING COSTS AND ACCOUNTS 
 
 in accuracy between them. In the circumstances under which 
 alone Method B is accurate, discussed above, the hourly plan is 
 somewhat more accurate than the percentage plan, but as B 
 is applied to all sorts of circumstances, it is hard to say whether, 
 as a general principle, the hourly plan always maintains its 
 superiority. It will depend very much on the individual case. 
 
 Normal Burden. — The term "normal" burden is sometimes 
 applied to the hourly burden or percentage figure obtained in a 
 depart men! when all the resources of the department are fully 
 employed and production is consequently at a maximum. 
 Omitting the considerations of overtime (which might be con- 
 sidered in tins connection as a kind of "forced-draft" working) 
 it will be obvious that under such circumstances the ratio between 
 the cost of service (burden) and productive activity is at a mini- 
 mum. This normal burden figure represents the figure that 
 should be used in estimating, because it represents full employ- 
 ment of the manufacturing capacity of the plant, and any higher 
 figure than this represents the influence of unfavorable circum- 
 stances and a consequent waste of manufacturing capacity due 
 to pari of the plant being idle. This function of normal burden 
 has recently been announced in certain quarters as a remarkable 
 and new discovery, but it has always been known to cost specialists 
 and applied daily for many years. But it must be remembered 
 that the application of normal burden to any individual job is 
 strictly dependent for its accuracy on the suitability of Method 
 B for the industry in question. If Method B is in use under 
 circumstances in which it does not give correct cost, then reliance 
 on normal burden in estimating might easily lead to grave error 
 and loss. 
 
 Normal burden is also dependent on the possibility of keeping 
 the plant full of work at all times. That is to say that it will not 
 apply to any industry in which there are seasonal variations. 
 To apply it to such conditions would lead to serious consequences, 
 inasmuch as the busy seasons have to pay for the slack seasons 
 Normal cosi in such a case would have to be an averaged cost. 
 The whole course or cycle of seasonal costs would have to be 
 reviewed, and a normal burden fixed on that would. cover the cost 
 of enforced idleness in ^lack seasons. Otherwise, if prices were 
 based on the minimum cost observed in busy seasons, it would be 
 too low. Not Bufficienl profit would be made in the busy season 
 to pay for the heavy charges of the slack season.
 
 COSTING ON METHOD H 339 
 
 Prorating Burden on Quantity or Weight. — In certain indus- 
 tries where the product is a simple one, through individual lots 
 may require more or more skilled labor than other lots, or are 
 paid for on a piecework or premium basis, and must, therefore, 
 have direct labor charged to them, the department burden 
 may nevertheless bear a closer ratio to weight or quantity pro- 
 duced than to either time taken on the job or to wages paid on it. 
 In such cases the total weight or quantity of the output must be 
 ascertained and burden divided by it. The result will be a 
 burden charge per hundred, or per pound. Then, when entering 
 orders on Manufacturing Journal, the quantity or weight pro- 
 duced on each order is given (instead of hours worked) and this 
 multiplied by the above burden charge will give the burden 
 chargeable to the order. 
 
 Molding-floor costs in foundries are frequently arranged on this 
 plan — tonnage burden being substituted for hourly burden or 
 percentage on wages burden.
 
 CHAPTER XIX 
 
 COSTING ON METHOD C (SCIENTIFIC MACHINE 
 
 RATE PLAN) 
 
 It has been pointed out in former chapters that the line of 
 approach to accuracy in cost keeping is adequate departmental- 
 ization. In proportion as we isolate unlike processes and 
 machines and skills, the clearer the connection between cost and 
 individual items of product will be perceived. As has already 
 been pointed out the three methods A, B and C are three degrees 
 of approach to the elimination of averaging. In A all expenses 
 and all productive wages were considered to average over all 
 jobs in proportion to time taken. In B expense only was con- 
 sidered to average in this way, and direct wages were charged 
 against individual orders. In Method C, now to be described, 
 mechanism is introduced to identify all expense with the cost of 
 working individual machines, or "production centers," so that 
 each machine becomes as it were a separate department, with an 
 accurately determined departmental cost. We have then only 
 to determine how long each order has remained in the depart- 
 ment (or in other words how long it has been operated on at the 
 machine) to find its due and proper charge for machine service. 
 And as direel wages are on this method, as in Method B, charged 
 against each Production Order, it is evident that we have here 
 the closest degree of accuracy that is possible in any system of 
 costing. 
 
 But as explained in previous chapters, this method is neces- 
 sary only when a department contains equipment varying to a 
 considerable degree amongst itself. Where a department con- 
 tains 20 machines or production centers of any kind, all practi- 
 cally alike then Method ( ' affords no advantage over B when B 
 ie applied on the hourly burden plan. 
 
 The organization of costing on Method C naturally falls into 
 two main divisions, one connected with the finding of the burden 
 charge againsl each department, and the other connected with 
 the determination of the amount chargeable, of this total, against 
 each production center. 
 
 340
 
 COSTING ON METHOD C 341 
 
 The method of collecting the various items of service expense, 
 and distributing it to departments as burden is precisely the same 
 as that described for Method B. This is obviously so, because, 
 as already explained Method C deals exclusively with the dis- 
 tribution of such burden expense within the department. The 
 form of the Standing Orders, the pay-roll, the stores issues sys- 
 tem, and the Depreciation Schedules will, therefore, not require 
 special description, inasmuch as they are the same as just 
 described in the last chapter. 
 
 New matter in connection with Method C will deal: (1) with 
 the form of Time Sheets, Standing Order and Production Order 
 Cost Sheets, Plant Addition Cost Sheets, and Manufacturing 
 Journal, all of which require additional columns to record the 
 machine time and machine earnings (which are machine time 
 multiplied by a machine rate, just as a man's earnings are his 
 time multiplied by his wage rate); and (2) the various blanks 
 required for subdivision of the normal departmental burden into 
 production center burden. This last mechanism is equivalent 
 to a sub-departmentalization of the department into its ultimate 
 production centers, or nearly so. This latter determination 
 is carried out only at long intervals, or when some rearrangement 
 within the department has disturbed the original computation 
 of machine rates. 
 
 The current working of Method C will be seen to be no more 
 difficult or laborious than that of Method B once the machine 
 rates have been determined in a satisfactory manner. 
 
 As the working of Method B will be fresh in the memory of the 
 reader we shall first proceed to describe the actual working of the 
 method, leaving till later the method of fixing the machine rates. 
 For the present it must be assumed that each machine is provided 
 with a machine rate, which rate is made up of elements representing 
 the individual call of that machine on the various serivces, as mapped 
 out by the Standing Order system. Thus a given machine rate^ 
 may be made up of a large charge for space, a small charge for 
 power, a high charge for supervision, a low depreciation rate and 
 so forth, the aggregate of these separate charges being combined 
 so as to form a single hourly rate chargeable against production for 
 the use of that machine. Other machines will have these various 
 elements of service combined in a different proportion, so that 
 each machine will have its individual machine rate, much as 
 every man has his individual wage rate.
 
 342 MANUFACTURING COSTS AND ACCOUNTS 
 
 The Order System. — This will be similar to that described 
 for Method B. Standing Orders are arranged so that, as regards 
 cadi department, .the groups of expense relating to buildings, 
 power, etc., arc segregated, and their total ascertained separately. 
 This information is made use of in fixing machine rates and also 
 in applying verification from time to time as to the accuracy of 
 the ra 
 
 Production and Component Orders will be also similar in all 
 l to those described for Method B. 
 
 Cost Sheets. — In costing on Method C additional columns 
 must be provided on the Cost Sheets in which the amounts 
 charged through machine rates to each order can be recorded. 
 An additional column is also necessary in the case of Production 
 
 STANDING ORDER COST SHEET 
 For Dent. 
 
 No. 
 
 
 
 
 Date 
 
 Item 
 
 Ilrs. 
 
 Mach. 
 Wages 
 
 Earn. 
 
 Mat'l 
 
 Works 
 Exp. 
 
 Total 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 r" ^~ 
 
 
 
 
 
 
 
 I i- 'liny; Order Cost Sheet (Method C) for engineering shops. 
 
 Order or Component Cost Sheets only, to take care of what is 
 known as supplementary rate, to be discussed presently. Stand- 
 ing < >rders and Plant Addition Orders do not take supplementary 
 which is in fad a mere ratio between unused manufacturing 
 capacity of the department and that used productively. 
 
 Figure 92 shows a Standing Order Cost Sheet. This differs 
 from thai shown for Method B (Fig. 81) in having a column 
 headed "Machine Earning This column will be used only in 
 
 engineering plants, where it may happen that repair, etc. work 
 ifl done by one department for another to a Standing Order 
 number. It might also be used in a repair shop of a non-engi- 
 neering factory or mill, where it was desired to make use of 
 machine rates in connection with the repair shop machines. As
 
 COSTING ON METHOD C 
 
 343 
 
 
 
 
 
 
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 344 MANUFACTURING COSTS AND ACCOUNTS 
 
 already stated, however, this is usually not advisable. Con- 
 sequently the provision of such a column will be unnecessary in 
 the case of Standing Order Cost Sheets, save in machine shops 
 that may undertake occasional or regular repairs for other 
 departments. The use of such a column does in fact bring 
 annoying complications into play. Additional columns have 
 to be provided in Burden Journal, so that the amounts col- 
 lected on Standing Order ( lost Sheets in this way can be credited 
 to the Burden account of the department doing the work. In 
 the discussion of Method C that follows, it will be assumed that 
 such columns are not in use. It is necessary, however, to call 
 attention to the fact that under certain circumstances they are 
 required or at any rate are advisable. 
 
 Standing Order Cost Sheets similar to Fig. 82, for collection 
 of depreciation, etc., items from schedules can also be used 
 in the same way and under the same circumstances as described 
 in connection with Method B. 
 
 The Production Order Cost Sheet (Fig. 93) used in Method 
 C is similar to that described in the last chapter, except that 
 no "Burden" column appears. Its place is taken by a column 
 headed "Machine Earnings," which is double, like that de- 
 voted to wages — the left-hand division takes care of the daily 
 entries, while the right-hand division is used for bringing out 
 totals at the month end, in the way already described for wages. 
 It will readily be understood that these columns receive the 
 entries of machine rate extensions, that is, hours worked on the 
 job multiplied by the machine rate per hour that has been 
 allotted to each machine in the department. Another column 
 is provided for "supplementary rate" an item which is dis- 
 tributed over Production Orders after Burden Journal is made 
 up for the month, much in the same way as burden was shown 
 to be distributed in the last chapter. The meaning of supple- 
 mentary rate will be explained later. 
 
 General Diagram for Method C. — Figure 94 (p. 352) shows a 
 general diagram for Method C which may be compared with 
 the large folding general diagram for Method B. This diagram 
 may be referred to in reading the ensuing detailed description 
 of the working of the method. 
 
 Distribution of Material. — There is no difference between 
 Methods B and C in regard to the manner in which material is 
 bandied in any of the records.
 
 COSTING ON METHOD C 
 
 345 
 
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 346 MAMI-ACTURING COSTS AND ACCOUNTS 
 
 Distribution of Wages. — While no difference between Methods 
 B and C exists as regards the handling of wages items, the Time 
 Sheets or Time Cards used for recording men's time are pro- 
 vided with an additional column (see Fig. 95 where a sectional 
 Time Sheet otherwise similar to Fig. 84 is shown). On the 
 extreme right will be seen a column headed "Machine Earn- 
 ings." This is filled out by the cost clerk before the sheets are 
 dissected, by multiplying the "hours" entry by the machine 
 rate. This should be done after the sheet has been checked 
 with gate time and fully completed as regards wages. In 
 addition to being a wages distribution record, the sheet thus 
 becomes a machine earnings distribution record. 
 
 Collecting Standing Order Costs and Charging to Depart- 
 mental Burden Accounts. — The procedure is exactly the same 
 as that described for Method B except in the special case that 
 Standing Order Cost Sheets are provided with a column for 
 machine earnings, and this exception has already been referred 
 to above. 
 
 Distributing Departmental Burden over Production Order 
 Cost Sheets. — At this point Methods B and C part company. 
 Hitherto the differences between the two systems have been 
 confined to extra columns in certain blanks on which informa- 
 tion could be recorded as to the machine hours taken on dif- 
 ferent jobs, and the extension of these hours, by multiplying by 
 a machine rate, into money value. But the effect of this pro- 
 cedure, if the machine rates have been accurately fixed, is that 
 Production Order Cost Sheets have already been charged with 
 burden, inasmuch as the machine rates represent very carefully 
 worked out individual charges for the various services as ab- 
 sorbed by the different machines or production centers. When, 
 therefore, we list all Production Orders and Plant Addition 
 Orders in a Departmental Manufacturing Journal (Fig. 96) 
 at the month end, we shall obtain a total of burden so dis- 
 tributed, and it will be a matter of interest to observe whether 
 the amowrl so distributed is actually the same as the amount 
 Btanding to the debil of Departmental Manufacturing account. 
 
 l\ the shop is working full time, and there has been no lack of 
 order-, then the amount distributed by machine rates to Orders 
 should be exactly or very nearly the same as the amount to 
 debil of Departmental account. Jf this is not the case, under 
 the circumstances mentioned, then some error has occurred in
 
 COSTINO OF M FT HO I) C 
 
 347 
 
 fixing machine rates, or some 
 It is, of course, important at 
 the outset to be able to de- 
 termine which of these two 
 causes has been concerned in 
 the result. 
 
 The use of Manufacturing 
 Journal will be easily under- 
 stood from inspection of Fig. 
 96. It is the same as that 
 shown for Method B with the 
 exception that instead of a 
 column headed "Burden" we 
 have a column headed "Ma- 
 chine Earnings" which, as ex- 
 plained above, takes its place ; 
 and another column headed 
 u SupplementaryRate"theuse 
 of which will now be explained. 
 
 Supplementary Rate. — If, 
 when all the Production and 
 Plant Addition Orders for the 
 month have been listed and 
 totalled in Manufacturing 
 Journal, we find that the 
 amount in "Machine Earn- 
 ings" column is equal to the 
 balance against the depart- 
 ment in the Burden account, 
 then it is evident that when 
 the posting has been effected 
 there will be no balance left in 
 Burden account. This is 
 equivalent to saying that all 
 the burden has already been 
 distributed to Orders by means 
 of machine rates. In that 
 case there is obviously no 
 further distribution possible, 
 and no "supplementary rate" 
 will be required. 
 
 inefficiency in the shop exists. 
 
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 348 MANUFACTURING << >STS AND ACCOUNTS 
 
 But this exact distribution is contingent (assuming for the 
 moment that all machine rates are correctly fixed) on every 
 machine having worked full time. If it should happen that a 
 number of machines have worked less than full time, then it 
 becomes obvious that the machine earnings which they would 
 have discharged on to Orders if they had been working on orders 
 has not been distributed at all. When this happens, it is also 
 obvious that the credit from machine earnings column in 
 Manufacturing Journal will not wipe out the balance standing 
 against the department in Burden account, but that a balance of 
 greater or less amount will still remain against the department. 
 
 Now, it* we also reckon up the value of the machine-hours on 
 the various machines that have not been charged to Orders, that 
 is, which for some reason or other have stood idle, then this 
 amount must either be equal to or more than the balance in 
 Burden account. If the balance in Burden account is greater 
 than the amount of machine earnings thus listed as idle, then it 
 i< evident that machine rates are at fault, since if, instead of their 
 being idle, all machines had been engaged on orders and had so 
 charged their earning to Orders in the machine earnings column 
 of the Manufacturing Journal, they would still have failed to wipe 
 out the balance in Burden account. 
 
 But if the amount in Burden account remaining after machine 
 earnings have been credited, is equal to the value of the idle 
 machine earnings, then obviously everything is correct, since 
 if 1 hey had been disl til >u1 ed over Orders, they would have become 
 machine earnings and so have wiped out the balance in Burden 
 account . 
 
 On the other hand, it may be found that the machine earnings 
 Listed a- due to idle time would amount to more than the balance 
 againsl the department in Burden account. This is likely to 
 be the case if the rate of production has fallen off, and orders are 
 scarce, since in that cast; a little of the service charges against 
 the department will have been reduced below normal — the 
 charge for power, for example, though not falling off in propor- 
 tion as production fall- off, yet is reduced to some extent if a large 
 percentage of idle machines obtains. So that in general we shall 
 be content with the resull if the balance not wiped out by 
 machine earnings is a -mallei- amount than the value of machine 
 earnings calculated ; ,~ lost due to idle time. 
 
 This balance- ha- to be removed from Burden account. The
 
 COSTING ON METHOD C 
 
 349 
 
 question is, first, "what does it represent?" and secondly, "how 
 shall we dispose of it?" These are very important questions. 
 
 The answer to the first is that it represents waste. And the 
 particular variety of waste it represents is wasted manufactur- 
 ing capacity. The price of this wasted capacity is the balance 
 remaining in Burden account after the machine earnings charged 
 to Orders have been credited. It is now easy to see why this 
 balance must never be more than the undistributed machine 
 earnings would amount to. It is because the price of the wasted 
 capacity is the amount of those earnings less any economies 
 that have been effected in view of the slack condition of work. 
 If no such economies have been effected, then the balance will be 
 equal to the total of undistributed machine earnings. In no 
 case can the balance ever be legitimately more" than the value of 
 the undistributed machine earnings, as that would show that 
 some items had escaped being represented in machine rates. 
 
 Total Dep't'l Burden 
 
 
 
 Total Machine Earnings 
 
 
 
 Balance % 
 
 = Supplementary Rate 
 
 
 
 Fig. 97. — Determining supplementary rate. 
 
 These assertions must be taken as being approximate. Very 
 small variations may occur, without upsetting the general prin- 
 ciple involved. It will hardly ever happen that no balance is left 
 in Burden account after machine earnings charged to Orders have 
 been credited, even if the shop is working full time. If some over- 
 time is worked occasionally during the month a slight amount of 
 overdistribution may even occur, but in general this should be a 
 trifling percentage of the amounts handled. A certain elasticity 
 in matters of this kind must necessarily be allowed. 
 
 As a matter of general practice, therefore, any balance remain- 
 ing in Burden account after machine earnings have been credited 
 through Manufacturing Journal must be distributed as a supple- 
 mentary rate over Production Orders only. Such distribution 
 must not be made to Plant Addition Orders, as that would be to
 
 350 MANUFACTURING COSTS AND ACCOUNTS 
 
 include an item of waste as part of the cost of plant, thus making 
 an illegitimate profit on such orders. 
 
 Figure 97 shows the blank used in calculating the percentage 
 on machine earnings, which must be added to the latter in order 
 to exactly absorb the balance against the department in Burden 
 account. The total amount of the balance before crediting is 
 entered in the upper space; the total of machine earnings per 
 Manufacturing Journal is entered in the second space, and sub- 
 tracted; the result is placed in the lower space, and will represent 
 the balance yet to be distributed. This is expressed as a 
 percentage of the machine earnings. 
 
 Thus, with total burden charge against the department $3,000, 
 machine earnings charged to Orders $2,400, the following entries 
 would be made: 
 
 Balance in Burden accounts $3,000 
 
 Deduct machine earnings 2,400 
 
 Balance undistributed (waste) $ 600 
 
 GOO being 25 per cent, of $2,400, supplementary rate is 25 per 
 cent, accordingly. This amount has, therefore, to be charged 
 to all Production Orders as listed in Manufacturing Journal. 
 To do this 25 per cent, is calculated on the amount of machine 
 earnings standing against each order number, and the resulting 
 figure is placed in the column headed supplementary rate. 
 When this operation is carried out, supplementary rate column 
 is totalled, and the total credited to Burden account, thus 
 extinguishing all balance in that account. 
 
 If Plant Addition Orders are included in the Manufacturing 
 Journal, a- they probably would be in most engineering shops, 
 then ;i slightly different procedure must be followed. After the 
 amount ($600) has been found as above, the percentage must be 
 reckoned not upon the $2,400 but on such less amount as repre- 
 sents machine earnings on Productive Orders only. Thus, if 
 $600 of the $2,400 wen. on Planl Addition Orders, and $1,800 
 of it on Production Orders, then the percentage to be found would 
 be thai of 600 to 1,800, namely 33.33 per cent., and this percent- 
 age when applied to the Production Order machine earnings only, 
 would, of course, yield a total of $600 in the supplementary rate 
 column, as before. 
 
 When all these operations are carried out, then the new 
 amount- due to calculated supplementary rate are posted to the
 
 COSTING ON METHOD C 351 
 
 respective Cost Sheets in the same way as burden is posted to the 
 Cost Sheets in Method B. Costing operations arc then complete, 
 each Production Order having received its due share of every 
 kind of factory expenditure, and none of the latter being unac- 
 counted for. The total now in Manufacturing account will, as 
 before, equal the aggregate of all the credits made to the main 
 ledger accounts on the left side of the general diagram. The way 
 in which Manufacturing account is credited when work is finished 
 and removed from the department will form the subject of a 
 separate chapter. It is, of course, the same for all three methods 
 of costing. 
 
 OTHER DISPOSITIONS OF WASTED MANUFACTURING CAPACITY 
 
 In the majority of cases the procedure described is the only safe 
 one. There will often be a small supplementary rate even 
 when the shop is full of work, because it is practically impossible 
 to maintain all machines, in many kinds of industries, at full 
 work during a whole month. In other industries, however, of a 
 non-engineering character, full operation is common, and in such 
 the absorbtion of burden by machine earnings should be very 
 close indeed. 
 
 It has been stated (and will be readily understood if we realize 
 that this method practically makes each individual machine 
 into a separate department for costing purposes) that all amounts 
 not passed to Orders through machine earnings are waste. If 
 a department should have only one large machine, and it is 
 used only half its time in a particular month, through slackness 
 of trade, it is perfectly obvious that half the expenses of the 
 department have been wasted. Half will have been charged to 
 Orders and half will remain uncharged. This uncharged por- 
 tion will not be as great as it would be if the machine were 
 working, inasmuch as power at least will be cut off, and probably 
 other expenses will be curtailed also. Therefore, something of 
 the loss which would otherwise occur will have been saved. 
 Still there will be a considerable loss, not 50 per cent, of the 
 normal charges for the month, but say 80 per cent, of this 
 figure (i.e., 80 per cent, of 50 per cent.). 
 
 This amount is that which is distributed over the produc- 
 tion for the month by means of a supplementary rate. But it 
 is obvious that this is only another, and roundabout, means of
 
 352 MANUFACTURING COSTS AND ACCOUNTS 
 
 ultimately charging it to Profit and Loss account. By charging 
 it to Production Orders we increase the cost of the latter, and 
 consequently when we come to set this cost against selling price 
 so as to ascertain gross profit, such profit is diminished to an 
 extent equal to the amount of supplementary rate included in 
 the cost. 
 
 It may be asked, therefore, why the balance in Burden account 
 should not be charged at once against Profit and Loss instead 
 of being distributed over Production Orders and so made into 
 a part of cost. 
 
 Some writers advocate this. It is, of course, a simplification 
 of the method, inasmuch as the distribution of the amount 
 by means of a percentage to each Production Order and the 
 posting of the amount to each Cost Sheet is saved. And in 
 certain cases the method may be adopted, particularly where 
 departments contain few machines of large size, performing 
 more or less regular and simple processes. But there are often 
 reasons why this is undesirable. In an armor-making plant, 
 for example, the wasted manufacturing capacity due to no work 
 may be very high. Yet it is very desirable to express this loss 
 as a percentage of actual cost, and in fact make it part of such 
 cost, because it has to be recovered in the selling price of the armor. 
 
 This feature of the matter is obviously very important. 
 The actual time cost of the product is not its true cost unless the 
 market is of such a nature that we may hope to fully employ our 
 plant at all normal states of trade. Not all industries are in 
 this position. Plants making some special product of which the 
 demand is very intermittent must provide manufacturing 
 capacity capable of taking care of such demand at the maximum 
 period. Perhaps 3 months in the year the plant may be very 
 busy and ai other times slack. In such cases the wasted manu- 
 facturing capacity in the slack months has to be paid for by the 
 profits made throughout the year, and it would be a dangerous 
 policy to charge wasted capacity in any month to Profit and 
 Loss. Il would tend to cover up important facts, and give a 
 misleading view of the whole situation. On the other hand, 
 it i- very valuable to know what proportion of factory cost 
 represents actual production and what proportion represents 
 mere idle equipment. If for no other purpose, this is valuable 
 from the point of view of manufacturing efficiency. The 
 machine rate method lias this virtue, that it represents the true
 
 Pay Kotl Distribution Summary 
 
 Stores Issues Summary 
 
 Depreciation Acct, 
 
 | Dep„ 
 
 •n Schedule 
 
 
 Inter 
 
 st Schedule 
 
 
 Kenti 
 
 Sec Schedule 
 
 Time Sheets Man & Machine 
 
 Stores Iss'jos ?h>.:ets 
 
 5; 
 
 Costing on Method C 
 
 Departmental Burden Distributed 
 by Machine Rates 
 Wasted Manufacturing Capacity 
 Expressed as Supplementary 
 
 St.t; 
 
 Order C^>st Sheet 
 
 | 
 
 I 
 
 i 
 
 5 
 
 \\ 
 
 Production post 
 
 Sheets 
 
 
 1 
 
 1 
 
 _ 
 
 i 
 
 
 i 
 
 t 
 
 
 £ 
 
 ■r, 
 
 3 
 
 is 
 
 s 
 
 " 
 
 £ 
 
 S 
 
 H 
 
 Fio. 94.— General diagram for Method C. 
 
 r
 
 COSTING ON METHOD C 353 
 
 shop or department cost of the product at all periods irrespective 
 of the slackness or otherwise of the shops. If it takes $40 
 machine time to do a certain job today when the shop is busy, 
 it should not take any more machine time next month when the 
 shop is slack. But if the machine should earn $80 in a mouth, 
 and thus be capable of doing two such jobs when the work is 
 there for it to do, that is no reason for charging $80 as machine 
 time to the job in the slack season. It is much better, and will 
 make the situation much clearer to everybody if we express 
 the cost of the job in the slack season in two parts thus: 
 
 Machine time $40 
 
 Supp. rate 40 
 
 Factory cost $80 
 
 There are certain cases when wasted manufacturing capacity 
 might be required as a separate item. Thus, if we have to 
 maintain a repair department in connection with our product in 
 a certain locality, the prices which we get for our work being 
 regulated by competition, or at any rate by other considerations 
 than actual cost, then it might be valuable to charge the cost 
 of wasted manufacturing capacity to a special account, and so 
 later to Profit and Loss. By this means the true cost of doing 
 the work would be known, the true profit on each order would 
 also be known, and the loss due to unemployed capacity of the 
 plant would be kept as a separate item. 
 
 No clear and general rule can, therefore, be laid down as 
 to whether the cost of wasted manufacturing capacity should be 
 distributed over Orders by means of a supplementary rate or 
 charged to a Waste account and so to Profit and Loss. If 
 there is any doubt about the matter in a specific case, then 
 preference should be given to the distribution method. There 
 are certain dangers in writing off wasted capacity. The de- 
 partment is apt to take the view that their responsibility is 
 relieved thereby. Now it does not follow in all cases that this 
 waste is due to the conditions of trade. It is also sometimes 
 due to poor management. Even though the machine time of 
 jobs is not increased, there may be quite remediable slackness in 
 keeping machines at work. One of the advantages of Method C 
 is in fact that it focusses attention on something that is too 
 frequently neglected, namely, the keeping of machines at work. 
 
 23
 
 :;:.! MANUFACTURING COSTS AND ACCOUNTS 
 
 In many plants where no accurate and systematic watch has 
 been kept on this matter, it is surprising what the application 
 of a record to machine performance will reveal. Now supple- 
 mentary rati', or rather its percentage, is to some extent a 
 barometer of idle machines. If it is rising, it signifies that 
 machines are more idle, and whether this is justifiable or not is 
 soon seen from a reference to the Order Register. 
 
 Summary of Method C. — Method C has now been described as 
 to its working features, though the manner in which machine 
 rates are fixed and verified has yet to be discussed. It is essen- 
 tially a method of measurement of burden charges in proportion 
 to service absorbed by individual machines. This being the 
 case, and such charges being reduced to a cost per hour for each 
 machine, a division into hours that have been employed usefully 
 to make product, and hours that have been wasted, is an obvious 
 one And if it were not the case that idle machines mean usually 
 reduced service in some respect or other, it is evident that we 
 could say. simply, that the cost of the wasted time was so many 
 hours multiplied by the machine rate; just as w T e do say that cost 
 of utilized time, as applied to Orders, is so many hours multiplied 
 by the machine rate. Actually, however, it will be something 
 less than this, since, to say nothing of other services, an idle 
 machine is not consuming power. 
 
 Therefore, the cost of wasted capacity is not the wasted hours 
 multiplied by the machine rate of each idle machine, but simply 
 the difference between machine time charged to Orders and the 
 total burden allocated to the department during the month. 
 
 Having ascertained the cost of wasted capacity in this way, we 
 must get it out of Burden account. One way, and the usual way, 
 of doing this is to prorate it over Production Orders as a per- 
 centage of waste. Another way, to be used only under special 
 circumstanceSj is to charge it to a Waste account, and so later 
 to Profil and Loss. 
 
 Iii either case the true cost of doing the work, when direct 
 Labor and direcl material are added in, is shown separately on the 
 Sheet, and this true cost will be the same at all times, 
 whether the shop is busy or slack, if the job has been done with 
 the same technical efficiency in both cases. If it has not, then 
 thai fart ie visible on the face of the Cost Sheet, wholly divorced 
 from any complications due to the amount of work in the shops 
 on either occasion.
 
 CHAPTER XX 
 
 COSTING ON METHOD C (DETERMINING THE MACHINE 
 
 RATE) 
 
 It will, of course, be understood at the outset, from what has 
 been said in previous chapters, that before considering the dis- 
 tribution of burden within any department, a thorough and 
 rigorous departmentalization of all factory expense, and its entire 
 separation from selling expense, and certain other expenses such 
 as legal expenses, that come out of profit and cannot be charged 
 to customers by way of cost, must be made. 
 
 In the present chapter it will be assumed, therefore, that 
 such departmentalization has been carried out, and that the 
 various items of expense chargeable against the factory are col- 
 lected by means of a Standing Order scheme on the lines sug- 
 gested by Fig. 56. This being the case, two kinds of expense have 
 to be considered, namely, that chargeable against the depart- 
 ment itself, such as the depreciation, repairs, etc. of its own 
 building; the salaries of the employees of all kinds within the 
 department, the depreciation, repairs, etc. of its own productive 
 machines or production centers, and in general all those expenses 
 which are listed under productive department columns in Fig. 
 56. In addition to these interior expenses, we have also to con- 
 sider the prorating of the various non-productive departments 
 over our productive department, and the way in which such 
 prorated expense must be charged against the production 
 factors of the department. 
 
 Figure 98 (p. 366) shows, in the upper portion, the main 
 elements which are collected into departmental production 
 factors. These are only suggestions, inasmuch as each plant 
 will have individual items of expense, either additional to or 
 replacing those shown. Individual plants will also have, in 
 some cases, to provide for additional production factors, as, for 
 example, when certain machines in the department are driven 
 by hydraulic power or compressed-air power, or when a tool- 
 room service is maintained for the use of the department. In 
 
 355
 
 356 MANUFACTURING COSTS AND ACCOUNTS 
 
 the latter case not merely the cost of the service itself, such as space 
 charge for the room occupied, wages of attendants and messengers, 
 etc., but also depreciation and other charges for the use of the 
 tools will have to be allotted to the machines making use of each 
 chtss of tool. Thus, for example, if we have among our machines 
 some large boring lathes, the depreciation, maintenance, etc. 
 of the boring bars used by them will have to be made part of a 
 special tool factor, and a charge included in the machine rate of 
 each of the boring machines to take care of such items of expense. 
 
 Referring to Fig. 98, it will be seen that the first step is to 
 assemble in great detail every item of expense chargeable against 
 each of the factors. This expense must be that incurred, as 
 shown by the past records of the firm, when the department is 
 working full time. Of course, a number of the items are annual, 
 and quite irrespective of the number of hours the department 
 i- working. Depreciation, rent, taxes, insurance, interest (if 
 charged), salaried men, and so forth, are not affected by working 
 hours within limits, but others, such as the charge for power made 
 to the depart inent , and some floating labor, will be higher when the 
 shop is full of work than when it is not. 
 
 Further, these expenses must be annual figures. They must 
 represent the whole of the charges for one year, since items like 
 heating and lighting at any rate will vary in amount between 
 one part of the year and another. A selected month will, 
 therefore, not meet the case. 
 
 When all the expense items have been collected in groups, 
 corresponding to production factors, then the distribution of 
 each factor to individual machines or production centers' may be 
 considered. Each individual machine, as shown in Fig. 98, will 
 also have certain individual items of its own to be taken into 
 account. Depreciation, interest (if charged) and insurance on 
 the capita] value of the machine, the annual cost of its repair and 
 maintenance, the annual cost of cleaning it, and of oil, waste and 
 similar supplies musl be carefully worked out. These items form 
 the individual factor of the production center, and, therefore, are 
 pari of the machine rate. The way in which the production 
 center's share of the service represented by each of the other 
 factors, when worked out, is entered against the machine as part 
 of the machine rate, will he understood from the figure. Each 
 factor i- worked out to a figure representing its own share of the 
 hourly machine rate, and this is done with considerable accuracy.
 
 COSTING ON METHOD C 
 
 357 
 
 That is to say that if the space factor for a given machine is 
 found to be $63 per annum, and the working hours are 2,500 per 
 annum, then the exact factor hour rate is $0.0252. This figure will 
 be recorded against the machine, for a control purpose that will 
 be hereafter described. Otherwise, the addition of all the annual 
 factors, divided by the working hours per year give the hourly 
 rate for that machine. 
 
 We may now consider, briefly, the collection of data for each 
 separate factor, and the basis on which, in each case, a dis- 
 tribution between machines is effected. 
 
 Space Factor. — Figure 99 represents a schedule used for 
 preparation of the space factor distribution. In this, as in all 
 
 Description 
 
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 Prod. Center 
 
 d 
 
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 _^_ . — _ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 222 
 
 
 2 
 
 
 
 
 
 
 223 
 
 
 1 
 
 
 
 
 
 
 224 
 
 
 3 
 
 
 
 
 
 
 225 
 
 
 1 
 
 
 
 
 
 Total Charge 
 Against Dept. 
 
 
 50 
 
 
 
 
 
 Fig. 99. — Schedule for distributing building or space cost to production 
 
 centers. 
 
 subsequent factor schedules, columns are provided for a list 
 of machines, giving brief description and number of each. The 
 basis on which space cost is distributed to machines is that of 
 the working area occupied by each. Consequently the working
 
 358 MANUFACTURING COSTS AND ACCOUNTS 
 
 areas, that is the space occupied by the machine itself, plus 
 sufficient free space around it to permit handling of work, will 
 Leasured up, and entered opposite each machine. In some 
 space may be occupied in a shop by enclosures belonging 
 to other fact < us, as, for example, a sub-stores or a time office. 
 In such cases the item in question must he listed, with the area, 
 it occupies, and when the; value of the space has been deter- 
 mined, it must be charged up to the factor concerned. Thus in 
 Fig. ( .)S charges for space factor are suggested against each of 
 the other factors. But unless the services represented by such 
 factors occupy space in the department, being considered such as 
 office room or store room, this item will not materialize. 
 
 The item of lighting may in some cases require a separate 
 treatment. Where overhead lighting is in use, then obviously 
 each machine benefits in proportion to the area it occupies, but 
 in shops where the exigencies of production demand separate 
 lighting then the share taken by each machine must, so to speak, 
 lie weighted, so that some machines get more lighting charge 
 than others. This may be done by considering the share of 
 each machine in the general lighting as 1, and then adding 
 "votes" to such machines as take individual lighting, in pro- 
 portion to the number and size of the lights used by them. Then 
 when all the "votes" are totalled (as in column "Lighting call" 
 Fig. 99) the total lighting charge is divided by this figure, and the 
 value of 1 vote found. This value is, of course, multiplied 
 by the number of votes allotted to each machine, and forms the 
 lighting charge tor that machine. This device will rarely be 
 necessary. Modern systems of lighting diffuse illumination 
 floor area in smh a way that individual machine lights are 
 unnecessary in mosl ca 
 
 If no separate calculation for lighting is made, then the two 
 columns headed ' Lighting call" and "Annual lighting charge" 
 will be omitted from the schedule. The annual expenditure 
 on the class of expense represented by the space factor is simply 
 totalled, and this t < > t .- 1 1 divided by the total working area of all 
 machines, to find the space charge per square foot, per year. 
 
 Multiplying this unit charge by the working area of each 
 machine gives I he annual charge for space for each machine. 
 This figure i- entered in column headed "Annual Space Charge" 
 if lighting i- reckoned separately, or in the column headed 
 "Annual Rate" if not. Division of this figure by the working
 
 COSTING ON METHOD C 359 
 
 hours per year gives the hourly charge against cadi machine for 
 the space factor. 
 
 When interest is included in cost, and the land on which the 
 factory is built is the property of the firm, then a Land Schedule 
 must be prepared, tabulating the interest charge per square foot, 
 and allotting the proper amount to each department: this 
 amount will then be included in the depreciation item of the 
 space charge. 1 
 
 Power Factor. — Figure 100 shows the schedule for distributing 
 power factor to individual machines or production centers. 
 The power factor has commonly two divisions, charges incident 
 on the presence within the shop of shafting, pulleys, belts, 
 motors, switchboards, etc., and the charge for power supplied 
 by the power department, whether mechanically or electrically 
 transmitted. 
 
 Expenditure on the former division is collected by means of 
 the Standing Orders of the 50, 51, 53, 59 groups (see Fig. 56) 
 for each department separately. Expenditure on the power 
 plant itself is collected by means of the Standing Orders as listed 
 under department 4, power department, (Fig. 59). When all the 
 expenses of generating power have been collected, it is prorated 
 over the departments taking power, on a horsepower basis. 
 
 Referring to Fig. 100, the way in which each of the two 
 divisions of power factor is assessed against machines will be 
 readily understood. Against each machine or production center 
 the average horsepower taken by the machine is set down. 
 In the next column the average cost of the horsepower-hour, as 
 indicated by the prorating above, is multiplied by the horsepower 
 taken, and entered against each machine. This horsepower 
 cost figure will be that obtaining under the most favorable 
 conditions of production, when all the departments are running 
 full time. In the next column the interior expense of the 
 department on its transmission equipment is assessed against 
 each machine. Finally, each line is cross-totalled, thus giving 
 the total annual power factor charge against each machine. 
 Dividing this by the normal hours in the working year gives 
 the hourly charge for the power factor. This is expressed 
 to four places of cents. 
 
 In some cases, however, a somewhat different procedure 
 
 ^ee the author's "Production Factors" for a full discussion of the various 
 conditions under which land factor is chargeable.
 
 360 MANUFACTURING COSTS AND ACCOUNTS 
 
 is preferred. The sphere of the power department is con- 
 sidered to include delivery of the power to the machine itself. 
 In that case whatever devices are used within the shop, such as 
 main shafts, belts, motors, switchboards, etc. are considered to 
 be the property of the power department, and consequently 
 the costs of the Standing Orders of the 50, 51, 53, 59 groups are 
 
 Description 
 
 of 
 Prod. Ctr. 
 
 d 
 
 u 
 
 
 
 P-, 
 
 c 
 
 M 3 
 
 r ° 
 
 h x 
 
 X 
 
 Annual 
 Power Charge 
 
 Charge for 
 
 Power Eq'pt. 
 
 in Shop 
 
 u 
 
 "rt 
 
 3 
 C 
 
 a 
 < 
 
 u 
 
 3 
 O 
 
 X 
 
 
 201 
 
 1 
 
 
 
 
 
 
 202 
 
 v 2 
 
 
 
 
 
 
 203 
 
 n 
 
 
 
 
 
 
 204 
 
 i 
 
 
 
 
 
 
 205 
 
 7 
 
 
 
 
 
 
 206 
 
 1 
 
 
 
 
 
 
 207 
 
 1 
 
 
 
 
 
 
 208 
 
 3 
 
 
 
 
 
 
 
 
 
 
 
 
 221 
 
 1 
 
 
 
 
 
 
 222 
 
 2 
 
 
 
 
 
 
 223 
 
 1 
 
 
 
 
 
 
 224 
 
 H 
 
 
 
 
 
 
 225 
 
 1 
 
 
 
 
 
 Total Charge 
 against Dept. 
 
 
 
 
 
 
 J IG. 100. -Schedule fur distributing power cost to production centers. 
 
 charged nol againsl the -hop luit against the power department, 
 and merged in the general total of power costs. By this means 
 there is only one elemenl in the department power factor, namely 
 the cost of the horsepower-hour, all power costs of whatever 
 kind being included in this. Space docs not permit of dis- 
 cussing the circumstances under which such a disposition of 
 the power service charges is justified, but under certain cir- 
 cumstances the arrangemenl is preferable. The arrangement is,
 
 COSTING ON METHOD C 361 
 
 of course, equivalent to taking current from the mains, the supply 
 company furnishing the motors and other shop equipment 
 necessary, without charge to the consumer. 
 
 Stores-transport Factor. — The items composing this factor 
 will vary greatly in different plants. In some it will be a very 
 important factor, in others it will be of very small dimensions. 
 It includes, as in the case of the power factor, one division 
 arising out of expenses within the department, and also a division 
 representing the prorated share of the general stores depart- 
 ment, and it may be also, outside crane and yard service in large 
 plants. 
 
 The former division of expense will consist of the expenditure 
 on transporting and moving material, including work in process, 
 in and about the department. It may thus include charges for 
 crane equipment, conveyors, etc., wages of crane men and 
 movemen, depreciation on and cost of repairs to the equipment, 
 etc. These items are collected within each department by the 
 Standing Orders of the 20 to 29 groups (see Fig. 59). 
 
 The other division of the stores-transport factor, namely the 
 cost of the stores department, and other agencies outside the 
 department, will be collected by the Standing Orders listed under 
 the column devoted to department 3. The items here will re- 
 quire expanding in many cases, as for instance to include yard 
 service. When collected, such items are prorated to the various 
 departments on a basis presently to be discussed. 
 
 Within the department, if the industry is one using heavy 
 cranes or travelers, it is necessary to map out the floor area of the 
 shop into " crane areas." This is effected by filling out a blank 
 like Fig. 101, in which the annual expenses for each crane area 
 or "bay" as assessed separately, in order that they may be 
 divided among the machines served by the- crane. Fig. 102 
 shows how this is done. Columns are provided for each crane 
 area or bay, and a mark is placed in the column opposite the 
 machines that are situated in that bay. Then the total cost of 
 the crane service in the bay is prorated over the marked machines 
 on a basis of the service judged rendered to each, having regard 
 to the kind of work done at each machine. It does not follow, 
 of course, that each machine receives an equal charge. It might 
 happen that some machines in a bay made no use whatever of the 
 crane facilities. Charges will be adjusted accordingly. 
 
 In the next column of the distribution schedule, Fig. 102,
 
 362 1/.1A UFACTURING COSTS AND ACCOUNTS 
 
 STORES TRANSPORT FACTOR 
 Building Nn f)pnt- 
 
 
 
 
 IT1.M 
 
 Total 
 
 Bay 
 No.l 
 
 Bay 
 
 No.2 
 
 Bay 
 No. 3 
 
 Crane No. 
 
 
 
 
 
 Span 
 
 
 
 
 
 Capacity 
 
 
 
 
 
 Cost 
 
 
 
 
 
 Area 
 
 
 
 
 
 
 
 
 STATEMENT OF ANNUAL EXPENSE 
 
 Depreciation 
 
 
 
 
 
 Insurance 
 
 
 
 
 
 Interest 
 
 
 
 
 
 
 
 
 
 
 Repairs 
 
 
 
 
 
 
 
 
 
 
 Current 
 
 
 
 
 
 
 
 
 
 
 Cranemen 
 
 
 
 
 
 Other Labor 
 
 
 
 
 
 
 
 
 
 
 Supplies 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 Ik;, loi — Analysis of crane costs per bay
 
 COSTING ON METHOD C 
 
 363 
 
 Description 
 
 of 
 Prod. Center 
 
 o 
 U 
 
 T3 
 
 I* 
 
 u 6 
 O 
 
 >> 
 
 B i 
 rt /5 
 
 U 
 
 u O 
 
 U 
 
 
 V** CJ 
 
 o ^ 
 
 u Eh 
 
 rt & 
 
 ^ CO 
 
 "rt 
 
 3 
 C 
 C 
 
 < 
 
 rt 
 
 3 
 
 o 
 
 
 201 
 
 
 * 
 
 
 
 
 
 
 
 202 
 
 
 
 * 
 
 
 
 
 203 
 
 
 
 * 
 
 
 
 
 204 
 
 
 * 
 
 
 
 
 
 
 
 205 
 
 - 
 
 
 
 
 
 
 
 
 206 
 
 
 
 .': 
 
 
 
 
 
 
 207 
 
 
 ft 
 
 
 
 
 
 
 
 208 
 
 
 
 
 
 
 
 
 
 209 
 
 
 
 ft 
 
 
 
 
 
 
 210 
 
 
 
 * 
 
 
 
 
 
 
 211 
 
 * 
 
 
 
 
 
 
 
 
 212 
 
 * 
 
 
 
 
 
 
 
 213 
 
 
 
 ft 
 
 
 
 
 
 214 
 
 
 
 $ 
 
 
 
 
 
 215 
 
 
 * 
 
 
 
 
 
 
 
 216 
 
 
 
 ft 
 
 
 
 
 
 
 217 
 
 
 
 ft 
 
 
 
 
 
 
 218 
 
 
 
 ft 
 
 
 
 
 
 
 219 
 
 
 
 
 
 
 
 
 
 220 
 
 
 
 
 
 
 
 
 
 221 
 
 
 
 :: 
 
 
 
 
 
 
 222 
 
 
 ft 
 
 
 
 
 
 
 Total Charge 
 against Dept. 
 
 
 
 
 
 
 
 
 Fia. 102. — Schedule for distributing stores-transport cost to production 
 
 centers.
 
 364 MANUFACTURING COSTS AND ACCOUNTS 
 
 space is provided for assessing the charge to each machine for the 
 corps of movemen and handlers employed in the shop when 
 it is working full time. This will be assessed in the same way as 
 crane service, namely, after consideration of the kind of work done 
 by each machine and its call on the service of the movemen. 
 
 A column is also provided for distributing the total of the 
 prorated charge for stores department, to the machines. In the 
 first place, this prorating will have been made on the basis of the 
 kind of work done in each department, and its relation to the 
 outside service. It will be proportional to the size of the depart- 
 ment, of course, and also to the nature of the work carried on in 
 it, and the call of this latter on the services of the stores depart- 
 ment. No general rule can be laid down, as decision depends 
 on a close and careful review of the circumstances in each case. 
 
 Naturally, the considerations that have been taken into 
 account in prorating a certain sum against any department will 
 follow the amount into the shop and be used in arranging the dis- 
 tribution of the amount to each individual production center. 
 A very close and satisfactory distribution can be attained with 
 a little analysis and judgment. Either the distribution will be 
 a uniform one or it will not. In the latter case, there will be 
 reasons why it should not, and the giving of relative weight to 
 each of these reasons is a matter of detail offering no insuperable 
 difficulty. 
 
 When all these columns (Fig. 102) have thus been filled out, 
 cross-total- are made as in the former schedules, giving annual 
 and hourly charge for the stores-transport factor against each 
 machine or production center. 
 
 Supervision Factor. — Figure 103 shows the schedule for dis- 
 tributing the cost of supervision to production centers. Again, 
 there will be certain items arising within the department, and 
 some outside. The former arc represented by Standing Orders 
 of the 36 group (see Fig. 56); the latter by the prorating of the 
 total cosl of the departmenl of superintendence and production 
 over the various productive departments. In this latter depart- 
 ment i he factory share of the salaries of the higher officials is also 
 included. 
 
 Within the departmenl it may happen that particular groups 
 of machines are under the care of sub-foremen or "gang bosses." 
 Columns are, therefore, provided in the supervision schedule 
 for each such oflicial, and the machines under his care are marked
 
 COSTING ON METHOD C 
 
 365 
 
 Description 
 
 of 
 Prod. Center 
 
 6 
 
 u 
 
 o 
 t- 
 
 a 
 
 vl 
 
 ° J 
 
 fa Z 
 
 3 
 CO 
 
 d 
 3 
 
 E 
 
 1) rsi 
 
 t- • 
 O O 
 
 ^ 2 
 
 x> 
 
 3 
 
 CO 
 
 c 
 S c 
 
 i-i ■*-» 
 O .2 
 
 fa 23 
 
 r < 
 5 ^ 
 
 o 
 
 C3 
 
 rt _ 
 
 CO c 
 
 u 
 
 
 
 3 
 
 a 
 
 a 
 < 
 
 i) 
 
 3 
 O 
 
 
 201 
 
 
 
 
 
 
 
 
 202 
 
 
 
 
 
 
 
 
 203 
 
 
 * 
 
 
 
 
 
 
 204 
 
 
 
 
 
 
 
 
 205 
 
 
 * 
 
 
 
 
 
 
 206 
 
 * 
 
 
 
 
 
 
 
 207 
 
 
 
 
 
 
 
 
 208 
 
 
 
 
 
 
 
 
 209 
 
 
 * 
 
 
 
 
 
 
 210 
 
 
 
 
 
 
 
 
 211 
 
 * 
 
 
 
 
 
 
 
 212 
 
 
 
 
 
 
 
 
 213 
 
 
 * 
 
 
 
 
 
 
 214 
 
 * 
 
 
 
 
 
 
 
 215 
 
 
 
 
 
 
 
 
 216 
 
 * 
 
 
 
 
 
 
 
 217 
 
 
 
 
 
 
 
 
 218 
 
 * 
 
 
 
 
 
 
 
 219 
 
 
 * 
 
 
 
 
 
 
 220 
 
 
 
 
 
 
 
 
 221 
 
 
 
 
 
 
 
 
 222 
 
 
 
 
 
 
 
 Total Charge 
 against Dept. 
 
 
 
 
 
 
 
 Fig. 103. — Schedule for distributing supervision to production centers.
 
 366 MANUFACTURING COSTS AND ACCOUNTS 
 
 as in the case of crane bays (see Fig. 103). The salaries of the 
 sub-foremen arc then divided among the machines under his 
 special care. The next column collects the salaries of the 
 general department foreman and his assistants, and this total is 
 distributed over machines cither equally or, if circumstances 
 warrant it, on a basis of "weighting" some machines more than 
 others. 
 
 Finally, a column is provided to collect the department's 
 share of the prorated expense of department 1 (see Fig. 56). 
 This department assembles the cost of superintendent's office, 
 and of the production staff, tracers, etc., and also the factory 
 share of the higher officials' salaries. When all the cost of de- 
 partment 1 has been assembled, it is prorated over productive 
 departments in general proportion to their productive pay-roll, 
 though in this case also "weighting" is permissible, if it is judged 
 that certain departments take more than the average share of 
 supervision and attention from the superintendent's and 
 product ion staffs. 
 
 Distribution within the department is usually on a basis of 
 equality as between machines, but the same considerations as to 
 weighting will apply in this case also whenever there is justifica- 
 tion for it. 
 
 When all these items have been assessed against machines 
 -totalling gives, as before, the annual and hourly charge 
 against each production center for the supervision factor. 
 
 Organization Factor. — Figure 104 shows the schedule for dis- 
 tributing organization factor expense to production centers. 
 Usually there will not be any interior organization expense, 
 within :i department, since any cost or time clerks stationed there 
 may 1m- considered as part of department 2, and any clerks as 
 part of the supervision charge (when they are merely clerical 
 help for the foreman). In some plants, however, the 40 to 49 
 series may require applying to one or more departments, but 
 tin- will iii general only apply to very large plaids. 
 
 Excepl in tli'- case just mentioned, all organization expense 
 comee from outside, and is represented by the prorating of depart- 
 ment '-' (see Fig. 56). This prorating is made on a basis of the 
 relative productive pay-roll of the department, and within the 
 departmenl may be made on an equal basis as between machines, 
 unless there is reason to the contrary, when the share of certain 
 machines may be weighted. The guiding principle will be the
 
 - $ Depreciation „ '^ ^ 
 
 - $ Insurance jf 5 g 
 
 —Interest ■++,£; K - 
 
 —Repairs & Maintenance 
 — Lightning 
 —Heating 
 
 —Cleaning & Sundry Labor 
 Sundry Supplies 
 
 pace Factor (if any) 
 
 Depreciation Shop Equip 
 
 -Insurance •• 
 
 -Interest •■ 
 
 -Repairs & M'tce 
 -Cleaning & Oiling ■■ 
 -Sundry Labor 
 
 Sundry Supplies 
 
 ■Current or Power Charge 
 
 Space Factor (if any) 
 
 -Depreciation 
 
 -Insurance 
 
 -Interest 
 
 -Wages, Cranetnen &c 
 
 Repairs & M'tce 
 
 Cleaning & Oiling 
 
 -Sundry Supplies 
 
 -Share of Stores Dept 
 
 Space Factor (if any) 
 
 —Foremen & Assistants 
 -Sub foremen or Bosses 
 
 Deprec'n on Equipment 
 
 —Insurance ■• 
 
 -Interest 
 
 Repairs &c .. 
 
 Share of Supt & Prod Staff 
 
 Share of Admin Salaries 
 
 -Space Factor (if any) 
 -Deprec'n.on Equipment 
 -Insurance »■ 
 
 -Interest 
 
 Salaries in this Dept. 
 
 Books, Blanks ■• •• 
 
 Sundry Supplies 
 
 Share of Gen'l Org'n 
 
 Individual Machine 
 
 !»:; 
 
 o 
 
 True Cost of Job Cost Including Waste 
 
 Cost of 
 
 Manufacturing 
 
 Capacity 
 
 Utilized 
 Work 
 
 Time 
 
 True Cost 
 of Job 
 
 Inclusive 
 Shop Cost 
 
 Selling Expense 
 
 FIG 98 SHOWING COMPOSITION OF MACHINE RATES 
 AND ALSO THE RELATION OF UTILIZED AND WASTED CAPACITY 
 TO COST AND SALE PRICE 
 
 Note 
 Profit made pays 
 for the Item of Wasted 
 Shop Capacity Included 
 in Cost 
 
 But Sale Price 
 could be that much 
 less and still leave 
 the same Profit on th 
 actual Process Cost 
 of Production 
 This would be a 
 Hard Times Pric 
 
 c
 
 COSTING ON METHOD C 
 
 367 
 
 degree to which the nature of the work gives rise to detailed n scon I - 
 ing, etc., so that more expense of the kind arises from the work of 
 one machine or production center than of another. 
 
 The usual cross-totallings, and reduction to hourly value are 
 made as in the case of other schedules. 
 
 Description 
 
 of 
 Prod. Ctr 
 
 o 
 
 :z 
 
 ■<-» 
 
 u 
 
 o 
 
 U| 
 
 0. 
 
 Organization 
 
 Expense 
 
 in this 
 
 Dept 
 
 Share of 
 
 General 
 
 Factory 
 
 Organization 
 
 U 
 
 3 
 
 3 
 C 
 
 c 
 
 < 
 
 n 
 
 3 
 O 
 
 X 
 
 
 201 
 
 
 
 
 
 
 202 
 
 
 
 
 
 
 203 
 
 
 
 
 
 
 204 
 
 
 
 
 
 
 205 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 219 
 
 
 
 
 
 
 220 
 
 
 
 
 
 
 221 
 
 
 
 
 
 
 222 
 
 
 
 
 
 
 223 
 
 
 
 
 
 Total Charge 
 against Dept. 
 
 
 
 
 
 Fig. 104. — Schedule for distributing organization expense to production 
 
 centers. 
 
 Individual Machine Factor. — Each machine or production 
 center has an individual factor, representing the charges and 
 expenses arising out of its depreciation, repair, etc. Fig. 105 
 shows the schedule for determining these individual factors. The 
 expenses to be distributed are those collected by the 60 to 63 
 group of Standing Orders (see Fig. 56). They are wholly 
 individual, not merely to the department, but to each production 
 center. 
 
 The first item is that of depreciation. Columns are provided 
 for the cost of the machine, the depreciation rate pertaining to
 
 368 U.l VUFACTURING COSTS AND ACCOUNTS 
 
 it, and for the resulting annual sum chargeable for depreciation. 
 These particulars will be in agreement with the Depreciation 
 Schedule (Chap. VII, Part II). A similar column is provided for 
 insurance, and for interest when this is charged into Cost (see 
 ( 'hap. XXIV, Part II). The next two columns are used for plac- 
 ing against each production center an estimate of the average 
 amount of repairs, and of supplies such as oil, waste, etc. likely 
 
 Description 
 
 of 
 Prod. Center 
 
 o 
 
 •z, 
 
 u 
 
 6 
 
 -a 
 o 
 
 o 
 O 
 
 01 
 
 u 
 
 a. 
 
 ■j 
 Q 
 
 c 
 
 .2 
 
 2 73 
 
 c " 5 
 
 5 u 
 
 C u 
 
 < §• 
 Q 
 
 V 
 
 o 
 
 c 
 
 C4 
 
 u 
 
 3 
 
 a 
 
 u 
 
 O 
 
 c 
 
 n 
 
 Li 
 '3 
 
 a 
 
 0> 
 
 K 
 
 ■a 
 
 c 
 
 3 
 W 
 
 « 
 
 73 
 
 3 
 C 
 C 
 < 
 
 31 
 
 rt 
 M 
 _^ 
 S 
 
 3 
 O 
 
 
 201 
 
 
 2'/2 
 
 
 
 
 
 
 
 
 
 202 
 
 
 3 
 
 
 
 
 
 
 
 
 
 203 
 
 
 4 
 
 
 
 
 
 
 
 
 
 204 
 
 
 2 
 
 
 
 
 
 
 
 
 
 205 
 
 
 2V 2 
 
 
 
 
 
 
 
 
 
 20G 
 
 
 3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 218 
 
 
 
 
 
 
 
 
 
 
 218 
 
 
 2 
 
 
 
 
 
 
 
 
 
 219 
 
 
 4 
 
 
 
 
 
 
 
 
 
 220 
 
 
 3 
 
 
 
 
 
 
 
 
 
 221 
 
 
 2H 
 
 
 
 
 
 
 
 
 
 222 
 
 
 2 
 
 
 
 
 
 
 
 
 Total Charge 
 Against Dept. 
 
 
 
 
 
 
 
 
 
 
 I i'.. 105. — Schedules fur determining individual production center charges. 
 
 to be incurred during a normal year. If good records exist 
 these figures can be based on past experience, but if not they must 
 ■ ry carefully worked out. 
 
 totalling of the items gives, as before, the total charge 
 against each machine for the individual machine factor. 
 
 Hourly Machine Rate. — If there are no special factors to be 
 determined, as for instance a hydraulic power, or compressed- 
 air factor, the nexl step is to tabulate all the charges which have 
 separately determined by means of the foregoing schedules,
 
 COSTING ON METHOD C 
 
 369 
 
 a^Bji Action 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 sjoiobjJ 
 l^nuuv IB^ox 
 
 
 
 
 
 
 
 
 
 
 
 
 * 
 
 
 
 
 
 
 
 
 
 
 
 
 joiob^j 
 jBnpiAipuj 
 
 
 
 
 
 
 
 
 
 
 
 
 JOpBJ 
 
 uoi^bziubSjo 
 
 
 
 
 
 
 
 
 
 
 
 
 JO^OBJ 
 
 uoisiAjadng 
 
 
 
 
 
 
 
 
 
 
 
 
 JtOrpB^ 
 
 •^dj, saao^s 
 
 
 
 
 
 
 
 
 
 
 
 
 jo^db^ aaMoj 
 
 
 
 
 
 
 
 
 
 | 
 
 
 jo^db^ aoBdg 
 
 
 
 
 
 
 
 
 
 j 
 
 
 •on *a^O MJ 
 
 o 
 o 
 
 CM 
 
 o 
 
 CM 
 
 o 
 
 CM 
 
 CO 
 
 o 
 
 CM 
 
 o 
 
 CM 
 
 o 
 
 CM 
 
 O 
 CM 
 
 © 
 CM 
 
 
 
 0) ** 
 
 to o. 
 
 •a^O -poaj 
 
 JO 
 
 uopduossQ 
 
 
 
 
 
 
 
 
 
 ( 
 
 c3 
 
 > 
 
 - 
 
 ii 
 
 
 o 
 
 d 
 
 w 
 
 
 S-l 
 
 a) 
 
 ai 
 
 ■M 
 
 
 
 3 
 
 T) 
 
 
 d 
 
 
 o o 
 
 o 2 
 
 I - 
 
 P»H 10 
 
 21
 
 370 MANUFACTURING COSTS AND ACCOUNTS 
 
 so thai they may be combined into a single amount, expressible 
 
 as an hourly rate for the use of the machine. 
 
 Figure 106 shows the Machine Kate Schedule. Its use 
 will be evident from an inspection of the ruling. The amounts 
 (the annual amounts) shown on each factor schedule against, 
 say, machine 200 are transferred to the proper columns in this 
 schedule, and when cross-totalled give a grand total of annual 
 expense chargeable against 200 for all factors. This total divided 
 by the working hours per year, will give the hourly machine 
 rate. 
 
 Special Machine Rates. — From what has been explained 
 as to the manner in which machine rates are built up from Stand- 
 ing Order elements, it will be readily understood that machine 
 rates can be constructed to meet all circumstances and several 
 special wants. Thus they can be constructed for plants working 
 double or treble shifts — such rates being, of course, very different 
 from ordinary rates and not in any sense multiples of the 
 latter. They can be arranged to take care of regular but inter- 
 mittent periods of overtime, and to meet the case of machines 
 which arc used only a part of their time. Further, for estimating 
 purposes, machine rates may be made up which eliminate the 
 inclusion of interest (as described here interest has been assumed 
 to be omitted, but it could easily have been included) and even 
 of depreciation. The use of these latter varieties is for what 
 may be called "hard luck" estimating, when the rock bottom 
 price based on actual out of pocket expenses is required to be 
 found. Though these latter varieties are mentioned, it must 
 not be supposed that their use is to be encouraged.
 
 CHAPTER XXI 
 COSTING ON METHOD C (CONTROL OF FACTORS) 
 
 The accuracy of machine rate determination depends on 
 the way in which a large number of small expenses have been 
 carefully analyzed and allotted, so that the resulting errors will 
 be very small individually, and the final result will, therefore, 
 be the closest approximation to accuracy possible. 
 
 But it will be obvious that, after all, the machine rate is a 
 standardization of factor cost, and it is, therefore, necessary to 
 set up mechanism by which its accuracy may be tested from 
 time to time, under varying conditions of the business. The 
 machine rate is, in fact, a measure of cost, but everything de- 
 pends on whether, so to speak, this measure has been correctly 
 graduated. 
 
 It will be remembered that each of the factor schedules 
 described in the last chapter was arranged with a column to 
 contain the hourly rate representing the machine charge jor one 
 factor. All the factors were combined to make the hourly rate 
 for the use of the machine. It follows, therefore, that it would 
 be possible to decompose any amount charged through machine 
 rates so that the amount could be split up into smaller amounts 
 each representing a charge for one factor. 
 
 Though very simple, this is too laborious an undertaking 
 to perform as part of the costing operations every month, nor 
 is it necessary. It will suffice if done occasionally, now for one 
 factor and now for another, and at still longer intervals for all 
 factors together. 
 
 The blank, Fig. 107, will be found useful for this purpose. 
 The machine numbers are listed in the first column, and their 
 rates in the second. The third column contains the total hours 
 worked by the machine, and the fourth the total earnings of the 
 machine for the month under examination. The remaining 
 columns are six in number, each pertaining to one factor, and 
 are double — the left-hand portion containing the machine 
 factor rates taken from the factor schedules, and the right- 
 
 371
 
 372 MANUFAi TURING COSTS AND ACCOUNTS 
 
 m 
 bO 
 C 
 
 'c 
 
 u 
 
 a 
 
 u 
 o 
 
 o 
 
 o 
 c 
 
 to 
 
 to 
 
 c 
 
 £ 
 
 W 
 
 O 
 
 c 
 IS 
 
 o 
 08 
 
 
 
 >*) 
 '35 
 j>» 
 
 "3 
 
 c 
 
 < 
 
 3 fa 
 
 > J 
 
 ■9 a 
 
 < 
 
 
 
 
 
 
 
 ■j 
 *-< 
 cd 
 
 - 
 
 
 
 
 j 
 
 
 
 "n 
 
 a 
 
 rt 
 W 
 u 
 
 o 
 
 1 
 < 
 
 
 
 
 
 
 
 
 
 
 
 ( 
 
 
 
 c 
 .2 
 
 'm 
 
 '> 
 b 
 
 ft 
 
 D 
 ■j. 
 
 < 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 6 Qi 
 
 3 c 
 w 2 
 
 I 
 
 
 
 '' 
 
 
 
 
 
 
 
 b 
 
 eg 
 
 o 
 
 s 
 
 
 
 
 
 3 
 
 
 
 
 o 
 
 a 
 ft 
 
 4-» 
 
 S 
 
 
 
 
 
 . 
 
 
 Total 
 
 of 
 Earning 
 
 for Month 
 
 P*V°M '"H 
 
 
 
 ■ joniv* 
 
 
 
 1 
 
 °"!'P C K 
 
 
 h 
 
 hand portion the amount 
 which results from multiply- 
 ing the hours worked by the 
 machine by this factor rate. 
 The blank may be blue- 
 printed (blue lines on white 
 ground), the machine num- 
 bers, machine rates, and 
 factor rates being written in 
 on the negative so as to ap- 
 pear on all copies. The fill- 
 ing out of the blank is then 
 confined to inserting the 
 hours w r orked, total earnings 
 and making the computa- 
 tions in the factor columns. 
 A Munroe machine will be 
 found useful for this work, as 
 the hours being set on the 
 machine, the alterations 
 necessary in the multiplier 
 for each factor rate are made 
 by turning the handle back 
 and forth till the new multi- 
 plier is rung up in the dials. 
 If only one factor is being 
 worked out, the factor hour 
 rate is set on the keyboard, 
 and the hours worked figure 
 rung up on the dial. The 
 amount in total earnings for 
 month column must, of 
 course, agree with the amount 
 as shown in Manufacturing 
 Journal for that month. 
 
 Having w r orked out the 
 earnings for one or all factors 
 we may now compare the 
 figures with the actual debits 
 t<> the Standing Orders which 
 enter into any one factor. In
 
 COSTING ON METHOD C 373 
 
 all cases the amount in the factor column must be equal to or less 
 than the actual debits per Standing Orders. In general it will 
 only be equal when the shops are working full time. In all 
 other conditions it will be less. How much less will depend on 
 the condition of activity of the shops. 
 
 In the case of the power factor, where power is purchased 
 from outside at a flat rate and the power factor charge has been 
 made on the basis mentioned in the last chapter (where the shop 
 transmission equipment charges are assumed by the power 
 department, and everything is based on a single horsepower- 
 hour rate) it is evident that the decomposition of the machine 
 earnings into factor earnings should show a very close corre- 
 spondence between the amount distributed by machines and 
 the amount debited to the department under examination. 
 If, on the other hand, the factory maintains its own power 
 plant, the cost of power actually consumed would be higher than 
 allowed for in the power factor, and this balance would properly 
 fall into supplementary rate. 
 
 A factor which needs close watching is the individual machine 
 factor, since the amount assigned for repairs to each machine 
 may bear a high ratio to the total factor charge. But in this 
 case, of course, a mere monthly comparison means nothing, since 
 the amount of repairs in so short a period may fluctuate violently 
 as compared with a similar period. The way in which this item 
 can be checked is by keeping a record (through Standing Orders) 
 of the repairs made to each machine, and recording it on the 
 record card (Fig. 42) . Machines that have been under-estimated 
 as to their annual repair bill, or vice versa, will have their repair 
 allowance modified accordingly. 
 
 The yearly examination of amounts charged to the various 
 factors through standing orders, and comparison with the amounts 
 assigned in making up the factor schedules, is the true method 
 of controlling the make up of machine rates. Whatever amount 
 is assigned to a schedule will be distributed by machine rates in 
 strict proportion to the use made of the machines, but if this 
 amount is over- or under-stated, as compared to actual charges, 
 it will mean that supplementary rate (which wipes up all 
 unabsorbed charges at the month end) will have been too high, 
 or too low. This is one reason why supplementary rate balances 
 should not be charged direct to Profit and Loss, unless we are
 
 :;7-l MANUFACTURING COSTS AND ACCOUNTS 
 
 quite certain, by experience, that the factor schedules were cor- 
 rectly made up in the first place. 
 
 Verification of factor schedules is, therefore, the main line of 
 control in Method C. Where the shops are working full time, 
 .lie. imposition into factors now and then will give a very close 
 control of the situation, care being taken to consider the influence 
 of unusually heavy repairs or of seasonal items like lighting and 
 heating. A little experience and familiarity with the details in 
 practice will soon enable a close grip on actuality to be attained. 
 It may be remarked also that this frequent scrutiny of burden 
 items in all their ramifications is one of the most beneficial things 
 for the business, quite apart from its importance in controlling 
 the correctness of machine rates. 
 
 In examining the resulting figures of any decomposition, the 
 viewpoint will be dependent on the consideration that the factor 
 rates represent the department at its maximum condition of 
 activity (without overtime, unless that was specifically arranged 
 in fixing factor charges). Now any less degree of activity will be 
 productive of idle lime, and consequently a lessened absorption 
 of factor expense by machine earnings. It may easily happen 
 that, notwithstanding the lessened activity, no economies in 
 Standing Order items have been effected. In that case, there is 
 no need to decompose the machine rate into factors, since we can 
 compare the actual charges with the factor schedule total, and 
 they will, of course, be about the same. 
 
 Bui if the lessened activity has forced on economies in Stand- 
 ing Order items, then it is important to observe that the amounts 
 In ing distributed by machine rates are not more than the new and 
 lessened total of any factor debit. It general they will be less, 
 because if we face a reduction of say 75 per cent, in shop activity 
 it i~ impossible to suppose that a 75 per cent, reduction of Stand- 
 ing Older item- has been found possible. Therefore, the amount 
 In hi chargi '/ as supplt mentary rate will be the difference between the 
 amount absorbed by machine rates and the lessened total of charges 
 for the month. A specific instance may make this proposition 
 Bomewhal clej 
 
 We v, ill auppose thai a ^iven factor schedule was set up with 
 
 :i total annual charge of $7,200, which would be equal to an aver- 
 
 age "!' 1600 per month. When the shop was working full time, 
 
 decomposition of the machine earnings would give a total earn- 
 
 for thai factor of $600. This would be obvious without
 
 COSTING ON METHOD C 375 
 
 decomposing the rate to see, because we would know it from an 
 inspection of the factor schedule itself. It would simply be 
 one-twelfth of the factor total on the schedule. 
 
 But if we assume that the shop's activity is reduced 25 per 
 cent, and that by strenuous exertions wehave managed to reduce 
 Standing Order charges concerned in the factor by $100, this 
 would leave the debit to the factor $500 for the month, Now, 
 the machine earnings under these circumstances would average 
 about 25 per cent, less than normal, due to shutting down of 
 machines, and 75 per cent, of the standard earnings would be 
 charged to machines rates, which being decomposed, would give 
 us factor earnings of $450. This is still $50 less than the reduced 
 factor debit, and supplementary rate would accordingly take up 
 $50. But if we had not economized at all, supplementary rate 
 would then be charged with the difference between $600 debit 
 ot the factor, and $500 factor share of the decomposed machine 
 earnings, or $100 in all. 
 
 It is practically impossible that economies can overtake the 
 lessened machine earnings due to idle machines, and this implies 
 that in slack times the amounts distributed through machine rates 
 can never be less than the actual debits either to individual 
 factors, as shown by Burden Journal, or to Burden account as a 
 whole. What is true of individual factors and decomposed 
 machine earnings is also true of burden as a whole and machine 
 earnings as a whole. 
 
 The main reliance in controlling the correctness of machine 
 rates must be placed on observing their behavior when the shop 
 is running full time. In this condition, supplemenary rate should 
 approach very closely to zero, and the actual debits to factors 
 as shown by Standing Order costs should agree very closely with 
 the amounts set out on the factor schedules and on which the 
 factor charges to machines were built. Under other conditions, 
 the examinations to be made from time to time will afford security 
 that burden is not being over-distributed, and a little experience 
 and comparison of economies effected, with the amount of various 
 factors as charged through machine rates when decomposed, will 
 go to show that no item of burden is being under-distributed to 
 any noticeable extent. 
 
 It must be remembered that the machine rate has a twofold 
 function: First, to distribute the department burden to work; 
 secondly, to distribute it in proportion as it has been spent on
 
 376 MANUFACTURING. COSTS AND ACCOUNTS 
 
 certain machines. These two aims are distinct. If the determi- 
 nation of rates has been carefully made, there will be very little 
 doubt about the successful performance of the latter function. 
 But to insure that the total burden (or the total of each factor or 
 class of burden) has been correctly stated to begin with is a more 
 difficult matter. It is to observe whether this is so that all the 
 above-mentioned precautions are taken. But at the end of any 
 year, this is a particularly easy thing to find out; because the 
 total charged to any group of Standing Orders forming one factor 
 must equal the amount originally set out on the factor schedule 
 when setting the machine rates. That is the last and final proof 
 of correctness. If such amounts are substantially alike, then no 
 fear as to correctness of machine rates need be entertained. If a 
 discrepancy is found, it means that a new factor schedule must be 
 gotten out with the new figures as its basis, and machine rates 
 altered accordingly. Unless the discrepancy is a gross one, no 
 great harm is done when supplementary rate is charged up to 
 Production Orders. It will merely have had the effect of showing 
 true cost a little higher or lower than it ought to be, and inversely 
 affecting the amount shown as supplementary rate. And on 
 any individual order this error should be a small one indeed.
 
 CHAPTER XXII 
 
 COLLECTING DEPARTMENTAL COSTS 
 
 When costing has 'been carried out on either of the three 
 methods described in former chapters, the stage at which the 
 costing process has arrived may be summed up as follows: 
 
 1. The work in any department will be represented by a set 
 of Production Order Cost Sheets or Component Order Cost 
 Sheets on each of which the cost to date of specific items of the 
 work may be found. 
 
 2. The aggregate of the items inscribed on the set of Cost 
 Sheets will be contained in the Manufacturing account. The 
 Cost Sheets are in fact the subdivision or detail of the balance in 
 Manufacturing account, just as we saw in a former chapter the 
 Stores Item Cards were the subdivision of the balance in Stores 
 account. 
 
 If there are also Plant Addition Orders, their Cost Sheets will 
 be the detail of the balance in Plant Additions account in the 
 same way. 
 
 All these remarks apply to one productive department. There 
 may be several such departments, each containing work in process 
 and each carrying the detail cost of such work to date on a set of 
 Cost Sheets, and a balance in their Departmental Manufacturing 
 account corresponding. 
 
 Further, cases have been instanced in which material is not 
 charged to departments but to a Material account, the detail 
 being recorded on Material Cost Sheets. In this case material 
 ranks as a department. Material account will contain a balance 
 of which the Material Cost Sheets are the item details. 
 
 We have now to consider what happens when an item of work 
 is finished as regards a department, passes out of it, and goes 
 somewhere else. As far as that department is concerned it no 
 longer exists, and steps must, therefore, be taken: (1) to take its 
 value out of the Departmental Manufacturing or Plant Addi- 
 tions account, and charge it to some other account according to 
 what has been done with it; and (2) to withdraw the correspond- 
 
 377
 
 378 MANUFACTURING COSTS AND ACCOUNTS 
 
 ing ( !os1 Sheet, and send it to some other quarter, where it will 
 become the subdivision of the new account. 
 
 Before discussing this further stage of costs, it will be well, 
 however, to obtain a clear picture of the nature of the informa- 
 tion contained in the Cosl Sheets. From what has been said 
 in the chapters en " ( !os1 ing," it will be obvious that on all the three 
 methods the costs obtained are in all cases costs of processes. 
 The data recorded are based on the time spent on a given order 
 by a man, or by a machine, or by both together, Now the way 
 in which this data fan be identified with product will depend on 
 the way in which the orders have been issued. 
 
 If Production Orders alone have been issued, then in each 
 department, there will be a record on one Cost Sheet of all the 
 process work done in that department. If there is only one 
 process, then whatever appears on the Cost Sheet will be the cost 
 of that process. If the order has been issued to several depart- 
 ments we shall have a ( 'ost Sheet in each department showing the 
 cosl of the process carried out by each department. If, then, we 
 collect the Cost Sheets belonging to that Production Order, we 
 -hall have: 
 
 1. Cost of the whole order, subdivided by departmental cost, viz., 
 one process in each department. 
 
 On the other hand, there may be several processes carried on in 
 each department, and our work may pass through all or some of 
 them. In that- case the Departmental Cost Sheet will carry 
 dat a a- to each of these processes, and we shall be able to identify 
 the cost of each individual process by its machine number. 
 If Beveral departments have been engaged on the Production 
 ( >rder, then each Departmental Sheet will carry the cost of the 
 various processes, each identifiable separately. Consequently, 
 if we colled t he \ arious Depart mental Cost Sheets and summarize 
 them, we shall have: 
 
 2. ( "• / of the whole order, subdivided t>y departmental cost, and 
 also by processes irilhin each department. 
 
 This is as fai as we can go by means of Production Orders only. 
 The information gives us t he cosl of work indicated on the order, 
 and of the differenl kinds of work, but it does not give us any 
 information aboul the cost of different parts, should it happen 
 thai the producl in question consists of parts. It is true that 
 in some cases, even this information san be deduced from the 
 of a Production Order, but only if single processes are never
 
 COLLECTING DEPARTMENTAL COSTS 379 
 
 duplicated on different parts. Thus if in a department we have 
 six processes, and two of them are confined to pari a, one to pari 
 b, and three to part c, then, of course, whenever we see a record 
 of these processes on the Production Order we known that certain 
 parts and not other parts are referred to. In this single case, we 
 may say that Production Order costs give us: 
 
 2a. Cost of the whole order, subdivided by departmental cost, and 
 (conditionally) by the cost of process work on parts. 
 
 In general, however, if our product consists of parts which are 
 made separately and subsequently collected and, it may be, 
 assembled or fitted together, it will be necessary to issue orders 
 to cover each separate kind of part. This is effected by the 
 device of Component Orders, each such order dealing with a 
 separate kind of part, although, as in the case of the Production 
 Order, any Component Order Cost Sheet may have a record of 
 several processes on it. When Component Orders are issued, 
 they supersede the Production Order as far as Cost Sheets are 
 concerned, since instead of issuing one Cost Sheet for the whole 
 of a Production Order in any department we issue as many sepa- 
 rate Component Orders as there are separate kinds of parts to 
 be made, and each of these has its own Cost Sheet. Conse- 
 quently, when we collect all the Component Cost Sheets relating 
 to one Production Order, we shall have: 
 
 3. Cost of the xohole Production Order. Cost of each separate 
 component. Cost of each separate process on each component. 
 
 This is the ultimate subdivision possible. No more detailed 
 question about costs can be asked than is furnished by this 
 arrangement of Production Orders and Component Orders. 
 Where parts have to be assembled and fitted together, the final 
 Component Order is a "Fitting" or "Assembling" Order, which 
 records the cost of completing the work and erecting the separate 
 components into a completed article. Where "part" or "com- 
 ponent" is used above, it does not imply single pieces. A 
 Component Order may be for 1, GO or 10,000 pieces, but they 
 must be all exactly alike. 
 
 Material. — Whether or not the cost of direct material is charged 
 to Department Production Orders (or to Component Orders when 
 these are in use) is a matter of indifference as regards the final 
 result. The principal guiding rule will be the possibility of iden- 
 tifying the material with the final subdivision of cost we make. 
 If the product is not composed of parts, then in general it will be
 
 380 MANUFACTURING COSTS AND ACCOUNTS 
 
 better to charge material to Material Cost Sheets, which will 
 rank as Departmental Cost Sheets; that is to say we shall have 
 several Departmental Cost Sheets dealing with labor and burden 
 in each department and one Material Cost Sheet dealing with 
 material for the whole Production Order. This arrangement 
 will answer very well, also, when the material used on different 
 parts is of a specific kind, as, for example, upper leather, sole 
 leather, heels, buttons, etc. in shoemaking, because the identifi- 
 cation of the cost of the material used in any individual com- 
 ponent is plain and not ambiguous. But if brass sheet, steel 
 rod, copper plate, etc. are being issued on an order, and any one 
 of these materials may be used on more than one part or com- 
 ponent, then confusion can easily arise, and it is best to charge 
 such material to Departmental Cost Sheets by providing columns 
 for such data. On the other hand, in some machine manufacture 
 everything is so standardized that a Bill of Material can be 
 made up and the material to be used on each individual part 
 specified. In such cases, when the mere filling out of the issue 
 price of the material provides a classified cost of material on 
 parts, it is unnecessary to go to the trouble of charging material 
 to individual Component Cost Sheets. A single Material Sheet, 
 namely, the Bill of Material itself, together with a record of any 
 odd or sundry material that may have been unexpectedly called 
 for, is all that is necessary. In this case the process cost of the 
 components is contained on the Component Cost Sheets, and 
 the material cost on the Material Sheet. Placing one alongside 
 the oilier, gives the entire cost of the component. 
 
 \V1ki i is t rue of Production Orders is also true of Plant Addition 
 Orders. Component Orders can be issued in connection with 
 these if required, and in general it is better to do so, since in- 
 dustries making their own equipment will usually be of such a 
 nature as to require Component Orders for production. But if 
 the detailed pari cost of such equipment is not required, then a 
 single Production Order worked on in each department will 
 give the total cost of the equipment when all the Departmental 
 Cosl Sheets are collected. Material may be issued to a separate 
 Materia] Cosl Sheet or to Component Orders if these are used. 
 
 There is in fact no greal difference between Production 
 
 Order- and Plant Vddition < >rders as far as costing is concerned. 
 
 are called by different names, because their ultimate 
 
 destination i- different, and, also, as explained in a previous
 
 COLLECTING DEPA R TM EN TA L < '< >S TS 
 
 381 
 
 chapter Plant Addition Orders do 
 not take supplementary rate on 
 Method C. In other respects a 
 Plant Addition Order is a Pro- 
 duction Order, only it is produc- 
 tion for the plant itself, instead 
 of being for sale. It is, therefore, 
 dealt with differently at the stage 
 we have now reached. 
 
 Every month, certain Cost 
 Sheets will be withdrawn from 
 the departmental files, owing to 
 work having been completed on 
 them as far as that department 
 is concerned. These Cost Sheets 
 will contain an amount of detail 
 as to the cost of the Production 
 Orders they represent, according 
 to the way in which orders were 
 originally issued. With this we 
 have no further concern. A Cost 
 Sheet is a Cost Sheet, and repre- 
 sents the cost of a certain definite 
 quantity of work done in the shop 
 on a definite item or items of 
 material. We have now to con- 
 sider the following steps: 
 
 1. The Production or Compo- 
 nent Order Cost Sheet must be 
 withdrawn from the department 
 files, and entered on a Finished 
 Department Orders Journal, Fig. 
 108; and also on the Production 
 Order Cost Summary Sheet, Fig= 
 112. 
 
 2. When all finished orders for 
 the month have been entered on 
 this journal, the Department 
 Manufacturing account will be 
 credited, and a Finished Depart- 
 ment Orders account charged. 
 
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 382 MANUFACTURING COSTS AND ACCOUNTS 
 
 3. The Cost Sheet will now be filed in the cost office under 
 its production number. The aggregate contents of this file 
 at any month end will be equal in amount to the balance standing 
 in Finished Department Orders account. They will be in fact 
 the Item Cards of that account, just as, when still in the de- 
 partment, they were the Item Cards of the Departmental 
 Manufacturing account. 
 
 Finished Department Orders account will thus represent 
 work which lias passed out of certain departments, but which 
 is no1 yet completed as regards the factory. The actual physical 
 location of the parts represented by the sheets in question will 
 depend on circumstances. In assembling industries, the balance 
 in Finished Department Orders account will virtually represent 
 the value of goods in the assembling stores. In other cases, 
 where the work is passed from one department 'to another, the 
 goods represented by the balance in this account will be dis- 
 persed throughout the plant. It will be obvious that in the 
 
 Prod. 
 Order No. 
 
 No.of 
 Sheets 
 
 Description 
 
 Class 
 A 
 
 Class 
 B 
 
 Class 
 
 c 
 
 Class 
 D 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fig. 109. — Finished Goods Journal. 
 
 latter case, we could credit the department parting with the 
 goods and charge the department receiving them. This is a 
 practice thai i- actually followed, but involves complex book- 
 keeping, and it is often difficult to see what advantage is gained. 
 The increasing cost from stage to stage of manufacture is thus 
 shown, it is true, but so it is by the far simpler method now 
 described. It is chiefly useful when product is salable or pur- 
 chasable ae a departmental product, e.g., castings in a foundry. 
 On the right-ham I side of the large folding general diagram, 
 the operations jusl described can be followed out. At the 
 top ie shown a Cos1 Sheel representing a piece of work that is 
 finished ae far as departmenl 5 is concerned. This Cost Sheet
 
 COLLECTING DEPARTMENTAL COSTS 
 
 383 
 
 may be, as already shown, 
 either a Production Order Cost, 
 Sheet, or, where Component 
 Orders are in use, it will be a 
 Component Order Cost Sheet. 
 Its entry on its own Production 
 Order Summary Sheet and on 
 the Finished Department Orders 
 Journal is indicated, and from 
 this journal a credit line is traced 
 to the Department 5 Manufac- 
 turing Journal, on the one hand, 
 and a debit line to the Finished 
 Department Orders account on 
 the other. 
 
 The next stage is reached 
 when all the Cost Sheets con- 
 nected with a given Production 
 Order number have (summarized 
 on a Summary Cost Sheet, Fig. 
 112) been passed through in this 
 way to the debit of Finished 
 Department Orders account. 
 The Production Order itself is 
 now wholly completed, and de- 
 livered to the selling arm. Con- 
 sequently, as will be seen from 
 the diagram, all the Cost Sheets 
 relating to the Production Order 
 are collected, and their total 
 cost (as' shown also on the Pro- 
 duction Order Summary) entered 
 on a Finished Goods Journal, 
 Fig. 109, and charged to a Fin- 
 ished Goods account. There 
 will, in general, be more than 
 one of such accounts, each being 
 devoted to a different line of 
 product. 
 
 It will be obvious from an in- 
 spection of the general diagram 
 
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 384 MANUFACTURING COSTS AND ACCOUNTS 
 
 that, if desired, the crediting of the Departmental Manufactur- 
 ing accounts and the charging of Finished Goods account could 
 take place at one time, thus eliminating the intermediate stage 
 of Finished Department Orders account. The diagram, Fig. Ill, 
 shows this short cut. No credits are made to the Departmental 
 Manufacturing accounts until all the Cost Sheets for a Produc- 
 tion Order are completed. They are then entered as one item 
 in the Finished Goods Journal (Fig. 110), the amounts charged 
 for departmental work being entered in the departmental columns 
 
 Collected Cost Sheet 
 
 of One Production 
 
 Order 
 
 Finished 
 Goods Accts 
 
 Finished 
 Goods Jn'l 
 
 >' 
 
 ^ 
 
 Credits to 
 ■ ^ Dept.Mfg. Acct. 
 
 Fig. 111. — Production Order Costs credited to Manufacturing account 
 and charged direct to Finished Goods accounts. 
 
 at the right hand, and the total cost of the order charged to the 
 finished goods column on the right hand which represents the 
 class of product th.it has been made on the order. Credits to 
 the various departmental accounts arc then made when the 
 journal is totalled, and correspondingly debits are made to the 
 various Finished ( roods accounts. 
 
 The disadvantage of this short cut is that Departmental 
 Manufacturing accounts are not cleared as soon as they have 
 finished work on any order. As long as any part of an order is 
 uncompleted, the amounts standing against that order in every 
 departmental journal must remain, even though the department 
 has long ago finished its portion of the order. In some classes of 
 business, tin- would not he a serious disadvantage, but in other
 
 COLLECTING DEPARTMENTAL COSTS 
 
 385 
 
 cases, where work is complex 
 and consists of large numbers 
 of components, it is a great 
 advantage to be able to know 
 at each month end, exactly 
 the value of work in process 
 in each department. If this 
 is increasing, it means that 
 the department is falling be- 
 hind in its work, whereas if 
 Manufacturing accounts are 
 not cleared until every de- 
 partment has finished, the 
 figures cannot be read in this 
 way. 
 
 Plant Addition Orders. — 
 The completed Plant Addi- 
 tion Orders in each depart- 
 ment having been charged to 
 a Departmental Plant Addi- 
 tions account, a similar pro- 
 cedure to that described 
 above must be gone through 
 to clear these accounts. The 
 same rulings may be used in 
 the journals allotted to plant 
 additions, except that instead 
 of debiting the cost of com- 
 pleted Plant Addition Orders 
 to Finished Goods accounts, 
 they are charged up to the 
 various Plant, Equipment, 
 Buildings and other main 
 ledger accounts on the left 
 hand of the diagram. In 
 many cases, however, this is 
 not done save at half-yearly 
 or yearly intervals. In this 
 case, a Finished Plant Addi- 
 tions account may be set up, 
 and the cost of Completed 
 
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 386 MANUFACTURING COSTS AND ACCOUNTS 
 
 Plant Addition Orders charged to it. Then at the end of the 
 financial period the items contained in this account can be 
 transferred to the Plant accounts concerned by means of gen- 
 eral journal entries. Plant Orders for auxiliary equipment are 
 sometimes transferred to a Production Order, as when special 
 patterns and tools have been made to carry out a special order 
 (see Chap. X, Part I). 
 
 The final stages of costs have now been discussed. The various 
 Departmental Manufacturing accounts have been cleared of 
 finished work, represented in detail by Cost Sheets. When all 
 the Cost Sheets pertaining to an order are collected, Finished 
 Goods accounts are charged with the total cost of the order. 
 These two operations (credit and debit) are sometimes carried 
 out simultaneously but sometimes an intermediate step is inter- 
 calated; by which those portions of an order that are department- 
 ally finished are credited to the department and charged to a 
 general Finished Components account until the whole order is 
 completed. Only then is Finished Goods account charged, and, 
 of course, Finished Components account, or as it has been termed 
 above "Finished Department Orders account" is credited. In 
 either case, whether by a shorter or longer path, the general 
 effect is that work done in the shops is credited to the shops and 
 charged up to the selling arm.
 
 CHAPTER Will 
 FINAL REMARKS ON COSTING 
 
 The entire routine of costing has now been covered. Com- 
 mencing with purchases, we have seen how these are transformed 
 into product. The intermediate stages are many and compli- 
 cated, and, of course, it has been impossible to cover many side 
 issues which constantly arise in practical cost keeping. Bui it 
 is believed that if the student has acquired a thorough grasp of the 
 detail given, and has been able to understand the reasons for each 
 step that has been described, he will not find great difficulty in 
 applying the same principles to any particular case. The great 
 secret of correct cost keeping is departmentalization. This 
 applies throughout all the operations and not merely to the 
 division into actual departments. Every step in the whole 
 process must have its own clearly defined sphere. It must carry 
 the costing operation from one well-defined point to another. 
 This rule can be applied with advantage in making whatever 
 developments are necessary in particular plants. 
 
 Another rule that might advantageously be kept in mind is to 
 set up as few ledger accounts as possible. Ledger accounts are 
 only necessary when they contain balances. Thus, many ac- 
 countants set up large series of Expense accounts, the use of 
 which is, to say the least, not very manifest. The general idea 
 is to provide a basis for reports and returns, but as long as all 
 figures are locked in with the ledger accounts as they are in all the 
 methods described in this work, then reports can be compiled 
 from the assembled figures in the Standing Order Cost Sheets 
 without charging these to separate ledger accounts for the pur- 
 pose. Moreover, statistics taken from ledger accounts are 
 usually too stale to be of much service to the technical ami. 
 This aspect of the cost problem will be discussed in Part III, 
 which deals with "Reports and Returns." 
 
 Auxiliary Equipment. — From what has been described in former 
 chapters it will be understood that, by the issue of properly 
 arranged orders, the cost of any item of product, and any kind 
 
 387
 
 388 MAM FACT (KING COSTS AND ACCOUNTS 
 
 of expense can be separately recorded. In the case of expense, 
 collected through Standing Orders, the Cost Sheets, represent- 
 ing the different kinds are merged at an early stage of operations 
 in a total of departmental burden, and so disposed of, by being 
 spread over Production Orders. 
 
 But Production Orders (with their subdivisions — Component 
 Orders) have two variants: Production Orders proper, repre- 
 senting salable goods, and Plant Addition Orders, representing 
 possibly additions to buildings, new machinery and equipment, 
 etc. Out also frequently representing items of auxiliary equip- 
 ment, the difficulties surrounding which were dwelt on in Chap. 
 X (Part 1). Some additional information must now be given 
 a- to the way in which auxiliary equipment is charged up to 
 production. 
 
 The simplest case is that where such equipment (tools, jigs, 
 patterns, etc.) is going to be used for only one order, after which 
 it will be consigned to the scrap heap. In this case, after the cost 
 of the equipment has been determined through a Plant Addi- 
 tion- Order, the cost of the latter is transferred to the former, 
 being credited from Plant Additions account to Finished -Goods 
 account, and forming part of the production cost of the order as 
 chargeable against sale price to ascertain gross profit. 
 
 Usually, however, no such easy method of dealing with 
 auxiliary equipment will present itself. Its cost must be dis- 
 tributed to production by means of a depreciation rate, and 
 handled through Standing Orders like any other class of ex- 
 pense. Frequently, also, depreciation is not the only charge 
 picked up by such items during their life. Patterns, for in- 
 stance, require storing in proper buildings, tools and jigs also, and 
 in plants of any size, there will probably be attendants whose 
 work is to take care of the equipment, attend to its issue when 
 wanted, and secure its due ret urn. This amounts to the erection 
 of a department or more than one department devoted to such 
 work. And the cost of this department, like that of any other 
 expense department must be prorated over the departments it 
 benefits. Thus the pattern storage will be charged to foundry 
 expense; tool-room Btorage will be prorated over the machine 
 shops; bul where the industry is a simple one, the depreciation 
 of patterns and auxiliaries with t he expense of looking after them 
 and storing them will be charged by classes of goods rather than 
 to any one department. Thus the cost of shoe lasts, printing
 
 FINAL REMARKS ON COSTING 
 
 rolls, and such like must be distributed over the actual work 
 done with each variety, so that a line of goods requiring no ex- 
 pensive extras, does not get charged with such extras. Or what 
 is more frequently the case, a standard line of goods which will 
 use its auxiliary equipment until it is quite worn out, must not 
 be charged with the cost of special equipment used for a variety 
 of product in limited demand. 
 
 Thus is introduced into the accounting scheme what may be 
 termed class burden, that is, burden that is confined to certain 
 classes or kinds of product and not, therefore, distributable by 
 any of the methods hitherto described. Where this type of 
 burden exists a separate Class Burden Journal should be set up, 
 similar to the ordinary Burden Journal but collecting those items 
 that are confined to particular classes of salable goods, especially 
 the depreciation on auxiliary equipment of the kind mentioned 
 above. Standing Orders will, of course, be issued and Cost 
 Sheets kept for the monthly record of all such items, and credits 
 will be made to the main accounts where these are concerned, 
 just as in the case of the ordinary Burden Journal, and various 
 productive departments will be charged, but not in one total. The 
 charge to each productive department will be divided up so 
 that so much is assigned to class A product, so much to class B 
 product, and so on. When the Production Orders are listed in 
 the Department Manufacturing Journal, these separate amounts 
 must be distributed over the orders they belong to, making use 
 of a separate class burden column for the purpose. 
 
 The subject is such a complicated one and has so many 
 variations in practice that, in an elementary work like this, 
 it is impossible to indicate more than the general lines of its 
 treatment. The principal things to be sot up as mechanism in 
 connection w T ith class burden, are : 
 
 1. Some originating document recording the use of the auxil- 
 iary equipment, the order for which used, and the quantity 
 of product resulting. 
 
 2. The Depreciation Schedule should contain the depreciation 
 charge for such item per unit of product as fixed by the technical 
 officers, and thus the correct amount to be charged to the order 
 may be determined and marked on the document. 
 
 3. A Class Burden Journal will list these documents, make 
 the necessary credits to Depreciation account, and charge the 
 Burden accounts of the departments using the equipment.
 
 390 MANUFACTURING costs AND ACCOUNTS 
 
 4. In Manufacturing Journals a special column for class 
 burden will be set up, and in this column the individual charges 
 on the originating documents will be entered against the proper 
 order numbers, and on the corresponding Cost Sheets. In this 
 way the class burden will be carried to the debit of Manufacturing 
 account, and Depart mental Burden account will be credited. 
 
 Depreciation on auxiliary equipment is, of course, a relative 
 term. It docs not imply the natural term of life of the appliance, 
 but its expected useful life. And as a general rule it is safer to 
 base this on the number of times it will be used, that is on the 
 quantity of product it will turn out, than on ordinary time rate. 
 If we have a se1 of shoe lasts, and expect to make 1,000 pairs of 
 shoes from them within a year, after which it is practically 
 certain that the pattern will go out of fashion, then the de- 
 preciation charge should be made 1/1,000 of the cost for each 
 pair turned out, and no attempt made to bring the one year 
 into the problem at all. And in fixing such a rate, a conservative 
 view should be taken, and if there is any question as to the ex- 
 pected life of the appliance the probable minimum rather than 
 the probable maximum should be taken. But the whole question 
 is a very intricate one, and depends for its successful solution on 
 shrewd judgment on the facts of every particular case. 
 
 Departments Using Different Methods. — From what has 
 been said as to the necessity for first departmentalizing all cost, 
 before distributing it to Orders on one of the three Methods A, 
 B, or C, it will be readily understood that we are not obliged to 
 use any one method in all departments. Thus one depart-' 
 menl may do work thai is suitable for costing on A. Another 
 department may contain a set of machines so uniform in char- 
 acter t hat Met hod B is cpiite proper. I >thers again may contain 
 production centers differing widely among themselves, so that 
 Method C is the only safe costing system. Should it happen that 
 a given Production Order is worked on in all such departments, 
 no difficulty arises, since each department's work appears on a 
 separate Cosl Sheet, and provides a complete cost whatever 
 the method of arriving at thai cost. The total of all Depart- 
 mental < losl Sheets will still be the total cost of the Production 
 Order as a whole. Similarly, the work in one department might 
 justify Componenl Orders, while in others no such necessity 
 might arise. This would simply mean that the latter depart- 
 ment- would work to i hi' Production Order number, and pro-
 
 FINAL REMARKS ON COSTING 391 
 
 vide on Cost Sheet for all their work on the Production Order; 
 the other department would not work to the Production Order 
 number but to a series of component numbers, and that de- 
 partment would consequently turn in several sheets as repre- 
 senting their work on the Production Order. No difficulty can 
 arise in combining departmental cost data, since each depart- 
 ment is absolutely independent of every other. 
 
 Spoilage. — From what was said in Chap. IX (Part I) as 
 to Replacement Orders, it will be understood that the column 
 headed "Spoilage" in the Department Manufacturing Journal 
 is intended to take the cost of such Replacement Orders. Their 
 aggregate is then charged to Spoilage account. This account 
 will probably receive debits from all the productive departments, 
 and though the amount standing to its debit at the month end 
 is charged, through Standing Orders and Burden Journal to 
 productive departments, it must not be overlooked that the 
 department making any given debit does not necessarily bear 
 the expense of that debit. The department to which it is 
 chargeable is the department responsible for the spoilage. Thus 
 a piece or component may have passed through several depart- 
 ments, and finally a flaw is discovered, due to a bad casting. All 
 the cost of the Replacement Order through all departments 
 will be chargeable against the foundry. Similarly, if a mistake 
 made in one department is disclosed only at a later stage, the 
 first department is clearly responsible, and must be charged with 
 the whole cost of the Replacement Order. 
 
 Summarizing Production Orders. — A Production Order should 
 in all cases show, in addition to the actual cost of production as 
 collected from the Departmental and Component Cost Sheets, 
 the cost of auxiliary appliances made specially in connection 
 with it, even if not chargeable entirely to the order, and also the 
 cost of spoiled work arising out of the order. A convenient form 
 for summarizing these details, and for assembling the cost of 
 selling alongside that of production, and thus exhibiting net profit 
 will be shown in Part III. Such elaboration is, however, chiefly 
 suitable for industries in which the sold units are large and cost 1 v , 
 as in machine-making. It may, however, be modified for any 
 industry, and when applicable is exceedingly valuable.
 
 CHAPTER XXIV 
 THE INCLUSION OF INTEREST IN COST 
 
 Whether or not interest should be included in cost of produc- 
 tion is a matter on which authorities are wholly at variance. 
 For this reason, though in many instances, columns have been 
 provided for interest entries in blanks described in former 
 chapters, nothing has been said about the inclusion of interest in 
 burden. When it is included, an Interest Schedule is worked out 
 exactly similar to the Depreciation Schedule, Fig. 43, except that 
 instead of "Depreciation Rate" the words "Interest Rate" 
 would be substituted. In many cases, however, the interest and 
 depreciation rates are combined in one by means of an amorti- 
 zation table. The employment of this method belongs, however, 
 to advanced accounting, and cannot be described here. 
 
 Otherwise, whenever the term depreciation has been used in 
 any of the blanks and rulings in former chapters, it may be under- 
 stood that an interest charge calculated in the same way and for 
 the same items as the depreciation charge, but uniform, say 6 
 per cent., for all classes of plant and equipment, may be included 
 also, since both are charges for the use of the equipment. Stand- 
 ing Orders would be issued to cover an interest charge on each 
 class of equipment in each department, just as they are issued for 
 depreciation charge. In fact, as said above, depreciation rates 
 can be arranged so as to include depreciation and interest in one 
 rate. Winn interest is charged, an additional column will be 
 Deeded in Burden Journal alongside that for depreciation, in 
 order to collect credits to Interest account. Debits will, of course, 
 be made to the different departments precisely as in the case of 
 depreciation. Interest thus passes into department burden and 
 es to have any separate existence. 
 
 If interest is included, however, the machine rates used in 
 Method (J will require an interest charge included for each 
 production factor, including, of course, the individual machine 
 factor. Wherever in Chap. XX (Part II) depreciation charges 
 are mentioned, interest charges would be required also, or a com- 
 
 392
 
 THE INCLUSIOX OF INTEREST IN COST 393 
 
 bined interest and depreciation charge. Each machine rate then 
 contains a portion of its total made up of interest, and thus 
 interest is charged to Production Orders in due course. 
 
 The writer's preference is for including interest charges on all 
 buildings, plant and equipment, especially when Method C is 
 employed, since on that method a "weighting" of productive 
 processes according to the amount of capital locked up in their 
 equipment is effected when interest is included. Many excellent 
 authorities, however, do not agree with the writer on this point, 
 though it is only fair to state that, on the other hand, many other 
 good authorities recommend the practice. 
 
 One objection sometimes made by manufacturers deserves con- 
 sideration. It is that when interest is charged in costs, it is very 
 difficult to say how much is included in a given order (or rather 
 it is practically impossible) and, therefore, when hard times de- 
 mand a rock bottom price, it is not easy to make estimates and 
 bids in which the cost of interest is eliminated. This objection 
 is a good one. But, as was pointed out in a previous chapter, 
 machine rates on Method C can be made up in as many variations 
 as desired. One set can be made up with interest for cost use and 
 one set without interest for "hard times" estimating purposes. 
 Even depreciation may also be left out, if desperate measures are 
 necessary, but this is a practice that cannot be recommended, 
 since depreciation is a real cost element, while interest is only a 
 measure of the incidence of capital values. 
 
 The term "interest" used in this chapter must not be under- 
 stood as referring in any way to commercial interest, such as is 
 payable by the firm for money borrowed, either on loans, mort- 
 gages or bond issues. Such interest is a purely financial matter, 
 and has obviously nothing to do with the efficiency of manufac- 
 turing. Interest as defined for our present purpose is a charge 
 made to production for the use of capital. And as capital is used 
 in different amounts by different departments and service, it is 
 only right that a measure of the amount of capital used by each 
 should be included in the cost of its operations, because the firm 
 has to pay interest on that capital, even though it does so under 
 the guise of dividends. And when we come to subdivide produc- 
 tion to its ultimate units as we do in Method C then it becomes 
 increasingly important that the use of capital by such units, 
 either directly as a charge for the capital value of the machine 
 or production center, or indirectly by including interest in the
 
 394 MANUFACTURING COSTS AND ACCOUNTS 
 
 cost of service departments such as the power plant, shall form 
 part of cost. 
 
 Otherwise, if we have two alternative processes, one employ- 
 ing little machinery, and the other employing very costly 
 machinery, no real comparison between the two can be made 
 unless we weight them both with their proper share of interest for 
 the relative amounts of capital they employ. 
 
 Interest, therefore, to sum up, is a charge made to non-pro- 
 ductive and productive departments, through Standing Orders, 
 for the use of capital, and is, of course, in proportion to the amount 
 of capital locked up in various forms as enumerated in the De- 
 preciation or Interest Schedules. It is a matter of option whether 
 it is included in costs; but if it is not, some of the advantages of 
 the more advanced methods of costing are lost. Whether there 
 arc disadvantages that counterbalance its inclusion on this ground 
 remains at present a matter of opinion.
 
 PART III 
 FACTORY REPORTS AND RETURNS 
 
 Note. — The following pages are the revised substance of a series of 
 articles published in the American Machinist in September, 1915. Though 
 primarily applicable to machine shops, and to costing on Method C the 
 data covered in the reports and returns described will be necessary, with 
 modifications, in nearly all manufacturing plants. In some, of course, 
 considerable extension will be necessary, some productive departments 
 requiring specially designed returns to bring out points of technical im- 
 portance, such as wastes; the proportion of "good" tonnage to total tonnage 
 in foundries; and many others items of a special character. All such 
 returns should be so arranged that they can be placed before the right 
 officials promptly, or their value will be greatly discounted. 
 
 395
 
 CHAPTER I 
 THE NATURE OF REPORTS AND RETURNS 
 
 It is not uncommon to find a certain amount of friction 
 existing between the accounting department and the technical 
 officials in a large plant, due to the fact that cost systems have 
 several uses, and are very often not designed to give prominence 
 to more than one of such uses at one time. Thus a system 
 may be quite satisfactory to the president or proprietor of a 
 business, less satisfactory to the superintendent and estimating 
 department, and a mere nullity as regards shop officials. Con- 
 versely, some systems with which everyone in the shop is per- 
 fectly satisfied, and that give fair satisfaction to the super- 
 intendent, may provide results that are quite untrustworthy and 
 inconvenient from the viewpoint of the general accountant, and 
 of the president or executive. 
 
 This is because the shop wants its data red hot, and will 
 welcome any method that provides it, while it is quite uncon- 
 cerned as to the later fate of the statistics or how they arc worked 
 up. The higher officials on the other hand do not want to be 
 overwhelmed with detail but want accurate results assembled 
 in a form that their significance can be quickly grasped. The 
 higher the position of the official the more general is the type of 
 information he requires, but also the clearer and more systematic 
 must be the grouping and presentation. 
 
 As expenditure on orders, both standing and productive 
 begins in the shops, we shall consider first what the shop fore- 
 man wants to know, leaving the other officials till later. 
 
 What the Foreman Should Know. — The foreman is concerned, 
 first and foremost, with the cost of jobs. A job may be defined 
 as one process on a Production Order, or if Component Orders 
 are in use, as we shall assume they are, then a job is one process 
 on a Component Order. It is the foreman's business to see thai 
 jobs are done at a cost not exceeding former or standard cost, 
 and as dozens of jobs are being finished daily some mechanism 
 must be set up to bring to his attention only the exceptional job, 
 
 397
 
 398 MANUFAi TURING COSTS AND ACCOUNTS 
 
 which has rust more or less or is costing more or less than was 
 expected. 
 
 For this information to be of any use to the foreman he must 
 have it promptly on the completion of the job, or if the job is 
 a long one, on the completion of some allotted portion of it. 
 In practice this mean- not later than next day. 
 
 Further, it is most desirable that the information should be 
 in very concrete form. A mere abstract statement conveys 
 little to a busy man surrounded with a multitude of detail. He 
 must be able to see and handle the prime records — the original 
 time notes, dips or card-, and all the information they bear. 
 
 With this information before him, and the man at hand 
 who did the job no longer than yesterday, the foreman will be able 
 to lav his finger promptly on the reason for the exceptional cost. 
 Unless he has red-hot data, this will be more and more difficult 
 as time goes on, and his investigation will become merety per- 
 functory, and he will regard the duty of making it, if it is forced 
 on him under such circumstances, as a nuisance. But with 
 prompt report to him, backed by the original documents in the 
 case, he will have but little difficulty in assigning the correct 
 reason for the exceptional cost. 
 
 When the cause has been assigned, it must be recorded for 
 future reference. A register of extra costs classified by causes 
 musl be kepi up, and this will form the basis of improvement as 
 regards such causes as are remediable either by him, or by some 
 higher authority. 
 
 Watching Idle Machines.- — The next thing that it is important 
 for the foreman to watch closely is the idleness of machines. 
 From adequate time notes, the working hours of each machine 
 '•an be obtained by a quick sorting and aggregating. Where 
 machine rates are in use the money value of machine earnings 
 is also easily found. By a simple tabulation on a properly 
 tied blank, a running record is kept of each machine's work- 
 ing time, and by deducting the day's total from standard time 
 and earnings, the day's loss due to idle machinery is made 
 visible to the foreman each morning. This, again, is a kind 
 of information thai is particularly useless 2 or 3 weeks or a 
 month after th< facts have passed into history. What the 
 foreman want- to know is, "How were my machines occupied 
 yesterday?" not how they were occupied at some past period. 
 lb mould be able to cast his eye over their earnings orworking
 
 THE NATURE OF REPORTS AND RETURNS 399 
 
 time day by day for the past few days, so thai be can Bee how 
 things are going. 
 
 Balance of Work in Hand. — Next, he wants a good idea of how 
 the work is coming on — whether he is keeping up with it or falling 
 behind. Is work piling up half finished in the shop, or is if 
 being carried through in a steady stream? Closely connected 
 with this information is the total of the pay-roll from day to 
 day, and its division into productive and non-productive work. 
 
 At the end of each day there will be a certain volume of un- 
 finished jobs (work in progress) in the shop. To this is added 
 today's productive wages, and from it is deducted the wages on 
 jobs finished this day. The resulting amount is the volume 
 of wages on work in hand to be carried forward tomorrow. 
 This figure, representing the volume of work in the shops each 
 night, is of value to the foreman, provided he gets it day by day. 
 If it is going up while productive wages remain steady, it shows 
 congestion of half-finished work. A little familiarity will make 
 this a highly significant figure to the foreman. 
 
 But this does not tell him how he stands in relation to orders 
 in sight. This information cannot always be provided in definite 
 form. It can be furnished only in the case of work that is 
 sufficiently standardized to allow the expected or standard cost 
 to be placed against each job as and when it is handed to the 
 shop. When this can be done, then the total expected cost of 
 each day's jobs will be added to the expected cost of all jobs in 
 hand, and each day's completed jobs will be deducted at cost, 
 leaving a balance of unexecuted orders as at each night. Every 
 morning, therefore, the foreman will have a figure representing 
 orders on hand and will be able to take measures as to overtime, 
 extra help, etc., on a basis of actual figures. 
 
 Daily Records of Spoiled Work. — Another matter that should 
 be brought to the foreman's attention daily is the "spoiled work." 
 This should receive his attention in the same manner as excep- 
 tional jobs, previously mentioned. His opinion as to the cause 
 of each item should be indorsed on the record, and a tabulation 
 by causes posted up against men, bad castings, or other visible 
 causes. 
 
 Indirect or Service Expense. — We may now consider indirect- 
 expense items. The foreman is not interested in the large ques- 
 tion of expense save at the points at which his responsibility is 
 incurred. A very simple return will, therefore, satisfy all his
 
 hid MANUFACTURING COSTS AND ACCOUNTS 
 
 needs. He is interested, first, in expense items incurred in his 
 own shop and, therefore, under his own control, and secondly, 
 in expense labor and material charged against his shop by other 
 departments. 
 
 A tabular blank should be provided listing all the usual items 
 of expense, including repairs of all kinds, and work done by other 
 departments should be shown separately. Every week the charges 
 against each item should be inserted in the proper column, so that 
 comparison with previous weeks may be easily made. A few 
 minutes' study of this return will suffice to show the foreman how 
 he stands on each item under his control, and whether he is being 
 fairly charged by other departments with work done for him. 
 
 Workman's Efficiency Record. — The daily returns of excep- 
 tional jobs and spoiled work will contain items that go against 
 sundry workmen. A record should, therefore, be kept for each 
 man, to include reference to all such losses, and also his bonus 
 earnings, late attendance, and other data against him or in his 
 favor. With properly designed methods such a record can be 
 compiled at little expense, and will be first-hand evidence of each 
 man's value. 
 
 These are the principal matters with which the foreman is 
 concerned, and which he is entitled to expect from any cost sys- 
 tem that pretends to be efficient. He may require more" than this 
 in some shops, because the status and duty of a foreman vary a 
 good deal, but in few shops should he be asked to put up with less. 
 We have now to consider the viewpoint of other officials. 
 
 What the Superintendent Requires. — The superintendent's 
 viewpoint is quite different from that of the foreman. He is 
 not so much interested in details, but more in broad results. 
 Consequently, he does not require such red-hot and up-to-the- 
 minute information as the foreman. But he wants some of it 
 day by day also. 
 
 Just as the foreman is interested in the cost of jobs, so the super- 
 intendent is interested in the cost of orders. An order may be 
 defined as a collection of individual jobs or components, such as a 
 machine, erected, or a thousand fittings which have passed 
 tlirough several departments. It is the superintendent's business 
 t' aee that orders are turned out at an expected or standard cost 
 and that they are not being delayed in their passage through the 
 plant. A proper system of cost accounts should secure these two 
 kinds of information at one and the same time. As every depart-
 
 THE NA T I ' R E ( )F h' F.I '( ) R TS AND R /•: TURNS I ! 
 
 mental job is finished, it should appear on the superintendent's 
 record and thus vouch for itself as to expected cost and expected 
 date. Just like the foreman, the superintendent is interested 
 only in the exceptional cases, but he is not interested in the same 
 way. The questions he will ask himself are : Is there any serious 
 delay on any item of this order? Is there any serious or general 
 increase of cost on this order? 
 
 Control of Orders. — The superintendent's control of orders 
 should be based on a "master schedule" listing all the different 
 components belonging to an order, and against each component 
 all the different processes to be carried out on it. A space will 
 also provide for the weight and cost of castings and forgings and 
 other material against each component. Standard or former 
 costs being stated against each process, the general condition 
 of the order as regards completion and its general standing as 
 regards increase or decrease of cost, will be visible from inspec- 
 tion at any time, provided finished jobs are posted daily to it. 
 He will also see whether components are being hung up for want 
 of material, and whether material has been issued in excess (as, 
 for example, in the case of a spoiled part). As soon as all the 
 spaces are rilled up, the cost of the whole order will be known. 
 This should be the day after completion. 
 
 Department Service Expenditures. — Apart from cost of indi- 
 vidual orders, the superintendent is chiefly interested in the effi- 
 ciency of departments. It is he who should have a close grip on 
 indirect expense, and he requires, therefore, much more detail 
 than the foreman in this respect. Expense will be of two kinds — 
 Standing Orders — the ordinary items arising from the pay-roll, 
 small repairs, regular issues of stores, etc., and specially author- 
 ized items such as extensive repairs that are carried out on special 
 Standing Orders. All expense will be classified according to the 
 purpose for which expended. For example, all expenses relating 
 to buildings will be classed under buildings, all relating to power, 
 including fuel, wages, repairs, etc., under power. Other classes 
 will be handling of stores and shop transport of materials ; super- 
 vision; organization; operative machinery. This classification 
 will be effected by the schedule of Standing Orders as explained 
 in Chap. XII (Part II). 
 
 "Exceptional" Expense Items. — Each Standing Order item will 
 be budgeted or forecasted, and actual expense will be placed along- 
 side each item. Any departure from expected cost of an item 
 
 26
 
 402 MANUFACTURING COSTS AND ACCOUNTS 
 
 will be called to the superintendent's attention, just as the wages 
 cost of an exceptional job was called to the foreman's attention. 
 This will be done each week, and the items tabulated on a large 
 sheet carrying a series of weekly columns, so that the tendency 
 of any item to increase will come under constant observation. 
 
 Departmental Efficiency. — Departmental efficiency in various 
 directions will be the principal remaining item to come under 
 the notice of the superintendent. This may be divided into 
 three classes — (1) as to men, (2) as to machines, (3) as to 
 wastes. 
 
 Information as to the first class is tabulated from the finished 
 jobs already scrutinized by the foreman with his indorsement 
 of the reasons for increased cost. Jobs will be tabulated under 
 their reasons, so that the loss or gain for each such reason can be 
 reckoned up in a total. Each item will be recorded on a columnar 
 statement, so that the increase or decrease against each reason 
 <an be compared. Thus, we may have a constantly increasing 
 amount under the heading of "Job Interrupted for Urgent 
 Work," which would be unfavorable and demand inquiry, or we 
 might have in one department a much higher ratio of increased 
 cost due to breakdowns. Whatever the classification, scrutiny 
 is applied as to increase or decrease of each item in each shop, 
 and also comparison is made as between different shops each 
 week. When this is done whatever unfavorable conditions may 
 develop cannot escape notice very long. 
 
 As regards the second class, the machine-hour value of lost 
 time due to idle machines is tabulated for each shop in weekly 
 columns. Comparison of one shop with another and one week 
 with another is easily made, and any undue increase of this item, 
 not warranted by slackness of business, is kept in view. 
 
 In the third class, that of wastes, the superintendent will have 
 a record showing the amount of spoiled work for each shop, 
 classified by reasons. These will also be tabulated in weekly 
 columns, so that different shops can be compared together, and 
 each shop can be observed from week to week. 
 
 Power-house efficiency will be the subject of special technical 
 reports, which, coupled with the above segregation of all expendi- 
 ture on the power plant for whatever cause, should give a close 
 grip on this item of expense. 
 
 Witli these returns made promptly each week, the superin- 
 tendent will be in a position to turn the searchlight on any point
 
 THE NATURE OF REPORTS AND RETl RNS 403 
 
 of weakness that may develop, without losing himself in detail 
 or trying to overlook everything at once. 
 
 What the Executive Wants to Know. — The higher we mount 
 the official ladder, the more general become the data necessary 
 and the longer the interval at which tabular statements are 
 required. The executive's interest in Cost accounts, as such, is 
 comparatively small. His viewpoint is that of the financial 
 outlook. He wants to know what is going into the business and 
 what is coming out. Generally speaking, monthly returns will 
 provide all the information he requires. Of course, all 1 he sources 
 of detail information already described are also open to him. 
 
 The most satisfactory plan of control is that of the budget. 
 This is, in effect, a forecast of the main operations of the business, 
 month by month, based on previous experience. All principal 
 outgoings such as pay-roll, stores purchases, taxes, insurance and 
 depreciation, are listed, and their expected amount set out in the 
 different monthly columns. Another set of items is expected 
 balances, such as stores in hand, work in process, cash on hand 
 and at bank, accounts owing by the firm and to the firm; while 
 a third set consists of expected sales in each line of goods manu- 
 factured, sales expense, including advertising, etc. The main 
 movements of cash in the business are thus scheduled, and 
 against each item the actual amounts expended, received 
 or in hand will be entered each month for comparison. Value 
 of orders received, executed, and balance on hand is also listed. 
 
 Undue and unexpected increases or decreases in any item and 
 their amount and significance are thus immediately seen. Thus, 
 if the balance of stores in hand or of work in process is rising, 
 without a corresponding movement in orders received, something 
 is wrong. It can be seen at a glance if collections are falling 
 behind normal, if sales expense bears a just proportion to results, 
 if any line of product is falling off in orders, or is becoming con- 
 gested in the shops, if indirect expense is increasing, if repairs are 
 unusually high or low — in short all the significant movements 
 of the business are focussed and compared with the experience of 
 previous years. 
 
 Under the head of the executive department the question of 
 estimating may be considered. As the records already describe I 
 under the heads of foreman and superintendent give the ultimate 
 detail possible as to every part manufactured and as to every 
 machine or group of articles made, the basis of estimating will
 
 nil MANUFACTURING COSTS AND ACCOUNTS 
 
 be full and complete. The only thing to be discussed is the 
 influence of idle time, or half-full shops, on the cost of production 
 and, therefore, on the price which should be quoted to get new 
 business. This, however, is a theoretical matter, or one of policy, 
 and cannot be gone into here. All the necessary data for decision 
 will, on the other hand, be found at hand in the records provided 
 for. 
 
 What the Proprietor Wants to Know. — The proprietor, or 
 whoever represents him in a corporate business, is mainly inter- 
 ested in one thing — profits. He is also interested in the condition 
 of his property, its liabilities and the quick and fixed assets that 
 offset this liability. Both these wants arc fully met by the pro- 
 vision each month of a full Balance Sheet of assets and liabilities, 
 and a Profit and boss account. With a system of accounting 
 designed to give the information described, there is no reason 
 why such a Balance and Profit and Loss account should not be 
 prepared every month, at no more expense than the filling in of 
 the figures on a printed form. This is in fact most desirable, for 
 it is the final test of the general accuracy of the returns. Returns 
 that will not balance do not comply with the dictum of "safety 
 first." If the accounts are arranged properly as described in 
 former chapters, each stage should be built up in more and more 
 general terms from detail that was verified at the beginning. The 
 Balance Sheet should thus be the final coping stone that com- 
 pletes the edifice and makes its correctness visible to the eye. 
 
 In the remaining chapters some of these arrangements will be 
 described in greater detail.
 
 CHAPTER II 
 REPORTS AND RETURNS FOR THE FOREMAN 
 
 There is probably more than a grain of truth in the suggestion 
 that some of the more highly elaborated modern systems would 
 never have been invented if every foreman had always been 
 provided with what he wanted to know at the time he wanted 
 to know it. By whatever name he is called, there must be some- 
 where a man who is responsible for operative efficiency, and the 
 more this man is in control of the situation, the more flexible will 
 be the adjustment of the shop to the unexpected. It is not our 
 purpose here to discuss how far "planning" should go. 1 Plan- 
 ning is specifying in advance all that can be specified, but its 
 degree of development must obviously depend entirely on the 
 kind of work that is being done. But specifying in advance is 
 not doing the work, though sometimes spoken of as if it were. 
 Someone has got to see that the work is actually done, has got 
 to nurse and shepherd it, and this man is called, for the purpose of 
 this article, a foreman. Now the question is, What does he 
 want to know, and when? 
 
 In a previous chapter this question was very briefly answered. 
 In the present chapter the methods necessary to provide the 
 information will be described. There will be no attempt to 
 describe a complete system of Manufacturing accounts, but 
 only so much of such a system as the foreman is concerned with. 
 
 The first step is to provide for recording the time of men and 
 machines on work. There are literally dozens of methods of 
 doing this, some of them involving complex and expensive 
 appliances. The problem, however, is simple. It is to have 
 accurate record of the time at which each job was changed, and 
 to so arrange, first, that the total hours accounted for check up 
 with the gate time for each man, and then, secondly, that the 
 verified details can be rapidly grouped in any way desired. 
 Further, the original records should be assembled so that they 
 
 1 For a discussion of planning and other details of organization, see the 
 author's "Science and Practice of Management" (New York, 1914). 
 
 405
 
 406 MA N I FA ( TIRING COSTS AND ACCOUNTS 
 
 are always available for reference. A simple and effective plan is 
 given here, which has worked well in practice, is easily under- 
 stood and possesses the advantage of quick results and easy 
 reference to the original record at any time. 
 
 Time on Jobs.— In Chaps. XVIII and XIX (Part II), Figs. 84 
 and 95, were figured two varieties of Time Sheet, one suitable for 
 Method B and the other for Method C. In the ensuing pages we 
 shall assume that Method C is in use. Such Time Sheets should 
 be kept and filled out by a job clerk in telephone communication 
 with the foremen and gang bosses, who give out and pass on 
 jobs at the various machines. "Whenever a job is changed, the 
 order number- and other details are telephoned to the clerk, 
 who makes the entries, noting the exact time. 
 
 This Time Sheet is usually a thin card, and each different 
 class of operation, say turning, milling, shaping, etc., has a 
 different color appropriated to it. The card is divided by thick 
 rules, the space between each corresponding to the record of one 
 job. Such a division is called a "section," because the card 
 is <-ut up into sections at a certain stage. The smaller division 
 at the top is called a "stub." 
 
 The ruling of each section is a matter depending on the nature 
 of the work. The sample shown was used in a plant making 
 heating apparatus and steam fittings, thus including rather 
 heavy pieces and also small pieces in lots up to a hundred in 
 each. In special cases modified rulings are used, as, for ex- 
 ample, in pattern shops, core shops, foundries, etc., and for 
 laborers. 
 
 Ai -tailing work, a blank card is appropriated to each man 
 and his name, check number and machine number are entered 
 on the top Bection, called the "totaling stub," as this ultimately 
 goes to the pay-roll clerk. Then the time of starting the first 
 job is entered in thi space "Began," also the order number and 
 piece number, and when necessary (in some shops) a brief descrip- 
 tion of the work, such as "facing boss" or "drill and tap for 
 
 3crew." 
 
 Winn the job is finished, the job clerk enters the time in the 
 " Finished" space and also in the "Began" space of the next sec- 
 tion, and also the order and piece number of the next job. This 
 is all he lias to do. Only when the workman proceeds to a new 
 job does be have to make an entry, except that at night he enters 
 the time in the "Finished" -pace on the last section used.
 
 REPORTS AND RETURNS FOR FOREMAN t07 
 
 Whoever passes the work telephones the number of pieces 
 "good" and "bad" to the job clerk, who makes entries in the 
 space provided. This is the signal that the job is finished as far 
 as that operation is concerned. Fig. 113 shows the condition of 
 the card as it leaves the job clerk at the end of the day. 
 
 The next morning the shop clerk lakes the cards and sorts 
 them into order of the men's numbers. He is provided with two 
 series of small rubber stamps, one giving men's numbers and their 
 wage rates and the other giving machine numbers and their 
 machine rates. These stamps are so made that rates can lie 
 
 Machine 
 
 Man's 
 
 Name 
 
 Check No. 
 361 
 
 Mach No. 
 26 
 
 P.W. 
 
 
 Hra. 
 
 Wages 
 
 Mach. 
 
 Shop No.l 
 
 A. Williams 
 
 
 
 Began 
 S.OO 
 
 Order No. 
 1001 
 
 Job 
 Turn Levers 
 
 Good 
 3 
 
 
 Man 
 
 Ilrs. 
 
 Wages 
 
 Mach. 
 
 Fin. 
 12.30 
 
 Comp No. 
 7320 
 
 Bad 
 
 1 
 
 Mach. 
 
 Began 
 12.30 
 
 Order No. 
 1921 
 
 Job 
 
 Good 
 1 
 
 
 Man 
 
 Hrs. 
 
 Wages 
 
 Mach. 
 
 Fin. 
 6.00 
 
 Comp No. 
 82 63 
 
 
 
 Bad 
 
 Mach. 
 
 Items in Bold Face Type are those Inserted by the Job Clerk 
 
 Fig. 113. — Time Card as filled out by job clerk. 
 
 changed when necessary without destroying the stamp. Each 
 stamp frame has a pad of different ink, say red for men and green 
 for machines. They give impressions thus : 
 
 361— 25c. 
 
 L26— 20c. 
 
 reading "Man number 361, hourly rate 25 cents" and "Lathe 
 number 26, hourly rate 20 cents." They are so arranged in the 
 holding frame that the figures can be read on the wood lops like 
 lines of print, so that any number can be picked out unhesi- 
 tatingly. 
 
 The clerk takes the first card, picks out the man's stamp cor- 
 responding, and stamps the impression, first on the totaling stub 
 and then on all the other sections that have entries on them. 
 This operation is then repeated for the machine concerned. 
 Both these operations take place more quickly than they can be 
 described. Verification is by observing that the impressions on 
 the totaling stub correspond with what the job clerk has written
 
 108 MANUFACTURING COSTS AND ACCOUNTS 
 
 there. We are then sure that all the other sections on that card 
 have proper rates on them. 
 
 Checking Up with the Total Time. — The next step is to make 
 sure thai the tale of work as shown by the Time Card does really 
 correspond with the time the man has actually been at work as 
 shown by the gate time. Here again there are all kinds of elab- 
 orate arrangements that may be used to ascertain gate time. We 
 cannot discuss this question here. Whatever system is used 
 should be able to do one thing, namely, to permit the gatekeeper, 
 as soon as the last man has passed the gate, to prepare without 
 delay a list of men and the total hours they have worked. The 
 list , of course, may be printed and the time rapidly rilled in by the 
 pen. The main thing is to have it done swiftly and accurately the 
 same night, so that a list is ready for each shop clerk early next 
 morning, covering all his men. The same list may be made to 
 last a week or longer, as it is free long before the end of the 
 working day and may be returned to the gateman. 
 
 The shop clerk takes his Time Cards, which are already in 
 order of men's numbers, one at a time, adds the hours shown 
 by the sections, and places the total on the totaling stub. Then 
 he compares the total thus shown, with the gate time as shown 
 by the gateman's list. If there is any discrepancy, he goes into 
 the shop and interviews the offender there and then. On first 
 putting such a system into work, many discrepancies will be 
 found, but patience and perseverance will soon improve matters, 
 and the men will gel to be careful about odd quarters, usually 
 due to coming late, that they have missed reporting to their 
 foreman or gang boss, when he telephoned the time of com- 
 mencing the firsl job to the job clerk. 
 
 When this is all done, we are sure that our job time is correct, 
 and the troubles of that day are behind us, as far as time is 
 concerned. 
 
 Totaling the Stubs. The next step is to extend the wages and 
 machine earnings on each section and on the totaling stub. This 
 ifl best 'lone by means of a "ready reckoner," (see Fig. 51) which 
 should be a small book simply giving a separate hourly rate on 
 each page and a series of figures representing the value of any 
 number of hours and quarters up to the highest likely to be 
 worked in one day. If higher rates are paid for overtime, a 
 separate column can contain these figures also. One reading 
 for each job should be all that is necessary. Such books can be
 
 REPORTS AND RETURNS FOR FOREMAN U)9 
 
 easily made up by the drafting room and blue-printed. I do 
 not know of any really compact or simple book of the kind on 
 the market. There are many full of unnecessary elaboration 
 and of inconvenient dimensions. 
 
 Having extended all the sections on a card, the next step is to 
 verify the total by adding up the working sections on an adding 
 machine and seeing that they agree to a cent with the total on 
 the totaling stub. Usually they will be a cent or so out, due to 
 quarter- or half-hours. One of the sections must be altered so 
 that the total of all-job-timc agrees with pay-roll earnings and 
 machine earnings on the totaling stub. This is important, so 
 
 Machine 
 
 Man's 
 A.Wil 
 
 Name Check No. 
 liams 361 
 
 Mach No. 
 26 
 
 P.W. 
 
 361.25c- 
 
 Hrs 
 
 Wages 
 2.25 
 
 Mach. 
 1.S0 
 
 Shop No.l 
 
 L26-20C 
 
 9 
 
 Began 
 S.OO 
 
 Order No. 
 1061 
 
 Job 
 Turn licvers 
 
 Good 
 
 1 
 
 P.W. 
 V 
 
 Man 
 361-25c 
 
 Hrs. 
 
 Wages 
 1.12 
 
 Mach. 
 90 
 
 Fin. 
 12.30 
 
 Comp No. 
 7320 
 
 Bad 
 
 Mach. 
 L26-20c 
 
 Began 
 12.30 
 
 Order No. 
 1921 
 
 Job 
 Turn Fin 
 
 Good 
 3 
 
 V 
 
 Man 
 361-25c 
 
 Hrs. 
 4H 
 
 Wages 
 1.13 
 
 Mach. 
 90 
 
 Fin. 
 6.00 
 
 Comp No. 
 8263 
 
 Bad 
 
 1 
 
 Mach. 
 L26-20c 
 
 Note that the Odd Cent in Wages has been Adjusted on the Lower Job 
 Fig. 114. — Time Card with all entries complete. 
 
 that absolute balance can be obtained in the accounts later. 
 When this is done we are sure that job time is locked into gate 
 time and into pay-roll (see Fig. 114). 
 
 Record of Machine Time. — Before slicing up the Time (aids 
 into sections it is usually convenient to take off the machine 
 time and tabulate it. A printed list of all machines in the shop, 
 with their normal days work and earnings is provided thus: 
 
 Mach. No. 
 181 
 
 Kind 
 36" Mill 
 
 Rate 
 15 
 
 Full Hours 
 10 
 
 Earnings 
 1.50 
 
 Columns are provided for each day, in which the actual hours 
 and earnings for each machine are entered. Each day's hours 
 and earnings are totalled and compared with standard hours and 
 earnings, showing loss due to idle machines. The individual 
 machines at fault can be indicated by a tick at the time of making
 
 mi MANUFAi TURING COSTS AND ACCOUNTS 
 
 
 
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 the entry. The figures for 
 entering are taken from the 
 totaling stubs where they are 
 already summarized (see Fig. 
 115). 
 
 Grouping the Details. — We 
 are now ready to consider 
 how the details of jobs, which 
 are contained on the sections 
 giving hours, wages and ma- 
 chine charges on each job, 
 shall be most conveniently 
 grouped together, so that all 
 the work on one piece or 
 group of pieces and all the 
 work on various expense jobs 
 or services may meet together. 
 The quickest way of doing 
 this is by dissecting the Time 
 Cards and sorting the sec- 
 tions according to their Pro- 
 duction Order numbers, or 
 Standing Order numbers in 
 the case of expense work. 
 This is rapidly done by a 
 paper cutter with a suitable 
 guard. The Time Cards are 
 sliced up into sections, and 
 then these sections are sorted 
 in properly designed trays, first 
 to thousands, then to hun- 
 dreds and later to tens and 
 units. The totaling stubs 
 are sorted out at the first sort, 
 and handed to the pay-roll 
 clerk or department, along 
 with the gate time report, 
 which is returned to the gate- 
 man after checking with the 
 stubs. We do not need to 
 follow these stubs further.
 
 REPORTS AND RETURNS FOR FOREMAN 111 
 
 All yesterday's work of the shop is now sorted into Production 
 Order numbers, and Standing Order numbers. Each component 
 will be represented by from one to four or five sections. Each 
 Standing Order will be represented in the Bame way. How 
 shall the information therein contained, which is not only veri- 
 fied information, but also information in the ultimate detail, 
 be made available for reference? 
 
 Summary of Wages. — The first step is to add, with a machine, 
 all the sections bearing work order numbers and enter their total 
 
 Dent. 
 
 
 Week Enrlino- 19 
 
 
 
 
 
 Item 
 
 Thr. 
 
 Fri. 
 
 Sat. 
 
 Sun. 
 
 Mon. 
 
 Tue. 
 
 Wed. 
 
 Week 
 Total 
 
 Productive Wages: 
 
 
 
 
 
 
 
 
 
 Wages, Ordinary 
 
 
 
 
 
 
 
 
 
 Wages, Overtime 
 
 
 
 
 
 
 
 
 
 Bonuses 
 
 
 
 
 
 
 
 
 
 Total Productive 
 
 
 
 
 
 
 
 
 
 Expense Wages: 
 
 
 
 
 
 
 
 
 
 Building Repairs 
 
 
 
 
 
 
 
 
 
 " Cleaning 
 
 
 
 
 
 
 
 
 
 " Sundry 
 
 
 
 
 
 
 
 
 
 Power Equipment Repairs 
 
 
 
 
 
 
 
 
 
 Oiling 
 
 
 
 
 
 
 
 
 
 Cranes, etc., Repairs 
 
 
 
 
 
 
 
 
 
 » " Operating 
 
 
 
 
 
 
 
 
 
 Supervision 
 
 
 
 
 
 
 
 
 
 Organization ( Clerks ) 
 
 
 
 
 
 
 
 
 
 Machines, Repairs 
 
 
 
 
 
 
 
 
 
 To Other Departments 
 
 
 
 
 
 
 
 
 
 Total Expense 
 
 
 
 
 
 
 
 
 
 Total Payroll 
 
 
 
 
 
 
 
 
 
 Fig. 116. — Daily record of wages expended in shop. 
 Note. — The classification of Expense Wages will follow the schedule of 
 Standing Orders. 
 
 opposite the lines on the blank Fig. 116; namely, productive 
 wages, ordinary and overtime respectively. Sections reporting 
 bonuses earned, which come from another source to be mentioned 
 presently, are also added together and entered. These three 
 items form the total of productive wages for the day. 
 
 Next, the sections bearing Standing Orders are added, each 
 order number separately, and the result is entered opposite the 
 proper line, such as "cleaning buildings," "repairing machines."
 
 412 MANUFACTURING COSTS AND ACCOUNTS 
 
 The examples given will, of course, be varied according to the 
 actual shop wants and will follow the Standing Order system in 
 use. Amounts charged to other shops will be entered in one 
 sum on this report each day. The total of expense items being 
 added, the grand total will represent total pay-roll for the day. 
 
 Watching this simple report daily will give the foreman the 
 closest grip on every cent of expense wages in his shop. Daily 
 familiarity will enable him to tell at a glance whether any in- 
 crease in any item is legitimate or not. Such expense is thus 
 closely controlled at its source. 
 
 Watching the Cost of Jobs. — The next matter for attention is 
 the disposal of the sections which refer to productive work. 
 We know their total, but not their detail. Being already sorted 
 into Product ion ( >rder numbers, we take each set of sections, and 
 sort them into their Component Order numbers. Each Produc- 
 tion Order may have, say, three or four components being worked 
 on at one time in the shop. 
 
 Each such component has a Cost Sheet arranged as shown by 
 Fig. 117. It is made large enough to allow of the time sections 
 being pasted on to it, thus avoiding the loss of time and danger of 
 inaccuracy arising from posting or copying. As each process or 
 operation is distinguishable by the color of the card, they can be 
 pasted on in any order as they come in day by day. When any 
 process is completed as indicated by the number of pieces appear- 
 ing on a section, the sections for that process are summarized 
 on a machine and their total entered in the oblong space at top 
 left hand of the Cost Sheet. In the case of standardized work 
 this space will already have been tilled out by the production 
 department with a list of operations and their expected or stand- 
 ard cost. < lonsequently as each process or operation is com- 
 pleted, it will be seen at once if the formen's attention is 
 necessary, and whether it ranks as an "exceptional" job or not. 
 
 All the Bections are thus rapidly disposed of by pasting on 
 their proper leaves. Each leaf is thus accumulating the history 
 of the piece exactly as it was actually worked on. Every inci- 
 dent is reflected. If the job was interrupted, if part of it was 
 worked overtime, if men were changed while it was on the 
 machine, if some was done at one time and some at another, if 
 the man failed to earn a bonus, or if, on the contrary, the job 
 wenl through promptly and smoothly — the whole story can be 
 read from a simple inspection of the pasted sections, without a
 
 REPORTS AND RETURNS FOR FOREMA V n:; 
 
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 414 MANUFACTURING COSTS AND ACCOUNTS 
 
 particle of additional clerical work or any delay. Moreover, it 
 is not only there, but it is there for all time. Ten years hence, if 
 required, it will be easy to refer back and see what man drilled 
 a particular hole and what it cost for him to do it. 
 
 We have shown in considerable detail the steps up to this point, 
 in order to emphasize the fact that the proper place to elaborate 
 detail is at the starting point, in the shop, where alone detail 
 i- a matter of daily bread and possesses a live significance wholly 
 missing at either a later stage or at a later date. Detail must be 
 piping-hot, or it is of slender value. The people who make the 
 detail arc the people who can use the detail. 
 
 Bringing the Detail into Line. — The way in which this detail 
 is brought into line with the rest of the system must now be 
 briefly discussed. As soon as a job is finished, if it is a bonus 
 job, the bonus earned is worked out on the job order given to the 
 
 Department Date 19 
 
 Prod. 
 Order No 
 
 Comp. 
 Order No 
 
 Wages Cost 
 
 V 
 
 Reason 
 
 Actual 
 
 Standard 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total for Day 
 
 
 
 
 Fig. 118. — Daily return of wa^os cost of finished operations compared 
 with standard cost. The mark (-y/) is placed against items requiring fore- 
 man'e scrutiny. 
 
 man (see Fig. 64), and summarized on a stub at the foot of the 
 order. This stub is thou detached, credited to the man in his 
 booi (see Figs. 85 and 86), and passed to the shop clerk to be 
 included among his soot ions, as mentioned. It thus finds its 
 way both to the pay-roll and to the Cost-Sheet. 
 
 Exceptional Jobs.- — When a process or operation is finished, 
 notified by receipt of the bonus stub or, if daywork, by the
 
 REPORTS AND RETURNS FOR FOREMAN 415 
 
 "good" and "bad" entries mentioned, the shop clerk, after all 
 his sections have been pasted up, proceeds to add the sections 
 of such finished operations, so as to find its cost. This i 
 with the standard or expected cost, is then entered on an 
 Operations Cost Return (Fig. 118). A mark is made against 
 all such jobs as have cost more than standard (or more than 
 an agreed percentage of standard), and these are examined by 
 the foreman, who puts his reason against them. An examination 
 of the pasted sections will frequently explain the reason, such 
 as "interrupted job" or"overtime." In other cases the defaulter 
 may be interviewed for an explanation. Anyway, the hue- 
 man's attention is called promptly to all cases of increased cost 
 and to these only. 
 
 
 
 Dent. 
 
 Week 
 
 Endin? 
 
 19 
 
 
 Item 
 
 Thr. 
 
 Fri. 
 
 Sat. 
 
 Sun. 
 
 Mon. 
 
 Tues. 
 
 Wed. 
 
 Total 
 
 Productive Wages 
 
 
 
 
 
 
 
 
 
 Wages on Fin. Jobs 
 
 
 
 
 
 
 
 
 
 Still in Shop 
 
 
 
 
 
 
 
 
 
 Fig. 119. — Daily record of balance of work on hand. 
 
 Balance of Work in Hand. — The total of finished jobs at 
 actual cost is also used as explained in the last article to give 
 the foreman daily information as to the balance of work in hand 
 in his shop. This is done by the shop clerk by taking yester- 
 day's balance, adding today's productive wages and deducting 
 finished jobs. This gives the new balance to be carried forward 
 to next day. A columnar sheet makes each day's figures com- 
 parable with the preceding days (see Fig. 119). 
 
 Each day the total loss on jobs (those that are checked on 
 Fig. 118) is classified and summarized under the various reasons 
 for the loss. Fig. 120 shows the ruling for this blank. 
 
 Spoiled Work. — Another byproduct of the sections is the 
 matter of spoiled work. The number of parts good and bad are 
 disclosed by the pasted sections, and when the job is being com i < I 
 these are summarized on the duplicate stub. They are also 
 listed on a special blank for the foreman's investigation and note
 
 416 MANUFACTURING COSTS AND ACCOUNTS 
 
 as to reasons. These reasons are tabulated as described in the 
 last chapter on a form similar to Fig. 120. 
 
 Workman's Record. — Figure 121 illustrates a blank on which 
 is recorded the nature and amount of loss on orders considered to 
 be the fault of the workman. This may be combined on one 
 card with a record of late attendance, bonus earnings, etc., if 
 desired. 
 
 
 
 Dent. 
 
 
 WppL- Fnctincr 
 
 19 
 
 
 
 
 Reason 
 
 Thur. 
 
 Fri. 
 
 Sat. 
 
 Sun. 
 
 Mon. 
 
 Tues. 
 
 Wed. 
 
 Total 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fig. 120. — Daily return of loss on "Exceptional Jobs." The various 
 causes are listed in the first column. A similar blank is used for recording 
 loss on spoiled work. 
 
 Man's Name. 
 
 .N'o. 
 
 .Dept. 
 
 Date 
 
 Order 
 No. 
 
 Nature of 
 Loss 
 
 Spoiled 
 Work 
 
 Other 
 Losses 
 
 Total 
 
 1 p.. 121. — Record of losses adjudged to be caused by fault of workman. 
 
 This is necessarily a description of the method of cost- 
 ing by sections, but anyone familiar with cost will see how 
 it can ho modified and extended. It may be mentioned that in 
 some case- the material issues (which are made on suitably ruled
 
 REPORTS AND RETURNS FOR FOREMA V 117 
 
 sections and cut up and sorted to numbers after they have been 
 priced out and the day's total of issues taken off) are pasted on 
 the Cost Sheet corresponding to the component which the 
 material is for. In other cases the material sections are entered 
 on a separate Material Cost Sheet and have nothing to do with 
 any shop or department. This depends on the nature of the 
 work. 
 
 The method of advising each foreman of the cost of work done 
 by the repair department or other shops is sufficiently obvious 
 not to need description. 
 
 Many details not given here will be filled in readily by those 
 familiar with previous chapters of this book. The control attain- 
 able over idle machines, over spoiled work, and over the regular 
 progress of jobs will be easily understood, but that over replace- 
 ments, urgent lots and delayed work will be understood if the 
 central fact that the whole history of each job as it occurred and 
 as it is occurring appears on the Cost Sheet of each order. We 
 have only to pick this up to know all about the order and its 
 present position, and to answer any possible question about it 
 that is within the purview of the shop. I do not know of any 
 other method that answers queries so minutely, and at the same 
 time so authoritatively, as this. 
 
 27
 
 CHAPTER III 
 REPORTS AND RETURNS FOR THE SUPERINTENDENT 
 
 An important part of the superintendent's duties is to insure 
 that the work is carried through the various departments in due 
 sequence and with regard to the time schedule. Closely con- 
 nected with this is the question of material, of new parts that have 
 to he ordered and made to replace those spoiled at some stage of 
 the work. The routine supervision of these matters will usually 
 be delegated to a production clerk. 
 
 < lontrol over the progress of work is attained by means of 
 master schedules, which are sheets on which are listed all the 
 parts or components in an order, and all the departments working 
 on each component, arranged in the sequence in which the work 
 of the departments is to be carried out.' 
 
 The arrangement of schedules will differ with the nature of 
 the work. They can be made to control either the sequence of 
 work alone or to keep such matters as variation from standard 
 cost, delays and replacements also in view. Fig. 122 represents 
 a portion of a sequence-control schedule used in an English plant 
 about 17 years ago. As each operation was reported finished the 
 symbol representing that operation was blotted out by a rubber 
 stamp. A glance at the schedule was sufficient to show whether 
 operations were being carried out regularly. Each schedule 
 represented an order for one machine, and being mounted on 
 separate carriers, the different orders on hand could be arranged 
 according to due dates. In this way a rather good control over 
 time sequence was obtained, especially considering the very 
 simple form of the schedule. 
 
 A more complete master schedule is shown in Fig. 123. This 
 doea not record processes within departments, but the complete 
 work of each shop on each component. The information is 
 derived from the Component Cost Sheets (Fig. 117) described 
 in ili<- lasl chapter, which are sent in to the superintendent by 
 each department as soon as completed, but after entry on the 
 Departmental Manufacturing .Journal and Departmental Fin- 
 
 418
 
 REPOR TS A ND R E T URNS FOR S UP E RINT E VDENT U9 
 
 For 
 
 PRODUCTION ORDER NO. 9374 
 5 Ton Arch Steam Hammer 
 
 
 
 
 CYLINDER 
 
 
 890 
 
 Cylinder 
 
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 891 
 
 Cyl. Cover 
 
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 STANDARDS 
 
 899 
 
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 903 
 
 Dis Bushes 
 
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 P 
 
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 In 
 
 T 
 
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 905 
 
 Crank Bushes 
 
 P 
 
 F 
 
 In 
 
 B 
 
 G 
 
 T 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Fig. 122. — " Sequence of operation " schedule in use 17 years ago. Printed 
 on long strips and attached to swinging boards so that the ordera could 
 be arranged in any desired series. P = Pattern ordered. F = Senl to 
 foundry. M = Casting received. The other symbols refer to machine 
 operations. The circle is a rubber stamp impression showing that the stage 
 in question has been passed.
 
 420 MANUFACTURING COSTS AND ACCOUNTS 
 
 
 
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 422 MANUFACTURING COSTS AND ACCOUNTS 
 
 ished Orders Journal, as described in Chap. XIX (Part II). 
 Information as to the material is obtained from Material Cost 
 Sheets in most eases but as previously explained, material is 
 sometimes recorded on Departmental Component Cost Sheets. 
 
 Use of the Master Schedule. — The blank schedule contains the 
 names and Component Order numbers of all components, and 
 against each is stated the departments which have to do work 
 on them and also the date at which each stage should be com- 
 pleted. Against each department the standard cost of the labor 
 in that department is also given. Then the Cost Sheets are 
 entered up daily as received, so as to show the weight and cost of 
 material, the actual labor cost, the difference between actual and 
 standard cost, the delay in days, if any, the number of parts good, 
 the reference to the Replacement Order, if any, and the cumula- 
 tive cost to date. 
 
 Inspection of the schedule at any moment will show the con- 
 dition of the order as regards completion, the degree of delay 
 already incurred, the extent to which the cost is coming out as 
 expected with reference to standard, and the cost to date of all 
 finished parts on the order. 
 
 As far as the superintendent is concerned the principle of ex- 
 ceptions applies to the work of controlling orders. As long as the 
 different Departmental Cost Sheets come through without undue 
 delay, and as long as no important increase of actual as compared 
 with standard cost occurs, the superintendent's attention does 
 not need to be called to the schedule. But if anything shows a 
 tendency to go persistently wrong, then he is warned and can 
 make inquiry in the proper quarter. The degree of increase of 
 cost and of delay that needs to be brought to his attention is, of 
 course, a matter of experience in each plant, and may vary from 
 time to time also according to known conditions. Where all 
 orders arc behind, and well known to be so, then only extra-bad 
 delays will be reported. The general idea will be quite clear 
 after a little study of the makeup of the schedule, as shown in 
 Fig. 123. 
 
 Some explanation may be needful as to the use of the columns 
 on the righ.1 hand of the blank headed "Cumulative Check Post- 
 ings." Only one line per day is used, and that only when a Cost 
 Sheci orCosI ShcOs have been received for entry. The first day 
 the whole of the completed Cost Sheets pertaining to, say, Pro- 
 duction Order 9,163 are totalled, as regards the different items —
 
 REPORTS AND RETl r RNS FOR SI PERI \ 7 /• \ hi \ / |_<:; 
 
 material, wages, etc. — and entered on the first line. The nexl 
 day the same process is gone through, 1ml instead of entering t he 
 day's figures at once on line 2, they are firsl added to the figures 
 on the previous day's line, thus making cumulative totals, or 
 totals to date, for each column of cost data. Consequently, a 
 glance at the sheet will (ell us at any lime what is the total ex- 
 penditure on finished parts for that Production Order. In the 
 instance shown, $1.55 had been expended on the first day, $2. in 
 at the end of the second day, and $13.36 up to the end of the third 
 day. For labor only, these totals are $0.65, $1.20 and $6.53 re- 
 spectively, and so with the other columns. When the order is 
 completed, the totals of columns on the left hand of the schedule 
 must agree with the totals of the cumulative 1 check postings on 
 the right hand, thus providing a proof of the accuracy of t he work. 
 
 On completion of all the parts or components shown on the 
 schedule, the Production Order is complete and the figures give 
 the total cost of the order, as well as a detailed record of t he cosl 
 of each part. Comparison of the totals of the "standard-cost " 
 column with the "labor-cost" column will disclose how far the 
 order as a whole has come up to expectations. If further investi- 
 gation is desired, the individual departments at fault will he indi- 
 cated by the loss and gain columns. If then any particular 
 department shows up badly, the fullest detail as to what happened 
 will be found in the Departmental Cost Sheets, which, as shown 
 in the last chapter, contain a detailed history of the work, as 
 shown by the original documents pasted on if . 
 
 The Cost "Album." — These Cost Sheets, when the whole order 
 is completed, are then bound into book form, and the master 
 schedule also folded and bound in with them. This collection 
 of documents may be supplemented in some cases by other official 
 papers, such as the report of the testing department on the per- 
 formance of the machine before delivery. The front cover of this 
 "Album" is a printed blank like Fig. 124 which summarizes all 
 the cost data, and also provides space for entries interesting to 
 the next higher authority, viz., the executive. 
 
 Separate master schedules, appropriately ruled, are provided 
 for patterns, tools and replacements in connection with each 
 Production Order. The expenditure on these three heads is sum- 
 marized on the album cover, the Cost Sheets being withdrawn 
 from the current file when the main Production Order is com- 
 pleted. In a few cases patterns and tools are chargeable to cus-
 
 424 MA X I FA CTl RIXC COSTS A XD ACCOUNTS 
 
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 REPORTS AND RETURNS FOR SUPERINTENDENT 425 
 
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 12G MANUFACTURING COSTS AND ACCOUNTS 
 
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 tomer, but whether they are or not, 
 these costs are always entered as 
 memoranda on the cover, and are 
 charged to their proper accounts at 
 a later stage. The importance of 
 recording such cost figures in con- 
 junction with the cost of the order 
 itself will 1)0 readily understood. 
 
 A> each album cover is filled out, 
 the data as to cost of the main order, 
 and the patterns, tools and spoiled 
 work in connection with it, are en- 
 tered on a Finished Order list (shown 
 in Fig. 125), which is sent weekly to 
 the executive. It summarizes, of 
 course, by classes the exact value at 
 si top cost of all finished orders, to 
 which is added the supplementary 
 rate representing wasted burden not 
 absorbed by working machines. 
 The difference between expected or 
 standard and actual cost is entered in 
 one of the columns on the left of the 
 blank. 
 
 Weekly Reports on Shop Efficien- 
 cies. — Having thus acquired a close 
 control over the run of orders and 
 their components through the de- 
 partments and a detailed knowledge 
 of their expected and actual cost, 
 the superintendent will require 
 figures to show him how the shops 
 are gel ting on in the matter of cer- 
 tain kinds of efficiencies. These are 
 afforded by what may be termed 
 "reason registers." Their general 
 ruling is shown by Fig. 126. 
 
 One of these blanks is devoted to 
 "exceptional jobs" and one to 
 "spoiled work." The information 
 is derived from the weekly totals of
 
 REPORTS AND RETURNS I ?i )R SUPERINTENDEN1 127 
 
 the corresponding shop records (Fig. 120) in the case of 
 exceptional jobs, hut in the case of spoiled work it will be 
 necessary to take into account the total loss incurred in the chain 
 
 SPOILED WOKK RETURN 
 
 1 
 
 ' MONTH 
 
 L i9 
 
 Dcpt 
 Chargeable 
 
 Reason 
 
 W.H. 
 
 W.I 
 
 E. 
 
 Total 
 
 For Monti 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Oept. Total j \ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Dept. Total 
 
 
 
 
 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 'IXULATION 
 
 
 RECAI 
 
 
 
 Reason 
 
 W.E. 
 
 \v 
 
 u. 
 
 Total 
 
 For .Monti: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 \ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total all Spoiled Wk. 
 
 
 
 
 
 
 Fig. 126. — Weekly and monthly return of spoiled work by causes. Re- 
 capitulation of same by causes for whole plant. A similar blank is used for 
 "Exceptional Jobs." 
 
 of production. The reports (Fig. 120) deal only with the loss 
 incurred in a particular department, but as work may have been 
 done by other departments on the piece, and as in any case there 
 is the loss of material to be taken into account, it will be neces-
 
 428 MANUFACTURING COSTS AND ACCOUNTS 
 
 sary to compile the superintendent's account of loss on spoiled 
 work from other sources. Moreover, the loss incurred in any- 
 particular department is not the significant matter from the super- 
 intendent's viewpoint; what he is concerned with is the amount 
 chargeable against a department for spoilage, wherever incurred. 
 Thus, if a piece has gone through several departments, and then 
 is wasted owing to a faulty casting, the cost of the whole piece 
 up to that point required to be accumulated and exhibited as a 
 loss against the foundry. 
 
 Where Replacement Orders are in use, as they will be in all 
 machine shops and engineering works, these will form the best 
 source for data to be entered on the superintendent's return. 
 It will also be remembered that the cost of such orders is entered 
 in a special column in the Department Manufacturing Journal 
 (Fig. 96). Consequently we have here a precise check on the 
 figures in the return at the month end. If, therefore, as each 
 replacement order is completed, the data are entered on a blank 
 like Fig. 126 the total for the month of all spoiled work must 
 equal the total charge to Spoiled Work account from the Depart- 
 mental Manufacturing Journals. This blank in fact provides 
 the authority for the distribution of that balance to the depart- 
 ments at fault. 
 
 The comparative performance of the different departments 
 from week to week can thus be very clearly grasped. In the 
 case of "exceptional jobs" the reasons assigned may be very 
 instructive. It may be found that a particular shop is running 
 high on account of "interrupted jobs" or "man's fault," or 
 " too much metal." Even if these reasons prove to be the wrong 
 ones, the attention of the superintendent will be immediately 
 directed toward conditions that want altering. Similarly, a 
 general tendency to attribute spoilage to "bad castings" will 
 lead t<» prompt inquiry and thorough threshing out of the situa- 
 tion. If returns like this are made weekly, so that the figures of 
 all exceptional jobs and all losses due to spoilage are brought 
 right under the notice of the superintendent, in such a form as to 
 be comparable by causes and shops with similar items in previous 
 weeks and months, a very close control over the efficiency of 
 operation will be secured. 
 
 Production and Expense Reports. — The daily statements of 
 productive and expense wages (Fig. 116) and machine earnings 
 (Fig. 115) made in each shop are also summarized weekly on a
 
 REPORTS AND RETURNS FOR SIEERI XTEX hEXT I-"* 
 
 blank similar to that used by the shop, and sent to the super- 
 intendent. He will enter the weekly figures on appropriate 
 
 blanks, similar in form, but columned for weekly instead of daily 
 totals, so that a comparison is set up for each shop, covering pro- 
 duction (including labor and bonus), expense in one's own Bhop, 
 expense chargeable to other shops, and total of productive and 
 expense wages. These figures signify nothing for one week, 
 but when placed side by side with a series of previous weeks they 
 give a good rough idea whether the normal proportion between 
 production and expense is being maintained. 
 
 Machine Earnings Month of ]9 
 
 Productive 
 Department 
 
 Stand. Week 
 
 W.E. _ 
 
 
 4 Wk Average 
 
 Hrs. 
 
 Amt. 
 
 Hrs. 
 
 Amt. 
 
 % 
 
 Hrs. 
 
 Amt. 
 
 % 
 
 Forge 
 
 
 
 
 
 
 
 
 
 
 Milling Dept. 
 
 
 
 
 
 
 
 
 
 
 
 Machine Shop A 
 
 
 
 
 
 
 _)]_ 
 
 
 
 
 Machine Shop B 
 
 
 
 
 • 
 
 
 j(— 
 
 
 
 
 Polishing Shop 
 
 
 
 
 
 
 =4 1 
 
 
 
 
 Total for all Depts 
 
 
 
 
 
 
 3n 
 
 
 
 
 Amount Below Standard 
 
 
 
 
 \\ 
 
 
 
 
 Fig. 127. — "Weekly totals and monthly average of machine earnings. 
 
 The weekly statement of machine earnings is summarized on 
 another comparative blank (Fig. 127), which records, shop by 
 shop, the actual and the standard machine earnings. This is a 
 very important return, as it enables the superintendent to see 
 how far machines are being kept at work. If any shop seems at 
 fault, reference is made to the shop record of machine earnings 
 (Fig. 115), where the actual daily duty of each machine is 
 recorded. 
 
 Weekly Balances of Work in Progress.— The labor value of 
 unfinished work in the different shops and the labor value of 
 finished jobs not yet closed out into finished orders are figures 
 that give a good idea of the smoothness or congestion obtaining 
 in the plant. Fig. 128 shows the weekly balances of work in 
 each shop, as posted from the foreman's daily report (Fig. 119), 
 at the end of each week. Below the shop totals the aggregate 
 total of all postings to Production Order master schedules still
 
 430 MA N I F. 1 ( TURING COSTS AND ACCOUNTS 
 
 in hand is entered. The grand total of these figures shows the 
 labor value of all work in shops and also of all finished com- 
 ponents. The former of these figures is checked monthly by- 
 comparing the figures for each shop with the balance of labor in 
 Manufacturing Journal, and the latter is checked by comparing 
 it with the balance for labor in the Finished Department Orders 
 Journal. The value of the return is, of course, the facility it 
 affords for comparing the current week's performance of each 
 shop with that of a series of weeks. By this means a very close 
 control is obtained on congestion in shops, inasmuch as a rise 
 
 Labor on Uncompleted Work Month of 19 
 
 In 
 Productive 
 
 Departments 
 
 W.E. 
 
 W.E. 
 
 W.E. 
 
 W.E. 
 
 4 Week Av. 
 
 
 
 
 
 Forge 
 
 
 
 
 
 
 Hilling Dept. 
 
 
 
 
 
 
 Machine Shop A 
 
 
 
 
 
 
 Machine Shop B 
 
 
 
 
 
 
 Polishing Shop 
 
 
 
 
 
 
 Total in Shops 
 
 
 
 
 
 
 On Schedules 
 
 
 
 
 
 
 Total Unfinished 
 
 
 
 
 
 
 Fig. 128. — Weekly total and monthly average of balances of work in hand 
 
 (labor only). 
 
 in these figures, if unaccompanied with an increase of the pro- 
 ductive pay-roll, means that unfinished work is piling up in the 
 shops. Similarly, an increase in the item taken from the master 
 schedules shows thai a mass of finished components is being 
 accumulated and thai their transformation into assembled 
 machines is falling behind. Though the return does not show 
 more than the value of labor concerned, it shows this every week, 
 throughout all productive departments and thus provides a 
 significanl figure relating to a principal factor of cost. 
 
 The Control of Expense.- -In the previous chapter the record 
 of expense as far as if affects the foreman was dealt with. The 
 superintendent has, of course, to review the same figures, and he 
 also has to control the economics of the non-productive depart-
 
 REPORTS A ND RETl h'XS FOR SI 7V-.7.7 \ 77 \ l>i:\ I 43] 
 
 merits, such as the power plant, the repair deparl menl , I be Bt< 
 and any others that minister to production only indirectly. 
 Thus in some big plants there may be departments for fuel oil, 
 for powdered coal, for oxy-hydrogen gas, etc. The expenses of 
 these have not only to be watched, but their outpul has to be 
 costed and then allocated to the productive departments in 
 proper proportion. 
 
 The power plant is a good type of these special departments. 
 The returns should deal with it as a separate business. Space 
 does not permit of describing a comprehensive power report, 
 but in a plant of any size the cost should be expressed as a rate 
 per horsepower-hour, and a charge made to each shop on the 
 basis of its actual consumption of power, for lighting, for crane 
 work, and for machinery. Steam for heating should also be 
 made the subject of a similar charge. All such items are col- 
 lected through Standing Orders. 
 
 The control of expense is best attained by the "budget" 
 method, combined with a rigorous segregation of expense items 
 by production factors. Each such item is represented by a 
 Standing Order number as explained in Chap. XII (Part II). 
 In the course of determining machine rates (see Chap. XX, Part 
 II) a careful analysis of the expected expenditure on every 
 Standing Order including power plant and auxiliary departments 
 will have been carried out, and this should be made the basis of 
 a weekly comparative Budget Return, showing on the one hand 
 the actual expenses incurred, and on the other, their comparison 
 with standard or expected expense. As in the case of the fore- 
 man's control of jobs, the superintendent need concern himself 
 only with cases in which the standard expense has been unex- 
 pectedly increased. Diminished expense should also be closely 
 watched by the clerk compiling the return, as it will probably 
 imply an error somewhere, unless the reason is already known, as 
 a reduction of staff, a strike, etc. 
 
 A blank, Fig. 129, shows how the weekly return of expense is 
 entered. The figures are obtained from a weekly addition of the 
 Standing Order Cost Sheets, and when the total for the month 
 is brought out, it must agree exactly with the same items as en- 
 tered on the Burden Journal, thus checking the accuracy of the 
 figures. In some cases, as for example, non-engineering plants, 
 these entries could be taken from the foreman's daily report of 
 Standing Order expense (Fig. 116), but when one shop does work
 
 432 MANUFACTURING COSTS AND ACCOUNTS 
 
 Weekly Return and Budget of Standing Orders 
 
 19 
 
 
 
 
 
 Standing 
 Order 
 
 Number 
 
 Item 
 
 WE, 
 
 ) Month 
 
 Standard 
 
 Actual 
 
 >/ 
 
 Actual 
 
 v 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 r 
 
 
 
 
 
 
 
 ' 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ' 
 
 r 
 
 
 
 
 
 
 
 | 
 
 
 
 
 
 
 
 [ 
 
 
 
 
 
 
 1 
 
 r 
 
 
 
 
 
 
 1 
 
 / 
 
 
 
 
 
 
 
 t 
 
 
 Grand Total all Depts. 
 
 
 
 
 
 
 In.. 129. — Budget of Standing Order expense, and record of actual expendi- 
 ture by weeks, and monthly total. 
 The (</ ) column is checked if any item needs superintendent's scrutiny.
 
 REPORTS AND RETURNS FOR SUPERINTENDS \ / 133 
 
 for another, it becomes necessary to disl ribute the charge entered 
 on the foreman's return as chargeable to "other shops," in detail. 
 In such cases it is better to ignore the foreman's return and take 
 the figures direct from the Cost Sheets. 
 
 Only those items within the control of the superintendent are 
 included in this return. Such items as rents, insurance, Lnteresl . 
 depreciation, etc., are not included, because the superintendent 
 is not responsible for them, and they are, moreover, invariable 
 amounts for the most part, not reducible by anyone. 
 
 Summary of Superintendent's Information. — The information 
 provided for the superintendent will now be seen to be divided 
 into three main groups: First, daily information as to the pr< >i 
 of orders is furnished, leading to a complete schedule of weights 
 and costs of each component of an order and to a summary of the 
 cost of the entire order, together with the subsidiary expense for 
 patterns, special tools and jigs, and spoiled work, which latter 
 items may or may not be ultimately chargeable to the order itself. 
 Secondly, information is supplied as to certain kinds of shop or 
 department efficiencies, namely, the average loss due to idle I 
 spoiled work, and exceptional jobs, shop by shop. The balances of 
 work in hand at the end of each week in each shop, and in the 
 shape of finished parts and material, are also provided, and can 
 be compared with the total of finished orders, and of orders re- 
 ceived. Thirdly, a current comparison of actual expense, classi- 
 fied by production factors, is maintained, comparable with the 
 budgeted or expected figures for such expense. This enables the 
 superintendent to observe, at once, any increase in expense items 
 in any part of the plant, and if illegitimate, to curb it before it 
 assumes either large or permanent form. 
 
 28
 
 CHAPTER IV 
 REPORTS AND RETURNS FOR THE EXECUTIVE 
 
 The ordinary Profit and Loss accounts and Balance Sheet are 
 derived from mercantile practice, and are much older than mod- 
 ern manufacturing. For this reason they do not commonly pre- 
 sent the facts in a strictly logical order, having reference to the 
 actual occurrences which have taken place in a plant during a 
 given period. For the executive's use we require to serve this 
 information in a series of groups, each of which corresponds to 
 the practical distinctions between purchasing, production, sell- 
 ing, credit, and cash. A short discussion as to these natural 
 groupings will be of service. 
 
 The operations of a plant have four main features — money has 
 been expended — part of the purchases have been expended on 
 production and part remain on hand. Secondly, the portion ex- 
 pended has gone into the factory and product (finished and partly 
 finished) is a result. These are two clearly defined groups. 
 Next, a certain portion of this product has been sold, by the aid 
 of additional expenditure for salesmen, advertising, etc., and 
 from such sales a profit has resulted. This is also a clearly 
 defined group. If all transactions were for cash, these two groups 
 would only need to be supplemented by an account of cash 
 received, expended and on hand to complete the story of the 
 period. Actually, however, we extend credit to our customers, 
 and the status of this credit — whether our outstandings are in- 
 creasing or diminishing — must also be recorded. Frequently we 
 take credit ourselves, and if so, the amount of our liabilities must 
 be recorded. These transactions form a fourth clearly defined 
 group. Finally, our disbursements and collections must be 
 tabulated so that the amount of cash we possess is known. This 
 i- the fifth and final group in which we are interested. 
 
 1' will be seen thai as regards each of these groups the execu- 
 tive askfi the same series of questions, namely: What went in? 
 Whal '•;unc ou1 ? What is left in, and in what form is it left? 
 
 In all these groups there are not only ingoings and outgoings, 
 
 434
 
 REPORTS AND RETURNS FOR EXECl 77 1 / 135 
 
 but there is also a remainder or balance of something. In the 
 first two groups we have balances of unused material and of work 
 in process. In the third group we have, in most a balance 
 
 of goods unsold. In the fourth group we have a balance of collect- 
 ible accounts, and perhaps of accounts payable by ourselves 
 when we can spare the money to do so. In the fifth group we 
 have the balance of cash in the safe or at the bank. 
 
 Though all these transactions and their resulting balances can 
 be read in an ordinary mercantile Profit and Loss and Balance 
 Sheet, their essential independence is not brought out clearly. 
 The fact that they are all entirely separate groups of 1 ransacl ions, 
 however, is most important to emphasize, if the executive is to 
 form a clear mental picture of the result of the operations of the 
 period. Further, it assists to a clear grasp of the situation if 
 certain groups of transactions, such as, for example, those relal ing 
 to stores, to factory burden and to selling expenses, are presented 
 separately, so that their individual movements can be seen more 
 distinctly and the main story more easily read by their separal ion 
 from it. 
 
 There is also the important consideration, in many plants, t bat 
 several different lines of product are made, and we may desire to 
 ascertain just how we stand with regard to each of them. The 
 latter information rarely if ever reaches the final Profit and Bal- 
 ance Sheets which go to the shareholders of a corporation; but 
 it is of prime importance to the executive. 
 
 If we imagine an executive who has just taken charge of a 
 business and wants to be put into possession of its salient features, 
 we shall have a viewpoint that lends itself to demonstration. 
 But though the first thought of such an executive would be 
 directed to the month's trading results — the profit that had been 
 made — his second thought would be for the general position of 
 the business as regards production; and as profits logically arise 
 from production, and not vice versa, we shall develop the series of 
 reports presented to him from the viewpoint of the factory first. 
 
 Reports on Expenditure. — Preliminary to the actual story of 
 production will come the reports on the expenditure that makes 
 production possible. First, there will be provided a summary of 
 wages paid, showing its distribution to factory burden, produc- 
 tion and equipment (that is, to additions to equipment values, 
 which in many shops are a regular feature of each month's work) 
 and to selling. Next in order is a summary of stores, showing
 
 436 MANUFACTURING COSTS AND ACCOUNTS 
 
 purchases, issues to burden, production, or equipment, and bal- 
 ance of stores left on hand. 
 
 Burden Reports. — The next step is to present the various items 
 of expenditure that go into burden, both factory and sales, and 
 this is presented in two divisions, namely, factory burden and 
 sales burden, or as it is usually called "selling expenses." Con- 
 sideration of the latter is postponed until the whole question of 
 production has been disposed of. 
 
 Production Reports. — The main story of production is now 
 ready to be told. The wages, stores and burden that have gone 
 into product are set against the cost of the finished product, 
 arranged in classes, that has been delivered to the selling depart- 
 ment. The burden which has not been taken up by machine 
 rates is reduced to a supplementary rate and, being distributed 
 over productive w r ork done in the factory, appears as part of cost 
 of finished product, and the balance represents work unfinished 
 and still in the factory, thus showing, as in the other cases, what 
 has gone in, what has come out and what still remains in. 
 
 A similar return is made for additions to equipment, buildings 
 and to other capital accounts. The wages, stores and machine 
 rates that have gone to the production of new equipment items 
 are placed on one side of the account and the cost of finished 
 items on the other. The balance left is the value locked up in 
 unfinished additions to equipment still in the shops. 
 
 The equipment itself is then similarly reported on. Finished 
 additions from the foregoing report appear on one side. Depre- 
 ciation written off into burden appear on the other, and the 
 balance represents the present value of equipment, buildings and 
 other capital items. 
 
 This finishes the story of production. It has been told step by 
 step, from the separate statements of what has gone in to the 
 statement of what has come out in the form of finished goods and 
 of additions to plant. Also the balances of stores, of work in 
 shops on orders, and of work in shops on additions to equipment 
 are clearly set out. Finished additions to equipment are also 
 shown in their relation to capital accounts. 
 
 Dealing with Finished Goods. — We have now to deal with 
 finished goods and their sale, and, of course, also with the selling 
 expense. If we have, say, three lines of product, each of these is 
 reported on separately from this stage onward. In most cases 
 finished goods will not be sold straight from the factory to the
 
 REPORTS AN J) RFTCRXS FOR FXFa l 7/1 / 437 
 
 consumer, but will be kept in stock ready for delivery. This 
 necessitates intermediate reports, to keep track of the balance ol 
 goods on hand. Otherwise finished goods from the production 
 report and selling expense from the sales-burden reporl would go 
 direct to the trading report. In the present instance, to simplify 
 explanation, we shall assume that this is so, and that all produc- 
 tion is on customer's order and goes direct from the factory to 
 the customer. 
 
 A separate trading report is provided for each line of product. 
 The ingoings are finished goods and selling expense. On the 
 other side is sale price, the balance between each being profit on 
 that line of goods. 
 
 The goods having now been sold and the profit ascertained, we 
 have to consider the question of collecting what is due to us. For 
 this purpose a ledger-balances report is provided. On one side is 
 placed sales for the month and balance brought forward from last 
 month, graded into three classes, namely, accounts due, not due 
 and overdue. On the other side is placed the amount actually 
 collected during the month, also the discounts allowed, and the 
 balance is accounts outstanding, graded, as before, into due, not 
 due and overdue. 
 
 Where we do not pay prompt cash for purchases a similar 
 report is made for accounts owing by us. This shows the amount. 
 of our liability outstanding at the end of the month. 
 
 Finally, the disposal of the cash so collected is reported on. 
 Cash received is set on one side, cash paid on the other, and the 
 balance is cash on hand in safe or bank. 
 
 This general scheme is applicable to any manufacturing busi- 
 ness, subject to extension in a few cases to cover special circum- 
 stances. It will have been seen that it covers all the operations 
 of the plant in distinct stages. In regard to each stage the three 
 questions stated previously have been asked and answered. 
 Certain of the reports, such as administrative expense, serve to 
 show the collection of items and the distribution of their total to 
 other reports. Others contain balances. If all is correctly 
 stated, these balances when brought together, and the capital 
 stock of the business added, will balance. In other words, they 
 are verified by a Balance Sheet of the usual kind. Having thus 
 outlined the system of reports, and explained the scope of cadi. 
 some specimen blanks will be shown. It may be pointed out here 
 that an important feature of the control that such reports give is
 
 438 MANUFACTl RING COSTS AND ACCOUN TS 
 
 ITEMS 
 
 JAN TAB Y 
 
 Budget Actual 
 
 TOTAL FOR TEAR 
 
 Budget Actual 
 
 WAGES & SALARIES 
 
 Fig. 130 
 
 Salaries, General 
 
 Salaries, Factory 
 
 Factory Wages 
 
 Total In 
 
 To Production 
 
 To Plant Addition 
 
 To Standing Orders 
 
 To Selling Expense 
 
 Total Out 
 
 STORES 
 
 Balance from Last Month 
 
 Purchased this Month 
 
 Total In 
 
 To Production 
 
 To Plant Addition 
 
 To Standing Orders 
 
 To Selling Expense 
 
 BALANCE FORWARD 
 
 Total Out 
 
 Fig:. 131 
 
 WORKS EXPENSE 
 
 Fig. 132 
 
 Balance from Last Month 
 
 Purchases this Month 
 
 Total In 
 
 To Production 
 
 To Plant Addition 
 
 To Standing Orders 
 
 BALANCE FOKWAKU 
 
 Total Out 
 
 Fias. 130, 131 and L32, Budgel and actual expenditure on wages, stores, 
 and works expense.
 
 REPORTS AND RETURNS FOR EXECUTH E l.;-.. 
 
 their arrangement in such shape thai each month can be ruin- 
 pared with previous months, with regard to cadi item appearing 
 on the reports. 
 
 More than this is also possible. In a business of an established 
 character we can, by using alternate columns on the blank for 
 that purpose, forecast the expected value of each item; or. in 
 other words, we can budget all the information, thus setting up a 
 standard, variations from which may be cause for inquiry. In 
 some businesses the value of budgeting is considerable, and in 
 every case it fosters the habit of looking ahead. 
 
 Wages, Stores, etc., Reports. — The wages report (Fig. 130) 
 explains itself. As wages are necessarily spent, and cannot be 
 stored, there is no balance in this report. Wages are all distrib- 
 uted to one or other of the later reports. 
 
 We begin with a balance of stores in hand (Fig. 131). To these 
 is added the value of purchases during the month. Against this 
 total is placed the issues of stores, and also any purchases that 
 may have been sent back to the supplier. The amounts entered 
 as issues are distributed to one or other of the following reports. 
 But in this case there is left a balance, namely, of materials still 
 in stores and not yet issued. This is carried forward to next 
 month. If desired, this report can be made more detailed by 
 division into classes of stores, such as brass, steel, or castings, wire, 
 etc. The balance in this report must be agreed each month with 
 the balance in the Stores account. 
 
 Certain items chargeable as works expense (see Chap. X. 
 Part II) are also reported by means of Fig. 132. It may happen 
 that part of this is held over to equalize distribution bet ween 
 months, so that there will sometimes be a balance to lie provided 
 for. 
 
 Factory-burden Report. — The executive is probably not inter- 
 ested in the technical details of burden expenditure, which, are 
 matters for the superintendent. The factory-burden report 
 (Fig. 133), therefore, gives him merely the total chargeable to the 
 factory, and against this the amount actually charged. The 
 balance "held over" represents the equalization of expense, such 
 as the holding over of part of the cost of heavy repairs. This is 
 the really significant figure of the report. It keeps uncharged 
 expense prominently in view. 
 
 Production Report. — The production report (Fig. 134) brings 
 forward the balance of work in hand at the beginning of month.
 
 440 MANUFACTURING COSTS AND ACCOUNTS 
 
 Items 
 
 January 
 
 
 Total For Year 
 
 Budget 1 Actual 
 
 
 Budget | Actual 
 
 FACTORY BURDEN ( FIG. 133 
 
 Balance Foreman 
 
 
 
 \ \ 
 
 
 
 Wages & Salaries on Standg. Orders 
 
 
 
 \ ; 
 
 
 
 Ditto 
 
 
 
 1 
 
 
 
 Works Expense Ditto 
 
 
 
 / i 
 
 
 
 Depreciation Factory- 
 
 
 
 { 
 
 
 
 Rents, Insurance etc. Factory 
 
 
 
 ( ! 
 
 
 
 Interest, Factory 
 
 
 
 i j 
 
 
 
 Total In 
 
 
 
 
 
 
 Distributed as Machine Rates 
 
 
 
 
 
 
 Distributed as Supp. Rates 
 
 
 
 ( 
 
 
 
 Balance held Over 
 
 
 
 
 
 
 Total Out 
 
 ■ 
 
 
 i 
 
 
 
 PRODUCTION 1 
 
 FIG. 134 
 
 Balance (Work in Hand) Fwd. 
 
 
 
 
 
 
 Productive Wages, this Month 
 
 
 
 
 
 
 Productive Material, this Month 
 
 
 
 / 
 
 
 
 Productive Works. Expense this Mo 
 
 ith 
 
 
 I 
 
 
 
 Burden as Machine Rates Ditto 
 
 
 
 ) 
 
 
 
 Burden as Supp. Rate Ditto 
 
 
 
 
 
 
 Total In 
 
 
 
 
 
 
 Finished Product Class A 
 
 
 
 
 
 
 " " Class B 
 
 
 
 ) ( 
 
 
 
 " Class C 
 
 
 
 \ 1 
 
 
 
 Machine Rates on PI. Addns. ifc 
 
 
 
 
 
 
 Balamce ( Wk. In Hd.) 
 
 
 
 
 
 
 Total Out 
 
 
 
 I 
 
 
 
 :•: This Item is Transferred to Plant Addition \ 
 Budget Report ( 
 
 
 1 [G 133 and ]:;! Budgets and actual expenditure on factory burden 
 
 and production.
 
 REPORTS AND RETURNS FOR. EX E( l 77 1 / ! 1 1 
 
 adds to it the wages, stores and burden from previous reports 
 expended during the month, and against the total of these two 
 items places the work finished during the month, leaving a bal- 
 ance of work unfinished to go forward. The finished work is 
 classified by products, such as superheaters, steam fittings, con- 
 densers, or whatever kinds there may be. A credit i~ also made 
 here for machine earnings expended on additions to equipment. 
 
 Fig. 135. — Budget and monthly returns of burden unabsorbed by m^hine 
 rates and distributed as supplementary rate. 
 
 This is usually a small item, and appears here to avoid complexity 
 in the accounts. As shown, the balances of work in hand are not 
 divided into classes of product, but this could be done without 
 much extra work if desired. This report is a very important 
 one, especially if we consider that the vertical columns repr'>mt 
 months. The monthly variations in the principal facts of pro- 
 duction are, therefore, disclosed by this report, which lends itself 
 particularly to the budgeting method as already explained. 
 Burden charged to the shops and not absorbed by machine
 
 442 MANUFACTURING COSTS AND ACCOUNTS 
 
 rates represents, of course, wasted opportunities. If all tne 
 machines had been working to the full there would have been 
 none unabsorbed. In order to get rid of it, one of two plans may 
 be followed: It may be charged off at once to Profit and Loss, 
 since it is simply waste and does not really represent the cost of 
 anything made. But a safer way is to prorate it over the work 
 that has been done. It increases the cost of this, and so reaches 
 Profit and Loss account after all. The unabsorbed-burden report 
 ( Fig. 135) keeps in view, month by month, its amount, and the 
 per cent, rate that has been found necessary to get rid of it by 
 prorating. Each month's waste is not prorated over that month's 
 finished work. That would produce too violent fluctuations. 
 The balance of all work done in the shop during the month, 
 including the finished work, is taken into account. Thus, work 
 in hand always includes a percentage of supplementary rate. 
 This unabsorbed burden must not be confused with the 'Tield- 
 over" burden in Fig. 133. The latter has already been explained. 
 The significant figure in this report is the percentage of supple- 
 mentary rate. It is an index to the degree in which the machin- 
 ery of the plant is being kept at work. In slack times, of course, 
 it tends to rise. 
 
 Equipment Report. — The additions to equipment report (Fig. 
 136) is practically a production report confined to plant addi- 
 tions. It is not included in the production report — first, because 
 it is a class of activity that merits being veiwed separately, and, 
 secondly, because it does not take a supplementary rate. It 
 would be quite illegitimate to charge plant additions with un- 
 absorbed burden due to idle machines. In fact, it would be 
 absurd to do so, since that would mean that such work would 
 cost more in slack times than in busy times. Yet it is in slack 
 times that as much of this kind of work as possible should be 
 put in hand. All equipment is shown in one item in the equip- 
 menl report (Fig. 136A). Subdivision into buildings, mach- 
 inery, tools, etc., would be desirable in most cases. The 
 gem ral idea would remain the same, namely, to provide a means 
 of Bhowing the present value of the equipment from month to 
 month, after new finished additions have been charged up and 
 depreciation taken off. 
 
 Selling Department Reports. — The distribution of sales-burden 
 n-port (Fig. L37) collects all the items of selling expense and shows 
 its allocation 1 >e1 ween the various classes of products. This being
 
 REPORTS AND RETURNS FOR EXECX TIVE 143 
 
 determined, the amount chargeable is shown separately for each 
 product or an individual product sales burden report (Fig. 137a). 
 This allows a proper amount of the sales burden againsl each 
 line of product to be charged to the current month, and also allows 
 some portion of it to be held up, as, for instance, when heavy 
 expense for a particular campaign has just been incurred. Jf so 
 held up, it must of, course, be carried forward to the next mouth. 
 
 PLANT &c ADDITIONS 
 
 FIG. 13G 
 
 Items 
 
 Balance from Last Month 
 
 Wages this Month 
 
 Stores this Month 
 
 Mach,Rates (from Fig 134) 
 
 Works Expense Items 
 
 Total In 
 
 Additions Finished this Month 
 
 Unfinished Work Forward 
 
 Total Out 
 
 JANUARY 
 
 Budget Actual 
 
 TOTAL Foil YKAR 
 
 Budget 
 
 Actual 
 
 PLANT REPORT 
 
 FIG. 136 A 
 
 Balance Last Month 
 
 Additions Finished as Above 
 
 Purchased this Month 
 
 Total In 
 
 Depreciation this Month 
 
 Equipment Sold 
 
 BALANCE FORWARD 
 
 Total Out 
 
 Figs. 136 and 136A. — Budget and actual expenditure on plant and 
 
 equipment. 
 
 The basis of distributing expense to the various classes of product 
 is not disclosed by the report (Fig. 137). It must be decided on 
 after careful consideration of all the facts. Once this basis is 
 fixed the allocation of the different items of selling expense to the 
 different products is a routine matter, so that all that is needed 
 here is a statement of the fact that they have been so allocated. 
 The "held-up" balance is the most significant figure of the Fig. 
 137a report.
 
 444 MANUFACTURING COSTS AND ACCOUNTS 
 
 I !'•-. 137 '.m> l37o. — Distribution of selling harden to products, and 
 individual statements of amounts charged and carried forward respectively 
 in regard to each separate product.
 
 REPORTS AND RETURNS FOR EXECUTU E 145 
 
 Trading Reports. — A trading report (Fig. 138) is made for each 
 class of product. Also a summary, consolidating all the separate 
 product reports in one set of figures, is desirable it' there arc more 
 than two products. The factory cost of the finished product for 
 the month (including its proportion of supplementary rate) is 
 added to the selling expense for that class of product for the 
 month. Against these items is placed the price of the goods as 
 billed, the difference or balance being the profit on that class of 
 product. 
 
 TRADING REPORTS FIG. 138 
 
 Items 
 
 JANUARY 
 
 
 TOTAL FOR YEAR 
 
 Budget 1 Actual 
 
 
 Budget Actuul 
 
 ALL PRODUCTS TOGETHER ) 
 
 Faotory Cost of Sales 
 
 
 
 
 
 
 Selling Burden this Month 
 
 
 
 
 
 
 BALANCE PROFIT 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 Sale Price of Sales 
 
 
 
 
 
 
 PRODUCT A \\ 
 
 Factory Cost of Sales of A 
 
 
 
 
 
 
 Selling Burden on A this Month 
 
 
 
 
 
 
 BALANCE PROFIT 
 
 
 
 
 
 
 Total 
 
 
 
 
 
 
 Sale Price of Sales of A 
 
 
 
 
 
 
 PRODUCT B 
 
 Factory Cost of Sales of A 
 
 
 
 
 
 
 
 
 
 
 
 
 Fig. 138. — Trading budget and actual returns on all classes of product 
 together and each individual product separately. 
 
 Collectible Accounts. — The collectible-accounts repori (Fig. 
 139) shows the status of credit. It collects the total collectible 
 and deducts the amounts collected and the discounts, leaving the 
 amount still outstanding at the month end, classified into ac- 
 counts due, not yet due and overdue. 
 
 Products for Own Use. — Where a firm makes subsidiary lines 
 for its own use, such as nuts, bolts, screws, etc., which arc trans- 
 ferred to stores on completion, a report like Fig. 136 should be
 
 446 MANUFACTURING COSTS AND ACCOUNTS 
 
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 used, and such work separated from ordinary production. The 
 reason is that such work does not take supplementary rate. To 
 charge it with such rate means thai the cosl of making things for 
 oneself is higher in slack times than in busy limes, which is 
 obviously untrue. This is one of the absurdities thai have been 
 promoted by the usual percentage burden systems, and many 
 firms have lost and are losing money because they suppose that 
 work for themselves is costing them much more than it really is. 
 The real truth of the situation is that in slack times they are 
 losing less by such work than would he the rase if they purch 
 outside, since such work absorbs machine rates which would 
 otherwise go into unabsorbed burden and be wasted. 
 
 Nothing has been said as to the cash report, nor as to the ordi- 
 nary Profit and Loss accounts and Balance Sheet, which will he 
 familiar to everyone. But the method of carrying the items in 
 vertical columns month by month should be extended to the ex- 
 ecutive's copies of these documents (sec Chap. XII, Part I).
 
 INDEX 
 
 Accounting and bookkeeping con- 
 trasted, 19 
 
 by business periods, 109 
 
 cost, 123 
 
 mechanism of, 12 
 Accounts, nominal, 18 
 
 real, 13 
 Administrative expenses, 34, 235 
 Advertising account, 31, 36 
 Allocating, definition, 16 
 Auxiliary equipment, 96, 193, 387 
 
 B 
 
 Balance sheet, 16, 21, 24, 115 
 Bids, 140 
 
 Bill of material, 268, 380 
 Bonuses, 129, 229, 230, 327 
 Bookkeeping and accounting con- 
 trasted, 19 
 
 elements of, 12 
 Books of original entry, 13, 21, 29 
 Budget, 403, 431 
 Buildings account, 30, 34, 191 
 Burden, 243, 272, 322, 346 
 
 class, 389 
 
 hourly, 312 
 
 journal, 59, 239, 280, 297, 330 
 
 normal, 338 
 
 report, 439 
 
 tonnage, 339 
 Byproducts, 93 
 
 C 
 
 Capital investment, 3, 27 
 Cash journal, 29, 146, 150 
 Catalogues, account, 31, 36 
 
 trade, 141 
 Class burden, 389 
 Clock system, 219 
 Closing journal, 22 
 Component orders, 257, 263, 318, 379 
 
 Continuous inventory, 158, 183 
 
 Cost accounting, 123 
 
 for product, 6, 9, 37 
 mechanism of, 25 
 Cost album, 423 
 
 including interest in, 392 
 of marketing, 9 
 
 sheets, 272, 273, 275, 319, 342, 
 378, 381, 412 
 Costing, 279 
 
 contrasted with purchasing. I 
 department hour-cost method, 
 
 287 
 methods, 44, 56, 66, 287, 312, 
 
 340, 355, 371 
 on machine rate plan, 340, 355 
 percentage plan, 56, 312 
 Costs, departmental, 38, 287, 355, 
 
 377 
 Crane area, 361 
 
 Creditor's ledger control account, 
 149 
 
 I) 
 
 Departmental cost methods, 38, 287, 
 355 
 
 costs, collecting, 377 
 
 efficiency, 402 
 
 manufacturing journal, 308, 334, 
 384 
 
 orders, 258 
 Departments, definition, 284 
 
 productive, 285 
 Depreciation journal, 34 
 
 of equipment, 4, 26, 27, 191, 
 367, 390 
 
 schedule, 202 
 Designs, accounting, 96 
 Direct labor, 41, 44, 56, 59, 118 
 
 material, 40, 48, 59, 118 
 Distribution schedule, 213 
 Double-entry bookkeeping, 13 
 
 449
 
 150 
 
 INDEX 
 
 E 
 
 Efficiency of departments, 402 
 
 of shop, report, 426 
 
 record of workmen, 400 
 Equipment, account, 30, 34 
 
 auxiliary, 90, 193, 387 
 
 depreciation, 4, 26, 27, 191, 367, 
 390 
 
 purchase of, 3 
 
 report, 442 
 Executive, reports for, 403, 434 
 Expense accounting, 56, 59 
 
 control of, 430 
 
 connecting with product, 41, 44, 
 118 
 
 journal fur .sales, 107 
 
 Factory cost, 33 
 
 reports and returns, 395 
 Finished goods journal, 382 
 
 work journal, 49 
 Foreman, reports for, 398, 405 
 
 G 
 
 Gate time record, 220 
 Goods received book, 170 
 
 H 
 
 Hand industries, 315 
 Hourly burden, 312 
 machine rate, 368 
 
 1 
 
 I. lie machines, 71, 349, 351, 398 
 Individual machine factor, 367 
 Insurance, account, 30, 207 
 Interest, including in cost, :;'.»_' 
 Inventory, continuous, 158, 183 
 
 ISSUe price register, 171, 175 
 
 Item cards, L60 
 
 Tigs, accounting, 96 
 
 Journals, 13, 29 
 
 Labor, cost of, 3 
 
 direct, 41, 44, 56, 59, 118 
 Land schedule, 359 
 Ledger accounts, 13 
 Lighting, 358 
 Lots, costing by, 54 
 
 M 
 
 Machine earnings, 429 
 
 rate, costing, 340, 355, 371 
 hourly, 368 
 
 time, reports, 409 
 Machines, idle, 71, 349, 351, 398 
 
 rented, 78 
 Manufacturing accounts, 1 
 
 recording purchases, 146 
 
 journal, 281 
 Marketing the product, cost of, 9 
 Master schedule, 422 
 Material, account, 30, 34 
 
 bill of, 268, 380 
 
 cost of changes, 2 
 
 costing, 379 
 
 direct, 40, 48, 59, 118 
 
 distribution in costing, 292, 323 
 
 journal, 309 
 Mechanism of accounting, 12, 25 
 Molds, accounting, 96 
 Munroe machine, 372 
 
 N 
 
 Nominal accounts, 18 
 Normal burden, 338 
 
 O 
 
 < >l>solescence, 192 
 
 < >rder register, 310 
 
 system of costing, 342 
 Orders, 238, 242 
 
 accounting, 54, 57, 81 
 component, 257, 263, 318, 379 
 control by superintendent, 401
 
 I.\ DEX 
 
 151 
 
 Orders, departmental, 258 
 
 plant addition, 270, 380, 385 
 production, 255, 290, 30). 318, 
 
 344, 380, 391 
 purchase, 132, 139 
 replacement, 90, 391, 428 
 standing, 245, 290, 29G, 317, 
 342 
 Organization factor, 366 
 
 Part orders, 257 
 
 Patterns, accounting, 96 
 
 Pay-roll, 217, 295 
 
 Percentage plan of costing, 56, 312 
 
 Perpetual inventory, 158, 183 
 
 Piecework, 129, 229, 327 
 
 Plant account, 30, 191 
 
 addition order, 270, 380, 385 
 
 cost sheets, 273, 275 
 Postage account, 18 
 Power, accounting, 67, 359, 373 
 
 house, expense of, 26 
 Premiums, 129, 231, 327 
 Process hour, 50 
 
 work, time record of, 305 
 Production, accounting, 37, 123 
 
 centers, 313 
 
 cost of, 5 
 
 cost sheets, 273, 275 
 
 factors, 68, 76, 248, 355 
 
 orders, 255, 290, 304, 318, 344, 
 380, 391 
 
 report, 436, 439 
 Productive departments, 285 
 Profit and loss account, 404 
 
 ascertaining, 102 
 Profits, 113 
 
 Property accounts, 110 
 Purchase, 118 
 
 definition of, 1 
 
 journal, 29, 146 
 
 orders, 132, 139 
 
 requisitions, 137 
 
 specifications for, 132 
 Purchases, division of, 3 
 Purchasing, contrasted with costing, 
 4 
 
 Purchasing, rust of, :•; 
 
 recording expenditures, l 16 
 
 i: 
 
 Kami index, L75, 22 1 
 
 Rr:il accounts, L3 
 
 Reject, 93 
 
 K«'iit account, 18, 30, 34 
 cost of, 3 
 
 Renting machines, 78 
 
 Rents, 207 
 
 Repairs, 373 
 
 Replacement order, 90, 391, 128 
 
 Reports, 130 
 factory, 395 
 for executive, 403, 434 
 for foreman, 398, 405 
 for superintendent, 400, 418 
 of expenditure, 135 
 of selling department. I 12 
 on burden, 436 
 on equipment, 1 1- 
 on factory burden, 439 
 on finished goods, 436 
 on production, 436, 439 
 on shop efficiency, 426 
 on stores, 439 
 on wages, 439 
 trading, 445 
 
 Requisitions for purchases, 137 
 for stores, 173 
 
 Reserve account, 211 
 
 Returns, factory, 395 
 
 Salaries, account, Ml, 34, 40, 216, 
 
 book, 232 
 Sales, 100 
 
 expense, 33, 36 
 
 journal, 21 
 Scrap, 87 
 
 by product, 91 
 Selling department, 10 
 
 expense, 100, 240 
 
 reports, 442 
 Service cost sheets, -7'A 
 
 costing, 288
 
 452 
 
 INDEX 
 
 Service expense, 399, 401 
 
 purchase of, 207 
 
 special, orders, 245 
 Shop efficiency reports, 426 
 Shrinkage, 91 
 Sold ledger, 25 
 Space factor, costing, 357 
 Special service orders, 245 
 Specifications for purchases, 132 
 Spoilage, 86, 311, 391, 399, 415 
 Standardization of charges to prod-> 
 uct, 70 
 
 of materials, 134 
 Standing order cost sheets, 275, 296 
 
 orders, 245, 290, 296, 317, 342 
 Stationery account, 18, 31, 34 
 Stock-taking, 8 
 Stores and storckeeping, 156, 167 
 
 issues journal, 34, 177, 292 
 
 report, 439 
 
 requisition for, 173 
 
 transport factor, 361 
 Summarizing accounts, 109 
 Sundry expenses, 34 
 Superintendent, reports for, 400, 418 
 Supervision factor, 364 
 Supplementary rate, 347 
 Supplies, account, 30, 34 
 Surplus in balancing accounts, 115 
 Suspended expense, 19, 211 
 
 Taxes, account, 30, 207 
 Time, accounting, 216 
 cards, 223 
 
 Time, machine, 409 
 
 record of process work, 304 
 
 recording, 50 
 
 reports for foreman, 406 
 
 sheets, 295, 324 
 Tonnage burden, 339 
 Total, monthly, 320 
 Trade catalogues, 141 
 Trading account, 22 
 
 reports, 445 
 Traveling account, 18, 31, 36 
 
 U 
 Unit quantity of product, 42 
 
 V 
 Voucher register, 150 
 
 W 
 
 Wages, account, 31, 34, 36, 40, 44, 
 216 
 distribution in costing, 293, 323, 
 
 346 
 rate register, 224 
 record of, 411 
 report on, 439 
 Waste, 86 
 Wasted machine capacity, 71, 349, 
 
 351, 398 
 Workman's efficiency record, 400, 
 
 416 
 Works expense, 234 
 order, 257
 
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