, ... . . BOOKKEEPING AND COST ACCOUNT FOR FACTORIES WILLIAM KENT THE ARTHUR YOUNG ACCOUNTING COLLECTION Graduate School of Business Administration Library of the University of California Los Angeles This book is P TTV . on the last date stamped below. 7,1 MA) WORKS OF WILLIAM KENT PUBLISHED BY JOHN WILEY & SONS, Inc. Bookkeeping and Cost Accounting for Fac- tories. vii+261 pages. 8Ji by 10 s 4 '. Profusely illus- trated with forms. Cloth, $4.00 net. The Mechanical Engineers Pocket-Book. A Reference Book oi Rules, Tables, Data, and Formula, for the Use ot Engineers, Mechanics, and Students. Ninth edition. Thoroughly revised with the assistance of Robert T. Kent, xi v+1526 pages, 4 by 6H- Flexible "Fabrikoid" binding, $5.00 net. Steam-Boiler Economy A Treatise on the Theory and Practice of Fuel Economy in the Operation of Steam-Boilers. Second edition, 1915. xvii +7 17 pages, 6 by 9, 287 figures. Cloth, $4.50 net. Investigating an Industry. A Scientific Diagnosis of the Diseases of Man- agement. With an introduction by Henry L. Gantt, author of " Work, Wages and Profits." xi + 126 pages, 5 by 7' 4 '. Cloth, $1.00 net. BOOKKEEPING AND COST ACCOUNTING FOR FACTORIES BY WILLIAM KENT, ME. Sc.D. CONSULTING ENGINEER MEMBER AMERICAN SOCIETY OF MECHANICAL ENGINEERS; ASSOCIATE TAYLOR SOCIETY FIRST EDITION NEW YORK JOHN WILEY k SONS, Inc. London: CHAPMAN & HALL, Limited 1918 400% Copyright, 1918 By WILLIAM KENT PRESS OF BRAUNWORTH & CO. BOOK MANUFACTURERS BROOKLYN, N. Y. Bus. Admin. library 5686 PREFACE The author of this treatise was a bookkeeper and cost accountant for some years before he became an engineer, and many times during his career as an engineer and as manager of works he had occasion to install systems of bookkeeping and cost accounting and to audit books. In this way, and by reading much of the extensive literature on accounting, he has kept in touch for over forty years with the development of accounting practice. More than twenty years ago he was urged by the president of one of the largest manufacturing corporations in New England to write a book on factory cost accounting, but he was then too busy with other matters and the suggested book had to be postponed to the indefinite future. Some three years ago the suggestion was repeated at a conference of several professional accountants, who agreed that the literature on cost accounting was in a most chaotic shape and was altogether unsatisfactory. The author then began a serious re-study of the subject, by reading many of the most recent books, both English and American (there has been a large crop of them in the last ten years), re-reading the articles on accounting that had appeared in Engineering Magazine and in the Transac- tions of the American Society of Mechanical Engineers during the last twenty-five years, and by visiting many factories and conferring with their managers and cost accountants. The result of the study was to confirm the statement that the word "chaos" properly describes the bulk of the literature, and the cost accounting methods in most factories. There are many good books on bookkeeping and ordinary accounting, and some useful books on certain parts of the general subject of cost accounting, but there seems to be a lack of books cover- ing a wide field and representing the best modern practice. The principal faults of the existing books may be listed as follows: 1. Over-conservatism. Adherence to old-fashioned theories and fallacies. 2. Over-development of red tape, leading to unnecessary clerical work. 3. Too much variety and novelty of method. 4. Vagueness and lack of detail in descriptive text. 5. Incompleteness. Partial treatment of complex subjects. Accounting practice in factories, and that of professional accountants who are introducing their "systems" into factories, varies all the way from excellent to very poor. Some accountants are in advance of the books both in theory and in practice. Others have not yet come abreast of the modern ideas of accounting. A few of the fallacies that are rapidly being discarded are: that interest on investment forms no part of factory cost; that business and selling expense are part of cost; and that a profit cannot arise until a thing is sold. Wrong methods of distributing burden are most common. The ratio of non- productive to productive labor is by many still considered to be an index of the efficiency of the manager. "Tying the costs to the general books" is erroneously supposed to prove the accuracy of the cost accounts. Inventories are priced and profits and losses are computed on the basis that the goods in the warehouse and stores are worth just what it cost to produce them, possibly many months earlier, although market values may have advanced or declined in the meantime. Inventories are inflated by charging to the cost of finished product the cost of keeping part of the factory idle. The time has arrived when there is a need for a systematic treatise on cost accounting which will start the student at the beginning with the elementarv principles of double entry bookkeeping and lead him through factory accounting to cost accounting, giving him not only the fundamental theory in accordance with the views of the ablest modern accountants, but also warning him against the time-worn fallacies of the older school. Such a treatise the author has undertaken to prepare. The first three chapters treat of elementary principles, titles and definitions of accounts, and the evolution from the ordinary journal and ledger systems into the labor-saving methods of separate purchase and sales ledgers, column cash books and journals, up to the monthly column ledger, and finally to the combined journal-ledger, by means of which the troublesome trial balance is dispensed with. The Fed- eral Trade Commission's system of accounts for retail mer- chants is then discussed, and it is shown how it can be im- proved by the use of the journal-ledger. Incidentally the Commission's views on Merchants' Selling Prices and Turn- over are criticised. Factory Accounting is then shown to be distinct from com- mercial bookkeeping, and the first principle stated is that in the general books of a manufacturing concern the operations of the factory should be treated as if they were those of a separate business, belonging to outside parties. Only two accounts need be kept with the factory, one for the investment in real estate and equipment, and the other, for the opera- tions of the factory, called Manufacturing or Factory Oper- ating account. This account is charged with all disburse- ments for factory operations, including purchases of material, payment of salaries, wages and expenses, together with monthly charges against the factory for its proportion of taxes, insurance, administration expense, interest on invest- ment, and reserve for depreciation. The account is credited with the "factory cost" or "warehouse value" of all goods shipped from the factory. IV PREFACE In the factory books an account is opened with "Com- pany," or "Private Ledger," which is the reverse of Factory Operating account in the general ledger. It is credited with all charges made by the Company against the factory and charged with the value of the goods shipped. No account of selling expenses is kept in the factory books. When " Company " is credited with the values received from it, charges for the monthly total of these values are made to Factory Cash, Stores, Labor, and Burden, and in recording the factory operations these four accounts are credited and Work in Process, Worked Material, and Finished Product are debited. Numerous examples are given to show how these principles are worked out in practice. Cost Accounting is then taken up, and the author divorces the accounting department from the cost department, having the latter determine costs by an independent, method. "A new definition of Factory Cost is now needed. It is not post-mortem cost, what the goods cost last year, but what it now costs to reproduce them or what they will probably cost during the remainder of the current year, assuming that the factory runs at its normal rate " (page 49). Various methods of cost finding are described, and the use of job tickets and stores-issue tickets is fully explained with examples. A long chapter is devoted to Distribution of Burden, and the errors of old methods are shown. The author considers the machine-hour rate as the basis of the best system for factories making " assembled " products, but shows how certain modifications of it may make the costs more accurate, and in the "Last Word on Burden; Standard Burden per Unit of Product" (page 81), explains a system by means of which the clerical labor of cost finding may be greatly lessened. Other chapters treat of Depreciation, Inventory Valuation, Appraisals, "Systems" and "Red Tape," Daily and Monthly Records, Charting of Statistics, Cost of Idleness, Problems and Difficulties, Uses of Costs, Various Opinions about Costs, Classification, Symbols, Bookkeeping by Machinery. These, with the introductory chapters take up about one-half of the book. The remainder is devoted to practical cost accounting in various industries, including a blast furnace, a steel works, foundries, a hardware factory, a machine shop, a bakery, a textile mill, a woodworking shop, cost and price of coal, power plants, and printing shops. The final chapter contains examples of reports to stockholders of large corporations, numerous blank forms in addition to those given in other chapters, and a list of books on cost accounting and on scien- tific management. The author here wishes to acknowledge his indebtedness to the many officers of corporations, accountants and others who have assisted him in his labors by allowing him to study their cost accounting methods. He is under especial obligations for courtesies extended by the following: Plimpton Press, Nor- wood, Mass.; New England Butt Co., Providence, R. I.; Yale & Towne Mfg. Co., Stamford, Conn.; Nash Engineer- ing Co., South Norwalk, Conn.; Federal Printing Co., New York: National Meter Co., Brooklyn, N. Y; Tabor Mfg. Co., Miller Lock Co., and Henry Disston & Sons, Philadelphia, Pa.; Ferracute Machine Co., Bridgeton, N. J.; H. H. Franklin Mfg. Co., Syracuse, N. Y.; Lodge & Shipley Co., and The Lunkenheimer Mfg. Co., Cincinnati, 0.; and The Joseph & Feiss Co., Cleveland, O. He is indebted also to Mr. Gershom Smith, Manager of the Tabulating Machine Co., New York, and to Mr. Albert Walton, manufacturing accountant and industrial engineer, Philadelphia, who have kindly contrib- uted matter which will be found under their names in the text. Attention is called to some unusual features of the book, designed to make it convenient for readers and students, viz., the size of the page, 8J by 1 1 inches, double column, with two sizes of type, to facilitate reading and to give space for large forms and tables without using folders; the use of the wax process instead of photographic methods of reproducing forms; the substitution in the forms of clear lower ease type for capitals and block letters which are often difficult to read; the very complete table of contents and index with occasional use of full-face type to call attention to the most important subjects; the index to forms and to names of authorities quoted ; and the use of easily read figures in the tables, with diagonal lines for the fractions in all 6-point type. CHAPTER I. BOOKKEEPING Elementary Principles PAOE The Ledger. The Cash Book 1 Labor-saving Methods 2 Payment of Bills 2 Single and Double Entry 2 The Journal 3 Rules for Journalizing 3 Loss and Gain Accounts 4 Invoice Book. Invoice Ledger 4 Sales Ledger 4 Trial Balance 4 The Bookkeeper, the Accountant, and the Engineer 5 Relation between the Accountant and the Efficiency Engineer 5 CHAPTER II. TITLES AND DEFINITIONS OF ACCOUNTS Stock, Partner's Account 6 Capital Stock 6 Profit and Loss 6 Surplus; Dividend Merchandise 6 Trading, Purchase Acct., Sales Acct. 7 Mdse. Returned; Sales Allowances. 7 Accounts Receivable and Payable. ... 8 Bills (or Notes) Receivable 9 Bills (or Notes) Payable 9 Bill Book 9 Balancing Bills Receivable and Pay- able 10 Interest Account 10 Suspense Account 10 Property Accounts 10 Balancing Property Accounts 11 Investments in Bonds and Stocks ... 11 Mortgage or Bonded Indebtedness . . 11 Expense Accounts 11 Advance Payments; Accrued Ex- penses 11 Insurance Account; Taxes 11 Consignment Accounts 12 Commission Business 12 Account Current; Account Sales. ... 12 Classification of Accounts 12 Accounting Code 12 Capital, Capital Stock, Definitions. . 12 CHAPTER III. THE EVOLU- TION OF BOOKKEEPING — THE COLUMN LEDGER Journalizing and Posting 13 Discount Column in Cash Book 14 Accounts Receivable and Payable. . . 14 CONTENTS PAOE The Column Cash Book 15 The Invoice Register 15 The Bill Book 15 The Eight-column Journal 15 The Safeguard Ledger 1(5 The Column Ledger 17 Combined Journal-ledger 17 Monthly Column Ledger 19 Balance Sheet 20 Notes on the Journal-ledger 20 Check on Journal-ledger 21 CHAPTER IV. ACCOUNTS FOR RETAIL MERCHANTS. SELL- ING PRICES. TURNOVER The Federal Trade Commission's System 22 System of Accounts for Retail Mer- chants 22 Monthly Summary of Business 22 Explanation of the Accounts 23 Balance Sheet 23 Profit and Loss Statement 24 Journal and Ledger Entries 25 Balance Sheet 27 Suggested Improvements in System . 2S Reducing the Number of Accounts . . 28 Reserves; Depreciation; Surplus.... 30 Profit and Loss Adjustment 30 Monthly Expense Ledger; Column Ledger 31 The Condensed Accounting System. . 32 Expense Distribution 32 Deferred Profit and Loss Items 32 Merchants' Selling Prices 33 Factory Cost and Selling Price 33 Formulas for Profit and Loss 33 Distribution of Burden 34 Turnover 34 Turnover of Goods and of Capital. . . 34 CHAPTER V. FACTORY AC- COUNTING Separation of Factory from General Books 35 Products, Continuous, Single, Varied 35 Recorded Costs 35 Normal Costs 36 Different Kinds of Industries 36 Company or Private Ledger 36 Subdivision of Total Expenditures. . . 36 Inter-departmental Accounts 36 The Factory Books 36 Opening a Set of Factory Books .... 37 Journal and Ledger Entries 38 v PA OB Trial Balance and Monthly State- ment 39 Accounting Code 39 Transfer and Balancing Entries 39 Company's General Ledger 40 Factory General Ledger 41 A Simple Accounting System 42 Journal and Ledger Entries 42 Inventory 43 Adjustments. Auditor's Report. .. . 44 Code of the Cost Accountant 45 Company Ledger; Factory Ledger . . 45 Burden Account 46 Statistical Sheet, Mfg. Accounts .... 46 The Auditor's Comments 46 Depreciation Reserve 47 Expense Assets 47 Suspense Account. 48 Contingent Liability 48 Dividend and Surplus 48 Error of Uniform Overhead 48 CHAPTER VI . COST ACCOUNT- ING Factory Cost. Definition 49 Divorce Accounting from Cost 49 Starting a Cost System 50 The Stores System 50 Labor Charges 50 Factory Orders 50 Standing Orders, Office Orders 50 Production Orders, Job Orders, Small Orders 50 Subdivisions of Pay Roll 51 Time Keeping 51 Stores Account 51 Petty Stores 51 Transactions and Journal Entries ... 52 Valuation of Stores 52 Profit Due to Increase in Value 52 Inventory of Warehouse and Stores. . 53 Inventory of Partly Finished Work. . 53 Checking the Continuous Inventory. 53 Cost Keeping by Pieces of Paper. ... 54 Balance of Stores 54 Production Orders 54 Job Tickets 54 Monthly Statements of Bills 54 Voucher Checks 54 Check Register 54 Requisitions 55 Stores Credit Card 55 Burden Distribution Book 55 Cost Card, Finished Product 55 Cards for Production and for Cost Keeping 55 Limitation of the Cost Accountant. 56 VI CONTENTS CHAPTER VII. COST FINDING METHODS. USE OF THE JOB TICKET PAGE Time and Job Tickets 57 Weekly Pay Voucher 58 Bonus Figuring 58 Workman's Yearly Record 59 Effect of Bonus on Profits 59 Examples in Use of Job Tickets 59 Problem in Cost Finding 60 Clerical Work on Tickets 60 Information on the Job Ticket 61 Storekeeper's and Burden Records. . 61 Office Orders 61 Operation Order or Job Ticket 61 Definition of " Job " 62 Piece Cost Card 62 Comparison of Burden Rates 63 A Complete Job Ticket 63 Sorting of Tickets 64 CHAPTER VIII. DISTRIBUTION OF BURDEN Yearly Burden Expenditure 65 Percentage on Direct Labor 65 Man-hour Method 65 Variable Factors of Burden 66 Department Method 66 Class-of-Product Method 67 Comparison of Different Methods. . . 67 Calculation of Machine-shop Burden 67, 68 Modification of Machine-rate Burden 69 The Job Burden Rate 69 Burden Table 70 Burden in Minor Departments 70 Blacksmith and Carpenter Shops. ... 70 Foundry 71 Polishing and Plating Rooms 71 Grinding Room 72 Figuring Burden on Three Machines 72 Departmental and Class Burdens . . 73, 74 Total Burden 74 Total Labor and Burden Costs 74 Use of Normal Burden Figures 75 Keeping Labor and Material Cost without Burden 76 Classification of Expenditures by Per- centages 76 Ratio of Non-productive to Produc- tive Labor 77 A Problem in Burden Charging 77 Another Problem 78 The Supplementary Rate 78 Application of the Supplementary Rate 79 A Common Fallacy 80 A False Theory 80 The Correct Theory 81 The Last Word on Burden. Standard Burden per Unit of Product 81 Saving of Clerical Work 82 Factory Cost and Warehouse Value. . 83 PAGE Interpretation of the Recorded Cost Figures 84 Advantage of the Standard Schedule . 84 Charge Unabsorbed Overhead to the Sales Department 84 CHAPTER IX. DEPRECIATION. INVENTORY VALUATION. APPRAISALS Method of Treating Repairs and De- preciation 85 Depreciation, Theoretical and Actual 86 Relation of Depreciation to General Expense 86 Four Methods of Treating Deprecia- tion 86 Depreciation Table 87 Valuation of Machinery 87 Table, Depreciation at Different Rates 88 Relation between Perpetual-Inven- tory Valuation and Appraised Valu- ation 89 Table, Standard Depreciation Rates . 90 Appraisals for Insurance Purposes. . 91 Appraisals of Manufacturing Property 91 CHAPTER X. SYSTEMS AND RED TAPE. FUNDAMENTALS OF A COST SYSTEM Use of Red Tape 92 The System-mad Manager 92 Cost Systems in Government Shops. 92 The Card System 93 Cost Accounting at the Brooklyn Navy Yard 94 A Better System 94 Federal Trade Commission's Cost System 94 Functions of a Cost System 95 Balance .Sheet 96 Commercial and Factory Ledger .... 97 Condensed Factory Ledger 98 Distribution of Overhead 98 CHAPTER XL DAILY AND MONTHLY RECORDS. CHARTING OF STATISTICS. COST OF IDLENESS Daily Record of Work in Progress. . 99 Monthly Comparative Cost Record. . 100 Perpetual Inventory 100 Monthly Report of Product 100 Weekly Labor Report 100 Weekly and Monthly Cost Periods . 100 Memoranda for Journal Entries 101 Journal-Ledger 101 Monthly Record of Progress 102 Tabulating Monthly Ledger Totals. . 103 The Charting of Costs 103 The Exception Principle 103 Diagram of the Accounting System . . 103 Diagram of Annual Exhibit 104 Idleness Charts 105 PAGB Chart of Iron Works Costs 106 Cost of Pig Iron 107 Chart of Reduction of Labor Costs. . 107 CHAPTER XII. PROBLEMS AND DIFFICULTIES. STANDARD COST Costs when the By-product from One Article is used in Making Another 108 Cost of Making Disks from Scrap . . . 108 Factory Costs, Recorded and Normal 109 Fixing the Value of Scrap 109 The Cost of Silver 110 How to Reduce Costs Ill Predetermination of Costs Ill Standard Costs Ill Cost Formulas Ill Causes of High Cost in Government Arsenals 112 Reducing the Cost of the Cost System 112 Problem, the Cost of Locks 112 Time-keeping Systems 113 Piece Cost Cards 113 Investigating the Cost System 114 Modifying the Cost System. 115 Problem, Cost of Engines and Tur- bines 115 Three Years' Statistics 116 Figuring Profits and Losses 117 The Books do not Tell the Whole Story 118 Scientific Management 119 CHAPTER XIII. USES OF COSTS. VARIOUS OPINIONS ABOUT COSTS Conclusions to be Drawn from Cost Statistics 120 Uses of a Cost System 120 Definition of Factory Cost 121 Objects of Cost Keeping 121 Controlling Accounts 121 Theories of Costs 122 Interpret the Figures into Actions. . . 122 Functions of the Cost Accountant. . 122 The Manager of the Future 122 Devising a Cost System 123 Part of the Cost System may be Dropped 123 Tying the Cost System to the Gen- eral Accounts 124 Wage Systems. The Bonus Plan ... . 124 The Flow of Values 124 Predetermined Costs. Standard Costs 126 Bad Cost Systems 126 Axioms Concerning Costs 127 Subdivisions of Cost 127 Cost of Organization, of Patents, etc. 128 Interest Charged to Cost 128 Inflated Inventories 128 The Rate of Interest 128 Problems in Charging of Interest. . . 128 CONTENTS vn CHAPTER XIV. CLASSIFICA- TION. SYMBOLS. BOOK- KEEPING BY MACHINERY PAGE Classification. Symbols 131 Letter Symbols versus Numbers 132 List of Operation Symbols 132 Nomenclature of Machine Details. . . 132 Record of Equipment 133 Method of Indexing and Filing 134 Plant Inventory 134 Bookkeeping Machines 135 List of Makers of Machines 135 The Hollerith Tabulating System.. 135 Samples of Tabulating Cards 137 Elapsed Time Recording Machine . . . 138 The Periodograph 138 Monroe Calculating Machine 138 Marchant Calculator 139 CHAPTER XV. OLD-SCHOOL ACCOUNTING IRON WORKS BOOKKEEPING Bookkeeping at a Pennsylvania Fur- nace 140 Ledger Accounts at a Blast Furnace. 141 Sample of Cash Book 141 Weekly Report of a Furnace 141 Labor Book 142 Bookkeeping at a New Jersey Furnace 143 Journal Entries 143 Cost of Pig Iron 145 Statistical Statement 146 A Better Method 146 Iron Works Ledger, New Form 147 Combined Journal Ledger 148 Cost of Iron when By-products are Made 149 Example of Tying Costs to Books. . . 149 Cost Keeping in a Rolling Mill 150 Machine-hour Rates in a Steel Works 150 CHAPTER XVI. MODERN AC- COUNTING SYSTEMS FOR STEEL WORKS A Steel Work's Accounts 151 List of Ledger Accounts 152 Description of Accounts 152-162 Trial Balance, Balance Sheet 163 Income Statement 163 Forms used by Mr. Walton 164-169 Penna. Steel Co. Ledger Accounts. . . 170 CHAPTER XVII. FOUNDRY COSTS— COST OF COAL Cost Finding in an Iron Foundry .... 171 Variable Conditions in a Foundry. . . 171 Cost Finding in Brass, Bronze, and Aluminum Foundries 172 Iron Foundry Cost Sheets 173 PAGE Estimating 174 A Cost Statement 174 Forms and Routine 175-178 Caution in Regard to Use of Forms. . 178 Cost and Price of Coal 178 Cost of a Ton of Anthracite Coal. . . . 179 CHAPTER XVIII. HARDWARE FACTORY AND MACHINE SHOP ACCOUNTING Accounting System in a Hardware Factory 180 Productive Classes and Departments. 180 Accounting Symbols 180 Stores Records 180 Time Keeping, Verification of Pay Roll 181 The Tabulating Machine Record 182 Statistical Sheets, Pay Roll Distri- bution 182 Accounting Distribution of Pay Roll 183 Journal Entries 184 Works Ledger 184 Residuum Expense 185 Determination of Costs 185 Recorded Cost (Shop Cost) 186 Cost of Finished Product 186 Part Cost Card 186 Present Cost Estimate 186 Overhead Percentage 186 Slippage 186 Unit Costs of Product 187 Original and Revised Costs 187 Estimates on Special Work 188 Annual Inventory 188 Statistical Reports 188 Labor Turnover 188 Monthly Estimate of Increase of Inventory and Profit or Loss 189 Various Forms 191 A Machine-shop's Cost System 192 Incentive for Cost Department 192 Fundamental Principles 192 Wages Record. Time Cards 192 Relative Cost Factor or Cost Num- ber 193 Shop Expense Rate 194 Cost Collecting Cards 194 Expense Distribution Sheet 194, 199 General Business Expense 194 Stores 194 Work of the Bookkeeper 195 Worked Materials in Process 196 Various Forms 197-201 General Ledger Balance Sheet 198 Proof of the Cost System 198 Criticism of the System 198 Distribution of General Business and Shop Expense 200 Shop Expense Rate 201 Sources of Error 202 CHAPTER XIX. COSTS IN A WOODWORKING SHOP; A BAKERY; A TEXTILE MILL; A POWER PLANT PAGE Woodworking Shop, Time Study 203 Statistical Records and Charts 204 Burden Distribution 21 1 1 Cost Estimate 205 Planning and Scheduling Work 205 Use of the System in Other Businesses 206 Cost Accounts for a Bakery Jii(i Textile Cost Accounting 206 Cost Estimates and Cost Records . . 21 K i Lot Costs; Operation Costs 207 Power Plant Operating Costs 208 Classification of Expenses 208 Comparative Cost of Operation and Maintenance 209 Standard Costs 210 Curves of Standard Costs 210 Standardization of Protective Charges 211 Comparison of Costs and Efficiencies 211 CHAPTER XX. COSTS IN A PRINTING SHOP Subdivision of Labor 213 Apportioning Expense to Depart- ments 213 Plimpton Press 214 A Standard Cost System for Printers 21(1 Synopsis of Forms 217 Statement of Cost of Production .... 218 Chargeable and Non-changeable Hours 218 Monotype Cost Records 220-222 Titles and Definitions of Accounts. . . 223 Federal Printing Co 224 Forms Used 224-236 CHAPTER XXI. REPORTS TO STOCKHOLDERS; EDUCA- TION OF ACCOUNTANTS; COST OF IDLENESS; MISCEL- LANEOUS FORMS; BIBLIOG- RAPHY. Reports to Stockholders of Corpora- tions 237 Surplus Earns Dividends 237 Bell Telephone System 2.'i~ Genera] Electric Co 238 Westinghouse Electric & Mfg. Co. . . 239 College Education in Accounting. .. . 240 Technical Experience Necessary. ... 211 An English View 241 Expense of Idleness 241 Miscellaneous Blank Forms 243-250 Books on Cost Accounting 251 Books on Industrial Engineering.... 252 Topical Index 255 Index op Forms and Blanks 259 Index of Authorities Quoted. . . . 261 BOOKKEEPING AND COST ACCOUNTING FOR FACTORIES CHAPTER I BOOKKEEPING ELEMENTARY PRINCIPLES Bookkeeping is a systematic method of keeping accounts of business transactions. Accounts are personal or non-personal: A personal account is a record of the transactions of a business with a particular person, firm or corporation. A non-personal account, sometimes called a " representa- tive account," is one kept with things dealt in, such as Cash, and Merchandise, or Bills Receivable, and with expenditures for or receipts from other things than purchases and sales of the goods dealt in, for example, Expense Account ; Interest Account. The Ledger. An account is usually kept in a Ledger. The name of the account is written at the top of the page. In the ordinary form of ledger the page is divided into two sides, left and right hand, called the Debtor and Creditor (or Debit and Credit) sides, and is ruled as shown below: Dr. John Jones Cr. 1916 1 J i ii Feb. 1 To Md«e. 24 l7l0 ii Feb. 15 By Cash II 2635 3 Ml v l z:> [l I 1 ! The meaning of these entries is that John Jones purchased merchandise on Feb. 1, $17.10 and on Feb. 3, $9.25, the details of the sale, corresponding with the bills or sales- tickets made at the time of the sale, being recorded on pages 24 and 25 of some other book, such as a Sales Book or Day Book, and that he paid the account on Feb. 15, as recorded on page 11 of a Cash Book. The words " To " and " By " are used as a matter of custom on the debit and credit sides respectively, but they are often omitted. In this system of bookkeeping there are at least three books involved, two books of original entry, the Sales Book and the Cash Book, and a third book, the Ledger, into which entries are transferred or " posted " from the other books. In some lines of business, such as that of a country store, the Ledger may be a book of original entry, and it may be ruled as follows: 1916 John Jones Feb. I 10 beef, 20 30 pork, 20 25 sugar, 7 6 dz. eggs, 25 2 lb. coffee, 30 I bbl. flour Feb. 3 I pc. dress gds. I pr. boots Paid Feb. I 5 2 00 6 1 1 00 75 50 60 5 25 17 10 4 00 5 25 9 25 26 35 In this ledger all the columns are debit columns, and there may be three or more money columns, depending on the size of the page. The Card Ledger. The ledger may be kept on cards, which are filed alphabetically in a drawer, instead of in a book. The Bill Files. The ledger and the sales book may even be dispensed with altogether. If a bill is delivered to John Jones each time he makes a purchase, a carbon copy of the bill may be put in a folder or envelope marked with his name, and kept in a filing case or drawer of Unpaid Bills in which the folders are arranged alphabetically. If bills are rendered monthly, a sales memorandum or sales ticket for each sale is similarly filed, and at or near the end of the month all the John Jones tickets are taken out of the folder and a type-written bill and a carbon duplicate are made from them, the duplicate being placed in the unpaid bill file while the original is sent to Jones. Originals should be kept. The original sales tickets, or the carbon copies of the original bills delivered with the several sales, should be filed carefully and preserved for two years as a precaution in case any dispute should arise about the account. When Jones pays his bill or bills, the duplicates are taken out of the unpaid bill file, marked paid and placed in the file of paid bills. The amount of cash received is entered in the cash book, which may be of any shape and ruling suitable to the kind and extent of the business, the following being the common form: Dr. The Cash Book Cash Cash Cr. 1916 Feb. 13 To Balance, forward 317 96 Feb. 13 By Expense, Clerk 14 To Wm. Smith on hire 24 17 acct. 50 00 14 By Mdse (Thom- 15 To John Jones in full 26 35 son's bill) 15 00 — 15 By W. Robinson & 394 31 Sons By Balance 217 137 24 90 137 90 394 31 Feb. 16 To Balance The receipts and payments of cash are usually kept on opposite pages of the book, the Dr. side (receipts) always being the left-hand page and the Cr. (payments) the right- hand page; corresponding to the Dr. and Cr. side of a ledger page. The entry "By Balauce, 137.90" on the Cr. side is usually made in red ink. 2 BOOKKEEPING AND COST ACCOUNTING Labor-saving Methods. The difference between modern bookkeeping systems and old-fashioned ones is not in the principles, which are as unchangeable as those of arithmetic, but in the use of labor-saving methods, such as card ledgers, bill files, and other "short cuts." An example in labor saving is shown in the modern way of paying bills by checks sent by mail. Fifty years ago Jones would have written a letter in copying ink reading as follows: New York, Feb. 14, 1866. Messrs. Thomas Brown & Sons, 230 Washington St., City. Gentlemen: I beg to enclose my check No. 1234 on the Bank of North America for $26.35 in payment of your invoices of 1st and 3d inst. Kindly acknowledge receipt. Yours respectfully, John Jones. He would make a press copy of this letter in a letter book, make a note of it in the index, and enclose it in an addressed envelope. On receiving the letter Thomas Brown & Sons would mail John Jones a formal receipt together, possibly, with a courteous letter of thanks, using time, paper, ink and postage stamps. In the year 1916 he would receive his monthly bill in a "window" envelope, his name and address being printed by an addressograph on a perforated coupon attached to the bill, which is folded so that the name and address show through the transparent paper in the "window." Here is one style of coupon : SPECIAL NOTICE IF THIS BILL IS PAID BY CHECK AND NO FURTHER RECEIPT REQUIRED PLEASE DETACH THIS COUPON AND MAIL WITH CHECK Folio 1794 Date Feb 1, 1916 Name Mrs. John Jones Address Montclair N. J. Amount 21.09 James McCreery & Co., 5 W. 34th St. N. Y. When a concern pays a bill it is no longer customary to send a letter with the check, requesting that a receipt be returned. The check is merely enclosed with a printed coupon attached to it, something like the following: The coupon may be dispensed with, and instead there is printed on the back of the check, at the top: In Payment of Account as per Statement of 191 . . In some places the labor of making and mailing monthly checks is still further shortened. The customer makes a list of all his monthly bills, giving names and addresses of the creditors, and sends to his local bank a single check for the total amount. The bank lumps together all the amounts due to each creditor, and sends each a cashier's check (or a credit memorandum if the creditor is a depositor in the same bank) for the total amount due him, thus acting as a clearing house between debtors and creditors. Single-entry Bookkeeping. The system of accounts described above is called single entry. Personal accounts only are kept in the ledger, and there is only one entry for each transaction. We " charge " or " debit " John Jones's account when he makes a purchase and credit it when lie pays his account. A creditor, one from whom we purchase goods, is credited when we receive his bill or statement of account, and charged or debited when we pay him. The system is rarely used by any except very small business concerns, because it does not give all the information that the owner wishes to know about his business, such as the amount of merchandise bought or sold during any given period, the amount of bills or notes receivable or payable received, issued or outstanding, and the amount of expenses. Double Entry. In double-entry bookkeeping, which is in almost universal use, ledger accounts are kept not only with persons, firms and corporations, but with things, such as cash, merchandise, bills payable, bills receivable, and with interest, discount and expenses of various kinds, also with the owner for liis investment or net assets; and there is a profit and loss account to show gains or losses. The chief principle of double-entry bookkeeping is that for every transaction an entry is made to two or more accounts, and that the entry or entries made on the debit side of the ledger must for every transaction be equal in amount to the entry or entries made on the credit side. The ledger thus is always "in balance," provided all the posting from the journal and other books has been done and no errors have been made; that is, the sum of all the entries on the debit sides of all the accounts equals the sum of all the entries on the credit . sides. The "balances" or differences between the debit and credit sides of the several accounts, when listed and summed up in a " trial balance," will also be in balance; that is, the sum of the debit balances will equal the sum of The above cheek is in payment of account as shown below. Tear off at perforation before using at bank. No receipt or acknowledgment is necessary. If unsatisfactory return all papers for adjustment. Date Our No. Details of Payment Made by This Re- mittance from Company Amount of Charge Less Discount Less Freight Other Deductions Net II 2 53191 Balance of Account 516 67 Detach this statement before depositing check. BOOKKEEPING the credit balances if the " posting " has been clone cor- rectly. The Jolm Jones transactions shown on page 1 in single entry will appear as follows in a double-entry ledger: (Page 26) Dr. Merchandise Cr. Feb. I 3 By John Jones By John Jones (Page 6) Dr. Cash 17 10 925 Cr. Feb IS To John Jones (Page 130) 26 35 I! Dr. John Jones Cr. ■ Feb. Feb. 1 3 To Mdse. To Mdse. 24 25 17 9 10 25 Feb. 15 By Cash 11 2635 In order to save time and ink when there are hundreds or thousands of personal accounts, the expressions " To Mdse " and " By Cash " are often omitted. The Journal. In the above entries the credits to merchan- dise account and the two charges to John Jones were posted from the Sales Book, and the debit of Cash and the credit of John Jones were posted from the Cash Book, but it is cus- tomary in double-entry bookkeeping to have another book called the Journal, which may be a book of original entry containing either all of the transactions of a business or only those which are not entered in the sales book, cash book or other book, or it may be an intermediate book between the books of original entry and the ledger, in which transactions are summarized or grouped, in order to avoid crowding the ledger with unnecessary detail. When all the transactions are entered in the Journal it is sometimes called the Day Book or Blotter. Entries in a Journal are always made in " journal form," that is, in Debtor and Creditor style, but in a Day Book they may be made in ordinary language, as below: DAY BOOK Tuesday, February 1, 1916 Sold John Jones (here insert items) Thursday, February 4, 1916 Sold John Jones (items) Tuesday February 15, 1916 John Jones paid his account 26 25 35 (Page 24) JOURNAL Tuesday, February 1, 1916 Dr. Cr 130 20 John Jones Dr. To Mdse. 17 9 26 10 25 35 17 9 26 10 (Page 25) Thursday February 3, 1916 130 20 To Mdse. 25 (Page 32) Tuesday February 15, 1916 6 130 Cash Dr. To John Jones 35 These entries are posted in the ledger as already shown. As each journal entry is " posted " a figure showing the page of the ledger on which the account appears Ls entered in the first column of the journal. In actual bookkeeping the expression " Dr." and " To " in the above entries and Dr. and Cr. at the tops of the columns are generally omitted. Except in small businesses it is not customary to make a journal entry of each separate transaction, as above shown, but once a month to make group entries of transactions of a similar kind, the original entries of which are made in other books, as below: Feb. 29 Sundries To Mdse 26 35 \ 130 John Jones 175 Wm. Smith 46 17 161 Thos. Robertson X. The sum of all the charges to individual accounts is entered here as a credit to 93 20 Merchandise account. Cash To Sundries X 130 To John Jones 26 35 175 To Wm. Smith 30 00 161 To Thos. Robertson X. Enter here the sum of all the cash receipts which are credited to individuals 85 10 The word " Sundries " means the " several accounts stated below." In the actual practice of large concerns both of the above entries would be omitted from the journal, on account of their involving an unnecessary amount of labor. The charges to Jones and others would be entered directly from the sales book and the credit to Mdse. would be the total of the monthly entries in the sales book. So also the receipts of cash would be entered to the credit of indi- vidual accounts directly from the cash book, and the debit to Cash account would be the total cash receipts of the month. Rules for Journalizing. Certain rules for making entries in journal form, whether they are made in the journal or in books of original entry such as the cash book or the sales book, are memorized by bookkeepers, and their careful ob- servance is essential for correct work. Such rules are as fol- lows: Rule 1. When a thing is received and a thing is given for it at the time, the thing received is Dr. to the thing given. Rule 2. When a thing is received and nothing is given for it at the time the thing received is Dr. to the party from whom it was obtained. Rule 3. When a thing is given and nothing is received for it at the time, the party to whom it is given is Dr. to the thing given. General Rule. The account that receives value is Dr. to the account that gives or parts with value. 4 BOOKKEEPING AND COST ACCOUNTING Examples Transactions Rule 1. We buy Mdse. and pay Cash We sell Mdse. and receive a note. Rule 2. We receive Cash from John Jones. We buy Mdse. on time from Peter James. Rule 3. We sell Mdse. to John Jones on time. We pay Cash to Peter James. Entries Mdse. Dr. to Cash. Hills Receivable to Mdse. Cash Dr. to John Jones Mdse. Dr. to Peter James. John Jones Dr. to Mdse. Peter James Dr. to Cash. Loss and Gain Accounts. While these rules are sufficient for most business transactions, such as purchases and sales, payments of cash or issue of notes for merchandise, or to settle open accounts and the like, they are scarcely sufficient without the use of some sort of bookkeeping fiction for other kinds of transactions, such as the payment of taxes, clerk hire, interest on borrowed money, the receipt of allowance for defective goods, or for changes in the value of accounts, such as may be caused by appreciation or depreciation of property, bankruptcy of debtors or other causes. To cover these cases we have another general rule to be memorized: Loss and Gain Account Debit for Losses Credit for Gains Loss and Gain Account, or Profit and Loss Account as it is commonly called, is an account that represents all changes in the net assets of a concern that are due to gains or losses of any kind. Such changes are not always entered at the time they occur. An appreciation in the value of land or the depreciation in the value of a building or of machinery or goods may not appear in the books until the proprietor of the business finds it convenient or advisable to make the entry. Discount, Interest, Taxes, Insurance, Commissions, Adver- tising, Clerk Hire, Freight and Cartage, Fuel, Light, Depre- ciation and similar expense accounts are branches or sub- sidiaries of the general Profit and Loss Account, and their balances (that is the difference between their debit and credit columns) are transferred to Profit and Loss Account at the end of the year or other time for closing the books. Sev- eral of these accounts, which represent the general con- standly recurring expenses of the business, are commonly lumped into one account, called Expense Account. Dis- count and Interest is a single account representing both receipts and payments or allowances for discount or interest. Expense Account and Discount and Interest, and all losses or gains on any other account, such as Merchandise Account, are closed into I rofit and Loss Account at the end of the year. Invoice Book. An Invoice Book is a book in which all purchases of goods and all bills for expenses are recorded. In small concerns having a limited amount of transactions in each month they may be entered directly in the Journal, but in larger concerns an invoice book of some form is used, and its summarized records are entered monthly in the Ledger. It may be either a book similar to the Journal, all entries being written in it, or it may be a large bound book of blank manila leaves in which the bills are pasted monthly after being sorted and arranged in alphabetical order. A vertical letter filing case may be substituted for the book, the bills being filed in folders labeled with the names of the cred- itors and arranged alphabetically. Invoice Ledger and Sales Ledger. In order to prevent the Ledger from being too bulky, when there are a great many personal accounts to be kept, the personal accounts are removed from it, putting the accounts of creditors in a sep- arate book, called an Invoice Register, Invoice Ledger, Purchase Book, or Accounts Payable Book, and the accounts of debtors or customers in a Sales Ledger. The monthly total of the entries in the Invoice Book is entered in the General Ledger to the credit of Accounts Payable, " By Sundries," and this account is debited " To Cash " for the total monthly cash payments of invoices. The monthly total of sales shown in the Sales Book is charged in the General Ledger to the debit of Sales Account or Accounts Receivable, " To Sundries," and this account is credited monthly with the total cash receipts from sales. Having thus described the general principles of double- entry bookkeeping we will in the next chapter illustrate their application to an ordinary commercial business. The Trial Balance. When all the monthly entries have been posted into a double-entry ledger from the Cash Book, Journal, Sales Book, Invoice Register or other books, the ledger will be "in balance" if the entries have been made correctly, for in double entry the sum of the debit items entered must always equal the sum of the credit entries. If we make a list of all the open accounts in a ledger and sum up the totals on the debit side and on the credit side of each account these two totals will balance, but this is not often done ; it is sufficient to take the balance or differences of the two sides of each account and write them on the Dr. or Cr. sides of the trial balance, according to whether the- Dr. or Cr. sides of the account is greater. The sum of the balances on the two sides, if no error has been made, must be equal. If the ledger is found to balance, that is, the trial balance shows that the sum of the Dr. balances equals the sum of the Cr. balances, it is generally assumed that the ledger has been properly posted and that it represents the true condition of the accounts. There are, however, possible errors which the trial balance does not reveal. They are: 1, Failure to post a journal entry, both Dr. and Cr. sides. 2, Posting an entry to a wrong account. 3, Making two errors in posting or in addition, or subtraction, or the transcribing from the ledger to the trial balance, one of which balances the other. As a possible means of finding an error of this kind, several steps may be taken. 1. Compare the balance of Cash in the Trial Balance with that in the Cash Book. 2. Compare Bills Receivable with the total of notes receiv- able on hand. 3. Compare Bills Payable with the balance shown in the Bill Book. BOOKKEEPING 4. Compare Accounts Receivable with the total balances in the sales ledger or with the total of unpaid accounts shown in the carbon copies in the file of customer's accounts unpaid. 5. Compare Accounts Payable with the total of unpaid bills in the Invoice Register or with the total of the file of unpaid bills for purchases. 6. Compare the present month's trial balance with the one of the previous month to see if the figures of those accounts in which there have been no transactions or entries during the month (such as Real Estate, Office Furniture, Capital Stock, Bond and Mortgage) are unchanged. If the two sides of the trial balance do not agree there is an error somewhere and it must be searched for until it is found. When the ledger has a great number of accounts this is often a long and tedious operation. The error may be in the trial balance itself; it may be found by taking a new trial balance, verifying the lead-pencil footings of the Dr. and Cr. sides of each account and the difference between them, which is entered in the trial balance. If the second trial balance shows the same figures as the first, then the postings in the ledger must be checked against the figures in the Cash Book, Journal and other books from which the postings were made, the bookkeeper or clerk calling off the figures from the several books while an assistant checks their posting in a ledger. If the error is not found in the posting, then the several books must be examined to see if the debit entries balance the credits. If the error remains undiscovered, the next step, and it is a long one, is to find if the previous month's trial balance correctly represents the difference between the lead- pencil footings of the Dr. and Cr. columns of the ledger when the trial balance was taken, then to post that trial balance in a new temporary ledger made on sheets of paper, then post in that ledger every entry of the month, first verifying the figures of the Dr. and Cr. items of each entry; then take a trial balance of the temporary ledger and compare it with the original trial balance. One of the best ways to lessen the trial balance difficulty is to have as few accounts as possible in the general double- entry ledger, keeping the Sales Ledger and the Purchase Ledger by single entry. The accounts of a factory should be kept in a separate set of books from those of the general offices, the whole of the operations of the factory being repre- sented in the general ledger by a single Manufacturing or Factory Operating Account. Perhaps the best of all the ways is to adopt the Column Ledger or Combined Journal-Ledger which is its own trial balance. This is fully described later. of directing the bookkeeper, and skilled in interpreting the language of bookkeeping and in making reports and drawing conclusions from the records in the books. A cost accountant is a man who possesses not only the general knowledge and skill of an accountant, but who has in addition the special knowledge and experience necessary to originate and keep a system of accounts which will show in gross and in detail the costs of a manufacturing or other industrial or financial operation, and to make reports and draw conclusions from records of costs. An industrial engineer is a man capable of managing an industrial enterprise, and who possesses as part of his equip- ment such a knowledge of cost accounting as will enable him to supervise and direct the cost accountant. Engineers need sound knowledge of the principles of double- entry bookkeeping, if for nothing else, to enable them to exercise a close, intelligent and independent supervision of manufacturing costs. — Humphreys. Relation between the Accountant and the Efficiency Engineer (C. E. Knoeppel and Harold Burt, Journal of Accountancy, Vol. 21, 1916, p. 101): The real trouble is this: The accountant looks upon the efficiency movement as a visionary, radical and revolutionary thing, full of inconsistencies, because it seems to violate all the principles of good accounting practice. The engineer views accounting as a theoretical exposition of facts and figures which are misleading, incorrect, as well as dangerous to use, and violat- ing all the rules of good practical management. The accountant and the engineer can get together if each will get away from the feeling that the other does not know what he is talking about. The accountant and the engineer should hold frequent con- ferences and each study the work of the other. Both should recognize that the engineer is concerned with the things that are to be accomplished while the accountant is concerned with things that have been accomplished. A slight modification of the wording of the first of the above quotations would make it more accurate. For " the account- ant," in the first line, read " some accountants of the old school," and for " the engineer " read " some half-educated engineers, who are not versed in modern accounting practice." The fact is that within the last few years industrial engineers and accountants (or a few of them at least) have got together, and each knows what the others are talking about. In many cases industrial engineers are accountants themselves and are training other accountants. THE BOOKKEEPER, THE ACCOUNTANT, AND THE ENGINEER A bookkeeper is a man skilled in the art of keeping the books of a business. A good bookkeeper is a good penman, quick at figures, rapid and accurate in making entries, posting the ledger, taking trial balances and the like. An accountant is a man versed in the theory and practice of accounts, capable of originating a bookkeeping system and The student who wishes to learn more of the details of bookkeeping than are given in the above highly condensed treatment is advised to purchase two or three old books on the subject at a second-hand book store and get the views of different authors on the fundamental theory, then for a great variety of detailed instruction and forms, with much good advice, get a recent edition of J. H. Goodwin's Improved Bookkeeping and Business Manual, published by Mr. Good- win at 1547 Broadway, New York City. CHAPTER II TITLES AND DEFINITIONS OF ACCOUNTS Stock When a man is in business for himself his individual account, representing the capital he has invested in the business, is commonly called "Stock." It might be called "Capital," "Owner," or "Proprietor," or the man's name might be used. George Robertson (Partner's name) When there are partners each partner has an account under his own name. The credit balance of each partner's account represents the amount of his interest in the business. Capital Stock; Common Stock; Preferred Stock In the case of a corporation the par value of the stock- holders' interests is represented by an account called Capital Stock. If there are two kinds of stock there is an account for each. The credit balance of Capital Stock account (or accounts) is the par value of the stock issued or outstanding. A Stockholder's Ledger (not a part of the general books) is kept to show the number of shares that each stockholder owns. A stockholder is credited in it with the number of shares he owns and charged with the shares he parts with. Profit and Loss Account (Loss and Gain) To this account are transferred all the profits and losses shown in the accounts representing business transactions. If an account shows a profit (there being a balance on the credit side of it after the inventory balance has been added) the amount of that profit is transferred to the credit of Profit and Loss Account by a journal entry. If an account shows a loss, such as an expense account, the amount of that loss is charged to Profit and Loss. Profit and Loss is Debited with Losses and Credited with Profits. Loss and Gain Debit Losses Credit Gains An item on the left or debit side of the ledger is an asset if the amount eventually will be received, is a loss if the amount eventually will not be received. An item on the right or credit side of the ledger is a liability if the amount will eventually have to be paid; is a gain if the amount will eventually not have to be paid. — Humphreys. There is an apparent exception to the latter statement in the fact that Capital Stock, Surplus, Proprietor's account, and usually Profit and Loss, are on the credit side of the ledger, and do not " eventually have to be paid," but this is not in reality an exception, for the amounts of these accounts represent the indebtedness of the business to its owners, and it will eventually have to be paid to them if the assets are all sold and the business wound up or " liquidated." Surplus; Dividend If Profit and Loss account, after all the entries have been made in it at the end of a fiscal period, shows a credit balance that is the net profit. If it shows a debit balance that is the net loss. In either case the account may be closed in red ink To (or By) Balance, and the balance brought down. Or in case of a business owned by a single proprietor it may be closed by a journal entry, transferring the profit to the credit side of Stock Account or the loss to the debit side of that account. In the case of a partnership, the balance of Profit and Loss Account is to be subdivided among the several partners in accordance with the terms of the partnership agreement, and a journal entry made transferring each partner's share of the profit or the loss to his individual account. In the case of a stock company the disposition of the bal- ance of Profit and Loss Account depends on the decision of the directors. They may decide to leave the account open and bring the balance down, and this is generally done when the account has a debit balance, showing a loss or "Deficit" on the year's business. If there is a gain the account may be charged through a journal entry, and Dividend Account credited, with such portion of the profits as it is deemed advisable to distribute to the stockholders, another portion may be transferred to one or more Reserve accounts, such as Reserve for Bad Debts, another portion to Surplus account, representing the increased value of the business over the par value of the outstanding Capital Stock. When the dividends are paid in cash, Dividend Account is charged and Cash credited. Merchandise Account Merchandise Account in ordinary bookkeeping is a mixed account. We charge it with the cost of our purchases at the invoice price. If we are allowed a discount of 2 per cent for prompt cash payment we do not credit Mdse. but credit Dis- count. If we keep the merchandise several months before sell- ing it we do not charge it with storage, insurance or interest on the investment, but let these expenses be hidden in the expense accounts. If we sell the goods we credit Mdse. account not with the cost of the goods sold but with their gross selling price. If we allow the purchaser a cash discount, we do not charge it against Mdse. Acct. but against Discount. When we take a balance of Mdse, Acct, we do not get the TITLES AND DEFINITIONS OF ACCOUNTS value of our Mdse. assets, but a figure which is made up of value of the goods on hand and of the profits or losses on the goods that have been sold. In order to separate the value of the goods on hand from the profits or losses it is necessary to take an inventory. EXAMPLE Buy $1000 worth of goods. Allowed 2 per cent discount for prompt payment, $20. Shall we make the entry on the Cr. side of the Cash Book, By Mdse. $980, or shall we make it By Mdse. $1000 and enter on the Dr. side To Discount $20? It is customary to do the latter on the theory that we shall probably have to give a cash discount when we sell the goods, or that we may have to keep them for some months before selling them, costing us interest on the investment, storage and insurance, so that they will cost us $1000 before they are sold ; also on the theory that financial accounts like Discount and Interest should be kept separate from Mdse. account, in order to have the books show how much we gain or lose by taking or giving discounts. Suppose we sell the goods, after keeping them three months, for 81100 and allow 2 per cent discount for cash. The entries then will be: CASH Jan. 10 April 10 To Discount To Mdse. 20 1100 Jan. 10 April 10 By Mdse. By Discount 1000 22 MDSE. Jan. 10 To Cash 1000 April 10 By Cash 1100 DISCOUNT April 10 To Cash 22 | Jan. 10 By Cash 20 Increase of Cash, $98; Profit on Mdse., $100; Loss on Discount, $2. Net profit on the transaction, apparently, $98, no entries having been made of the loss due to expenses, such as interest on the use of the money, which might have been invested in goods having a more rapid turnover, and storage, insurance, cost of handling, clerical work, etc., all of which are covered in the general expense accounts, which are not apportioned to particular transactions. Trading Account; Purchase Account; Sales Account On account of the complex nature of Merchandise Account some accountants split it up into two or three accounts, Trading, Purchase, and Sales. One author goes so far as to say that Mdse. Acct. is obsolete and that no first-class modern bookkeeper would use it, although perhaps 99 per cent of all bookkeepers do use it. Purchase Account, or Merchandise Purchased is charged with the cost of purchased goods and credited, Sales, or Trading, being charged, at the cost price, for the goods sold, the balance showing the cost of goods remaining unsold. Sales, or Trading, is credited, Cash or Accounts Receivable being charged, with the selling price of the goods sold. When all three accounts are used Purchases is charged with the cost of goods purchased, Sales is credited with the selling price of the goods sold, and at the end of the fiscal period Trading Account is opened, charged with the cost of the goods sold, Purchases being credited, and cred- ited with the total credit balance of Sales Account. When these entries are made the balance of Trading shows the profit or loss on the goods sold. Trading Account may also be charged with the balances of the various expense accounts connected with the handling of the goods, and charged or credited with discount and interest, and in that case the bal- ance of the account will show the profit or loss on the whole trading business. An example of the use of Trading Account will be found on page 25. It is doubtful if the advantages claimed for this method are sufficient to overcome the objections of increasing the number of accounts and the increased difficulty of taking trial balances. Merchandise Returned; Sales Allowances These items may be entered in Mdse. Account or in sep- arate accounts as may be found most convenient. If we return goods that we have purchased and credited to the party from whom they were purchased, Mdse. being charged, we make a counter entry, charging them back to the party and crediting Mdse. If goods have been returned to us that we have charged to the party to whom they were sent, crediting Mdse., we make a counter entry crediting the party and charging Mdse. By this method the Dr. side of Mdse. contains a record not only of the goods we have purchased but also of those that have been returned to us, and the Cr. side includes both the sales of goods and the goods that we have returned. Allowances, rebates, etc., may also be included in Mdse. Acct. EXAMPLE Dr. Merchandise Cr To Jones, purchased from By Jones, returned to him 100 him 1000 By Brown sold him 500 To Brown returned by him 200 By Jones, allowance for To Brown allowed him 50 defects 40 Dr. Jones Cr. To Mdse. returned to him To Mdse. allowance by him By Mdse. bought from him 1000 Dr. Brown Cr. To Mdse. sold him By Mdse. returned by him By Mdse. rebate allowed him 200 50 Or the entries may be made as follows: Dr. Merchandise Purchases Cr. To Jones 1000 BOOKKEEPING AND COST ACCOUNTING Dr. Mdse Sales Cr By Brown 500 Dr. Mdse. Returned Cr To Brown * 200 By Jonea 100 * The entries in this account appear to read wrongly, for Mdse. was not returned to Brown and returned by Jones, nor were allowances made to Brown and by Jones, but just the opposite. The Bookkeeper, however, will read them correctly: Mdse. returned Dr. To Brown, for goods returned by him, and Mdse. Returned Cr. By Jones, for goods that we returned to Jones. Dr. Allowances Cr. To Brown . 50 By Jones 40 Dr. Jones Cr. To Mdse. Returned To Allowances 100 40 By Purchases 1000 Dr. Brown Cr To Sales 500 By Merchandise Returned By Allowances 200 50 Dr. Trading Ace ount (entries at end of year) Cr Bal. Mdse. on Hand Total Purchases Total Mdse. Returned Total Allowances Profits on Mdse. Total Sales Total Mdse. Returned Total Allowances Bal. Invty. (red ink) Still another method of making these entries is to have Mdse. Account ruled in columns, as below: Di Merchandise Cr. Allow- ances Returns Purchases Sales Returns Allow- ances 50 200 1000 Jones Brown 500 100 40 The Jones and Brown accounts being treated in the ordinary way. In very large concerns having hundreds or thousands of personal accounts Mdse. Account may be kept as a con- trolling* account in the private ledger, entries of totals of Purchases, Sales, Returns and Allowances being made in it once a month, separate ledgers being kept for each of these subdivisions. The monthly entry in the controlling account might be made in two lines, Accounts Payable and Accounts Receivable taking the place of Jones and Brown in the form shown above. These subordinate ledgers may also be further subdivided into departmental merchandise ledgers or ledgers * The word "control" as used by accountants does not mean control in the ordinary sense, it means rather to condense or sum- marize. An entry in a controlling account is a total of the entries in several subordinate or detail accounts kept in another book. for different classes of goods, and the general Mdse. Account in the private ledger may likewise be subdivided as desired. The general principle upon which these subdivisions should be made is that they shall furnish all the information that the management needs concerning the merchandising part of the business, in gross, by summaries, or in detail, with the least possible duplication of entries or cost of clerical labor. Each transaction is recorded originally upon a piece of paper, such as an invoice of goods received, a carbon copy of a bill for goods sold, or a credit memorandum. These ma) - be sorted and filed every day by departments or by classes of goods and alphabetically by names of debtors and creditors, and at the end of the month verified by comparing them with the monthly statements received from creditors or sent out to debtors. These statements then become original records for permanent filing and their totals are transcribed to the Invoice Register or Purchase Ledger or Departmental or Class Ledgers as the kind and extent of the business may require, and to Sales Registers or Ledgers. These books should have as many columns as may be needed to show kinds of goods, discounts, returns and allowances, and it is only the totals of these columns that need to be posted in the con- densed private ledger. Accounts Receivable ; Accounts Payable In old-fashioned double-entry bookkeeping, with a single ledger, these accounts were unknown. The personal account of each debtor and creditor was entered under his own name. There were, however, accounts called Sundry Debtors and Sundry Creditors, which were used to keep in one place entries with such debtors and creditors as were likely to have only one or two transactions with us in a year. When entries were made in them the man's name was written on the line in either the Dr. or Cr. side, whichever was needed for the first transaction with him, a sale or a purchase. EXAMPLE Di Sundry Debtors Cr. Jan. 10 Feb. 17 J. Smith R. Johnson 17 15 26.40 Mar. 10 Cash 17. 15 Sundry Creditors Feb. 15 To Cash 46.50 Jan. 15 Feb. 12 M. L. Ewen P. J. Franklin 46 50 57.10 In modern bookkeeping, purchases, except cash purchases, are entered in an Invoice Register or Purchase Ledger, and the monthly total is credited to Accounts Payable in the general ledger, charging the footings of the columns headed Mdse., Expense, Supplies, etc., to these accounts. The monthly total of sales, except cash sales, is charged "Accounts Receivable to Mdse." in the General Ledger, the charges against the individual debtors being made in the Sales Register or Sales Ledger. The Dr. balance of Accounts Receivable should equal the sum of the Dr. balances of the TITLES AND DEFINITIONS OF ACCOUNTS individual accounts in the Sales Ledger. The Cr. balance of Accounts Payable should equal the total amount that we owe on individual accounts in the Purchase Ledger. Bills (or Notes) Receivable Notes, Bills of Exchange, or Acceptances (accepted time drafts) in our possession and payable to us, are called Bills Receivable (or Notes Receivable). They are usually entered in the order of their receipt (or alphabetically if numerous) in a Bill Book. Transactions (I) Wo sell Mdse., $1000 to Jones on 60 day credit and and take his note due 60 days hence in settlement. (2) Having sold Smith $2000 Mdse. and charged his ac- count with it, we take his interest-bearing note in settlement. (3) Instead of an interest-bear- ing note Smith gives us a 3-months' note for the ac- count including interest (4) Note (I) is renewed at the end of 60 days, we received a new note for the same amount and a $10 check for interest. (5) Instead of (4) Jones pays $400 cash on account and $ 1 interest and gives us a new note for $600 (6) We discount at. Bank Note (2) after it has run two months. The Bank credits us $2020 (7) Note (3) is discounted 30 days before it is due. The bank credits us $2020 (8) We draw on Brown at 30 days for the balance of his account, $1000 plus $15 interest which will then be due, and he returns the draft "Accepted." Journal or Cash Book Entrtk Bills Rec. 1000 To Mdse. 1000 Bills Rec. 2000 To Smith 2000 Bills Rec. To Smith 2000 To Interest 30 Cash 10 To Interest 10 No Journal entry is needed. The new note is entered on the Bill Book, and the entry of the old note is marked "re- newed." Cash 410 To Bills Rec. 400 To Interest 10 In the Bill Book the entry of the old note is marked "Pd. $400 on a/c. New note for $600." Cash 2020 To Bills Rec. 2000 To Interest 20 Cash Interest 2020 10 To Bills Rec. 2030 Bills Rec. 1015 To Accts. Rec. (Brown) 1000 To Interest 15 Bills (or Notes) Payable Transactions (9) We buy Mdse. $1000 on 60 days credit, and give a 60- day note in payment (10) We owe Johnson $2000 and give him an interest- bearing note (11) Instead of (10) we give 3- months Note with $30 in- terest added. Journal or Cash Book Entries Mdse. 1000 To Bills Payable 1000 Accts. Payable (Johnson) 2000 To Bills Payable 2000 Accts. Payable Interest 2000 30 To Bills Payable 2030 Transactions Journal or Cash Book Entries (12) The bank discounts our Cash Dr. 1000 To Bills Payable own note for $1000, credit- Cash Cr. 10 1000 ing us $990 By Interest 10 (Entry on both sides of cash book) (13) We renew note (II) giving Cash Cr. By Interest 30 a new 3-mog. note and a The new note is entered in the Bill Book check for $30 interest and the entry of the old note is marked " Renewed." (14) We accept Simpson's time Accts. Pay. (Simp- To Bills Pay. 1010 draft on us in payment of son) 1000 account due him $1000 and Interest 10 $10 interest (15) We pay note (10) which Bills Payable 2000 To Cash 2020 has 2 months' interest Interest 20 accrued (Entry on Cr. side of Cash Book) By Bills Pay. 2000 By Interest 20) If each one of the above entries represented a separate transaction the Cash Book entries would be as follows: Dr. Cash Cr. (4) To Interest 10 (12) By Interest 10 (5) To Bills Rec. 400 (13) By Interest 30 To Interest 10 (15) By Bills Pay. 2000 (6) To Bills Rec. To Interest 2000 20 (15) By Interest 20 (7) To Bills Rec. 2020 (12) To Bills Pay. 1000 The Bill Book entries would be as below: Bills Receivable Dr. Acct. Cr. Acct. Cr. Int. Total Dr. Acct. Dr. Int. (1) (2) (3) (8) Mdse. Smith Smith Brown 1000 2000 2000 1000 30 15 1000 2000 2030 1015 (5) (6) (7) Cash 400 Cash 2000 Cash 2020 10 Bills Payable Dr. Dr. Cr. Dr. Acct. Acct. Int. B.Paj. (15) Cash 2000 (9) By Mdse. 1000 1000 (10) By Johnson 2000 2000 (II) By Johnson 2000 30 2030 (12) By Cash 1000 1000 (14) By Simpson 1000 10 1010 The Bill Book usually contains numerous columns for Date of Note, Drawer, Endorser, Amount, when Payable, Accts. Credited (or Debited) and Remarks. Interest Account in the General Ledger, posted monthly from the footings of the Interest Columns in the Cash Book and Bill Book would show the following: Dr. Interest Cr. Cash Bills Rec. Bills Pay. 40 45 85 10 BOOKKEEPING AND COST ACCOUNTING Balancing Bills Receivable and Payable. Interest Account It is customary to enter all bills receivable and bills pay- able at their face value, whether this value includes interest or not, and on balancing the books at the end of the year to bring down the balances of notes unpaid at their face values. It is also customary to make entries charging or crediting interest when interest is added on the note at the time the note is drawn, but when the note is interest-bearing to make the interest charge or credit only when the interest is paid. At the end of the year, when interest account is balanced, if there is a Dr. balance it is charged, and if there is a Cr. balance it is credited to Profit and Loss. There is a certain inaccuracy in this method, since at the time of balancing the notes may be worth something more or less than their face values, depending on whether the notes are interest-bearing and have interest accrued on them but not entered, or whether interest to a future date has been added in the face value of the note but is not yet accrued. Also Interest Account may not show the true profit or loss, for there may be interest accrued but not entered or entered but not accrued. To correct these inaccuracies by Journal entries to an Interest Adjustment Account, or to such accounts as Accrued Interest Payable, Accrued Interest Receivable, Interest not Accrued, etc., introduces a complexity in the bookkeeping that is usually considered to be more trouble than it is worth. It is better to let the inaccuracy correct itself as it does when the notes are paid, and to make a memorandum of it, if thought desirable, on the balance sheet. Suppose that on December 1st White and Black each owes us $2000 and that we owe Gray and Green each $1000. White gives us a three-months' note, including interest, for $2030, and Black gives us an interest-bearing note for $2000. We give Gray a three-months' note for $1015, and Green a demand note, interest-bearing, for $1000. The Ledger entries are: Bills Receivable Dec. I To White To Interest To Black 2000 30 2030 2000 4030 Bills Payable Dec. 1 By Gray 1000 By Interest 15 By Green 1015 1000 2015 Interest Dec. I To Bills Pay. (Gray) By Bills Rec. (White) 30 On balancing the books we find that we own Bills Rec. $4030, that we owe Bills Pay. $2015, and that Interest shows a profit of $15. The actual present worth of White's note, however, is only $2010, $20 out of the $30 interest not having yet accrued, and the present worth of Black's note is also $2010, $10 having accrued on it, making the two notes worth $4020 instead of $4030. Our present liability on Gray's and Green's note is $1005 each, or $2010 for the two, instead of $2015. We have earned $10 interest on White's note and $10 on Black's, a total of $20, instead of $30, and $5 each has accrued on our notes to Gray and Green, a total of $10 instead of $15. Net profit on interest account $10 instead of $15. Rather than make a lot of adjustment entries in the journal and ledger, involving the opening of one or more new ledger accounts, to reconcile the book values with the present values of Bills Receivable and Bills Payable, and to show the exact profit on Interest Account, it is better to let the balances appear as they are in the accounts, and to put a footnote in the Balance Sheet showing the present values and the actual profit. A footnote should also show our contingent liability on notes that we have endorsed, and a statement of any Bills Receivable of which there is a doubt as to their being paid. I Suspense Account If there are Bills Receivable, or Accounts Receivable, of which there is a serious doubt of their being collectible, they may be taken out of their respective accounts and charged to Suspense account until they are either paid or found to be of no value, in which latter case Suspense acct. is credited and Profit and Loss charged with them. Various Property Accounts All the property that a concern possesses may be subdivided in the bookkeeping system into as few or as many accounts as the owner may deem desirable. The goods he buys and sells may all be lumped into a single merchandise account, sub- divided into Merchandise Purchases, Merchandise Expense, Merchandise Sales, Trading ACct., etc., or into classes of goods, as Mdse. Dept. A, Dept. B, or Wheat, Corn, Oats, etc. His factory property may be handled in one account, Factory, or divided into Land, Building, Machinery, Power Plant, etc. Store equipment may be divided into Store Fixtures, Office Fixtures, and other accounts. In making up a scheme for subdivision of the property accounts the owner should ask himself the following ques- tions: What do I wish to have a dollar-and-cent record of in regard to my property and the various parts into which it may be divided. Do I wish this record in gross or in greater or less detail? If I wish it in great detail, is it necessary to get it all into the shape of double-entry journal and ledger accounts? Should it all be in one ledger or in several ledgers? Will it not be well to have a private double-entry ledger with only a few controlling accounts, covering the business as a whole, and to have separate books or filing cabinets containing the details? What statistical reports, weekly, monthly or annual do I need? Can a statistical system be devised which will get the information directly from original documents, or must it all be got from the ledger? Whatever system be devised for the subdivision of the accounts there will necessarily be a double-entry ledger to TITLES AND DEFINITIONS OF ACCOUNTS 11 cover the whole business, and there may be subordinate ledgers for details. Balancing Property Accounts In all ledger accounts representing property the method of keeping the account is the same, viz.: 1. On opening the account enter the inventory or appraisal value of the property represented by the account. 2. Debit the account with the value of all additions to the property, whether by work done on it, or by purchases for it; and with all expenses incurred on account of it which increase its value. 3. Credit it with all values returned by the property whether by sale or by transfer to other branches of the whole property. 4. At the end of the fiscal period have an inventory or appraisal of the property made, and enter the value, in red ink, on the credit side of the account By Balance (Invty.) 5. Add up both sides of the account and find the differ- ence. If the Cr. side is the larger there is a profit, if the Dr. side is the larger there is a loss. Enter the profit or loss on a memorandum of profits and losses which is to be used in making a journal entry. 6. When all the property accounts have had their profits or losses determined in this way, two journal entries are made, viz.: Sundries To Profit and Loss For profits on the following accounts. (Here enter the accounts with the several amounts ) Profit and Loss To Sundries For Losses on the following accounts. 7. Post these journal entries to the several accounts in the ledger. 8. The two sides of each property account will now be equal. Rule the account, enter the total on both sides, and bring down the balance, entering on the Dr. side To Balance (Invty.) $ Investments in Bonds and Stocks If we invest any portion of our capital in bonds or stocks either because we have no immediate need of it in our active business, or because we wish to have some of our capital available for quick turning into cash in case of an emergency, the accounts of such investments are kept in the same manner as those of any other property accounts. Debit at cost what we receive, credit at the selling price what we part with or sell. At the close of the fiscal period, or at any other con- venient time, take an inventory, credit Profit and Loss with gains, charge it with losses. If we borrow money, giving a note with stocks or bonds as collateral, Cash and Interest are debited and Bills Payable credited, no entry being made to Stocks and Bonds account, but in the list of stocks and bonds mark the ones used "Deposited as Collateral." Mortgage or Bonded Indebtedness If on beginning business we have a bond or mortgage lia- bility, it is entered on the Cr. side of the Bond and Mortgage Account, and if we give a bond for cash or settlement of some account, Cash (or other account) is debited and Bond and Mortgage credited. When we pay cash in full or on account of bonded indebtedness, Bond and Mortgage is debited and Cash credited. Expense Accounts All expenditures except those for merchandise or other property are charged either to Expense account or to one or more of the several accounts into which it may be sub- divided. Some of these are Rent, Insurance, Taxes, Repairs, Salaries, Freight and Express, Postage, Cleaning, Fuel, Light, Heat, Power, Salesmen's Expense, Stationery, Advertising, Traveling Expense, Charitable Subscriptions, Accidents, Legal Expense. In manufacturing concerns Factory Expense may be subdivided into a hundred or more subordinate ac- counts. To keep all these accounts in the usual form of double-entry ledger involves an intolerable amount of clerical work, therefore, many kinds of "short-cuts" have been designed by which all the necessary information concerning the details of the various expenditures may be obtained with a minimum expenditure of time and labor. Some of these are described elsewhere in this work. Expense account (or any subdivision of the account) is charged with expenditures, Cash, Petty Cash, Accounts Re- ceivable or other account being credited. In balancing the books at the end of the year Profit and Loss is debited and the expense account credited with the Dr. balance of the account, except that when any part of expense can be considered as an asset, such as unexpired taxes or insurance, or advertising paid for this year but belonging chiefly to next year's busi- ness, or the cost of a catalogue which will be useful for years to come, the amount that is estimated to be an asset is inven- toried and brought down as a balance. Advance Payments and Accrued Expenses. Insurance is usually paid in advance, sometimes for a year, sometimes for three years. The entry is Insurance Dr. to Cash (or, in the Cash Book, Cash Cr. By Insurance), the insurance being an expense. When the books are balanced at the end of a fiscal period, so much of the insurance as has not expired is an advance payment for a future expense, and is, therefore, not an expense of the period but an asset. It may be closed in the books into an account called Advanced Expenses, and show in the Balance Sheet as an asset, but it is just as well, and less troublesome not to open this new account, but to let Insurance Account remain open, crediting it and charging Expense Account with the amount of the insurance that has expired, and leaving the balance to Insurance Account, rep- resenting the amount paid in advance. In the case of insur- ance paid on factory buildings, equipment and stores, the amount paid is charged on the general books to Insurance, and once a month the account is credited, Factory Operating Account being charged with the monthly proportion, or one- twelfth of a year's insurance. Taxes are usually paid at some other time in the year than 12 BOOKKEEPING AND COST ACCOUNTING the date of closing the books. If the books are closed on June 30th and December 31st, and the taxes are paid on October 1st for the year ending December 31st, then the June balance sheet should show on the Dr. side of Accrued Taxes one-half of a year's taxes, the amount of an expense or loss that has accrued but has not been paid. Advanced payments not belonging to the expense of the current period, but to the next fiscal period, or to other future periods, are also known as Deferred Charges. Consignment Accounts When we ship goods to a branch store, to an agent or to a commission house to be sold for us we open a Consignment Account, also called "Shipping" or "Adventure" account, charging it with the goods at our cost figures, and also with any expenditures we may make on account of the consign- ment, such as freight, insurance, etc. The consignee from time to time sends us an "Account Current" or "Account Sales" charging us with any expenditures he may have made on account of the consignment, such as drayage, storage, repacking, etc., and also with his commission on the sales he has made ; and crediting us with any advances we may have made him for his expenses and with any money he has received on account of the goods he has sold. The account current contains also a statement of the goods sold and an inventory of the goods remaining on hand. On receipt of the account current we make the proper entries to the Consignment Account, charging it and crediting the agent, if we keep a personal account with him, for his disbursements, crediting it and charging him for his receipts if he has not paid them over to us. When they are paid we credit him and charge Cash. When the goods are all sold and a final account cur- rent rendered the consignment account is balanced and Profit and Loss is credited with the profit or charged with the loss on the consignment. If at the end of the year any of the goods remain unsold they are inventoried at their present value at their present location, cost plus freight, etc., less depreciation, if any, and this inventory value is brought down as a balance for next year, the entry to Profit and Loss being made as in the case of Mdse. Account. Commission Business When we receive goods from another party to be sold by us on commission, we receive with the goods an invoice which we file as an inventory of goods received on commission. We open an account with the consignor, charging him for any payments we may make on account of the goods, such as drayage, insurance, labor, etc., also with our commission on the goods sold, and with any remittances we may make from col- lections we have made from the parties to whom we have sold the goods. We render to the consignor an account sales or ac- count current, showing the disbursements and receipts, a state- ment of the sales made, moneys collected and still due, inven- tory of goods on hand, and balance due to or by the consignor. An Account Current or Account Sales is a formal itemized statement made by the consignee to the consignor giving all the charges and credits entered on the consignment account, and a statement of the goods remaining unsold. Classification of Accounts — Accounting Code. In large concerns it is customary for the chief accountant to have a book in which all the titles of the accounts are listed, usually in alphabetical order, together with a description of each account and of the kind of transactions that are to be recorded on its debit and credit sides. Copies of this book, sometimes called the Accounting Code, are available for use by the book- keepers, to enable them to preserve a uniform system of classification and method of making the journal entries for every possible kind of transaction. SOME DEFINITIONS Capital. Money or wealth employed in any business. Capital, fixed: Invested in property in a permanent form (lands, buildings, machinery). Capital, active or working: Cash, or property, or assets, that can easily be turned into cash, also raw material, work in progress, finished product in warehouse. Capital Stock. The indebtedness of the business to its stockholders, as represented by the shares of stock issued to the stockholders, together with the shares held as "Treasury Stock" for sale or for issue in the future, for which "Treasury Stock" account is debited. Capital stock appears on the general ledger as a liability, and it is, therefore, entered on the Cr. side of the ledger. Capital expenditure, charges to capital. Charges to revenue, charges against income. The word "capital" is used in two opposite senses: 1, The assets of the business, or net assets, entered on the Dr. side of the ledger; 2, the amount of capital stock, issued or held for future issue, entered on the Cr. side. When money is spent for a new machine it may be charged to Machinery Acct. as an asset of the factory, or it may be charged to repairs or expense, if it is a new machine replacing an old one that is worn out. In the former case it is called by some writers a charge to capital or a capital expenditure, and in the latter case a charge to revenue or income. CHAPTER III THE EVOLUTION OF BOOKKEEPING. THE COLUMN LEDGER The beginning of double-entry bookkeeping was the use BUls Receivable of the Journal with its debit and credit columns, and of the Ledger with its debit and credit sides. Every transaction To Sundries was entered first in the Journal and then in the Ledger. A series of transactions would appear in the Journal as follows: Cash to Proprietor 600 600 Mdse. to Jones (purchase) 500 500 Smith to Mdse. (sale) 400 400 Sundries Jones — in Iuterest to Bills Payable payment of his acct. 500 10 510 Bills Receivable to Sundries to Smith, his a c. pd. to Interest on note by note 408 400 8 Sundries Cash Intrri-r to Bills Receivable Smith's note discounted at bank 401 7 408 Bills Pay — pd. Jones's note To C ash 510 510 Cash To Mdse. Cash sales 150 150 Expense (Payroll) To Cash 50 50 These entries would be posted into the ledger as below: Proprietor By Cash Cash To Proprietor To Bills Rec. To Mdse. 600 401 150 By Bills Pay. By Expense 510 50 560 1151 Mdse. To Jones 500 By Smith By Cash 400 150 To Sundries 408 By Sundries 408 Bills Payable To Cash 510 By Sundries 510 Interest To Bills Pay. To Bills Rec. 10 7 By Bills Rec. 8 Expense To Cash 50 Jones To Bills Pay. 500 By Mdse. 500 Smith To Mdse 400 By Bills Rec. 400 The Trial Balance taken after the above Entries are posted would be as follows: Dr. Trial Balance Cr. Cash Interest Expense 591 9 50 650 Proprietor Mdse. 600 50 650 The first modification of this system was the taking of the separate Cash transactions out of the Journal and entering them in a Cash book, the footings of the two sides being entered in the Journal at the end of the month — thus: Dr. Cash Bool Cr. To Prop. To Mdse. To Bills Rec. 600 150 401 By Bills Pay. By Expensa 510 50 1151 13 14 BOOKKEEPING AND COST ACCOUNTING Journal Cash To Sundries 1151 To Prop. 600 To Mdse. 150 To Bills Rec. 401 Sundries To Cash 560 Bills Pay. 510 Expense 50 Interest 7 To Bills Rec. 7 Int. on Smith's note The Ledger then would show: Dr. Cash Cr. To Sundries 1151 By Sundries 560 Bills Rec. Cr. Cash Pd. Dr. Acet. Cr. Dis. and Int. By Jones 495 500 5 check for $398, we making him an allowance of $2.00, the entry on the Dr. side of the Cash Book is This modification introduced one objectionable feature, the making of an entry in two different books when a note was discounted, one in the Cash Book, for the net cash received, and the other in the Journal, for the interest charged. This objection was avoided by making an entry on the debit side of the Cash Book for the face value of the note and on the credit side for the interest; thus, Cash Dr. to Bills Rec. $408; Cr. by Interest $7, on the fiction that Cash received $408 for the note and paid S7 interest, instead of receiving the net sum of $401 with which the bank credited its customer. A sim- ilar plan was followed when discounts were allowed for prompt payment of invoices. If instead of our giving Jones a note for $500 in settlement of his account for $500, he offers to take $495 for prompt cash and we draw a check for that amount, an entry By Jones $500 is made on the credit side of the cash book and To Interest $5 on the debit side. When the number of discount and interest transactions became large, an improvement was made in the Cash Book by adding a discount and Interest column to each side, a column crediting Discount and Interest account on the Cr. side, and one debiting that account on the Dr. side. Thus, in paying Jones's account of $500 with $495 cash the entry on the credit side of the Cash Book is The $500 is posted to the debit of Jones, balancing his account, and the footing of the column headed Cr. Dis. & Int. is credited to that account, Cash being charged. In like manner if Smith instead of giving us a note for $408 in payment of his account of $400 with interest gives us his Cash Dr. Cash Received Cr. Acet. Dis. and Int. Dr. To Smith 398 400 2 In posting, Smith's account is credited $400, and the footing of Dis. & Int. column is debited, Cash being credited. When the Cash Book is journalized at the end of the month, the discounts being received and allowed as above stated, the entries are: Cash To Sundries 1155 To Prop. 600 To Mdse. 150 To Smith -.00 To Dis. & Int. (from Jones, Cr. side of Cash Book) 5 Sundries To Cash 552 Jones 500 Expense 50 Dis. 4 Int. (from Smith, Dr. side of cash Bk.) 2 Accounts Receivable. Accounts Payable The next development, in the direction of simplifying the general Ledger, as the number of accounts increases to such an extent as to make the Ledger too bulky and the labor of balancing it too great, is to remove from it the personal accounts with debtors and creditors, putting them into a Sales Ledger or Accounts Receivable Book, and into a Pur- chase Ledger or Invoice Register, or Accounts Payable Book. In the general Ledger the accounts thus removed are repre- sented by two controlling accounts, Accounts Receivable or Sundry Debtors or Trade Debtors, and Accounts Payable, or Sundry Creditors or Trade Creditors. Two new columns are added to the Cash Book, one on the Dr. side with the heading Accts. Rec'l., and the other on the Cr. side, headed Accts. Pay. The Cash Book entries will then appear as follows: Dr. Dr. Cr. Cr. Cash Cash Rec. Dis. and Acet. Sundry Int. Rec'l. Accts. To Prop. 600 600 To Mdse. 150 To Smith 398 2 400 Cash Cr. Cash Pd. Cr. Dis. and Int. Dr. Accts. Pay. Dr. Sundry Accts. By Jones By Expense 495 50 5 500 50 Smith's account in the Sales Ledger, which has been debited $400 by posting from the Sales Book, is credited $400 from THE EVOLUTION OF BOOKKEEPING. THE COLUMN LEDGER 15 the Accts. Receivable column in the Cash Book, and Jones's account in the Purchase Ledger which has been credited $500 by posting from the Invoice Register is debited $500 from the Accts. Payable, in the Cash Book. In journalizing and posting Cash at the end of the month, Cash is made Dr. to Accts. Receivable, and credited by Accts. Payable for the amounts of the footings of the columns so named. If many notes are received or given two other columns are added, Bills Receivable on the Dr. side and Bills Payable on the Cr. side. The Column Cash Book. In this way the Cash Book develops into a Column Cash Book containing from six to ten columns on each side according to the number of accounts in the General Ledger the entries to which are numerous enough to warrant their being grouped together. One col- umn on each side will be headed Sundry Accts., to contain entries for which no place is provided in the other columns. Dr. Cash Cash Reed. Dis. & Int. Dr. Credit Accts. Name of Cr. Acct. Mdse. Bills Rec. Acct. Rec. Sundry Accts. Cash Cr. Cash Pd. Dis. & Int. Cr. Debit Accts. Nameof Dr. Acct. Bills Pay. Accts. Pay. Mdse. Exp. Sundry Accts. - When the column Cash Book is used it is not necessary to journalize it at the end of the month. The column footings may be posted directly into the General Ledger, the few entries in the Sundry columns being posted to their proper accounts. Another development of the Cash Book is the provision of a Petty Cash Book, also provided with several columns, to take care of a great number of small items with which it is not desired to cumber the Cash Book. The footings of the columns of the Petty Cash Book may be entered on a line above the footings in the principal Cash Book, in the proper columns, or they may lie posted sep- arately into the Ledger as may be most convenient. The Invoice Register is also a book of several columns, the number of them depending upon the number of classes into which it is desired to subdivide the materials or other things or services purchased. For example, the headings may read Mdse., Expense Supplies, Expense Services, Repairs, Selling Expenses. The footings of the several columns may be journalized, crediting Accounts Payable for the total, or they may be directly posted into the Ledger. The Sales Book or Register of Charge Sales (made up from sales tickets) usually needs only one or two columns, and the journal entry in the general Ledger is a single one, Accounts Payable Dr. to Mdse., but if it is desired to subdivide Mdse. into several classes this may be done by means of different columns with appropriate headings. The individual entries in the Sales Book are posted to the individual accounts in the Sales Ledger. The Bill Book. When the business involves the handling of a great number of notes or Bills Receivable and Bills Pay- able it is well to have a Bill Book as a book of original entry for recording these notes. Usually Bills Receivable are received only in settlement of Accounts Receivable and interest, and Bills Payable are given only in settlement of Accounts Payable and interest, so that only three columns are needed, Face of Note, Interest, and Dr. (or Cr.) Account, but a fourth column may be added for the notes given or received on any other account. Separate pages, or in large businesses separate books, are used for Bills Receivable and Payable. THE EIGHT-COLUMN JOURNAL The Journal is sometimes ruled with six, eight or ten money columns, half on one side and half on the other, with a wide central column for the description of the transaction; and two narrow columns for the entry of the ledger folio after posting to the ledger. The following is an example: Dr. c-. Sundry Accts. Interest & Disct. Accts. Rec. Mdse. L. F. February 28, 1917 L. F. Mdse. Accts. Pay. Interest i Disct. Sundries. A/c Pay 400 Bills Rec 204 10 300 500 • Mdse. to J- Jones T. Smith & Sons. To Bills Pay. Interest W. Brown. To Mdse. Bills Rec. To C. Jackson. Interest 40 300 500 4 Bills Pay 410 A c Rec 200 The meaning of these entries is (1) we bought Mdse. from Jones and credit him in the Invoice Register or Accounts Payable Book; the check showing that the credit has been entered. (2) We having credited Smith in the Accts. Pay- able Book for Mdse. purchased $400, now give him a note for $410, including $10 interest. We credit Bills Payable (the thing given) $410 and charge Accts. Payable in the Sundry- Accounts Column $400, posting the amount to Smith's account in the Purchase Ledger and charge Interest (it being a loss) on the Dr. side in the Interest column. (3) We sell 16 BOOKKEEPING AND COST ACCOUNTING Brown $300 of Mdse. on account, charging Accts. Receivable in Dr. side of the Journal, and posting the amount to Brown's account in the Sales Ledger. (4) Jackson gives us his note $204, in payment of his account $200 and $4 interest. We charge Bills Receivable (the thing received) $204, crediting Interest (a gain) on the credit side of the Journal, and Accts. Rec. in the Sundries Column on the credit side $200, crediting Jackson this amount in the Sales Ledger. The several col- umns are footed and the totals at the end of the month are posted into the proper accounts in the general ledger. The footings of the sundry columns are subdivided into their respective accounts, thus in the above, on the Dr. side $400 is posted to Accts. Payable and $204 to Bills Receivable. When an account is posted into the ledger the number of the ledger page is entered in the journal in the column L.F. (ledger folio). THE SAFEGUARD LEDGER A form of sales ledger known as the Safeguard Ledger, which is used by many large concerns, is illustrated in Fig. 1 . The size of the page is 15 Xl2 in. and a double page contains the entries for six months. A perforated crease is made in the June column on the right-hand page to allow the folding in of a strip of the width of the name column, so as to expose the name column on the left-hand page when the July and December entries are made. By this means the names have to be written only once a year. There are 79 numbered lines to a page besides a line for footings at the bottom. The number of lines allowed to an account depends upon the number of entries that are expected to be made in a month, as determined by inspection of the old ledger. The debit bal- ances from the old ledger are entered as shown in Column 1. In Column 2 are entered the debits, taken from the Sales Book or Sales Tickets, and the credits, whether cash, re- turned goods, or allowances, are entered in Column 3. After the debits and credits for the month have been posted each customer's account is balanced by adding the amount of his purchases to the old balance and subtracting the amount of his credits. The balance thus found is entered in Column 4. 2 (O JANUARY (2) (3) (4) 1 Designed by Safeguard Account Cotnpaay Chicago New York Boston Names Ti-ftna. Debit Balance Data [ktvk Tenna Debits Iv.ti' Book Creiiics Debit Balance Coliimns for February Date IWk Credits Traos. Page Page Pag. Led. A. March S. S. Pierce Co. 235 780 3-1 :; 204 V 125 2 1 V 500 - ! Aliril l t 21 245 V 375 - 31 3 V 790 HI May 1 2 3 4 Boston, Mass. 268 V 9 I'm 2 3 4 509 67 5 6 (Five lines or any multi >le " Jive a ■<■ i lov edf >r ecu h 5 6 7 account according the t roba tie ma tin um number V 7 8 of entries in a month) 3 8 9 s 9 10 John B. Stetson Co. 236 407 63 IS 245 V 25 - V 407 63 500 - 10 11 l 18 249 V 45 — V 70 - ea a 11 12 "Philadelphia, 20 254 367 50 § ») 12 13 14 Pa. 21 260 132 :,o 1 a 13 14 570 III) i 3 u o 3 15 16 17 18 18 79 (SO ruled lines to a page numbered i U 79) Totals 1188 00 1079 m 1767 67 500 | = : =^== == = = 19 Fig. 1. — -The Safeguard Ledger. Each page is footed separately, and if no error has been made in balancing the sum of Columns 1 and 2 should equal the sum of Columns 3 and 4. Instead of taking a trial bal- ance in the old way the footings of each page are transferred to a Proof Book, which contains four columns corresponding to those of the ledger, and these columns are footed. The total of the Transferred Balance column shows the amount outstanding from customers at the time of transfer of the accounts from the old ledger; the debit column total shows the charges to all customers during the month, and it should equal the total charges in the Sales Book; the credit total should agree with the total credits to customers as shown by the Cash book and Allowance or other auxiliary books; and the debit balance total shows the amount owing by cus- tomers at the end of the month. Errors in posting are shown by the differences between the total proved footings of the columns and the proved footings of the books from which the postings were made. The several advantages of this form of ledger over the old style ledger are fully explained in a handsome illustrated circular issued by the manufacturers, The Safeguard Account Co., New York. THE EVOLUTION OF BOOKKEEPING. THE COLUMN LEDGER 17 THE COLUMN LEDGER, OR COMBINED JOURNAL- LEDGER The greatest recent improvement in bookkeeping systems is the abandonment of the ordinary Journal and Ledger and the substitution for them of the "Combined Journal-Ledger," or Column Ledger. It is merely a stage in the evolution which began with the adoption of the Column Cash Book and the Column Invoice Register. It consists of a single sheet for each month's transactions, ruled with columns and hori- zontal lines, with the titles of the active accounts printed at the heads of the columns and at the left of the horizontal lines. Entries are made from the books of original entry by simply transcribing the column footings of these books into the Ledger. If an entry, Mdse. to Accts. Payable 83000, is to be made from the Invoice Register, it is done by once writing the amount in the Ledger column, Accts. Pay. Cr., on the line Mdse. Dr. Writing the figure once makes a double entry, charging one account and crediting another, just as a single entry on the Dr. side of the Cash Book at the same time charges Cash and credits the Account for which the cash was received. To illustrate the Column Ledger sys- tem of bookkeeping an example of handling a month's trans- actions, as shown in the books of original entry, by means of the ordinary Journal and Ledger and by means of the Column Ledger is given below. Other illustrations of the use of the Column Ledger will be found on pages 32 and 40. Column Footings of Books of Original Entry Cash Book Debit Acct9. Credit Acets. Mdse. Accts. Reel. Bills Pay. Bills Rec. Exp. Int. Cash Dr. 13.250 1200 5000 4000 3000 10 40 Credit Debit Acets. Sundries. Mdse. Accts. Pay. Bills Pay. Labor. Exp. Int. Cash Cr. 11,910 Store Fix. 30 200 6500 4500 300 350 30 Sales Book Acct9. Reel. Dr. 5050 Mdse. Cr. 5000 Exp. Cr. 50 Invoice Register Cr. Dr. Dr. Dr. Accts. Pay. 3400 Mdse. 3000 Exp. 300 Repairs 100 Bill Book Bills Rec. Bills Pay. Dr. Cr. 1015 1520 Accts. Reel. Accts. Pay. 1000 1500 Interest Cr. Int. Dr. 15 20 Pat Roll Cr. Cr. Dr. Dr. Labor Labor 450 Dr. 70 Mdse. Cr. 70 Expense 400 Mdse. 50 18 BOOKKEEPING AND COST ACCOUNTING In the common system of bookkeeping these footings would be journalized at the end of the month as follows: Cash To Sundries 13,250 Mdse. 1,200 Accts. Reel. 5,000 Interest 40 Bills Pay. 4,000 Bills Rec. 3,000 Expense 10 Sundries To Cash 11,910 Mdse. 200 Store Fix. 30 Aects. Pay. 6,500 Bills Pay. 4,500 Labor 300 Expense 350 Interest 30 Accts. Receivable 5,050 To Sundries To Mdse. 5,000 To Exp. (supplies sold) 50 Sundries 3,400 To Accts. Pay. Mdse. 3.000 Exp. 300 Repairs 100 Bills Receivable To Sundries To Accts. Reel. To Int. Labor To Mdse. 70 1,000 15 Sundries To Bills Pay. 1,520 Acets. Pay. 1,500 Interest 20 Sundries To Labor 450 Expense 400 Mdse. 50 70 The Trial Balance of the Ledger before posting the above Journal Entries may be as follows: Dr. Cr. 1 Cash 1,000 9 Proprietor 10,500 2 Bills Rec. 4,000 10 Profit & Loss 1,000 3 Accts. Rec. 6,000 1 1 Bills Pay. 8,000 4 Mdse. 10,000 12 Accts. Pay. 7,000 5 Real Estate 5,000 13 Labor 300 6 Store Fix. 500 14 Interest 7 Expense 300 8 Repairs 26,800 26,800 After posting the above Journal Entries the Ledger will appear as below: (I) Cash Bal. Sunds. Bal. To Sunds. Bal. To Sunds. Bal. Bal. To Cash To Accts. Pay To Cash To Cash To Bills Pay 1,000 13,250 Sunds. (2) Bills Rec. 4,000 1,015 By Cash (3) Accts. Rec. 6,000 5,050 By Cash By Bills Rec. (4) Mdse. (5) Real Estate 5,000 (6) Store Fixtures 500 30 (7) Expense (8) Repairs 100 (9) Proprietor Bal. (10) Profit & Loss Bal. (II) Bills Pay. (12) Accts. Pay. 6,500 1,500 Bal. By Sund. 11,910 3,000 5,000 1,000 Bal. 10,000 By Cash 1,200 To Cash 200 By Accts. Rec. 5,000 Accts. Pay. 3,000 By Labor 70 To Labor 50 Bal. 300 By Cash 10 To Cash 350 By Accts. Rec. 50 To Accts. Pay. 300 To Labor 400 1,000 8,000 4,000 1,520 7,000 3,400 THE EVOLUTION OF BOOKKEEPING. THE COLUMN LEDGER 19 (13) Labor To Cash To Mdse. 300 70 Bal. By Sund. 300 450 (14) Interest To Caah Bills Pay. 30 20 By Cash By Bills Rec. 40 15 Profit & Loss To Sundries To Expense Dr. Bal. of Exp. Acct. Less expense assets per ventory To Repairs, Dr. Bal. Acct. 1040 100 After taking a trial balance of the ledger to prove the cor- rectness of the posting, Mdse. shows a Dr. Balance of $6980, Expense a/c $1290, Repairs $100, and Interest has a credit bal. of $5.00. If the Inventory shows that Mdse. unsold has a value of $8400 and that there are Expense Assets on hand of a value of $250, viz., Supplies charged to Expense and not yet used, $50, prepaid Taxes $100, prepaid Insurance $100 — entries may be made in the Journal for the Profits and Losses as follows: After these entries are posted a balance sheet is made out, as follows: Sundries To Profit & Loss 1425 Mdse. On hand as per inventory 8400 Less Dr. Bal. of Acct. 6980 1420 5 Interest, Cr. Bal. of Acct. i Cash 2,340 9 Proprietor 10,500 2 Bills Rec. 2,015 10 Profit & Loss 1,285 3 Accts. Rec. 5,050 II Bills Pay. 9,020 4 Mdse. 8,400 12 Accts. Pay. 2,400 5 Real Estate 5,000 13 Labor 380 6 Store Fix. 530 14 Interest 7 Expense 250 6 Repairs 23,585 23,585 When the column ledger system is used, the entries are posted into it directly from footings of the books of original entry shown on p. 17, and from the Profit and Loss entries in the Journal. Monthly Column Ledger or Combined Journal-Ledger Charges Credit Accounts 1 2 3 4 5 6 7 8 9 10 II 12 13 14 Total Charges Cash Bills Accts. Mdse. R. Est. Store Exp. Reprs. Prop. P. & L. Bills Accts. Labor Int. Rec. Rec. Fixt. Pay. Pay. 1 Cash 3000 5000 1200 10 4000 40 13,250 2 Bills Rec. 1000 15 1,015 3 Accts. Rec. 5000 50 5,050 4 Mdse. 200 1420 3000 50 4,670 5 R. Est. 6 Store Fixt. 30 30 7 Expense 350 300 400 1,050 8 Repairs 100 100 9 Proprietor 10 Profit & Loss 1040 100 1,140 II Bills Pay. 4,500 4,500 12 Accts. Pay. 6.500 1500 8,000 13 Labor 300 70 370 14 Interest 30 5 20 55 Total Credits 11,910 3000 6000 6270 1100 100 1425 5520 3400 450 55 39,230 The postings in the Column Ledger are made directly from the books of original entry in the following manner. From the Column Cash Book the total cash receipts $13,250 is entered on line 1 in the last column, Total Charges. The cor- responding credits are taken from the footings of the columns on the Dr. side of the cash book and entered on line 1 under the proper headings. The total credit of cash, $11,910, is entered at the bottom of column 1, opposite total credits, and the corresponding debits to the several accounts are taken from the footings on the Cr. side of the Cash Book and entered in column 1 opposite the names of the several accounts. The entries Accts. Receivable Dr. to Mdse. $5000 and To Expense $50 are made from the footings of the Sales Book. The entries Bills Receivable Dr. To Accts. Receivable $1000 and To Interest $15, and the credits of Bills Payable, Accts. Payable Dr. $1500 and Interest Dr. $20, are taken from the Bill Book. The credits to Accts. Payable, Mdse. Dr. $3000, Expense Dr. $300, and Repairs Dr. $100, are obtained from the footings of the Purchase Book or Invoice Register. The Credits to Labor, Mdse. Dr. $50 and Expense Dr. $400, and the debit entry Labor to Mdse. $70, are taken from the pay- roll. When all these entries are made the totals of the columns and of the horizontal lines are entered in lead pencil, and the sums of these totals must agree if there are no errors in addi- tion. When the inventory of Mdse. is taken and the profit 20 BOOKKEEPING AND COST ACCOUNTING on this account is figured, the Profit and Loss entries may be made directly in the Ledger, preferably in red ink, viz.: P. & L. Dr. To Expense $1040 and To Repairs $100, and Cr. By Mdse. $1420 and By Interest $5, and then the footings should be entered in ink and the total debits and credits balanced. The column ledger should be a printed and ruled sheet, perforated for insertion in a loose-leaf book. An objection is sometimes made to the column ledger, that the bookkeeper is apt to make a mistake in putting a figure in the wrong column or on the wrong line, but this can happen only from gross carelessness. If the bookkeeper will fine himself $5 for the first error of this kind he will not be likely to make a second. After balancing the column ledger the totals are transferred to the transaction columns of the Balance Sheet, as shown below, and the figures added to (or subtracted from as the case may require) those in the Balance Sheet at the beginning of the month, to obtain the figures of the balance at the end of the month. Balance Sheet Bal. Jan. 1 Transactions Bal. Feb. 1 Dr. Cr, Dr. Cr. Dr. Cr. 1 Cash 1,000 13,250 11,910 2,340 2 Bills Rec. 4,000 1,015 3,000 2,015 3 A/c Rec. 6,000 5,050 6,000 5,050 4 Mdse. 10,000 4,670 6,270 8,400 5 R. Est. 5,000 5,000 6 Store Fix. 500 30 530 7 Expense 300 1,050 1,100 250 8 Repairs 100 100 9 Proprietor 10,500 10,500 10 Profit & Loss 1,000 1,140 1,425 1,285 11 Bills Pay. 8,000 4,500 5,520 9,020 12 A/c Pay. 7,000 8,000 3,400 2,400 13 Labor 300 370 450 380 14 Interest Total 55 55 26,800 26,800 39,230 39,230 23,585 23,585 In using the ordinary ledger a condensed statement of the course of the business for a month can be obtained only after compiling from the books a statistical abstract. In the Column Ledger system the ledger itself is at the same time a statistical abstract, a trial balance and a balance sheet, furnishing at a glance all the information that can be obtained only with a great amount of labor from the ordi- nary ledger. Notes on the Combined Journal-Ledger System It is impossible for the Journal-Ledger to be out of balance provided the figures in the horizontal lines and in the vertical columns are correctly added. The total debits must equal the total credits, fulfilling the fundamental principle of double-entry bookkeeping. The Journal-Ledger may, however, contain errors which must be carefully guarded against. These are: 1. Omission of items which should be entered. 2. Entering of an item in the wrong column or on the wrong line. 3. Entering an item which is an erroneous footing in the book of original entry. 4. Transposition of figures in making an entry (writing 76 for 67). Against these may be put the list of possible errors in the Ledger and Trial Balance in the ordinary system ■ 1. Omission of a Journal entry. 2. Omitting to post a Journal entry. 3. Posting an entry to a wrong account. 4. Entering in the Journal and posting in the Ledger an erroneous column footing of a book of original entry. The Ledger may be in perfect balance notwithstanding these errors, and taking a Trial Balance will not lead to their discovery. The following errors are likely to be discovered, when a hunt is made for them, after taking a Trial Balance and finding it out of balance, except in the case of two errors balancing each other: 5. Errors in adding the Dr. and Cr. columns in a Ledger account. 6. Errors in subtracting the Dr. and Cr. column foot- ings. 7. Errors in entering the balances in the Trial Balance. 8. Transposition of figures in posting a Journal entry. 9. The Journal entry out of balance. Excepting No. 8, these errors cannot take place in the com- bined Journal-Ledger system. There are many chances of making the four above-named errors to which the Journal-Ledger is liable, and, therefore, there is a necessity for providing means for checking against them. One of the best means is described below: The books of original entry are : Symbol. C and PC W B R S Cash Book and Petty Cash Book. Salary List and Pay Roll. Bill Book, for Bills or Notes Receivable and Pay- able. Accounts Payable Book or Invoice Register. Sales Book, or Sales Ticket Register, and Sales Allowance Book. Day-book Journal for any entries that do not find their proper place in the other books, such as Profit and Loss entries. Each of these books is provided with such columns as may be needed for debits and credits of Mdse., Expense, Interest and Discount, or other accounts, and it is the footings of these accounts which are entered monthly in the Journal- Ledger. When the footings of these accounts are entered in the Journal-Ledger they are at the same time entered in Double- entry on a printed or typewritten blank as shown below: THE EVOLUTION OF BOOKKEEPING. THE COLUMN LEDGER 21 Check on Journal-Ledger Entries Financial Accts. Mdse. and Expense Accts. Book Account Dr. Cr Accouni Dr. Totals Cr. Totals C PC W B B R ^Cash Sal. & Wages Notes Rec. Notes Pay. Accts. Pay. Accts. Rec. Add Mdae. & Exp. Total Profit & Loss Mdse. Expense Interest Proprietor Total Profit and Loss Total Journal-Ledger 1311 492 3358 63 00 31 690 574 2789 2 90 00 67 00 Mdse. Cash Accts. Pay. Accts. Rec. Notes Rec. Notes Pay Expense Cash Accts. Pay. Accts. Rec. Sal. & W. Interest. Cash Accts. Pay. Accts. Rec. 2759 2 67 00 6 1301 3358 55 65 31 4666 2 1 S 2761 198 30 574 67 90 00 00 2 00 51 5161 3564 94 57 4056 4669 57 94 8,726 800 563 51 90 34 8,726 1,362 51 81 43 J 809 90 1 43 00 43 3564 57 4669 94 1,364 24 1,364 24 10,090 75 10.090 75 The totals are compared with the figures in the last line and the last column of the Journal-Ledger and checked against each other. These checked figures are then entered in the Transactions column of the Balance Sheet, and by adding the Dr. and Cr. figures to those of the balances of Jan. 1, the Balances of Jan. 31 are obtained. These balances are further checked by comparing the Dr. balance of Cash and Notes Receivable with the cash and notes on hand; the balances of Accounts Receivable with the total of the unpaid items in the Sales Ledger or Sales Cards Un- paid; the balance of Notes Payable with the unpaid items in the Bill Book, the balance of Accounts Payable with the unpaid Invoices; the balance of Wages and Salaries with the unpaid items in the Salary List and Pay Rolls, and the balance of Property and Mdse. accounts with the in- ventories. These same comparisons are necessary of course in auditing a set of books kept on the ordinary system. CHAPTER IV ACCOUNTS FOR RETAIL MERCHANTS. SELLING PRICES. TURNOVER The Federal Trade Commission's System. "A System of Accounts for Retail Merchants" is the title of a 19-page pamphlet issued in July, 1916, by the Federal Trade Com- mission, Edward N. Hurley, Chairman. In an introductory letter Mr. Hurley says: "With the object of aiding retail merchants to improve their accounting methods we have outlined a simple system of accounts which provides for supplying the information necessary to properly direct a retail business." From the introduction the following extracts are taken: Banks are paying more attention to the accounting methods used by the merchant to whom they extend credit. They are willing to give larger loans to the merchant who keeps his books in a way that enables him to show the bank at any time just how his business is progressing. Another important point to which the bank gives consideration is whether the prospective borrower is making proper provision for depreciation on stock, buildings and fixtures, and his books should be so arranged as to show the amount of these provisions. No merchant can be said to be managing his business properly unless adequate provision is made for depreciation. The aim has been to devise the least involved system which will give the information essential to successful management. The best system of accounts for any business is one which furnishes the information required with the least effort. The system here outlined requires but four books of account: journal, general cash book, invoice book and ledger. Sales tickets and credit tickets are used for recording sales and sales returns. When the volume of business permits, it is advisable to use three ledgers, a general ledger, a purchase ledger and a sales ledger, keeping controlling accounts of the purchase ledger and the sales ledger in the general ledger. The pamphlet gives a list of 45 ledger accounts, of which 22 are "real" or asset and liability accounts, and 23 "nominal" or profit and loss accounts, with an explanation of their use, showing what debit and credit entries are made in each. Examples of transactions and of the method of entering them in the several books of original entry, summarizing them in the journal and posting them to the ledger accounts are unfor- tunately lacking, but three forms are given, a balance sheet, a profit and loss statement of one month's business, and a monthly summary of business, which are copied below. In order to make the system more clearly understood by the student and also in order to provide a basis for some com- ments that it seems to require we have attempted to discover and reconstruct from the three forms the journal and ledger entries from which the forms given may have been derived. From the explanations of the accounts and their uses the following paragraphs are taken : Monthly Summary of Business. 1916 Net Sales Buting Expense Selling Expense Delivery Expense Credit Cash Total Salaries and Wages of Buying Force Miscellaneous Buying Expense Salaries and Wages of Sales Force Advertising Miscellaneous Selling Expense. Salaries and Wages of De- livery Force Miscellaneous Delivery Expense Jan. $3356 31 $1301.65 $4657 96 $25 00 $14.00 $177 33 $30.00 $3.75 $102.67 $8.08 Feb. Total (12 Months) Per cent of Net Sales General Expense ■ Total Expense Management and Office Salaries Office Supplies and Expense Insurance on Stock and Store Equipment Taxes on Stock and Store Equipment Losses from Bad Debts Miscellaneous General Expense Rent Per cent of Net Sales Jan. $269 00 $22.03 $1.61 $2.50 $33.56 $26 79 $71.25 $787.57 16.9 Feb. Total Per cent of Net Sales 22 ACCOUNTS FOR RETAIL MERCHANTS. SELLING PRICES. TURNOVER 23 Explanations of Some of the Accounts 4. Reserve for Bad Debts. Credit this account with an esti- mated amount based on charge sales, sufficient to provide for losses, and charge the account with the balances of personal accounts when hope of collection is abandoned. 5. Prepaid Insurance. Charge with all insurance paid. At the end of each month credit the account and charge No. 35 (Insurance on Stock and Store Equipment) and No. 44 (Rent Income) with their monthly proportion, the balance being an asset as " Prepaid Insurance." G. .4ccn«(/ Interest Receivable. Charge at the end of the period with all accrued interest (not yet paid) crediting Interest account. When the interest is received it is credited to " Accrued Interest Receivable." 9. Reserve for Depreciation on Store and Warehouse. Credit with the amount of depreciation, charging "Rent Income." 17. Accrued Interest Payable. Credit at the end of the period with interest accrued (not yet paid) on notes, etc., due others, charging Interest Account. When the interest is paid it is charged to "Accrued Interest Payable." 18. Accrued Salaries and Wages. — Credit this account with salaries and wages earned and unpaid at the end of each month and charge the proper expense accounts. When payment is made this account is charged. 19. Accrued Taxes. — Credit with the taxes due up to the end of each month, charging the proportionate amounts to the accounts to which they belong. When taxes are paid this account will be charged. 23. Sales. Credit with the total of the charge tickets for the month and the total cash sales from the "Cash Sales" column in the Cash Book. Charge the account, at the selling price, for all merchandise returned. The difference in this account will be the net sales, which is transferred to the credit of "Trading Account." 24. Sales Alloicances. Charge with any allowance given a customer not contemplated when the sale was made. Allow- ances should not be charged to "Sales," but closed at the end of the period into "Trading Account." 25. Merchandise Purchases. — Charge with the face of the invoices before deducting cash discounts; also with freight, expressage and drayage. Credit with merchandise returned and with any allowances for defects in goods received. The balance of the account is transferred to the debit of "Trading Account." Balance Sheet, Jan. 31, 1916 Assets CURRENT ASSETS 1 Cash on hand and in bank $1611 67 2 Notes receivable — Trade Customers 191 84 3 Accounts Receivable — Trade Customers $3518 81 4 Less Reserve for Bad Debts 33 56 3485 2909 25 06 Inventory of merchandise (at cost) 5 Prepaid Insurance 100 14 6 Accrued Interest Receivable Total current assets 71 $8298 67 FIXED ASSETS 7 Store Property 4500 00 8 Warehouse Property 1975 00 6475 00 9 Less Reserve for Depreciation on Store and Warehouse 26 98 6448 272 02 71 10 Store Equipment 11 Office Equipment 74 37 12 Delivery Equipment Total fixed assets Total assets Liabilities and Capital 396 67 7191 77 15490 44 CURRENT LIABILITIES 13 Notes Payable — Trade Creditors 1210 50 14 Notes Payable — Banks 900 00 15 Accounts Payable — Trade Creditors 3685 72 16 Accounts Payable — Others 485 00 17 Accrued Interest Payable 19 23 18 Accrued Salaries and Wages 82 00 19 Accrued Taxes Total current liabilities 7 75 6390 20 21 Mortgages Payable (warehouse) Total liabilities 1250 00 7640 20 22 Proprietor's Capital Account Total liabilities and capital 7850 24 15490 44 24 BOOKKEEPING AND COST ACCOUNTING Profit and Loss Statement, Jan. 31, 1916 PerCt PerCt 23 Sales 4659 96 24 Less Sales Allowances Net Sales 2 00 100.0 4657 96 Inventory of merchandise at beginning 3451 09 25 Merchandise Purchases (cost delivered at store) 2759 67 6210 76 Deduct inventory of merchandise at closing 3062 17 Less Stock Depreciation Net cost of goods sold Gross profits from trading 153 II 2909 06 3301 70 70 9 1356 26 29.1 BUYING EXPENSE. 26 Salaries and Wages of Buying Force 25 00 27 Miscellaneous Buying Expense Total buying expense 14 00 39 00 8 SELLING EXPENSE 28 Salaries and Wages of Sales Force 177 33 29 Advertising 30 00 30 Miscellaneous Selling Expense Total selling expense 3 75 211 08 4 5 DELIVERY EXPENSE 31 Salaries and Wages of Delivery Force 102 67 32 Miscellaneous Delivery Expense Total delivery expense 8 08 110 75 2.4 GENERAL EXPENSE 33 Management and Office Salaries 269 00 34 Office Supplies and Expense 22 03 35 Insurance on Stock and Store Equipment 1 61 36 Taxes on Stock and Store Equipment 2 50 37 Losses from Bad Debts 33 56 38 Miscellaneous General Expense 26 79 39 Rent Total general expense Net profit from trading 71 25 426 74 787 57 9 2 16 9 568 69 12 2 INCOME FROM OTHER SOURCES 42 Interest n 09 43 Cash Discounts on Merchandise Purchases 6 55 44 Rent income (net) 16 52 45 Miscellaneous Outside Income Total net profit 2 00 7 98 576 67 37. Losses from Bad Debts.* Charge this account with the amount that has been reserved for bad debts (4). 39. Rent. Charge with all rents paid. If the store is owned rent should be charged equivalent to the amount it could be rented for to others, crediting "Rent Income" (44). In the latter event "Rent Income" should be charged with the taxes, insurance, repairs and depreciation on the store. 40. Trading Account. This account shows the inventory of merchandise at opening, and it is not touched again until the books are closed. It is then charged with Merchandise Pur- chases (25) and Sales Allowances (24) and credited with Sales (23) and with the inventory at the close. The balance is trans- * This title is a misnomer since the loss has not actually been incurred. A better title would be "Insurance for Bad Debts." It represents a monthly expense charge, Reserve for Bad Debts being credited, to provide against future bad debts. ferred to the credit of "Profit and Loss Account." The inventory is then brought down as a new balance. 41. Profit and Loss Account. Charge with the balances of all the expense accounts; credit with the gross profit from trading and with the net income from other sources. The difference will be the net profit or loss, which is closed into the proprietor's account; if a partnership, to the partners' accounts according to their several interests, and, if a corporation, to the surplus account. 44. Rent Income. If the store is owned, the rent which has been charged to account 39 should be credited to this account and it should be charged with insurance, taxes, depreciation and repairs on store. The account is closed into "Profit and Loss." 45. Miscellaneous Outside Income. Credit this account with incidental receipts such as toll from telephone pay stations in the store, etc. ACCOUNTS FOR RETAIL MERCHANTS. SELLING PRICES. TURNOVER 25 42. Interest. Charge this account with all interest paid and credit it with all interest received * and close into "Profit and Loss Account." (Compare Nos. 6 and 17.) The journal and ledger entries, which have been derived from the monthly statements, are given below: Journal Journal — (Continued) 1 Cash To Sundries 1311 63 23 To Sales 1301 65 43 To Cash Discts. 6 55 42 To Interest I 43 45 To Misc. 0. Inc. 2 00 1 Sundries To Cash 690 90 27 Misc. Buying Exp. 14 00 30 Misc. Selling Exp. 3 75 32 Misc. Delivery Exp. 8 08 33 Office Supplies and Exp. 22 03 38 Misc. Gen. Exp. 26 79 44 Rent Income (Store Repairs) 15 01 16 Wages and Salaries 492 00 5 Prepaid Insurance 109 24 The two entries above may be omitted from the Journal if a Column Cash Book is used and the footings of the columns are posted directly into the Ledger. The following entry may also be omitted and posted from the footings of the columns of the Pay Roll and salary list. Journal — (Continued) IB Sundries To Wages and Salaries 574 00 26 Salaries and W T ages Buying Expense 25 00 28 Salaries and Wages Selling Expense 177 33 31 Salaries and Wages Delivery Expense 102 67 33 Management and Office Salaries 269 00 15 Sundries To Accts. Payable 2789 67 25 Merchandise Purchases 2759 67 29 Advertising 30 00 5 Sundries To Prepaid Insurance 9 10 4( Rent Income 7 49 35 Insurance on Stock and Store Equipment 1 61 19 Sundries To Accrued Taxes 7 75 44 Rent Income 5 25 36 Taxes on Stock and Store Equipment 2 50 44 Rent Income 26 98 9 To Reserve for Dep'n on Store and Warehouse 26 98 * This is not clear and is not in harmony with Nos. 6 and 17. It does not seem [to agree with the general principle "The account which receives is debtor to the account which gives." The fact is that "interest paid" means that cash (or other value or credit) is given on account of interest, therefore Cash is credited and Interest, which is an expense, is charged. "Interest received" means that cash is received on account of interest, therefore Cash is charged, and Interest, which in this case is revenue or income, is credited. If we owe John Doe S1000 and settle his account by giving him a three-months' note for $1015, the entry is John Doe S1000 To Bills Payable S1015 Interest 15 If John Doe owes us $1000 and he gives us a note for S1015 in payment the entry is Bills Receivable, $1015 To John Doe, $1000 To Interest 15 39 Rent 71 25 44 To Rent Income 71 25 42 Interest 19 23 17 To Accrued Interest Payable 19 23 6 Accrued Interest Receivable 71 42 To Interest 71 37 Losses from Bad Debts 33 56 4 To Reserve for Losses from Bad Debts 33 56 3 Accounts Receivable 3358 31 23 To Sales 3358 31 24 Sales Allowances 2 00 3 To Accounts Receivable 2 00 40 Trading Account To Sundries 2761 67 24 To Mdse. (Cost of Sales) 2759 67 25 To Sales Allowances 2 00 23 Sales 4659 96 40 To Trading Account 4659 96 41 Profit & Loss To Sundries 804 66 26 To Salaries and Wages, Buying 25 00 28 To Salaries and Wages, Selling 177 33 31 To Salaries and Wages, Delivery 102 67 33 To Management and Office Salaries 269 00 29 To Advertising 30 00 27 To Misc. Buying Expenses 14 00 30 To Misc. Selling Expenses 3 75 32 To Misc. Delivery Expense 8 08 34 To Office Supplies and Exp. 22 03 35 To Insurance on S. & S. Equip. 1 61 36 To Taxes on S. & S. Equip. 2 50 37 To Losses from Bad Debts 33 56 38 To Misc. Gen Expense 26 79 39 To Rent 71 25 42 To Interest 17 09 41 Sundries To Profit & Loss 1381 33 40 Trading Account 1356 26 43 Cash Discounts 6 55 44 Rent Income 16 52 45 Misc. Outside Income 2 00 41 Profit & Loss 576 67 22 To Proprietor's Capital Account 576 67 Ledger Cash To Bal. To Sundries 990 1311 94 63 By Sunds., By Bal. 690 1611 90 67- 2302 57 2302 57 2 Notes Receivable To Bal. 191 84 3. Accts. Receivable To Bal. To Sales 162 3358 50 31 3520 81 By Sales Allowances By Bal. 2 3S18 3520 4. Reserve for Bad Debts By Losses from B. D. " 00 81 SI So 26 BOOKKFEPIXG AND COST ACCOUNTING Ledger — ( Cont in ued) 5. Prepaid Insurance To Cash 109 24 By Siinils By Bal. 9 100 10 U To Bal. To C;,-h To Bal. 3GS5 72 By Bal. By Sundries 16. Acets. Pay. — Others By Bal. 17. Accrued Interest Payable By Interest 18. Salaries and Wages 492 82 By Sundries 19. Accrued Taxes By Sundries 6. Accrued Interest Rec. To Interest i 71 7. Store Property To Bal. 4500 00 8. Warehouse Property To Bal. 1975 00 9. Reserve for Depreciation on Store and Warehouse By Rent Income 26 98 10. .Store Equipment To Bal. 272 71 1 1 . Office Equipment To Bal. 74 37 12. Delivery Equipment To Bal. 396 67 13. > Jotes Payable — Trade Creditors Bv Bal. 1 1210 50 14. Notes Payable — Banks By Bal. 900 00 15. Accts. Pay. — Trade Creditors 896 ■ 05 2789 ! 67 485 00 19 23 574 00 20. Proprietor's Drawing Account (no entries) 21. Mortgage Payable, Warehouse By Bal. 22. Proprietor's Capital Acct. To Bal. 24 By Bal. P. & L. 23. Sales To Trading a c 4659 96 By Accts. Rec. By Cash 1250 00 7273 576 57 67 3358 1301 31 65 7 75 24. Sales Allowances To Accts. Rec. 2 00 By Trading a/c 2 00 25. Merchandise Purchases To Acets. Pay. 2759 67 By Trading a/c 2759 67 26. Salaries and Wages, Buying To Accrued S. & W. 25 00 By Profit & L. 25 00 27. Miscellaneous Buying Expenses To Cash 14 00 By P. & L. 14 00 28. Salaries and Wages, Selling To Accrued S. & W. 177 33 By P. & L. 177 33 29. Advertising To Accts. Pay. 30 00 By P. & L. 30 00 30. Miscellaneous Selling Expenses To Cash 3 75 By P. & I,. 3 75 31. Salaries and Wages, Delivery To Accrued S. & W. 102 67 By P. & L. 102 67 32. Miscellaneous Delivery Expense To Cash 8 1 08 By P. & L. 8 08 33. Management and Office Salaries To Accrued S. & W. 269 00 1 By P. & L. 269 00 34. Office Supplies and Expense To Cash 22 03 By Profit & L. 22 03 35. Insurance on Stock and Store Equip. To Prepaid Ins. 1 61 1 1 By Profit & L. 1 1 61 36. Taxes on Stock and Store Equip. To Accrued Taxes 2 50 1 By Profit & L. 2 50 ACCOUNTS FOR RETAIL MERCHANTS. SELLING PRICES. TURNOVER Ledger— (Continued) 42. Interest 37. Losse9 from Bad Debts To Reserve for B. D. 33 56 By Pro6t & L. 33 56 38. Misc. General Expense To Cash 26 79 By Profit & L. 26 79 39. Rent To Rent Income 71 25 By Profit & L. 71 25 40. Trading Acct. To ' al. (Inventory) To Mdse. Purchases To Sales Allowances To Profit & L. 3451 09 2759 67 2 00 1356 26 7569 02 By Sales By Bal. (Inventory) 4659 96 2909 06 7569 02 41. Profit and Loss To Sundries To Prop. 804 576 By Sundries 1381 33 43. Cash Discounts on Purchases To Profit t.v L. 55 By Cash 44. Rent Income 27 To Acer. Int Pay. 19 23 By Ac. Int. By Cash By P. & I.. Reo. 1 17 71 43 09 • ■-• To Acer. Taxes 5 25 By Rent 71 75 To Prepaid Ins. 7 49 To Depn. S. & W. 26 98 To Cash 15 01 To Profit & L. 16 52 71 25 45. Miscellaneous Outside Income To Profit & L. 2 00 By Cash 00 From this ledger the Balance Sheet may be made as below, showing the transactions during the month as well as the balances at the end of the month. A sheet of this form with thirteen double columns would show the whole course of the business each month for six months. BALANCE SHEET 7,8 2 3 4 5 6 10-12 9 13 14 15 16 17 18 19 21 22 23 24 25 26-27 28-29-30 31 32 33-34 35-36 37 38 39 40 41 42 43 44 45 Cash Notes Rec. Accts. Rec. Res. for Bad Debts Prepaid Ins. Accrued Int. Rec. Real Est. & E. Res. for Dep'n. Notes Pay. Trade Notes Pay. Banks Accts. Pay. Trade Accts. Pay. others Accrued Int. Pay. Accrued Sal. & Wages Accrued Taxes Mortgage Payable Proprietor Sales Sales Allowances Mdse. Purchases Buying Exp. Selling Exp. Delivery Exp. Office Exp. Ins. & Tax on Store Equip. Losses from Bad Debts Misc. Gen. Exp. Rent Trading Aeet. Profit. & Loss Interest Cash Discts. Rent Income Misc. Outside Income Trial Balance, Jan. I Dr. 990 191 162 7,218 3,451 09 12.015 1,210 900 896 485 1,250 7,273 17.015 12 Transactions, Jan i ary 1,311 3,358 109 4,659 2 2,759 39 211 110 291 4 33 26 71 4.117 1,381 19 6 71 '>079 38 690 2 33 9 26 2,789 19 574 7 576 4,659 2 2,759 4.659 1,381 19 6 71 57 I "5.079 38 Trial Balance, Jan. 31 Dr. 1,611 191 3,518 100 7,218 2,' 09 2,909 15.550 06 Cr. 06 33 15.550 26 98 1,210 50 900 00 3,685 72 485 00 19 23 82 00 7 75 1,250 00 7,850 24 >6 28 BOOKKEEPING AND COST ACCOUNTING Suggested Improvements of the Trade Commission's System The system described by the Commission is an excellent illustration of the later elaborated methods of the old school of accountants, and it should be clearly understood by students before they proceed to modern methods in which much of the clerical labor required by the older methods is dispensed with. The system is open to the objection that it violates the principle laid down by the Commission: "The best system ot accounts for any business is one which furnishes the information required with the least effort." Instead of its being "the least involved system which will give the information essential to successful management," it is a highly involved one, requiring much more labor to keep it than is needed with other systems. It has 45 accounts, 14 of which, Nos. 26 to 39 inclusive, are subdivisions of expense, and are carried through all the routine of journal, double-entry ledger, balance sheet, profit and loss statement, and monthly summary. Instead of having a single Real Estate and Equipment Account, the subdivisions of it being entered once a year in certain columns of an Inventory Book, there are five separate accounts. It has two accounts for Notes Payable, one for banks the other for trade creditors. If there is any necessity for separating the two kinds of notes, they may be marked with the letters B or T in the Notes Payable Book. The same may be said of the two Accounts Payable, "trade creditors" and "others." Many of the accounts show, not actual business transactions, but fictitious or imaginary transactions, or accruing expense liabilities which there is no need of entering in the general ledger until they are paid. If there is need to have these liabilities taken into account in order to avoid inaccuracy in Profit and Loss statements, they can be entered in a memo- randum "Profit and Loss Adjustment" at the bottom of each monthly balance sheet. The accounts referred to are: Reserve for Bad Debts; Losses from Bad Debts (not actual losses but merely a monthly charge to an expense account, offsetting the monthly credit to the Reserve account) ; Reserve for Depreciation on Store and Warehouse, the monthly credit of which is charged to another expense account; Rent and Rent Income, both of which are accounts of imag- inary transactions, the buildings being owned and not rented. Instead of using a single Merchandise account, as in older and simpler systems, it is divided into five accounts: Mer- chandise Purchases; Cash Discounts on Merchandise Pur- chases; Sales; Sales Allowances; and Trading Account. In the old systems Merchandise Account would appear as follows in the Ledger: Mdse. To Bal. (Invty.) To Accts. Reel. (A) To Accts. Pay. To Profit & Loss 3451 2 2759 1362 09 00 67 81 By Cash By Cash (D) By Accts. Rec. By Bal. (Invty.) 1301 6 3358 2909 65 55 31 06 7575 57 7575 57 To Bal. 2909 06 (A) Sales Allowances. (D) Cash Discounts on Purchases. By the Commission's system the same transactions would be recorded as follows: Merchan dise Purchases To Accts. Pay. 2759 67 By Trading Acct. 2759 67 Cash Discounts on Mdse. Purchases To Profit and Loss 6 55 By Cash 6 55 Sales To Trading Acct. 4659 96 4659 96 By Cash By Accts. Rec. 1301 3358 4659 Sales Allowances To Accts. Rec'l 2 00 By Trading Acct. Trading Account To Bal. (Invty.) To Mdse. Purchases To Sales Allowances To Pi out & Loss 3451 2759 2 1356 7569 02 By Sales By Bal. (Invty.) 4659 2909 7569 % 06 02 In these five accounts there are fifteen entries, while in the single merchandise account there are only eight. The five accounts give not a scrap more of information than the single account. In the Profit and Loss Statement the "Net Cost of Goods Sold" is given, erroneously, as $3301.70 in the following statement : Inventory at beginning Purchase at Cost 3062 153 17 II 3451 2759 09 67 6210 2909 76 Deduct Invty. at closing Less Stock Depreciation 06 Net Cost of Goods Sold 3301 70 The depreciation of 5 per cent, or $153.11 on the goods remaining unsold is thus made to increase the cost of the goods sold. A more correct statement would be the following: Inventory at beginning Purchase, at Cost 3451 2759 09 67 6210 3062 76 Inventory at closing, at cost value 17 Net cost of Goods Sold 3148 59 The Profit and Loss Statement would then read as below: Sales, less Sales Allowances Cost of Goods Sold 4657 3148 96 59 Profit on Sales Deduct Depreciation on goods unsold Gross Profit on Trading 1509 153 1356 37 II 26 The first improvement to be made in the Trade Commis- sion's system is to consolidate some of the fourteen expense accounts so as to reduce their number. The "Monthly Expense Ledger," see page 31, reduces them to eight. The next is to consolidate the five property and equipment ac- ACCOUNTS FOR RETAIL MERCHANTS. SELLING PRICES. TURNOVER 29 counts into one Real Estate and Equipment Account, letting the subdivisions remain in the Inventory Book. The 44 accounts of the original Balance Sheet are thus reduced to 34, as shown in the improved Balance Sheet on page 27, in which the monthly transactions are given as well as the bal- ances at the beginning and end of the month. A further step is to consolidate the eight expense accounts of this balance sheet into one Expense Account in the General Ledger, taking the footing of the last column of the Monthly Expense Ledger, $787.57, as the debit to Expense Account, balancing the eight credit accounts whose titles are given in the headings of the columns, the amounts being in the bottom line. By this means the number of accounts is reduced to 27. The next stage in reducing the labor of keeping the accounts is the abandonment of the old-fashioned Journal and Ledger and the adoption of the Column Ledger, or Monthly Combined Journal-Ledger, with printed titles of the accounts, shown on page 31. For a description of this Ledger, see page 17. One page of this Ledger is used for each month. The footings of the columns (Total Debits) and the totals of the horizontal lines (Total Credits) are transferred to the Dr. and Cr. columns of Transactions in the Balance Sheet, the titles of accounts in which are also printed. One sheet will last six months, showing a complete record of the total trans- actions of each account for each month if the sheet is made with thirteen double columns (Dr. and Cr.) seven of them being for balances and six for transactions. In making entries in the monthly Expense Ledger and in Combined Journal-Ledger the figures are obtained from the footings of the columns of the books of original entry, Cash Book, Petty Cash Book, Bill Book (or Notes Receivable and Notes Payable), Invoice Register, Sales Book (or Sales Ticket Record), just as in making the entries in an ordinary journal. In ordinary bookkeeping methods the total monthly pur- chases of merchandise, as shown in the Invoice Register or Accounts Payable book, would be journalized in the entry Mdse. To Accounts Payable $2759.67; $2759.67, and the entry would be posted to two accounts in the Ledger. In the Combined Journal-Ledger System the entry is made both as a journal entry and as a ledger entry at the same time by a single writing of the amount $2759.67 in the vertical column with the printed heading "Mdse.," on the horizontal line having the printed title "Accts. Payable." Comparing the amount of labor required to enter the figures in the Expense Ledger and the Journal Ledger with the old method of writing the entries in the Journal and then posting them in the Ledger, we have the following: Entries of figures in the Expense Ledger Entries of figures in the Journal-Ledger 70 70 18 28 Total Items written in the Journal 46 Total 140 There are 18 journal entries comprising the 70 items, and postings are made on 29 of the ledger pages. In making a trial balance all the 45 accounts in the ledger have to be examined and their balances written down. The Journal- Ledger is self-balancing, if the columns and horizontal lines are correctly added. In the Monthly Expense Ledger and Journal-Ledger here shown not a single transaction entered in the old- style journal has been omitted. Such entries, for example, as Salaries and Wages, Buying Expense To Accrued Salaries and Wages, $25.00, and Profit and Loss To Salaries and Wages, Buying Expense, all appear in the one entry $25.00 in the Ex- pense Ledger, the transfer to Profit and Loss being taken care of in the credit of $787.57 to Expense in the Journal Ledger. The Expense Ledger and the Journal Ledger may be greatly improved and reduced in bulk by removing from them the following accounts: Reserve for Bad Debts Dr. Cr. 4 33 56 5 Prepaid Insurance 109 24 9 10 6 Accrued Interest Receivable 71 9 Reserve for Depreciation of Store and Warehouse 26 98 17 Accrued Interest Payable 19 23 19 Accrued Taxes 7 75 24 Sales Allowances 2 00 2 00 37 Losses and Bad Debts 33 56 33 56 40 Trading Account 4659 96 4659 96 43 Cash Discounts on Purchases 6 55 6 55 44 Rent Income 71 25 71 25 45 Miscellaneous Outside Income Unbalanced Accounts 2 00 2 00 4885 27 4871 94 100 85 87 52 Profit & Loss Adjustment for Accts. re- moved from Ledger 13 33 The reasons for taking Sales, Sales Allowances, Cash Dis- counts on Merchandise Purchases, and Trading Account out of the Ledger and including them all in Mdse. Account have already been given, but they may be repeated here in a dif- ferent form: Transactions (1) Inventory at beginning 3451 09 (5) Sell goods on Credit 3358 31 (2) Purchase goods on account 2759 67 (6) Make allowance on invoice 2 00 (3) Receive Cash Discount 6 55 (7) Inventory, final. 3062.17 less depn 153. 1 1 2909 06 (4) Sell goods for Cash 1301 65 Journal Entries on the Commission's System Original Transfer and Balancing en Mdse. Inventory 3451 09 (2) Mdse. To Accts. Pay. 2759 6? (3) Cash Discts. To Profit & Loss 6 55 (3) Cash To Cash Discts. 6 55 (4) (5) Sales To Trading Acct. 4659 96 (4) Cash To Sales 1301 65 (6) Trading Acct. To Sales Allow. 2 00 (5) Accts. Rec'l. To Sales 3358 31 Trading Acct. To Mdse. ("Net Cost") 2759 67 (6) Sales Allow. To Accts. Rec. 2 00 Trading Acct. To Profit & Loss 1356 26 (7) Cr. by Inventory 2909 01 30 BOOKKEEPING AND COST ACCOUNTING In the ordinary systems the same seven original entries would be made, but "Mdse." would be used in all instead of Sales, Sales Allowances and Cash Discounts; but only one transfer double-entry would be needed, instead of five, viz., Mdse. To Profit and Loss, $1362.81 ; the four Trading account double entries, or eight ledger postings, being eliminated. The increased complexity due to having these extra accounts in the ledger, with no compensating advantages, is a good reason for their exclusion from the ledger. Reserve for Bad Debts and Reserve for Depreciation on Store and Warehouse may just as well be left out of the Ledger and taken care of by a Profit and Loss adjustment statement appended to the Balance Sheet. In the Commission's sys- tem these reserve accounts are handled as follows: 4. Reserve for Bad Debts: Credit with an estimated amount, based on charge sales, sufficient to provide for losses. Charge with the balances of personal accounts when hope of collection is abandoned. 37. Losses from Bad Debts: Charge with the amount that has been reserved for Bad Debts (4). 9. Reserve for Depreciation on Store and Warehouse: Credit this account with the amount of depreciation on store and ware- house and charge the amount to Rent Income (No. 44). Taxes and insurance appear in the following Journal entries: The Journal entries are: Losses from Bad Debts To Reserve for Losses from Bad Debts 33 56 Profit & Loss To Losses from Bad Debts. 33 56 Rent Income To Reserve for Dep'n on S. & W. 26 98 Rent To Rent Income 71 .25 Profit & Loss To Rent 71.25 The result is to decrease the credit balance of Profit and Loss account by $33.56 plus $26. 9S and put these amounts to the credit of the two Reserve Accounts. The same result can be accomplished, for all practical purposes, with less book- keeping, by leaving these accounts out of the ledger, and making a statement concerning them in the Balance Sheet. The pamphlet of the Commission says: " No merchant can be said to be managing his business properly unless adequate provision is made for depreciation." Adequate provision for depreciation consists first in selling the goods at such an advance over cost and expenses that a surplus may be built up, out of which depreciation, when it takes place, may be provided for, and second, in not distrib- uting this surplus in the form of dividends to such an extent as will deplete it below a proper reserve for depreciation. Whether or not the portion of this surplus that is kept as a reserve is credited to a reserve account in the Ledger or is kept in a surplus or Profit and Loss account is merely a matter of bookkeeping. The financial condition of the business, which a bank may consider as a basis for a loan, is precisely the same if the surplus account has a credit balance of $5000, with no reserve for depreciation, or if the credit balance is $4000 with $1000 credited to a reserve account. There is, however, an important advantage in putting part of the surplus into a reserve account; a surplus is popularly supposed to be something that ultimately may be divided among the stockholders, while a reserve is a fund that will some day be wiped out by actual depreciation of assets. If it is kept as a reserve, stockholders will not expect it to be paid out in dividends. Prepaid Insurance To Cash Insurance on Stock and Store Equipment To Prepaid Insurance Rent Income, Insurance To Prepaid Insurance 109 1 7 24 61 49 Taxes on Stock and Store Equipment To Accrued Taxes Rent Income To Accrued Taxes 9 2 5 10 50 25 7 " If the Insurance premium $109.24 was paid in advance for a year, and $9.10 of it is charged in the expenses for January, the balance on January 31, $100.14, is an expense asset which is decreasing every day. Instead of keeping the three accounts, Prepaid Insurance, Insurance on Stock and Store Equipment, and Rent Income, open on the Ledger, the amount of $100.14 may be entered as an expense asset and the items $1.61 and 7.49 as incurred or accrued expenses in a memorandum Profit and Loss adjustment. In the same way this Adjust- ment may contain Accrued Taxes $7.75 as an expense liability incurred and the items $2.50 and $5.25 as incurred expenses. Accrued Interest Payable, $19.23, and Accrued Interest Receivable, $0.71, may also be put in the Profit and Loss Adjustment, the first as a liability or credit, the second as a debit, or asset. Miscellaneous Outside Income, $2.00, re- ceived for use of the telephone in the store, may be treated as income from Expense Account, offsetting to that amount the rent of the telephone. By removing all these accounts from the Ledger, Profit and Loss Adjustment will be as follows: Profit & Loss Adjustment. Dr. (Liability) Cr. (Asset) Insurance Taxes Reserve for Bad Debts Reserve for Depreciation Accrued Int. Rec. Accrued Int. Pay. 9 7 33 26 19 10 75 56 98 23 109 24 71 Balance, Deferred Credit to Profit and Loss 96 13 62 33 109 95 The result of removing all these accounts from the Ledger is shown on page 32. Here on one page is the whole record of every essential fact of the month's business that is shown in the Commis- sion's system of 45 ledger accounts, 18 journal entries with 70 items, monthly summary, profit and loss statement, and balance sheet. -The only items missing are the five separate accounts which are here condensed into one Real Estate and Equipment Account, and Trading Account. There are onlj' 13 accounts in the combined Journal-Ledger and 10 in ACCOUNTS FOR RETAIL MERCHANTS. SELLING PRICES. TURNOVER 31 the Expense Distribution, and 7 items in the Deferred Profit and Loss Charges and Credits. There are only 15 entries in the Journal-Ledger and 12 in the Expense Distribution, a total of 27, figures only, as compared with 140 items, writing and figures, in the Commission's system. Twelve sheets with proper rulings and printed headings in this system contain the record of a whole year's business in sufficient detail for the manager's or owner's needs as far as the general course of the business is concerned. If minor details are wanted for any purpose the bookkeeper can easily supply them by reference to the books of original entry from the footings of which the Journal-Ledger entries were made. The student is advised to make a thorough and sys- tematic study of this chapter. He should provide himself with blank books with journal and ledger rulings, and after first journalizing and then posting the assets and liabilities, as shown in the Trial Balance of January 1, he should journalize the transactions, as in the journal entries on page 25, verifying the transfer and profit and loss entries, and post the entries into his ledger. A trial balance of the ledger should then be made, and when it is found to bal- ance, the Monthly Summary of Business, Balance Sheet and Profit and Loss Statement, January 31, should be derived from the ledger and put into the forms given by the Trade Commission. The student should then study carefully the " suggested improvements," page 28, and repeat the work, using the combined journal-ledger system, and obtain the final results in the forms given on page 32. He will thus be enabled to satisfy himself as to the advantages of the new system. Monthly Expense Ledger Credit Accounts Charge Accounts Cash 15 Accts. Payable 18 Wages and Salarie. 5 Prepaid Insurance 19 Accrued T:i vs 37 Res. for Bad Debts 9 Res. for Dep'n. 41 Profit and Loss Total Expense Char^" * 26 27 14 3 8 22 00 75 08 03 25 177 102 269 00 33 67 00 39 211 110 291 4 00 28 29 30 30 00 08 31, 32 75 33. 34 03 35, 36 Tax. and Ins. on Equip. 1 61 2 50 1 1 37 33 56 33 56 38 26 15 79 01 26 71 79 44 7 49 5 25 26 98 16 52 25 Total Credits 89 66 30 00 574 00 9 10 7 75 33 56 26 98 16 52 787 57 Monthly Combined Journal-Ledger Charge Accounts Credit Accts.* J3 03 03 o 1 u K 03' o 3 to a a t. 5 <: 6 *oi 23 o < DO 0) e3 (B 24 S3 25 -a a « »> a. ol •c « ■3 fi 26-33 03 a c. W 27-39 60 c H 40 to 03 a 42 Q 03 03 O 43 45 a 03 ^ to O O hJ 40 O o Eh 1 Cash 109 24 492 00 89 5( J6 10 98 00 75 690 9(1 3 2 00 2 33 9 26 2789 19 7 576 4659 2 2759 574 787 4659 19 6 2 1381 19008 on 4 Res. for B. D.. 33 9 26 30 56 5 10 9 ■Depn. S. & W 98 15 2759 1,7 67 17 Acct. Int. Pay. 19 V M 19 7 7S 22 57£ '. '. 3358 31 96 24 OC 67 mi 25 Mdse. Purchd . 2759 (,7 26-33 574 OC III) 27-39 787 17 ii' 57 40 4659 ■>h 96 42 Interest Cash Discts... . Misc. Out. Inc. 1 6 2 43 55 00 71 M 43 V", 45 no 41 16 787 52 57 1356 2(; 19 23 6 5! 55 2 00 00 1381 33 11 Total Debits. 63 31 24 71 ')(, 2 lid 2759 (,; in 1311 3358 109 4659 492 4117 6 2 13 [ The titles of debit accounts may be put in this column and the titles of credit accounts at the head of the columns of figures if desired. 32 BOOKKEEPING AND COST ACCOUNTING The Condensed Accounting System Combined Journal-Ledger, Januart, 1916 Credit Accounts Charge Accounts to ca O 1 K DO U o 2 *CJ pfj CO o < 3 CO OJ o 5 CD O < 6 c a » s t ■r cj CO 7 0) 10 s 9 0J m a CJ n K 10 4* tn cj 0J C II G OJ ^ *j cn ta o o ,-i £ 12 o CJ o 13 13 0J C t3 Eh 1 Cash 1308 20 2 Ol' 1 43 1311 2 3 3358 31 3385 1| 5 6 7 492 00 492 4124 802 1 1364 00 9 Mdse 2 00 2759 30 67 00 1362 81 10 196 )( 574 00 11 1 4! 563 !4 12 800 90 13 Total Credits 690 90 — 2 on — 2789 67 574 00 4666 51 802 'in 1 43 1364 24 563 34 11454 99 Balance Sheet Jan. 1 Transactions Jai\ . 31 Dr. Cr. Dr. Cr. Dr. Cr. 1 Cash 990 191 162 7,218 94 84 50 75 1,311 63 690 90 1,611 191 3,518 7,218 67 84 81 75 2 3 3,358 31 2 00 4 Real Estate & Equip 2,110 4,170 82 1,250 5 2,110 1,381 50 05 50 6 2,789 574 67 00 72 7 Salaries and Wages 492 00 00 8 1,250 00 00 9 3,451 09 4,124 802 1 1,364 48 90 43 24 4,666 802 1 1,364 563 51 90 43 24 34 2,909 06 10 11 12 13 7,273 57 7,836 91 12,015 12 12,015 12 11,454 99 11,454 99 15,450 13 15,450 13 Expense Distribution Cash A/cs. Pay Sal. & Wages Total Buying Exp. 14 00 25 00 39 00 Selling Exp. 3 75 30 00 177 33 211 08 Delivery Exp. 8 08 102 67 110 75 Office Exp. 22 03 269 00 291 03 Miscel. Exp. 26 79 26 79 Repairs 15 01 15 01 Insurance 109 24 109 24 Total 198 90 30 00 574 00 802 90 Deferred Pro6t & Loss Items Cr. Prepaid Ins. Charged to Expense Less Insurance Accrued (Bldgs. 7.49; Stock, 1.61) 19 7 33 26 23 75 56 98 109 9 24 10 Accrued Int. Rec. 100 14 71 Dr. Ace. Int. Pay. Ace. Taxes (Bldgs., 5.25; Stock, 2.50) Res. for Bad Debts Res. for Dep'n. 100 87 85 52 Bal. to Cr. of P. & L. 13 33 ACCOUNTS FOR RETAIL MERCHANTS. SELLING PRICES. TURNOVER 33 MERCHANTS' SELLING PRICE A merchant in order to price his goods properly must know his overhead expenses. With a proper arrangement of his accounts the percentage of overhead m^y be readily obtained. Goods not priced high enough to cover this percentage are actually sold at a loss. The most convenient way of arriving at the proper per- centage to add to the first cost of goods for overhead is to use the average ratio of operating expenses to net sales covering a past period. For instance, if a merchant's annual sales for the last fiscal year were $'25,000 and the expense of conducting his business was $5000 his overhead was 20 per cent. By adding the desired percentage of profit on sales to this overhead per- centage and deducting from 100 gives the percentage of invoice cost to selling price. The invoice cost of an article divided by this percentage gives the selling price. (Federal Trade Com- mission's Pamphlet, p. 6.) The system above described for fixing selling prices is rarely, if ever, used in actual business, and in any business dealing with a large variety of goods it is practically impos- sible. The statement that "goods not priced high enough to cover the percentage (of overhead) are actually sold at a loss " may be far from true. Suppose that a month's business of a certain grocery store showed the following results : Invoice SellingPrice Gross Profit Turn- Sold over of Goods Cost per lb. Amt. Per lb. Amt. Per lb. Amt. % 1000 lbs. Sugar H $50 s.H $55 0.5s 1 $5 10 24 200 lbs. Tea A 35 70 40 80 5 10 14.3 44 100 lbs. Tea B 40 40 50 50 10 10 25 12 50 lbs. Tea C 60 30 80 40 20 10 33 6 1350 190 225 35 18.4av Other goods 12150 1710 2150 440 25.7 13500 total 1900 2375 475 25 10 Overhead. Rent, taxes, insurance, interest, proprietor's services, clerk hire, cartage, stationery, postage, shortage, heating, lighting, depreciation, per month, $300 = 1 5.8% of Invoice Cost. Net profit per month, $175. According to the statement quoted above the sugar and the tea A " are actually sold at a loss," for the selling price is only 10 per cent and 14.3 per cent, respectively, above the first cost, while the average overhead on all the goods handled is 15.8 per cent. The fact is that it is not correct to consider the overhead as an amount which must be uniformly distributed over all the goods sold as a percentage on their cost. The only reason why overhead is distributed on a uniform percentage of value basis is that that is an easy way to do it. The actual relation between the overhead and the cost of goods is a variable one, depending on the cost of handling, which varies with the bulk, weight, depreciation, shortage, etc., and with the turn- over or rapidity with which the goods are sold. If the average amount of sugar purchased at one time is 500 lbs. and 1000 lbs. is sold per month the goods turnover is 24 times a year. If tea, C, is bought in 100-lb. lots and only 50 lbs. is sold per month its turnover is 6 times per year. The selling price of sugar has no necessary relation to the average overhead of 15.8 per cent, for the overhead properly belonging to it may be only 5 per cent. The selling price of the sugar and the cheaper tea may be fixed very low because the turnover is rapid, because the depreciation and shortage are small, and, because it is advisable to have some goods sold at a small profit in order to attract customers to the store who may be induced to buy other classes of goods on which there is a large profit. Factory Cost and Selling Price. Many authors publish diagrams illustrating the following formulas: 1. Cost of Material+Cost of Direct Labor =Prime Cost. 2. Prime Cost -(-Departmental and General Expense = Factory Cost. 3. Factory Cost -(-Selling Expense = Total Cost to Make and Sell. 4. Total Cost to Make and Sell + Profit = Selling Price. These formulas for finding the selling price may be use- ful in some few lines of manufacturing business, but, in general, only the first two lines of them are of any value. The factory cost, or what it costs to make an article, can be determined from the factory cost records provided the burden, or departmental and general factory expense, is properly distributed, and in many cases it may be pre- determined, but the selling expense is generally such an uncertain quantity that both it and the profit (or loss) are not determinable until after the goods are sold and paid for. Much of the cost of selling an article this year was incurred and charged to selling expense last year, and much of this year's expenditures of the sales department will not result in sales until next year. The selling price is not always fixed by the manufacturer, it is more often fixed by competition, or by the purchaser. Costs Factory Costs Selling Costs Selling Price Profits or Losses Direct Material 1 „ . „ , _. , _ . \ PrimeCost Direct Labor > Proportion of Fi- nancial and Ad- Gross, less Discounts (See below) ministration Costs and Allow- Indirect Material ances = Net Indirect Labor Advertising Price Other Factory Exp. Salesmen Proportion of Fi- Burden Branch offices nancial and Ad- Other selling ex- minis t r a t i o n penses Costs FORMULAS FOR PROFITS AND LOSSES Net Selling Prices - (Factory Cost -(-Selling Cost) = Profit. (Factory Cost -(-Selling Cost) —Net Selling Price = Loss. When the selling price is not fixed by the market after the goods are made, but is a matter of contract between maker and buyer, then the formula may be Factory Cost -(-Selling Cost-f Profit =Selling Price. In many factories the Prime Cost only is determined for each item of product, Direct Labor -I- Material, and no attempt 34 BOOKKEEPING AND COST ACCOUNTING is made to distribute the burden over the several products. Monthly totals of labor, material, and actual burden are kept. It is better to make no distribution than to distribute by a wrong method. TURNOVER The rapidity of the turnover is a very important element in conducting a retail business. It is obvious that an increase in turnover goes hand in hand with an increase in profit. A slow turnover may be due to poorly selected stock, to overstocking; or to an inefficient selling organization. No effort should be spared to increase the turnover to its maximum. To ascertain the turnover divide the cost of goods sold during the year by the cost of the average stock carried. (Federal Trade Commission's Pamphlet, p. 6.) The turnover referred to in the above extract is only one kind of turnover, that of the goods handled. Another equally important turnover is that of capital invested. In the case of the sugar sold by the grocery store, if 1000 lbs. is sold each month and 500 lbs. is purchased every half month, the turn- over is 24 if we consider that 500 lbs. is turned over 24 times a year, and this is the usual method of computing goods turn- over, but according to the rule given in the pamphlet, as quoted above, we might figure that the average stock carried was half of a single purchase, or 250 lbs. (assuming that a new barrel could be obtained on the same day the old one was emptied) costing $12.50 and this divided into $600, the cost of the sugar sold during the year, gives a turnover of 48. The turnover of capital is an entirely different matter. If a grocer could buy a barrel of sugar for $25 spot cash and sell it in two weeks for $27.50, collecting all the money before he needed to buy another barrel, his cash capital invested in sugar would be $25, and if he sold 24 barrels a year, costing $600, his turnover of capital would be the same as the goods turnover, or 24 times. But if he gave his customers three months' credit on the average he would have invested in sugar and in customers' accounts for sugar $150, making the turnover only 4 times a year, and this figure would be still further reduced by reason of the additional capital required for equipment and for expenses. Quick Turnover. There is nothing so vitally important to the success of the business, in every direction, as the quickening of shop production and the possibility thus secured of making a quicker turnover of working capital invested. — C. U. Carpenter. CHAPTER V FACTORY ACCOUNTING The first principle in modern factory accounting is that in the general books of the Company the operations of the fac- tory shall be treated as if they were tKose of a separate busi- ness, belonging to outside parties. An account may be opened in the general books called Factory Plant (or Real Estate and Equipment), representing the Company's investment in the land, buildings, machinery and other permanent equipment of the factory, and another account, which may be called Factory Operation (or Manufacturing Account), is used to record the transactions between the factory and the general office. This account is charged with cash sent to the factory, with bills paid by the genera! office on account of the factory, and with all charges properly made against the factory for interest on the total investment in it (which includes both the cost of the plant itself and that of its oper- ation) for insurance, taxes and depreciation, and for such portion of the salaries of general administrative officers as is rightly charged to the cost of operating the factory and not to the cost of the selling or financial departments. The monthly entries on the debit side of the Factory Operation Account will generally include the following: GENERAL BOOKS, FACTORY OPERATION ACCOUNT Dr. To Cash — for payroll and petty cash expenses. To Accounts Payable — for invoices of goods purchased. To Interest Earned, for interest on investment in factory. To Insurance and Taxes, for tV of annual insurance and taxes. To Reserve for Depreciation, for yV of estimated annual depreciation. To Administration Expenses, for proportion chargeable to factory. The account will be credited each month "By Mdse." for the value of the products shipped from the factory, and By Factory Plant for the value of any additions or "betterments" that have been made by the factory to the building or its equipment. What is the meaning of the word "value" in this connec- tion? The answer to this question involves all the difficulties of the theory and practice of factory accounting and cost- keeping. For any particular business the method of fixing the value to be used in crediting the factory for its shipments of goods should be determined at a conference between the management and the chief accountant. Whatever method be adopted it should be adhered to until very important reasons are found for changing it. The "value" to be credited may be either "factory cost" or "cost of sales." Factory Costs may be either "actual" (so-called), "recorded" or "normal" costs; "Cost of Sales" may be catalogue list price less a certain percentage to cover discounts from list and estimated costs of selling, adminis- tration and estimated profit, or actual selling prices less a fixed percentage or a percentage varying with business con- ditions, or it may be the total of the charges against Factory Operation Account during a month (or other fiscal period) plus the decrease (or minus the increase) of the inventory during that period. Continuous Product, Single Product. The simplest sys tern is one that is often used in a continuous process factor}', making a single product, such as pig iron, or paper of one grade, or cotton goods of one grade, in which the total expend- iture of the factory in a month is divided by the number of tons or yards to obtain the inventory cost per ton or per yard for that month; then the factory is credited at the inventory cost for all the goods shipped. In this way Factory Operat- ing account shows neither a profit nor a loss. The balance of the account represents the inventory value of the product that has not been shipped, plus the inventory value of raw material on hand and that of the "work in process" or un- finished product. The system has the merit of simplicity and of low cost for bookkeeping, but it may lead to absurd results as to unit costs when the product of any month is low, or, possibly, nothing, the factory being shut down for repairs or on account of a strike, or lack of raw material, or lack of orders. Varied Products. In factories making a variety of product the so-called "actual cost" may be obtained by a most elab- orate cost system, in which the cost of every article made includes the cost for direct material, direct labor and "bur- den," the burden or total indirect expenditure for a month being distributed according to some plan, such as the machine- hour rate plus a "supplementary rate," over the product of that month. This method, like the first one described, has the apparent bookkeeping merit of having the factory show neither a profit nor a loss, but it also has the demerit of giving useless and absurd cost figures when the factory is running below its normal rate. Recorded Costs may include the actual expenditures for direct labor and material, or "prime cost," plus a burden figure which may be a fixed percentage on labor or on material or on prime costs, or an arbitrary figure per unit of product which is estimated to be sufficient to cover the average burden during the year. This is a satisfactory method from a book- keeping standpoint, but it may lead to erroneous conclusions as to the cost of some portions cf the product. By this method the books may show that the factory makes a profit or a loss according to whether the total indirect expenses for a year are less than or greater than the burden which has been charged against the cost of the several products. 35 36 BOOKKEEPING AND COST ACCOUNTING Normal Cost includes the sum of direct labor and material or prime costs, and a standard burden charge on each item of product which is made by a careful estimate of the machine- hour rate which should be charged against each machine, work-bench, assembly floor, or other "productive center," such that the total of such charges to cost of product during a year of normal business shall approximate the total indirect expenses of the factory for such a normal year. In a year of brisk business the factory will show a profit equal to the excess of the sum of all the burden charges made against the cost of products over the charges against burden account or the total yearly indirect expenses. In a year of depression, when the factory is running below its normal rate, or in a year when it is badly managed so that a large part of the machinery is idle from lack of work for it, or the indirect expenses are unduly large, the factory will show a loss equal to the Unearned Burden, or the excess of expenses over the sum of the burden charges. Different Kinds of Industries 1. Industries with continuous processes; uniform product with uniform specifications; single-purpose machines; uniform operations; simple routing. Illustrated by the manufacture of paper and pulp. 2. Industries with non-continuous processes; uniform product with varying specifications; single-purpose machines; uniform operations; simple routing. Illustrated by the manufacture of envelopes, books, and handkerchiefs. 3. Industries with non-continuous processes, varying products with varying specifications; multiple-purpose machines; vary- ing operations; complex routing. Illustrated by machine shops. From a lecture on " Scientific Management," by H. S. Person, Ph.D., Director Amos Tuck School of Administration and Finance, Dartmouth College, President of the Taylor Society. Company or Private Ledger of Resources. a Manufacturing Business Liabilities 1. Cash. (Including Capital Stock and 2. Accounts Receivable Surplus and Reserves.) 3. Bills Receivable. 1. Capital Stock. 4. Merchandise. 2. Bonded Debt. 5. Office Fixtures. 3. Surplus. 6. Factory Plant, 4. Reserves for including Bad Debts, Land, Depreciations, etc. Buildings, 5. Accounts Payable. Permanent Equipment. 6. Bills Payable. 7. Factory Operating. 7. Accrued Taxes Covers all investment in and Insurance. the factory except that 8. Earned Interest. charged to plant- Charged to Factory. 8. Deferred charges. Includes taxes and insur- ance paid in advance but not yet charged to Fac- tory or other accounts. 9. Outside Investments. Subdivision of Total Expenditure for Factory Operations On Company's General Books Charge Factory with all money sent to factory. Credit Cash. Charge Factory with all purchases for account of factory. Credit Accounts Payable or Cash. Charge Factory once a month with its monthly propor- tion of the yearly expense for Interest, Taxes, Insurance, Depreciation. Credit Interest charged to Factory, Taxes, Insurance, Reserve for Depreciation. Credit Factory with all goods shipped by factory or put into warehouse on Company's account. On Factory Books (a) Credit Co. with all values received from Co. (6) Charge Co. with all values delivered to Co. (a) Charge Stores with material received. Labor with payroll money received and paid out on ace. of wages and salaries Cash with other money received from Co. Burden with the monthly charges made by- Co. for interest, insurance, etc. (6) Credit Finished Product, Warehouse, or Stores with goods shipped. Inter-departmental Accounts in Factory Charge Accounts Work in Process Cr. Labor, Stores, Burden, for productive work. Stores Cr. Work in process, for material returned from shop. Burden Cr. Labor, Stores, Burden, for work done by departments not directly chargeable to Work in process. Burden Acct. is subdivided into as many departmental divisions as may be found desirable, such as power plant, blacksmith shop, repair shop, etc. Labor may be divided into Direct and Indirect Labor (sometimes but erroneously called Productive and Non- productive). Direct Labor is that which is expended upon the raw material converting it into finished material, and Indirect Labor is that which is employed in supervision or in keeping the factory running and is not directly chargeable to any particular part of the product. The Factory Books. The following is a skeleton of the principal factory accounts. They may be subdivided into departments, processes, or classes of product as desired, according to the nature of the business. Factory Accounts: Credit Company with all disbursements made by the Com- pany on account of factory operations. Charge Cash (Factory Cash) Stores Burden (that part of burden that is paid for directly by the Co.'s general office, such as insurance, taxes, etc., and charges made by Co. against the factory for Interest, Reserve for Depreciation, and the proportion of business adminis- tration that is chargeable to factory operations). Credit Cash, Stores, Labor, Burden, Work in Process. FACTORY ACCOUNTING 37 Charge Work in Process, for costs of unfinished products. Warehouse, for cost of finished products. Betterments, for cost of additions to or improvement of the factory property. In these entries the credit to Burden is the " earned burden " or " normal burden." Charge Company Credit Warehouse, for goods shipped. Betterments, for cost of betterments, when they are finished. Work in Process, for outside work done on Company's orders. Credit Cash, Stores, Burden, Labor, W T ork in Process. Charge Cash for any receipts of factory cash for sale of stores, or of supplies which may have been previously charged to burden, or for any cash received from workmen and credited to them or the payroll. Stores, with factory cash purchases of material for stores, or with labor expended on materials for stores, or with materials put in stores that were previously charged to burden, or to Work in Process. Burden, with all expenditures of factory cash for general factory expenses, with all indirect labor and indirect material. The burden of one department may be credited and the burden of another department charged when one department does work for another, or furnishes supplies that have been charged to the department burden of another department. Labor, with payroll payments in cash or in stores charged to workmen. OPENING A SET OF FACTORY BOOKS The principle upon which a factory accountant opens a set of books for factory operations considered as distinct from the commercial and financial operations of a company is that the factory owes to the "owner" of the business, which, on the factory ledger, may be be called "New York Office," "Com- pany," "A. B. Co." or "Private Ledger," all the net assets of the factory at their appraised valuation, that it credits the "Company" account with these assets, and credits it also with everything it receives from the Company, such as cash for the payroll, material and supplies, the invoices for which are certified to the Company for payment, and cash for minor current expenses, or "Petty Cash," and charges it with everything delivered to the Company or shipped to the Company's customers, the bills for which are to be paid to the Company. For example the Company's Chief Accountant may say to the Factory Accountant, "We have had an inventory and appraisal made of everything in the factory on January 1st, the whole details of which you will find in this schedule, and have deposited in the local bank to the credit of the factory $1000 as a fund from which to pay your minor current expenses. We will send a check for the amount of the pay- roll every week, and we will pay all the bills which you certify to us for payment for material purchased. You will credit us with all these items and charge us monthly at the 'factory cost' with everything you send to us or to our cus- tomers. What is meant by 'factory cost' you will find in this typewritten 'Book of Instructions.' " The Factory Accountant then opens his books with the following entries: In the Factory Cash Book Jan. I, 1916 To Company 1000 on In the Journal Jan. 1, 1916 Sundries To Company as per Schedule of Factory Assets, Jan. 1 Real Estate (Land and Buildings) Equipment (Fixtures, Furniture, Power Plant, Machine Tools, Small Tools) Material (Haw material for manufacture) Supplies (Fuel, Oil, Waste, Lumber, Paper, etc.) Mfg. a/c. (Work in progress in shops) Warehouse (Finished goods ready for Ship- ment) Worked Material (Partly finished products in stores) 40,000 00 200,000 80,000 20,000 00 00 5,000 10,000 00 00 30,000 00 15,000 00 00 After making these entries the Management decides that the last five accounts, or the goods represented by them, should be subdivided into departments or into classes of product, so as to facilitate the determination of costs. Thus the warehoused goods might be divided into four classes, Wl, W2, W3, W4, the Supplies into SI, Power-house Sup- plies; S2, Forge and Machine Shop Supplies; S3, Grinding- and Plating-room Supplies; S4, Shipping-room Supplies. The Accountant would then determine the most convenient way of making these subdivisions. He might properly con- clude, if the business was a large and complex one, that in order to simplify the general factory books it would be better not to subdivide these accounts in the Works Journal and Works Ledger, but to keep them as controlling accounts, making the subdivisions on statistical sheets or cards or loose-leaf books. To simplify the accounts still further, and save clerical labor, he might keep no account with Worked Material, considering all partly finished goods as belonging to Mfg. Acct., and crediting that account only as the goods are delivered to the warehouse. Even Warehouse Acct. may be dispensed with, the finished products remaining in Mfg. Acct. until they are shipped, when they are charged to Company. Real Estate and Equipment may also be omitted from the Factory books and kept in the Company's General Ledger. 38 BOOKKEEPING AND COST ACCOUNTING After the books have been opened suppose that a condensed summary of the transactions of the factory in the first month is as follows: Material purchased, bills certified to Co. for payment Supplies purchased, bills certified to Co. for payment Supplies purchased, paid for out of Petty Cash Labor, including salaries, paid by Co. on pay rolls Labor, paid out of Petty Cash Material delivered from Stores to Shop Supplies used during month Worked material, withdrawn from Stores Worked material, delivered by Shop to Stores Labor (inc. salaries) total credits on Pay Rolls Current Repairs, to tools, done in shop New Equipment built in shop Finished Goods delivered in Warehouse, at estimated "factory cost" Goods shipped from warehouse, at estimated factory cost 5,000 1,000 200 25,000 200 10,000 1,500 5,000 6,000 25,500 100 500 35,000 40,000 From this summary the following Journal Entries would be made. January 31, 1916 Sundries To Company 31,000 Material 5,000 Supplies 1,100 Labor 25,000 Mfg. a/c. To Sundries 42.000 To Material 10,000 To Supplies 1,500 To Worked M iterial 5,000 To Labor 25,500 Sundries To Mfg. a/c. 41.600 Worked Material 6.000 Repairs 100 Equipment 500 Warehouse 35,000 Company 40,000 To Warehouse 40,000 Besides the above entries the following additional charges would be made to Mfg. a/c: One-twelfth of the estimated yearly interest on investment in the factory and its contents, and yearly taxes and insurance, none of which is yet paid, 7§ per cent on $200,000 = 15,000 -=-12 =$1250. One-twelfth of the annual estimated cost for depreciation, for obsoles- cence and for wear and tear and extraordinary repairs, $4800, 400 Minor repairs during the month, to close Repair a/c 100 The entry would be Mfg. a/c. To Sundries To Adjustment of Interest, Taxes and Insurance To Reserve for Depreciation and Ex. Repairs To Repair a/c 1250* 400* 100 * These two items may be credited to Company account, instead of to the two accounts named. The Cash Book entries may be journalized at the end of the month (if they are not posted directly from the footings of the columns of a Column Cash Book) as follows : Sundries Supplies Labor To Cash 400 The entries of Jan. 1 and Jan 31 (and any other entries that may have been made during the month) are posted in the Factory Ledger, as follows: Factory Ledger Company Jan. 31 To Warehouse 40,000 Jan. 1 Jan. 1 Jan. 31 By Cash By Sundries By Sundries Jan. 1 Jan 31 Jan 31 To Company To Company To Cash 5,000 1,000 200 Jan. 31 By Mfg. a/c. Petty Cash Jan. 1 To Company 1,000 Jan. 31 By Sundries Mfg. a/c. Labor Jan 31 Jan. 31 To Company Petty Cash 25.000 200 Jan. 31 By Mfg. a/c. Adjustment of Int. Tax and Ins. Jan. 31 By Mfg. a/c. Reserves for Depreciation and Ex. Repair Jan. 31 By Mfg. a/c. 1,000 200,000 31,000 Real Estate Jan. 1 To Company 40.000 Equipment Jan. 1 Jan. 31 To Company To Mfg. a c. 80,000 500 Material Jan. 1 Jan. 31 To Company To Company 20.000 5,000 Jan. 31 By Mfg. a/c. 10,000 Worked Material Jan. 1 To Company Jan. 31 1 To Mfg. a/c. 15.000 6,000 Jan. 31 By Mfg. a/c. 5,000 Supplies 1,500 Jan. 1 Jan. 31 Jan. 31 To Company To Sundries To Sundries 10,000 42,000 1,750 Jan. 31 By Sundries 41,600 25,500 1,250 400 FACTORY ACCOUNTING 39 Factory Ledger (Continued) Current Repairs Jan. 31 To Mfg. a/c. 100 Jan. 31 By Mfg. a/c. 100 Warehouse Jan 1 Jan. 31 To Company To Mfg. a c. 30,000 Jan. 31 35,000 By Company 40,000 Jan Trial Balance and Monthly Statement A trial balance and monthly statement of the Ledger for 1 and Jan. 31 would show the following: Jan. 1 Balance January Balance Jan. 31 Dr. Cr. Charge Credits Dr. Bal. Cr. 201,000 Company 40,000 31,000 192,000 40,000 Real Estate 40,000 80,000 Equipment 500 80,500 20,000 Material 5,000 10,000 15.000 15,000 Worked Mat. 6,000 5,000 16,000 5,000 Supplies 1,200 1,500 4,700 1,000 Petty Cash 400 600 10,000 Mfg. a/c. 43,750 41.600 12,150 Labor 25,200 25,500 300 Adj. of Int. etc 1,250 1,250* Reserves 400 400* 30,000 Warehouse 35,000 40,000 25,000 201,000 201,000 156,650 156,650 193,950 193,950 * See footnote on page 38. ACCOUNTING CODE FOR A MANUFACTURING BUSINESS The principal accounts in the general books of a manu- facturing concern are the following: Assets and Expenses Cash Bills Receivable Accounts Receivable Factory, Real Estate and Equipment Factory Operating (or Manu- facturing Acct.) Mdse. (or Sales Acct.) Administration and Selling Exp. Outside Investment (if any) Capital and Liabilities Capital Stock Bonded Debt Surplus Profit and Loss Bills Payable Accts. Payable Reserve for Depreciation Other Reserves (if any) Besides these there are other accounts which represent assets or expenses if they have debit balances, and liabilities or profits if they have credit balances, such as Taxes, Insur- ance, Discount and Interest. Some accountants divide Taxes and Insurance each into two subdivisions, for example, Accrued Taxes, Prepaid Taxes, but this is needless. If taxes have been prepaid, the debit balance of the account shows that fact; if there is a credit balance it represents the amount of accrued taxes, not paid, which have been charged to fac- tory operating or some other expense account. The transactions and the corresponding journal and cash book entries for the last month of a year or other fiscal period may be as follows: Journal Entries Factory Operating: To Accts. Payable 10,000 To Bills Payable 10,000 To Taxes and Insurance 300 To Res. for Depn. 600 To Interest Chgd. Facty 500 To Admin. Exp. 1000 Sales To Factory Oper'tg. 40,000 Transactions Stores bought for factory Factory is charged with its monthly proportion of General Charges such as interest on factory invest- ment, taxes, etc. Goods were shipped from the fac- tory and charged to Sales Acct. at factory cost Sales were made on open account ' and on notes rec. J Cash sales were made Cash was received in payment of notes and accts. Cash rac. for interest Bills and accts. pay. were paid in cash Cash was paid for factory payroll Cash was paid for administration and selling expense Cash was paid for insurance, taxes, and interest Transfer and Balancing Entries After the above entries are made and posted several trans- fer entries are needed before making a balance sheet. At the beginning of the month Administration and Selling Expense Accts. showed debit balances amounting to $2000, representing advances to salesmen and advance advertising. This together with $10,000 charged during the month, less a credit of 81000 which has been charged to Factory Operat- ing is now charged to Sales Account. The credit balance of Sales Account, 84000, is transferred to the credit of Profit and Loss. Sales l Bills' lice. 1 0^000 I ToSalea 4". 000 Cash Book Entries Cash To Sales 6,000 To Bills Rec. 1 2,000 To Accts. Rec. 40,000 To Disct. and Int. 300 Cr. By Accts. Pay. 22,000 Cr. By Bills Pay. 3,000 Cr. By Factory Oper'g 15,000 Cr. By Adm. Expense 2,000 Cr. By Sales Expense 8,000 Cr. By Insurance 600 Cr. By Taxes 400 Cr. By Dis. and Int. 500 To Profit and Loss To Adm. Exp. 4000 1 1 ,000 The factory reports that the total cost of betterment work for the fiscal period is S2000 and the general bookkeeper enters it as an addition to the permanent assets. Factory R. E. & Equip. To Factory Operating 2000 The factory reports the cost value of spoiled work for which no charge could be made to customers or to the cost of finished goods; also the loss of unearned burden, due to idleness. Profit & Loss To Factory Operating 40 BOOKKEEPING AND COST ACCOUNTING A loss of $500 on Accounts Receivable, and the debit balance of Discount and Interest, $1200, are charged to Profit and Loss. Profit & I.oss To Accts. Rec. To Dis & Int. its present value but to transfer a part of the credit balance of Reserve for Depreciation to Surplus Account, making it available for dividends. Reserve for Dep'n To Surplus 5000 Interest charged to Factory shows a credit balance which has accumulated during the fiscal period, and is now credited to Profit and Loss as part of the profits of the business. Interest Charged to Factory The credit balance of Profit and loss is transferred to surplus Acct. Profit & Loss To Profit and Loss To Surplus The factory reports that one of its heavy machines had an accident requiring costly repairs which were made in the factory, and which ought not to be charged to current repairs and thence to the cost of finished goods, but to reserves for depreciation. Reserve for Depreciation A dividend of 8 per cent on the capital stock is declared payable Jan. 15th. Surplus To Dividend 8,000 To Factory Operating A re-appraisal of the factory machinery shows that it has a much higher value and longer probable life on the average than was assumed in making the appraisal five years earlier, when the estimated annual credit to Reserve for Deprecia- tion was fixed. The management decides to let Factory Real Estate and Equipment account stand on the books at When the dividend checks are signed and mailed, a cash-book entry will close Dividend Account, Cash being credited. The Journal-Ledger form of posting all the above entries is shown on one sheet, below, the liabilities at the beginning of the month being entered on the upper line and the assets in the left-hand column. In this sheet the balances of each account both at the beginning and end of the month are shown, as well the transactions during the month. COMPANY'S GENERAL LEDGER Liabilities — Credits 7j 03 a a m Q O O m •o a o N no a e a} T3 a oj s c a o Q o ED K o u tf> ° a to O (a o CD 3 d >> o3 a, S >. 03 DO O < J3 CO o +3 6 O 03 K cj CJ « CO o o < m V X 03 H ■8 en a « jo V a O >. V 03 c < m CD "e3 a: Total Dr. (not incl. Balances) Total Bal. 200,000 100.000 40.000 10.000 15.000 5.000 5.000 5.000 20.000 Cash 25.000 300 12.000 40.000 6.000 58.300 Bills Rec. 15.000 10.000 10.000 Accts. Rec. 45.000 39.000 39.000 JS Ins. & Taxes 2.000 1.000 1.0OO io Fcty. R. E. & E. 50.000 •2.000 2.000 gFcty. Op'g. | Ad. & S. Exp. 60.000 600 500 lo.ooo 10,000 15.000 300 1,000 37.400 2.000 10,000 10,000 " Dis. & Int. 1.000 500 500 g Res. for Dep. •5.000 •1.000 6.000 ^ Int. chg'd Fcty. •5.500 5. 500 P. & L. •11,800 •1.20C •500 •1,000 14,500 Bills Pay. 3.000 3.000 Accts. Pay. 22.001 22.000 Sales •4.00C 40.000 • n.oool 55.000 Surplus Cr. •4000 8,000 Total for Month / 16.800 8,000 600 500 9.500 I0.0C0 10.000 51.500 1,500 12.000 40.500 300 44.000 12.000 55.000 272.200 Dr. Cr. 8.000 6,000 5.500 14.500 3.00C 22,000 58.300 500 10.000 39.000 1.000 2.000 37.400 10.000 55.000 272.200 Balances for Mo. < 8,800 8,000 7.000 1.000 2.000 1.501 6.600 2.000 36.900 Dr. Cr. Dr 5.400 5.000 5.000 12.000 6,800 700 2.000 36.900 New Balances J 100.000 40.000 18,800 8,000 9.60C 12.00C 8.000 31.800 13.000 43.500 2.700 52.000 53,400 196.400 196.400 * Transfer and balancing entries. FACTORY ACCOUNTING 41 The Factory General Ledger From the Company's General Ledger entries for the month it is seen that the debits and credits of factory operating account cover all the transactions of the company with the Factory. At the beginning of the month the account showed a debit balance of 160,000. On the Factory Ledger this will appear as a credit to Company account, and it will be bal- anced on this ledger by debits to Stores, Work in Process, Warehouse, and Factory Cash, and a credit to Labor account for wages due and unpaid. The credits to Company account during the month, totaling 837,400, will be debited to Com- pany General Charges (a subdivision of Burden), $2400, representing the charges for Reserve for depreciation, $600; Interest, $500; Insurance and Taxes, $300; and Adminis- tration charges (proportion of officer's salaries and general office expense charged to the factory, $1000) ; also purchases of material for the factory, $20,000, charged to Stores ac- count, and cash sent to the factory for payroll and other cash expenditures, $15,000, charged to Factory Cash. The charges to Company account, $44,000, will be balanced by credits to Warehouse, for goods shipped, at factory cost, $40,000; to Spoiled and Defective Work, which could not be charged to the cost of finished goods in the Warehouse, say $400; to Burden account, representing unearned burden, which is a loss due to idleness or other cause, not properly chargeable to the cost of finished goods, say $600; to Better- ments, $2000 for work done on additions to the factory equip- ment; and to Repairs and Maintenance (part of Burden) $1000 for extraordinary repairs, which will be charged on the Company's books to Reserve for Depreciation. The entries of the above-named items might appear on the Factory Journal and Cash Book as follows: Sundries To Company Stores Cash Burden (Gen. charges) 20,000 15,000 2,400 37,400 Company To Sundries To Warehouse 44,000 40,000 To Betterments 2,000 To Burden: Spoiled work 400 Unearned burden 500 Extra repairs 1,000 2,000 Besides the above entries there might be the following representing transactions inside of the factory. Sundries To Labor 18,100 (Distribution of labor as per payroll and Job tickets) Stores 300 Work in Process (Depts. A. B. C.) • 10,000 Auxiliary Depts. (Depts. D. E. F.) 2,000 Betterments 600 Burden (Supt., foreman, gen. labor) 5,000 Warehouse 200 * Separate accounts would usually be kept for the separate departments. The work in process might be divided into classes of product as A, steam engines; B, steam turbines, C, other products. The auxiliary departments are Power House, Tool Room, Repairs and Maintenance, Blacksmith Shop, Yard, etc. Sundries To Cash 14,700 Labor (Wages and Salaries paid) 14,000 Stores, Petty cash exp. 400 Aux. Depts., Petty cash exp. 200 Warehouse, Petty cash exp. 100 Sundries To Stores 22,800 Work in Process 17,000 Betterments 1,000 Auxiliary Depts. 2,000 Burden (supplies issued) 2,400 Warehouse (supplies issued) 200 Labor (charged to workmen) 200 Sundries To Work in Process 41,000 Stores (partly finished work put in stores) 5,000 Warehouse, finished product 36,000 Sundries To Auxiliary Depts. 7,900 W T ork in Process (work done in the auxiliary depart- ments directly chargeable to work in process) 2,000 Warehouse (work done on finishing products in the warehouse) 900 Burden (power plant and other general factory expense) 3,000 Auxiliary Depts. (Subdivided in the actual account- ing) work done by one department for another 2,000 FACTORY LEDGER Co. Labor Cash Stores Work in process. Better- ments Aux. Depts Burden Ware- house Total Debits Company 2,000 2,000 40,000 44,000 Labor 14,000 200 14,200 Cash 15,000 15,000 Stores 20,000 300 400 5,000 400 26,100 Work in process 10.000 1 7,000 2,000 8,000 37,000 Betterments 600 1.000 400 2,000 Aux. depts. 2,000 200 2,000 2,000 1,700 7,900 Burden 2,400 5,000 2,400 3,000 12,800 Warehouse 200 100 200 36,000 '00 300 37,100 Total credits 37,400 18,100 14,700 22,800 41,000 2,000 7/00 12,800 40,000 196,700 Total debits 44,000 14,200 15,000 26,100 37,000 2,000 7.900 12. BOO 37, 00 196,700 Bal. for month fCr. 1 Dr. 6,600 3,900 300 3,300 4,000 2,; oo 10,200 10,200 (Cr. (Dr. 60,000 500 60,500 Bal. at 1st of month 4,000 20,000 18,000 18,500 60,500 New balances fCr. 1 Dr. 53,400 4,400 4,300 23,300 14.000 16,200 57,800 57,800 42 BOOKKEEPING AND COST ACCOUNTING Sundries To Burden as per Burden Distribution sheet 10,800 Stores 400 Warehouse 300 Work in Process 8,000 Betterment 400 Auxiliary Departments 1,700 Journal Entries (Summarizing the month's entries in the books of original entry, such as Cash Book, Petty Caah, Sales Book, Invoice Book, Bills Receivable and Payable Book. The letters A, B, C, etc., refer to the list of Transactions.) Putting these entries into the Journal-ledger form they appear as shown on page 41. A SIMPLE ACCOUNTING SYSTEM A simple double-entry bookkeeping system for a man- ufacturing concern is illustrated below. The General Ledger or Private Ledger has only from twelve to fifteen accounts, but they are all that are necessary. A purchase or invoice ledger might be kept in which each creditor would have a page, and a sales ledger in which each debtor would have a page, but these are by no means required, for all the infor- mation that an invoice ledger world contain, and more, is found in the alphabetical file of the creditor's bills, and all that a sales ledger would contain is found in the alphabetical file of the carbon copies of the bills and statements rendered to the debtors. By dividing each file into two parts, Paid and Unpaid, the accountant can at any time find out by adding (preferably on an adding machine) the amounts of unpaid invoices and bills how much is owing to or by the concern on open accounts. The auxiliary BUI Book furnishes a more correct record of Bills Receivable and Bills Payable than the ledger does. A simple statistical sheet with entries made on it from the ledger at the end of each month shows the general course of the business during the year. In this system Manufacturing Account is charged each month with all the costs of operation that appear as direct charges in the Cash Book, Petty Cash Book and Invoice Book, but it is not until the end of the year (or other fiscal period) charged with depreciation of material or equipment, or with interest on investment, or credited with the value of the manufactured products. Merchandise is credited with all sales, whether of manufactured or partly manufactured product, or of raw material that has been sold, and is not charged until the end of the year with the cost of goods sold. The following is a statement of the summarized trans- actions that are journalized monthly and posted in the General Ledger. Transactions (A) Stockholders Invested $100,000 Cash. (B) Paid $50,000 for Factory Property. (O Bought Material and Supplies $20,000. (D) Paid for Labor, Salaries, Taxes, Insurance, and Factory Expense $25,000. (£) Paid for Purchases (Cash) $10,000. (F) Issued Notes for Purchases $9,000, and Interest $150. (G) Paid for Advertising, Traveling, and other Selling Expenses, $5,000. (//) Paid for Office Furniture $400, and Stationery, $100. (J) Sold Factory Products on Acct., $18,000. (./) Sold ditto for Cash, $2,000. (K) Received Cash in part payment of accts., $3,000. (L) Received Notes with interest ($250) added, for accts., $12,000. (M) Discounted some of these notes, $10,000, bank deducting discount, $200. (A T ) One of our banks credits us interest on deposits, $100. Cash 115,100 (.A) To Capital Stock 1 00,000 V) To Mdse. 2,000 (.K) To A/cs. Rec'ble 3,000 (.M) To Bills Rec'ble 10,000 (AT To Interest 100 Sundries To Cash 90,700 (B) Real Estate and Equipment 50,000 (D) Mfg. a/c. 25,000 (E) Accts. Payable 10,000 «?) Sales Expense 5,000 (//) Office Furniture 400 (ff) Mfg. Acct. 100 (M) Interest 200 (O Mfg. a/c. 20,000 To Accts. Pay. 20,000 (F) Accts. Payable 9,000 Interest 150 To Bills Pay. 9,150 tf) Accts. Rec'ble 18,000 To Mdse. 18,000 (L) Bills Rec'ble 12,250 To Accts. Rec'ble 12,000 To Interest 250 In the ordinary form of Ledger these entries would be posted as below: Ledger Capital Stock By Cash 100,000 Cash To Sundries 115,100 By Sundries 90,700 Real Estate and Equipment To Cash 50,000 j Office Furniture To Cash 400 Bills Receivable To Sundries 12,250 By Cash 10,000 Accounts Receivable To Mdse. 18,000 By Cash By Bills Rec. 3,000 12.000 Bills Payable By Sundries 9,150 Accounts Payable To Bills Payable To Cash 9,000 10,000 By Mfg. Acct. 20,000 FACTORY ACCOUNTING 43 Ledger — (Continued) -Mfg. Acct. To Cash To A 09. Pay. To Cash 25,000 20.000 100 Mdse. By Cash By A/cs. Rcc. 2.000 18,000 Sales Expense To Cash 5,000 Interest To Cash To Bills Pay. 200 150 By Cash By Bills Rec. 100 250 350 350 Trial Balance Capital Stock 100,000 Cash 24,400 Real Estate, and Equip. 50,000 Office Furn. 400 Bills Rec. 2,250 Accts. Rec. 3,000 Bills Pay. 9,150 Accts. Pay. 1,000 Mfg. Acet. 45.100 • Mdse. 20,000 Sales Expense 5,000 Interest 1 30, 1 50 130.150 The system, as shown in this elementary form, is one in which the entries in the General Ledger during the year are made only of actual transactions between the concern and outside parties, the values being ascertained from bills, invoices and payrolls. It takes no account of transfers of values inside of the concern, of changes of values, or of profits or losses in the factory operations, until the end of the fiscal period. The accounts being kept as above for twelve months a trial balance taken at the end of the period may show the .following: Trial Balance Capital Stock 100,000 Cash 20,000 Real Estate and Equipment 50.000 Office Furniture 5C0 Bills Receivable 5,000 Accounts Receivable 25, COO Bills Payable 30,000 Accounts Payable 15,000 Manufacturing Account 250,000 Merchandise 215,000 Sales Expense 10,000 Interest 500 - 360.500 360,500 Inventory The inventory taken at the end of the year shows. Real Estate and Equipment 49.000 Depreciation 1000 Office Furniture 400 Depreciation 100 Mfg. Acct Mail, and Supplies 30.000 Work in Process 20,000 50.000 Mdse., Finished Product in Warehouse 20.000 The depreciations $1000 and S100 may be charged either directly to Profit and Loss or indirectly to Mfg. Acct. as part of the expense of factory operations. The credit bal- ance of interest account is due to financial rather than to factory operations and, therefore, may be credited to Profit and Loss. The Sales Expense, $10,000, is chargeable against the gross proceeds of sales $215,000. The following Journal entries should, therefore, be made: Mfg. Acct. To Sundries To Real Estate and Equipment To Office Furniture 1,000 100 Interest 500 To Profit and Loss 500 Mdse. 10,000 To Sales Expense 10,000 When these entries are posted and the inventories entered in red ink in the respective accounts Manufacturing account will appear as follows: Dr. Mfg. Acct. Cr. Bal. (Trial Bal.) To Sundries 250,000 1,100 Invty. Bal. (tr. to Mdse.) 60,000 '.01,100 251,100 2'I.100 To Bal. flnvty.) 50,000 The balance on the credit side represents the total man- ufacturing cost, including all the losses in the factory, of the Mdse. that was sold for S215.000 and of the $20,000 Mdse. on hand. It should, therefore, be charged to Mdse. account and the difference then appearing between two sides of the account closed into Profit and Loss by the following Journal entry : Mdse. To Profit and Loss Sales of Mdse. Inventory 215,000 20,000 235,000 Cr. Bal. of Mfg. Acct. 201.100 Selling Expense 10,000 211.100 23.900 44 BOOKKEEPING AND COST ACCOUNTING Merchandise Acct. will then be balanced as below: Dr. Mdse. Cv. To Sales Exp. To Mfg. a/c. To Profit and Loss 10.000 201,100 23,900 Bal. (Trial Bal.) Invty. 215,000 20,000 235,000 235.000 To Balance 20,000 A Profit and Loss Statement may now be made as below: Total Sales Less Selling Expense 201,100 20,000 215,000 10,000 205,000 181,100 Cost of Sales Credit to Mfg. Acct. Less Invty. of Mdse. on hand Profit on Sales Profit on Interest Acct. 23,900 500 Total Profit 24,400 A Balance Sheet taken after all the closing entries are posted will show the following: Dr. Balance Sheet Cr. Cash 20,000 Capital Stock 100,000 R. Est. and Equip. 49,000 Bills Payable 30,000 Office Fur. 400 Accts. Payable 15.000 Bills Rec. 5.000 Profit and Loss 24.400 Accts. Rec. 25,000 Mfg. Acct. 50.000 Mdse. 20,000 169,400 169.400 Adjustments and Criticisms — The Auditor's Report It thus appears from the books that the net earnings of the concern are $24,400, or 24.4 per cent of the capital stock. We will suppose that an auditor, who is well acquainted with the nature of the business and is competent to act as an appraiser as well as an auditor, is asked to report on the accounts and also to advise as to how much of the $24,400 apparent net earnings should be considered available for divi- dends. He reports that the accounting system is admirable for the purposes for which it was intended, that is, keeping a record of all transactions between the Company and its debtors and creditors, and of all receipts and expenditures, and also showing in the statistical sheets the progress of the business from month to month. He says: "I have verified the cash and bills receivable on hand; I find that the balance of the Accounts Receivable correctly represents the balance due by debtors of the Company for goods sold to them, and balances of Bills Payable and Accounts Payable correctly show all the liabilities of the concern to its creditors (contingent liabilities due to endorsements of bills receivable not included); that all goods shipped to customers are accounted for by the ship- ping book and have been properly charged at contract prices in the Sales Book, and that the invoices for all purchases have been verified as to receipt of goods and as to correctness of prices. The books have been kept correctly, and the trial balance dated Dec. 31st, taken from the books before the profit and loss entries were made, is a true statement of the ledger balances of that date. The closing entries, which have been made in order to determine profits and losses, depend for their validity upon certain assumptions : 1. That the depreciation in value of Real Estate and Equipment was $1000 and that of Office Furniture $100. 2. That the inventory values, Material and Supplies, $30,000; Work in Process, $20,000, and Mdse. $20,000, are correct. 3. That nothing remains of the $10,000 charged to Sales Expense which is of any appraisable value for the business of the coming year. 4. That of the total charges to Mfg. a/c $250,000, during the year, the whole amount is covered by the cost of goods sold and the cost of the material and goods inventoried, and that none of it belongs to expenses incurred partly for the past year's business and partly for business of the current and future years (such as patterns and small tools charged to expenses of manufacturing, but which have some value yet remaining). 5. That the credit of the balance of Interest, $500 to Profit and Loss is correct, which could be the case only if the book values of Bills Receivable and Bills Payable are their present values, or that the face or book values do not include interest which is not yet accrued. 6. That all the Bills Receivable and Accounts Receivable represent good accounts, collectible at their due dates. Before I can give an opinion as to the Profit and Loss entries I must ask for an explanation of these six items." The head bookkeeper replies to the auditor, "I can answer as to the fifth and sixth items, but as to the others I will have to refer you to the cost accountant. Referring to the sixth item there is one account receivable, amounting to $1,000, which is doubtful, as the concern is in the hands of a receiver. We may ultimately collect this account in full, but it is quite uncertain." "In that case," says the auditor, "it had better be transferred to a Suspense Account." As for the fifth item, the Interest Credit balance, the present value of the Bills Receivable is about $50 less than their face value, which includes interest not yet due. The Bills Payable were drawn at 60 days without interest, in accordance with the terms on which the materials were purchased. Of the $30,000 Bills Payable outstanding Dec. 31st, the average date of pay- ment is about one month later. If we discounted them and paid them now we could gain $150 for interest, which we might credit to interest or to Mfg. Acct. as might seem proper. "As the Bills Payable were issued in payment for material charged to Mfg. Acct. the entry naturally would be Mfg. Acct. Dr. To Bills Payable, $30,000. FACTORY ACCOUNTING 45 If we could pay the notes a month before they were due receiving a rebate of interest $150 the entries in the Cash Book would be Cash Cr. By Bills Payable, $30,000 Cash Dr. To Interest, 150 But if we do not discount either our notes receivable or our notes payable, but let them run to maturity, what is the use of making any entries for interest not accrued, just because we wish to be exceedingly precise in our annual Profit and Loss statement? If we made such entries we would have to make counter entries later on when the interest had accrued and the notes were paid. It is better to let both Bills Receiv- able and Bills Payable appear on the annual statement at their face values, and if precision is desirable, to enter in a footnote the amounts of interest not accrued at the date of the statement. As to the $500 credit balance of Interest account which we have closed into Profit and Loss, that represents the actual gain due to having interest added on notes receivable and holding these notes until near their date of maturity, when we put them in the bank for collection instead of having them discounted." The auditor expressed himself as satisfied with this explana- tion, and then had an interview with the cost accountant, who showed that he had a most elaborate cost system, kept with great care, that a perpetual inventory was kept of all raw material and partly worked material in the stores, as well as of finished products in the warehouse, and that the work in process at the time of taking the inventory was all priced at its actual cost of labor and material as shown by the job tickets, plus its proper proportion of burden charge. "The inventory values," said the accountant, "are the ac- tual cost values as they appear on the cost ledger and they are correct, as they are proved by the general ledger, the cost accounts being tied to the general accounts according to the practice of the highest authorities in accounting." On being questioned further the accountant produced a typewritten document which explained his method, as below: CODE OF THE COST ACCOUNTANT Company's General Ledger. All disbursements made or indebtedness incurred on account of the factory is charged in the General Ledger to only two accounts, Real Estate and Equipment, and Manufacturing Account. No credits to these accounts (except in the case of the sale of some of the real estate or machinery) are made until the end of the year. A statistical statement is made showing the total charges to Mfg. Acct. each month, and the accumulated total to the end of the year. The sources from which these charges originate are the Cash Book, which gives the amounts paid on the Pay Rolls, and Petty Cash disbursements for the factory, and the invoices for materials purchased. All sales of goods from the factory warehouse, whether produced in the factory or purchased outside are credited to the Mdse. Acct. at the net price at which they are charged to customers in the Sales Ledger. No charges to this account (except for goods returned or for allowances) are made until the end of the year. A statistical sheet shows the monthly sales and the total sales to date. The Factory Ledger. A double-entry factory ledger is kept, in which "Private Ledger" account is credited with all the amounts that are charged as above stated to Mfg. Acct. in the General Ledger, the following accounts being debited: LD. Direct Labor. Labor employed directly in man- ufacturing, and charged on job tickets to the product made. LX. Indirect or Expense Labor. Including salaries, and all factory labor that cannot be charged directly to specified products. SM. Stores. Purchased material used in the manu- factured product. SS. Stores, Supplies. Fuel and other supplies pur- chased in quantity and issued by the stores as needed. SS. and SM. are recorded in a per- petual inventory. SX. Expense Supplies. Minor supplies, such as small tools, charged directly to expenses of the factory departments — not inventoried. GX. General Expense. Taxes, Insurance, Water Rent, and other expenses, details of which are entered in a General Expense book, which has columns for the different classes of expense. { Purchased from out- BB. BM. Betterments to Buildings and Machinery. ER. Repairs to Equipment. side and not pur- duced in the fac- tory. Credits of Labor and Material Accounts — Direct Labor, LD., and Stores, SM., applied directly to the manufacture of goods, are charged on the job tickets to one of the two oper- ating accounts, WM., worked material, which includes both work in process and work which has undergone one or more operations and is kept in store for future operations or finish- ing, and FP., Finished Product, which includes both the finished goods delivered to the warehouse for shipment and work which has been withdrawn from worked material stores and is undergoing the finishing processes, such as fitting, assembling, painting, packing, etc. They are also charged on job tickets to the betterment accounts, BB., buildings, and BM., machinery. Perpetual inventories are kept of worked material in stores and of goods in warehouse. Indirect Labor, LX., and Stores, SS. and SX., are credited, as applied or issued, on Expense books or Department Expense sheets, and charged to the following accounts : PP.' Power Plant. EC. Office and Clerical Work. ES. Superintendence. ER. Repairs and Maintenance. GX. General Expense or its subdivisions. At the end of each month all the entries on job tickets and expense sheets are added (on adding machines) to obtain the 46 BOOKKEEPING AND COST ACCOUNTING total hours of labor, wages earned, and value of supplies issued, and the totals of charges to the several charge accounts. A journal entry of these totals is then prepared in the follow- ing form: Journal Entry Charge Accts. Date. No. . Amt. WM FP BB BM PP EC ES ER GX Cre lit. LD LX SM SS SX Total When this entry is posted the labor accounts on the factory ledger will show a credit balance, since the total credits to LD. and LX. cover all the labor that has been performed during the month, as credited to the workmen on the pay- rolls or salary lists and as charged to the several accounts on the job tickets and expense sheets, while the debit entries are only those representing the amounts that have been paid. Burden Account. The Total charges to PP., EC, ES., ER. and GX., represent the factory overhead or burden, but some of them are not properly chargeable to the cost of production of the current month, but should be distributed over several months. For example, if taxes and insurance, charged to GX., are paid annually, only one-twelfth should be charged to Burden each month. Also if an expensive repair job should be done in one month its cost may be distributed over several months. A journal entry is to be made each month charging Burden and crediting PP., EC, ES., ER. and GX., for so much of these accounts as pertains to the cost of that month's production, the debit balance remaining in these accounts being the amounts carried over to be credited in other months. Distribution of Burden. The total monthly debit to Burden acct. is charged to WM., FP., BB. and BM. accounts in the following manner: Each job ticket is charged with the standard burden for the particular job, on the machine-hour rate or production-center-hourly rate basis. The sum of the charges thus made is added up and the total compared with the total debit of Burden acct. for the month, and the dif- ference divided by the sum gives a percentage or supple- mentary rate which is to be added to the cost of each job. A statistical sheet is kept showing the total cost of manu- facturing operations each month, as follows: Raw Material Purchased. Raw Material issued by Stores. Raw Material balance at end of month. Labor on Worked Material. Burden on Worked Material. Total, Matl. Labor and Burden. WM., L. & B. issued for Finishing. Labor on Finishing. Burden on Finishing. Total cost of Finished Product. Cost of FP. Sold. Balance FP. in Warehouse. The statistical sheet for the preceding year's business was then shown as given below (for convenience round numbers are used, each figure representing $1000. The accountant explained that the factory operations started with a rush in January, on material purchased the ' preceding month but billed in January. Some overtime was made in that month. By February the work reached a steady gait, which con- tinued until July when there was a slight falling off for two months. On Sept. 1, a great depression of business began, which caused the shutting down of most of the factory for three months in order to reduce stocks. Dec. 1st the fac- tor}' started again at nearly its normal rate. Statistical Sheet — Manufacturing Accounts d PQ o H 03 TJ IX C a, 3 J) ^ ~0 % a 5 « f 5 £ s V 3 O C "a m % a a h O .2 U c o a a P. s o z CD is a. u, c o Iri o a. c o c o CO On "3 Oh a s s J a h is 18 05 a] .-; 5 5 O 28 o O 20 3 M Jan. 20 6 14 8 7 21 3 8 Feb. 10 5 19 6 6 17 15 5 3 4 22 20 10 Mar. 6 4 21 6 6 16 14 7 2 3 19 18 II April 6 4 23 6 6 16 15 8 2 2 19 17 13 May 6 4 25 6 6 16 15 9 2 2 19 17 15 June 6 4 27 6 6 16 15 10 2 2 19 17 17 July 5 4 28 5 6 15 14 II 2 2 18 17 18 Aug. 4 4 28 5 5 14 13 12 2 2 17 16 19 Tot. for 8 rno. 63 35 48 48 20 22 Sept. 4 3 29 1 2 6 5 13 1 2 8 14 13 Oct. 1 2 28 1 2 5 3 15 1 2 6 10 9 Nov. 4 2 30 1 2 5 6 14 1 2 9 6 12 Dec. 6 6 30 5 6 17 II 20 2 3 16 8 20 Total 12 m. 78 48 30 56 60 164 144 20 25 31 200 180 20 Total 4 m. 15 13 8 12 5 9 The Auditor's Comments After examining the Code and the statistics the auditor said "This is all right with one exception, the addition of the supplementary burden rate to the valuation of the worked material in store and of the finished product in the ware- house. During the first eight months the direct labor cost of worked material was 48 (units of $1000 each) and of fin- ishing 20, total, 68 units, while the burden for the same period was 48 plus 22 equals 70, the burden being practically 100 per cent of the labor cost. In the next three months the total direct labor cost was 6 and the burden 12, or 200 per cent of the direct labor cost. By charging into the inventory value of such of the goods as remain of those produced during these three months you have overvalued them and so increased the apparent profits of the year's business. Suppose that during these three months the manufacturing departments FACTORY ACCOUNTING 47 had been entirely shut down and no goods were produced. The greater part of the burden would still be running on, costing say S or 10 units. You could not charge that to cost of goods if none were produced; you would have to charge it to Profit and Loss, or else let it remain in Burden Account to be charged wrongly to the cost of goods made in succeeding months. This supplementary burden, due to the partial idleness of the factory, should not be charged to the cost or inventory value of the goods produced, but to Profit and Loss. It is not a cost of production but a cost of idleness and non- production. "It appears from the statistics," continued the auditor, "that if the product of the last four months, costing S plus 5 equals 13 units for direct labor, had been charged with the normal rate of burden, the burden would have been only 13 units instead of 12 plus 9 equals 21 units. There is, there- fore, an overcharge of cost of $4000 for worked material and $4000 for finished product, a total of S8000. Much of this overvaluation appears in the inventory of goods on hand, a large proportion of which consists of the over-costed goods made during the three dull months. An examination of the perpetual inventory cards shows that the over-valuation in the inventory amounts to about $2000 in worked material and S2000 in finished product. The following entry should, therefore, be made: Profit Loss To Sundries 4000 For over-valuations in inventory To Mfg. a/c. 2000 To Mdse. 2000 In regard to the second query of the auditor, relating to the S1000 charged as depreciation of Real Estate and Equip- ment Account, and to the fourth query, relating to remaining asset values of some of the charges to Mfg. Acct. the account- ant explained that the Inventory Book showed that a depre- ciation of 2 per cent or $500 had been assessed on Real Estate, §25,000, and 4 per cent or $1000 on Machinery, $25,000, but that $500 had been added to machinery and credited to Mfg. Acct. for betterments to machinery and equipment, in the addition to it of certain patterns and small tools, which had a present value estimated at $500. This reduced the total depreciation of Real Estate and Equipment to $1000. The auditor agreed to this, but said that while 4 per cent was, no doubt, a sufficient allowance for the actual deprecia- tion of the machinery below its cost value, an additional sum should be deducted as a Reserve Depreciation against obsoles- cence which might take place in the next ten or twenty years. He recommended that an additional 4 per cent be allowed for this. The Real Estate and Equipment account would then stand as follows: Original Cost, Land and Buildings Machinery Additions to Machinery 500 1000 1000 25,000 25.000 500 Depreciation on land and buildings, 2% Depreciation on Machinery, 4% Reserve for obsolescence, 4% 50,500 2.500 Difference 48.000 There are different ways of treating depreciation in the books, the auditor said, but he preferred to keep Real Estate and Equipment Account at its full value to the business as a "going concern," in this case at $50,500 and since the depre- ciation was not actual, but only theoretical, the machinery being as good as, if not better, than new, it had better be kept in a separate account, called Reserve for Depreciation, and it will appear there as a credit, offsetting the debit balance of Real Estate and Equipment, and reducing the credit of Profit and Loss account, or Surplus Account, into which the credit balance of Profit and Loss will ultimately be closed. For the additions to machinery, estimated on the inventory at $500 present value no entry has hitherto been made, and the amount has been hidden in the general ledger in the charge to Mfg. Acct. and in the factory cost accounts in numerous charges to Repairs or General Expense which cannot be sep- arated. Since Mfg. has been closed, except as to the inven- tory balance of $50,000 the only proper way to get the $500 additional value into Real Estate and Equipment Acct. is to credit it to Profit and Loss. The following journal entries should, therefore, be made: Real Estate and Equipment 1500 To Profit and Loss Cancelling former entry of de- preciation 1000 Betterments to machinery, see inventory 500 2500 150O Profit and Loss To Reserve for Depreciation: Est. Dep'n on Buildings 2 J or 25,000 500 Est. Dep'n on Machinery, 4% or 25,000 1000 Est. Dep'n for Obsolescence, 4% 1000 250O As to the third query, relating to Sales Expense, the book- keeper showed that of the $10,000 charged to the account $3000 had been incurred for publication of a catalogue, and that $2000 of it might properly be considered as the present value of it, as a new catalogue would not be needed for sev- eral years. Also S2000 had been spent in traveling and other expenses in establishing agencies and in doing advance advertising, which expense was for the benefit of the busi- ness of future years. The auditor agreed that the entry which had charged the whole of Sales Expense to Profit and Loss should be amended by a counter entry, as below: Sales Expense 3000 To Profit and Loss for present value of expenses in- curred by Sales Dept., viz.: Catalogue 2000 Establishing Agencies 1000 3000 This would leave Sales Expense with a debit balance of $3000, representing an asset which would be gradually written off in the next two or three years. When all these correcting entries are posted the trial bal- ance will be changed in the following items: 48 BOOKKEEPING AND COST ACCOUNTING Dr. Cr. Real Estate and Equipment 1,500 Profit and Loss 2,500 1,500 Profit and Loss 4,000 3,000 Reserve for Depreciation 2.500 Manufacturing Acct, 2,000 Merchandise 2,000 Sales Expense 3,000 Suspense Acct. 1,000 Accts. Receivable 1,000 12.000 12,000 An Income or Profit and Loss Statement may now be prepared for the information of the stockholders as fol- lows: The balance of Profit and Loss is now reduced to $22,400 and against this is a charge of $1000 to Suspense Account which may ultimately prove to be a bad debt. There is a contingent liability in regard to $10,000 worth of discounted notes receivable which have the company's endorsement. No account of these appears in the books, except in the form of memorandums in the Bills Receivable book, but they should be taken into consideration before declaring a dividend. The liability on them can be insured against, and a reserve of $2000 against it will probably be ample. Deducting these two amounts $1000 and $2000 from S1S,400 leaves $15,400 as applicable to Dividends and Surplus. As to the amount that should be divided among the stockholders it should always be borne in mind that a suc- cessful business is a growing business and one with increasing capital and surplus. A business that does not grow is suf- fering from "dry rot" and unless something happens to rejuvenate it it will ultimately fail. It is difficult to get new capital for a business that is not growing. Therefore it is most important that net earnings in normal business years should not all be divided, but that a considerable portion should be retained in order to increase the surplus and pro- vide for future growth, and also in order to provide a fund to maintain regular dividends in times of depression. In this case an 8 per cent dividend would appear to be about right. If checks are drawn for this dividend the following entries may be made and posted. Profit and Loss To Sundries 22,400 To close P. & L. acct. for the year: To Dividend, 8% 8,000 To Surplus 14,400 Dividend 8.000 To Cash 8.000 The trial balance now becomes a statement of Assets and Liabilities as below: Ass.-ts Liabilities Cash 12,000 Capital Stock 100,000 Real Est. & Equip. 50,000 Surplus 14,000 Office Furniture 400 Bills Payable 30.000 Bills Receivable 5,000 Accts. Payable 15,000 Accts. Receivable 24,000 Reserve for Dep'n. 2,500 Mfg. Acct. 48,000 Mdse. 18,000 Sales Expense 3,000 Suspense 1,000 161,900 161.900 Income from Sales 215,000 Less Charges to Sales Exp. 10,000 Deduct Catalogue and other ex- penses chargeable to next year's 3,000 7.000 business 208,000 Net Income from Sales Cost of Sales: Charges to Mfg. a/c. 250.000 Add Depreciations 2,600 252,000 Credits: Machinery betterment 500 Inventory: Raw Mat'l. 30.000 Worked Mat'l. 18,000 Finished 18.000 66,500 196.100 Profit on Sales 21,900 Profit on Interest 500 Total Profits 22,400 Dividend 8% 8,000 Surplus 14,400 Against this Surplus there is a Suspense Acct. of $1000 for a possible bad debt, and a contingent liability on $10,000 worth of endorsed paper. Error Due to Keeping Overhead Percentage Uniform Some years ago, the president of a bridge company told me one day that he could not understand why his actual earnings fell so far short of his estimates. He stated that he knew the material charge was correct, that he had considerably reduced his direct labor by introducing piece work, etc., and that he was figuring his overhead at the same per cent he always had, and yet his actual earnings came over $100,000 short of his esti- mates. I rather surprised him by telling him that he himself had told me the cause of the difference, namely the reduction of his direct labor, and distributing his overhead at the same per- centage of the reduced amount as he had used before the reduc- tion. For instance, assuming a labor cost of $100 and overhead of $100, the overhead would of course be 100 per cent. Now if you reduce the labor cost to $S0 and the overhead remains $100, and yet you only distribute 100 per cent or $80, you have $20 remaining undistributed. I told him to divide his overhead for a given time by the tonnage produced in that time which would give the unit cost of overhead per ton to be multiplied by the number of tons in the particular order under consideration. The next time I met him he told me I had solved his problem. It is an actual example showing how we may be led astray by follow- ing the same old way of doing things without giving proper con- sideration to the subject. — -Gershom Smith, Eng. Mag., June, 1909. CHAPTER VI COST ACCOUNTING Factory Costs. A finished product in a factory making metal goods sometimes consists of a single piece, such as a casting, on which very little work is done, but usually it con- sists of many pieces, each one of which may have from one to six or more operations done on it, which are "assembled" or fastened together, first into groups of two or more pieces with their fasteners, and then the groups are assembled into the finished product, so called, which later may be plated, lacquered or otherwise "finished." A "piece" is a single bit of metal — it may be a casting of iron or brass, or be punched or stamped from sheet metal, or cut from a rod. Anything done to it, by a machine or by hand, which causes it to progress from raw material toward finished product is called an "operation." An " operation " is usually a work of one kind, such as drilling a hole or series of holes, or cutting a groove or two or more grooves, on one piece or on any number of pieces of the same kind and shape, and it is usually done by one man on one machine, but sometimes it is done by a man with a helper or two, on two or more machines, such as a blacksmith with a heater and a helper, heating, rough forging, die forging and trimming, the whole being classed on a single " work order " as one operation, whether it is done on one piece or on ten thousand pieces of the same kind. Each kind, variety and size of finished product has a selling price, per single article, per dozen, hundred, gross or thou- sand, which may vary with market conditions. The selling price is supposed to cover factory cost, selling expense and profit, but as the selling price may be governed by competition and as the factory cost or the selling expense, or both, may be abnormally high, relatively to the selling price, the profit may be turned into a loss. In this treatise, only factory costs are considered, the selling expense and the selling price being matters that concern the Sales Department and the General Management. The Factory Cost of the whole annual product covers the raw material, less the value of scrap returned from any of the operations, the Direct Labor, the Indirect Labor, includ- ing salaries, fuel and other supplies, repairs, depreciation and every other kind of expense " burden " or " overhead " that is related to the turning out of product. It does not properly include the cost of breakdowns that cause shutting down of the factory for any long period of time, nor losses of work or of profit caused by such breakdowns, nor losses due to idleness caused by fires, by business depressions, by strikes, by inefficiency of the sales department, or by a por- tion of the product becoming obsolete or out of fashion. These are business losses and not factory losses; and they may be covered by an insurance fund, the annual contribu- tion to which should be considered by the Sales Department in fixing selling prices, or deducted from the surplus out of which dividends are declared. The Factory Cost of the whole annual product, thus defined, may be obtained by the Accounting Department by the ordinary methods of bookkeeping, and when the product of the factory is a single kind of article, such as pig iron, or flour, or cloth, or automobiles of one size and style, the cost price per ton, or per barrel, or per yard, or per piece, may easily be determined month by month, but when the product is of many kinds and sizes and the operations on different parts, from raw material to finished product take place in different months the determination of the " unit cost " of each kind is a matter of great difficulty. When the number of varieties runs into thousands, and the number of opera- tions into tens of thousands all ordinary accounting systems utterly fail even to approximate real factory costs of individ- ual articles. The best solution of the complex problem of obtaining unit factory costs is to divorce the Accounting Department from the Cost Department, and have the latter determine costs by an independent method. A new definition of Factory Cost is now needed. It is not post-mortem cost, what the goods cost last year, but what it now costs to reproduce them or what they will probably cost during the remainder of the current year, assuming that the factory runs at a normal average rate. What the management needs to know is the costs that can be used as a basis for fixing the minimum selling price, as a basis for inventory values from which profits and losses are computed; as a basis for comparison of costs of similar articles of different sizes or grades, or of the same article at different times; as an index of the efficiency of the factory management; and as a guide in determining whether to abandon the manufacture of some parts of the product and to push the sale of other parts. Accounting versus Cost Keeping. Accounting has to do with payments of bills; classification of expenditures; changing records of assets and liabilities; inventories; gross and net profit; credits, finances, bank relations, notes. The cost system takes hold where accounting leaves off. It has in common with accounting only two things — the use of the same set of figures of expenditures, and the value of the account- ing as a means of proof. It deals with internal affairs only — accounting with external. The cost system demands a somewhat different experience 49 50 BOOKKEEPING AND COST ACCOUNTING and different training than does accounting. Accountants have mistaken form for substance. No business is made a success by systems alone. Success is due to policies, energy, enthusiasm, work and sagacity. The best way to build a cost system is from the totals down to the details, and not from the details up to the totals. Start with the totals of the three general elements, material, labor and expense, as proven with the accounting. Divide into sub-totals and then into still other subdivisions.* It takes in a plant of any size from one to two years to build a good cost system, because so much human nature is involved.! B. A. Franklin, Eng. Mag., vol. 43, p. 705. STARTING A COST ACCOUNTING SYSTEM The Stores System. In organizing a complete cost system in a factory making a variety of products the first thing to be done is to establish a stores system, and to keep an accurate record of all materials and supplies purchased and of all given out to the shops. There should be a place for everything and everything in its place, whether the place be a bin, shelf or hook in the storehouse itself, or a pile in the yard, or on the floor of the factory. The storekeeper is to be held responsible for all material and for keeping record of it, until he is relieved of responsibility by turning it over to the foremen of departments either on general or standing orders, or on written orders, or requisitions, or stores issue tickets for special jobs. A continuous or perpetual inven- tory, or " balance of stores " record, should be kept, prefer- ably on cards, and it is advisable to supplement these with bin cards on the bins in which the materials are kept. The minuteness of detail of these records is a question for the management to settle. Care must be taken not to let the stores system be overburdened with red tape, which costs more than it is worth. All direct material, that is raw or partly worked material that enters into the finished product, must be charged on individual stores issue tickets or job tickets, but minor supplies for the departments may be lumped together in many eases and charged monthly to department burdens. Labor Charges. The next important thing in cost accounting is to make provision for charging all direct labor to the job on which it is employed. The best means for doing this is the job ticket. Direct material and direct labor thus being charged to * This needs some explanation. If "to build a system" means to prepare a scheme for the system, we may build down from the totals to the details as stated, thus: Total Expenditure: Material; Labor; Expense; Distribute to Departments or to Classes of Products; Subdivide into Costs of Individual Products. But in using a cost system we build up from details to totals, thus: Stores issue Tickets; Time Cards; Bills for expenses. Allocation of Expense Burden to the Machine-hour Costs. Cost summaries of Parts or Pieces. Cost of Groups and of Products. Totals by Classes. Grand Total. t " Engineering is the science and art of overcoming the resistances of nature — including human nature.". — W. K. individual jobs, we obtain the prime cost, which, in many businesses, is considered sufficient for all practical require- ments, but in all factories in which the burden is an important fraction of the total cost, and especially in factories having more than one department, the proper distribution of the burden is fully as important as the accurate recording of prime costs. FACTORY ORDERS Factory orders may be divided into several classes: 1. Standing Orders. These need not be in writing, but are taken for granted, such as " Keep factory clean "; " Tool room, grind all tools sent in from the shops, as directed by the foreman "; " Blacksmith shop, forge all tools as required by tool room; do all repair work required by department foremen." A list of such orders with their appropriate symbols should be kept in the counting room and on the desks of the foremen or department clerks, so that when labor or expense tickets are made out for work done on these orders the proper charge symbol may be written on them. 2. Office Orders, issued either by the general office or by the factory office for certain work to be done, the details of which will be arranged by the planning department. " Example: Make 12 engines, Class E9 for stock. Deliver in warehouse within three months." 3. Production Orders, made by the planning department, for work to be done in the several departments. Usually these are subdivisions of the office orders. Example: Foun- dry, make 12 cylinders, 12 pistons, 12 flywheels, 12 bed- plates, 24 bearing caps, from E9 patterns. Forge shop, make full set of forgings for 12E engines as per drawings. Main shop, do machine work on 12 engines E9, as per drawings. 4. Job Orders, written on job tickets, subdivisions of Production Orders, specifying work to be done by one man or by a group of men using one machine or a group of ma- chines, or a bench or floor, on a single operation or on several operations in sequence, on one piece or on any number of pieces of the same kind. A job order is also written for the assembling of pieces into groups or into completed structures. The job ticket when issued should contain all the informa- tion concerning the job that may be needed by the foreman of the shop, and when completed it should have such addi- tional information as is required for the records of the Cost, Statistics and Accounting Departments. Small Orders. A large factory may receive as many as a hundred or more such trifling orders in aday, the total costing perhaps not over $25. Under old systems of management these gave a great deal of trouble to the foremen of the sev- eral departments on account of their interfering with regular work, and to the order clerk held responsible for " chasing them through the factory " and getting them shipped within a reasonable time. No attempt was made to record their costs and there was no check upon delays and wasted motions and consequent excessive costs of production. Under modern systems of management, with a planning room to issue orders to the several departments, small orders COST ACCOUNTING 51 are executed promptly without interfering greatly with the regular work and records are made of every operation. In order to keep the clerical work down to a minimum a system should be devised after joint study by the head of the planning room, the chief cost clerk, the chief accountant and the superintendents of the several shops, by which the progress of such work through the shops will be made auto- matically without any " chasing," by which the least possible number of blank forms will have to be filled and handled, and the least amount of writing and bookkeeping done con- sistent with obtaining a complete record of every operation and its approximate cost. SUBDIVISIONS OF PAY ROLL Direct Labor. — Departments A, B, C, etc. Charged on job tickets to particular jobs on Pieces, Groups, Finished Goods, by Departments. The total direct labor on these tickets equals the total departments' direct labor pay rolls. Indirect Labor — Departments A, B, C, etc., and Expense Departments. TIME-KEEPING The time may be kept on time books, time tickets (daily, weekly, or by jobs), or on the regular job tickets, which con- tain all the original entries both for time and for jobs. The time may be kept by any convenient method which is most suitable for the department. Thus, in the Power Plant where a man's job is the same from month to month, the time of each fireman would be entered each day in a time book, and the cost of firing labor would be entered only once a month, as the total of all the firemen's wages for the month. In the blacksmith shop some of the work would be direct labor, charged on job tickets to particular jobs, some work on standing orders, such as " Forge all tools as required by the Tool Room." " Repair all tools for the Power Plant." The daily time ticket may be found most suitable for this shop, with several lines on it showing by symbols the different jobs worked on in a day and the time required for each. Example : Time Ticket, No. of Wkm Name Blacksmi t h Shop . Date Symbol Description of Work Hrs. Rate Amt. Symbol of Machine Used J 1017 PPR TR Job order Repairs of tools for Power Plant Forging Tools for TR Total 35 4 5- 2 10 35 3.50 The tickets for each day would first go to the pay-roll clerk, who would enter the time on the pay roll, then to the job clerk, who would sort the tickets by symbols, and at the end of the pay-roll period add up the hours and amounts for each symbol, take the total of the amount and compare it with the total pay roll of the shop. A Blacksmith Shop Labor Distribution Sheet is then made out which is used as needed by the Cost, Accounting and Statistics Departments. STORES ACCOUNT "Stores" in the factory ledger may include all raw mate- rials that are to be used in manufacture of the product, all partly worked materials that have been returned from the shop to the stores for safe-keeping until they are needed again in the shop for further operations, all finished parts, whether purchased or made in the shop, that are to be kept until they are to be assembled into finished products, also all supplies, such as fuel, small hand tools and other things that are, when issued to the several departments, to be charged to expense accounts; or, if desired, separate accounts may be opened for each class of these items, such as raw material, partly worked material, finished parts, fuel, sup- plies, etc. In the latter case numerous transfer entries are needed, as will be shown below, as the materials progress from one stage of work to another. The accounting will be simplified if all the materials for which the storekeeper is responsible are kept in one stores account in the General Factory Ledger, the subdivisions being taken care of in the continuous Inventory cards, which are properly classified. The work in progress through the shop, for which the department foremen are responsible, is kept in " Work in Process," or " Work in Shop," and the finished goods, ready for sale, under the care of the warehouseman are kept in " Finished Product " or " Warehouse " account. Suppose a production order is issued in an engine building shop for making for stock several engines of one class and size, and job tickets are made out for all the operations required. The order is not to be rushed through the shop, and as different parts are made or partly made, they may be kept in the store until needed for further operations or for assembling. As the work progresses the job tickets are returned from the shop first to the pay-roll clerk, and then to the cost and accounting clerk, who, after figuring up the cost for labor, material and burden on each ticket, and making the proper entries on the Piece Cost, Group Cost, and Fin- ished Product Cost cards, makes the monthly accounting entries from the statement of transactions given on the following page, which is made up from the adding machine totals of the job tickets for the month: Petty Stores. It is well to have an inflexible rule for the storekeeper that nothing is to be given out from the stores without an order, receipt or some sort of memorandum or check representing it. To lessen the work of accounting, however, such small items as cost only a few cents each, which are chargeable not directly to product but indirectly to burden, may be lumped together and charged to general burden or to departmental burdens at the end of each month. The memorandums as they are received may be filed in a box with numerous labeled partitions or pigeonholes, classified by departments or by the kinds of material issued, and taken out and totaled at the end of the month. 52 BOOKKEEPING AND COST ACCOUNTING -, Transactions Journal Entries First Method Second Method Work on $500 raw material, Labor $1000, Burden $1000 Work in Process To Stores To Labor To Burden 2500 500 1000 1000 Work in Process To Stores To Labor To Burden 2500 500 1000 1000 Put $1200 of the product into stores, as partly worked material Partly worked material To Work in Process 1200 1200 Stores To Work in Process 1200 1200 Work on $100 raw material, $800 work in process in thp] shop, $600 part worked material, $200 Labor, $200 Burden. Put all in stores, as finished parts Fin. Parts To Stores To Work in Process To Part W.M. To Labor To Burden 1900 100 600 600 200 200 Work in Process To Stores To Labor To Burden 1100 700 200 200 Stores To Work in Process 1900 1900 Assembling Job. $50 R.M. from store, $200 work in Process in the shop, $400 Partly worked material from store, $1 500 Finished parts, from store, $100 Labor, $100 Burden. Put all in warehouse. Fin. Product To Stores To Work in Process To Partly worked matl. To Fin. Parts To Labor To Burden 2350 50 200 400 1500 100 100 Work in Process To Stores To Labor To Burden 2150 1950 100 100 Fin. Product To Work in Process 2350 2350 Journal Ledger First Method Credit Accts. Debit Stores Labor Bur- den Wk. in Proc. Part Wkd. Mat'] Fin. Parts Fin. Prod. Total Dr. Wk. in P. Pt. wkd. M. Fin. parts Fin. prod. 500 100 50 1000 200 100 1000 200 100 1200 800 200 600 400 1500 2500 1200 1900 2350 Total Cr. Dr. 650 1300 1300 2200 2500 1000 1200 1500 1900 2350 7950 7950 Dr. bal. Cr. bal. 650 1300 1300 300 200 400 2350 3250 3250 Second Method Stores Labor Burden Wk. in Proc. Fin. Prod. Total Stores Wk. in P. Fin. Prod. 3150 1300 1300 3100 2350 3100 5750 2350 Totals, Cr. Dr. 3150 3100 1300 1300 5450 5750 2350 11200 Dr. bal. Cr. bal. 50 1300 1300 300 2350 2650 2650 Attention is called to the extreme simplicity of the second method. Not only are all the journal entries dispensed with, but the whole of the ledger work consists in entering on a printed blank only five figures, viz.: 3100, 3150, 1300, 1300 and 2350, the totaling of the horizontal lines and the vertical columns, and the entering of the balances. The figure 3100 is the adding machine total of the entries on the job tickets of partly worked material and finished parts put in stoves; the figures 3150, 1300, 1300 are the totals of the entries on the job tickets of material of all kinds, raw, partly finished or finished, received from stores, and of labor and burden. The figure 2350 is the total of the entries on the assembly job tickets of finished goods delivered to the ware- house. The whole result of the operations is shown in the last two lines of the sheet. We have spent $1300 for labor, $1300 for burden and have reduced the store inventory $50, a total expenditure of $2650, and we have to show for it $300 increase of work in process and $2350 increase of finished goods in the warehouse. Valuation of Stores The best accounting uses costs as a basis. An increase in values in a thing still held is not profit. Profit cannot arise until a thing is sold. — W. M. Cole, Accounts, their Construc- tion and Interpretations, p. 159. A rigid adherence to this rule might lead to no end of con- fusion in the estimation of profits and losses in a manufac- turing business in times of violent fluctuations in market prices. Suppose a concern making electric motors in 1916 used in some of them an old stock of copper wire purchased in 1915 at 25 cents a pound and in others used wire pur- chased at various dates in 1916 at prices advancing from 30 to 40 cents. In taking an inventory January, 1917, shall the motors be valued at different costs depending upon the date at which the wire in them was bought, or shall they all be valued on the basis of the latest market price of wire? It is well generally " not to count chickens before they are hatched," and to err, if at all, on the safe side in fixing inven- tory values, but in such a case as the one above men- tioned a profit does arise before a sale is made. The cost that COST ACCOUNTING 53 should be used in taking an inventory, and in fixing a base on which to figure the minimum selling price, is not the post mortem cost, but the present estimated cost of repro- duction, based on present costs of material and labor. The advance in market values of material in stores, or of finished goods in the warehouse in 1916 should be credited to Profit and Loss, of 1916, when the inventory of January 1, 1917, is taken; otherwise when they are sold at high prices later the business of 1917 will show a greater profit than was really made in that year. In the Profit and Loss statement of 1916 the fact should be recorded that the gross profit was not all due to manufacturing but that some of it was due to advance in values of raw mate- rial, and the fact thus recorded should be considered before declaring a dividend. The same material may sometimes be transferred back and forth several times between the stores and the shop, so that the monthly totals of Stores Account and the Work in Process account do not show a record either of business transactions or of the amount of work done in the shop, the entries being mostly of transfers of material from one place to another. The balances of the two accounts added together show the cost values of all the material, raw or partly finished, and the balance of Finished Product (or Warehouse Account) shows the cost value of products on hand and ready for ship- ment. The entry Stores to Accounts Payable * is a business record of monthly purchases, the entry Finished Product to Stores and to Works in Process is a factory record of the amount of goods finished during the month, and the entry Sales Account to Finished Product is a business record of the cost value of the goods shipped. Inventory of Warehouse and Stores Suppose a concern makes an annual product costing $200,000, and that one-half of the total product is on hand at the end of the year, estimated to have cost $100,000. The $200,000 cost of product is made up of material $80,000; Labor, $55,000; Burden, $65,000, and on account of the burden on all portions of the product being figured on the uniform percentage of labor basis it is estimated that one-half of the product, costing $40,000 for material and $27,500 for labor should have half of the total burden appor- tioned to it, making the total cost $100,000. But suppose that a more accurate method of apportioning burden should show that the $200,000 total cost should be distributed over three classes of product A, B and C, as follows: Now, when the inventory of half the product, costing $40,000 for material, is taken it may be found to consist of different proportions of A, B, and C, giving rise to valuations that may differ widely from $100,000, for example: Material Labor Burden Total A B 20,000 40,000 20,000 20,000 20,000 15.000 30,000 20,000 15,000 70,000 80,000 C. . . 50,000 80,000 55,000 65,000 200,000 Material Labor Hurden Total H of A, B, and C. All of B A and C 40,000 40,000 40,000 40,000 40,000 27,500 20.000 35,000 30.000 25,000 32,500 20,000 45,000 40.000 25,000 100,000 80.000 1 20.000 A and J3 B CandHB 110.000 90.000 * Or Stores to Company (or Private Ledger) if the factory books are separate from the general or financial books. In this case the entry in the general books is Factory Operating Account to Ac- counts Payable. Showing a possible difference of $20,000 above or below the $100,000 valuation based on the common method of appor- tioning burden, or 20 per cent of the total annual cost of pro- duction. Inventory Valuations of Stores, of Partly Finished Work, and Products in Warehouse. The profit or loss of a busi- ness, as established by the books depends on the inventory valuations, and these will vary according to the theory upon which valuations are made, viz. : 1. At cost as shown by the books. 2. At the probable cost of reproduction. 3. At the standard cost of a normal year or average of a five-year period, called " Record Costs " or " Five-year Standard Cost." 4. At this standard cost plus or minus a percentage to cover advance or reduction in costs of labor, material or burden since the standard cost was recorded. 5. At the market or selling price less a percentage esti- mated to cover normal selling costs and normal profit. In a business making a great variety of products, No. 5 will rarely give valuations that do not differ widely from factory costs, for it is practically impossible to apportion even approximately the total selling expenses to the different items of product. The valuations on Nos. 1, 2, 3 and 4 bases will depend largely upon the method of distributing the fac- tory burden. When the amount of the inventory is a large fraction of the total annual product an error in the method of distributing may lead to great errors in the inventory values, which, if they do not balance each other, may lead to dan- gerous conclusions in regard to profits on the business and as to the amount of dividend that may safely be declared. On this account it is advisable that the annual inventory, on which the yearly profits available for dividends are based, should be taken at a time of the year when the value of the goods in the warehouse and of the work in process is apt to be at its minimum, and when the error in the total of the inventory valuation is, therefore, also likely to be a minimum. Checking the Continuous Inventory If a continuous or " perpetual " inventory is kept on ranis properly filed, or in a loose-leaf Balance of Stores Book, and is checked at frequent intervals by actual counting, measuring or weighing the goods, or stores, on hand, there is no need of shutting down the factory to take the annual inventory. Some system should be adopted to insure that each bin, or 54 BOOKKEEPING AND COST ACCOUNTING other place for storing materials, should receive proper attention from the storekeeper's assistants, and that at least two or three times during the year its contents are inspected and compared with the balance shown on the bin card. As each bin is inspected, a memorandum, giving the symbol of the article, the quantity found in the bin, and the date, should be written and sent to the balance of stores clerk for comparison with his records. The best time to inspect a bin, and check the bin card, is when it is empty or nearly empty. If the inspector tacks a small card, of a different color for each month of the year, on each bin, after he inspects it, he will have a continuous reminder, as often as he walks past it, of the time that has elapsed since the bin was last inspected. COST-KEEPING BY PIECES OF PAPER Modern bookkeeping and cost-keeping show a tendency to dispense with books, pens and ink, and laborious tran- scribing from one book to another and to use instead printed blanks, typewriters, adding and billing machines, and filing cases. Take the example of what is done in a shop building steam engines: (1) The general office sends to the factory a printed blank with a typewritten order. " Build for stock twelve engines Class A, size 10x12 in., date, March 1, 1910. Deliver in warehouse on or before July 1st." (2.) The Production Department takes from a pigeonhole or file case a mimeographed sheet headed Schedule EA, 10X12 in. which contains a complete list of all the parts that go into such an engine, specif ying for each part its name, symbol, size, drawing and pattern number or symbol, kind of metal, which also has columns headed: Date ordered, From whom Ordered, Date to be delivered, Date received. It fills out in the proper column the number of individual pieces of each kind required for twelve engines, and sends it to the storekeeper, placing (1) in the " Unfilled orders " file. (3) The storekeeper takes from his inventory file the sheets of Balance of Stores that correspond to the piece symbols marked on the schedule that may be kept in stock, and enters on them the number of pieces that are to be reserved for this particular order and marks on the schedule in the column " from whom ordered " the words " in stock " or " in stock 4, wanted 8 " (or as many as may be wanted), and returns the schedule to the Production Department. (4) The production clerk takes a lot of order blanks and writes in triplicate (using carbon paper) orders for the materials or finished parts (such as bolts) that are to be purchased from outside concerns, as shown by the schedule, stating the dates at which each lot of material is to be de- livered to the factory, and sends these orders to the Pur- chasing Agent. (5) The production clerk takes from another file blanks for factory production orders for each piece or lot of pieces of one kind to be made. As these pieces have been stand- ardized as to patterns and operations the blanks may be printed or mimeographed with all details, and require to have written in ink only the date of issue, serial numbers of the office and factory orders, number of pieces to be made, and date foi delivering to the storeroom or assembling floor. (6) Job tickets are then made out for each operation or group of operations to be performed by one man, corre- sponding to each of the several production orders. These tickets may be so printed as to serve several distinct functions, viz.: (a) an order on the storekeeper for the material, a payroll record showing the date at which the operation was performed, the time of the man and of the machine, his wages or piece work payment, and the machine or other burden, thus making the job ticket also a cost ticket for the operation. It may have a move coupon attached to be given to the " move man," containing an order to move the piece or pieces to the next machine, to the storeroom, or to the assembling-room floor. The job ticket is the most important element in the modern cost system of factories that make an " assembled " product. The job tickets may be made out, or partly made out, long in advance of the time when they are needed, and put in a file on " jobs waiting assignment " until the time arrives for them to be put on the bulletin board of " jobs in factory " and " jobs ahead." (7) Instruction cards corresponding to each job are on file and they go with the job ticket to the workman or are put on a board in the workroom for his inspection. (S) Bills begin to come in for the goods purchased. They take the regular course of verification and are then filed alphabetically in the file of " bills unpaid " or bills to be certified for payment. (9) The storekeeper or receiving clerk fills out a blank for each lot of goods received from outside parties, has it ap- proved, if required by the inspector of material, and sends it to the factory office where it is compared with the bill (8). (10) The cost clerk takes the blank (9) and enters on it the unit cost of each kind of material with a proper addition for freight, express, storage, depreciation, etc., if that is the custom of the factory, and sends it to the storekeeper or balance of stores clerk who enters it in his balance of stores sheets or perpetual inventory. (11) Mcnthly statements of the bills (8) come in at the beginning of the month; they are compared with the bills, and, if correct, are certified to the treasurer or cashier of the company. If bills are to be paid promptly, in order to obtain prompt cash discounts, a statement is made out from the bills and certified for prompt payment. (12) After the bills are paid they are arranged alpha- betically by names of dealers and in the order of dates for each dealer and filed permanently in the Paid Bills file. (13) The cashier pays the bills with voucher checks, that is ordinary bank checks with the words " In payment of your bills of (date)" or statement of (date). Before the bills are filed, a rubber stamp legend (or a slip pasted on the bill) is filled out with the names of the account or accounts to which the bill is to be charged in the Accounts PayableBook. (14) The voucher checks are all entered in the Check Register, which in large concerns takes the place of the right-hand side of the Cash Book. (15) When the work of production is started in the factory COST ACCOUNTING 55 the job ticket is sent to the storekeeper as a warrant for his issuing the material that it calls for, or else a Requisition is made for it. This requisition to be returned to the cost clerk, or a separate bill is to be made for the material deliv- ered with the price at which the material is to be charged to the job. The bill is to be charged on the job tickets and credited on the stores inventory. (16) If any material that has been charged to a job is returned to the stores, such as surplus material or scrap, a Credit Card is sent with it for entry in the Inventory and credit on the Job tickets. (17) Time tickets or job tickets are returned from the factory as the work progresses. They are sorted first to the names of the workmen, so that the Pay Roll may be made out, and then sorted by job numbers or symbols so that the cost of each job may be determined. The job totals are then added on the adding machine, together with the charges for burden, and the charges for material if they are on the job ticket. The sum of labor, burden and material on the job tickets for one week must equal the total of the jobs for the same period. The total of the burden figures is entered on the memorandum book of Distributed Burden. (18) The job tickets belonging to each piece or lot of pieces of the same kind are brought together, and when the piece, or lot of pieces, is finished and ready for delivery to the storeroom or to the assembly floor a Piece Cost Card is made out, giving date, piece symbol, number of pieces in the lot, average cost per piece for material, labor, burden and total. This cost card is sent to the storekeeper for entry in the Balance of Stores or Perpetual Inventory, after which it is filed permanently in the Piece Cost file. The same cost card may be used at subsequent dates when other pieces of the same kind are ordered. (19) When enough parts have been made so that " group assembling " may be begun (that is, putting together of cer- tain parts that belong together, such as " base and cylinder group," " shaft group " or " governor group "), an assembly job ticket is made out, which serves as a requisition on the storekeeper for the pieces belonging to the group, and for a job and time ticket for the work of assembling. • A similar assembly job ticket is made out for the assembling of the groups into complete engines and for the finishing of the engines for delivery to the warehouse. These tickets take the same course as that of the operation job tickets, described under (6), (17), and (18). (20) A Finished Product Cost Card (or Engine Cost Card) is made out from the information contained in the Piece Cost Cards and in the Assembly Job Tickets, giving the cost of the engines complete. This is entered in the Warehouse Inventory, and the card is placed in the file of costs of Fin- ished Product. The Cost System is now complete except as to the method of computing and distributing burden. It includes the filling out and handling of the following cards, sheets or other pieces of paper: 1. Office Order. 2. Schedule of Parts. 3. Inventory or Balance of Stores. 4. Orders for Materials. 5. Factory Production Orders. 6. Job Tickets for Operations. 7. Instruction Cards. 8. Bills for Goods Purchased. 9. Blanks for Goods Received. 10. Monthly Statement of Bills. 11. Voucher Checks or Vouchers to be paid by the Gen- eral Office. 13. Credit cards for material returned. 14. Pay Rolls. 15. Piece Cost Cards. 16. Assembly Job Tickets. 17. Engine Cost Cards. Besides these cards there are bound books that are connected with the system. 18. Accounts Payable Book. 19. Burden Distribution Book. 20. Petty Cash Book for minor cash receipts and pay- ments by the factory. The Cash Book and Check Register are not included, as they are handled by the General Office and not by the factory office. Provided that the factory expense has been properly com- puted and distributed to the job tickets according to the method in use in the factory, the blanks have been properly filled out and that no arithmetical errors have been made, this system shows what was the cost of the engines and what was the cost of each piece and each operation on each piece. These blanks, however, are not all necessary for the account- ing system; many of them are required for administrative purposes, that is for getting the order .systematically car- ried ftirough the shop without any reference to costing or accounting. We may have the production department entirely separate from the cost department, the former being charged with the duty of getting the engines built within the prescribed time and the latter with the duty of reporting the costs. The blanks required by the two departments then would be: Production Department. (1) Office Order. (2) Schedule of Parts. (3) Inventory. (4) Orders for Materials. (5) Factory-production Orders. (6) Job Tickets for Operations. (7) Instruction Cards. (12) Requisitions on Storekeeper. (16) Assembly Job Tickets. (4a) Replacement orders for spoiled work. Cost Accounting Department. (3) Inventory (for prices of materials). (8) Bills for goods Purchased. (14) Pay Rolls. 56 BOOKKEEPING AND COST ACCOUNTING (12) Requisitions on storekeeper. (For prices of materials delivered by storekeeper.) (13) Credit cards for materials returned. (15) Piece Cost Cards. (17) Engine Cost Cards. (19) Burden Distribution Book. (20) Petty Cash" Book. The Accounts Payable Book (18), Monthly Statements (10), Vouchers (11), and the Cash Book and Check Register are not included in either of these two lists, since they belong to the Financial Department. Limitation of the Cost Accountant With the above-mentioned seven blanks and three books properly filled out and filed the cost accountant is in position to answer any reasonable question that may be asked by the officers of the Company as to what uas the cost of the engines, of the parts, and of the operations, and also what is the recorded cost or inventory value of raw material or of fin- ished parts in stores. They give him all the data that are needed for this purpose. He is also in position to make such statistical sheets, reports or charts as may be required, giving monthly (or other periodica]) total of expenditures for material, labor, supplies, or burden, and comparisons of present costs with past costs or with standard or predeter- mined costs that may have been made by the drafting or plan- ning department. He is also able to say whether certain fluctuations in cost are due to changes in the market price of materials or to changes in wages or burden. He may alsc give to the financial department the figures to be entered in the monthly journal entries of the books of the general office for the purpose of " tying the cost-books to the Gen- eral Ledger." He is not able, however, to say that the costs that he reports are " true costs." They are true only to the extent that the theory and method of estimating depreciation and of dis- tributing burden are correct and true, which they never are, they are only approximations. The most accurate cost accounting system that deals with past events is but a historical record. It does not deal with the causes of these events, and it is not able to predict or to plan for future events. It cannot show that the unduly high cost of an engine was due to any kind of bad management in the planning room, to defective tools, to incompetent fore- men or unskillful workmen. These are matters for the man- agement to investigate after inspection of the cost account- ant's and statistician's figures. CHAPTER VII COST-FINDING METHODS. USE OF THE JOB TICKET Time Tickets Time tickets may be made out on either one of the fol- lowing systems: 1. One ticket per man per week, showing all the jobs he works on during the week, with the time used on each job. 2. One ticket per man per day, showing all the jobs the man worked on that day. 3. One ticket per man for each job that is worked on that day. 4. One ticket for each man for each job, whether it is done in a fraction of an hour, or whether it takes a whole week. If the job runs over a week a continuation ticket is issued for each succeeding week. Combined Time and Job Ticket. Form M 1 shows the two sides of a combined time and job ticket used by the Miller 3 Employee No 313 Order j, No ' 1200 John Doe Week Ending 12/6 /IS Lock No. Part Lid Operation Trim Mach. Tool Foreman's O.K.. o 2030 Units Start Hoi 2 rs 8 45.00 Weighed by Stop 42.2 Foreman's O.K. o Lbs. Units Start Weighed by Stop Foreman's O.K. o Lbs. Units Start Weighed by Stop Foreman's O.K. o Lbs. Units Start Weighed by Stop Foreman's O.K. o Zbs. Units Start Weighed by Stop TOTAL 2030 Units Total Hours 2 8 Code 514 RATE .03 22 PIECE WORK VALUE ei THIS SIDE Form No.178-I0-1G.50 >I..\:.I, UP FOR START AND STOP Morn. IN Bfl - c -. c n «< Morn. IN Noon our Noon OUT Morn. IN -z C % Noon IN Noon OUT Night OL I Noon IN 0. << Morn, IN 13. UJ Night OUT Noon OL 1 1 IN 0) E F M a Noon IN OUT Night our IN B a a Morn. IN OUT Noon OUT IN s e a M Noon IN OUT Night OUT IN - Morn. IN OUT Noon OUT IN Noon IN OUT Night OUT THIS SIDE UP FOR IN AND OUT Form Ml. Combined Time and Job Ticket. Lock Co. A card is used for each separate job whether it lasts a fraction of an hour or runs over several days, but if the job is not finished at the end of the week the card is returned to the cost department and a new card is issued. While the work is in progress the card is kept at the desk of the foreman of the room in which the work is done. A time clock stamps the starting and stopping time on the front or job side of the card, and the in and out times are stamped on the other side, on which the days of the week are printed. The size of the card is 5§ x3| in. The clock registers hours and tenths. It runs backwards, starting at 55 o'clock at 7 a.m. Tuesday morning (the time- keeping week begins on Tuesday) registers 50.0 at noon, and also at 1 p.m., stopping during the noon hour, and 45.0 at 6 p.m. and also on Wednesday at 7 a.m., stopping during the night. On Saturday it registers only 5 hours, from 15.0 to 10.0, and on Monday 10 hours from 10.0 to 0.0. The time clock calculates the elapsed time by subtracting the " stop " from the " start " time. As shown in Fig. 3 which is John Doe's No. 3 card for the week, the job was started at 45.0 and stopped at 42.2, the elapsed time being 2.8 hours. On the other side of the card only one figure is shown, 45.0, the man's " in " time on Wednesday morning. His next job card No. 4 shows three time figures, noon out 40.0, noon in 40.0 and night out 35.0. The cards have large figures 1 to 10, printed on the upper left-hand corner to indicate the number of the jobs done by the man during the week, starting with No. 1 on Tuesday 57 58 BOOKKEEPING AND COST ACCOUNTING morning. Some cards are provided with the place for the figure left blank, to be filled in with ink in case a man has more than ten jobs in a week. Job cards of completed jobs are collected from the depart- ments twice a day. They are first filed in the pay-roll section of the cabinet where they accumulate during the week. At the end of the week all job cards are collected, whether the jobs are finished or not. A certain bonus is given if a man does 50 per cent more than the standard set for the job. Thus, a man rated at $11 per week making 50 per cent more or $16.50 per week gets 48 cents bonus, making a total of $16.98. The bonus figure is derived from a formula and curve and is taken quickly from a revolving multiplication table. Weekly Pay Voucher. The job and time tickets of the Miller Lock Co. are summarized on a voucher sheet for each workman, which is shown in an abridged form below. The size of the sheet is 9 by 12 in., and it contains some col- umns in addition to those here given, such as Estimated value per 100, Standard Product, Per cent of Standard, etc. In this factory the bonus is figured on the total weekly earnings and not on each separate job. John Doe is rated as an $11 a week man, or 20 cents per hour for 55 hours per week. On jobs S and 9 he was given this rate for day work, "°- 3 13 Narae JW^Z/J^?-^ MILLER LOCK CO., Weekly Pay Voucher n O C'ts Dept. ,X Day Work Per Bonus / / f) n Per -£xi/(o.i^iS ' ' Job No. Lock No. Part Operation Quantity Units Rate Hours on Job Rate per Hour Non Prod. Day Work Productive Day Work Piece Work Dist. No. 1 /loO -&cu$Jl/ CQ^jj-e^ ???? JO s ■/? 99 £/U 2 11 u ft £*MJb /OOO . '(' S .8.0 / oo 3 /bo jCds&gU c^A^tyyvi/ 1O30 .03 a i: .aa 6>l 4 IbO c&^t-V-wi/ fooo .OX 7 ■2 .2-5 / KO 5 im ^OjU' &uJL> uo .10 1 .20 OV 6 2Wif .. ^cnA-e/U fo ' cn*MfaAAsu>r)Jy 'SIXd> ■ 30 ? » .SO a. X? .ozs 2. 9 .S.¥ *ro 8 ^^yL^UL^D/Ylytl. — . — 2 ,-- 7 / .0-0 / u?. SS-b 9 'V'SU fc- e£ « Jtsyz^]shz Jdv-trts £^aJA V- fe^m; 3b .035 3 r .3V- / 16 12 U Total 53 tL ^2L 2 9¥ % 2-0 Week Ending Job No. shortage Reason Am'Is Week 1 n.imy Job No. Surplus Reason Am'ts Deductio For as Am'ts Total Day Work Z Cfl/. Restu. so Total Non Prod. SL t/5. Dues Total Earned /3 5-to Cash Bonus / 2.2- Mdse. Total Wages 14- W Scrap Deductions SO Surplus Paid Week Ending Actual Wages Reed m SH Dare Paid Total Date Deducted Total Total so Form M2. Weekly Pay Voucher. but on job 6 he was given a special rate of 30 cents per hour, possibly because that was the regular rate attached to that job. On the other job he received piece-work rates, as in the rate column, per piece, per hundred or per thousand according to the job. At the end of the week his total earnings are figured up $13.56, and he is given a bonus of $1.28, which is 50 per cent of the excess of his earnings above $11.00 a week. This method is much easier for the accountant than one in which the bonus is computed on each job, and it may be satisfactory to the workman, and it may give the factory a close enough approximation to the labor cost of the several operations, but if accurate labor costs of any article or oper- ation are desired the apportionment of the $1.28 bonus among the eleven jobs is a matter of some difficulty. The bonus $1.28 is 9.4 per cent of $13.56, the total weekly earnings; 11.5 per cent of $11.14, the total productive work; and 15.6 per cent of SS.20, the total productive piece work In figuring the labor cost, including bonus, on any job shall we add 9.4 per cent, 11.5 per cent, or 15.6 per cent to the cost, not including bonus; or, shall we consider each job by itself, and give it a bonus per hour of 50 per cent of the excess of the hourly rate earned, as in the rate column over the base rate of 20 cents per hour? Take jobs No. 2 and No. 11, for example. Was the total labor cost of No. 2 $1.00, with no bonus, or $1,094, $1,115 or $1,156.' With the same per- centage additions, No. 11, $1.26, not including bonus, would cost $1,378, $1,405 or $1,457, but figured with a bonus of 50 per cent of the excess of the hourly rate earned above 20 cents per hour, the hourly rate would be 41 cents, and the cost 3.7 hoursX41 =$1,517. A bonus figured as a percentage added to the total weekly COST-FINDING METHODS. USE OF THE JOB TICKET 59 piece-work earnings does not give a satisfactory basis either fixing piece rates or for the estimation of standard costs. Suppose that John Doe is equally skillful and equally ener- getic and faithful on both of the jobs No. 2 and No. 11, and that he was fair]}'' entitled to earn $15 per week as an aver- age. If he worked a whole week, 55 hours, on job No. 2, making 11,000 units at 10 cents per 100, he would earn 20 cents an hour, or $11.00, and would get no bonus, while, if he worked another whole week on job No. 11, making 535 units, at $.05 each, or 55 hours at 34 cents an hour, $18.70, to which would be added a bonus of one-half the excess over $11.00, or $3.85, making his earnings for that week 55 hours at 41 cents an hour $22.55, or more than double what he received for the other week. The chief cost accountant, or cost analyzer, on glancing over this weekly pay voucher should make a memorandum for his " Tickler " " John Doe, Dec. 6, 1915, earns only 20 cents per hour drilling 214 case, and 41 cents per hour drilling and reaming S. T. P. O. door. Why? " and at a convenient time hand this memorandum and other similar ones to a cost clerk, who would first find by examining other pay vouchers or job ticket's for 214 case and S. T. P. O. Door, whether the conditions noted were chronic or only accidental and unusual. If chronic, the rate fixer should be informed, and he would investigate and report whether or not the estab- lished piece rates for these two operations were the proper ones, and whether or not a time study with the aid of a stop watch should be made in order to correct them. Workman's Yearly Record. The total hours and earn- ings on the Weekly Pay Voucher are entered on a Yearly Name Jolin Doe No. 313 Name D. W. Rate 20 Spec. 30 Bonus Rate 11™ D.W. Rate Sex M. Age 23 Nat. A. Sex PREVIOUS YE. Total Hrs. 1914 Wages i7S*> Aver, per Hr. 25 R'H RECORD Total Hrs. Aver. perWk.13.75 fflffl ITOXTl ,.,-.:,■ | Dale «- P.w, D.W. B „u. Dedc. ta L Wages Received 1 Date Hour. ts <■ 55 8.20 6.30 1.28 Ml 14.34 2 3 Form M3. Workman's Yearly Record Record Sheet, as shown in Form M3. There are two sets of headings on each sheet, and 54 ruled and numbered lines, so as to give room for a two-year record on one sheet. The sheets are bound together in a loose-leaf binder. Most of the work in this factory is piece work, and more than 20,000 piece rates have been established. They are entered on cards which are kept in filing boxes. Burden rates are apportioned on productive wages — a standard burden. The difference between the monthly total burden on the general books and the sum of the burdens apportioned to jobs is charged or credited to Profit and Loss each month. There is no supplementary rate. Business and adminis- tration expenses are entirely separate from shop costs. There is no inventory period — a perpetual inventory is kept. Material is charged at standard value each month, for simplicity. Apparently the material is a small part of the real cost of the product (except in the case of brass locks) and variations in market price of material make only slight variations in total cost. When the Workman Fails to Earn His Bonus, Does the Business Gain or Lose? Suppose that under the task and bonus system of paying wages a workman is paid 40 cents per piece if he makes 10 pieces in a day, but only 30 cents per piece, the regular piece price, if he makes less than 10 pieces. If he makes 10 pieces the labor cost of a day's work is $4, if he makes 9 pieces it is only $2.70. Suppose the factory expense is $4 per man per day, and that the selling cost is the same whether 9 pieces or 10 pieces are sold in a day, and that the selling price is $1.50 per piece. We may compute the profit on the day's work of the man, as follows: No. of Pieces Labor Cost Fact'y Exp. Fact'y Cost Selling Exp. Total Cost Selling Price Profit 10 9 4.00 2 70 4.00 4.00 8.00 6 70 4.00 4.00 12.00 10.70 10 at 1.50 = 15 00 9at 1.50 = 13.50 3 00 2.eo Increased profit when the workman earns his bonus 20 But suppose the selling price is reduced to 81.30 per piece, the costs remaining as before, we now have No. of Pieces Total Cost Selling Price Profit ' 10 9 12.00 10 70 lOat 1.30 $13.00 9 at 1 . 30 1 1 70 $1.00 1 00 Showing equal profits whether the workman earns his bonus or not. Suppose the price is reduced to $1.25 per piece, then No. of Pieces Total Cost 10 12 00 lOat 1.25 12 50 9 10.70 9at 1.25 11.25 Increased profit when the workman fails to earn his bonus Selling Price Profit 0.50 0.55 It thus appears that it is highly profitable to a concern to pay a high bonus rate when the margin of profit between the selling price and the total cost of an article is large, but that when the margin of profit is small the profits decrease when the bonus is earned. EXAMPLES IN THE USE OF JOB TICKETS A direct labor job ticket contains the following informa- tion: Dept. A, Week ending Jan. 8, 1917, Workman's Name and No. Milling Connecting Rods, Piece E46. Machine M 13 Credit 50 Hrs. at 30c. $ 1 5 00 Move to M17 Bonus 30% 4 50 19.50 Ent'd on Pay Roll W E. Material, 1000 lbs. forgings Ent'd on Store Inventory E46 at 4c. 40 00 SK. Burden 1000 lbs. at 0.2 c. 2.00 Ent'd on Cost Card CL. 50 hrs. Mach. 30c. 15.00 Pieces finished 19 Job 10 17 10 Pieces spoiled 1 76 60 Ret d to Stores — Ret'd to scrap, 50 lhs. Job finished 1/8. Approved, J. J., F oreman. Cr. for scran 50 60 BOOKKEEPING AND COST ACCOUNTING The opposite side of the card will contain the time clock The entry made from the job ticket on the cost card will record and any remarks that may be made by the foreman. be as follows: Cost Card Piece E46 Date Marlniii' Matl. Labor Burden Total Pea. fin. Spoiled Cr. for Scrap Cost per pc. Remarks Standard Cost 1 8 17 M 13 40 00 19.50 17 10 76 60 19 1 50 4 01 3.83 Additional entries on this cost card will be made for suc- ceeding operations on the same lot of pieces, and when they are finished, the total cost, less the credit for scrap, is added up and divided by the number of pieces made to obtain the cost per piece. This, together with the number of pieces is entered on a perpetual inventory card. When the entries on the pay roll, inventory and cost cards have been made from all of the week's job tickets, the adding machine may be used to obtain either directly from the job tickets or from the cost cards the following totals. Machine hours; cost of labor; cost of materials; credit for scrap or for unused material returned to stock, and burden. The totals for four weeks give figures for the monthly bookkeeping and statistical entries. The total machine hours is entered on a card which shows the number of machine hours for different months in comparison with the estimated number of hours run in a normal month. This card, together with the monthly total material and labor costs, forms an index of the activity of the business. The monthly totals for labor, net material used, less scrap, and burden, are used for the monthly Journal entry, Work in Process Dr. to Labor, To Stores, To Burden. This entry may be subdivided and apportioned to different departments or classes of product if desired. After all the entries from the job tickets have been made, as above described, the tickets may be assorted by machine numbers, and the number of hours that each machine was engaged during the month footed up on the adding machine. The figures thus formed may be listed and compared with the number of hours that each machine is estimated to be engaged in a month of normal business, or with the full number of working hours in a month. The result expressed as a per- centage or " work-factor " may be used in estimating the " cost of idleness." Problem in Cost Finding Job Ticket Job Ticket Dept. M. Machine Work Back of Ticket Assembling Job No. 101. Wk. ending Thurs. 1-20-16 Date Jan. Job No. 210 Wk. ending Th. 1-27-16 Piece Symbol A, Operation Symbol a Man No. 137 Name A. Smith Stop 14 Kri Start 15 Sat. Stop Start 17 Mon. Stop 6.0 Start 3.0 18 Tu. Stop 9.2 Start 7.0 19 We. Stop Start 20 Th. Stop Start Time 5.2 hours Pes. A, B, C Part- Base A, B, C Mach. No. L13 Hours Rate Amt 5.2 .25 1.30 Premium 30% 39 1.69 Burden per hr. .20 1.04 2.73 Material 100 lbs. Castings 3c 3.00 Total inc. Matl. 5 . 73 Pieces delivered 20 Pieces finished 1 9 Pieces rejected 1, scrap val. 03 Cost per piece 570-=-l9=30c, 5.70 Man No. 107 A. Brown Room L Bench 10 Hrs, Rate Amt 4 30 1 .20 Prem. 20% .24 1.44 Burden. 4 hrs. at lOo . 40 1 84 Pieces cost A 19 5.70 B 38 2.40 C 57 1.80 9 90 II 74 Groups finished 19 Av. cost 0.62 Clerical Work on Tickets Planning Room. Make out tickets. Pay-roll Clerk. Enter in Pay roll. ' Cost Clerk. Enter all costs on cost ticket for Piece A. Enter all costs on cost ticket for Group A, B, C. Add up all labor charges entered on cost tickets for week and compare the total with pay roll total. Add up machine hours for each machine (sorting the job tickets for this purpose) and record the totals in machine record — as a basis for computing the normal burden. Add up burden charges entered on cost tickets for each week, and record weekly totals in Burden record. Add up material charges on cost tickets for the week, and compare total with storekeeper's record. COST-FINDING METHODS. USE OF THE JOB TICKET 61 Sort the job tickets by Piece symbol (or Group symbol for assembling tickets) and file them for comparison with future work on similar pieces. What is the cost of the clerical work per 100 tickets? How can this work be shortened to cut down its cost, and yet put on record all necessary information? Information Written on the Job Ticket. (1) Date issued. (2) Office Order No. (3) Class Letter. (4) Piece Symbol. (5) Description of Work. (6) Room No. (7) Machine No. (8) Workman's No. (9) Workman's Name. (10) Rate, Piece or Day Work, or Bonus. (11) Man's Time. (12) Amount of Wages. (13) No. of Pieces. (14) Order on Storekeeper. (15) Material Delivered by Store- keeper. (16) Cost of Material. (17) Receipt of Finished Work by Stores or Foreman. (18) Memo, of Material or Scrap returned to Stores. (19) Burden. (20) Total Cost. (21) Cost per Piece (Material, Direct Labor, Burden, Total). (22) Order to Move Man. (23) Date of Finishing Order. (24) Bonus or Premium. (25) Man's earnings per hour. The Storekeeper's and Burden Records may be on separate cards if desired. A list of standard burdens for pieces, groups and assembled structures may be kept and added to labor and material costs in the inventory as they may be needed, as at the end of the year, instead of entering the burden on the job tickets. The entries to be made from job tickets include: 1. Workman's Credit on Pay Roll. 2. Such Statistics as may be needed by the Cost, Statistics or Accounting Depts. If the cards, after being entered on the Pay roll are sorted and filed by Piece Symbols they form a complete cost system for unit costs, without any transcribing on books or cards. To find what any Piece has cost at different periods during the year, all that is necessary is to take out of the file all the cards relating to that piece. Total monthly costs, by classes, rooms, departments or machines may be found by sorting the cards by classes, etc., and adding up the totals on an adding machine. If the machine-rate burden method is not used the burden figures may be left off the cards, and the burden by Classes, Rooms or Departments may be computed from the monthly totals of hours and of labor by multiplying the hours by cents per hour, or the wages by the burden percentage, determined from previous records or recent investigations. The storekeeper's record may be omitted from the job tickets if it is not desired to keep detailed costs of material for each piece. Office Orders An Office Order is an order issued from the office to the shop, or to the planning room, for the execution of any kind of work, it may be for the making and shipping a single bolt, or for the making and putting into the warehouse a hundred or a thousand complete machines, each comprised of hundreds of pieces. The shop superintendent, or in modern practice the planning room, plans how the order is to be executed, and issues all the necessary shop orders for details of the work to be executed, drawings, instruction cards, and job tickets. The following is an example of an Office Order and of one of the job tickets which is part of the history of ths execution and of the cost accounting related to it. Office Order 7867. Mar. 16, 1916 Forge 1000 steel bolts 1 X 6 in. square heads. Thread 500 of them, \\ in. of standard threads. Thread 100 of them, 2 in. special thread, 12 per in. Machine finish heads of 100 of the 500. Machine finish all over 100 of the 500. Polish and nickel plate 50 of B l-6m. When the order is finished there should be in the Inventory, 400 bolt forgings, 1 X 6 in. 300 threaded bolts, standard. 100 threaded bolts, special threads. 50 threaded bolts, machined heads. 100 threaded bolts, machined all over. 50 threaded bolts, nickel-plated heads. 1000 Symbol Bf 1-6 Bl-6 B 1-6 sp. 12-2 B 1-6 m B 1-6 ma B 1-6 mp Date issued. Mar. 16/16. Room No. Forge Clock No. 317 Work. Forge 1000 I' Machine No. BF 4 Name J Moran X6" Bolts. Operation Order or Job Ticket Class Letter B Office Order No. 7867 Hour or Piece Rate 0.60/100 Piece Symbol Bf 1-6 In Out Hours Total No. of Pes. Total Amount M Storekeeper, Deliver for thia order T 1 " Round Steel 1000 pes. 7% in. W Del'd. Date 3/16 Th6.7 10 3 3 160 Pes. Wt. Price Amt. F 10 10 590 1000 1725 1.4 24.15 8 4.2 4 2 17 5 250 1000 6 00 Storekeeper's Punch X Wk. ending Fin. Rate per Hour per piece 60/100 Bonus 3/18 = 34.3^ Matl 24.15 $3,365 Burden 3.50 Total 33.65 Excess Material Returned to Store lb. at Scrap, lb ... . Earnings per hr. 600/17.5 Cost per 100 pieces Burden Rate-Mach. I 7 5 at l^i Foreman's Punch O .*t $ 01 >0 ^ o o o w > o s -c a a Sis ° 2 2 o o a, u> so "■" f labor, and time and wages for each operation. By means of time, motion and fatigue studies the methods of doing the various operations are standardized, and by the task and bonus system of wage payments the labor cost of any operation may be predetermined within a narrow range of variation. The standardization of burden is a more dif- ficult problem, but it may be accomplished whenever the same articles of product are made continuously or frequently. Suppose that a certain product, which is regularly made in large quantities, year after year, consists of four groups assembled together, each group having an average of five pieces, and each piece requiring on an average five operations. In this case there would be a hundred operations on each finished article (in the case of a typewriter, a cash register or a calculating machine the number of operations might run into the thousands). In the ordinary accounting system, for a hundred operations on a given lot on one office order (whether the lot be a single article, as in the case of a large engine, or ten thousand articles as in the case of small articles like clocks or valves) at least a hundred separate job tickets would have to be written — more than a hundred if some of the operations on a given lot lasted more than a week and a new job ticket was issued each week that the job lasted, perhaps a thousand if a new job ticket was issued each day. Each of these tickets would contain a great mass of detailed information (see the job tickets on pages 59 and 60). They would include the workman's name and number, his time, usually stamped by a clock, his wage or piece rate, the bonus earned and the total wages, all of which would be necessary in order to make up the pay roll, and besides this, for cost and sta- tistical purposes, the office order number, the job number, the piece and the operation symbol, the machine number or symbol, the number of pieces operated on, and finally, if the machine-hour rate method of distributing burden is used, the burden figures corresponding to the machine hours and rate. Each one of these job tickets, under the old system, is posted, with all its variety of detail, onto piece cost cards or into a piece cost ledger, and when the pieces are assem- bled into groups and the groups into the finished product the assembling job tickets are further posted into cards or ledgers in order to obtain the total cost and the unit cost of the finished product. In one factory visited by the author there were thirty loose- leaf cost ledgers, each containing probably 2000 pages, making 60,000 cost pages in all. Each one of these pages would have to be examined by a clerk at least once in order to obtain the cost figures for use in inventory valuations of finished parts in stock and of finished products in the ware- house, and a statistician might examine them in order to obtain figures for his statistical reports and comparisons of costs at one period with those at another, but except for these purposes all these books and all the costly pen-and-ink work in them are of little or no value to any one. The machine-hour rate system of distributing burden is, undoubtedly, the best yet found for approximating the true cost of a manufactured product, and when the product ((in- sists of many pieces, each requiring numerous operations, it is necessary to obtain the burden for each operation, but 82 BOOKKEEPING AND COST ACCOUNTING having once determined the cost of a given lot, and having standardized the cost of raw material and of labor for each piece and for the assembled product, the total burden charges obtained by adding together all the burden charges for the several operations may then be taken as the standard total burden for all similar lots, and, thereafter, there is no need of figuring the burden on each separate operation until there is a change in the method or in the speed of manufacturing, or until there is a change in the monthly charges against Burden Account, such as rent, insurance, taxes, superintendence, indirect labor, reserves for depreciation, etc. A vast amount of clerical work may thus be saved. This plan of using a standard burden per unit of finished product may make it possible to introduce an entirely satisfactory cost system into some large factories where the old method of figuring the burden separately on each job ticket would be so costly as to make it impracticable. When the standard task and bonus rates and the standard burden per unit of finished product have been established there is no need of writing a separate job ticket for each operation, or even for each piece or lot of similar pieces. A weekly time ticket is issued to each workman, on one side of which is stamped the clock figures for " in " and " out," morning and afternoon, and on the other side is entered the count of pieces finished each day, or each operation, together with the piece and operation symbols and the office order or lot number, which takes the place of the separate job ticket numbers in the old system. Example. Suppose a certain product, 106X, is made of two pieces, A and B, and each piece has three machine operations. An experimental lot has been made, the best process of manufacture has been determined, time, motion and fatigue studies have been made for each operation, standard times, tasks* and bonuses have been fixed, and the burden on each machine operation and on assembling, fin- ishing, testing and packing has been calculated on the ma- chine-hour rate basis. A standard schedule of operations is then made out as follows : Operation Schedi le FOR 106X Operation No. Machine No. Time for 1 00 pieces hours Wage per hour, base cents Piece rate per 100 Bonus 30 per cent Labor per cost 00 Burden Total labor and Piece per ma- chine hour per 100 burden per 100 A 1 S7 4 3 25 1 03 32 $1 40 40 72 3 12 2 T6 2 7 30 81 24 1 05 30 81 1 86 3 M10 6 25 1 50 45 1 95 50 4 00 4 95 B 1 P3 5 1 30 1 53 46 1 99 40 3 04 4 03 2 Dll 1 9 25 48 14 62 30 57 1 19 3 T6 3 4 30 1 02 31 1 33 30 1 02 2 17 35 23 4 6 42 ' 92 8 24 9 16 50 Assemble Bench 1 '0 — — 40 15 15 55 Finish Bench 5 40 — — 20 15 08 28 Test Bench 2 40 — — 08 15 03 II Pack Bench 1 40 40 15 15 55 2 7 1 08 41 1 49 Total, 10 ) articles 26 1 9 42 9 57 18 99 An office, or production, order may read as below: Order No. 1761. Jan. 2, 1917. Make 10,000- 10GX, in 10 lots. 1000 per month. The weekly time ticket of a man working on Machine T6 may show the following: Time Ticket, Week Ending Jan. 14, 1917. Name, J. Jones. No. 87 (Reverse side ol card). Order Article Piece and oper'n Mach. Start Finish Hours Pieces Finish or not 1761 I06X-1 A? B3 TS T6 'A7A Vn 4P Vn 4P 26 24 1010 700 F XF Jan. In Ouc In Out Hours 9 M 12 5 9 10 T 12 5 9 11 W 12 5 9 12 Th. 12 5 9 13 F 12 5 9 14 S 12 + 5 50 Cr. Labor 1010 at 1.05 per 100 10 60 700 at 1.33 per 100 9.31 Chg. I06X-I 19.91 When the time ticket is turned in at the end of the week the pay roll clerk credits Jones $19.91 and puts the card in a file of unfinished orders, in a folder marked 106X. When all the operations, including the packing, on the lot have been completed the cards are taken out of the folder, and the total labor costs are added on the adding machine and DISTRIBUTION OF BURDEN 83 entered on a Finished Product Cost Card. The total amount or finished parts returned to stores, taken from Charge of the material issued for the order, taken from the Stores Stores, Credit Work in Process cards, are also entered on the Issue Cards, and a credit to the job for scrap unused material Cost Card. The card may contain the following information: Finished Product Cost Card. Article I05X. Lot Ordered 1000 Date Finished Order and Lot Cost of Material Labor Standard Labor Actual Burden Standard Finished Spoiled Credit Charge stun- Charge Warehouse Co8t per IUU Jan. 28 1761-1 1 50 00 94 20 96 40 95 70 995 A, 15; B, 10 2 60 240 00 24 12 When this entry has been made in the cost card, an entry The next month the weekly memorandum may show: is made on a memorandum for Journal Entry as follows: Completion of 106X, lot 1. Feb. 3. Labor. 23.70 Materia] issued 2.00 Scrap returned B0 Factory Costs. Month of January, 1917 Charge Credit Article Store Work in Process Store Labor Burden Total 106 X-l 2 6(1 240. 00 50 Si) 96 40 95 711 242 60 And at the end of the month the several columns in this memorandum are posted and the totals entered in the Journal- Ledger. The total credits to labor should equal the total of the direct labor pay roll, and the total credits to stores should equal the total of the Stores Issue tickets for material issued for work in process. If the lot is not completed by the end of the month and it is desired to balance the factory accounts monthly a modifi- cation of the method is made. A memorandum of the weekly charges and credits to lot 106X-1 is made as below: Weekly Direct Labor Charges. Order 1761— Article 106X. Lot 1. 1917 January 7 14 21 28 31 7.25 24 60 14.30 21.40 5.15 72.70 Material issued, per stores tickets Scrap returned, charge stores Not finished Standard Labor Cost, if finished Estimated Labor Cost to finish Estimated burden for work done 48.50 1.80 94.20 21.50 72 70 94.20' ■ of 95.70=69.57. be The entry in the memorandum for Journal Entry then will Charge Credit Store Work in Process Store Labor Burden 106 X-l (N.F.) 1 80 188 ■n 48 50 72 70 69 57 and the Journal Entry Memorandum for February: Charge Credit Store Work in Process Store Labor Burden 106 X-l (F) 51 in 2 mi 23 70 26 13 The burden charge being the difference between the standard burden, S95.70 for 1000 articles, and the $69.57 charged in January. This method of calculating the burden for the two months separately (in proportion to the direct labor cost in each month) is, of course, inaccurate, for the work done in the first month probably included most of the work on the large machines carrying an hourly burden rate of 40 and 50 cents while the work in the second month was largely bench work with a burden charge of only 15 cents per hour. A more accurate method of apportioning the burden for the two months would be to take from the time tickets the machine hours of the work done and from the standard schedule the machine rates, but this would involve an amount of clerical labor that would probably not be worth its cost. The error made by the shorter method of estimating the burden of the first month, whatever it may be, is corrected in the second month by charging the difference between the standard burden for the whole month and the amount already charged in the first month. The object of cost accounting is to arrive at the factory cost of the product when it is completed and delivered to the warehouse, and not to make a monthly balancing of the accounts. An overcharge or undercharge of burden on the separate portions of a given lot finished or partly finished in two or three different months is of no serious importance when it is considered that the machine-hour rate, while the nearest approximation to an accurate burden-charging method is still but an approximation. Moreover the " factory cost " which is most important is not always the actual expenditure incurred by the factory in making a given portion of its product, but the figure at which the product should be charged in the warehouse inven- 84 BOOKKEEPING AND COST ACCOUNTING tory and charged to the sales department; not what the product cost to make in the past under possibly unfavorable conditions, but what it should cost at the present time or in the near future under normal conditions, in other words the probable cost of reproduction. It is the figure to be used in computing the factory profit and loss at the end of the year or other fiscal period, and the figure to be used as a basis for establishing the minimum selling price. " Warehouse value " might be a better name for it. Interpretation of the Recorded Cost Figures. Recapit- ulating the figures from the above example we have the fol- lowing: Material Direct Labor Burc en Spoiled Charge Stores Warehouse Value Cost per 100 Standard, 1000. . . 50 50 49 00 50 75 94 96 93 20 40 73 95 95 95 70 70 22 239 240 238 90 00 70 23 24 23 99 Actual, 995 Standard for 995 . A, 15; B, 10 2 60 12 99 60 75 2 67 48 -2 1 30 It is not to be expected that the actual material and labor costs will ever be exactly equal to those of the standard schedule. Machines will break down; belts will slip; mate- rial will be harder or easier to machine; men will some- times fail to earn their bonus, or may earn extra wages for overtime; more material will prove defective or will be spoiled in one lot than in another; the spoiling may take place in the first operation or in the last; men may some- times be penalized for spoiling material and sometimes not, the factory in the latter case assuming the spoilage as one of the normal risks of the business. In the imaginary case above described, for the lot of 1000 articles 1010 pieces each of A and B were furnished by the stores, of these 15 of A and 10 of B were spoiled in process so that only 995 articles could be completed, 5 pieces of B being left over and put in stores for the next lot. In the above case we have charged the warehouse with $240 for 995 pieces. Sticklers for absolute accuracy may find fault with these figures, one set holding that the charge is too low, for we have charged the standard burden $95.70 for 1000 articles, when 1010 pieces each of A and B were worked upon, and the direct labor cost was $2.20 more than the standard and, therefore, the burden should be greater, more machine hours than the standard having been employed on the lot; while another set would say that we have inflated the inventory by charging the standard burden for 1000 articles when only 995 were made, and, that we have also inflated it by charging to warehouse the cost of spoiled work, which should have been charged to a separate account and not to the cost of the product. These are matters of refinement of detail which each factory should settle for itself in its " accountants' code." It may be well for the code to specify that the machine- hour burden shall include an allowance of say 2 per cent for a normal amount of spoiled or defective work and that when the actual spoilage or defective material is less than this amount no account need be taken of it in figuring costs, but that when it is in excess of this amount, as it often is in engine building, when a cylinder is spoiled in boring by a shop accident or on account of a flaw in the casting, the loss due to spoilage shall be taken account of as one of the occa- sional risks of the business, charged to spoiled work account, closed at the end of the fiscal period into Profit and Loss, and not be included in the inventory valuation of the product. We must be careful not to inflate our inventory and, therefore, exaggerate our book profits, and possibly also to in- crease our selling prices to such an extent as to decrease our sales, and on the other hand not to underestimate our costs, which may lead to making sell- ing prices too low, thereby less- ening profits. The middle course seems to be the safest, and this may be had by speci- fying in the accounting code that the machine-hour rates include an allowance of 2 per cent (or other moderate figure) for spoiled work, and that the standard burden to be charged to a lot is that belonging to the number of articles ordered and expected to be made (1000 in the case described) although work is done on a few extra castings ordered with the expectation of some loss from spoilage (10 extra castings in this case) and although less than the expected number of articles (995 in this case) are actually finished. One advantage of this method is that it minimizes the clerical abor. Advantage of the Standard Schedule. The saving of labor in accounting due to the adoption of the standard bur- den per unit of product has been sufficiently discussed above, but a more important advantage of the standard schedule is that it leads to obtaining prompt information in regard to the progress of work through the factory and, in regard to excessive cost of any operation. With the standard opera- tion schedule on his desk for each kind of product that is going through the shop, the superintendent or production clerk can compare the daily count of pieces made in each operation with the standard, instantly note any serious variation from the schedule and promptly investigate the cause and apply the remedy. Charge Unabsorbed Overhead to the Sales Department I recently had a discussion with a public accountant in New York who claimed that overhead should only be charged to costs on the basis of normal production, and that when orders were insufficient to allow of normal production the unabsorbed expense should be charged to the Sales department, because they didn't get the orders. Some works managers and superintendents would very much appreciate such relief. For the purpose of intelligent comparison of costs some such arrangement should work satis- factorily, although probably in the steel business the excess should be charged through some special account against the income rather than to the Sales department.— Gershom Smith, Eng. Mag., June, 1909. CHAPTER IX DEPRECIATION. INVENTORY VALUATION. APPRAISALS Method of Treating Repairs and Depreciation in the Accounts. Suppose a shop is fitted with new machinery valued at $60,000. It is estimated that the possible depre- ciation due to obsolescence will require contributions to an insurance fund at the rate of 4 per cent per year, or $2400 per year, or $200 per month; that the depre- ciation due to wear and tear, not made up by current repairs, but deteriorating the usefulness of the machinery so that it will have to be replaced at an average time of 25 years, is also 4 per cent, or $200 per month, that minor repairs, such as renewal of bushings, replacing small gears and the like will average 2 per cent, or $100 per month. Suppose also that extraordinary repairs, due to accidents and costing from $103 to $2000 each, are apt to happen at irregular intervals, the total cost hi different years ranging from $300 to $3000. It is desired to distribute and absorb these depreciations and repairs into the monthly records of costs of the several classes of product or of costs of work hi the several departments. If the normal output of a certain department or of a certain class of goods is 5000 pieces per month, costing $5000, or $1 each, and in one month there is a breakdown costing $1000 in crease in the repair account above the usual cost, and cutting the monthly product down to 2500 pieces, the apparent cost of these pieces, if the cost of the extraordinary repair is S1000 and it is all charged against the product of that month, may be raised to $1.50 each or up- wards. It is evident that a cost so obtained is of no use to the management for any purpose. It is not a basis for the valuation of goods in the warehouse or for fixing the minimum price at which goods may be sold Example 1st Month 2d Month 2d Month Wrong Right Method Method Material $1000 $ 500 $ 500 Direct labor 2000 1000 1000 Indirect labor and all normal expenses, repairs, depreciation, etc. 2000 1500 1000 Extraordinary repairs none 1000 Total cost 5000 4000 2500 No. of pieces made 5000 2500 2500 Apparent Cost per piece $1 00 $1 .60 $1 00 The warehouse in the second month should be charged only $2500 or $1 each, the normal cost of the 2500 pieces made and the difference between the total and the normal cosl ($4000 -$2500 =$1500) should either be charged to Profit and Loss and at the end of the year, with other profits and losses, be balanced into surplus or capital or " Company " account, or else be charged against a Reserve for Repairs account, which is accumulated for the purpose of taking care of such extraordinary repairs. Current small repairs may be charged directly to a Repair Account which may be closed monthly into Manufacturing Acct. and distributed in the cost records of departments or classes of product. Manufacturing Acct. should also be charged monthly with one-twelfth of the average estimated yearly cost of depreciation, Reserve for Depreciation being credited, and with one-twelfth of the estimated average yearly cost for extraordinary repairs, Reserve for Ex. Repairs being credited. As actual expenditures of cash, labor or material are made for replacement of machines that have become obsolete or worn out, or for extraordinary repairs, these Reserve Accounts are charged and Cash, Labor, Mate- rial, or Mfg. Acct. credited. The balance of the Reserve accounts at the end of the year, if on the credit side, repre- sents a fund which has accumulated and n ay be drawn upon for replacements and extraordinary repairs in the following years; if on the debit side, the balance represents the excess of actual expenditure for replacement and repairs above the total of the monthly credits to these accounts. This debit balance may be carried over into the next year and may gradually be wiped out by the monthly credits, or it may 1 e transferred to Profit and Loss, as may seem best to the man- agement. The credit balance of the Reserve Accounts may be trans- ferred to the credit of Equipment Acct. to reduce the inven- tory value of the equipment, or it may be carried forward and dealt with at some future time. Thus, if at the end of a few- years after the opening of the books the Dr. balance of Equipment Acct. is $60,000 and the Cr. balance of the Reserve Accts. is $20,000, this may mean either that the equipment is worth only $40,000, having depreciated $20,000 in value, or that its present value to the Company as a " going concern " is the full $60,000, but that there is a $20,000 fund held in reserve against its possible rapid depre- ciation at some time in the near future. In any event the meaning of the $20,000 reserve should be clearly explained on the Ledger for the information of an auditor or examiner. If it should appear to the management that this $20,000 fund is greater than the real depreciation plus a reasonable reserve 85 86 BOOKKEEPING AND COST ACCOUNTING for the future, then part of it may be credited to Profit and Loss or Surplus Account, and then to Dividend Acct., paying it back to the stockholders, but this is a matter that is for the Directors and not the Accountant to decide. In making estimates of costs the amount to be added for depreciation of machinery, if figured as a percentage of the value of the machinery, should be based on its original value and not on a depreciated value. For example, if the machin- ery when new was worth $60,000 and 5 per cent per annum or S3000 is deducted from its inventory value for depreciation, this amount being charged as one of the items of cost of the annual product, the same amount should be charged to costs each year, although the inventory value may have been reduced to $40,000 or less. This annual charge does not in fact represent the actual depreciation each year; what it does represent is an annual contribution to a fund which is to be used eventually for such repairs, renewals and replace- ments as will bring back the value of the machinery to its original amount. Depreciation. From notes on Business Engineering, by Alex. C. Humphreys. Definition. Reduction in worth caused by wear and tear through use, and by obsolescence and inadequacy. Repairs, renewals and replacements are things done to repair or compensate for the losses occasioned by depreciation. Estimating in advance of the facts the probable and possible future depreciation to be included as one of the annual items of operating cost is a different proposition from determining the actual depreciation which is found in the appraisal of a plant in operation. The first is known as theoretical, the second as actual depreciation. Repairs and replacements of certain minor parts of the plants are paid for out of current income and should be charged as part of the expenses of the year unless they are covered by an inclusive yearly charge to cover all repairs, renewals and replacements. Replacements of parts greater in value may be charged as part of the expenses of the year, or their cost may be distributed over a number of years, or they may be included in an inclusive yearly charge above mentioned. The theoretical depreciation due to obsolescence, inadequacy, or such decay as will in time necessitate renewal, is one of the cost or expense items that must be treated as an accruing liability. The first step is to estimate as closely as we can the annual loss occasioned by this depreciation. To estimate the probable life of each part of the plant it is necessary to consider the class and character of the plant, its design and construction; its capacity; the way in which it is operated; the present volume of business and prospects of the future; whether it is overworked or not; whether it is kept in good repair; and whether the cost of repairs is charged year by year against the profits. To assume that certain kinds of apparatus and machines can each be given definite life-expectations without regard to the special conditions involved is quite indefensible. What is the life of a boiler? What is the life of an engine? Such general questions cannot be answered. No general rules can be estab- lished either for future depreciation or for making estimates of actual depreciation as an element to be considered in the appraisal of present value of plant. Having examined each part of the plant and having developed a table of life expectations, it should be assumed for the purpose of this estimate that at the end of each life period covered by the table the parts of plant will have to be renewed. Many things may happen to change the estimate. As we should be careful to make the life estimates on the safe side we may hope for longer lives than those assumed. If as to any part we have under- estimated the element of inadequacy and we find the plant wholly or in part inadequate as to capacity before the expiration of the assumed life, we, at least, have the unexpected higher rate of increase in sales to compensate for the necessity of renewing the plant in advance of our estimate. It may be in such a case that the investment of additional capital will be found to be fully warranted. The problem of estimating accruing depreciation is a most difficult one 'to solve, even by the man who, by training and experience, is an expert. We should be prepared to amend our estimate from year to year as we have the opportunities to check up the correctness of the assumptions upon which we have based our estimate. All the details of depreciation estimates should be recorded fully and exactly so that as conditions change we, or those who follow m.s, may always be able to compare the results of the estimates with the facts as found. With every record, especially in accounting, the statements should be com- pletely self-explanatory. Depreciation and its Relations to General Expense. H. M. Norris, Eng. Mag. XVI (1898), p. 812. Mr. Norris sent a list of questions to several manufacturers of machine tools asking such questions as " How would you figure depreciation?" "How do you regard small loose tools, as drills, reamers, etc.? " "Into how many items do you divide General Expense, and what are they." The answers showed wide difference of opin- ions on all the questions; for example, one manufacturer said he carried drawings, wood and iron patterns, jigs and fixtures on his books at cost, while another charged them to expense and took no further account of them. Mr. Norris says of these things : Drawings are not merchandise, they are merely means to an end, a necessary evil in production. Standard drawings are chargeable to capital, not as assets from which a given per- centage can be written off annually, but as assets ^\hose real value can only be approximated. Only those drawings which are in use should be valued in the assets. Patterns when seldom used have little value. Patterns should be broken up as fire- wood as soon as they are no longer needed. Metal patterns in regular use remain of fixed value, repairs being charged to general expenses. Two of the replies were as follows: " We do not feel like going into all the details of our private business in the way you have suggested." " We feel that this is in a measure private information that we do not care to have disseminated generally." Mr. Norris thus comments on these replies: " A nation's progress is dependent upon the distribution of knowledge, and knowledge withheld is progress retarded. This is equally true of private enterprises, and I think it will be admitted that one of the chief essentials of progress, espe- cially in the mechanic arts is unselfishness — a willingness to exchange ideas, a broad and liberal policy fostered by an esprit de corps which insures its own reward." Four Methods of Calculating Depreciation.* If depreciation is calculated on too restricted a basis it may easily be found that money has been paid away in profits which ought to have been retained for the future. There are still divergent ideas as to the way in which it should be charged, quite apart from the percentage. The method matters little so long as enough is set aside. There are four recognized methods of charging depreciation. 1. The reduced balance method; 2. The straight-line method; 3. The annuity method; 4. The sinking-fund method. ♦Condensed from an editorial in Engineering (London) Jan. 19, 1917, reviewing a paper read before the Institution of Civil Engi- neers, by F. Gill and W. W. Cook. DEPRECIATION. INVENTORY VALUATION. APPRAISALS 87 Taking a hypothetical machine, costing S1000 (£100 in the original article) with a physical life of 25 years and a scrap value of $20, and an economical life of 19 years with a scrap value of $130, assume that the $1000 will provide $50 annually for the shareholders and that enough should be written off to provide J870 at the end of 19 years. (1) Reduced balance method. Depreciation of $10,000 in Twenty Years by Three Methods In successive years The capital value becomes The depreciation fund becomes 1 2 3 1000 898 2 806 7 724 6 101 8 193.3 275.4 19 130 870 The value of the machine falls very rapidly at first and very slowly toward the end, 821.90 the last year. This does not agree with the facts. A machine properly cared for suffers no damage the first three or four years. (2) In the straight-line * method $50 is required annually for interest and $45. SO for the depreciation fund, the latter totaling $879.20 in 19 years without interest. The $45.80 is invested either in a special fund or in the business. The interest of the fund, however, goes into the general account and the dividend is swelled by this interest. In the last year the interest on the fund amounts to $41.20. If the interest be added to the deprecia- tion fund year by year then a depreciation of $28.50 per year would be sufficient to furnish $870 in 19 years. In the case of a plant like a telephone pole (which carries its wires with uniform efficiency until it is blown down or condemned by the Inspector), it is clear that the dividends are, by the straight-line method, being reduced in the early years and augmented in the later years, while the profits are uniform. Clearly this is not good bookkeeping. (3) The annuity method. Each year a part of the capital is repaid and a return is paid on the capital outstanding. The total charge is uniform at $78.50 for interest and depreciation and is made up of a decreasing return component and an increas- ing depreciation component. In 19 years the amount available for depreciation rises from $28.50 to $68.60. The capital value is written down each year by the amount of the depreciation and consequently the amount required for interest grows less and less. At the same time the interest earned by the depreciation fund is paid into the general account, so that the shareholder still gets his $50 yearly partly by earnings from the depreciated machine and partly from the fund. By this plan the plant is written down slowly at first and more quickly toward the last, which certainly corresponds with the condition of moving machinery. (4) The sinking-fund method. The total annual charge is $78.50, made up of uniform charges each year, both for interest and depreciation The interest earned by the fund is added to it annually, while the value of the plant is not written down, but is credited with earning 5 per cent all the period. This is exactly the case of the telephone pole. The amount set aside in methods 3 and 4 is identical and the result is identical at the end of 19 years. The difference is that in one case the value of the plant is supposed to decrease annually and in the other it remains con- stant. The difference is one of bookkeeping mainly: The manufacturer who adopts method (1) and accumulates money fast in the early years is in the safer position, while the one following the straight-line method (2) is not dependent on the interest of the fund to square his accounts. A big reserve fund is a most useful asset, but like many other desirable things it is difficult of attainment, especially by limited companies, whose shareholders generally think more of present dividends than of future safety. * This refers to a downwardly inclined straight line on a plotted diagram representing the uniform annual reduction in value. In other methods the reduction of value is shown by a curve. Straight Line Depreciation Depreciation at 10% on AT 5% Diminished Yalces Year Total Remaining Total li< uniining Depreciation Value Depreciation Value 1 $500 $9500 $1000 00 $9000 00 2 1000 9000 1900 00 8100 00 3 1500 8500 2810 00 7290 00 4 2000 8000 3439 00 6561 00 5 2500 7500 4095 10 5904 90 6 3000 7000 4685 59 5314 41 7 3500 6500 5217 03 4782 97 8 4000 6000 5695 33 4304 67 9 4500 5500 6125.80 3874 20 10 5000 5000 6513.21 3486 79 11 5500 4500 6861 89 3138 II 12 6000 4000 7175.70 2824 30 13 6500 3500 7458. 14 2541 86 14 7000 3000 7712.33 2287 67 15 7500 2500 7941.09 2058 91 16 8000 2000 8146.98 1853 02 17 8500 1500 8332 28 1667.72 18 9000 1000 8499 06 1500.94 19 9500 500 8649 15 1350 85 20 10000 8784 23 1215.77 Sinking Fund Method Annual Payments or $302 43 for 20 Years. 5% Compound Interest* End of Principal Yearly Accumulated Total of Remaining Year Interest Interest Fund Value 1 $302 . 43 $302.43 $9697 57 2 604 86 15.12 15.12 619.98 9380 02 3 907 29 31.00 46. 12 953 41 9046 59 4 1209 72 47.67 93 79 1 403 5 1 8696 49 5 1512 15 65.18 158 97 1671.12 8328 88 6 1814 58 83 56 242 53 2057 11 7942.89 7 2117 01 102.85 345.38 2462 39 7537.61 8 2419.44 123.12 468.50 2887 94 7 1 1 2 06 9 2721.87 144.40 612.90 3334.77 6665.23 10 3024 . 30 166.74 779 64 3803 94 6196.06 II 3326 73 190.20 969.84 4296 57 5803 . 43 12 3629 16 214.83 1184 67 4813.83 5186.17 13 3931 59 240.69 1425 36 5356.95 4643.05 14 4234 02 267.85 1 693 2 1 5927.23 4072.77 15 4536 45 296.36 1989.57 6526.02 3473.98 16 4838.88 326.30 2315.87 7154.75 2845.25 17 5141 .31 357.74 2673.61 7814 92 2185.08 18 5443.74 390.75 3064 . 36 8508 10 1491.90 19 5746. 17 425.40 3489 76 9235 93 764.07 20 6048.60 461.80 3951.56 10000. 16 $395 1 . 96 * The formula by which the annual payment is found is P=- (l+0"-l in which i =interest rate expressed as a decimal =.05, n =number of years, P=payment made at the end of each year. The amount of the annual payment may also be found in annuity tables. See the " Mechanical Engi- neer's Pocket-book," page 16. Valuation of Machinery. " If the machines are appro- priate for their purpose," says Mr. Matheson, " then their value will be arrived at by adding to their original cost the expense of installation, and deducting an amount for depre- ciation proportioned to their age and wear, and a further amount for any actual repairs they may require." 88 BOOKKEEPING AND COST ACCOUNTING Mr. Matheson says: Where the production is stimulated by a system of piece-work, the deterioration of the plant is likely to be more rapid than in a factory where the workmen are paid according to time only. In very busy times, when there is a pressing demand for the products, and profits are large, it may be expedient and remuner- ative to work long hours, and to force the plant and machinery to their utmost power, even at the risk of a breakdown, so as to take full advantage of the transient high prices; but in such a case a corresponding rate would have to be written off for depre- ciation. Mr. Oberlin Smith, President of the Ferracute Machine Co., Bridgeton, N. J., says:* The grand principle which lies at the root of correct valuation, and which should govern the appraiser throughout all his work, is that any article is worth, not what it did cost, but what it would cost to replace it to-day, providing it is so useful that it would be desirable to so replace it, were it destroyed. Thus, if a shop has a lot of machine tools which are built so near to the best modern practice that it would be desirable to duplicate them were they destroyed, they are worth exactly what said dupli- cates would now cost, delivered and set up in the shop, less the depreciation due to the wear and tear. The depreciation of special tools for wear and tear need be but very little, as, if they serve their purpose at all, they must be kept in such repair as to serve it perfectly. In practical dealings with this question, it seems to me that the best course is to give all special tools an inventory rating at their apparent value, and then to lay aside a portion of the extra profits which these tools have earned by their special usefulness, in the general reserve fund, or " Surplus," of the concern. They may thus be drawn upon, should any too sudden collapse in values take place. In a recent paper (Jour. A.S.M.E., Jan., 1917), Mr. Smith said: Some people depreciated a set of machine tools 10 per cent each year and that soon made them worth one-half or one-quarter of their original value, when they were as good as ever. His rule had been to allow a small amount for depreciation each year and keep the tools in good order. If a tool was run down and needed repairs, or an additional part was applied to it and perhaps 50 per cent of the original value spent on it, then it was worth more at the end of the year when repaired and it was not right to keep depreciating it right along. It was worth as much as when new. In 1916 the author saw in operation in a factory in Phil- adelphia a heavy punching press that had teen bought from Mr. Smith's company in 1872. It had been running regularly for 44 years, always on the same kind of work, and was to all appearances as good as new. It, no doubt, had some repairs made on it from time to time, such as re-bushing or rebab- bitting of its shaft bearings, and replacing some worn-out slides and gear wheels. A sinking fund reserve with an annual payment of 1 per cent of the original cost would probably have covered all of the repairs and depreciation. The amount of interest and amortization to be charged in any well-equipped power plant is greatly a matter of financial policy and not so much a question of the actual life of the plant. In our age of technical and industrial progress, plants lose their usefulness through obsolescence rather than actual deterioration, and the management with foresight favors high amortization charges, i.e., short life, to provide a sinking fund for the replace- ment of obsolete with new and efficient machinery. — H. Haas, Bull. Am. Inst. Mining Engrs., May, 1917, p. 867. The Effects of Depreciation at Different Rates for Terms of Years l Years 1% 2% 3% 4% 507 J /o 6% 7%. 8% 10% 12% 15% 20% , 990,000 . 980,000 .970,000 . 960,000 . 950,000 .940,000 .930,000 . 920,000 .900,000 .880.000 . 850,000 800,000 2 980,100 .960,400 .940,900 .921,600 .902,500 .883,600 864,900 .846,400 .810,000 774,400 .722,500 640,000 3 .970,299 .941,192 .912,673 .884,736 .857,375 .830,584 .804,357 .778,688 . 729,000 681,472 .614,125 .512,000 4 .960.596 .922,368 .885,292 .849,346 .814,506 .780,749 .748,052 .716,392 .656,100 599,695 . 522,006 .409,600 5 . 950,990 .903,921 .858,734 .815,372 773,781 .733,904 .695,688 .659,081 .590,490 .527,731 .443,705 327,680 6 .941,480 .885,843 .832,972 .782,757 .735,092 .689,870 646,990 606.355 .531,441 464,404 .377,149 262,144 7 .932,065 868,126 .807,982 .751,477 .698,337 .648,478 .601.700 .557.846 .478.297 .408,675 .320,577 209,715 8 .922,745 .850,763 .783,743 .721,389 .663,420 .609,569 .559,581 .513.218 .430,467 359,634 .272.490 . 167,772 9 .913,517 .833,748 .760,231 .692,534 .630,249 .572.995 .520,411 .472,161 .387,420 .316,478 231,617 . 134,218 10 .904,382 .817,073 .737,424 .664.832 .598,737 .538,616 .483,982 .434,388 .348,678 .278,500 . 196,874 .107,374 II .895,338 .800,732 715,301 .638,239 . 568.800 .506,299 .450,103 .399,637 .313,811 .245,080 167,343 085,899 12 .886,385 .784,717 .693,842 .612,709 .540,360 .475,921 .418,596 .367,666 .282,429 215,671 . 142,242 .068,720 13 .877,521 . 769,023 .673,026 .588,201 .513.342 .447,366 .389,294 .338,253 .254,186 . 189,790 . 120,905 054,976 14 868,746 .753,643 .652,836 .564,673 .487,675 .420,524 .362,043 . 3 1 1 , 1 92 .228,768 . 167,015 . 102,770 .043,981 15 .860,058 .738,570 .633,250 .542,086 .463,291 .395,292 336,700 .286,297 .205.891 . 146,973 .087,354 .035,184 16 .851.458 .723,798 .614,253 .520.402 .440,127 .371,575 .313,131 .263,393 . 185.302 .129,336 .074,251 . 028, 1 48 17 .842,943 .709,323 .595,825 .499,586 .418,121 .349,281 .291,212 .242,322 . 166,772 . 113,816 .063,113 .022,518 18 .834,514 .695,136 .577,950 .479.603 .397,214 .328.324 270,827 .222,936 . 150,095 . 100,158 053.646 .018,014 19 .826,169 .681,233 .560,612 .460,419 .377,354 .308,624 251,869 .205,101 .135,085 .088,139 .045,599 .014,412 20 ,817,907 .667,609 .543,794 .442,002 .358,486 .290,107 .234,238 . 188,693 .121,577 .077,562 .038,760 011,529 21 .809,728 .654,257 .527,480 .424,322 .340,562 .272,701 .217,842 .173,597 . 109,419 .068,255 .032,946 .CC9.223 22 .801,631 .641,171 .511,655 .407,349 .323,533 .256,338 .201.593 .159,709 .098,477 . 060,064 .028.C04 .007.379 23 .793,615 .628.348 .496,306 .391,055 .307,357 .240,958 . 188,411 . 146,933 .088,629 .052,856 .023,803 .005,903 24 .785,679 .615,781 .481.416 .375,413 .291,989 .226,501 . 175,222 .135,178 .079,766 .046,513 .020,233 004,722 25 .777.822 .603,466 .466,974 .360,396 .277,390 .212,911 . 162,957 . 124,364 .071,790 .040,931 .017,198 .003.778 26 .770,044 .591,396 .452,965 .345,980 .263.520 .200,136 . 151,550 .114,415 .064,61 1 .036,019 .014,618 .003,022 27 .762,343 .579.568 .439,376 .332,141 .250,344 . 188,128 . 140,941 .105,261 .058,150 .031,697 .012,425 .002,418 28 .754,720 .567,977 .426,194 318,855 .2^7,827 . 176,840 .131,075 . 096,840 .052,335 .027,893 .010,562 .001,934 29 .747,173 .556,618 .413,408 306,101 .225.935 . 166,230 . 121,900 . 089,093 .047,101 .024,546 .008,977 .001,547 30 .739.701 .545,485 401,006 293,857 .214,639 156,256 .113,367 081,966 042.391 .021,601 007,631 .001,238 1 H. M. Norris, Engineering Magazine, Mar., 1899. * " Inventory Valuation of Machinery Plant." Trans. A. S. M. E., Vol. vii, p. 433. DEPRECIATION. INVENTORY VALUATION. APPRAISALS 89 Charge all non-perishable tools of an unusual and irregular nature to special plant at cost. Let their value remain at this figure until the saving in cost on the future probable output of said tools falls below their cost. Then depreciate dollar for dollar, in accordance with the shrinkage that occurs from time to time in the total amount of saving that will be effected during the remaining term of their usefulness. — H. M. Norris. The Relation between Perpetual-inventory Value and Appraisal Value * "What is your plant worth? You should know — exactly. You should know for insurance purposes, for financial purposes, for every purpose that has anything to do with the safe conduct of your business. You should know — must know — before you can calculate costs, overhead, profits; before you issue securities, make loans, place insurance. Your annual statement has a hollow foundation if its estimate of your assets as a going con- cern is based on the accountant's guess — a guess that has no better foundation than an estimate of costs at some past period, from which certain arbitrary percentages have been written off each year." This statement, taken from a publication of one of the appraisal companies, can be accepted as sound without committing our- selves to the conclusion which the appraisal company is anxious to establish: that the real worth of a plant for all purposes can be established only through the work of professional appraisers. Most plants grow from small beginnings, and during their early life expand as the needs dictate. The organization is nec- essarily small, because the most rigid kind of economy must be practiced, and original costs and the costs of additions are fre- quently so completely submerged in the total assets that no safe records of these costs can be established. The annual statements of plants so conducted have indeed a hollow foundation, for not only their assets but usually their profits are based on the account- ants' guesses. Industries so managed need the assistance of a competent appraisal company to inform them of the value of their assets, as a basis for embarking on a sounder and safer system of accounting methods. Appraisals are also valuable in establishing comparative values of plants that are about to merge, or in serving as a basis of a scheme of financing. But the claims that an appraisal is necessary for figuring overhead costs and the selling price and profit of manufactured articles, are, to say the least, sadly over- drawn. Need for Determining a Proper Rate of Depreciation. Few owners are astute enough to foresee their needs for ten years to come, and fewer still have the means to build or expand along the lines that will give ample opportunity for future business growth. It is safer by far, therefore, to provide proper sinking funds through an ample rate of depreciation, so that when build- ings that have outlived their usefulness require reconstruction, funds have been provided out of profits for rebuilding along more modern lines. Machine tools have changed very considerably as a result of the development of the Taylor-White and other high-speed steels, and companies that followed appraisal methods of depreciation find themselves with obsolete equipment and no funds to replace it with modern equipment. Patterns and small-tool equipment often have but temporary value and should disappear wholly from the inventory when they have served their purpose, yet these two items are fertile sources for inflation of values through appraisals. What the management of an industry is chiefly concerned in, is to provide a fund through a proper scale of depreciation which will reimburse it for the difference between the cost price of a piece of equipment and its fair cash selling price when sold either * Extracts from a paper by Charles Piez. Chicago, 111., Trans. A.S.M.B., 1916. because it is ready for the scrap heap or because some newer form or method has made a change desirable. This difference is properly a part of the cost of the product, but becomes so only by charging depreciation against the expenses of opera- tion. Depreciation not Properly Determined by Appraisal ('uiiijinnu Has any appraisal company ever investigated the subject of depreciation from the operating standpoint and recommended a schedule of depreciation for adoption? Has any appraisal com- pany ever advocated that depreciation be distributed as an oper- ating expense against the product? Can any appraisal com- pany claim with any justice that it can determine proper rates of depreciation without close contact with and full knowledge of the operating conditions and operating needs of an industry? The primary business of an appraisal company is to determine an authoritative replacement value, and its entire organization is trained for this purpose. But when the appraisers entei the field of depreciation, operating values and costs, they are doing their clients positive harm and are leading them straight to the shoals of financial disaster; for appraisals have a distinct upward tendency, and the increases in value which they show as the result of wholly extraneous conditions have the effect of lulling the manufacturer into a wrong sense of financial security. All of those with whom I have been associated in business for the last quarter of a century have been radicals in their methods of depreciation, but with all of this strong leaning toward what might be considered an excessive write-off, we fre- quently find when we are ready to discard a tool or reconstruct a building, that a substantial additional amount must be charged off to profit and loss. The great majority of industries charge off too little rather than too much, and the appraisal companies, if anything, are assisting, unconsciously, of course, in increasing this unprofitable and oft times disastrous habit. I had occasion recently to go over the financial statement of a manufacturing plant which had delegated the important function of depreciation to an appraisal company. The amount charged off annually was less than one-half of the proper amount, this being due, the owner said, to the constant and considerable advance in the replacement value of the property. Here was a typical case of reducing the operating burden of a plant by crediting it with a wholly speculative and unrealizable increase in property value. In this case the appraisal company specified the amount to be depreciated each year, and was, therefore, responsible for this wholly unsound and unscientific procedure. The owner is about to build a new plant, and I take no chances in prophesying that he has some bitter disappointments awaiting him in unforseen shrinkages of assets when he abandons the old plant. The problem of determining an adequate scale of deprecia- tion is by no means a simple one, and it goes hand in hand with the problem of distributing depreciation against the cost of the product. It is astonishing to find how widely the practice among different manufacturers in the same line varies. Proposed Standard Rates of Depreciation . The manufacturers of conveyors and elevators have made an effort to agree on some standardized form of accounting procedure. The preliminarj meeting of the manufacturers and their accountants disclosed the fact that, out of nine manufacturers, two disregarded the question of depreciation entirely, five charged off depreciation to profit and loss, and only two charged depreciation against operating expenses, making it thereby a component pari of the cost, The rates of depreciation varied widely, and the first steps taken by the conference consisted in determining a standard schedule of rates of depreciation. The rates are but com- promises growing out of the judgment and experience of the individual members of the conveyor manufacturers' conference, but their correctness can later be verified by matching the per- petual inventory values which these rates will establish, against the actual experience of loss in cash value when equipment or buildings are discarded. 90 BOOKKEEPING AND COST ACCOUNTING Standard Depreciation Rates Adopted by Manufacturers' Cost Con- ference, Feb. 25, 1916 Per Cent Per Cent on on Cost Reducing Balance Buildings and Accessories: Reinforced concrete or steel and tile 2 3 Brick and steel with non-combustible roof and concrete floors 2.5 4 Brick, steel and wood 3 5 Brick and wood 3 5 Steel frame, wooden roof and corrugated-iron walla 3.5 7 Steel frame, non-combustible roof and corrugated iron walls 3 6 Concrete block, with wooden roofs and floors 3.5 8 All-wood structures, well built (20 years) 4.5 10 All-wood structures, cheap (20 years) 5 12 Sprinkler system (20 years) 4 7.5 Heating and ventilating system (20 years) 4 7.5 Water and sewer piping and sanitary fixtures (where separate) 4 7.5 Tanks and reservoirs, steel 4.5 10 Tanks and reservoirs, wood (10 years) 9 20 Steel shelving, lockers, etc. 5 12 Machinery and Large Equipment: Boilers, pumps ; feedwater heaters and air com- pressors 6 15 Power piping 6 15 Switchboards, main wiring and conduit 6 15 Engines and dynamos 5 10 Machinery, motors, machine tools, traveling cranes, etc. 4.5 10 Punch presses, bending rolls, power shears and drop hammers 4.5 10 Miscellaneous Real Estate Improvements: Pavements, sidewalks, fences, retaining walls, roadways, tracks, yard drainage, general conduits, tunnels, vaults, etc. 4.5 10 Cupolas, converters, melting furnaces and acces- sories 5 10 Annealing and heating furnncs, ovens, forges, etc. 5 10 Motor truck* 20 60 Storage battery locomotives (battery renewals to repairs) 10 30 Horses and wagons 12 35 Shafting, pulleys, hangers and belting * 50 Machine tool accessories — Boring bars, drivers, key seating broaches, etc. 50 (All renewals to Repairs) Small Tools: For machines, net additions 50 Hand tools, net additions 50 Punches and Dies (Standard), net additions 50 Chills, Iron and Steel Flasks and Accessories, net additions 50 Fixtures. Furniture and Miscellaneous Equip- ment: 1 Mechanical appliances, net additions 60 2 Departmental wiring and electric fixtures, net additions 60 3 Miscellaneous items (wood), net additions 70 Patterns (Standard): Metal, net additions 75 Wood, net additions 100 All patterns required for a particular order or contract to be charged to the job. 5 5 Drawings: All new standard drawings to be charged to ex- pense. All drawings required for a particular order or contract to be charged to the job. In a letter to the author, explaining the high rates of depreciation for small tools, fixtures, etc. Mr. Piez writes: " Only the items that are actively used in the fabrication of standard product are inventoried in this way, all other items being charged off wholly to expense. This seems somewhat radical treatment, but, as a rule, the inventory schedules for these several classes are catch-basins for all sort of charges, which seem to swell the inventory values without adding to the real assets of the manufacturing enterprise. With a new concern, such treatment of these items is, of course, more radical than is justified, and our own practice where entirely new departments have been built up, has been to assess these items with a depreciation charge of 15 or 20 per cent per year, until they have been marked down to the point indicated by the schedule. In the case cited (a new shop purchasing $1000 worth of small tools at the beginning of the first year, and 8100 worth in each of the ensuing three years), we should charge off 15 per cent of $1000 cost of small tools for two years, and 20 per cent for the third year, and we should write off 50 per cent of the $100.00 additional purchased each year. At the end of three years, therefore, the inventory on the original lot would be $500.00, and the inventory value of the three years' purchases of $300.00 would be $150.00, making a total inventory of $650.00 for the purchase price of $1300.00. In the discussion of Mr. Piez's paper Mr. R. J. Hearne said: A perpetual inventory is a time saver. A written invoice of all goods junked is vital. It has been found best to number each section. Symbols should be avoided. At first they seem helpful, in the end they are a nuisance. The inventory items should all be on cards. Books are not practicable. Appraisal of present value can only be made by a competent, honest person, who knows all the facts and is familiar with the business. Appraisals by outsiders are of little value. Taking off a fixed percentage is unreliable. A simple test is to ask for how much cash you would be willing to part with the machine. Honestly applied this test will give an accurate value. Mr. Piez in closing the discussion said: An occasional check by actual count and a re-appraisal of the value of the active items on the basis provided in the schedule of depreciations is strongly advised. In order to compare the two schedules a condensed depre- ciation statement for a 34-inch boring mill costing $1318 and purchased Jan. 1, 1894, developed first on a straight deprecia- tion of 4j per cent on the original cost and, immediately below, on a 10-per cent rate on the reducing balance, is given herewith : Inventory Valuation at End of Year At 4j % At 10% 1894 $1258.69 1186.20 1895 1199.38 1067.88 1904 $665 . 69 413.90 1909 $369.04 284.23 1914 $73.49 144 23 $0 00 116 83 * These and the following items are depreciated once for all at the end of the first year after their purchase by the stated percentage, and the balance is then carried on the inventory without further reduction. By the second method the original cost is never wholly extin- guished, but the amount of depreciation thus written off each year approaches more nearly the shrinkage in value that usually takes place. Under normal conditions loss in the selling value * * Why should the selling value be considered ? The equipment is not for sale as a secondhand machine; it is being used, and its value to a going concern is what it would cost to replace it if it were burned. DEPRECIATION. INVENTORY VALUATION. APPRAISALS 91 of any item of equipment is more rapid in the early years of its life than in the later years. Then, too, there is usually some scrap value at the end of the period. The method employed by many manufacturers of charging depreciation to Profit and Loss is wrong, for, while this method brings the book values of assets in line with actual values it does not make depreciation a part of the cost of production. All equipment, jigs, templates or patterns especially made for a particular order should be wholly charged to that order, and the reduction in value of all other buildings and equip- ment, as determined by the schedule of depreciation must be considered as a legitimate expense of the business and charged against the cost of the product. The easiest way of accom- plishing this is to estimate in advance the depreciation of each department of the plant for the ensuing year, and assess one- twelfth of these estimates as monthly expense charges against the departments, as factors in the departmental overheads. Depreciation charges that cannot properly be assessed against any particular department should be assessed against general expense and distributed over the product through the general expense factors. Depreciation Appraisals for Insurance Purposes * The method developed by the appraisal department of the Factory Mutual Fire Insurance Companies is based on the theory that if the larger factors are carefully ap- praised, the less important items may be estimated in groups. The price values used for buildings and all the subdivisions of machinery are based on replacing new at today's market (regard- less of original cost) and these price values are then depreciated as judgment dictates. Depreciation of Buildings. A building badly out of repair naturally deserves fairly heavy depreciation. A building in good repair, but so antiquated in size and shape that it is man- ifestly unsuited for the uses to which it is being put, also deserves a reasonably heavy deduction. When, however, a building is of such dimensions that it perfectly answers its purpose, has remained plumb and is constantly kept in repair, actual age has little influence on judgment. It is considered that about 5 per cent of the new value is enough. In other words, buildings are not depreciated a certain per cent a year, but have a flat amount deducted on account of condition and not on account of age. Depreciation of Machinery. Machines vary greatly both in the manner in which they wear out and in the rapidity with which they go out of date. In rare cases where a machine has been practically superseded in the market by one that will cost much less, it is better practice to use for a new value the cost of the less expensive machine rather than show an excessive deprecia- tion. As a rule, the amount deducted applies chiefly to wear. With machines that need repairs at all points from time to time, a day arrives after a period of years when it is better to throw them out altogether and replace with new rather than continue to repair them. Practically all textile machines come in this class, as do engines and other power plant machines, and also some machine tools, wood working and paper-working machines. To all of that nature a depreciation table is applied, allowing 2, 2\, 3, 4 or 5 per cent a year, deducted from the net and not from the gross. If a machine is entirely rebuilt, it is usually considered to be worth at that time within 5 per cent of new value and the table is applied for succeeding years. In either case, the probable average life is ascertained and the table that best fits is used, but seldom is the depreciation carried to a point beyond 50 per cent. There are many kinds of machines where the main portion, * Extracts from a paper by John G. Morse, Appraiser, Inspection Dept., Assoc. Factory Mutual Fire Insurance Companies, on "Ac- Curate Appraisals by Short Methods." Trans. A.S.M.E., 1916. sometimes as much as SO per cent of the total value, remains for years with practically no wear. The small moving parts, how- ever, wear so rapidly that they are constantly being replaced, This is true of a great variety of machine tools, metal, wood and paper-working machines. With these it is considered thai tin- wearing parts are always in a state of .50 per cent depreciation, and the amount deducted is half of the percentage the value of the wearing parts bears to the total value of the machine. This method also applies to rolling mills, rubber mills and calendars where the frames and gearing remain intact for years and the rolls constantly wear down and are replaced. There is another class where neither the depreciation table nor the average described above can be used. This includes most of the machinery in paper mills, bleaeheries and dye works where wet processes are used. These machines wear rapidly and are frequently rebuilt. Paper machines in particular are composed of a train of parts and from time to time different sections are either rebuilt or removed entirely and replaced. The depreciation in such cases depends upon the condition at the time of the appraisal and is not influenced by the age of what remains of the original machine. Depreciation of Shafting, etc. Shafting shows such slight wear that depreciation is seldom recognized. It is becoming the custom, however, to show either a slight deduction or else purposely record the new value at a conservative figure when, on account of poor arrangement an amount in excess of what is needed is in use. Main belts wear slowly, while machine belts will always average 50 per cent wear, so that, as a rule, the total amount of belting is depreciated 33 £- per cent. Piping will last for years, except where exposed to acid fumes. Pipe covering and valves show wear, but piping as a whole is seldom depreciated more than 10 per cent. Electric wiring wears little and is usually kept pretty well up to date on account of the rigid rules of both local authorities and the insurance companies. It, therefore, seldom deserves much depreciation. The miscellaneous equipment classed under the head of "furniture and apparatus" is made up of objects most of which are constantly wearing out. The amount is, therefore, usually depreciated from 20 to 50 per cent. Small tools, dies, print rolls and electrotypes wear out, but they are affected to a great extent by obsolescence. Patterns, drawings, moulds and lasts are subject to depreciation for the latter reason only. In determining the amount to be deducted from the new value of any of these the appraiser n.ust ascertain what proportion of the equipment is indispensable or practically new. Appraisals of Manufacturing Property * We define the valuation of industrial property as the value at which the physical manufacturing property of a corporation is carried on its books. Our view is that the valuation of land, buildings and equip- ment should be shown on the books at their original cost, less a depreciation for use or obsolescence. As a check on our valua- tions and on our depreciation ratios, we have appraisals made by professional appraisers at intervals of approximately ten years and compare results carefully with our valuations. In contrast with the accounting method, which should be based on actual cost, we believe that appraisals should be n ade on the basis of present cost to replace, less proper allowance fur age or for obsolescence, rather than on the basis of original < ost, as the latter may be difficult to determine at the time of the appraisal. Great care should be exercised in comparing appraisal values made on the basis of replacement values to avoid taking advantage of an abnormal present cost, such, for instance, as would occur in the case of appraisals made at the present time, due to the very high prices of practically all materials and labor. * J. B. Milliken, Treasurer, The Yale & Towne Mfg. Co., Stamford, Conn., Jour A.S.M.E., Feb., 1917. CHAPTER X SYSTEMS" AND "RED TAPE." FUNDAMENTALS OF A COST SYSTEM Use of Red Tape. Prosperity depends on "red tape" — a system of high organization which can have its root and its fruit only in strict adherence to clearly outlined divisions of respon- sibility and authority and in accurate recording of the minutest details.— Geo F. Stratton, Eng. Mag., Vol. 34, p. 569. Unless a controlling common sense is continually exercised, a system of red tape may be developed which will be out of all proportion to the actual requirements of the business. System overdeveloped becomes red tape, and that perhaps i~ to be avoided as much as lack of system. — Humphreys on " Business Engineering." Red Tape is simply bad system, system that has never been tackled by all the individuals of a loyal and interested organiza- tion determined to answer the following questions: 1. How can we simplify? 2. How can we eliminate? 3. How can we condense? — F. B. Gilbreth in "Practical Talks on Contracting." Too much cost system, too many figures, defeat the real pur- pose of costs, clogging action. — B. A. Franklin, Eng. Mag., Vol. 43, p. 709. One of the essential elements of scientific management is study of the subject of waste, whether of capital, material or time, or even of ink and of red tape. The work of the committee on information and statistics, and especially that of the " leak hunter," will include the study of whether the excessive use of red tape hinders the progress of the work or is costly in itself, and of finding ways by which the use of red tape may be curtailed. The words " red tape " are now used to signify any systematic method of making records, issuing requisitions or orders, checking against mistakes, counter- signing checks and the like. In scientific management prop- erly applied this so-called red tape is used only so far as inves- tigation shows it to be necessary or desirable, and automatic machinery or other means are used to make the quantity of it as little as possible. — Win, Kent, in " Investigating an Industry." One fact that has retarded the extension of cost accounting is the unnecessary and the expensive refinement to which it is sometimes carried. There can be no objection on principle to red tape when that tape is necessary to tie together the organi- zation; but sometimes there may be too much of it. It is a waste of valuable time and energy to attempt to make each detail of the estimate absolutely correct. — C. B. Thompson. The System-mad Manager. System is the rut in which some men are proud to live. The systematic type of manager is a decided improvement on the rule-of-thumb type. Averages are the fallacy of the system-mad manager. — E. St. Elmo Lewis. If there is one thing more than another that excites criticism, it is red tape that does not justify itself in practical results. It may show itself in a mass of undigested reports, troublesome to make up in the shop and impracticable to use in the office, or it may take the forms of volumes of data that no one ever looks at. Another form of red tape, not uncommon, is carrying small items of cost to such a degree that the process of deter- mining them is more expensive than the costs themselves. — Nicholson. Cost Systems in Government Shops. Captain Metcalfe thus describes a part of the system in use in United States Arsenals before his book* was written (1885). Timekeeping. The timekeeper, generally the foreman, goes about the shop towards the close of the day and asks each work- man how he has spent it. According to the workman's recol- lection he enters the time reported in a book. At the end of the month these time books go to the main office where the clerks use them in making up the pay roll, and afterward allotting the various charges among the appropriations to which they belong. But the latter part of this work is, from the nature of the case, very imperfectly performed. The entries are confusing and indefinite. So the deciphering of these entries falls, as does the statement of the work done, and the cost of the fabricated product, upon the foreman, again burdening him with work for which he is not fitted, and interfering with the free exercise of his proper functions. Procuring and Accounting for Malarial. 1. Let us take the simplest case first, and suppose the material to be in store, and the foreman to know it. He makes an entry in the "Store Book"; the commanding officer signs it; the book goes to the ordnance storekeeper or one of his assistants, who sends the material and the book, when he can get it, to the foreman. The latter receipts for the material on the margin of the original entry; the material is expended on the books of the storekeeper and the transaction is at an end. 2. When there is nothing suitable in store or the foreman thinks there is not, he makes his wants known on the "Purchase Book." As this book is kept in the office, he goes there, taking a memorandum of his wants; they are thus written twice (1, 2). They are then approved by the commanding officer (3); written on an order blank (4); copied on a duplicate stub (5); signed again by the commanding officer (6); and sent to the dealer (7). The supplies come with the bill, which is copied into the inspec- tor's book (9) and initialed by him after inspection (10). To get it out of store, the foreman, still desiring them, writes them again on the store book (11), and after being again approved by the commanding officer (12) the book goes to the storekeeper, who takes the material and the book, when he can get it, to the fore- man, whose receipt (13) ends his share of the business. The initialed bill then goes to the ordnance storekeeper, who receipts for the stores on the duplicate stub (14). The assistant store- keeper also keeps a record, of a more or less perfect kind, of all receipts into (15) and issues from (16) his storehouse. From the stubs receipted by the ordnance storekeeper and the bills received from the dealer, is made out a certificate of inspection (17) signed by the assistant inspector (18) then by the commanding officer as principal inspector (19) then the * The Cost of Manufactures and the Administration of Work- shops. Public and Private. 92 "SYSTEMS" AND "RED TAPE." FUNDAMENTALS OF A COST SYSTEM 93 material is receipted for again by the ordnance storekeeper (20); then approved by the commanding officer and forwarded to the chief of ordnance for payment to be authorized (21); then returned by the chief of ordnance for payment (22); Vouchers in duplicate (23, 24) are then made out, approved by the commanding officer (25, 26) and the creditor's receipt affixed to each (27,28) after payment. The purchase is then entered in duplicate on the monthly abstract of purchases, a cash paper (29, 30) ; and again in duplicate on the Quarterly Abstract of purchases, a property paper (31, 32). The Ord- nance Storekeeper credits himself with the expenditure of the same items on the abstract of expenditures, also in duplicate (33, 34). Examples Illustrating the Practical Use of the Service Cards. Note.— The card is here reduced to fit the page. (7-) SERVICE CARD, Frankford Arsenal. APR 6 1885 No. Name. Price per unit 235, Larmigan, 0,25. Charge to- Nature of service in detail. No. *>f units. s-o. soy /<0&tz-'?nJi4e 3. J N. B. Make but one entry on each card. Pieces. Time. c. -zf. AMOUNT. o.ai. it,. Price per unit. AMOUNT. 44 \00.\e.c.) NAME. Condition. N. B. Make but one entry on each card. #W ta tfttm* /*?m fi>a 4 te * n * fmm* 4ad- (/. corrected by s.c.) 4t044 caot {.s.c.) (~ h<*&4 tad, /{' 'w CHARGE TO 2/S Object CREDIT TO Object. WEIGHT, Lbl MEASURE, Ft. Received from, or sent to REC'O BY Foremen punch here. Storekeepers punch here. ISSUED BY Foremen punch here. Storekeeper punch here. AUTHORITY, CO Samples of the service and material cards, repro- duced from Capt. Metcalfe's book, reduced in size, are here shown. The actual service card is about 4|x55 inches. The card system proposed by Capt. Metcalfe has been generally adopted in Government shops, but, as shown in some of the testimony given before Congressional Investi- gating Committees, much yet remains to be done in the way of cutting out unnecessary red tape. Quotations from this testimony are given on the next page. Accounting systems in Government arsenals: Major 0. M. King, Ordnance Dept., Rock Island Arsenal, Rock Island, 111. Testimony Jan. 12, 1913, before the Special Committee of the House of Representatives to inves- tigate the Taylor and other systems of shop management, Vol. 2. 94 BOOKKEEPING AND COST ACCOUNTING (Abstract), p. 1081. The engineering division makes up a list of parts necessary to finish an order. A copy of this list goes to the planning room. The planning room determines the different operations to perform in order to complete any particular part. This is entered on a route sheet. For each particular operation a job card is made. A move ticket is issued, which is to follow the material from the storehouse to the different machines and to the assembling place. When the material is moved to the first machine, the card comes back to the division, notifying it that the material is at the machine. Then the shop card covering the operation is posted. (Time studies and instruction cards had not, then been intro- duced). Gen. Crozier's testimony. P. 1128. In ascertaining the cost of our productions, I have, of course, encountered what every manufacturer encounters, namely, the elusive nature of costs. It is very difficult to ascer- tain costs. Mr. Redfield (to Mr. Pepper): I wish you would bear that phrase in mind; it would make a classic. P. 1130. In some establishments there is a process which still exists; a timekeeper with a ruled sheet on a board would walk about the shop every day and ask each workman how much time he has spent on different jobs that he had worked on that day and put them down with more or less accuracy — often consider- abl i less. The job card contains: No. of the work to which the expense h to be charged. Symbol of the form No. for this card. Man's name and No. Symbol for the portion of the shop in which he works. . Piece symbol. Lot No. No. of the operation and enough of the description of the operation to understand it. Name of the article and a statement of what the man is to do. No. of the drawing. No. and location of the machine. All this is placed on the card when it is handed to the man. The time is stamped on the card when it is given to him, and when he returns it. Cost Accounting in the Brooklyn Navy Yard. (Extract from the testimony of Adolph Muller, sheet-iron worker, in a hearing before a special Committee of the House of Repre- sentatives to investigate the Taylor and other systems of Scientific Management, Oct. 25, 1911, Government Printing Office, 1912, Vol. 1, p. 672.) Now, in cost accounting in repairs for ships — I am the planner over there and had occasion to make out the instruction cards to make 74 brackets for the storage of fire extinguishers. In order to get at the cost accounting on account of these brackets being made to be installed on 13 different ships, and being that there were so many operations on each bracket, it necessitated the writing of 104 instruction cards and 104 duplicates. I complained about having to write out 104 tickets for a small job that in my estimation wouldn't cost any more than $40 to do, and he instructed me to put all the job numbers on the one ticket. There wasn't room on the ticket to do it, and I sug- gested to attach a slip, which I did, with all the job numbers written on the slip. I distributed those slips and told the men to charge up their time pro rata, so that left the man to do more figuring according to that system than he would have had to do if he had no system at all, because prior to that the charging of the time was left to the clerk, and the clerk would divide up the time equally. Now, the condition is this, that a man has all those job num- bers, and he must divide up his time and send his card in to the accounting department in order to receive his pay, with the number and the amount of time written on it. and the result is that the men are not bookkeepers and the time isn't being sent in right and the job isn't finished yet, but the cost accounting on that job will be anything but what it should be. A Better System. Here is the way the accounting might have been done under a better system. The Navy Yard receives from the Bureau of Construction and Repair an order " Make 74 brackets for fire-extinguishers as per sketch herewith. Deliver them to warehouse tagged as follows, 5 for Columbia, 6 for Connecticut," etc. The planning department has a working drawing made with complete instructions, and makes as many job tickets as there are men who are to work on the several operations. The first card contains, or has attached to it an order or the storekeeper for the raw material needed. The move man with tins order gets the material and takes it to the place where the first operation is to be done, and returns the order to the planning room with the storekeeper's check on it- showing that the material has been delivered, and a memo- randum of the kind, quantity and price. When the workman who is to do the first operation (or series of operations), has finished his preceding job he gets the job ticket for his work on the 74 brackets, has it stamped b} r the time clerk and pro- ceeds with the work. When it is finished he returns the ticket with the time stamped on it, and with the foreman's or inspector's cheek certifying' that the work has been done properly. The job tickets for the remaining operations are given out and returned in like manner. Y\ hen all the opera- tions are finished the accounting department enters on the tickets the costs for material, labor and burden and makes a Piece Cost Card for the 74 brackets, which summarizes the information on the job tickets, credits Labor, Stores and Burden accounts with their respective portion of the costs, and charges Warehouse with the total. Thus, the cost accounting is complete up to the delivery of the brackets to the warehouse, which is credited and tl.e c'ifferent ships charged as each receives its proportion of the 1 laikets. The Federal Trade Commission's Cost System Funda- mentals. The Federal Trade Commission, Edward N'. Hur- ley, Chairman, has published a pamphlet of 31 pages entitled " Fundamentals of a Cost System for Manufacturers." It presents some good arguments in favor of the use of a cost system by manufacturers, and outlines in seme detail the elements of such a system. In genera!, it shows a regular double-entry journal and ledger system, the ledger having 36 accounts. The commercial end factory accounts are all included in one ledger, and the ccsts determined, as far as the pamphlet goes, are the total costs for a month of " work in process " and of finished goods. The " Job Cost System " is recommended and briefly described, but no example of its use is given. In the system described Accounts Receivable is detited with Sales, and credited with Sales Returns, Allowances, and Discounts, also with Cash for cash sales, and with Reserve for Bad Debts. Accounts payable is credited with all indebt- edness incurred for material, labor and expenses of all kinds, and debited to Cash and to Discounts on Purchases as the indebtedness is settled. Work in Process is charged with Material and Labor directly expended in production, and with Overhead, which is subdivided into three departments "SYSTEMS" AND "RED TAPE." FUNDAMENTALS OF A COST SYSTEM 95 A, B, and C, each of which is charged on the basis of the " productive hours," 67 cents per hour for A, 52 cents for B, and 15 cents for C. The total indirect expenses, sub- divided into Labor, Building Expense, Power, Insurance, Taxes, Repairs, and General Factory Expenses, together with Reserve for Depreciation are charged to these three over- heads. Finished Goods is charged and Work in Process credited with the cost of goods put in warehouse, and Finished Goods is credited and Trading Account charged with the cost of goods sold. Profit and Loss is charged with Shipping, Selling Expense, General Expense, Discount on Sales and Reserve for Bad Debts, and credited with the gain on Trading Account and with Discounts on Purchases. Surplus account is credited and Profit and Loss charged with the credit balance of Profit and Loss Account. The complete ledger entries of the 36 accounts, including 196 entries from the journal and 12 balancing entries, a total of 20S, are given in six pages of the pamphlet. By transcrib- ing the 196 entries to the form of the Combined Journal- Ledger or Column Ledger (see page 17, ante), and dividing the ledger into two, a Commercial Ledger and a Factory Ledger, the number of the entries is reduced to 103, viz.: 28 in the Commercial Ledger and 75 in the Factory Ledger, as shown below, on page 97. Two additional accounts are needed in making this division, Factory Account, to which all transactions between the Company's office and the fac- tory are charged or credited in the Commercial Ledger, and Company Account, for the same transactions, in the Factory Ledger. At the bottom of the Factory Ledger there is a statement of " Details of Credits to Company Acct." con- taining 20 items which might have been made as entries in the Factory Ledger, increasing the number of accounts in it from 19 to 28 and the number of entries from 75 to 95, but it is more convenient to enter them in a separate state- ment. In the Balance Sheet (page 96) are entered in the two middle columns the total charges and credits of the several accounts in the Commercial and Factory Ledgers. In most of the accounts the Dr. and Cr. sides balance (8 out of 15 in the Commercial Ledger and 9 out of 17 in the Factory Ledger, as shown by the check marks at the right of the figures in the columns headed Total Charges). When the account is open or unbalanced, the difference between the two sides is added to, or subtracted from as the case may require, the balance at the beginning of the month to obtain the balance at the end of the month. On page 9S is shown a modified form of the Factory Ledger which has some advantages. The number of accounts is reduced from 19 to 10, and the number of entries from 75 to 27. Eight accounts, Building Expense, Power, Insurance, Taxes, Reserve for Depreciation, Repairs, General Factory Expense, and Shipping, are lumped together in one " control " account, General Charges, and they are taken care of in a separate ledger form, entitled Distribution of General Charges and Overheads. The last two columns are added to give the details of the entries in the Condensed Ledger: Gen. Charges to Labor, $1051.00 and to Gen. Charges, $436.66. The Details of Credits to Company Acct. at the bottom of the ledger on page 97 should also be given, to show the details of the item Gen. Charges to Company, $3079.35. The advantages of the Column Ledger, or Combined Journal-Ledger over the old style double-entry journal and ledger have already been explained (pages 20 and 30), but for convenience they may here be restated. Instead of a page being required for each ledger account only two pages— or sheets to be bound in a loose-leaf binder — a month are required, one for the Commercial Ledger, the other for a Factory Ledger. Making a double entry, debiting one account and crediting another, is done by writing the amount once in the proper column and line; no other writing whatever is needed, the titles of all the accounts being printed. The Journal is made unnecessary. Instead of making a Journal entry as follows: (3) (10) (in H2i Lundriua Bldg. Exp. Overhead A Overhead H Overhead I r, , i'uv it (4) 841 84 10 252 30 336 40 168 20 00 and then posting the amounts on five pages of the ordinary double-entry ledger, a single entry is made in column 4 of the Factory Ledger, on lines 3, 10, 11, and 12, of the figures 84.10; 252.30; 336.40; 168.20. The sum of these figures 841.00 will be entered at the bottom of column 4 if there are no other credits of Power account, otherwise the total of the column will be entered when it is added up after all the entries are made. A most important advantage, not heretofore mentioned, is that photostat copies of the journal-ledger pages and of the balance sheet may be used, instead of the usual form of reports, laboriously transcribed from the old-fashioned ledger, for the information of officers and directors. The functions of the cost system are stated in the pam- phlet as follows: A "Cost System" provides not only for the determination of the amount of each element (material, labor, expense), of cost properly chargeable to each job, but also provides for an improved method of bookkeeping which causes the books to reflect at all times the true financial and industrial condition of the business and renders possible the preparation of monthly statements of conditions, as well as complete monthly statements of financial and factory operations. This long sentence charges the Cost System with far more duties than should properly be laid upon it. It charges it with certain functions which belong to bookkeeping, account- ing and statistics, and to statements of industrial conditions, which are functions of other departments. The functions of the several departments may be labeled as follows: Bookkeeping. Recording in proper form the receipts and expenditures of the business, sales, purchases, cash, bills and accounts payable and receivable, salaries, pay roll, etc. Accounting. Organizing the bookkeeping system and causing it to show not only the record of receipts and expend- itures, but their relation to merchandise, cost of plant and of 96 BOOKKEEPING AND COST ACCOUNTING its operation, discount and interest, depreciation, repairs and other expenses, profits and losses; financial conditions of the business. Statistics. Historical record of accomplishment of the business. Goods made and sold, divided into classes and departments. Total and departmental manufacturing costs, buying, selling and general expenses. Comparisons by months, seasons and years, and by classes of goods dealt in. Industrial Conditions. Reports as to labor, buildings, machinery, transportation, efficiency of manufacturing and selling departments, market conditions, etc. Commercial Costs. Furnished by the accounting and statistical departments. Factory Cost System. Costs (labor, material, and fac- tory expense) of each kind of article produced, and of each job. Monthly Balance Sheet. Jan., 1916 Commercial Ledger Balance Jan 1 Monthly Balance Jan. 31 Dr. Cr. Charges Credits Dr. Cr. 16 Sales 13,485 60 13,485 60 1 7 .Sales Returns 865 20 865 20 18 Sales Allowances 50 00 50 00 19 Outbound Freight 120 00 120 00 20 Trading 13,047 52 13,047 52 22 Selling Expenses 1,120 53 1,120 53 23 General Expenses 1,180 67 1,180 6/ 24 Discount on Purchases 165 40 165 40 25 Discount on Sales 95 00 95 CO 26 Reserve for Bad Debts 125 00 64 00 70 00 131 00 21 Profit and Loss 4,222 28 4,222 28 28 Accounts Receivable 6,000 00 13,485 60 10,949 20 8,536 40 29 Accounts Payable 6.250 00 15,515 90 19,499 71 10,233 81 30 Cash 17,061 00 9,875 00 15,350 50 11,585 50 34 Capital Stock 100.000 00 100,000 00 35 Unissued Stock 15,000 00 15,000 00 36 Surplus 5,000 00 1,518 89 6,518 89 38 Factory 73,314 00 17,765 57 9,317 77 81,761 80 Total 111,375 00 111,375 00 91,058 27 91,058 27 116.883 70 116,883 70 Factory ^EDGER 1 Material 3,000 00 8,084 32 6,484 32 4600 00 2 Labor 200 00 5.692 28 6,179 07 686 79 3 Building Expenses 508 60 508 60 4 Power 841 00 841 00 5 Insurance 828 00 72 00 756 00 6 Taxes 1,095 00 94 25 1,000 75 7 Depreciation Reserve 1,240 00 328 74 1,568 74 8 Repairs 589 23 589 23 9 General Factory Expenses 467 99 467 99 10 Overhead, A 1.207 34 1,207 34 11 Overhead, B 1,431 74 1,431 74 12 Overhead, C 816 35 816 35 13 Reserve for Overhead 273 43 273 43 14 Work in Process 2,000 00 14,110 99 12,086 13 4,024 86 15 Finished Goods 3,754 00 ) 1 12,086 597 13 1? } 8,801 53 7,635 72 21 Shipping 237 19 237 19 31-33 Real Estate and Equipment 66,000 00 66,000 00 37 Company 73,314 00 9.317 77 17,765 57 81,761 80 Total 74.754 00 74,754 00 58,184 48 58.184 48 84,017 33 84.017 33 "SYSTEMS" AND "RED TAPE." FUNDAMENTALS OF A COST SYSTEM 97 ^V> •CtNO O H im V°*S 1 S paneeiuQ | JfiXttg 1 1 qs»0 as siqsXBJ 1^ 3 Iq « B^anoooy eso^ pas »goj »-c =3.3 s § § SS o oj3-« S-j 8= S.g.3 I g S § 8 fa ! CO 03 3 ,3 3 & o ■*-» u as (h •» «. pr, •* CT i-N — Sojco — coirt os r^ r*» — *<" o e\ i-*» r* 5 ^0*in» cO ■■& oi^ — r-.— com — 00 0-Ou"ic0ooo w» ■«■ cm ■» co f^ — "O r*i hi — £ A"u«duioQ iN(^«>rt mOi/MA — obo ooo O •£> ^J Saiddiqg _ I ' irt epooo paqsiuij pBaT^jaAQ joj say = M =o^ IS asnadxg moo — *0^ saXBX 3 yn SDnBjneni ™ SSI! J.l.ttliJ IS aeaadxg aaiptmg joqeq — JBUaiBJV - c a i an, 9) ££ *> *J -^ J3 a; >. Sj aj a c g o > > > O as 1 ^ ""3 OJ Ml (OOO j O oSolo-o I- O o K O T u^ OfeH N "S 5"a s s offl So ^ "3 v c. J — oo I ■ O^CXNO^ — •fiiTiCOO 'oco CO"J' Turn 10 20 30 40 50 60 70 SO 90 Total Expense of Idleness Details of Idleness Expense Dire to Remarks Lack of Work Lack of Help Lack of and Poor Material Repaiis Poor Planning Spinning 1 1 1 1 ! 1 l 18 18 70 ■ ■ ■■ : \ 70 Winding 118 ;i 103 74 15 .«, J ; > t u Doubliug 11) 61 10 61 ■>;•-, A Twisting 1? 95 17 95 < : i • 1 Quilling 20 r,7 10 07 10 llll i -, i ; ; t Warping 390 75 390 75 Lack of Wound Yarn : 1 Weaving 915 25 75 mi SIO 25 Lack of Warps l '• i ■• ■< >| Finishing 210 72 210 72 Lack of Woven Goods :'.., 1 Inspecting 49 70 10 70 39 00 Lack of Woven Goods : : . . ■ 1 Shipping 21G IT 00 00 150 17 Lack of Woven Goods Total 19C9 20 198 93 124 44 1630 39 15 00 '- ! Approved by Supt. Patent Applied For Fig. 3. — Gantt's Idleness Chart. Fig. 2 illustrates this subject most clearly. Charts of this nature, which are being made monthly in several large plants, have already had a very educational influence on the managers of those plants. They show that idle machinery which cannot be used should be disposed of, and the money received, and the space occupied, put to some useful purpose. If now the cause for idleness is ascertained each day we can find the expense of each cause of idleness as shown on the chart. That part which is due to lack of orders points out that our selling policy is wrong, or that the plant is larger than it should be — in other words that somebody in building the plant has over- estimated the demand. It is clear, however, that no conclusion should be based on the figures for one month, but on the results for a series of months during which the problem has been carefully studied. Expense due to lack of help means that we must investigate the labor policy. Expense due to lack of, or poor material, is an indication of the efficiency of the purchasing policy and storekeeping system. If in any case the expense of idleness is greater than can be attributed to all of these causes together, it must go in the last column as poor planning! * Extract from a paper by H. L. Gantt, on "Productive Capacity a Measure of Value of Industrial Property." Trans. A. S. M. E., 1916. t It may be due to panic or general business depression, something for which the owners of the concern are not responsible. It may also be due to permanent decrease of demand for the product caused by competition of other products, as in the cases of automobiles replacing horse-drawn vehicles, and of steam turbines replacing reciprocating engines. — W. K. Mr. Gantt is undoubtedly correct in favoring the second one of the two theories as to what cost consists of, but some question may be raised as to what are " the expenses actually needed for the production of the article," and, whether, under some conditions, it is not right to charge some of the cost of idle machinery to the cost of an article. It may be that the nearest approximation to true costs will be found in a compromise between the two theories. In many lines of business it is not the cost of a certain article that has to be determined or estimated, but that of hundreds or thousands of different kinds of articles, finished and unfinished, in order to obtain reasonably correct inventory valuations and profit and loss estimates. In that case it is impossible that every department and every machine can be run every day at its full capacity, or that the machine equipment can be so nicely apportioned to the orders on hand that no machines are ever idle. In the textile mill, the idleness chart of which is shown, it may be possible, if the mill is a large one and makes only one style of goods, so to balance the machinery that none of it is idle more than say 10 per cent of the time, but, if many dif- ferent styles are made, the demand for which varies with the season and with the fashion, the weaving machines may be running full time and not be able to take the whole capacity of the spinning machines, some of which would, therefore, have to be idle part of the time; and it 106 BOOKKEEPING AND COST ACCOUNTING may not be possible to utilize the full capacity of the inspecting and finishing departments. The " expense actually needed " for the production of a variety of articles may thus include, at least, part of the idle time of some machines which must be kept in the factory to meet a varying demand, but which cannot be kept contin- uously employed, and hi such a case it is right to charge some of the cost of idleness into the " normal burden " which is distributed in the machine-hour rate to the cost of the goods. The machine-hour rate should be figured once a year, after studying the statistics of preceding years, for each machine, and it should include an allowance for the average or normal time that the machine may be expected to be idle during the coming year. If the actual idleness time hi the ensuing year is greater than the amount estimated, the excess should not be apportioned to the cost of goods in any one month, or in a year, but should be charged to profit and loss, either directly or through a subordinate account, such as " Loss due to Idleness of Plant." A modification of Mr. Gantt's idleness chart is thus sug- gested in order to show how much of the idleness of a machine or department is normal and necessary to the conduct of the business, and how much is abnormal or excessive. This may be made by drawing vertical lines on the chart indicating the normal percentags of full capacity which each machine or department is expected to run during a month of good business. In the chart shown, Fig. 3, doubling might have such a line at 70 per cent and twisting at 75 per cent, showing the excess idleness of doubling to be 22 per cent as compared with 52 per cent total idleness, and the excess idleness of twisting 22 per cent as compared with the 47 per cent shown on the chart. The most important function of Mr. Gantt's idleness chart is not that it is a historical record of what happened during the past month, not a mere statement of what was the cost of idleness in that and in preceding months: it is that it is an exhibit of inefficiency which will stimulate the managers of the business to action. It leads to investigation of the causes of idleness and to the finding of methods to remedy it. IRON WORKS STATISTICS-GRAPHICAL PRESENTATION The accompanying table and chart, Fig. 4, taken from a paper on " A Decade of Progress in Reducing Costs," by Fig. 4. — Ikon Works Statistics. Chas. Kirchhoff (Trans. Am. Inst. Mining Engrs., 1S99), show the relative percentages of the several items entering into the cost of a ton of pig iron, taking the costs in the year 1S99, a year of high profits, at 100 per cent. The method of presentation is one that may be found useful in many indus- tries. The chart, which is made by plotting the figures of the table, shows the fluctuations and general tendencies of costs much more clearly than do the figures themselves . DAILY AND MONTHLY RECORDS. CHARTING OF STATISTICS. COST OF IDLENESS 107 FlOCRE FLUCTUATIONS IN COST OF PRODUCTION OP PlQ IRON. — SOUTHERN PLANT Comparative Statement of Pig-iron Costa for the Year 1839 to 1898, both Inclusive, with the Figures of 18S9 taken as a Unit Basis Product Coke Con- Ore Cost, Limestone Coke Cost, Labor Cost, Cost of Cost of Total Cost. Average Net Year per Day, sumption Per Cent Cost, Per Cent Per Cent Arbitraries, Sundries, Per Cent Selling Average Tons, per Ton Iron Per Cent Per Cent Per Cent Prices, Profit Per Cent Per Cent Per Cent Per Cent 1889 100 100 100 100 100 100 100 100 100 100 100 1890 94 1 99,4 107.6 87.6 99 4 112.8 • 103.3 105.8 104.3 103 95 1 1891 101 102.3 98.2 97 6 102.8 81.8 103.3 99.6 97 1 94 6 79.7 1892 98 1 100 6 104.5 53 7 100.8 70.2 106 6 112.2 95 1 87.1 38.7 1893 120 6 94.7 105 8 67.1 94.6 60.5 100 90.8 89 6 76 9 00 1894 166.7 91 2 85 4 54.7 72 6 44.6 88.3 70 1 69.7 65 36 5 1895 155.7 91 2 76.6 81 2 74.5 55.3 95.6 47.1 69.8 64 9 35 7 1896 164.4 101.2 78 41 6 70.6 50.9 127 42 1 67 64 6 50 8 1897 184.3 84.1 78.4 24.5 64.8 50.2 116.6 37.4 63 2 59 5 37 5 1898 167.7 91.2 79 40 3 64 1 519 113 3 33.4 63.4 61 2 47 9 Memoranda. — Arbitraries cover relining charge, general office expense, taxes and insurance, and engines and boilers and pumps, and small tools and furnace supplies. Sundries cover sand, brass and iron castings, coal to locomotive 1870 71 72 73 74 75 76 77 78 79 80 81 82 S3 84 * 50 18 46 11 12 40 38 36 31 32 30 2S 26 21 82 20 18 16 11 12 10 8 6 1 2 X •>. R — c- D r E 1870 71 72 73 71 75 76 77 78 79 80 81 82 83 81 85 Fig. 5. — Chakt of Labor Costs. Fluctuations in Labor Costs on six commodities during 6fteen years under a contract and piece-work system. ( Henry R. Towne, Trans. A. S. M. E., 1886. From Eng. Mag., April, 1916.) CHAPTER XII PROBLEMS AND DIFFICULTIES. STANDARD COST ESTIMATES OF COST WHEN THE BY-PRODUCT OR SCRAP FROM ONE PRODUCT IS USED IN MAKING ANOTHER Problem. A boiler and tank manufacturer installs a costly punching press to be used in making large disks for boiler and tank heads. The material used is steel plate, cut into squares, and the waste or scrap is 25 per cent of the original material. This waste may be sold in the market for remelt- ing, or it may be used as the raw material for small disks or washers which are cut in a small press. At what price shall the scrap be valued in estimating the cost of the small disks, and what is the factory cost or inventory value of the small disks, and also of the large disks, (a) when the scrap is sold at a low price, (6) when the scrap is utilized in making small disks? Cost Data, before Installing the Small Press Operation. Cutting large steel disks. Machine. Heavy punching press — cost, with attachments, $2000. Material. Steel plates costing 2c. per pound delivered at the machine. Scrap. 25 per cent of the raw material, sold at 0.8 cents per pound. Labor. Pressman, 30 cents per hour. Helper, 25 cents per hour. Product. 20 disks per hour. Average weight of blanks, 100 pounds. Running Time. 600 hours per year, the market for large disks being limited. Yearly cost for materials: 600X20X100 = 1,200,000 lbs. © 2(i Yearly cost for labor: 600X0 30+600X0.25 Estimated burden: Interest, Taxes, Insurance, Depreciation, Repairs, Lubrication of machinery, $2000 @ 15% 300 Rent of space for machinery and storage, 1000 sq. ft. @ 20^ per year 200 Interest on capital invested in material and product (6 turnovers a year) $4000 @ 6% 240 Power, 0.5 H.P. @ 4i per H.P.-houi, 600 hrs. 12 Superintendence, 10% of labor cost, 33 785 $24,000 330 Credit 300,000 lbs. scrap @ 0.8f! per lb. Total 25,115 2,400 Additional Cost after Installing the Small Press The small press costs $500. Of the 25 pounds scrap left after making each large disk, 60 per cent, or 15 pounds is made into small disks, and 40 per cent, or 10 pounds is scrap sold at 0.8 cents per lb. The machine occupies a corner of the room in which the large machine is located, it requires no extra superintendence, and no extra investment of capital. The extra costs are : Labor, one man 1200 h,s. per year, @ 30p Burden: Int. Depn. etc., on machine $500 @ I59< Power, 0.2 H.P. @ 4f!, 1200 hrs. 75 9 00 60 360 84 444 00 60 60 If we charge the material at the scrap value 300,000 lbs. @ 0.8 Less 120,000 lbs. sold scrap @ 8 Making total extra cost for making 180.00C lbs. small disks or 1 .047 per lb. 2400 960 1440 1884 (10 60 Estimated cost of small disks made from new material: Material: 240,000 lbs. @ 2^ 4800 00 Less scrap 257c, 60,000 @ 0.8(5 480 00 4320 00 Labor, 1200 hrs. @ 30(i 360 00 Burden: Int., Depn., etc., on machinery, 500 (ai 4880 60 15% 75 00 Power, 0.2 H.P. @ *i per H.P.-hr., (1200 hrs.) 9 60 Superintendence (part of coat charged large disks) 18 00 Rent, 250 sq. ft. @ 20j! per year. 50 00 Interest on capital, $4800 -=-6 =$800 @ 6% 48 00 200 60 Cost of 180,000 lbs. disks ©2.711 per lb., total 4880 to Cost of 900,000 lbs. of disks, average 2.524^ per lb. $22,715 Revised Estimate of Cost of Large Disks Charging the small disks with part of the burden of the large disks as in the above table involves a modification of the cost estimate of the large disks as below. If we charge the small disks and credit the large disks with the scrap at a price which will make it equivalent to that of raw material, making the net cost of material for the small disks $4320 after deducting $960 for 120,000 pounds scrap sold at 0.8 cent, this charge and credit will be 4320+960 = 5280, or 1.76 per pound. The revised estimate for the large disks then becomes 108 PROBLEMS AND DIFFICULTIES. STANDARD COST 100 Material, 1.200,000 lbs @ 2(i 240,000 Less 300,000 lbs. scrap @ 1 76 5,280 18,720 Labor as before 330 Burden, Interest, Depreciation, etc. aa before 300 Rent, 750 sq. ft. @ 20ji 150 Interest on capital 240 — 48 192 Power 12 Superintendence 33 — 18 15 669 19,719 Total 900.000 lbs. @ 2 I9lf? per lb. Summary (1) Cost of 000,000 pounds large disks, material cost 2 cents per pound, and 300,000 pounds scrap sold at 0.8 per pound, total cost $22,715 = 2.524 per pound. (2) If the scrap is credited at 1.76 cents per pound, the price charged to the small disks, and a portion of the burden is also charged to the small disks, total cost $19,710 = 2.191 cents per pound. (3) Cost of 180,000 pounds small disks made from 240,000 pounds new material at 2 cents per pound, 60,000 pounds scrap sold at 0.8 cents; or from the 300,000 pounds scrap from the large disks, charged at 1.76 per pound, and crediting 120,000 pounds scrap sold at 0.8 cents, the small disks being charged with their share of the burden of the department, $4880.60 = 2.711 cents per pound. (4) Cost of the small disks if made of scrap charged at 0.8 cents per pound and with only the extra burden caused by making the small disks, leaving the large disks to assume all the regular burden of the department as in (1), $1884.60 = 1.047 cents per pound. (5) Total cost of 900,000 lbs. large disks and 1 80,000 lbs. small disks 1.080.000 lbs. average cost 2.278f! per lb. 22.715 1,884 00 60 19,719 4,880 24,599 60 24,599 60 Analysis of Costs Material Burden Labor Large disks Small disks 21,600 or 18,720 1,440 or 4.320 785 or 669 84 60 or 200.60 $330 360 Total 23,040 23,040 869.60 869.60 690 Now, which of these figures is the " true " factory cost and which should be entered as the inventory value or used as a basis for quoting prices? The net cost of material, $23,040, is based on the most favorable condition of the utilization of scrap, viz.: that all the scrap from the large disks was taken for the manufacture of the small disks and that none of it had to be sold outside on account of deficient demand for the small disks, and that no new material needed to be bought for the small disks at 2 cents per pound on account of the demand for small disks being greater. Such a balance between demand and supply of scrap of a given quality and shape is exceedingly rare, and would not be likely to repeat itself the next year. If all the disks were unsold at the time of taking the inventory for the purpose of figuring profits and losses, it would be proper to value them at the recorded cost, $24,599.60, or 2.278 per pound, although it would probably cost more to replace them when they were sold; but it would not be safe to use this figure as the basis upon which the lowest selling price for future contracts should be fixed, for that should take into consideration the fact that the recorded cost was probably abnormally low on account of the unusually favorable con- dition of the balance of supply and demand for scrap. Factory costs are needed in order to get approximately correct inventory values, from which to calculate profits and losses; also in order to have a basis for minimum selling prices; the recorded costs are past history, useful to the bookkeeper, to balance his books, but the costs that are to be used as a basis for future prices should be " normal costs " or probable future costs, and these may differ considerably from the recorded costs. The case becomes much more complicated when the product is of two or more classes, as in the case of the disks, and when, in taking the inventory there is found on hand a much larger fraction of the total annual product of one class than of another. Suppose that before taking the inventory two- thirds or 600,000 pounds of the large disks were sold at 3 cents per pound, the selling expense being 0.3 cents per pound, and one-third or 60,000 pounds of the small disks at 2.5 cents per pound with a selling expense of 0.5 cents per pound, what is the profit on each size, and what is the inventory value of the remainder? Large Disks Sold 600,000 lbs. © (3-0 3) f Coat © 2.524f! $16,200 15,143 00 33 or @ 2 191 or $16,200 13,146 00 00 Profit 1.056 67 3,054 00 Small Disks Sold 60,000 lbs. ©(2.5-0.5)? Cost © 1 047ff Profit Sum of profits 1,200 00 628 20 571 80 1,628 47 or @ 2.711 or Loss 1,200 1.626 426 2,626 00 87 87 13 Putting the transactions in ledger form we have: Dr. Large Disks Cr. 900.000 ©2.524 Profit 22,715 1,056 00 67 600,000 ©27 Bal. 300,000 © 2 .524 600,000 ©27 Bal. 300,000 © 2 191 16.200 7.571 00 67 or 900,000 © 2 191 Profit 23,771 19,719 3,054 67 00 00 23,771 16.200 6,573 67 00 00 22.773 00 22,773 00 Small Disks 180,000 © 1 047 1.884 60 60,000 © 2 1,200 00 Profit 571 80 Bal. 120,000 © 1 047 1,256 40 2,456 40 2,456 40 or 180,000 © 2 711 4,880 60 60.000 © 2 1,200 00 Bal. 1 20.000 © 2 711 3,253 13 Loss 426 87 4,880 60 4,880 60 110 BOOKKEEPING AND COST ACCOUNTING Suppose that all the disks are sold, leaving no inventory, then, for the two assumed values of scraps, we have: Profit on investment of capital: Scrap at 0. 8 j! total Per lb. Scrap @ 1.76^ total Per ib. Large Disks Cost 22.715 2.524? 19,719 2.181 Profit 1585 0.I76C 4581 0.519 Small Disks Cost 1 884 60 1 047C 1880 6C 2 711 Profit 1715.40 0.953C Loss 1280.60 0.711 All Disks Cost 24.599.60 2.278 24,599. 6C 2 278 Profit 3300.40 0.356(* 3300.40 356 If the scrap is charged at the market value, the apparent cost of the small disks is much too low, and the apparent profit much too great. If the scrap is charged at a price equivalent to that of new material, the cost of small disks is too great, leading to an exaggerated inventory value and to a large apparent loss when the disks are sold. Both methods of computing costs and corresponding inventory values and profits are wrong. Some compromise value of the scrap used for the small disks must be found. It will not be correct to lump the two sizes of disks together, using the average cost 2.278 cents per pound, thus eliminating the question of the value of the scrap, for that would make the small disks cost more than their selling price less selling expense. It would appear to be fair to fix the price of scrap to be credited to the large disks and charged to the small disks at such a figure as would split the difference between 0.8 and 1.76 cents, making it 1.28 cents, thus allowing the large disks to gain 0.4S over the market value of the scrap and the small disks to gain an equal amount over what they would have to pay if they were made from new material at 2 cents per pound or from scrap at the equivalent value of 1.76 cents. Figur- ing in this way we obtain revised cost and profit estimates as follows: Large Disks: Material, 1,200,000 @ 2(! Less 300,000 @ 1 . 28 Labor Burden Selling price, net @ 2.7 Profit, 0.349(« per lb. Small Disks: Material 3000,000 @ 1.28^ Less 120,000 @ 0.8 Labor Burden 180.000 @ 1.91 If! Selling price, net ® 2p Profit, 0.089)! per lb. 24,000 3.840 20,160 330 669 21,159 24,300 3,141 3,840 960 2.880 360 200.60 3,440.60 3,600 159.40 Capital in machinery Capital in stock $3141 + 6000=52.35% Large Disks 2000 4000 Small Disks 500 6000 500 159.40+500=31 88T t , This is probably a close enough approximation to true costs, considering that in actual business there would rarely, if ever, be such a balance between supply and demand for scrap that none of the large scrap would have to be sold at the market price for scrap used for remelting, or that there would be no need of purchasing new material for the small disks on account of the deficiency of scrap — also that so much of the burden charged is based not on actual expendi- tures but on estimates, which themselves are based on hypotheses or guesses. Moral: There is no such thing as " true cost " when the product is varied in kind and when one product gives by- products to be utilized in another product, but the account- ants and the management should make every effort to obtain as close an approximation to true costs as possible. Elbourne (Factory Administration and Accounts) says: "The art of costing is essentially one of close approximations rather than the collection of absolute facts. However precisely the ne*, quantities of materials are obtained there will be a call for judgment in the prices to be charged in the costs. "Until men become absolutely automatic machines and the administration is perfected in the last degree there can be no guarantee of the absolute accuracy of the time charged to a given job. Those systems that provide for the time lost between jobs being charged up to a special account neglect the human nature of most foremen. "As to strict accuracy in the allocation of works expenses, this is obviously impossible, but it is in this field that so much return is yielded by a scientific investigation of the approximately true incidence of expense." The Cost of Silver (from an article by James H. Collins in the Saturday Evening Post, October 14, 1916). "Silver has been so thoroughly a by-product during the past generation that the West has almost forgotten how'to figure costs upon it. "Some estimates of cost can be made from the reports of rep- resentative mining companies. The mountain at Bingham, Utah, worked by steam shovels, last year yielded 150,000,000 pounds of copper, 370,000 ounces of silver and 35,000 ounces of gold. The cost of operating was 812,000,000 and the metals sold for $27,000,- 000. This gave an all-round cost of less than 50 per cent; and as the silver sold for 50 cents an ounce its cost might be set at about 23 cents. The Bunker Hill and Sullivan mine, in Idaho, yielded 75,000,000 pounds of lead and 1,300,000 ounces of silver. Operating costs were about $3,000,000 and the metals sold for about $4,000,000. With silver at 50 cents an ounce the cost was 37 cents." When silver is produced as a by-product of gold and copper or of lead, it is absurd to say that its cost is 23 cents or 37 cents per ounce, or any other figure. A farmer might figure the cost of raising sheep, but he could not figure separately the cost per pound of producing wool, hides and mutton. PROBLEMS AND DIFFICULTIES. STANDARD COST 111 HOW TO REDUCE COSTS. STANDARD COST The cost accountant may consider that his work is finished up to any given date when he is able to show figures for the cost of each article in the warehouse, the cost of assembling it from the finished parts, the cost of each part, and the cost of each operation on each part, but when all of these figures are available the work of the cost analyzer (or ot the Factory Cost Committee) has only just begun. His problem is to answer the questions. Why did this operation cost so much? What are the elements into which this operation may be divided? What is a reasonable standard time for each element? What must we do to bring down our actual operating times to or near the standard time? Assuming that the operation in question is one done on a machine tool, in order to reach minimum costs the following requirements must be met before the machinery operation is started. (C. U. Carpenter on " Profit-making Manage- ment. - ') 1. There must be ample stock delivered to the workman before he stops work upon his preceding job. 2. The stock must be so placed as to be most easily reached or handled by the workman. This presupposes a standard place for the stock. 3. The clamping devices must be simple, effective and standard, and must be supplied to the workman before he is ready to start. 4. The tools must be standard in every respect, ground to proper shapes and supplied to the workman before he is ready to start. 5. The jigs, fixtures, punches, dies, gages, etc., must be so designed as to be handled easily, quickly and accurately, and must be at the workman's side before he is ready to begin work upon his new job. These tools and gages must be inspected for accuracy regularly so that the foreman and workmen may have full confidence in them. 6. All stock coming into a department ?nust be inspected before it is placed upon the department platform. To the above-named requirements several more may be added, which relate to the machine itself, such as: The machine must be of the kind and size best suited for the work; it must be rigidly supported, in good repair; properly belted and geared; lubricated with the right kind of oil; its working table at the proper height and its operating levers, handles or wheels so arranged as to involve the least possible fatigue to the workman; it should be in a sanitary location and well lighted. When all of these requirements are fulfilled, and not before, time studies should be made, by means of a stop watch or other timing device, such as Gilbreth's chronocyclegraph, of the following: 1, The time required to handle the part or parts; 2, The time required to " set up " the job; 3, The time required for the machinery operation; 4, The time required to remove the work. The next consideration in the matter of reduction of costs, and obtaining standard costs, is the selection of the kind of man best suited for the work. It is evident that if the work is of a simple and repetitive character, such that an ordinarily intelligent and willing day-laborer can do it easily after a few weeks' practice under instruction, it is not good economy to have it done by an all-round expert machinist, a 4-dollar-a- day man. A $2 man, encouraged by a bonus which will enable him to earn S3 a day without undue fatigue, when he becomes skillful, will do more work than the .?•! man, whose rightful place is in the tool room or in charge of a machine operating on a variety of work requiring a wide range of knowledge and experience. Standard conditions, standard times and standard task and bonus rates having been thus determined by the cost analyzer or the cost committee for different operations, the figures are handed to the cost accountant, who now has a new and most important job, the preparation of Standard Prime Cost cards for different operations, and the charting of costs of operations on all the machines of the shop, so that a basis may be had for the Predetermination of costs of future work. When job tickets and instruction cards are given out for new work, the standard times may be entered on them, and if in actual operation the standard times are not reached the foreman may be called on for an explanation and the proper remedy applied. Some of the things to be considered when costs appear to be too high are listed below: Idle time. Load factor of machines. Revision of burden charges. Can total burden be reduced? Is it properly apportioned to departments and machines? Cost of the cost accounting system. Re-design of patterns. Change in system of manufacture. Change in material. Standard Costs. Manufacturing plant has the capacity for a certain production, and incurs burden charges in maintaining that capacity. These charges must be distributed over the standard production. This means the determination of standard costs for burden, as well as for labor and material, and enables a standard of cost to be established for all products. If the cost accounting is to be of maximum value, much emphasis must be laid on the importance of knowing more than present cost alone. Costs should be established which represent standards by which to gain a true conception of the value of results. — Clinton H. Scovell. Universal Cost Formula (Harrington Emerson). Material cost + Man cost -[-Machine cost = Value Q, T, and t, are the Quantity Factors P, W, and R are the Quality Factors QP+TW+tR = Value. Cost Formula separating Burden from Direct Costs: (1) QP+TW+tR+P+M+S+R = Cost QP = Value of Direct Material, TW = Value of Direct Labor, tR =Cost of Machne Hour, P =Cost of Power, M =Cost of Maintenance, S =Cost of Supervision, R =Cost of Rent, 112 BOOKKEEPING AND COST ACCOUNTING (2) Q(P+Bp) + T(W+Bw)+t(R+Br) = Cost. Q = Quantity of Direct Material. P = Price per unit of material. Bp = Burden on Price. T = Quantity of Direct man-hours. W = Hourly Wage. Biv = Burden on Hourly Wage. t = Quantity of direct machine-hours. R = Rate per machine-hours. Br = Burden on rate. Causes of High Cost of Work in Government Arsenals (Extract from a statement by Col. C. B. Wheeler, Ordnance Dept., U. S. A., in the hearing before the House of Repre- sentatives Committee to investigate scientific management, Vol. l,p. HO). After considerable thought on the subject I am led to believe that the present unsatisfactory condition as to relative cost of manufacture to which attention has been invited, results from a series of conditions most, if not all, of which are correctable by proper management and which, of course, can be materially assisted by hearty cooperation. The following appear to be the principal causes which increase cost of production, or have a tendency to, and to which especial attention must be constantly given to insure results tending toward economy, viz.: 1. Frequent changes in management. 2. Absence of system and shop management. 3. The number of working days each year allowed for holidays and vacations, amounting each year at Watertown Arsenal to an expenditure of approximately $30,000. 4. Lack of a proper stock of supplies. 5. The conduct of all work on the day's pay system. 6. The restrictions imposed by laws and regulations especially as to the procurement of material. 7. Lack of coordination of the work being carried on in the different shops. S. Multitudinous duties of foremen. 9. Lack of sufficient tools of proper power. 10. Loss of time in looking for proper and necessary tools and fixtures. 11. Loss of time due to employees waiting at grinders and at the tool room. 12. Loss of time due to breakages or repairs of machines and belts. 13. Loss of time waiting for the next job. 14. Losses due to lack of proper instructions or to spoiled work. 15. Lack of a proper tool-room equipment. 16. Lack of proper transportation facilities in the shops, such as cranes, hoists, and runways. 17. Wastage and lack of economy in the operation of the power plant. 18. Lack of proper attention to costs of detailed operations. 19. Endeavor to make parts with poor facilities and at great expense which can be procured very much cheaper. 20. Delays in getting material when needed, causing changes in plans. 21. Additional cost of transportation service between shops under a system that permits a helper for each teamster. 22. The large amount of metal that is frequently left on cast- ings and which has to be removed. 23. The commencement of work before a sufficient supply of material is on hand to finish the job. 24. Failure to take full advantage of the machines or tools provided; and, finally, a lack of information as to the best practice. Perhaps the most important of all these items is lack of system and shop management, since once established many of the other items would naturally be drawn into line for elimination. A system that would most economically produce the results desired is under consideration and already some progress has been made toward its adoption. It is expected when in running order to relieve the management, including the foremen, from numerous exhausting details, the time consumed on account of them bein- more profitably employed in other directions. Concerning methods of distributing expense burden, Col. Wheeler said (page 791): Prior to 1906 shop expenses were unknown to the Ordnance Department, and all labor, no matter how promiscuous or diffi- cult of apportionment, was charged directly to order. This involved an immense amount of unprofitable clerical labor. The department was, however, so wedded to this old system of charging everything directly to orders, and was otherwise so conservative, that for a long period after Congress authorized the taking of a valuable share of productive labor costs to pay shop expenses, there was a feeling that the efficiency of an estab- lishment was measured by the smallness of the shop expense percentage, and great stress was laid upon the ratio of the non- productive to the productive labor at the various arsenals. This standard for the measurement of efficiency is entirely wrong. The only proper way of considering this matter is to determine whether or not the non-producer is profitable — that is to say, fully occupied in keeping the skilled producer at the kind of work for which he was employed and for which he is best fitted. A comparison of shop-expense percentages is generally mislead- ing and can not measure efficiency of production. The method now in force is one which causes orders passing through the manufacturing departments to contribute mote equitably their proper share to the shop expense fund by appor- tioning the shop expenses to them in accordance with the man- hour or machine-hour costs involved in their execution. The result of such apportionment is that the larger pieces requiring the larger and more expensive machines contribute more per hour to the shop expense fund than do the smaller pieces requir- ing smaller machines or perhaps only bench work. Any system of shop expense recruitment based upon a percentage of direct labor charges means that smaller work carries the larger. REDUCING THE COST OF THE COST SYSTEM The chief objection to all elaborate cost-finding systems is that they cost too much; that their operation involves the employment of a small army of clerks, and that the informa- tion obtained is not worth what it costs. A good cost system is a necessary element in scientific management, the aim of which is the elimination of useless work and of waste motions, and the consequent reduction of costs. The principles of scientific management should be applied to cost systems themselves as well as to manufacturing operations. In order to illustrate what may be done in the direction of reducing the cost of a cost system we may take an imaginary case of the costing of an order for 10,000 locks in a large hard- ware factory in which all the paraphernalia of a cost system based on the normal machine-hour rate have been installed. Every machine, work-bench or other center of production has its hourly burden rate fixed, all work is done and all stores are issued on written orders. Job tickets are used for each operation on each piece that enters into the finished product, and from the data obtained from these tickets is found the cost of each product delivered into the warehouse. The raw materials, which are in the store ready for the manufacturing operations, consist of iron and brass castings, PROBLEMS AND DIFFICULTIES. STANDARD COST 113 steel drop forgings, sheet, band, wire, rivets and screws. The clerical work done in connection with the progress of the order through the shop involves the following: Permanent blue print or carbon: 1 stores issue for all the material; 1 schedule of parts; 1 route sheet; 1 set of instruc- tion cards. Production order, reading as follows: Production Order No. 1117. Date 2/20/17. Make 10,000 locks, style X -45. The part and routing schedules show that there are 10 parts to each lock (not counting duplicates of any part) and that there are on an average five operations on each part, besides the operations of inspection of parts, assembling, testing, japanning, final inspection and packing. The work is done by ten different men, using ten machines or work benches. The time of each man averages forty days of nine hours each, making a total of 3600 man-hours. All the work is on piece work or task and bonus, and the average earnings are thirty cents per hour. The total direct labor cost is $1080 or 10.8 cents per lock. The total material cost is 500 or 5.0 cents per lock. The total burden cost is 920 or 9.2 cents per lock. 2500 25.0 cents In order to obtain the labor and burden costs we start with the time-keeping. Here we meet the first application of scientific management to the cost system, the finding out, by careful investigation and accurate recording, which is the best and at the same time the cheapest way of keeping time. There are many different ways, starting with the old-fashioned foreman's or time-keeper's time book. Those in common use may be compared as below: Time-keeping Systems Daily Time Tickets 10 men, 40 days, 400 tickets. (1) As there are 60 jobs on each lock there may be two or three jobs entered on some of the daily tickets. (2) Or else a separate ticket may be issued when a man works on more than one job in a day, making say 800 tickets. Weekly Time Tickets The 40days mayinclude 6 whole weeks and parts of two others, making 8 weeks. (3) 10 men, 80 tickets, each ticket having a record on it of the dif- ferent jobs done by a man in each day. (4) or a new ticket may be issued when a man changes his job during the week. This may double the number of tickets, making 1 60 tickets. Job Tickets As there are 60 opera- tions on each lock one ticket may be used for each, on which an entry is made of the man's No., Name, Ma- chine No., Production No., Job No., Part and operation symbol, Hours, Pieces made. Piece Hate, Bonus and Burden. All of these data are transcribed from the time tickets. (5) 60 tickets, 160 or 800 entries, according to whether daily or weekly time tickets are used. (6) Combined Time and Job tickets. No. 4 tickets may have en- tered on them all the data of the jobs, thus saving the transcrib- ing of 160 tickets. Production Order, 1,117 Job No., 19,172 Week ending 3 10/17 Workman's No. 126 Workman's name, J. Jones Machine No. L 13 Piece symbol, AEF Operation symbol, Dg Hours, 54 Pieces made, 1520 Piece rate, 0.9 Bonus, 30% Wages Burden, 54 hr. X30 Labor and Burden cost Mateiial (on store card) Defective pieces, 12 The back of this card has the "in" and "out" times stamped on it by the clock, from which the hours for the week are figured. The burden rate is taken from a table of the normal rates of the several machines. The card may also have a memorandum of the number of spoiled or defec- tive pieces, stating whether they were due to flaws in the material or to bad workmanship. The cards are sorted by workmen's numbers and posted on the pay roll. They are then sorted by machine numbers, and the total hours for each machine for the week entered on the machine-hour record sheet. - They are finally sorted by piece symbols, and the figures are entered on the piece cost cards. They are then filed in envelopes or folders bear- ing the piece symbols for future reference. The Piece Cost Cards may contain the following informa- tion: Piece Symbol AEF Prod, order 1,117, No. of pieces Finished Material lbs. © Total direct labor Total cost Total burden Cost per 100 pes. Job No. Operation Pieces Labor Burden Total 19171 Fg. 2000 4.00 3.00 7 00 2 dg. 1520 17.78 16.20 33 98 3 mg. 1400 9.30 10 00 19 30 1 fg. 2200 4.40 3.30 7.70 2 dg. And 30 on until all the operations on AEF for 3 mg. 10.000 lo eka are finis hed: Labor and Burden on 42 pes. spoiled Cr. for value of scrap The totals on the Piece Cost Cards are transferred to a Finished Product Cost Summary. Finished product X — 45 Prod, order 1117 Finished 4 21 17 No. made 10.000 Cost each $0 25 The combined time and job ticket No. 6 has the follow- ing information: Piece Material Labor Burden Total Cost per 100 AEF G H (etc.) Inspection Assembling Japanning Testing Packing Total 500 1080 920 2500 $25 00 114 BOOKKEEPING AND COST ACCOUNTING The final result, $25 per 100, is entered on the Stores Inven- tory Card for X-45 and is used as a basis for the annual inventory value, for fixing selling prices, and for various statistical purposes. Let us suppose that the cost system above described has been installed by a " systematizer," and is in operation in one department only of the hardware factory, the lock depart- ment, and that the first production order has been completed under it, the daily time ticket, No. 2, having been used. The manager investigates the results, and he is satisfied that the reported cost, 25 cents per lock, is as near to the true cost as can be ascertained by any system. It is accurate as far as the cost of material and direct labor is concerned, but the burden is based on two assumptions which may be far from ' accurate; one is the estimated life of the machinery, from which the charge for depreciation reserve is based, and the other is the estimated number of hours that the machines will run during a normal year, from which the normal hourly burden of the several machines is calculated. The calculated total burden in the cost of the 10,000 locks, $920, may be as much as 25 per cent, or $230, too high or too low, and the true cost of the locks instead of being 25 cents may be any- where between 22.7 cents and 27.3 cents, a difference of 9 per cent in either direction. In fixing the minimum whole- sale selling price the manager will add the 9 per cent to the recorded factory cost, in order to be on the safe side, besides making a liberal estimate for selling and administrative costs. He now begins to figure the cost of the cost system. For a production order involving the work of ten men for forty days, it has involved the writing of 800 time tickets, 60 job tickets with S00 entries on them transcribed from the time tickets, 10 piece cards with about 20 entries on each, and one cost summary card, with about 10 entries. If the whole factory has 1000 men, working 300 days in the year, on light hard- ware involving a multiplicity of operations and the same clerical work in proportion, the 861 cards will be multiplied by 7500, making nearly six and a half millions of cards per year and about as many transcriptions from one card to another. No time study or motion study of clerical work has been made and the cost of cost-keeping has not been segregated from the cost of making up the pay roll, doing the ordinary bookkeeping, and making statistical records, but the man- ager makes a rough guess that there will be 6,000,000 cards handled in a year, that one minute's time on the average will be spent on each, making 100,000 hours of clerical labor, at 20 cents per hour = $20,000 cost of the cost system per year. The manager, while startled at the figure, has more impor- tant matters in hand than studying the merits of cost systems, so he turns the job over to a scientific management expert, for study and report on the questions whether this cost system is suitable for the requirements of the business, and whether or not its cost can be reduced. The expert is not a cost accountant, which is probably to his advantage, for he has nothing to unlearn. He starts his investigation by getting acquainted with all the facts that are available in connection with the cost system as applied to these 10,000 locks. He finds the time tickets, pay rolls, job tickets, stores, issue cards, piece cost cards, and cost summary, all leading up to the final conclusion, that the cost of these locks, packed and delivered to the warehouse is 25 cents each. He finds the theory or theories on which the cost system is based, viz., that the cost of a lock is the sum total of the cost of every machine or manual operation on every piece, and the cost of every piece of raw material that enters into the lock, and that each piece and each operation or job is saddled with what is supposed to be its proper share of the " burden " or general expenses. of running the factory, including administration and supervision, planning, clerical work, power, heat, light, lubrication, internal transportation, services of watch- men and cleaners, storekeepers, messengers, stationery, and other supplies for the factory or office, besides a charge for depreciation due to wear and tear, obsolescence and inad- equacy and a charge for interest on the investment in the factory and its operations. He examines the theory and method of allotment of the burden, and finds that the old- fashioned and grossly inaccurate methods " percentage on direct labor " and " man-hour," have been rejected and the more modern and more accurate normal machine-hour rate method adopted. The method of fixing the rates for the several machines and production centers is investigated and approved. The first criticism he makes is that the estimated normal number of hours of operation of the various machines in a year is only a guess, and that there are no available statistics by which the estimate might be checked. 1 his defect, how- ever, will be corrected in time. The probable error of the estimate is not serious and is on the right side, that is it tends to make the recorded cost greater than the true or approx- imately true cost. The next minor criticism is that the whole burden is dis- tributed on the machine-hour rates, whereas a more strictly accurate accounting would distribute on this basis only that portion of the burden that had a relation to the machine hours, distributing the rest of it partly on material and partly as a job charge for clerical and supervisory service, inde- pendent of the time the job lasted. This refinement, however, in a general hardware manufacturing business, where nearly all the work is done in large lots and each job usually lasts several days or weeks, is probably not necessary. The material burden may be included in the prices charged by the stores to the factory, and this avoids the trouble of entering it on the job ticket. So far as the theory and accuracy of the cost system is concerned with the exception of the two minor objections stated above, the expert finds no fault with it, but in regard to the mechanism for carrying out the system he finds it unnec- essarily complex and troublesome. The first important objec- tion is that the use of the daily time ticket No. 2 and the transcribing of the figures on it to 60 job tickets involves a needless waste of labor. He recommends for it the substi- tution of the combined job and weekly time ticket No. 6. Continuing the investigation he has all the records tran- PROBLEMS AND DIFFICULTIES. STANDARD COST 115 scribed onto 160 job tickets in order that they may be analyzed and conclusions drawn from them. He subdivides the pro- duction order for 10,000 locks into ten orders for 1000 each, and makes a tabulation of the material, labor and burden cost of each of the ten lots. Since each lock requires exactly the same amount of material, the cost of material for each of the ten lots is the same, and since the work is done and paid for on the task and bonus system, after numerous time studies have been made to determine the proper task and the men have become so skilled that they always earn their bonus, the daily variation in the men's wages is slight, while there is almost no variation in the total labor cost from week to week or from one lot of 1000 to another. The machine hours also are practically uniform with each lot, and, therefore, the burden charge has the same uniformity. If the total burden charge for the 10,000 locks is S920, and the burden computed for each lot of 1000 locks ranges only from 890 to $94, what is the use, he says, of computing the individual burdens on each one of the 60 operations? If we obtain the labor and burden costs of each operation on the first 1000 locks on the combined job and weekly time-card system, what is the use of continuing this elaborate and costly system for the other 9000, provided no change in the machine methods or labor conditions have taken place? It is desirable to know, for statistical purposes, and to study the comparative results at different times and with different machine methods, the cost of each piece and of each operation on each piece of lock X-45, but this can be deter- mined with all the needed accuracy just as well on 1000 locks as on 10,000. The expert then recommends the following modifications of the cost system. Have the Production Order read as follows : Production Order No. 1117 Make 10,000 locks, style X -45 Date 2/20/17 Obtain detailed costs, including burden, of each operation on the first 1000 or 1500 locks by the combined job and weekly time-card system (No. 6). For the remainder use weekly time tickets only (No. 3), without job tickets, obtain- ing labor cost only, to be charged to the production order No. 1117. The weekly time tickets will have the following information : Production Order 1, 17 (continuation) wee k ending 3/17/17 Workman's No. 156 Workman's name J. Jones Machine No. 13 Hours 54 Pieces made 1 500 Piece rate cents . 09 13.50 Bonus 30% 4.05 Wages 17.55 Defective pieces Symbol AEF-Dg If the man works on more than one machine or on more than one operation during the week the entries on the card may appear thus: Machine No. B I. 13 L 13 Total Symbol AEF, Fg. AEF, Dg. AEH, Dg. Hours 24 20 10 54 Pieces 1200- 560 300 Piece rate 0.9 8 Hourly pate, cents 30 Wages $7.20 $5.04 $2.40 Bonus 1.51 .72 $7.20 $6 55 $3,12 $16 87 Piece Cost Cards and Cost Summary Cards will be made up from the job tickets of the first lot only, and from these the burden per 100 or per 1000 locks will be calculated, and this burden will be considered the standard burden charge on these locks as long as the piece rates of the various operations remain unchanged and the weekly earnings of the men when working full time remain fairly constant. The final cost of the 10,000 locks, at which they are to be charged to the ware- house, is then made up as follows: Material: As per stores issue cards Labor: Total of all the time tickets (by adding machine) Burden: 10,000 locks (Standard burden 9.20 per 100) Per 100 Locks. $5 00 10.80 9 20 25 00 The machine numbers and machine hours are entered on the weekly time tickets so that they may be entered in the machine time record, which is kept for the purpose of com- puting the loss due to idle time of machinery, and the number of hours the machines will probably run in a normal year, which is used in establishing the normal machine-hour rate. The next time a production order for the same style of locks is run through the factory it will not be necessary to make job tickets for a portion of the order unless there has been a change in the manufacturing method, in the piece rates or in the speed of the machines. The weekly time ticket gives all the information required for pay roll, statistical and ac- counting purposes, and the burden is added only when the order is finished, at the standard rate determined when the previous order was going through the factory. By these modifications of the cost system the cost of operating it will be greatly lessened. PROBLEM. THE FACTORY COST OF STEAM ENGINES AND OF STEAM TURBINES Suppose that a factory is equipped for the manufacture of Corliss engines, with a total investment amounting to $200,000, subdivided as follows: Machinery and other equipment, including power plant $100,000 Land, $10,000; Building, $20,000; all other asaets less liabilities, $70,000 100,000 $200,000 116 BOOKKEEPING AXD COST ACCOUNTING Case A. Suppose that in a fairly good year the total product of the factory was sold for $200,000, made up of factory cost, $170,000; selling expense, $10,000; profit, $20,000, and that the factory cost was shown by the books to consist of the following items : Interest on investment at 5% $10,000 Taxes and Insurance, 2M% on 120,000 3,000 Depreciation of Building 5% 1.000 Reserve for Depreciation of Equipment, 6^ 6.000 $20,000 Power Plant Expense: Labor 2,000 Fuel and Supplies 2,000 Current Repairs 1,000 5,000 Machinery, current repairs 3.000 Tool room expenses 4,000 Drawings and Patterns 3.000 10.000 Superintendence 5,000 Planning Room 5,000 Office Expense 5,000 15,000 Other Indirect Labor Miscellaneous Supplies 15,000 5,000 Total Indirect Expense 70,000 Direct Labor 70,000 Direct Material 30,000 Total Factory Cost $170,000 Suppose that in this year the factory machinery is on the average 30 per cent idle, on account of the impossibility of an engine works having the production of the several machines so perfectly balanced that every machine will be employed continuously the whole time. Case B. Suppose that in another year of exceptionally brisk business it is possible to reduce the idle machine time to such an amount that the factory handles 20 per cent more material, and uses 20 per cent more direct labor, without any increase of the indirect expense. The factory cost then will be Indirect Expense Direct Labor Direct Material $70,000 84,000 36,000 $190,000 and the total sales will also be increased 20 per cent, or to $240,000 without any increase of the selling expense, the profit and loss account showing: Grots Sales Selling Expense Factory Cost Profit $40,000 Case C. Suppose that a few years later the advent of the steam turbine has reduced the demand for Corliss engines to such an extent that it is no longer possible to sell the larger sizes of them in competition with larger factories which are able to build them cheaper, and, in consequence, the larger planing and boring machines remain idle a whole year; the smaller sized engines for which there is still some demand continuing to be built, but in smaller numbers, so that the total direct labor is cut down to $35,000, and the direct mate- rial to $15,000, and the sales to $100,000, while the indirect expenses, which have been pared down as much as possible, appear as follows: Interest, Taxes and Depreciation as befoie S20.UUU Power Plant Expense 4,000 Machinery, current repairs 2.000 Tool Room Expenses 2,000 Drawings and Patterns 1,000 Superintendence, Planning Room, Office Expenses 1 2,000 Other Indirect Labor 10,000 Miscellaneous Supplies 3,000 Total Indirect Expense $54,000 Adding direct labor, $35,000, and cLrect material, $15,000 50,000 Total Factory Cost Selling Expense Selling Price Loss $104,000 10,000 $114,000 100,000 $14,000 SCHMABY Case A Case B Case C Material Direct Labor Indirect Expense $30,000 70,000 70,000 $36,000 84,000 70.000 $15,000 35.000 54,000 Factory Cost Selling Expense Profit $170,000 10,000 20.000 $190,000 10,000 40.000 $104,000 10.000 Loss 14,000 Factory Cost Per cent of Selling Price $200,000 85 $240,000 79 2 $100,000 104 Indirect Expenses expressed in percentages Case A Case B Case C Of Material Of Labor Of Material and Labor 233 3 100 70 194 4 83.3 58 3 360 154 5 108 Several problems arise in connection with the figures of cost shown by the book entries of these three cases A, B, C. 1. Can the recorded factory costs be used as a basis for fixing selling prices? Answer: No, the selling prices are fixed by market conditions and not by the apparent factory costs. 2. Can these costs be used to determine the inventory value of the engines remaining unsold at the end of either of the three years? Answer: They can in Case A, for in that year factory conditions were normal, and the book cost of the engines is probably as near an approximation to their value as merchandise in the warehouse, ready for sale, as can be obtained by any fair method of appraisal, but in ease B the engines are worth more than their apparent cost, and they should be valued on the basis of the factory conditions of Case A, that is on the basis of normal cost. In case C the engines are worth less than their apparent book cost, because that is higher than the selling price, even if the cost PROBLEMS AND DIFFICULTIES. STANDARD COST 117 of selling them was reduced to nothing. The engines remain- ing unsold are worth no more than they would be if they had been made under the conditions of Case A. 3. What should be the recorded costs of the engines in cases B and C to be used in charging them to the selling department at factory cost, or in valuing them for the inventory? Answer: Assuming that the direct labor and material cost the same per engine in all three cases, then the engines should be charged or valued at the sum of the direct labor and material plus the normal burden or indirect expense per engines found in Case A. This would make the total cost to be charged against the engines as follows for the three years: Case A Case B Case C Material Labor Burden, 100% $30,000 70.000 70,000 $36,000 84.000 84,000 $15,000 35,000 35,000 Factory Cost Selling Expense 170,000 10,000 204,000 10,000 85,000 10,000 Total Cost Selling Price 180,000 200,000 214,000 240,000 95,000 100,000 Profit 20,000 26,000 5,000 4. How do you explain the profit of $26,000 instead of $40,000 in Case B and the profit of $5000 instead of a loss of $14,000, as shown in the former estimate? Answer: The profits of $26,000 and $5000 are merchandise profits of the selling department, which in Case B bought the engines from the factory for $204,000, spent $10,000 in selling ex- penses, sold them for $240,000 and made $26,000 profit; and in Case C, bought for $S5,000, selling expense, $10,000, sold for $100,000, making $5000 profit. The difference between $20,000 and $40,000 is gain in the factory due to running overtime or with a larger labor force, caused either by greater activity of the selling force, the increased reputation of the engines, or general improvement in the demand for engines. This difference of $14,000 may appear in the factory books as a credit balance of Burden account, as overearned burden, and in the general books as a credit to Profit and Loss Account. The factory books would show the following: Dr. Burden Cr. To various expense accts. To company, to transfer balance, overearned burden $70,000 By charges to Engine Costs $84,000 The company's general books would show: Dr. Profit and Loss Cr. By factory, overearned burden Sales, profits on sales $14,000 26,000 Dr. Factory To Profit and Loss, transfer overearned burden to Company 14.000 In Case C, the difference between $5000 profit and $14,000 loss, or $19,000, is the loss due to idleness of men and machines in the factory caused by the decreased demand for steam engines, consequent upon the increased use of steam turbines. It would appear in the factory books as below: Dr. Burden Cr To various expense accts. $54,000 By charges to Engine costs By Company, to transfer balance, unearned bur- $35,000 den 19,000 and in the Company books: Dr. Profit and Loss Cr. To Factory, loss due to un- earned burden By Sales a/c, profit on sales 5.U00 Factory Cr By Profit and Loss, unearnrd burden I". 5. Do the figures for overearned or unearned burden con- stitute an index of the efficiency of the factory or of its man- agement? Answer: Not at all. The efficiency is practically the same in each case as far as the figures show, since the direct labor and material costs bear the same proportion to the selling price of the engines in all three cases. 6. What do figures of overearned or unearned burden indi- cate? Answer: They may, and generally do, indicate less or greater idleness of the machinery due to business conditions or to greater or less activity of the sales department, or to underestimates or overestimates of what is the normal bur- den of the several machines. Only a detailed investigation of all the facts can determine which. 7. It appears that the Company's total profits on manu- facture and sales of engines were $40,000 in Case B, and the loss $14,000 in Case C, whether they are figured by the first method or by the second, in which the $40,000 in Case B is made up of $26,000+$14,000, and the $14,000 in Case C is made up of $19,000 -$5000. What then is the use of com- plicating the bookkeeping by dividing the profits or losses into two parts and of computing overearned or unearned burden? Answer: The advantage is in giving the owners a greater amount of desirable information as to whether the profits and losses are due to the factory, to the selling depart- ment, or to general business conditions, and as to the cost of ' idleness in the factory. The subdivision is of especial advan- tage in giving more accurate inventory values of the product remaining unsold at the end of the year and of the work in process, on which inventories the profit and loss estimates depend. 8. Is the $14,000 loss in Case C the actual loss in the engine business during the year. Answer: By no means; this apparent loss, as shown by the books, includes as one of the elements a charge for reserve for depreciation of 6 per cent on $100,000 = 86000, but as some of the heavier and more 118 BOOKKEEPING AND COST ACCOUNTING costly machinery has been thrown entirely out of service, probably permanently, by the cessation of demand for large engines, these machines, costing, say, $20,000, have suddenly depreciated perhaps $10,000 more than the amount that has accrued to their credit in the reserve account. There has also been a large depreciation in the value of the drawings, patterns, jigs and special tools used in manufacture of the large engines, their value now being practically nothing. The total loss, therefore, instead of being $14,000 is more likely to be double that figure. Continuing the record of these supposition cases, we may next suppose that at the end of the year of Case C the account- ant presents to the directors of the company the tabulated statement above given showing a loss of $14,000 on the year's business, and also statements of the assets and liabilities of the concern at the beginning and end of the year, which may be condensed as follows: Statement Jan. I Net Resources Real Estate and Equipment Less Depreciation Reserve $130,000 30,000 100,000 80,000 Other assets less liabilities $180,000 Capital Stock and Surplus Capital stock Surplus $150,000 30,000 $180,000 Statement Dec. 3 1 Net Resources Real Estate and Equipment Less depreciation reserve $130,000 37,000 93,000 73,000 Other assets, less liabilities 166.000 Capital Stock and Surplus Capital Stock Surplus $150,000 16.000 $166,000 The president says: Notwithstanding the loss of $14,000 and the consequent reduction of our surplus from $30,000 to $16,000, as shown in the books, our financial position is good. We have no notes payable outstanding, $10,000 cash in the bank, and $10,000 invested in bonds that are good collateral to borrow on. The question is shall we declare our usual 6 per cent dividend, which will take $9000 and reduce the surplus on the books to $7000? The general manager replies: " The books do not tell the whole story. The accountant has charged only $7000 to depreciation reserve during the year, taking no account of the fact that $20,000 worth of our best machinery is now per- manently idle, and ought to be sold at a quarter of its cost, in order to save insurance and taxes, and to make room for other machinery, if we can find some other product to make. Unless our sales department can get more business for the factory we had better be preparing for going into liquidation, rather than be declaring a dividend." The accountant was requested to answer the general man- ager, and he said: " The books never do tell the whole story. It is impossible that they can. They record the facts of actual transactions, such as the receipts and payments of cash, and the purchase and sale of goods; they record our guesses as to depreciation and depreciation reserve; but they do not record other things, such as appreciation of real estate and changes in market value of materials in store. Our apparent surplus of $16,000 is based on the theory that the net value of real estate and equipment is $93,000, its actual depreciation below its original cost being the $37,000 accumulation in the reserve for depreciation account. This reserve account is based on a pure hypothesis, that 6 per cent per annum on original cost will cover the average deprecia- tion on all the machinery, during the ^hole of its life, includ- ing the depreciation due to obsolescence and inadequacy. It probably was fixed at this figure without any thought that the whole business of manufacturing engines was apt to become obsolescent, and that the heavier machines which might reasonably have been expected to have a life of 30 or 40 years would become out of date in less than 10 years. Whether or not the $37,000 in the reserve account covers the total depreciation at the present time cannot be told by any system of accounting. The only way to determine it is to have an appraisal made, and even an appraisal at the present time will only be an approximation to the true value of the heavy machines. They are an expense and not an asset if they are kept standing idle; they are worth their secondhand or scrap value if they are going to be sold, and they may be worth all that they cost if they are going to be used in making other products. There is no use in changing their value on the books until we know what is going to be done with them." The president then said: " The accountant is right. The apparent surplus of $16,000 is only a book figure. It will be reduced to nothing at the end of next year if we sell the large idle machines at their present market value and continue the engine business at its present rate of sales $100,000 a year; it will be turned into a deficit of perhaps $40,000 or $50,000 if we liquidate the concern, either selling the business as a whole or selling the assets in parcels ; it may be doubled if we continue in business, making other things which will keep our machinery running. The immediate question before us is that of declaring a dividend. The surplus, whatever it may be, has been accumulated by keeping the dividends low, returning to the stockholders only a portion of the net earn- ings in order not to have to stop dividends during a year or two of poor business. It would disappoint and embarrass the widows and orphans among our stockholders if we sus- pended dividends. If we decide to liquidate we may as well PROBLEMS AND DIFFICULTIES IN COST ACCOUNTING 119 pay the $9000 dividend now. We have the cash to pay it with, and it will only be an installment of the larger dividend that will be paid when the concern is wound up. " I have had an appraisal made, and find the depreciation reserve on the books is $20,000 larger than the actual depre- ciation of our assets, basing the appraisal on the present value of the plant to a going concern, its cost of reproduction less a reasonable reduction for wear and tear; but it is $30,000 less than the probable depreciation if we intend to retire from business and sell the assets for what they will bring. " I now have a proposition to make for continuing the busi- ness and enlarging it. The A. B. Steam Turbine Co. has been building turbines for three years, and after overcoming many difficulties has now established an excellent reputation for its machines, but it has used up all its available cash and credit resources and is deeply in debt. I have made an arrangement with the company and its creditors, subject to your approval, to take over all its business. It will transfer to us its drawings, patterns, machinery, including some costly special machinery, and its stock of materials, supplies and finished parts, for $50,000 payable in stock of our company at par, and will give to us an exclusive license under its patents, for an annual license or royalty fee of $10,000 payable cash in advance each year, with the pro- vision that when our sales of turbines amount to over $200,000 a year, there shall be an additional payment of 5 'per cent on the excess. We can also secure the services of the chief engineer and the chief salesman of the company at reasonable salaries. I have had reports on the turbine and on the machinery by two turbine experts, and they assure me that the proposition is a bargain. I propose that we have a committee of three, two of our directors and our fac- tory superintendent, to examine into the matter and report at a special meeting to be called by them next week. " I may say further that if we go into this business it will be advisable to manufacture turbines in advance of orders, so that we may have a few of each size, either completed, or nearly completed, on hand for prompt delivery. We should also carry quite a large stock of castings and other material and should invest some money in advertising and in sales- men's expenses. This will call for an additional issue of stock and I am ready to subscribe for $20,000 of it, payable in installments as it may be needed." The dividend was declared, the committee appointed and the next week the proposition was accepted and the new business was taken over. The accountant was instructed to make a new statement of assets and liabilities and to bring in a scheme for a system of accounting which would show separately the factory costs of engines and turbines of the several sizes. SCIENTIFIC MANAGEMENT That form of management that conducts a business or affairs by standards obtained through systematic research, experiment or reasoning. — Geo. D. Babcock, 1915. The laws of management worked out by Taylor and his dis- ciples are as fundamental as those of falling bodies. No manager or management can avoid making use of them in some form oi other if they are honestly out for the combination " high waged and low labor costs." — H. F. L. Orcutt, Engineering (London) Sept. 7, 1917. Costing and Scientific Management. Scientific management in a system based on the conception that the whole routine of the works, down to the last detail of every operation, is organized by the management, so that confusion, over-lapping, delay and waste (both human and material) are avoided, and the course of the work is planned to run as smoothly, rapidly and efficiently as possible. This system applies not only to works manage- ment, but also to costing and all the other accessories. There is yet little recognition in this country [Great Britain) of the The Pyramid of Scientific Management necessity that costing should be undertaken by those who have a real knowledge of the work in question. Generally there is more improvement possible in the arranging for costing than in any other department of works. Costing can and should be the greatest asset to the management; it should be the pulse of the whole organization, instead of being merely an approximately accurate record of performance in the past — sometimes hi the distant past. — From a paper on " The Question of Scientific Management," by James Richardson, Engineering, Dec. 21, 1917. Scientific management is really intensive thinking. It means that every problem shall be solved intellectually and not by means of trial and error and we may add to this that a large percentage of mankind not only hates such a practice, but is quite incapable of carrying it on. — From an editorial in the same issue of Engineering. CHAPTER XIII USES OF COSTS. VARIOUS OPINIONS ABOUT COSTS CONCLUSIONS TO BE DRAWN FROM COST STATISTICS When the directors of a company have a sheet of cost statistics of the business laid before them what chief facts should be studied and what conclusions may be drawn'.' The cost statistics should show the factory costs of labor, material and burden for each of the several classes of product; they should also show the quantity of product of each class. The general books, or the books of the sales department should show the amount of sales, the cost of selling and the profits realized on each class of product. The factory costs, quantity of product, selling cost and profit (or loss) on each class of product should all be considered together, and the relation of profits to costs and to quantity should be studied. The principal object of the study is to determine what course of action will lead to the greatest profits in the future, both the immediate future and the distant future. The objects of a business are: 1, to make profits that may be used to pay dividends; 2, to organize and operate the business so that it may have a long life, even when subject to strong competition. The condition of long life is growth. When growth ceases and stagnation ensues decay comes sooner or later. Cost Keeping should be not merely the keeping of records of what goods have cost, but also of what they should cost under standard conditions, from which may be predicted the probable costs in future. When actual costs are notably higher than standard costs the reason why they are higher should be promptly ascer- tained and recorded. Uses of a Cost System. 1 . To find the factory cost of articles delivered to the warehouse. (a) As a basis for fixing the price at which they shall be charged to the sales department. (6) As a basis for fixing their inventory value. 2. To find the cost of the several elements that enter into the total cost (viz., material, labor and burden) of a finished article, of each part, and of each operation on each part. 3. To furnish comparative records of costs of articles made at different times, or by different methods of manufacture, or under dilTerent conditions. 4. To discover which part of the products of a concern are unprofitable; in order to form a judgment as whether to push the manufacture of an article or to abandon it. 5. To inform competing manufacturers what our costs are. in order to induce them to keep a cost system and thereby to dis- cover that they are selling goods below cost. It is no satisfaction to a producer to know that the ignorance of his competitor will destroy that competitor, if another equally ignorant and dangerous follow him. The only hope lies in a complete education of all who enter a given competitive field, else that field is hazardous. — J. Newton Gunn, in " Business Engineering," by Alex. C. Humphreys, page 479. The competitor most to be feared, while he lasts, is one who does not know his costs, nor understand how to obtain them. — Henry R. Towne. Many concerns charge a certain percentage for overhead irrespective of what the expense really amounts to, and when they take an annual inventory, are surprised to find that their cor- rected earnings are very much less than they estimated. This ignorance or carelessness in the matter of the correct overhead is, I think, responsible for a great deal of ruinous competition, and although in many cases the low bidders fail after doing business for a longer or shorter period according to their resources, there always seem to be some new ones coming along so as to prevent the manufacturers whose costs contain all the cost getting th3 proportion of business to which they are entitled. — Gershom Smith, Engineering Magazine, June, 1909. Uses of Cost. An accurate and reliable knowledge of costs is indispensable to success in closely competitive manufacturing and merchandising business. — S. S. Wheeler, Trans. Efficiency Society, Vol. 1 (1912), p. 175. The function of the cost department is to gather information from which the management can outline its policies. — Clinton H. Scovell. The main value of the knowledge of unit costs is not to fix the selling price, but to lead to methods of cost reduction and con- trol.— B. A. Franklin, Eng. Mag., Vol. 43, p. 421. A cost system should primarily be so devised as to give the manufacturer an accurate knowledge of his most costly and expen- sive operations, so that he may know unerringly these " high spots " and attack them vigorously. The cost system should provide a club with which to beat down costs. — C. U. Carpenter. Indirect costs may amount in some instances to as much as two or three hundred per cent of direct costs. Failure to take them into consideration may lead speedily into bankruptcy. — C. B. Thompson. What do I want to know? How can the facts best be obtained, summarized and averaged so as to get the most out of them with the least trouble and expense? — J. L. Nicholson. Among the uses of costs are: 1. The financial or accounting use, as showing how money was expended. 2. Comparison with estimated results, as in Mr. Emerson's method, the discrepancy between estimated and actual results being regarded as preventable waste. 3. The technical use, showing the cost of every process on every part, enabling a close check to be made on efficiency of production. 4. t'se as a basis for fixing premium or bonus rates. 5. The commercial use, as a basis of fixing remunerative prices, and for selecting that class of product that can be most profit- ably manufactured. — A. Hamilton Church, Eng. Mag., Vol. 38, p. 185. It is the business of costs to represent facts and nothing but facts. 120 USES OF COST. VARIOUS OPINIONS ABOUT COSTS 121 The object of cost accounts is to register and record every stage and step of production as they actually happened — it should be nothing else. — Ibid., page 184. A cost system that represented facts and nothing but facts would be of little use except to the bookkeeper. It might enable him to balance his books and to show that all the money expended was accounted for in the records. It might show what were the costs for labor and material on each item of product, but it could not correctly assign a burden charge to each item, for such a charge is based upon something more than bare facts, it depends on a theory of the method of dis- tribution of burden, and on the application of that theory to estimates, which are only approximations, and often very rough approximations, to facts. The true cost is not what an article is produced for in good times, in bad times, or the first time, but what it can be produced for in the ordinary average routine of shop practice. — B. A. Frank- lin, Eng. Mag., Vol. 42, p. 921. The cost of a thing is what has to be paid to get it.* The " factory cost " of a manufactured article is what it costs the owner of the factory to get the article into the factory warehouse under normal shop conditions. It does not include the cost of storing and insuring it after it is in the warehouse, nor the cost of advertising and selling it. The latter are commercial costs, and in the accounting system they should be kept entirely separate from the factory cost. The cost of idleness of machinery caused by Ia-k of orders, failure to get raw material, strikes, or other iibnormal cause should not be charged as part of factory cost; it should be charged to Unearned Burden, or to Profit and Loss. The general advantages of any cost system are: 1. To reduce costs. 2. To increase production. 3. To introduce machines to do work hitherto done by hand. 4. To equalize the output in each department. 5. To serve as a guide in selling. 6. To serve as a guide in pricing. 7. To serve as a basis for judging the product, efficiency and diligence of the workmen. 8. To place the employer in a position to get a safe basis, independent of the judgment of the foremen of the different departments, on which to reward the efficient and to develop the promising but inefficient. 9. To act as a moral stimulus to every workman and to insure fair distribution of reward to all. A cost system will not tell you what your costs should be. It will simply tell you what your costs are. Costs by themselves mean nothing. We must have standards of comparison by which to test their value. — "Efficient Cost Keeping," E. St. Elmo Lewis, 3d edition, 1914, published by the Burroughs Adding Machine Co., Detroit, Mich. Objects of Cost Keeping. 1. Determination of the price at which the product can lie offered in the market. * One of the difficulties the student meets is the number of different meanings and applications of the word "cost." It is both a noun and a verb, and as a verb it seems to have a different significance when used in the past, present and future tenses. The bookkeeper uses it in the past tense. "What did it cost to get this article into the warehouse?" He needs this figure in order to balance his books and account for the expenditure. The factory manager wants to know "what is this thing costing now; how can we reduce costs?" The owner of the factory, "What will this thing cost next year?" bo that he can fix next year's prices. 2. Lessening production costs — To attain this the most minute attainable subdivision of cost is demanded. Production expenses cannot be reduced in gross, but must be attacked in small parts. The experienced cost-keeper may divide the expense account into a hundred or more subordinate accounts, while the inex- perienced one may keep it in a single account or at most divide it into a very few heads. Henry Roland, Eng. Mag., Vol. 16, p. 47. A knowledge of the total cost of a machine is of use only in fixing the selling price or in taking an inventory. It is of no practical value in reducing costs. The information is too general. It is impossible to reduce the cost of a machine to its mini- mum figure without first obtaining an accurate knowledge of the time consumed in the manufacture of each piece. The workman must be offered some incentive. The piece-work, premium and different systems * are conducive to this end, but should be used after and not before the acquisition of reli- able time records. It is necessary to know the cost of every operation on each piece. We must adopt some form of job ticket.— H. M. Norris, Eng. Mag., Vol. 16, p. 385. The cost of any equipment made by the plant itself must include its share of burden. Installation charges are one part of the cost of a machine. Special tools for a particular order should be charged against that order. The cost of experimental work should be made a deferred charge which will not be absorbed until the result of the experi- mental work are in actual operation. Machines and appliances perfected through experiments should be considered as assets, their theoretical value being the sum of all the elements of cost that have been incurred in their behalf during the cost of the experiments. Ovr, short and damage account. Wastes, shrinkage, de- fective work are charged to this account, and it is credited with value received for any disposition of the items charged. The balance becomes part of the indirect expense. — J. L. Nichol- son, "Cost Accounting Theory and Practice." Controlling Cost Records. Accounts may be kept in the general ledger, which should control the various items of pro- duction costs. For example, accounts should be kept with material, labor, indirect expense, work in process, and part- finished stock, entries being made to these accounts in the same manner as if they were kept in the factory ledger. — Nicholson. Keeping the various items of factory costs in the general ledger involves much unnecessary bookkeeping. These items should be kept in the factory ledger, and the general ledger need have only one account for factory operations, charging it with all cash sent to the factory and with invoices certified by the factory for payment by the general office, and crediting it, at factory cost value, for goods shipped from the factory. What is " Control " and a " Controlling Account "? These words are used by many authorities on accounting in a sense that is different from their ordinary meaning. To control means to compel, to manage, to restrict. In the accountant's sense it means to summarize or to lump together, for example, when main- expense accounts are kept in the cost records their totals are brought together and entered in a single Factory Expense Account in the factory or general * For information on wage systems see F. W. Taylor's "Shop Management," F. B. Gilbreth's "Primer of Scientific Management," and "Motion Study." Gantt's "Work, Wages and Profits," and Knoeppel's "Maximum Production." 122 BOOKKEEPING AND COST ACCOUNTING ledger, and this is called a control or controlling account. It does not control anything, it only shows the totals of several minor accounts of a class. It is proper to expect from a cost system : 1. Final costs; that is the cost of completed units of the product at the door of the factory. 2. Partial costs; the cost of component parts, or costs at cer- tain stages of their production. 3. Comparative costs between one period and another — like articles under different conditions. 4. Costs of operations — direct-labor cost, so that it shall be possible to change from day to piece work. 5. Indirect costs by classes and groups — a basis for the dis- tribution of indirect expense. Crude systems with careful handling produce better results than elaborate systems poorly run. The best plan for factory organization*and costs can be evolved only after many months and, perhaps, years of painstaking development and modifications. Cost finding is not merely the work of an accountant, it is the work of an engineer, supplemented by the best accounting knowl- edge that he can command. Costs have no value except in comparison, that action may be directed by experience. The end of cost keeping is cost reduction. The cost records must be made use of, or they are of no value. — J. N. Gunn, Eng. Mag., Vol. 20, 705. Cost Securing — gathering details by means of shop order, requisition, time cards, etc. Cost Compiling — entering the data on proper forms. Cost Comparison — placing the latest information beside other information. Cost Analysis — thought and deduction applied to the cost comparisons. — C. E. Knoeppel, Eng. Mag., Vol. 33, p. 172. Theories of Costs. Many of the questions about cost and value would become simpler if we would give up the idea that there is any abstract "cost" or "value," and instead should work on the basis that the business of the accountant and engineer is to provide data which will enable the executive to take action. There is no such thing as an abstract " cost," or if there is it is of no use to any one. Sometimes we want to know whether we have made or lost money during a given period. In other cases we want to know how much our expenses will be increased if we put some by-product on the market. In that case we want to know only the real extra cost of the by-product. In still other cases a factory owner may want to know whether he had better shut down his factory for a period, or run it until the market for the product improves. To answer this question he needs an entirely different set of figures than when he is deciding whether or not to build a new factory. Practically every theory of cost or theory of valuation helps to answer some particular question, and we shall continue to have new cost theories and new value theories so long as new questions are coming up to be answered. — R. S. Hale, Jour. A. S. M. E., Feb., 1917. It is a fundamental mistake not to check the burden charged to cost through the machine rates with the actual burden during corresponding periods. Unless this is done, machine rates, developed in an effort to secure accurate costs, may be so inac- curate as to lose much of their potential value. It is equally a mistake to omit the necessary check on any other kind of burden methods. If the percentage-on-labor or the man-hour methods are used, control should be established to make an accurate comparison between the amount of burden applied and charged to cost and the amount of expense burden actually incurred. — ■ Clinton H. Scovell. Many cost systems which have fairly good records of material and labor fail entirely in their purpose because they deal so inad- equately with the subject of burden. Important elements of indirect costs are thrown together in a "general expense " account, concealing the leaks and wastes that reduce efficiency and curtail profits. Scientific management is never complete unless there is developed at the same time an accounting practice which shall adequately reflect for the management the net results of all indus- trial endeavor. — Clinton H. Scovell. Interpret the Figures into Actions. The day of guesses is past. Knowledge of costs of each article produced or handled, of expenses by departments, of the performances of each sales- man, of the work turned out by each workman and machine, of the stocks on hand, of the gross profits and the net profits month by month, are necessary to success. The man who can interpret these figures into actions that produce profits is the successful manager. But, first of all, he must have the figures. — Charles R. Stevenson, General Manager of the National Veneer Products Company Factory, Sept. 15, 1916. Functions of the Cost Accountant. In the past the principal function of a cost system, besides indicating a limiting selling price, has been to enable those in financial control to criticize those operating the factory. These criticisms are usually from one to three months late, and are so general in their character as to afford, as a rule, no guide whatever by which the superin- tendent can be governed. Such a system is too often most highly prized for its worst defect, namely, that it enables those in financial authority to criticize without taking any responsibility whatever for showing how to do better. Before we can expect to get any great benefits from the newer managerial idea, we must readjust our ideas of the functions of the cost accountant, who must become the servant of the operating executive r» well as of the financial executive. As long as the cost accountant is simply a critic, he may be called "non-productive," but when he furnishes the superin- tendent with prompt information which enables him to reduce costs he becomes "productive." Promptly detailed information of what is being done each day, furnished in such manner as to be readily compared with what has been done, and what can be done, is the best method of measuring efficiency. — H. L. Gantt, Trans. A. S. M. E., 1914. The end and aim of cost accounting should be to know not how much a certain order cost for its constituent productive elements, but why it cost what it did, and under what conditions the cost might be reduced. — F. E. Webner, Eng. Mag., Vol. 35, p. 591. The Chief Cost Accountant. A proper head to the depart- ment of cost keeping must be as much an engineer as an account- ant, and capable not merely of compiling figures, but of using the information when the facts are compiled; for the end of cost keeping is cost reduction. This man must be so efficient that he may be depended upon by the highest official of the company and he will naturally be high in the counsels of the latter. . . . A man who fills such a position will have no sinecure. — James Newton Gunn, Eng. Mag., Jan., 1901. The Manager of the Future. Before the cost accountant can become efficient the management must become efficient, because if the management is not efficient the cost work will not be organized and functionalized so that it can reflect truly, adequately and completely the real value of the business per- formance. The efficient manager knows a cost system to be a means to an end, and not an end in itself. The systematic manager occupies his time in writing history; the efficient manager is writing scientific prophecies. He is scientifically determining what is going to happen the day after to-morrow. He is systematic, too, but his system is projected into the future. The manager of the future will be more of an accountant, more of an engineer, no matter how much of a financier or sales- man he may be. — E. St. Elmo Lewis. USES OF COST. VARIOUS OPINIONS ABOUT COST 123 Devising a Cost System. If the work is to be undertaken by the regular office force the system must be one that they can handle. The cost accounting must work along the line of least resist- ance and begin with as simple a system as possible. This is the reason for introducing at first an estimating system, which will soon show where more complete methods should be applied. There are conditions that remain constant from year to year, and when a cost system has obtained the results by de- tailed methods for one or two years that part of the system may be dropped and the results considered as a constant quantity. There is little merit in verifying established data, especially if the verification is involved or expensive and can be accomplished approximately by other means. Whatever kind of system is devised every precaution should be taken to avoid making it top-heavy. — Nicholson. If the original data of time and material are kept and filed by cost symbol or number, then in some lines of business the compiling, comparison and analysis need be done for one-tenth or one-hundredth of all the data, selecting the pieces whose cost is desired to be known; thus greatly de- creasing the cost and the complexity of the cost system. For example, if it were attempted in a hardware factory employing 1000 men or more, and making 10,000 different styles and sizes of product, nine-tenths of which are made on piece work, by the same processes and machines year after year, to have a cost system in which all the original data were transcribed to piece cost, group cost and finished product cost cards, each with labor, material and burden cost tab- ulated, and in which a monthly summation of all these cards was made for the purpose of making journal entries for the general books, thus tying the cost system to the bookkeeping, the cost of the cost system would be so great as to endanger the profits of the concern. // is not imperative to record the. cost of each individual machine if it is an exact duplicate of others whose cost is known . It is suf- ficient that the cost of individual parts or operations be recorded so as to note any variation of cost due to changes in the cost or in the efficiency of labor or material. — John Sturgess, Eng. Mag., Vol. 36, p. 940. When a new construction is in progress or important altera- tions are being made in an existing machine, the manager requires the most minute subdivisions of costs, so that he may know in what sections of work or in which departments he must seek to economize. But at other times when the works are producing machines of standard patterns only or executing reproductions of previous orders, such subdivisions are not so necessary. It is then usually sufficient to ascertain the total on each machine or structure so as to insure that it does not exceed a normal amount. — F. G. Burton, " Engineers' and Shipbuilders' Accounts." In the securing of costs in a specific case it is necessary to regard : a. The character of the enterprise. b. The value of the information when secured. c. What use should be made of the facts. d. The provision in the organization of having the facts used as intended. e. Whether or not those for whom the facts are intended are competent to use them. /. Whether through proper inspection there is assurance that the facts have been used. g. In what degree of refinement should the costs be presented. — J. Newton Gunn, in Humphrey's " Business Engineering," p. 500. Unintelligence was and is still exhibited: By the lack of appreciation of the vital necessity of having any facts used in the operating department capable of proof in the final accounts of the corporation or firm. — Ibid., p. 499. If by the words " final accounts " is meant the general books of the concern, this is an entirely unnecessary " tying of the costs to the general books." The sentence should end with the words " capable of proof." If the " operating department " makes a boiler, for example, all the facts con- cerning its cost may be proved by the job tickets and stores issue cards, not by the " final accounts." Many people believe that costs may be usefully manipulated and twisted and arranged so that they cease to represent what actually happened but what in the opinion of the manipulator ought to have happened. A simple illustration of this is the argument, not infrequently met with, that where machine rates are in use a job done on a large, heavy planer that could have been done on a lighter machine should not be " penalized " by bearing the burden incident on a large machine. It would be just as proper to insist that where premium work is in use a piece of work should always be costed at its lowest rate of pro- duction. — A. Hamilton Church, Eng. Mag., Vol. 38, p. 21. The " argument " that the job should not be " penalized " by the burden of the large machine is a perfectly sound one if the costs are to be used as a basis of inventory values or of selling prices. If a job for a light planer comes into a shop and all the light planers are busy while a heavy planer is idle, " eating its head off " with unearned burden, it is advis- able to do the job on the heavy planer, but to charge only the burden of a light planer which would ordinarily be used for the job. Why should a job be " penalized " just because the light planers all happened to be busy when it came into the shop? The following is an example of incorrect reasoning which sometimes follows a strict adherence to the machine-hour system of distributing burden: An owner of a machine shop who had a tabulated hourly burden charge for each machine, varying with the size of the machine, the ci >^t of running it and the number of hours that the machine was expected to run in a year, noticed that a small piece was being turned in a very large lathe. He told the foreman that he should not use the lathe for that piece because the burden charge on it was too heavy, and it would make the piece cost too much. The foreman replied that all the other lathes were busy and that there was no heavy work on hand for the large tool, and he thought he would make the big lathe " do something for its keep." The foreman was right, and, moreover, the burden that should be assessed against that piece in making up its cost, if the cost was to be used as a basis for estimating on future orders for similar pieces, is not the machine-hour rate of the big lathe, but only that of a small one, on which the work would ordinarily be done. Systems of factory accounting must show not only the cost of the product but also indicate the working conditions and efficiency of all departments. The manager must have some means by which he can check large unnecessary expenditures or heavy losses. He should be able to detect increases in cost above normal or any unnecessary investments in stock for manufacture. — C. U. Carpenter, Eng. Mag., XXIV, 39. To make savings of money, service and time, the cooperative [accounting] adviser to an executive must be able: (a) To 124 BOOKKEEPING AND COST ACCOUNTING distinguish clearly between records which are vital to the future policies of a business and those which are merely historical. The past in industry as a determinant for policies is of value only as it is vitally concerned with the future. 6. To omit many [accounting] refinements that cost much money and lead to a "false and delusive accuracy "; to avoid so far as possible doing work that "costs more than it is worth." — Dr. Hollis Godfrey, in a paper on " Application of Engineering Methods to the Problems of the Executive, Director, or Trustee." In the original the word "engineering" is used where "account- ing" appears in the quotation. " Tying in " the Cost Records to the General Accounts. When the cost records are "tied in" with the general accounting, the management has complete control not only over the operating expenses of the factory, but over the inventories of raw material, work in process, and finished product. Cost calculations are sometimes made entirely detached from the general bookkeeping, but it is very rarely that such records have anything like their full value, and their use is always attended by the very considerable risk that they cannot be proved by the showing on the financial books at the end of the year or other closing period. — Clinton H. Scovell. The original entries of factory costs of salable products or of betterments are made on job tickets and stores issue tickets. Those of auxiliary department costs are made on the pay rolls of the several departments for labor and on stores issue tickets or store books for indirect material. The burden charges to cost of salable products or betterments are made on job tickets, on stores issue tickets (for material burden) on piece cost cards, or on cost summaries, according to the system of burden distribution that has been adopted. The costs are " tied to the general books " through the journal entries on the factory books: Sundries to Labor, Sundries to Cash, Sundries to Stores, Sundries to Burden, the Sundries being Work in Process, Stores, Betterments, Burden. The cost accounts are balanced or " proved " by the total credits to labor equalling the total of the pay rolls, by the total credits to Stores equalling the total of the stores issue tickets, but this is by no means a " proof " of the accuracy of the costs. Their accuracy depends entirely upon the accuracy of the original entries on the job tickets and stores issue tickets, and upon the correctness of the method or theory as well as the clerical accuracy of the distribution of burden. Any error in these will be carried forward into the general books, where it will remain undiscovered. The costs may be tied to the books but cannot be proved by them. " Complete control over the operating expenses of the factory " cannot be obtained by any system of accounting. That is a function of the management which is independent of the accounting system. With the cost books once established the best modern method is to incorporate their record in total in the general financial books. The cost books must be interlocked with the financial books. The cost books contain the data showing the analysis of the elements of cost, all of which should be controlled by the finan- cial books so as to permit of a verification of the mathematical accuracy of the transactions on the cost records. — Nicholson. It is desirable that cost accounts should be based on an elastic system, and that while they are built up on the same founda- tion and, in general, must agree with the financial books of the concern, they should not be interlocked with them. — F. G. Bur- ton, "Engineers' and Shipbuilders' Accounts" — The Account- ant's Library, Vol. XIV. WAGE SYSTEMS The Bonus Plan. Explained in detail by Mr. Gantt in his valuable paper read before the A. S. M. E. in December, 1901. Distinctly a system of task work combined with the use of instruc- tion cards for the workmen and a bonus for accomplishing the task within the time set for it. This bonus system of pay has always appealed to me as the most easily understood, the easiest to introduce with little oppo- sition, and the most effective of all systems yet produced. It is adaptable in some forms to almost any other system of pay that may be already in existence in the shop. It is the easiest to introduce in case the men are working upon the day-work basis. Nor is it difficult to persuade the workmen to abandon piece work for it in case the reward is made sufficient. I have been intro- ducing it into works under my control with marked success. — C. U. Carpenter. A Benefactor to the Race. Every cheapening of production brings a more than proportionate increase of consumption. There is no greater benefactor to the whole race, from a material point of view, than the man who, by diligence or inventiveness, makes one hour of labor suffice for the work which formerly took two. His blessing is like in kind and great in proportion to his who makes two blades of grass grow where one grew before. — Editorial in Eng. Mag., June, 1900. The man who causes one man to cut the grass that two or three men cut before is a public benefactor. — W. Kent, 1914. The Cincinnati Milling Machine Co., in a pamphlet describing its factory, explains its wage system as follows: Wages are paid weekly, (a) An hourly rate is established for each employee, according to his skill and experience. (6) Additional Compensation. We aim to provide detailed instruction sheets for all operations, which will show in detail the method of handling the job to best advantage and with the least labor. On this sheet is also shown the normal or standard time for the performance of the operation. If this work is done in this time, the workman is paid a bonus, which approximates a one-third increase in wages. If the work is done in less time than the standard time shown on the instructicn sleet, the employee receives the bonus as above and a pren ium in ;.dditicn to the bonus. If it takes an employee longer than the standard time to do the work, he has an opportunity to earn a premium for all the time that he saves inside of standard time plus 40 per cent. This premium time is also clearly stated on the instruction sheet. The above standard time is in all cases reasonably and fairly set, and the average man has no difficulty in earning the bonus. The time is set with great care and when it is once set, it is never changed until the job itself is changed or some change is made in the method of performing the operation, or different tools or jigs are employed. The Flow of Values. The two diagrams, Fig. 6, page 125, show a method of illustrating the " flow of values." The same final results are accomplished by each. The total expendi- tures for labor, material and burden are all accounted for, as shown in the block marked " Results." The difference between the tw 7 o diagrams is that in the first the total of labor, material and burden flows in three large streams into Work in Process, while in the second it flows through a great number of small streams, through departments, classes, and opera- tions, which later are concentrated into a few large streams that lead to the total result. We may put flow meters on all these small streams, and their total may equal the total USES OF COST. VARIOUS OPINIONS ABOUT COSTS 125 Cash Labor Direct Indirect Betterment (Chg. Co.) Cr. Company Stores ^5L Material Direct Indirect Work in Process Warehouse Gen. Charges Burden RESULTS Goods Shipped (Chg. Co.) Balances In Warehouse Work in Process Stores Undistributed Burden Total Expenditure = \°"tc . Labor Material ^ 77 Depts. A B C D Indirect Labor Classes of * Product ^^ vy' 1 2 3 Operation Pieces Groups Product by Catalog Nos. Indirect Material I I Co's Gen Charges Burden Different Methods of Distributing Burden a Proportional to Cost of Direct Labor b " " " " ** Material C ■• *' Prime Cost d By Departments e By Departments and Classes f By Classes of Product By Machine Hour Rates applied to g Operations h Pieces i Groups j Products Undistributed Burden Total Prime Cost + Total Burden = Factory Cost of Work in Process, distributed as in "RESULTS" "Tying the Cost System to the General Accounts" Fig. 6. — Diagrams Illustrating the Flow of Values. Co. Cr. Bal. 60,000 '"-"Ills 37,400 **~* ^ An Dr.Bal. 20,000 \ 20,000 A Co. Cr. 97,400 Co. Dr. 44,000^ Fig. 7. — The Flow of Values. Factory Ledger. (See page 41.) 126 BOOKKEEPING AND COST ACCOUNTING of the meters on the pipes leading from Labor, Material and Burden, which agrees with the meter measuring the Results. Thus, we have " tied the cost system to the general accounts," and we have " checked the burden charged through the machine rates with the actual burden during corresponding periods." It is a great satisfaction to the bookkeeper to have done this. It proves that his books are in balance, that he is a good arithmetician, that every expenditure has been entered and charged to some account, but it does not prove the accuracy of the cost accounts. Material and labor may have been charged to one article that belonged to another. The burden may have been distributed according to a wrong system and one product greatly overcharged and another as greatly undercharged. The idea that the cost accounts are " proved " to be correct by tying them to the general accounts is a delusion. Diagrams of " flow of values " have sometimes been made with figures of the values inserted. They may be of some use in explaining to students the theory of accounts, but they are of no practical use to accountants. Fig. 7 shows such a diagram made from the figures given in the Factory Ledger on page 41, and Fig. 8 one made from the General Ledger, page 40. On comparing the diagrams with the column ledgers it will be seen that the ledgers give all the information that the diagrams do, and more, and they also give it in a more simple and easily understood form. Cap. Stock 100.000 Bonds 40,000 Surplus Cr. 10,000 •• 11.800 •• 5,000 Dr Dividend 8,000 Fct'y R.E. & E. Bal. 50.000 2,000 Bal. Cash 25,000 6,000 12,000 40,000 Res. for Dep. Cr. 15.000 ,!»Dr. 1,000 Int.Chgd.Fact'y Cr. 5,000 *- Dr. 5,500 -» Txs. & Ins. Dr.Bal. 2,000 * 1,000 Dis. & Int. Dr.Bal. 1,000 ► 500 T- Profit & Loss Cr. 5,000 Cr. 5,500 -*Dr. 1,000 * 1,200 500 ■*■■ Fact.y Oper'g Bal. 60,000 *■ 600 500 10.000 10,000 -» 15.000 300 *■ 1,000 Adm. & Sel. Exp. Dr.Bal. 2,000 ,-•* 10,000 I _l Bills Pay Cr. 5,000 — > 3,000 ( I I I I -+- I Bills Rec. Cost of Sales » — > 4,000 * 11,000 40,000 Bal. 15,000 -* 10,000 Accts. Pay Cr. 20,000 ->-22,000 4 Accts. Rec. Fig. 8. — The Flow of Values. General Ledger. (See page 40.) Predetermined Costs — Standard Costs. There are two meth- ods of ascertaining cost. 1. Ascertain them after the work is completed. 2. Ascertain them before the work is undertaken. The first is absolutely incorrect, mixing up with costs incidents that have no connection with them. Real costs are divided into (1) standard costs, (2) avoidable loss. There was a railroad shop in which charges were distributed with such painful care that the shop sweepers subdivided their time to the various locomotives around which they loitered. But locomotives, as well as men, can loiter, and one of them stood in this shop three months, waiting for a steel deck plate. Being familiar with its number the workers charged all the time they could not account for to this locomotive, so that at the end of three months the total amounted to more than $500. In prin- ciple there is no difference between charging an hour of wholly wasted time to a locomotive and charging it with two hours of time when one hour should have accomplished the work. The moment specific wastes of any kind are charged to a definite order instead of being charged to some inefficiency account real costs are vitiated. Because costs are not standardized the variations due to inefficiency are in the records either increased or lessened by the much larger variations due to change of conditions. A job done one month under 100 per cent conditions but with 60 per cent labor efficiency may equal in (recorded) cost the same job done in another month under 00 per cent conditions but 100 per cent labor efficiency. In one month surfacing a slide valve cost $37.00 and in another month S3. 65. The object of cost accounting is to record ac- curately present (not past) facts, and to facilitate future improve- ments. "A day's work," "a pound of material," "the performance of a machine," should be predetermined in all cases. The difference between standard costs and actual costs is the loss due to inef- ficiency. Allotted costs = standard cost + current wastes. Current wastes are predetermined by assuming that they will be relatively of the same percentage as for an immediately preceding period. — Harrington Emerson, Eng. Mag., Vol. 36, d. 336. Defects and Troubles of Bad Cost Systems. The cost keeping is usually under the jurisdiction of the bookkeeping department who are apt to make too much of a bookkeeping proposition of it. A manufacturing concern installed two different systems within two years, and at enormous expense, and for a long time they had costs coming on through three different systems, and it was more than three years before they got anything satisfac- tory, and then the costs were not as satisfactory for com- mercial purposes as the ones they obtained by their original system. A system should be adapted to the particular needs of the business.— W. M. S. Miller, Eng. Mag., Vol. 36, p. 832. The systems which failed were: Group Cost, Operation Cost, Piece Cost. They involved an immense number of cards and USES OF COST. VARIOUS OPINIONS ABOUT COSTS 127 entries and a delay of from a few days to several weeks before any tangible total could be arrived at, and that was not trust- worthy. — John Sturgess, Eng. Mag., Vol. 3C, p. 1)40. Axioms Concerning Manufacturing Costs. By Henry R. Towne, Trans. Am. Soc. Mech. Engrs., 1912. Axion 1. Every cost (of a manufactured article) includes three fundamental factors, labor, material, expenses. Axiom 2. The expense factor should be split into two parts; manufacturing, commercial. Axiom 3. A manufacturing cost has three phases: prime cost, shop cost, actual cost. Axiom 4. Accurate cost information is vital to good manage- ment. Axiom 5. Accurate costs imply the correct classification of every expenditure. Axiom 6. Every production expenditure should be charged directly to its proper account. Axiom 7. All non-productive expenditures should be properly grouped for final distribution. Axiom 8. The normal basis for distributing manufacturing expense is productive labor. Axiom 9. The normal basis for distributing commercial expense is shop cost. Axiom 10. An accounting system should show results both by departments and by totals. Axiom 11. A contract product may require a more complex accounting system than a stock product for the accurate deter- mination of costs. Axiom 12. An accounting system should be embodied in a code of instructions for the guidance of those responsible for its operation. Axiom 13. Symbols are better than titles for recording charges in an extensive accounting system. Axiom 14. Extraordinary gains or losses, in order not to dis- tort the statistical value of the annual profit and loss record, should be covered into the surplus account between the closing of the books for the old year and the opening of the books for the new year. Axiom 15. Interest on borrowed capital should not be treated as an operating expense, but should be charged direct to the profit and loss account of the year. Axiom 16. Final profits properly signify the amount earned on the capital invested. If interest on capital is deducted this fact should be stated, and interest should be computed on the total capital employed. Axiom 17. Terms used to designate profits should indicate clearly the stage of profits to which they refer, and should be mutually understood. Axiom 18. Speculative profits and losses should be segregated from those due to the normal operations of a business. Axiom 19. A reduction in cost implies a corresponding reduc- tion in inventory. Axiom 20. Expenditures in one year which cover the require- ments of several years should be distributed over the years to which they fairly apply. Axiom 31. An annual inventory of all property is indispen- sable to accurate knowledge and to good management. Axiom 22. Valuation of fixed property should be subject to annual review and to fair depreciation. Axiom 23. An accounting system should present facts, without bias in any direction. Axioms are statements of what are supposed to be self- evident facts. Some of Mr. Towne's so-called axioms are by no means self-evident, and some of them are open to serious objection, as below: No. 2. Each department has its own expense factor, and that of the manufacturing department has nothing to do with that of the commercial department. No. 3. A manufacturing cost has three elements, direct material, direct labor, and expense. The sum of the first two is often called " prime cost," and the sum of the three is shop cost, which is the same as manufacturing cost or factory cost. The term actual cost has no well-defined significance. No. 7. The modern term for " non-productive " is " indirect." No. 8. In the best systems of cost-accounting the basis for distributing manufacturing expenses is the normal machine-hour rate. The cost-of-productive-labor basis is the most faulty. No. 9. Commercial expenses have no relation whatever to shop costs. A shop may make two classes of products, the shop cost of each in one month being $1000. It may cost for selling expenses $100 for the first lot and $1000 for the second. No. 15. Interest on borrowed capital is a financial expense which has nothing to do with cost accounting, but interest on the whole investment of the factory, whether cash obtained by the sale of stock or borrowed money, is a manufacturing cost. It should be charged against the factory and credited to Interest Earned, or some such account, in the Company's general or private ledger. No. 16. Final profits include Interest Earned, Profit of the Selling Department, and any other profits, less all the losses. They are all finally closed into Profit and Loss, the balance of which, for the year, shows the final profits, or losses as the case may be. No. 21. An annual inventory is not at all necessary if a continuous inventory is properly kept, the cards being fre- quently checked as the quantities or amounts of the several items inventoried are at their lowest stages. The above axioms together with these comments were submitted to a professional accountant for his opinion on them, and he replied as follows: " I would avoid axioms as a plague. The thing for the cost accountant is to use his own common sense at all times, and STUDY HIS OWN PROBLEMS rather than those of others. For a clear outline of the whole field let him go to some one book such as the present, for genera' principles only." Subdivisions of Costs. F. A. Parkhurst in his book on " The Predetermination of True Costs " subdivides costs as below: Direct Labor 1 „. , „ _.. , , r , . , > Direct Costs Direct Material > Indirect Costs True Costs Administration Financial Sales Operating A better schedule of division is as follows: Direct Labor Direct Material [ Factory Cost Factory Expense J Factory Cost !_,._ ... Commercial Expense / TotaI Ex Penditure 128 BOOKKEEPING AND COST ACCOUNTING Mr. Parkhurst says that he " considers the word cost to include all items both direct and indirect, including the minimum profit factor." This is an unusual definition of cost. The cost of a thing to us is what we have to pay to get it. It does not include either our selling expense nor any part of our profit that may be made when we sell it. Costs of Organizations; of Patents and Patent Litiga- tion ; of Experiments. There are often some costs incurred in connection with a business that are neither factory operat- ing costs nor commercial or selling costs, such, for example, as the legal and other expenses of organizing a corporation, expenses connected with the ownership of patents, and the cost of experiments which may or may not prove successful. Accounts for these expenses should be opened in the general books, and whether or not any part of them should be charged to factory costs of production is a matter for the management to determine as is also the question whether they should be entirely written off at the end of the year, by charging them to Profit and Loss, or carried in the books as assets, a portion of them being written off each year. The Westinghouse Electric and Manufacturing Co. in 1917 reported as part of its assets Patents, Charters and Franchises, $4,285,206.51, while the General Electric Co. carries on its books Patents, Franchises, and Good Will at a total valuation of $1.00, writing off each year the total expenditure upon them. Interest on Factory Investment Should be Charged to Cost Inflated Inventories.* The most serious objection to reckoning interest into costs, in the opinion of some accountants, is that to do so "inflates" the value of an inventory. The debate arises over the word inflate, for there can be no doubt that, so far as a calculation of interest on investment increases cost, it logically raises the price at which manufactured goods are carried in an inventory. To the present writer this seems no objection at all. Seasoned lumber is worth more than green lumber. Paper, wines and leaf tobacco are more valuable when properly "aged." The cost of this aging process is almost exclusively a capital cost. The cost of carrying is an entirely appropriate part of manufacturing costs and should be recognized in pricing the inventory of finished goods. The capital cost of converting rags into paper is just as inev- itably an addition to its cost, and just as fair an addition to its inventory price as the cost of seasoning or loft-drying the paper. The capital cost of converting seasoned lumber into furniture is just as fair an addition to its inventory price as the cost of sea- soning it beforehand. Frequently a liberal use of capital dimin- ishes other costs, and the too meager use of capital increases other costs. Interest on investment is the conventional and logical way of expressing capital cost. Why isn't one kind of cost as good an addition to value as another? There is, therefore, no reason why an inventory should not be carried at all its cost, including so much thereof as may be due to interest on the investment employed. The more carefully one considers the varied uses of accurate costs the more certainly does he arrive at the conclusion that interest on investment should be reckoned as a factor. The Rate of Interest. The rate of interest which should be charged to cost depends upon the income which the capital might be expected to earn if invested in high-grade securities where no manufacturing or trading risks are taken. . . . The * From Clinton H. Scovell's " Cost Accounting and Burden Appli- cation." Harvard Bureau of Business Research recommends the use of the ordinary interest rate on reasonably secured long-time investment in the locality in which the business is situated. Interest on investment in a plant is very rarely included in the cost of manufacture, but should be in all cases. — J. L. Nicholson, "Factory Organization and Costs," p. 33. Two factories, A and B, are making machine screws. A has a small capital, uses low-priced screw-cutting lathes, purchases raw material in small lots as needed, carrying only a small stock. A's yearly interest on the capital invested is only $1000. B has ample capital, uses modern turret lathes and a few automatic screw machines, purchases material in large lots and carries large stocks in order to buy at the lowest prices. The annual product of B is the same as that of A, but it is made at a much lower labor cost, and at a some- what lower cost for material. The interest on the capital invested, however, is $4000 per year, and this must be charged as part of the burden cost of the screws made, in order to arrive at their warehouse, or inventory, value. Mr. Nicholson, in Journal of Accountancy, Vol. 15, p. 330, says: " The writer firmly believes in the theory that interest on capital invested shall be charged to the proper expense accounts before ascertaining the actual profit from manu- facturing or trading." He quotes Wm. Morse Cole as fol- lows: " Since one of the purposes of accounting is to show whether the return is adequate, the interest would seem necessarily to be involved somewhere in the accounting." F. E. Webner, in his " Factory Costs," says: " The inter- est on an investment in plant and equipment, or rent paid for the use of a factory, would seem to be almost as direct an incident of cost as labor, material, power or incoming freight." Problems on the Charging of Interest. A blast furnace in Northern Ohio at the close of the navigation season on the lakes has a million dollars invested in a pile of ore sufficient to run the furnace during the next five months. It has half a million dollars invested in a storage plant and in the hoist- ing and conveying machinery required to transfer the ore from the piles to the bins at the furnace. The transporta- tion company that brings the ore from Lake Superior has its vessels lying idle while the lakes are frozen. A furnace in Alabama has its ore delivered directly from cars to the ore bins, and never has more than two weeks' supply of ore on hand. The northern furnace is handicapped, as compared with the southern furnace, by having to charge against the cost of its ore the interest on the capital invested in the stor- age piles and in the handling machinery; and the transporta- tion company has to charge in its cost of freighting interest on the cost of its vessels during the whole year although they are idle for five months. In this case the cost of idle- ness is a legitimate charge against the cost of production. A southern warehouseman at the beginning of the cotton picking season has a million dollars invested in mortgage bonds which pay 6 per cent interest; he also owns an empty warehouse and an idle baling plant, costing $200,000 but at present earning nothing. He sells his bonds at par and buys a million dollars' worth of cotton which he bales and stores. Each month that he holds the cotton, it is costing USES OF COST. VARIOUS OPINIONS ABOUT COSTS 129 him $5000, the interest on his bond investment, which he charges to the cost of cotton. He also charges to it the interest on his investment in the warehouse and baling plant, $1000 per month, or $12,000 per year. If he sells the cotton in portions of one-tenth of the whole quantity per month for ten months, each portion must bear as part of its cost one- tenth of the whole interest charge for one year on the plant, or $1200, plus $500 per month for the number of months it has been held, as its share of the interest on the purchase price, whether it is shipped the first month or the tenth. If it is shipped the first month the space it occupied in the warehouse remains idle until the next crop is stored, and in this case the cost of unavoidable idleness, a necessary part of the cost of doing a cotton warehouse business, must be charged to the cost of the cotton handled. Example. If the warehouse is rilled October 1st and the shipments of each month are billed to the sales department at the end of the month at warehouse cost = purchase cost -r-interest+all other expenses, such as taxes, insurance, inspection, baling and handling, depreciation of plant, superintendence, etc., and that out of the receipts from sales (supposed to be for spot cash) an amount equal to the sum of the purchase and interest costs is reinvested in per cenl bonds, a statement of the cost of cotton at the end of each month for purchase and interest only, omitting the expense costs, might be made as below: End of Month. Lot No. Purchase Cost. Interest on Purchase Cost. Interest on Plant Cost. Rebate of Interest. Purchase + Interest. Total Invested in Bonds. Interest on Each Lot of Bonds. Interest on Interest Re-invested. 1 2 3 4 5 6 7 8 9 10 $100,000 100,000 1 00,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 $500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4.500 5,000 $1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 $66 60 54 48 42 36 30 24 18 12 $101,700 102,200 102,700 103,200 103,700 104,200 104,700 105,200 105,700 106,200 $101,700 203,900 306,600 409,800 513.500 617.700 722,400 827,600 933,300 1,039,500 Mos. 1 1 10 9 8 7 6 5 4 3 2 $5,500 5,000 4,500 4,000 3,500 3,000 2.500 2,000 1.500 1,000 + $93.50 110 121 .50 128 129 50 126 117.50 104 85 50 Julv 62 August $1,000,000 $27,500 $12,000 $390 $1,039,500 $1,039,500 $32,500 $1077.50 The sum of the interest on purchase cost of the several lots, $27,500, and the interest on the several bond invest- ments, $32,500, is $60,000, the same as would have been received from the original investment of $1,000,000 in 6 per cent bonds. If greater accuracy is desired, the charges against each lot for interest on plant cost may be reduced by the figures in the column headed Rebate of Interest, representing the money that might be earned by the invest- ment of $1200 for periods ranging from eleven months to two months. This modification would diminish slightly the figures in the succeeding columns. Account may also be taken of the fact that each lot of bonds purchased earns interest (and the interest may be compounded quarterly) as indicated by the figures in the last column. Interest and Cost. " The Journal of Accountancy has consistently maintained that except for the purposes of com- parison the inclusion of interest as an element of cost was technically unsound and furthermore was unwise from a public point of view." (Editorial in J. of A., Vol. 22, 1916, p. 206.) The Bureau of Business Research of the graduate School of Business Administration, of Harvard University, main- tains that interest is an element of cost. It says (J. of A., Vol. 22, p. 209) : The bureau has come to the conclusion that every business, whether or not incorporated, should have a specific charge for interest on the cost of investment — the amount the capital could earn if invested elsewhere. No business is truly profitable unless it yields the proprietor not only a salary for his time and rent for his store, but also interest on his investment. The bureau has decided, furthermore, that it is more practicable from an accounting standpoint to consider this interest charge a part of expense rather than a distribution of profit. The Federal Trade Commission's pamphlet on " The Fundamentals of a Cost System for Manufacturers " says (J. of A., Vol. 22, p. 213): As seasoned material has a higher value . . . the interest on the capital locked up during the seasoning forms in a sense a direct part of the cost of the material ... it is impossible to get true relative costs unless consideration is given to interest on the capital employed. Cost accountants and industrial engineers, for comparative and statistical purposes, almost unanimously advocate including interest in cost, and so far as interest is included in cost for com- parative or statistical purposes it serves a useful purpose. Auditors, on the other hand, . . . take the ground that inter- est is not an element of cost, and that to include it in cost results is an inflation of inventory values and an anticipation of profits. It is recommended that where interest on the investment is treated as an item of cost that the interest charged to the goods be eliminated from inventory values, and that in preparing profit and loss statements the amount of the interest charged to costs during the period be returned to income under the specific caption " interest on investment." Suppose a furniture factory buys on the first day of the year a lot of green lumber for $10,000 and seasons it for a year before using it. At the end of the year it has cost 130 BOOKKEEPING AND COST ACCOUNTING in addition $400 for storage, insurance and taxes. The accountant also adds to the cost $500 for interest, crediting Interest on Investment, and it is now inventoried at $10,900. The Profit and Loss statement will show no profit on lumber but a profit of $500 on interest on investment. If the lumber had not been bought, but instead the money had been invested in 5 per cent bonds, the profit due to interest earned would have been $500. Suppose instead of buying the green lumber on the first of the year, it had bought it on the last day of the year after it had seasoned in a lumber yard. If the price of green lumber had not advanced, the seller would charge not less than $10,900 in order to cover his expenses, including interest on his investment. It is evident that the true inventory value of the lumber at the end of the year is $10,900 whether it was purchased by the factory on the first or on the last day of the year. But the Trade Commission recommends that where interest on investment is treated as an item of cost " the interest be eliminated from the inventory values " and " returned to income under the specific caption ' interest on investment.' " It is not clear what the expression " returned to income " means. It is probably a technical term used by some accountants, having a different meaning than the same words when used in ordinary language. There is no " in- come " in the case, but only " outgo." If the interest is eliminated from the inventory, Lumber account would appear as follows : Lumber To Cash (purchase price) $10,000. By Int. on Invest., $500. To Expense (storage, etc.), $400. Bal. (Inventory) $10,400. To Interest on Investment, $500. The recommendation of the Commission is certainly wrong. The inventory value is $10,900 instead of $10,400, for it cannot be purchased in its seasoned state for less. The $500 interest is part of the cost at the end of the year whether it was purchased green at the beginning of the year and stored in the factory sheds, or whether it was purchased at the end of the year after it had been stored in the lumber yard of the seller. In the first case the purchaser earns $500 interest by investing $10,000 in lumber, and in the second hand case he may earn the same interest by investing the money in bonds. CHAPTER XIV CLASSIFICATION. SYMBOLS. BOOKKEEPING BY MACHINERY Classification.* A classification shoujd provide for an orderly and logical grouping of subjects which will bring together, more or less automatically, in their proper relationship the various divisions and subdivisions, and enable the location of any desired subdivision quickly and without the need of cross-indexing. It must also be flexible enough to permit wide expansion. The method of numbering consecutively in one series is the extreme opposite of logical classification. In working up the classification appended hereto, the writer has followed the method developed by Frederick W. Taylor, based on the plan made familiar by Melvil Dewey, which is exten- sively used in cataloguing books in libraries. The basis of the Dewey classification is the designation by a numeral of each of the main or generic groups into which the matter classified is divided. Mr. Taylor attempted, in endeavoring to classify the expenses, activities and products of a manufacturing plant, to use the Dewey scheme, but found that it was awkward to be limited to ten classes or ten subdivisions, and that there were frequently numerical values to be embodied in a symbol, these numerals being in danger of being confused with those used to designate classes or subclasses. Hence he settled upon the use of letters for the classification proper, which has the advantage of per- mitting a symbol to be to a great extent mnemonic. While Taylor undoubtedly developed to its fullest usefulness the mnemonic system of classification, he always referred to Oberlin Smith as the originator. In using this system we ascertain, by reference to the first sheet, showing the main classes, the letter designating that in which the subject with which we are concerned would naturally fall. Next, we refer to the sheet giving the subdivisions of that class, and so on until we get to the elementary subdivision. The final test of any classification is use, so the one here- with submitted for Machine Shop Practice must not be regarded as either complete or final, but only as a starting point from which to work. PROPOSED TENTATIVE CLASSIFICATION OF MACHINE SHOP PRACTICE Main Classes A Administration, Management and Maintenance of Plant and Machinery A Administration, Manage- ment and Maintenance of Plant and Machinery B Building and Yards C D E Employees F G General — Covering a wide range of subjects treated in an interrelated manner H J K L M Machinery (other than trans- portation) N P Power Transmission R S Materials — Their purchase, storage and handling, and machinery for hoisting and transportation, of them T Tools and Appliances — ■ Their construction, use and maintenance U V Various Features of Ma- chine Shop Practice not otherwise classified W X Y Z AA Accounting — Costkeeping AB Building Maintenance — ■ Caring and Cleaning AC* AD Drawings for Machine Shop Use AG General — Relating to Man- agement and Organiza- tion treated as a whole AM Maintenance of Machin- ery AP Planning of Work AS Supervision AT Timekeeping AW Wage Systems B Buildings and Yards BC Construction — Types BS Sanitation BF Fire Protection BV Ventilation BH Heating BY Yards BL Lightning E Employees ER Record of Employees ET Training of Workers — Apprenticeship, Shop Schools, etc. EB Beneficial Associations and Other Shop Organiza- tions ED Discipline EE Employment — Selection of employees with respect to fitness for work EH Health Maintenance M Machinery (Other than Transportation) MP Punching, Stamping and MV Various Machinery not Bending otherwise classified MT Machine Tools MW Welding MT Machine Tools MTA Abrasive (Grinding) Ma- chinery MTB Boring Mills MTC Cutting-off Machines MTD Drill Presses MTG General — Relating to more than one kind of machine MTK Keyseaters MTL Lathes MTM Milling Machines and Rotary Planers MTP Planers, Shapers, and Slotters MTV Various Machine Tools not otherwise classi- fied MTA Abrasive (Grinding) Machinery MTAD Drill Grinders MTAP Polishing Machines MTAT Tool Grinders MTAU Universal Grinders MTAV Various Grinding Ma- chines not otherwise classified MTAW Emery Wheels — Their Construction Materials, and Uses * H. K. Hathaway, Trans. A. S. M. E., 1916. * Left blank. In Mr. Hathaway's paper there are numerous blank spaces in each subdivision, as in his list of main classes, all the letters of the alphabet being used except I, O and Q. The blanks are omitted here in order to save space. It is well not to use Z, as when written it is apt to be mistaken for the figure 2. 131 132 BOOKKEEPING AND COST ACCOUNTING P Power Transmission PB Belting PR Rope Drives PE Electrical PS Shafting — other than PL Lubrication Countershafts (which are included with ma- chines) S Materials, their Purchase, Storage, and Handling, and Machinery for their Hoisting and Transportation SM Characteristics of Various Materials SP Purchasing SS Shipping SA Store-room Arrangement. and Store System SH Handling — Transportation while in process of manu- facture and the imple- ments and machinery used for transportation T Tools and Appliances, their Construction, Use and Maintenance TA Tool-room Arrangement. and Administration TC Cutting Tools TG Grinding, Lapping and Pol- ishing TH Holding Devices TJ Jigs, Fixtures, and All Spe- cial Tools for Duplicate Work TM Measuring Tools TP Punching, Bending and Stamping TV Vise and Floor Work (Including Erection and Assembling and the Tools and Appliances used in connection therewith) TCB Broaching Tools TCC Cold Saws TCD Drilling and Boring Tools TCM Milling Cutters TC Cutting Tools TCP Paring Tools TCS Slotter Tools. (Other than Paring) TCT Thread-cutting Tools Letter Symbols Versus Numbers. Letters for symbols have some advantages over numbers. In the first place they may be made mnemonic, aiding one to remember the thing signified by them. Secondly, fewer characters are needed, since numbers are made of only ten digits, to 9 inclusive, while 22 different letters (of one style) may be used, omitting 0, 1 and Z because they are apt to be mistaken for 0, 1, and 2, and Q because it is difficult to make; if two styles are used, capitals and lower case, there are 44 available characters. The number of different tilings that may be represented by combinations of two, three, and four characters is as follows: One Two Three Four No. of digits No. of letters: One style Two styles 10 22 44 99 484 1,936 999 10,648 85.18* 9,999 234,256 3,748,096 The following is a mnemonic listing of operations in a machine shop, the final letter, lower case g, representing " ing " or operation and the capital initial letter the first letter of the name of the particular tool or operation. Ag Assembling Bg Boring Bw Bench Work Cg Centering Cpg Chipping Cog Cutting off Dg Drilling Eg Erecting Fg Filing Rg Reaming Fng Finishing Sg Shaping Gg Grinding Slg Slotting Hg Helping Tg Turning Lg Laying out Tgr Rough Turning Lng Lining Tgf Finish Turning Mg Milling Thg Threading Pg Planing Tpg Tapping Phg Polishing Vw Vise Work Nomenclature of Machine Details. (Abstract of a paper by Oberlin Smith, Trans. A. S. M. E., 1881.) The requisites for a good system of names and symbols are: 1st, isolation of each from all others that did, do, or may exist in the same establishment. 2d, suggestiveness of what machine, what part of it, and, if possible, the use of said part — conform- ing, of course, to established conventional names as far as prac- ticable. 3d, brevity combined with simplicity. Of the im- portance of isolation to prevent mistakes and confusion; of sug- gestiveness to aid the memory; of brevity to save time and trouble, it is hardly necessary to speak. To define Terms: "Machine name" and "Machine symbol" refer respectively to the name and symbol of the whole machine or other article of manufacture; for it will be noticed that the system is applicable to almost any products, except those of a textile or chemical nature. "Piece name" and "Piece symbol," in like manner, refer to the separate pieces of which the whole is composed. Our system, as finally decided upon, is as follows: Machine names and piece names are determined by the designer in general according with the principles already pointed out, being, of course, made as brief and suggestive as possible, with no two machine names alike, and no two piece names alike in the same machine. In this nomenclature no positive laws can be followed but those of common sense and good English. A machine sym- bol consists of a group of three arbitrary capital letters. A piece symbol consists of an arbitrary number and follows the machine symbol, connected by a hyphen; thus, FPA-2 might symbolize the force-pump handle, smallest size. The machine symbol may be used alone when required, as FPA. As thus described, these symbols fully possess the qualities of isolation and brevity. To make them also suggestive, some attention must be paid to what, letters to use. In practice, we aim to make the first two letters the initials of the general name of the machine, and the last, letter one of an alphabetical series which will represent the size of the machine. An example of this is shown in the symbol for the smallest-sized force pump FPA. If there is any chance of a future smaller or intermediate size, gaps should be left in the alphabetical order. This "ini- tial" method cannot always be strictly followed, because of such duplicates as FPA for force pump and foot press. The remedy would be to change one initial for one beginning some synonym- ous adjective, that is, foot presses might be symbolized TPA, assuming that it stands for treadle press. Usually the least important machine should be thus changed. From this it will be seen that, in defining the theory of this scheme, the words "arbitrary letters" were purposely used. The idea is to make the system thoroughly comprehensive. There might be such a number of machines having identical initials that the letters would be almost arbitrary. In practice, the designer can usually succeed in making the symbols sufficiently suggestive. In considering how many letters to use in a symbol, considera- tion of brevity advised two, suggestiveness three or four. Two letters did not allow of enough permutations nor indicate well enough the kind and size of machine. Three seemed amply sufficient in the first respect, as it provided over 17,000 symbols. If, for any reason, in the future four letters should seem desirable, the addition of another would not materially change the system. If three letters hyphened to a number of one, two or three digits CLASSIFICATION. SYMBOLS. BOOKKEEPING 15V MACHINERY 133 should seem bulky, remember that this symbol can stand by itself anywhere and express positively the identity of the piece. Its comparative brevity is shown by comparing the second and third columns of the following table (A). In the different lines an idea is given of the application of the system to a variety of products not usually made in any one shop. Table A 1st 2nd 3rd 4th 5th 6th 1 Full Name of Machine and Piece Our Symbol Symbolic Name as Characters Characters Excess of for it often used in Col. 2 in Col. 3 Col. 5 over 4 6" X4" Engine Lathe, spindle head ELA-4 Engine Lathe A-4 4 13 9 No. 4 Power Press frame PPD-I Power Press D-l 4 12 8 7" XI 4" Steam Engine, crank shaft SEG-51 Steam Engine G-51 5 14 9 Buckeye Mowing Machine, left axle nut MMD-81 Mowing Machine D-81 5 16 II No. 3 Glass Clock, main spring GCC-105 Glass Mantel Clock, C-105 6 20 14 One-Hole Mouse-trap, choker wire MTA-3 Wooden Mouse-trap, A-3 4 17 13 Table B FPL N o. 3 Foot Press Weight Piece No. Same as Piece Name Material Quantity Rough Weight Finished Weight Aggregate Finished Weight 1 Frame Cast Iron 1 220 200 200 2 Gib Cast Iron 1 10 9 9 3 Side Bar Cast Iron 1 45 40 40 4 Front Leg Cast Iron 2 30 30 60 5 Back Leg Cast Iron 1 40 40 40 6 Treadle Cast Iron 1 17 15 15 7 Lever Cast Iron 1 85 80 80 8 FPH-8 Lever Weight Cast Iron 4 5 5 20 9 Pitman Cast Iron 1 . 12 10 10 10 FPH-10 Clamp Sleeve Cast Iron 2 3 2' 4 4J-2 21 Lever Pin Steel 1 2>2 2 2 26 FPJ-26 Treadle and Pitman Bolt Iron 3 X i ., 1 '; Table B is a specimen of part of a page of our " Symbol Book," in which are recorded any machines which have arrived at such a state of perfection and salability as to be marked " Standard " on our drawings. This table almost explains itself. The piece numbers in the first column do not have the letters prefixed, because the latter stand at the top of the column. " Same as " means that the piece is identical with a piece belonging to some other machine, and can be manufactured with it. If it is common to several machines in a set, the smallest of the set in which it occurs is given. The " quantity " column tells the number of pieces of a kind required. The last " weight " column, added upward, shows the total weight of the machine. The piece numbers are " gapped " after each kind of material, and also at the ends of " groups," as described further on. This is to allow for future changes and additional pieces; also that other nearly similar machines having more pieces may, in general, have the same piece numbers. The order in which the pieces are numerically arranged cannot follow positive rules in all cases. In our list of instructions (too long to be here quoted) we direct a classification by materials. In each class we group pieces of the same general character, in regard to the prevailing work to be done upon them, and in natural " machine shop " orders; i.e., first planing, then drill- ing or boring, then turning. We also aim to place the heaviest and most important pieces first. Between each group we " gap " the numbers. Regarding position in naming pieces, we assume a front to the machine (where the operator is most likely to be placed), and define direction tersely as " forward," " back," " right," "left," "down," "up." The adjectives of position prefixed to piece names are, of course, derived from these words, as " upper," " lower," etc. A perpendicular row of similar pieces, say 5, would be rated upper, second, third, fourth and lower. A number of different-sized pieces of similar name may, in like manner, be prefixed smallest, second, third, etc. Before closing, a brief refer- ence to certain (two) supple- mentary symbols may not be out of place. One is a small letter after a piece symbol (as FPL-21-a), signifying thai i lie piece is obsolete, t he standard FPL-21 having been altered. After a second alteration, the last obsolete piece would be suffixed "b," and so on. Thus, duplicate pieces of old-style machines can lie identified and supplied to customers. The other symbol referred to is to indicate the number of the operation in the construction of a piece, and is written thus: FPL-21-lst, FPL-21-2d, etc. Its use is of great value on detail dm wings, time cards and cost records. A good system of symbols must have four qualities: 1. Simplicity combined with efficiency. 2. Definiteness — just one symbol to one thing, and one thing to one symbol. 3. Mnemonic quality; that is it should be capable of being easily remembered. 4. It must be brief. Here is a choice specimen from a catalog: "Lower left- hand-eutting-blade - set-screw- Iock-nut" — a full-blooded linguistic dachshund. — C. B. Thomp- son. Record of Equipment. A method of keeping track of every piece of equipment in a power plant is shown by W. Sailes, in Power, March 21, 1916. It may be used as a model for the record of all the machinery in a factory, giving the original cost, present valuation, condition, performance, and cost of upkeep of each particular machine. The record is kept on cards, like WS1, classified in groups and filed in one or more cabinet drawers, as shown in Fig. 9. Class No Service Special Data: Maker Date of Purchase Price Delivered Blue Print No List of Repair Parts Nearest House carrying Repair Parts. Performance Guarantees Accessories: Location Method of Operation . Purchased through . Date Installed. Cost Installed. Mfrs. Serial No . . . Purchased from Price Cost Installed Form WS1. — Record of Individual Equipment. 134 BOOKKEEPING AND COST ACCOUNTING Record of Repairs, Inspections, etc. Date Report of Details \>w Parts or Material Used Total Cost Initial Cost 1915 1916 1917 1918 1919 1920 1921 1922 1923 Inventory Value Main Unit ($ ) Accessories ($ ) Total Valuation Class and No total valuation of all tools at the beginning of any year; (9) the total valuation of all tools at the close of any year. Notes: (Reverse of Card.) Fig. 9. — Method of Indexing and Filing Cards. Mr. Sailes says: " The first step in a complete power-plant record should be the identification of every piece of equipment in the plant, and the establishing of a record of its cost, upkeep, performance, etc., thereby simplifying the matter of keeping a schedule of the present valuation, condition, capacity and cost of upkeep of each particular machine. This system of identi- fication also prevents confusion when giving instructions con- cerning any particular piece of equipment. " One of the best methods is to classify all power-plant appa- ratus into, say, three main groups: (1) Steam Generating; (2) Power Generating; (3) General Maintenance." Plant Inventory. Mr. H. M. Norris designed the two forms shown below for keeping a continuous record of the machine tools in a shop, with their original cost, cost of installation and of repairs, depreciation, and appraised value in different years. The forms are 4x6 in., and have a margin for filing in a loose-leaf book. Mr. Norris says: " The book accomplishes nine distinct objects. It shows: (1) just what tools have been made for each machine; (2) the date when each was made; (3) what each cost; (4) the total valuation of the tools added each year; (5) the amounts by which each has been depreciated; (6) the year in which said depreciation was made; (7) the amount by which the full set has been depreciated; (8) the STANDARD PLANT LEDGER Machine No. 3 Plain Miller Maker Cin. Milling Machine Co. Cost $ 650. Location: Floor 2 Row 2 No. 8 Purchased 1-6-90 Estimated Life 15 Yrs. NeworS.H. New Prob. Selling Value: $ 1S5. Weight 3t00 Pounds [Req'd Rate of Dep'n 3 91 598 96 895 92 550 97 113 93 506 98 120 91 416 99 386 95 129 Losses, Repairs or Additions Tending to Neutralize or Augment Depreciation Description Order Date Credit Debit General Overhauling 8621 12 15 96 50 00 Rack Attachment Sold 3 6 97 10 00 2712 8 It .. 80 IHJ [ft additional lines) For Cost of Installation and List of Attachments See Reverse Side Form Nl. Inventory of Tools. SPECIAL PLANT LEDGER Tools for No. 1 Radial Drill Symbol 61 Mark Made Cost Total 1890 1891 1892 1893 6 A 1 25 " 2 15 5 •' 3 30 70 « 1 2 4 90 48 :,0 e " 5 4 6 .. 6 75 •■ 6 7 15 10 25 65 50 10 i-> a " 7 1 3 91 8 S » 8 :: 7 .. 5 50 1 51) ■a a " 9 5 S .. 10 25 23 75 a oa Valuation in January 70 00 130 50 112 5U Shrinkage During Year 5 00 11 75 Valuation in December 05 00 118 75 Form N2. Reverse of Nl. " Instead of having to go over, and revalue, from one to two thousand special tools every year, it is necessary only to note what tools have been rendered obsolete since the last inventory, the entries being made by the chief draftsman at the time of making the alterations in the corresponding drawings and patterns which destroyed their usefulness." CLASSIFICATION. SYMBOLS. BOOKKEEPING BY MACHINERY 135 Each individual machine in a group should carry its own particular designating letter and number. For instance the subdivision might be made as follows: STEAM-GENERATING EQUIPMENT, " S " Boilers B Economizer HE Stokers S Water Meter WM Blower Equipment D Boiler-Feed Pumps FP Coal and Aah Equipment A Water Softener W Coal Weigher CW Steam Meter SM Ash Weigher AW Gas-Analysis Outfit CM Feed-Water Heater H POWER-GENERATING EQUIPMENT, " P " Turbines T Condensers C Engines E Condenser Air Pumps CPA Generators G Condenser Water Pumps. . . CPW Exciters GE Condenser Circ. Pumps CPC GENERAL MAINTENANCE, " M " Cranes CH Air Compressors AC Fire Pumps FP Elevator Pumps TE In a plant having eight boilers, the designation would be Sb-1 to Sb-8. If there were three turbines the designation would be Pt-1 to Pt-3. Cranes would be designated as Mch-1, etc. Wherever possible a standard form of lettering, as well as color, should be used. BOOKKEEPING BY MACHINERY Bookkeeping Machines. Are you still paying large salaries for dips into inkwells, "flourishes," blottings and ink-spots — for illegibility, mistakes and erasures — for brain additions and subtractions, late statements and trial balances freighted with trials? Why? — when a bookkeeping machine will substitute neat readable type-printed entries, machine-accurate figuring — will save hours of time daily, keep each account in daily balance, prove postings daily, get statements out on the first, and re- duce trial balances to a mere formality? — (From an advertise- ment in Syste77i). The great advance in bookkeeping methods made in the last thirty years consists chiefly in getting rid of the labor of making pen-and-ink entries in large books, and of trans- cribing from one book to another, and of "brain additions and subtractions." The means by which these advances have been made are: cards; loose-leaf books; carbon paper; typewriting machines; mimeograph and other duplicating machines; cash registers; filing cases and cab- inets, with their folders, flags and indexes; index racks; adding machines; calculating machines; tabulating machines; photostats; addressing machines. Descriptions of these numerous devices are unnecessary here, as most of them are well advertised, and those interested may obtain, by writing to their manufacturers, illustrated circulars describ- ing them. Following is a list of several leading manufacturers, taken from the advertising pages of System. Baker-Vawter Co., Benton Harbor, Mich, and Holyoke, Mass. Filing systems, steel ledger and statement tray. Burroughs Adding Machine Co., 217 Broadway, New York. Figuring and bookkeeping machines; ledger-posting ma- chines; 98 machine models. National Cash Register Co., Dayton, Ohio. Cash registers; credit files, "cuts outall bookkeeping of customers' accounts." Dalton Adding Machine Co., Norwood-Cincinnati, Ohio. Adding and calculating machine. Stickney and Montague, 54 Franklin St., New York. "Direx- All" addressing and listing machines. Wilson-Jones Loose Leaf Co., 3021 Carroll Ave., Chicago. Loose-leaf systems and binders. Cincinnati Time Recorder Co., Cincinnati, Ohio. Clock records and time keepers. 60 models. Graphic Duplicator Co., 228 West Broadway, New York. Duplicating machines. Elliott-Fisher Co., Harrisburg, Pa. Bookkeeping machines. International Time Recorder Co., Endicott, N. Y. Time recorders, 250 styles. The Rand Co., North Tonawanda, N. Y. Visible index, 10 styles. John C. Moore Corporation, Rochester, N. Y. Loose-leaf forms and binders. Stromberg Electric Co., Harvester Bldg., Chicago, 111. Time recorder for cost keeping. It records on the job ticket the starting and stopping times in hours and decimal fractions, automatically deducting the dinner and other non-working periods. Electrically operated recorders controlled by a master clock. The C. J. Root Co., Bristol, Conn. Automatic counters. Kalamazoo Loose Leaf Binder Co., Kalamazoo, Mich. Loose- leaf devices and accounting systems. The A. W. Shaw Co., Chicago, 111. Correspondence course in retail merchandising and stores records. Addressograph, 910 W. Van Buren St., Chicago. Addressing and listing machines. Duplicator Manufacturing Co., Chicago, 111. Duplicating machines. Marehant Calculating Machine Co., Oakland, Cal. 208 Broad- way, New York. The Automatic Time Stamp Co., 158 Congress St., Boston, Mass. Time stamps. The Elliott Addressing Machine Co., Cambridge, Mass. Hand, foot and electric addressing machines. Mailometer Company, Detroit, Mich. Machine for sealing, stamping and counting envelopes 250 per minute. Alvah Bushnell Co., 925 Filbert St., Philadelphia, Pa. Vertical file pockets. Art Metal Construction Co., Jamestown, N. Y. Steel filing cabinets. Chas C. Smith, Exeter, Neb. Index tags and signals. \Y. A. Morschhauser, 1 Madison Ave., New York. Calculat- ing machine. Felt & Tarrant Mfg. Co., 1733 N. Paulina St., Chicago, 111. "Comptometer" adding and calculating machine. A. B. Dick Co., Chicago and New York. Edison-Dick mimeo- graph. The J. C. Hall Co., Providence, R. I. Voucher check sys- tem. Commercial Camera Co., Rochester, N. Y. The "Photostat," for copying cost sheets, vouchers, statements and ac- countings. Copies direct on paper in a few minutes. Write for the Photostat book. The Zenith Systems Corporation, Tonawanda, X. Y. Card filing system, visible index. The Hollerith Tabulating System, which was first used in compiling the records of the U. S. Census of 1890, is now extensively used by large manufacturing concerns for lessen- ing the labor of accounting and cost finding. The following description is taken from circulars of The Tabulating Machine Co., New York City. The essence of the Hollerith System is the preparation of a slip, or card, to represent each transaction (or essential par- of a transaction) in such a form that these slips can after- wards be sorted out upon any desired basis of classification, and that each group — having been so sorted — may be added, 136 BOOKKEEPING AND COST ACCOUNTING so as to show the total effect of this group of transactions under any desired number of headings. The " System " consists of three machines: The Puncher (Fig. 10), the Sorter (Fig. 11), and the Tabulator (Fig. 12). The Puncher is operated somewhat like an ordinary typewriter, but, being simpler, can be worked more rapidly. Its purpose is to cut perforations in cards (Fig. 13), so as to enable the other two machines to " take hold of " them. All cards for use in the standard machines are uniform in size (7|X3j in.); but the headings given to the various columns may be varied to suit particular requirements. The top right-hand corner of the card is cut off, to ensure that all cards are placed in the machines the right way up. The card has 45 vertical rows of figures (letters are some- times used in some of the columns). Fig. 10. — The Pdncher. Fig. 11. — The Sorter. Fig. 12. — The Tabulating Machine. When cards are being punched in series many consecutive cards may require to be punched identically in (say) the first nine or ten columns. To save time, a " Gang Punch " is often employed for this purpose, which can be rapidly " set " by the operator to any desired combination, and will punch cards a dozen or so at a time. Punching is not highly skilled work: boys or girls soon learn to punch cards accurately at the rate of 250 per hour. Each card represents a " trans- action." The Sorting Machine (Fig. 11) is worked by electricity from an ordinary lighting socket. By its aid anyone can sort cards at the rate of about 15,000 per hour. The operator sets the pointer of the machine against the column repre- senting the basis upon which the sorting is to proceed, and the machine does the rest. The cards are placed vertically in position on the table of the machine in batches, and in due course find their way into one or another of the receptacles *hown one above the other in the lower part of the machine. Cards not perforated at all, which may have been included by mistake, are also sorted out automatically. If the sorting basis consists of more than one column of figures the cards are first sorted for the hundreds column, then each hundred group must be sorted according to the tens column, and sub- sequently according to the units column. Operating at a speed of 15,000 per hour, it is not a lengthy process. The Tabulating Machine (Fig. 12) is also worked by elec- tricity. It takes the cards sorted out into groups by the preceding process, a group at a time, and shows — in as many columns as may be required — the total of any desired col- umns thereof in tabulated form. Fig. 12 model shows five tabulated divisions. The machine will classify about 9000 cards per hour. The sectional totals must, of course, be taken off the Tabulating Machine by hand, and built up into daily totals. An effective check is secured by agreeing the " daily " totals arrived at upon one basis of sorting with the " daily " totals CLASSIFICATION. SYMBOLS. BOOKKEEPING BY MACHINERY 137 arrived at by another basis of sorting; but there is no limit to the number of different ways in which the same series of cards may bebuilt up into daily totals — each, of course, shoiving a different basis of classification. For illustration, the daily Form 1936 Revised J.T.150 Depmt. THE PENNSYLVANIA STEEL CO. Man's No. Date Dec. 22 Time Started A.M. 7 Name fyttiwv Z> °& P.M. 6 Time Finished No. Vat. Order No. Macb. No. or Employment Do not write here Time Rate Cost 10 9 6 fy/zo 01 ZH9 1 1.1-1 2> Z7* «' V 6' II e> OH t'f IJLl-l 27' / 6' /I 9 ktl/yo o9 8I& l3t-3 17' 3 /■in '? bSyixo c3 b-oiy 1CS-1 17' / S 2 So /J-i 17' / i~ •S.A'o s loW-T-0 07 <7o3 $ ol-l i? 1 / S b (, bSi'/2-0 01 °I0F go/- 1 t 1 .VI 1 3 3 -'e. Pieces Order Number Sub. Order No. Dent, ami Cost Group Charge \ Miolilnu No. X Hours Burden X Lttb.r 3 9 • • 0|0 • • • o e • • 4 l 1 1 • 1 1 1 1 1 1 • 1 1 1 • l l i 1 1 O 1 • • 1 1 i 1 1 1 1 1 1 1 • 5 <° 6 o D » ft 2 2 2 2 2 2 2 2 2*2 2 2 2 2 2 2 2 2*2 2 2 2 2 2 2 2 2 2 • e 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 • 3 3 3 3 • 3 3 3 3 3 3 3 3 7 4 4 4 4 4 4 4 4 • 444 4 4 4 • 4*4 4 4 4 4 4 A • 4 4 4 4 8 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5* 5 5 5 9 6 6 6 6 6 6 • 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 10 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 11 8 3 8 8 8 8 8 8 8 8 8 8 8 • 8 8 8 8 8 8 8 8 8 3 8 8 8 • 8 e 9 3 9 9 9 • 9 9 9 9 9 9 9 9 9 9 99 9 9 9 9 9 9 9 9 9 9 9 9 / Fio. 13. — Tabulating Machine Card Corresponding with Item 1 of Form PS1. REQUISITION ON STOREKEEPER jf. Storekeeper I X*~ J 8~06 Section ___ Date Please deliver to Department 98 l£ L h^O Order No. ta a bt c a 0. 11 3 O J3 «5 C V E a. a a H z < 5 >. -a ■a s Weight u r Quantity Description For Office Use Only Unit Price Value tQynvyjJs'W'Atdl' £ < 7§ t 7 t .o-S-~— / ^ J ¥ 33 a Z a tj * a <" * Z z 3 a - Q 6 z 11 ■p Signed The Pennsylvania Sieel Co. Form PS2. — Requisition On for Storekeeper. 138 BOOKKEEPING AND COST ACCOUNTING 1 2 1 • 2 • |l 1 • 4 6 8 5 7 9 X Dept. Credit • Class • Qunntltj • •• Unit • • Money Value • •• 3 • •• • 0*0 4 5 2 6 1111 2 2 2 2 3 3 3 3 A K 1 1 1 1 1 B l 2 2 2 2 • "33333 A K B L C M 11111 2 2 2 2 2 3 3 3 3 3 111* 2 2 2 2 3 3 3 3 Di Pi Or Qt 1111 2 2 2 2 3 3 3 3 1111 2 2 2 2 3 3 3 3 1 1 2 2 • • • 2 3 rt 7 8 9 4 4 4 4 5 5 5 5 6 6 6 6 "44444 E p 5 5 5 5 5 "66666 D N E P F R 4 4*44 5 5 5 5 • 6 6 6 6 6 4 4 4 4 5 5 5 5 6 6 6 6 Oi Q1 Lt) Pk T Cd 4 4 4 4 5 5 5 5 6 6 6 6 4 4 4* 5 5 5 5 6 6 6 6 4 4 5 5 6 6 4 5 6 10 11 • 7 7 7 7 8 8 8 8 9 9 9 9 O 5 j a I g J U g 7 7 7 7 8 8 8 8 9 • 9 9 G b 11 T ' » • 7777 8 • 8 8 8 9 9 9 9 9 7 7 7 7 8 8 8 8 9 9 9 9 LF SF Vd 7 7 7 7 8 8 8 8 9 9 9 9 7 7 7 7 8 8 8 8 9 9 9 9 7 7 3 8 9 9 7 8 9 n Fig. 14. — Machine Card Punched to Correspond to Form PS2. An Elapsed-time Recording Machine is made by the Bishop Calculating Recorder Co., Woolworth Building, New York. On starting a job a card is inserted in the machine, which cuts a notch in the edge of the card. When the job is finished another notch is cut, and the time-controlled mechanism is so arranged that the second notch always shows a direct reading of the elapsed hours. The noon hour and non- working periods are automatically subtracted. By placing the notched card on a " wageometer," a form of wage table made by the company, a direct reading of the amount due the workman is at once shown. A tabulating machine may be used in combination with the recorder, to sort the cards automatically by man, job or operation number and to com- pile the amounts. The Periodograph, made by Gisholt Machine Co., Madi- son, Wis., consists of a master clock and a panel board kept in one of the offices of the factory and a number of time- stamping registers which are placed in convenient locations throughout the shops. A unit of time, usually a tenth of an hour, is called a period, and the periods are counted con- secutively through the working hours of the clay, week or month that the shop runs, non-working hours being auto- matically omitted. A job card is issued for each job and the card is stamped with the periods at which the job is started and finished. The difference is the number of periods the man worked on the job. The printing on the cards varies with the kind of work done and with the system of shop accounting in use. Form PR is a sample of a card used in a machine shop. It shows that man No. 187 started on order 1271X July 6, period 412, but was stopped at period 443. He started again at period 475 on the same day and worked continuously to period 857 July 10, when the job was completed. Another form of card contains spaces for the following information: Name and number of workman; piece name and number; operation name and number; machine number; shop order number; number of pieces; number spoiled; number defective; setting up time allowed; time per piece allowed; time each; stopped; completed; total time, hours; labor cost; premium; total labor cost; Inspector's OK and date; also six spaces similar to those in Form PR for the clock stampings and the entry of the period differences. Kfrrji-®** OurOrd.No. Id'j^AC \ B/P ^00^ /2cW-£/ ^^axu2y Bench Work Blacksmith Bolt Cutting Boring Mill Cutting Off Drill Press Erecting Gear-Cutting Grinding Helping Hydraulic Press Keyseatin;* Lathe Work ^.Milling *> — /Planing O Repairing Sawing OSlottlng Shaping O Tapping Testing Turret Lathe Change Card When You Change Jobs KEEP CARD CLEAN PUT IN RACK AT NOON AND NIGHT Jul Jul 857 475 Jul Jul 443 412 t 2 . 3fZ 3/ Total Periods ¥/J Cost Labor Z2.39 Shop Ex. /¥.¥-S Stopped Tipleje< Adamson Machine Co. Suidincjg uaqA\ juoj j ap !s siqx dfl pug siqx Form PR. Periodograph Card. The Monroe Calculating Machine is an adding and calculating machine the three principal parts of which are a standard flexi- ble adding machine keyboard for setting up the numbers to be added, subtracted, multiplied or divided, a crank at the right of the keyboard for performing the operations, and a carriage at the top of the machine holding the dials which show the results and the proofs of the operations as they are performed. The main crank operates in either direction, forward or clock- wise for addition and multiplication, backward or counter- clockwise for subtraction and division. There are two stopping places, after a forward turn stop at the upper position, after a backward turn stop at the lower position. Automatic locks CLASSIFICATION. SYMBOLS. BOOKKEEPING BY MACHINERY 130 provide against operating errors which might result if the turn is not ended at the proper position. The machine is made by Monroe Calculating Machine Co., Woohvorth Building, New York. The following examples of its operation are taken from the " Instruction Book." Addition. 325+456+222 = 1003. Set the automatic release key with the arrow pointing to the right. See that the dials are clear. Set 325 on the keyboard at the right and turn the crank forward a full turn to the upper position registering 325 in the lower dial. Set 456 on the key- board and turn the crank forward again; this adds 456 to 325. Set 222 on the keyboard, turn the crank forward once more, registering the result 1003 in the lower dial. Subtraction,. 1003 —445 = 558. At the end of the preceding example 1003 appears in the lower dial; to subtract 445 from it set 445 on the keyboard, turn the crank backward a turn and a half to the lower position and the answer, 558, appears in the lower dial. Multiplication. 4346 X 122 = 530,212. Turn the crank forward two turns, stopping at the upper posi- tion. With the carriage shifting lever shift the carriage one position to the right and make two more turns. Shift carriage again and make one turn. The three successive steps register in the rtsult dials as follows: 1st Step 2d Step 00000002 00000008692 00000022 000095612 3d Step 00000122! 00000530212 Upper Dial Lower Dial Division. 477591-^224=2132; remainder 23. Set the dividend 477591 in the keyboard and by one turn of the crank forward register it in the lower dial. Clear the upper dial and the keyboard, set the divisor, 224, in the keyboard and shift the carriage 3 spaces to the right so as to bring the divisor 224 directly under the 477 of the dividend, the first posi- tion for dividing. Turn the crank backward, subtracting 224 from the first three figures of dividend (477) as many times as it can be subtracted, that is twice. The red 2 in the upper dial indicates the first figure of the result, as shown under 1st step below, Shift the carriage one space to the left, again subtract the 224 as many times as possible from the three figures of the dividend that appear immediately above it, that is, once. See 2d step. Continue this shifting and subtracting until no further sub- traction can be made. The figures as they show up on the machine at the end of each step are as follows: 1st Step 2d Step 3d Step Last Step OOOO^OOO 0000029591 0000 2 1 00 000007191 0000.'/. 30 000000471 00002 132 000000023 Upper Dial Lower Dial The instruction book shows numerous examples of the solu- tion of special problems and of the use of various " short cuts," such as multiplication and division of decimals, shortening multiplications, taking off discounts and chain discounts, accumulative multiplication, use of reciprocals, prorating, figuring interest, etc. The Marchant Calculator, made by Marchant Calculating Machine Co., Oakland, Cal., is shown in Fig. 15. Instead of the usual adding-machine keyboard it has a series of movable disks with the figures 1 to 9 on I heir rims. The operations are thus described in the instruction book. Addition. 245+3275 +84 = 3604. Space carriage to unit column. Place 245 on machine and turn handle forward one stroke; clear lexers, Bel up 3275 and repeat operation until all the numbers have been added into machine when total amount will be accumulated in the right hand dials. Subtraction. 24567-13245 = 11322. Space carriage to units column, set 21567 on levers and turn handle forward one stroke as in addition; clear levers and set up Fig. 15. — The Marchant Calculating Machine. 13245, the number to be subtracted, and give a backward or reverse turn to the handle, answer appearing in right hand dials. Multiplication. 245 X5281 = 1293845. Place 5281 on setting up levers — shift carriage to third column (because the multiplier has three figures), and turn handle for- ward two times — shift carriage to second column and turn handle forward four times — shift to first column and turn handle five times, completing the operation. In order to check the opera- tion see that you have the proper figures set on the levers and the proper numbers appearing in the proof dials. Division. There are two systems of division used on the Marchant. Division by Addition, and Division by Subtraction. Division by Addition is the fastest method known, and although more difficult to learn, is preferable to the Subtraction method. To illustrate the two methods in as simple a manner as possi- ble we will divide 25 into 100. Addition Method. Set the divisor 25 on levers, space carriage to units column, and turn handle of machine forward as in addi- tion, w : atching the Product dials for 100, the dividend, to appear. In four forward turns you have 100 and the quotient 4 is shown in the left-hand dials. Subtraction Method. Set the Dividend 100 on levers and add it into machine by one forward turn of handle, clear the left- hand dial of the Fig. 1. Clear the levers and set up Divisor 25, then reverse the handle action. In four backward turns the Dividend 100 has been taken from the lower dials and the quo- tient 4 appears in left-hand dials. CHAPTER XV OLD-SCHOOL COST ACCOUNTING. IRONWORKS BOOKKEEPING BOOK-KEEPING AT AN IRON BLAST FURNACE IN PENNSYLVANIA In the year 1872 the author was engaged as bookkeeper at a blast furnace in Northern New Jersey. He was first sent to two furnaces at a works near Easton, Pa., for three weeks to study the system of bookkeeping then in general use in the principal furnaces of the Lehigh Valley, so that he could open and keep a set of books on the same system at the New Jersey furnace. The system used at the Pennsylvania works was old-fashioned double entry with Cash Book, Journal and Ledger, and such auxiliary books as are needed at a blast furnace, such as Furnace Book, in which were entered daily the weights of the coal, ore and limestone used by the fur- nace and the product of pig iron with its several grades, Coal and Ore Book, Shipping Book, Labor Book, etc. There were also Time Books for each department, such as Furnace, Foundry, Mine, Farm, Blacksmith Shop, Wheelwright Shop, and Outside Labor. In the latter book the kind of work that each man was engaged upon was marked by a symbol so that at the end of the month the total outside labor could be distributed to the several accounts to which it should be charged. There was a Company Store in which the men traded, and it kept a Store Ledger with an account for each man. At the end of each month the store sent to the office of the furnace the charges against each man, which were entered on the Labor Book together with charges for Rent, Doctor, Cash Advanced, etc., and the balances due the men were paid a few days after the end of the month. In the Labor Book the men's names were grouped by departments, and it was ruled with columns for credits for Labor, charges for Store, Rent, Doctor, etc., and Balance. Journa entries were made from the Labor Book, charging Furnace, Foundry, Mine, etc., and crediting Labor, and charging Labor and crediting Store, Rent, Doctor, etc. Invoices for goods purchased were marked with the accounts to which they should be charged, such as Store, Furnace, Mine, etc., and Journal entries were made from them, Store Dr. to Sundries, General Supplies Dr. to Sundries, etc., the Sundries being the names of the creditors from whom the goods were purchased. A Ledger account was kept with each creditor in the old-fashioned way, which involved a great deal of labor for the bookkeeper and often caused con- siderable delay in getting a monthly trial balance. When the monthly statements from creditors came in they were checked against the ledger entries, and the original bills and statements were then sent to the New York office to be paid, and a long journal entry was made, Sundries (names of creditors) Dr. to Company, which when posted balanced the creditors' accounts. Each department, Furnace, Mine, etc., was charged directly, as above stated, with the labor and with the goods purchased belonging to it, as far as possible, and also with such supplies, General Charges (outside labor) or service of teams, and with goods delivered to it from the Store, Farm, Blacksmith Shop or other department, as it might have received during the month. The original entries for these transfer accounts were either Day Book entries or invoices or memorandums from the several departments. Each department also was credited with the products it had shipped or delivered to other departments, at cost price as nearly as it could be estimated, thus Ore was charged and the several mine accounts credited with all the iron ore produced by the mines, the price per ton being the total charges against the mines during the month divided by the number of tons produced. The several depart ments, Elacksmith Shop, Wheel- wright Shop, Furnace, Limestone Quarry, and Saddler Shop, not only had operating accounts with these names, but also separate Supply Accounts and Tools and Fixtures Accounts. After all of the various debits and credits to all these accounts had been entered in the journal and posted in the ledger, an entry was made Pig Iron Dr. to Sundries, crediting Coal, Ore and Limestone Accounts for the materials used, and the several operating accounts above named with the labor and supplies furnished by the departments, charging or crediting Pig Iron also with any balance representing profits or losses in these accounts. Thus, the total cost of pig iron in any month was the sum total of all the charges that had been made to Pig Iron account for the month less any credits that had been made for slight profits in the operating accounts. At the end of the year, when a general inventory was taken, apparent profits and losses in operating accounts were cred- ited or charged to Pig Iron account for December. At the end of 1S72, at this Pennsylvania furnace Farm account was credited and Lime account charged with a profit of $791.84 of Lime account, and Pig Iron then charged and Farm account credited with 81127.27 loss on Farm, and Pig Iron charged and Store credited with $4163.93 loss on Store, winch indi- cated that in that year, at least, the workmen had not been overcharged with the store goods and farm products they had purchased. When pig iron was shipped on orders from the company it was charged on the furnace books at a round figure slightly in excess of the average cost per ton of the pig iron remaining on hand as it appeared on the books, thus, in June, 1872, the cost of pig iron on the books was 821.40 per ton and the iron shipped during that month was charged to the company at $22.00. In July, 1S73, the apparent cost was 834.39 per ton, and the shipments were charged at $35.00. It will be noted that this method of obtaining the cost of 140 OLD-SCHOOL COST ACCOUNTING. IRON WORKS BOOKKEEPING 141 pig iron, while quite satisfactory from a bookkeeper's stand- point, since it enables the books to be balanced each month, and makes the total cost of pig iron in any month the total cost of running the establishment in that month, is far from giving the true cost, for it takes no account of interest on the investment, depreciation from wear and tear or from ob- solescence of the plant, nor of the cost of relining the furnace, which had to be done about every two years. In fact, the two furnaces at this plant were already obsolete and had to be torn down and replaced by a large furnace in a few years. In 1872 the average price of No. 1 Foundry pig iron, at Philadelphia, was $48 per tor, having risen from $33 in two years. In 1873 the average price had dropped to S43, and it continued dropping until 1S7S, when the average price was only 817.50. In these five years three-quarters of all the furnaces in the United States became obsolete and had to be rebuilt or abandoned. Following is a list of the ledger accounts kept at the iron works in Pennsylvania, together with brief samples from some of the other books, from notes which the author has kept since his two visits to the works in 1S72 and 1873: Ledger Accounts at a Pennsylvania Blast Furnace Farm (includes Horses and Teams). General Repairs. General Charges Tools and Fixtures. General Charges. Labor. Limestone Quarry Supply. Limestone Quarry. Limestone. Moulding Shop. Office. Ore. Total representative accts. Personal accts. Pig Iron. Rent. Saddler Shop Tools and Fix- tures. Saddler Shop Supply. Saddler Shop. Savings Fund. Store. Wheelwright Shop Tools and Fixtures. Wheelwright Shop Supply. Wheelwright Shop. Wood. 46 51 Total 97 Sample of Cash Book Blacksmith Shop Tools and Fixtures. Blacksmith Shop Supply. Blacksmith Shop. Back-vein Ore (and ten other Ore Accts.) Company (New York Office). Cash. Coal. Coal Wharf. Engine Room Tools and Fix- tures. Engine-room Supply. Engine Room. Furnace Tools and Fix- tures. Furnace Supply. Furnaces. Credits 1872 Cash Dr. Ledger Labor Book June 1 On band, balance from last mo. 757 15 3 H Frankenfcld, for hay Blacksmith Shop, work done 50 57 00 4 Lime Aect. Lime sold in May Gen. Ch. T. & Fix. Horse of R. F. Stover Joe Lewengood. Acct. Labor Office Acet. Washing Towels Savings Fund. Wm. Martin de- posited 191 100 54 00 I'O 00 50 1 00 FURNACE BOOK Seventy-fourth Weekly Report for Furnace No. 1, Blast No. 11. Week Ending Aug. 30, 1872 Date Charges Coal Ore Limestone Total Total Total Ores Used August each Day per Charge per Charge per Charge Coal Ore Limestone Re marks I S j B O R S 24 29 24 21 10' 2 696 609 304' x ■s x X X X M 25 27 24 21 I0' 2 648 567 283'- N 's x X '- H T 26 27 24 21 101,2 648 567 2832 Mi '« x X X \ W 27 28 24 21 \0X 672 588 294 '. 's X X X N Stopped 2 hrs fixing pump. T 28 26 24 21 I0M 624 546 273 X X X X X X F 29 22 24 21 I0U ( 528 1 221 462 231 a x X X X % Stopped 4 hrs repairing arch. S 30 25 24 21 I0' 2 600 525 262= X x X X X X Average Coal 2-10-3-23 4637 3864 1932 Average Ore 2-2-1-21 Quantity of Iron Made Tons Cwts. Qra. Lba 1 2 A 2B 3 4 1 2A 2B 3 4 Ore on hand received 10,053 904 16 7 3 S 24 6 7 used 193 4 M 25 b\i 8 m balance 10,765 T 26 •>Vi 6' 2 "> 7 7X W 27 Coal on hand 5,049 II T 28 bX 6 received 1,022 14 F 29 4 ■jm used 231 17 S 30 7 m 4 2X balance 6,640 8 28 H 13"., 31 X 17', Lim?stone used 96 12 Average Limestone, 1 —1-0-26. Total Iron, 60 No. 3, 31 Mott =91 ons. 142 BOOKKEEPING AND COST ACCOUNTING The weights of coal, ore and limestone charged into the furnace were given in hundredweights (112 pounds) and the averages per gross ton of iron made were recorded in the old style in tons, cwts., quarters and pounds. It is interesting ing to note that the total product for the week was only 91 tons. No. 2 furnace, working on better ores, made in the same week 108 tons, with a coal consumption of 1-1S-0-4; ore, 1-15-0-14; and limestone, 0-16-3-16. These were about the average figures for a small blast furnace using anthracite coal at that time. Ten years later the small furnaces were replaced by a large one, coke was used instead of anthracite for fuel, fire-brick ovens were substituted for cast-iron hot-blast stoves, the production mounted to over 100 tons per day, and the fuel consumption was reduced to less than a ton of coke per ton of iron made. Comparing the figures iirthe above table with the following report of the same furnace in 1S57 it appears that no improvement in practice had been made in the 17 years prior to 1S73. Note from an old Report Book of the same Furnace: Report of a Larger Pennsylvania Furnace Week ending Nov. 24, 1871 Furnace No. 1, Blast No. 5, 84 weeks ended April 4, 1857. Average Coal per ton of Iron Average Ore per ton of Iron Average Limestone per ton of Iron Average Iron made per week Tons Cwts. Qrs. 1 18 2 2 3 16 1 96 3 ' I.bs. 23 26 10 Furnace No. 2, Blast No. 4, Blowed out Feb. 27, 1S.56 Blowed in Aug. 4, 1S56: Ran S3 weeks, blast ended Mar. 12, 1S58. Iron made first six weeks, 93, 84, 124, 109, 111, 116 tons. Tons Cwts. Qrs. I.bs. Average Iron per week for 83 weekfi Average Coal per ton of iron Average Ore per ton of iron Average Limestone per ton of iron 112 1 2 9 16 1 15 1 1 16 12 24 9 Material Consumed Product of F URNACE Coal Ore Limestone No. Ix No. 2x No. 2 No. 3 White Aggregate 289 426 M 289 30 51 H 167H 25 7 14 H 5 i. 200; 2 ton Stock on Hand at Last Report I12H Iron Shipped Ix 2x 2 3 w 10 120 Glen I Wks. W. F. & M. Co Barber & Co. Total Shipped 10 50 70 130 Stock on Hand 30 53 72 ; 2 7!-2 20 183 Heading of a Monthly Pay List at a Charcoal Furnace in New Jersey in 1871 We, the subscribers, do hereby ac- knowledge to have received the sums prefixed to our names respectively, in full payment of the amount due us for work done between the dates specified, and we, the subscribers, as witnesses, do hereby certify that we have witnessed said payments where the receivers could not sign their own names. Heading of Columns: Name. Em- ployment. Commencement and Expira- tion of time of Service. Time Employed. Work Done. Rate. Total Amount Paid. Paid in Goods. Debit Balances. Credit Balances. Paid in Cash. Signatures of Payees. Witnesses. Remarks. LABOR BOOK Summary of Pay Roll, June, 1872 Debits Bal. from Last Month Store Rent Coal Wood Farm Doctor General Charges Total Furnace: (33 names here) Total 20 94 375.91 68.00 3 00 10.14 12 15 21 00 1 .50 512 64 General Charges: (33 names) Total 240.93 44.50 2.77 6.89 3.00 13.00 57.93 369 02 Credits Balances Cash Balance to Next Month Time Rate Amount Bal. last Mo. Total Debit Credit On Pay Day Debit Credit (33 items) Total 2015.98 10 31 2026 29 1.38 1515.03 OLD-SCHOOL COST ACCOUNTING. IRON WORKS BOOKKEEPING 143 BOOKKEEPING AT A NEW JERSEY BLAST FURNACE When the author opened the books at the New Jersey furnace he followed the general system that he had found in Pennsylvania, but made several changes in order to decrease the number of accounts kept in the Ledger. For example, instead of having separate accounts for Blacksmith Shop Supply, Blacksmith Shop Tools and Fixtures, and Black- smith Shop (operating account), there was only one Black- smith Shop account, the Dr. Balance of which at the begin- ning of the year represented the inventory of its equipment, and a General Supply account, which included the supplies (other than furnace raw material) for the furnace and for all the auxiliary departments. Later all the personal accounts of parties from whom goods were purchased and whose bills were credited to New York office for payment, were taken out of the ledger and one general account, Accounts Payable, substituted for them, the bills being listed in an Invoice Register, which was provided with columns headed with the names of the accounts to which the goods purchased were to be charged. There were several ore mines owned by the Company about four miles from the furnace, and a mines store, in which all local accounts relating to the miners were kept, but the furnace books were a sort of clearing house between the mines and the New York office. All the bills for goods purchased, certified by the mines manager, were sent to the furnace for record, and in the furnace books were charged to Mines account and credited to Company, while Company was charged with the ore shipped to outside parties at the arbitrary price of $5.00 per ton. The mines had been run, more or less profitably, for over a hundred years, and no cost accounts had ever been kept at them. The system of charging New York office with the pig iron shipped at the book cost for the month in which it was made, thus showing neither profit nor loss on the furnace books, was not adopted for the ore shipped, as the books kept at the mines store gave no means of estimating the cost at the several mines, but at the arbitrary price of So. 00 per ton (which at that date was below the market price for good grades of New Jersey ores). The mines account showed a profit of over 850,000 in the year 1873, thus overbalancing all the losses at the fur- nace, including the cost of new construction, as will be shown below. The method of bookkeeping used at the furnace is shown by the following journal entries and the notes explaining them.* The "Summaries for Posting" at the top of the second column on the next page were not used in the actual book- keeping, but they are given here in order to diminish the number of entries in the columns Personal Accounts and Horses and Teams in the Ledger on page 147. By means of these summaries sixteen ledger postings have been reduced to four. They have not been used in the Column Ledger on page 148. * The furnace has been abandoned for many years, but the mines and stores are still operating. In 1916 the author found at the fur- nace store the old books that he kept 43 years before, and copied from the Journal the entries here given. Journal Entries March 31, 1873 No. 1 P. R. G. (Manager) To Company, for Cash brought from New York 2 Cash To Sundries To Store To Coal To Wood To P.R.G. (Manager) Cash for Pay Roll To Horses and Teams (for use of team) 3 Sundries To Cash Labor Other accounts, mostly personal 4 Sundries To Labor Blacksmith Shop Wheelwright Shop Horses and Teams Office General Charges* General Repairs New Construction Furnace 5 Sundries To General Charges W r ood (cutting wood) Horses and Teams Furnace General Supplies (getting timber for W.W. Shop) Coal (unloading) Ore (unloading) Limestone (unloading) New Construction Mines (hauling coal) 6 Labor To Sundries (Charges against workmen on pay roll) To Store To Coal To Wood To Horses and Teams To General Charges 7 Sundries To Horses and Teams (Charges for hauling done) General Supplies (timber for W.W. Shop) Furnace (timber for repairing houses) New Construction Mines Wood 8 Sundries To Store (For supplies furnished) Furnace Horses and Teams Personal accounts (transferred from store to office) 9 Coal To Sundries To Horses and Teams (hauling) To Mines (hauling by mine teams) To Personal accounts (outside teamsters) 10 Limestone To Sundries To Horses and Teams (hauling) To Mines To Personal accounts 3000 00 3000 00 1496 69 60 00 IS 69 14 00 1400 00 4 00 1496 10 838 67 657 43 2381 68 99 63 44 50 283 70 233 34. 337 00 16 50 138 63 1228 38 333 80 75 20 8 60 23 20 47 80 44 80 3 20 6 40 84 40 40 20 1441 95 1322 55 9 56 64 50 42 14 3 20 326 00 51 50 135 75 12 75 59 50 66 50 III 30 16 60 16 41 78 29 493 51 219 67 98 09 175 75 55 60 31 41 22 1 22 97 * General Charges covers outside labor, not charged directly to the other accounts on the pay roll, but distributed to them in the neit entry according to notes made in the time book of the outside labor loss. 144 BOOKKEEPING AND COST ACCOUNTING Journal Entries — Continued No. 1 1 Pig Iron To Sundries Hauling 132 tons to R.R. To Horses and Teams To Mines To Personal accounts 12 Horses and Teams To Personal Accts. (G. White, }■<» day) 13 Personal Accounts To Horses and Teams 14 Sundries Mines Personal Accounts To Blacksmith Shop 1 5 Personal Accounts To Wheelwright Shop 16 Store To Wood To Horses and Teams To Sundries I 7 Mines To Coal (furnace coal sent to mines) To General Supplies 18 Sundries Furnace Blacksmith Shop New Construction 19 Sundries To Personal Accounts As per Invoice Register Mines Store General Supplies Coal Limestone General Repairs New Construction 20 Ore. Spanish ore bought for furnace mixture To Company 21 Sundries To Mines Company (for ore shipped on Company's account) Ore (hauled to furnace) Store (goods shipped to Furnace Store by Mines Store, Cr. Mines account) Coal (unloading by men on Mines Payroll) General Supplies (received from mines) 22 Mines To P. R. G. (Manager) Cash for Mines Pay Roll 23 Company To Pig Iron Shipped in March: 10 Tons at 139.42 (Feb. Cost) 1394.20 Hauling to Station 7 . 50 24 Personal Accounts To Company (Invoices certified to Com- pany for payment) 25 Pig Iron To Sundries 316 tons made in March Av. Cost $34. 18 To Coal To Ore To Limestone To Wood To Office (includes Supt's salary) To Blacksmith Shop To Wheelwright Shop To General Repairs To Furnace (Labor 251 .58.Sunds.416. 28) 14 on 82 50 4 90 253 00 285 05 5 00 2 50 6,827 07 311 10 806 84 4,501 10 124 00 877 28 28 58 1,061 95 8,050 00 156 50 936 44 29 16 15 18 1.703 58 1,401 70 14,092 72 10,799 23 80 5 13 2 75 50 253 292 1,051 9,187 1.703 1,401 14,092 3.605 II 3.787 84 479 0-1 24 00 236 34 76 88 14 00 908 16 1,667 86 44 25 31 88 82 50 40 97 58 72 Summaries for Posting Entries 8 to 15 Horses and Teams Nos. Dr. Cr. 8. 6 16 41 42 14 12, 7 88 326 219 00 9 17 29 67 10 31 41 II 80 44 13 14 82 714 48 Personal Accounts Xos. Dr. Cr. 8, 9 78 29 . 175 75 13. 10 14 82 1 97 14, II 1 25 13 31 15, 12 1 50 88 95 86 191 91 The posting of the above 25 journal entries required entries on only 21 pages of the ledger containing representative (asset or operating) accounts, as compared with 46 pages containing such accounts in the books at the Pennsylvania works. In both places the personal accounts might have been contained in two pages, Accounts Receivable and Accounts Payable, if desired. All of the posting might have been done on a single page of a Works Ledger, such as is shown on page 147. The page is a large sheet containing a column for each account. It is strictly double entry, the debit items being entered in black ink and the credit items in red. The balances shown are those of the single month posted, and do not include balances brought forward. These might be entered below the monthly balances in the following manner : Company P.R.G. Cash Store Office Debits Credits 9,451 18,162 70 67 :<7 /<• 07 3000 31 US 00 68 -,S 72 14 1496 1496 69 10 59 60 19 1251 HOS 44 86 41 50 233 236 34 34 Balance, Month Balance from last Mo. 8,700 24,316 103 260 24 241 1760 3 3 00 00 Balance Forward 38,017 157 25 1519 09 00 A still better plan is the use of the Combined Journal- Ledger, which dispenses with both the journal and the old- style ledger. All the journal entries have been posted into the single form shown on page 148. It will be noticed that it contains fewer figures than the form on page 147, it avoids the red-ink entries, and there is less trouble in making the addi- tions. All the entries can be made in it directly from the footings of the auxiliary books of original entry, except a few that may require explanations, and they can be taken OLD-SCHOOL COST ACCOUNTING. IRON WORKS BOOKKEEPING 11 r. from a Blotter or Day Book, kept in journal form, for the record of those special transactions that are not included in the regular monthly or routine entries in the other books. Four additional lines should be added to this Journal- Ledger, giving the Dr. and Cr. Balances brought forward from the preceding month and the new balances carried forward to the next month. A carbon, or a photostat, copy of this Journal-Ledger may be used for a monthly statement to be sent to the Company's office. It forms both a trial balance and a record of the business for the month. The use of the condensed form of monthly ledger shown on page 14S would make unnecessary many of the longer journal entries. For example, No. 4, " Sundries to Labor " consists of the footings of the columns of the Labor Book, and these could be posted directly into the ledger without going into the Journal. Entry No. 5 comes from a summary of small entries in a Day Book called General Charges, and as this summary is entered in this book in permanent form at the end of the month, it might be posted directly into the ledger. Entry No. 19 is but a transcription of the footings of the columns of the Invoice Register, and there is no need of put- ting it in the journal. The entry " Pig Iron to Sundries " for the preceding month is something of a curiosity. Here it is except as to the details of the charges for different kinds of ore which ranged from $3.40 to $9.63 per ton. Feb. 28, 1873. Fig Iron To Sundries For Cost of making Pig Iron in February in- cluding filling of furnace and all expenses since Jan. 27, 58 H tons at $139.42 8190 •63 To Coal 3886 97 Ore 2638 37 Limestone 322 07 Furnace 1557 14 Office 242 49 Wood 90 00 General Repairs 53 59 The corresponding entry for March was for 316 tons at 34.18 $10,799.23 The corresponding entry for April was for 241 H tons at 36.87 8.902.86 Total for 3 months 616J4 tons at $45.26 $27,892.72 The average price of No. 1 Foundry Pig Iron, at Phila- delphia, that year was about $43. The Furnace went out of blast at the end of April and it made no more iron for nine years, or until the " boom " year 1882. In Journal entry No. 23 there is a charge to the Com- pany for 10 tons of iron shipped at $139.42 per ton, plus a charge of S7.50 for hauling the iron to the railroad and load- ing it on a car. In April, 30 tons more was shipped and charged at the same price per ton. In May the charge was as follows: I85i tons (Feb.) at $139.42 91 y 2 tons (Mar.) at 34. 18 Hauling This is a very satisfactory system of bookkeeping for the furnace, for no matter how high the cost of making pig iron it all gets charged to the Company when the iron is shipped, so that the books are balanced without the trouble of com- puting and entering profits or lossrs. On the Company's books at the New York office, however, there would be a different story. Pig Iron account would be charged and the New Jersey furnace would be credited with each shipment of iron at the apparent cost of the iron on the furnace books in the month in which it was made, plus the cost of hauling to the railroad and loading on cars. Pig Iron would be credited with the amount received from tin- sale of each lot shipped. Assuming that all the iron made at the New Jersey furnace had been shipped before June 30, and that a single entry was made for it at that date before closing the books, and that at the same time an entry was made charging all the iron made at the two furnaces in Pennsylvania during the six months, whether it was shipped or ordered stored for Com- pany's account, at the book cost at these furnaces, the Dr. side of Pig Iron account would appear as follows (omitting the charges for hauling): Pig Iron To Penna. Furnaces 1873 Jan. 745 >2 tons at 30 06 22,529 97 Feb. 705 27 77 19,577 85 Mar. 841 Yt 27 97 23,536 75 Apr. 861 28 20 24,280 20 May 903 > a 35 31 v 31,902 58 June 822 37 >0 28 18 30,662 80 152,490 15 4879 av. To N. f. Furn ice Feb. 58 Yi tons at 139 42 8,190 63 Mar. 316 34 18 10,799 23 Apr. 241 H 36 45 87 26 8,902 86 27,892 72 616^ 180.382 87 $2613 83 3127 47 86 69 5827 1 (The figures for tons and cost per ton were taken from the furnace books.) What would appear on the credit side of the account would depend upon the dates at which the iron was sold. If the whole 5495J tons had been sold at the average price of No. 1 Foundry at Philadelphia, in 1873, $43, it would have brought $236,295.75, an apparent profit of $55,912.88, less the cost of selling, bad debts, etc. (there were many bankruptcies in 1873). But if it had been stored for a year or more (as was done by many furnaces in the Lehigh Valley in 1873-4), and sold at the average price of 1874, $30, it would have brought only $164,857.50, showing a loss of $15,525.37, besides cost of storage and loss of interest. The apparent cost of 616j tons of pig iron at the New Jersey furnace, $45.26 per ton, was far below the actual cost (on the basis of charging all the expenses of the plant to pig iron), for the following items appear on the books charged respec- tively to New Construction No. 1 Furnace and Repairs of No. 1 Furnace, that were later charged to Company. 14G BOOKKEEPING AND COST ACCOUNTING Expenditure on No. 1 Furnace from Sept 1 ,/72 to Jan. 27/73 (Converting a charcoal furnace into an anthracite furnace) 18,137 26 Cost of repairing No. 1 Furnace, including all expenses at Furnace from Apr. 27, 1873, to Dec. 31, 1874 7,436 51 There were also entries for the cost of building No. 2 Furnace and its appurtenances Mar. 31, 1873, to Nov. 30, 1874, totaling 32,618 82 Total 58,192 69 All of which was a dead loss. The work of building No. 2 furnace was abandoned when the furnace was half finished in 1874, and No. 1 furnace after being repaired was not put in blast until 18S2, when, after another disastrous campaign, it was finally abandoned. The system of bookkeeping used at the Pennsylvania fur- nace was a fine example of double-entry carried to an extreme. Everything was journalized and posted and balanced monthly, and monthly costs of operation were obtained for the two furnaces (taken together, no attempt being made to get separate costs) for the blacksmith shop, wheelwright shop, moulding shop, and for each separate mine, but the costs obtained were merely accountants' costs; they gave no in- formation to the management as to the causes of variations in costs nor anything as to how the costs of any item might be reduced. The " costs were tied to the general books " to the limit; " the costs were proved by the books," but they were of no practical value. The chief thing lacking in the system is a statistical state- ment of comparative monthly costs, which might be made on a single sheet lasting a year. The following is such a statement for the three months' campaign of the New Jersey furnace: Cost of Pig Iron 1873 Feb.* Mar. Apr. Pig Iron Made — tons 58 s 4 316 24 \i Coal per ton of iron, tons 9 22 2.02 1 97 Ore per ton of iron, tons 7 19 2.27 2.33 Limestone per ton of iron, tons 1 82 0.50 0.65 Book Cost per ton of iron: Coal 55.94 11.41 12.16 Ore 44 97 11.99 13.93 Limestone 5 50 1.52 1.94 Labor, including Office 20.22 4 71 6.20 Supplies and Sundries 4 13 0.68 0.66 Repairs 8.72 3.87 1.98 Total 139.42 34.18 36.87 Cost of Raw Material, per ton: Coal 6.07 5 65 5 33 Ore 6.24 5.28 5.97 Limestone 3.01 3.01 2.66 Total Book Cost per month 8190.63 10,799.23 8902 86 Normal Cost T 1938 75 10,428.00 7769.50 Furnace Operating Loss 6251.88 371 .23 1133.36 Furnace Operating Loss, per ton 106 42 1. 18 3.87 The above statement illustrates the fallacy of " charging to the product all the factory costs of the month," which is advocated by many accountants, and letting the cost remain on the books as an inventory value, crediting this value to Pig Iron account and billing the iron to the Company at the same value when it is shipped. As was shown above the shipments in April were billed part at $139.42, the February book cost, and partly at $34. IS, the March cost. If any of the April iron had been shipped in April it would have been billed at $36.87. A far better method of treating the pig iron account is after charging it as above with all the operating costs for the month, to credit it and charge Profit and Loss with the dif- ference between the operating cost and the " normal cost," which is the estimated cost with the prevailing prices of materials and fairly good furnace practice for a furnace of that size. The iron will be inventoried at this normal cost until it is shipped, and when it is shipped will be billed to the Company at the same cost. Another bookkeeping device for figuring costs at a blast furnace is to charge furnace operating account with the monthly cost for materials, labor, supplies and regular repairs, together with a fixed sum, say 50 cents per ton of iron made, which is credited to Eeserve for Extraor- dinary Repairs, which is allowed to accumulate until the furnace is blown out, when 'it is drawn upon to pay for the cost of relining and other repairs. At the end of the month Pig Iron is charged and Furnace Operating credited with the pig irori made at the estimated normal or inventory price. The balance of the operating account will represent a profit or loss which can either be trans- ferred to Company at the end of the month or carried to Profit and Loss account on the furnace books until the end of the fiscal period, when the latter account is closed into the Company account. An itemized statistical statement, like the one shown above, is one of the most important parts of blast-furnace cost accounting, for it gives the information that the owners or directors most need. The items under Book Cost should include the total expenditure in dollars as well as the cost per ton, and they should include also Reserve for Extraordi- nary Repairs and Depreciation, Administration Expenses (relating to the furnace and not to the selling depart- ment) and Interest on Investment. The statistics also- should be charted, as shown on page 106, entries being made monthly. the beginning. Stopped filling April 27, 2 p.m. Stopped blast I p.m., 28th. Length of blast 13 weeks. Weekly product: 23, I6#. I, 21 X. 56 \i, 72 H. °6, 77 3 4, 54 %, 58 H. 77 H. 64 M, 6> 2 . Total 614', tons. Grades 463 H No. 3, 83 % mottled, I9}i white, 49 ' 4 silver gray. t Normal or Inventory cost, based on average costs (at that date) of material and average good practice. * Remarks. The February costs included filling the furnace and all costs of the plant from Jan. 27. Furnace lighted 10 a.m. Jan. 30; Blast put on 4.30 p.m. First cinder Jan. 31,6 p.m. The furnace worked very badly from 2 tons Coal at $5 75 $11.50 2 . 2 tons Ore at 5 50 12.10 0.8 tons Limestone at 3 00 2.40 Labor 4.50 Supplies, Repairs, etc. 2.50 $33.00 OLD-SCHOOL COST ACCOUNTING. IRON WORKS BOOKKEEPING Iron Works Ledger, March, 1873 147 Journal Entry Com- P.R.G. Cash Store Labor Personal General General Office Horses Black- No. pany Accounts Charges Repairs and Teams smith Shop 1 3000 00 3000 00 2 1400 00 1496 69 60 00 4 00 3 1496 10 838 67 657 43 4 2SS1 68 337 00 16 50 233 34 283 70 99 63 5 1322 56 383 80 8 60 6 1441 95 3 20 8 111 SO 95 86 714 48 14, 15 191 91 17 29 16 4 90 3 40 X 75 18 5 00 19 311 10 13,475 97 877 28 20 1,061 OB 21 8,050 00 936 44 22 170S B8 23 1,401 70 24 14,090 72 14,090 72 25 90S 16 2S6 34 76 88 63 63 Total Debits 9,451 70 3000 00 1496 69 1252 44 2280 62 14,844 01 337 00 893 78 233 34 309 59 104 Total Credits 18,152 67 3103 58 1496 10 1493 85 2381 68 13,667 88 337 00 908 16 236 34 721 88 79 Journal Entry Wheel- General Wood Coa Ore Limestone Furnace Mines Pig Iron New No. wright Shop Supplies Con- struction 2 14 00 18 69 4 44 50 1228 38 138 63 5 47 80 75 20 44 80 3 20 6 40 23 20 40 20 84 40 6 64 B0 9 56 7 51 50 66 50 135 75 59 50 12 75 8, 9 493 51 16 60 98 09 10 55 60 22 22 II 6 25 99 00 14, 15, 16 1 60 / B0 1 50 17 253 00 253 00 18 292 SB 285 05 2 50 19 806 84 4501 10 124 00 6827 07 28 58 20 1061 95 21 15 18 29 16 156 50 9187 28 22 1703 58 23 1,401 70 25 14 00 24 00 360B /; S7S7 84 479 04 1667 86 10,799 23 Total Debits 24 50 921 32 141 70 5068 57 1221 65 186 00 1688 98 8884 85 10,898 23 266 86 Total Credits 15 50 292 55 104 00 3886 36 3787 84 479 04 1667 86 9312 84 1,401 70 148 BOOKKEEPING AND COST ACCOUNTING O < a i-J -a •JQ JB^OX OOOsftN — OoO^TOsmOfNO IN, m G OO in m sO 1 rso-O-r-OOOrsmm-ommrs m O o 0> » tN «3 1 vO o 1 Os OS 9,451 3.000 1.496 1.252 2.280 14.844 337 893 233 309 104 44 .. 921 141 5.068 1.221 186 1.688 8,884 10.898 266 IN (-4 m in tn m* -O sO m m ■O sO OO 00 rsj cn -UOQ JAdfi -£> 1 ■ ■& OO | .CO O sO 1 - \C (NJ . (N| uoji SlJ o r^ ■ - o m 1 • *n is N 1 .in o ■ • ■ ■ -«■■■• OO o as *r oo — " o ■ sO ■ Os ■ ■* : os* samjY o • • *r • ■ al ■ * o- o rN ■ in O..TJ- — ■ — o m fS . . rs t m 1 as OO OO 1 Os o - ■ no • ■ - m • o* oo »o r*) - - in • K . tn — . cn o m o , GO >C os 1 ■ rsi co as 1 1^ . . vO | -o IS CO *o OO . (N aaoieauiiq '.'.'.'.'.I'.'.'.'.'.'.'.'.'.'.'. '. o - o o 1 o . ■ o* os so | m rs oo os sj o : : :S : •nt in 1 as OO sO 1 — ■ is • ■ ■ CO . is 3787 1221 2566 l*°0 ■^ j< ; § — ' -o r^ i - ■ — m m 1 . r>i . oo • o> • • en ifl ' . — . . in o • • • in o • m 3886 5068 1182 po°M . O O O ■ ■- ■ . . o ■ , o in >n ...©• C3 O 1 ■ O O IS 1 . ts : :2-5 :::.;::::::.: : : : :S : O -1- - rs ■ m soijddng iBiaudQ :::::::: :S ::::: : :S::S m m | . rs m ■ in - - rs . CO ■ CN ■ ■ doqg AVA\ :::: :S :::::::::: : : : :g : En ° 1 ' ° . — ■ . ^- . — ^r . rsj doqsS'Q in ■ ■ • o oo . fN ■ • - - . m CO rn m 1 - o «o sO 1 ■ o — ■ — *o ; - :;;:::;:::; ■ rs . IS o ■ *N eureajL pun BOSiOJJ - o o *}- C — in Os O CN ■**■ — : : : : : "^ *° :™ m m m co — — OS 1 CN IN O — rs en "n*" «SO ■ *r . • m m m 1 o ■ • ■ o . . . m ■o m m m m BJIBd^JJ [BJ9U3Q . o ■O CO 1 CO — rs I m - ■ CO - . o - ■ o co m I -^ o os — Os CO 603JBH3 |UjauoQ . o • — ■OO-OO ooo-o . rsj . . ■ s© ■ OD IN ■ OO IN V (N in .t •=> 3 1 '■ - m -co - rs m -*r m, omo **■ - nT t-» - Nf fS T .00 rs fs i mm . . m m ] IBnosaaj • o -co -co • v o m * o rs rs — qo .«— .cni .oo -co . — in, . o o , o m in co — j -mi OO o 1 - — ■ — in. o - -g > — «n .^-_ • is m as . ~- . rs . •© . O N . o . rs joq^i -OOfOmo -co - m o m m is %o in m . . *o CO (N 1 O is %o m m o> nt - - -oo -co m — m co o* ^r tN . .tn m sO sO 1 o OS OS *OUd" . o - OC ■ CO O 1 CO • n- :;:;::—:; o o o , O - - in ■ «A . O I rs >o is 1 o^ OO 3.000 14.090 1.061 18.152 9.451 o o rs oo* Q Co P.R.G Cash Labor Personal Accounts ... General Charges Office Horses and Teams. . . . B.S. Shop W.W. Shop General Supplies Wood Coal Ore New Construction. . . . <- c c 1 c Ofl CJ Cj c a ffl « OLD-SCHOOL COST ACCOUNTING. IRON WORKS BOOKKKKl'INC 149 COST OF IRON WHEN BY-PRODUCTS ARE MADE Iron works accounts tend to become complicated when valuable by-products are made in addition to the principal product. For example, a blast furnace makes slag, some of which may be sold as a raw material for making cement. It also makes a vast quantity of gas, part of which is used for furnishing and heating the blast for the furnace itself, but another part may be sold to an Electric Co. to be used in gas engines to make electric current. There may be coke ovens run in connection with the furnace, making more coke than the furnace can use, and the surplus is sold at the mar- ket price. The Electric Co. may also purchase some of the gas from the coke ovens, and the tar and gas washings may be sold to a Chemical Co., at a price to be agreed upon, for the manufacture of by-product chemicals. The Iron Co. itself may carry on a cement works, a by-product plant, and an electric plant, as branches of its business. Under these cir- cumstances it becomes a problem how to find the c5st of pig iron and of the other products. Example. A modern blast furnace with coke ovens adjoin- ing makes 10,000 tons of pig iron in a month. The coke ovens make 20,000 tons of coke in the same month, of which half is used by the blast furnace and half is sold. The follow- ing are the statistics of cost, the coke being charged to the furnace at the market price, S3 per ton : Blast Furnace: 20,000 tons Ore © $5 1 0.000 tons Coke @ $3 5,000 tons Limestone © $1 Labor, $1 per ton of Iron Supplies, 50^ per ton of Iron Current repairs, 30^ per ton of Iron Reserve for Ex. repairs Interest on Investment Average Cost $16.20 per ton. Credits: Furnace Gas sold Slag sold Dr. Balance Inventory: 10,000 tons Pig Iron Apparent profit on Furnace Coke Ovens: 30,000 tons Coal © $1.40 Labor, 20^ per ton Coal Supplies, Repairs, Interest, etc. 20,000 tons Coke make average cost per ton $2.70 Credits: 10,000 tons Coke to Furnace © $3 Gas sold Tar and Washings sold Dr. Balance Inventory: 10,000 tons Coke @ $270 Apparent Profit on Coke Ovens $100,000 30,000 5.000 10.000 5,000 3,000 5,000 4,000 $162,000 $10,000 1,000 11,000 151,000 162,000 11,000 $42,000 6,000 6,000 $54,000 $30,000 3.000 3,000 $36,000 $18,000 $27,000 $9,000 coke ovens be deducted from the gross cost of coke, $54,000, making the cost of coke per ton $2.40 instead of $2.70, and the inventory of coke on hand made $24,000 instead of $27,000? 2. Should not the blast furnace be charged with coke at the net cost price $2.40 per ton, instead of $3, the market price, making the cost of pig iron $15.60 per ton instead of $16.20? 3. Should not the pig iron cost be further reduced by cred- iting the furnace with $11,000 for by-products, making the net cost of pig iron and the inventory value per ton $14.50? In the simplest form of accounting no attempt would be made to separate the blast furnace from the coke ovens in the general ledger and to determine unit costs of product from the ledger, but all charges and credits would be made to a single Manufacturing or Operating Account as below: Dr. Operating Account Ore, 20,000 tons © $5 Coal, 30,000 tons © $1.40 Limestone, 5,000 tons @ $1 Labor Supplies, Repairs and Reserves Interest $100,000 42,000 5,000 16,000 19,000 4,000 $186,000 Furnace Gas Furnace Slag Oven Gas Oven Tar, etc. Balance $10,000 1,000 3.000 3,000 I 7.000 169,000 [186,000 Inventory 10,000 tons Coke @$ 2.40 10,000 Ions Iron © $14.50 $24,000 145.000 169,000 Several questions arise in connection with this statement. 1. Should not the credits of $6000 for by-products of the Thus showing no profit, all the credits for by-products going to reduce the cost and the inventory value of the coke and the iron. Or, if the inventory were made at the gross costs given in the first table it would appear as follows: 10,000 tons Coke ©$2.70 $27,000 10,000 tons Iron ©16.20 162,000 Inventory 189,000 Less Balance of Account 169,000 Profit, $1 1,000 on Furnace, $9,000 on Ovens $20,000 If the above simple method of keeping the accounts were adopted the costs would be kept in a separate book, and in this book tne cost-accountant might figure costs and inven- tory values by two or three different methods, or on two or three different assumptions as to the method of treating the by-products of the accounts, for the information of the man- agement. The directors could then choose which of the methods would be the best for obtaining unit costs to be used as a basis for inventories, for fixing minimum selling prices or for determining profits available for declaring dividends. There are several advantages in this method of separating the cost system from the accounting system. By having a single operating account all the actual expenditures and actual receipts may be posted to it from the Invoice Book, Sales Book, Pay Roll Book, etc., immediately after the end of the month and a balance sheet taken which shows the general course of the business. The balancing of the general books does not have to be postponed until estimates of costs are made, and no question arises as to whether the furnace shall 150 BOOKKEEPING AND COST ACCOUNTING be charged with the coke at the market price, $3, or at S2.70, or at $2.40, or whether the furnace should be credited with the receipts from the sale of by-products, so that the book cost of pig iron may thereby be lowered. All these trouble- some questions may be avoided by the general bookkeeper and turned over to the cost accountant and to the manage- ment. When the market value of a by-product is a considerable fraction of the value of the whole product it becomes impos- sible to determine what is the real cost of either the principal product or the by-product, and the only way to fix the inven- tory value of either product is to take the market price less the estimated cost of selling, including the cost of storage, transportation and interest charges. Thus, if a certain mine produced an ore containing, at market values, $20 worth of gold, $10 worth of silver and $15 worth of copper per ton of ore, and the total cost for mining, concentration, smelting, refining, transportation, management and selling was $35 per ton, the profit would be $10 per ton of ore, but the cost per ounce of gold or silver, or per pound of copper, could not be stated. Cost Keeping in a Rolling Mill Puddle Mill No. I, Etna Iron Works. Pay Roll for Week ending Saturday 191 Fur- Name Muck Bar Made Pounds nace No. M T W T F S Total Rate Wages 1 2 J. Weish T. Jones R. Morgan W. Reese Furnaces Total 20 Total tons Labor per ton $ Material, tons pig iron @$ Material, tons scrap @ Material, tons pig scrap @ Material, tons pig ore @ Material, tons pig cinder @ Fuel @ Repairs * Material (Items) Repairs Labor (Items) Charge to this week's product for repairs Foreman's Wages Other labor Other charges, burden (details) per ton Total Less value of cinder made Total cost of muck bar Total cost per gross ton The cost of refined bar is figured in the same way. The raw material is muck bar, charged at the puddle-mill recorded cost, and scrap, either purchased, drawn from other mills, or sheared crop ends from the bars made. All this scrap is usually charged at the market selling price in carload lots. * This charge may be an estimate based upon previous statistics. A memorandum account of repair is kept for the actual cost of repairs each week, which will be totaled as a charge to Repairs and the account will be credited each week with the weekly charge to Muck Bar. The skilled labor is commonly paid by the ton, and common labor by the day. Repairs and other burden are treated as in the puddle mill and a weekly statement is made showing the totals of raw material, labor and burden, bars and scrap produced, and cost per ton of refined bar made. MACHINE-HOUR RATES IN A STEEL WORKS Mr. Gershom Smith in an article in Engineering Magazine, June, 1909, thus described the method of establishing the machine- hour rates which he used in the works of the Pennsylvania Steel Co., Steelton, Pa., about seven years earlier: " The first step was to ascertain the floor space of the shop under consideration, and to divide this space into the sum of the upkeep of land, depreciation of the building, the power plant and power-transmission machinery, also general machinery for common use throughout the shop, such as overhead cranes, etc., also expense of a general nature, such as heat, light, superin- tendence, non-producing labor (that is, laborers), current minor repairs, etc., the quotient being the yearly value of floor space per square foot. The next step was to ascertain the square feet of floor space occupied by each machine, and to apportion to this machine its pro rata share of the aforementioned items, on the basis of its square feet of floor space. In the case of a building of several floors, the floor space on each would have to be considered, and it is probable that the engineers would decide that certain floors being more valuable in the matter of location than others should stand a greater share of the depreciation of the building. Some machines require more clear space around them than others for the handling of work. Any floor space not occupied by machines or in operating them should be charged pro rata to all machines. In one shop the total square feet represented was 4278, the machines actually occupied 8333 sq.ft., and the working space allowed was 833| sq.ft. additional, leaving 2611 sq.ft. for aisles, storage, etc. This 2611 sq.ft. was pro rated to the 1667 sq.ft. apportioned to the machines so that each square foot apportioned was charged with the expense of a little over 2 j actual square feet of floor space. Next, the depreciation on the cost of the machine itself is ascertained, including installation and necessary equipment such as counter-shaft, belting, motors, tools, and machine fixtures. To this must be added the proportion of cost of power, this figure being furnished by the mechanical superintendent and based on horse power, also supplies, and all expense directly applicable to the machine. Having taken all such expense into consideration, based oil the totals of one year, the next step is to ascertain by careful enquiry (to be verified and if necessary corrected later from actual data), the number of hours per month or per annum which each machine will run under normal conditions. Having ascertained the number of hours per annum, we use this as a divisor, and the total yearly cost of the machine (ascertained as described), as the dividend, the resulting quotient giving the machine's hourly rate. As it would be impractical to operate this plan with a different rate for every machine in the shop, the machines have been divided into ten groups, with a different rate for each group and the machine is assigned to the group nearest to its ascer- tained rate. The desire is to provide a slight leeway per hour on each machine to cover unforeseen expenses, and also to provide a reserve in normal times which can be drawn on in subnormal times, and thus to keep the expense rate fairly even. Where owing to trade conditions the machines do not operate sufficient time to absorb the total expense, if there is no reserve to draw on, I prefer to show the deficit as a charge against the department income or profit and loss account, thus keeping the costs on a normal basis." CHAPTER XVI MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS A STEEL WCRKS ACCOUNTS The following outline of accounts for a Steel Manufacturing Company including crucible and open-hearth, steel making, rolling, cold rolling, etc., has been furnished to the author by Mr. Albert Walton of Philadelphia, manufacturing accountant and industrial engineer. The general outline as far as the main accounts are concerned is analagous to the arrange- ment that would be satisfactory for a machine shop and foundry, or for a large corporation with varying manufactur- ing activities. Forms used by Mr. Walton will be found on pages 164 to 169. Some extracts from Mr. Walton's letters are given below. " One factor that has often been overlooked by both manufacturers and accountants is that of having the cost system an actual part of the accounting system. Many concerns are content to have a memorandum cost system, built in pa t on estimates made by superintendents and foremen, but I have never found such a system that would stand investigation or analysis. '* A properly arranged accounting system is one that requires the data from which the entries into the General Ledgers are made up, to be established from the various shop and other reports, made up daily and carrying accumu- lative totals and balances, so that, if necessary, it would not be required to wait until the end of the month to obtain a balance sheet, the record being in such shape that a prompt and accurate statement could be made at any time. The cost of arranging such a system is not any more expensive than many methods that do not even give monthly results and frequently only enable a Profit and Loss statement to be made once a year. " In one actual case the remodeling of the cost system re- sulted in a reduction of 16 clerks in the accounting and cost department. Prior to the rearrangement the books were closed only at the end of the fiscal year, and it was necessary to close down the factory employing S00 men for about ten days to take the inventory. With a considerably reduced office force, they now have a monthly balance sheet and in- come statement, and the cost of taking inventory on Dec. 31st, 1914, was reduced $2400.00, this being the first yearly closing after making the accounting and works system change, and at the end of this present year, 1915, there will be a further reduction. This shows what can be done by the elimina- tion of needless detail and by concentrating the work of the office and shop clerks in directions that result in the accumulation of only those data that are absolutely neces- sary for the cost accounts, the general books and the statis- tical reports. " A certain company of international reputation found that their estimated profits on a line of heavy machinery, the sales of which run over $1,000,000, per year had not materialized. They were doing business with absolutely no attempt to arrange their estimate in detail that could be satisfactorily compared with the cost of manufacture of the machines. They had not kept costs of manufacture in detail by kind of machines built, and of course had paid no attention to the costs of parts of individual machines, so that whether certain machines were made profitable and others at a loss was unknown. " Their real mistake was in accepting large orders, based upon the guesses of their engineers as to what the work could be gotten out for — and accepting their estimates with too much assurance that the figures were correct. Their engineers are good designers but very poor estimators. In this case there was a loss that ran into over $100,000 that could have been prevented had attention been paid to detail costs and the proper detailing of estimates. " A simple but very satisfactory method of routing work is in effect at one plant, all output being scheduled practically three months in advance, and weekly sub-schedules issued for the shop to work to; planning boards are not used, but a special form of job ticket follows the work through the shops, being carried in a special holder (see Fig. 16, page 167) on the truck. There are 200 standard size trucks used for handling work, and there has been worked out a system, whereby a truck load of parts constitutes an order, and this truck starts from the foundry or stock room, and after passing through all necessary shop departments winds up either at the erecting department or at the finished part store room. " The tickets are made out in advance in the Production Department from the Production Schedule book, in which is predetermined the quantity of parts to be brought through each week of the year. This card is sealed in a holder with celluloid front that is attached to the truck; the only column open for use of the workman is the one headed " operatives," thus preventing the changing of any figures by the operator, the inspector only having access to the card record and he being furnished with pliers and lead rivets for opening and resealing the holders. The use of this holder did away with a great many abuses that had existed prior to properly safe- guarding the cards." 151 152 BOOKKEEPING AND COST ACCOUNTING Ledger Accounts. — Analysis of Entries Thereto and Account Symbols for a Company Operating Steel Furnaces, Rolling Mills, etc. By Albert Walton. CHART OF LEDGER ACCOUNTS AND SYMBOLS !0 11 12 13 14 15 16 17 20-22 Assets .1 Current. Cash Petty Cash No. I Treasurer's Fund Accounts Re- ceivable Bills Re- ceivable Unexpired Insurance Outside Se- curities Cash Ad- vanced to Branches Unexpirei 1 Taxes B Inventory. Melting Stock Crucible Ingots and Billets O. H. Ingots and Billets (Made) 0. H. Ingots and Billets (Purchased) Billet Cost Adjustment Work in Process Finished Stock Finished Stock on Order Wire Dept. Stock Wire Dept Process Stock Wire Dept. Finished Stock Fuel Melters Sup- plies General Stores Stock Adjust- ment Scrap Warehouses C Fixed. Real Estate Buildings Machinery and Equip- Branch Prop- erty Liabilities D Current. Accounts Payable Notes Pay- Payable Accrued Int. on Bonds Accrued Taxes Accrued Pay Roll Dividend Income Tax Deducted Deferred Charges Private Accounts E Reserve. Depreciation Relining Furnaces Rolls Contingencies F Capital. Capital stock Bonds Surplus Loss and Gain G Revenue. From Outside Securities Discount on Purchases Interest Received Sales A Sales B Sales C Sales D Sales E Sales F Sales G Sales H H Cost. Cost Adjust- ment Cost of Sales A Sales B Sales C Salt 3 D Sales E Sales F Sales G Sales H J Expense. Discount on Sales Executive Expense Sales Expense Claims and Allowances Freight Allowed Interest Paid X and P Expense Ledger Accounts, X 20 to 614 P 60 to 4024 (see list in following pages) Profit and Loss. Acct. Symbol EXPLANATION OF ACCOUNTS Account Acct. Symbol Account Al A4 CASH (Financial Ledger) Sub-accounts, A1a, A1b, etc., for various Branches. Analysis of Entries Debit at end of month with: Cash received and deposited in banks during the month See Cash Received Book for details. Credit with: The amount of checks issued during the month (entries Debit with: made at end of month). See Check Register for details. Balance: The available cash in Banks at end of month. TREASURER'S FUND (Financial Ledger) Debit with: Moneys issued to meet Treasurer's special disbursements. Credit xmlh: Disbursements made. Details in Treasurer's private Journal. A5 ACCOUNTS RECEIVABLE (Financial Ledger) The total Charge Sales at the end of each month. A2 PETTY CASH No. 1 (Financial Ledger) Debit with: Amount placed in fund to meet currency requirements. Credit with: Disbursements from the fund, as per Petty Cash Book. Balance: Funds on hand to meet petty cash disbursements, and pay roll advance payments. Credit with: a. Footings of "Accounts Receivable" column of Cash Re- ceived Book, at end of each month. Includes all payments received from customers plus the discount allowed. 6. Allowance to customers for goods returned. Claims al- lowed, etc. charged to Mdse. or to Profit and Loss. c. Accounts that are uncollectible, charged to Reserve for Bad Debts or to Profit and Loss. Balance: The amount due and collectible from customers. Should agree with the result of a trial balance of customers' ledger cards. MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 153 Acct. Symbol Account Acer. Symbol Account A6 BILLS RECEIVABLE (Financial Ledger) Analysis of Entries Debit with: The face value of notes received from others. Credit with: The face value of notes received from others that have been paid, discounted, or otherwise disposed of. Balance: Represents the face value of notes on hand. A7 UNEXPIRED INSURANCE (Operating Ledger) Debit with: Cost of Insurance (from Accts. Payable Book). Credit with: The monthly proportion of insurance premiums that have been charged to this account, the proper Operating Expense Accounts being charged. Balance: Represents the Cost of Unexpired Insurance. A8 OUTSIDE SECURITIES (Financial Ledger) Debit with: Cost of Stocks and Bonds of other companies purchased or acquired. If deemed advisable to depreciate at any later period the value of such stocks when first acquired, charge Profit and Loss with the difference between actual cost and the Company's valuation. Credit with: Cost (or valuation) of Stocks and Bonds of other companies sold. The difference between the Cost (or valuation) and Selling price should be charged or credited to Profit and Loss Account. Balance: Represents the Company's valuation of Stocks and Bonds of other Companies on hand. A9 CASH ADVANCED TO BRANCHES (Financial Ledger) Sub Accts. A9a Branch A9b A9c Debit with: All items of Cash Advanced to Branches. Credit ivith: Disbursements made by Branches from this fund, debiting the various accounts chargeable therewith, as per the distribution furnished by Branches. Balance: Unexpended cash in hands of Branches at the time their report of disbursements was made. Note: Branches should make report of their disbursements as of the last day of each month and mail it to the main office not later than the first business day of the succeeding month. A10 UNEXPIRED TAXES (Operating Ledger) Debit with: Amount of taxes paid. Credit with: The monthly proportion of taxes charged to operating expense accounts. Balance: Amount of taxes paid but not yet charged to operating accounts. B FACTORY OPERATING ACCOUNTS Bl B2 B3 B4 B5 B6 B8 B9 Melting Stock Crucible Ingots and Billets O-H Ingots and Billets, Own Make O-H Ingots and Billets, Purchased Cost Adjustment Mill, in Process B6a Mill Cost Adjustment B7 Finished Rolled Product, Warehouse A Finished Rolled Product, Warehouse B Wire Dept. Stock BIO Wire Dept. Process Stock Bll Wire Dept. Finished Stock B12 Fuel B13 Melters' Supplies B14 General Stores B16 Stock Adjustment B16 Scrap Debit irith: a. Cost of Material purchased. 6. Cost of Inbound Freight on Materials. c. Pay Roll and other expense in connection with fabricating material in process. Credit with: a. Cost of Materials transferred to other accounts while in process of fabrication and when finished. 6. Cost of Materials sold, at which time the proper Cost of Sales account will be charged. Bala nee: Represents the Cost of Materials on hand. Note: The debits and credits to the various accounts for materials transferred to other accounts during process or when finished and delivered to finished stock B7, BS, Bll, will be compiled from the current records and reports furnished by each depart- ment, and from the distribution of pay roll and other expenses. Journal entries will be made at the end of each month cov- ering these Various transfers. B.5, Cost Adjustment, will be used as a balancing account to take up the differences between actual prices paid for or actual costs of rolled billets and the estimated values that may at times have to be used when the billets are worked up prior to the receipt of outside invoices or of the approval of them in case of a price dispute, and when the cost of billets of our own makes are not obtainable until after the end of a current month. In these cases the entries will be as follows: Example: Dr. Billet Account Stock 50,000 154 BOOKKEEPING AND COST ACCOUNTING Dr. Billet Cost Adjustment Cr. (1) (3) 1000 146 (2) 1146 Dr. Mill in Process Cr. (2) 1146 In entry No. 1, it is assumed that certain billets of a value estimated at $1000 are used from stock for a specific rolling order. At the end of the month the true cost is found to be $1146, this amount is credited to Billet Cost Adjustment and debited to Mill in Process Account as per entry No. 2. The credit balance of $146 will be closed into Billet Account as shown in entries No. 3. A clear record of the transactions is thus made. This refinement in accounting applies principally to mills rolling short orders for special specification steel where it is necessary to estimate the cost prior to the end of a month. Example: Dr. B 20 Warehouse (New York) Cr. To B 7 100 tons Billets @ 26 2600 By Cost of Sales, Class A, 50 tons @ 27 (1) 1350 To B 11 100 tons Wire @ 30 3000 By Cost of Sales, Class B, 50 tons @ 31.50 (1) 1575 To J 3 Sales Warehouse Exp. 250 This entry is typical of the method of charging stocks received from the Home Warehouse to Inventory Accounts at the trans- ferred Cost Value, to which is added the monthly charges covering the cost of the selling expense of the Branch Ware- house. This addition to cover Branch expenses, freights, etc., calls for the establishment of a higher cost of sales, and this has been assumed in the above entry to be covered by $1 per ton on billets and $1.50 per ton on wire. Subsequent entries will then be as follows: Dr. (H 5 and H 6, Cost) Sales (G 5 and G 6, Revenue) Cr. ToB20 (1) H5: To B 20 (1) H6: Cost Billet Sales 1350 Cost Wire Sales 1575 (2) G 5. Sales Billets (2) G 6. Sales Wire 1500 1800 Dr. A 5. Accounts Receivable Cr. Sales, G 5 and 6 3300 These entries explain the method of crediting Warehouse, B20, and debiting the proper Cost of Sales accounts H5 and H6, also the crediting of the proper Sales Revenue accounts G5 and G6, and debiting Accounts Receivable, A5. The subsequent entries to cover the adjustment of claims and allowances to customers will be found under Claims and Allow- ances, J4. Accounts H5, H6, Cost of Sales, and G5, G6, Sales (Revenue) will be closed at the end of a fiscal year. At the end of each calendar year the debit balance in H5-6 and the credit balance in G5-6 will, when compared with each other, set up the Gross Profit on Sales, and in making up a Monthly Income State- ment would show as follows: For Month %of Cost For Year to Date %of Cost Gross Sales Less Cost of Sales $135,000 114,000 18 4 642,715 503,400 21,000 139,315 27 6 B6-a, Mill Stock Adjustment, represents a balancing account to prevent undesirable fluctuations in Mill Stock Accounts, due to Mill Report errors. It is an account similar to Billet Cost Adjustment and it is used in the same manner where it is necessary to estimate the cost of rolling prior to the actual monthly cost being established. Outside purchases, however, do not enter into consideration. The accounting for a specific case would be as follows: Dr. B 6. Mill in Process Cr. (1) (3) $1000 50 00 00 Dr. B 6a. Mill Cost Adjustment Cr. (1) (3) $1000 50 00 00 (2) $1050 00 Dr. B 7. Warehouse (Finished rolled steel) Cr. (2) $1050 00 Entries No. 1 and 2 are made during a month; after the cost is established early in the following month, the correcting entry No. 3 is made. Accounting entries covering the rolling of ingots into billets and of billets into finished Rolled Product: B 6. Mill in Process Cr. (1) Billets 1380 (2) Finished product 1600 (1) Ingots 1000 (6) Scrap 30 (4) Pay roll 200 (3) Billets (rolled) 1150 (5) Expense (overhead) 200 Dr. B 3a Ingots Cr. 1000 B 3f> Billets (3) 1350 B 7 Finished Product (Warehouse A) Cr. (2) D 5 Pay roll Cr. X — Expense Cr. 200 B lc Melting Stock (Scrap, Sub-account) This entry shows the source of the various entries establishing the debits and credits of B6, Mill in Process, and it is assumed that all the expense debited thereto has been absorbed by the product and scrap made. In actual practice there will be a balance of work in process to carry forward into the succeeding month's account. MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 155 Stock Adjustment This account will be debited or credited with the amount of any important errors, discovered during a year to have been made in the physical inventory taken at the end of the previous fiscal year, which it would not be correct or advisable to debit or credit to specific current inventory accounts. At the end of the current year the balance in Stock Adjustment Account should be debited or credited to Surplus Account, thus withdrawing the correction from the current year's statements as to operating results, that should not be affected by errors applying to the preceding year. Acct. Symbol Account B20 New York Warehouse B21 Chicago Warehouse (Consigned Stock) B22 San Francisco Warehouse (Branch Acct.) Analysis op Entries Debit with: Cost of Materials transferred from Stock Accounts B7 and Bll. Credit with: Cost of Materials sold, at which time the proper Cost of Sales account will be charged. Balance- Represents the cost of materials on hand. Note: Materials carried at outside Warehouses are billed to them at cost. When sales are made from these stocks in addition to crediting the specific Warehouse Stock, the Cost of Sales Account (proper subdivision) should be charged with the cost of the specific sale — and General Sales (proper subdivision) should be credited with the billing value. This will then bring all sales into General Sales Account, and set up the Gross Profit on the Company's business. If it is desired to maintain a separate identity for each Outside Warehouse and credit the sales made from each to its own account it can be accom- plished by carrying subsidiary Sales Accounts for each outside Warehouse, treating them as follows: Entries Covering Transactions at Branch Warehouses Branch Warehouse Account Debit with: a. Cost of materials transferred to Branch. 6. Warehouse expense, salaries, commissions, insurance, freight, etc. (This may be on a percentage basis to maintain a fair distribution of expense.) Credit with: Cost of sales made, as established at Branch, so as to ensure a fair cost of sales f .o.b. Branch. Balance: Represents the cost value of stock on hand. Note. The sales for the month will be credited at billing value and charged at the transfer value plus the proper proportion of Warehouse Expense. The difference between this revised Cost and the billing value will give the Gross Profit on such sales. INVENTORY SUB-ACCOUNTS The Inventory Accounts Bl to B24 represent the principal or controlling inventory accounts and each is subject to further subdivision as deemed necsesary: For example: Bl, Melting stock may be subdivided as follows: Bla. Melting Bar. b. Shovel scrap, punchings, etc., purchased. c. Own make scrap. d. Ferro-manganese. e. Ferro-silicon. /. Tungsten. g. Vanadium, etc. Similarly other divisionswould be established on form necessary to cover the different kinds of finished Rolled steel, Fuel General Stores, etc. The Inventory Account. B3 and B4 may be divided into: B3a, O-H Ingots — Own make. B3b, O-H Billets— Own make. B4a, O-H Ingots — Purchased. B4b, O-H Billets— Purchased. In the detail accounting this would be done — even though for balance-sheet purposes they were combined together. Acct. Symbol Account CI REAL ESTATE (Operating Ledger) Debit with: a. Cost of land purchased. b. Cost of surveying, title insurance, recording fees, etc. c. Cost of important improvements, i.e., grading, construct- ing roads, etc. Credit ivith: Cost of land sold, Profit, or Loss on sales of real estate entered in this account, but if land is sold Profit and Loss Account would be credited with profit or charged with loss, resulting from the sale. Example: If land cost $10,000 and sold for $15,000 cash, the Journal Entry would be Cash $15,000, To Real Estate $10,000, To Profit and Loss $5000. Balance: Represents cost of land owned. C2 BUILDINGS (Operating Ledger) Debit with: a. Actual Cost of buildings purchased or constructed. 6. Cost of replacing buildings, or important parts (hereof, destroyed by fire, flood, etc., or on account of ordinary wear and tear. Credit with: Cost of buildings replaced (if any) at which time Reserve for Depreciation (Buildings) should be charged. Balance: Represents cost (or appraised value) of Buildings owned. Example of Account C-2. Original cost of building, $20,000. Depreciation Reserve, Cr. balance, $4000. Present net value, estimated, $16,000. Damage by fire, estimated, $8000. Re- ceived cash from Insurance Co., $6000. Repaired damage at cost of $10,000. Appraised value of building now $18,000. Required the entries to be made: C2. Buildings Jan. I June 5 July I Balance, Coat To Cash (repairs) To Balance (present valued $20,000 10,000 Mar. 20 June 5 June 30 June 30 $30,000 $18,000 By Cash from Ins. Co. By Depn. Reserve By Profit and Loss By Balance $6,000 4,000 2,000 IS, 000 Mo, nun 156 BOOKKEEPING AND COST ACCOUNTING E 1. Depreciation Reserve June 5 To Buildings $4,000, Jan. 1 Cr. Balance $4,000 Acct. Symbol Account Acct. Symbol Account C3 MACHINERY AND EQUIPMENT (Operating Ledger) Debit witli: a. Cost of all machinery and equipment purchased or built. 6. Cost of first installation, but not subsequent installations due to changes which do not add to asset value, which should be charged to Operating Expense. c. Cost of additions and alterations, only however when such changes increase the original efficiency of machine or equip- ment. d. Cost of new Machinery or of replacing machinery or equip- ment scrapped or sold on account of wear or obsolesence. Credit with: a. Cost of any machinery or equipment sold the difference between the cost and the amount it sold for being charged against Reserve for Depreciation Account (Machinery and Equipment). b. Cost of any Machinery and Equipment replaced or scrapped, Reserve for Depreciation Account (Machinery and Equip- ment) being charged. Balance: Represents the cost of Machinery and Equipment on hand. C4 BRANCH PROPERTY (Operating Ledger) Debit with: Actual cost of property owned. Credit irith: Cost of any property sold the difference between the cost and the amount it sold for being charged against Reserve for De- preciation account. If the Reserve is insufficient charge the deficit to Profit and Loss. Balance: Represents cost of branch property owned. Dl ACCOUNTS PAYABLE (Financial Ledger) Debit with: a. Footings of "Accounts Payable" column per Check Register (Entry to be made at end of month). b. Amounts allowed by creditors for materials returned, damaged, etc. Credit with: Footings of " Accounts Payable " column per Voucher Record (Entry to be made at the end of month). Balance' Represents the amount owing to creditors for Materials, etc., purchased, and should agree with the aggregate amount of unpaid Vouchers. D2 NOTES PAYABLE (Financial Ledger) Debit with: The face value of all notes redeemed. Credit with- The face value of all notes issued. Balance: Represents the aggregate face value of notes payable out- standing. D3 ACCRUED INTEREST ON BONDS PAYABLE (Financial Ledger) Debit with: Payments of interest on outstanding Bonds. Credit until : Interest accrued for the month on outstanding Bonds (entry made at end of month), charging Profit and Loss. Balance: Represents the amount of interest accrued but not due. D4 ACCRUED TAXES (Financial Ledger) Debit irith: Amount of Tax Bills when they are paid. Credit with: Estimated monthly proportion of taxes, at which time debit the various Operating Expense Accounts to which taxes are charged, with the proportion proper to each. Balance: Represents Estimated Taxes accrued but not due. D5 ACCRUED PAYROLL (Operating Ledger) Debit with: All payments for labor. Credit with: a. Labor charged to Productive Accounts. b. Labor charged to Non-Productive Accounts. c. Salaries not paid from Treasurer's fund. Balance: Represents pay roll accrued but not due for payment. D6 DP/TDENDS (Financial Ledger) Debit with: Dividends paid. Credit with: Dividends declared. Balance: Represents dividends due but not paid. D7 INCOME TAX (Deductions)* (Financial Ledger) Debit u'ith: Items of Income Tax deducted from Salaries and paid to the Government, Cash being credited. Credit with: a. Any adjustments that may be necessary. 6. Amount of Income Tax return made to the Government. Balance: Will represent the amount of Income Tax Collected but not remitted. ♦Example of Entries to D7, Income Tax: Mfg. a/c To Salaries 500 G.M'a Sal. for March 500 Salaries To Income Tax 60 1% Deducted from G Ms Sal. for year 60 Salaries To Cash 440 Bal. pd. G.M. 440 Income Tai To Cash 60 Paid to Govt. 60 MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 15? Acct. Symbol Account D8 DEFERRED CHARGES (Financial Ledger) Debit with: Amount of bonus set aside as due specific employees, Accrued Pay roll being credited. Credit with: Amounts of bonus paid to specific employees, Operating Ex- pense being charged. Balance: Will represent Bonus set aside but not yet paid to employees. D9 PRIVATE ACCOUNTS (Financial Ledger) Debit with: Amounts paid to employees chargeable to their private account, crediting Cash. Credit with: Amounts as established by properly approved traveling and other expense vouchers, and with cash returned, expense accounts or Cash being charged. Balance: If a debit will represent the total amount of Company's fund in hand of employees, as traveling and special expenses, that have not been accounted for to date, and will be transferred to the Asset side of a balance sheet. If a credit will represent a liability. El RESERVE FOR DEPRECIATION Sub Accts. El a Reserve for Building. EIb Reserve for Machinery and Equipment. (Operating Ledger) Debit with: a. Cost of replacing building, machinery and equipment, or important parts thereof, at which time credit Building or Machinery and Equipment Account. 6. Difference between cost and selling price of Buildings, Ma- chinery or Equipment sold, the proper asset account, C2 or C3 being credited. c. Cost of Buildings, Machinery or Equipment discarded or scrapped, the proper asset account, C2 or C3, being credited. Credit with: At the end of each month one-twelfth of the total estimated depreciation for the year, at which time debit the various Operating Expense Accounts to which Depreciation is charge- able with the proportion proper to each. Balance: Represents the available Reserve for Depreciation. When com- piling a Balance Sheet the balance of this account should be deducted from the Asset Accounts C2 and C3, in order to show their estimated present value. Note: At the end of fiscal year any difference between the estimated depreciation charged off monthly and the actual depreciation as established at close of year will be adjusted through Profit and Loss Account. E2 RESERVE FOR RELINING FURNACES Sub Accts. E2a Relining O-H Furnace. E2b Relining Crucible Furnace. (Operating Ledger) Debit with: Cost of relining Furnaces (except for unimportant and minor repairs which will be absorbed in Operating Expense) crediting Pay Roll and Material accounts with their respective portions of relining expense. Credit with: The estimated monthly charges to Operating Expense Accounts to which rebuilding furnace expense is chargeable. Balance: Represents the available reserve for rebuilding Furnaces. Note: At the end of the fiscal year any debit or excessive credit balance in Reserve for Rebuilding Furnace Account should be closed out as follows: a. If a debit balance by charges to Operating Expense Accounts sufficient to close out the debit balance and leave a reasonable credit balance to carry over into the succeed- ing year. 6. If an excessive credit balance by credits to Operating Ex- pense Accounts and debits to Reserve for Rebuilding Furnaces of an amount sufficient to close out the excess portion of the credit balance. c. The division of such adjustment between Open-Hearth and Crucible Operating Expense Accounts will be based upon the experience gained during the year and the amount of rebuilding that has been necessary. d. It will be proper to carry forward at the end of each year a reasonable credit balance in Reserve for Rebuilding Furnace Account, the amount depending upon the phys- ical condition of the furnaces at that time and repre- senting the approximate cost of restoring them to first class condition. Acct. Symbol Account E3 RESERVE FOR ROLLS (Operating Ledger) Debit with: The Cost of making new and changing and repairing old rolls, Pay Roll and Material accounts being credited with their re- spective portion of this expense. Credit with: The estimated monthly charge to Mill Accounts to which Roll expense is chargeable. Balance: Represents the available reserve for providing new and repair- ing old rolls. Note: At the end of a fiscal year any debit or excessive credit balance in this account will be adjusted in a manner similar to that arranged for the account Reserve for Rebuilding Furnaces E2. E4 RESERVE FOR CONTINGENCIES Sub Accts. E4a Special and General Expenses. E4b Strike Expenses. E4c Special Experiments and Investigations. E4d Patent Litigation and Expenses. E4e Bad Accounts. E4f Bonus to Employees. E4g Extraordinary Repairs and Renewals. (Financial Ledger) Debit with: All expenses of such kinds as it has been determined to pro- vide for through this reserve. 158 BOOKKEEPING AND COST ACCOUNTING Credit with: An Estimated monthly charge to Operating Expense Accounts of Manufacturing departments. On special occasions when it is anticipated that extraordinary charges may be pending against this account it will be proper to raise sufficient credit in the account to meet them by direct charges to Profit and Loss. Balance: Represents the available reserve for Contingencies. Note: The purpose of the Reserve for Contingencies is to provide for certain expenditures that will have to be met at specified times and for others that may be unforeseen. The principal expenditures that will be paid from this reserve are as follows: E4a. Special and General Expenses. Will include payments made to special agents for services and expenses while engaged on special work not connected with current operations and construction, also payments to em- ployees and others in consideration of extra services in direc- tions that are beneficial to the Company's interests. E4b. Strike Expenses. E4c. Special Experiments and Investigations. Will include special experiments and investigations that may affect Operating and Sale Departments, but which will not be charged thereto unless the experiment or investigation accrues ultimately to the credit of such Departments, when it will be proper to credit this Account E4c, and charge the department benefited thereby with all or a portion of the expense as may be deemed advisable. E4d. Patent Litigation and Expe?ises. Will include all expenses connected with protecting or securing patents and patent rights. Amounts paid for patents pur- chased may be charged to this account. E4e. Bad Accounts. Will include all uncollectible accounts receivable charged off. E4f. Bonus to Employees. Will include bonus amounts paid to employees who participate in the division of bonus based upon the net profits on a year's operations. E4g. Extraordinary Repairs and Reneirals. Will include the cost of such repairs and renewals that are extraordinary in character and which, if charged into the current cost of operations would unduly increase it. This account will not include the rebuilding of Open-Hearth and Crucible Furnaces, and the replacing of broken Rolls, which are taken care of through special reserve accounts. Acer. Symbol Account Acer. Symbol Account Fl CAPITAL STOCK (Financial Ledger) Analysis op Entries Debit with: Par value of shares retired. Credit with: Par value of shares issued. Balance: Represents par value of stock outstanding. F2 BONDS (Financial Ledger) Debit with: Amount of Bonds retired. Credit with: Amount of Bonds issued. Balance: Represents amount of bonds outstanding. F3 SURPLUS (Financial Ledger) Debit with: Dividends declared, at which time credit Dividend account. Credit with: Net Profit as shown by Profit and Loss Account after the closing entries have been made, at which time Profit and Loss account should be charged, thus causing the latter account to balance. Balaticc: Represents the accumulated net profits to and including the last closing period, less any dividends paid. Gl INCOME FROM OUTSIDE SECURITIES (Financial Ledger) Debit with: Losses sustained on Stocks sold. Credit with.: a. Income (dividends) received from Stocks owned. b. Profits realized from Stock sold. Balance: Represents net income from Stocks of other Companies. G2 DISCOUNT ON PURCHASES (Financial Ledger) Debit with: Discounts taken but not allowed by creditors. Credit with: Footings of "Discount" column in Check Register book (entries made at end of month). This footing represents cash dis- counts allowed by creditors. Balance: Represents Net Discounts on Purchases. G3 INTEREST RECEIVED (Financial Ledger) Debit with: Any adjusting entries. Credit with: All interest received on past due accounts. Balance: Will be transferred to Profit and Loss accounts at closing period. G5 to G12 GENERAL SALES (Representing Division of Sales by classes of goods. A to H inclusive.) (Financial Ledger) Debit with: The debit side of this account will be kept in the Operating Ledger and will be known as Cost of Sales Accounts H.5 to H12 inclusive. Credit with: The billing value of Sales made during month (both cash and charge sales). Balance: When the Cost of Sales Account (kept in Operating Ledger) is deducted from the credit postings in general Sales Accounts the balance will represent Gross Manufacturing Profit on Sales. MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 159 Acct. Symbol Account HI COST ADJUSTMENT (Operating Ledger) Analysis of Entries Debit or Credit U'ith: a. Such adjustments as are necessary on account of using arbitrary prices in establishing cost values. 6. Gains of losses on Sales which at the time of Sale were credited to cost at an arbitrary price. Balance: Will be closed out to Profit and Loss at closing periods. Note: Cost adjustment entries will be adjusted from time to time, the basis for adjustment being value instead of tonnage as the former more nearly represents the most equitable basis. The postings to this account will come from all Producing Depts. and the detail of the account should be kept on sup- porting sheets in such manner as to show each department's cost adjustments separately. H5 to H12 COST OF SALES (Representing Classes of Goods, A to H inclusive). (Operating Ledger) Debit ivith: a. Cost of Sales of Product shipped each month. 6. Gross profits taken on Product sold and afterwards returned by customer. Credit with: The credit side of this account will be kept in the Financial Ledger and will be known as General Sales Account Go to G12 inclusive. Balance: The debit postings in these accounts will offset the credit postings in General Sales Accounts, the credit balance remain- ing in the latter accounts representing Gross Manufacturing Profits on Sales. Jl DISCOUNT ON SALES (Financial Ledger) Debit with: The footing of "Discount" column in Cash Received Book (entry made at end of month). This footing represents cash discounts allowed to customers. Credit with: There will be no credits to this account excepting possibly readjustments for corrections of discounts revised. Balance: Represents Net Cash Discounts allowed to customers. J2 EXECUTIVE EXPENSE (Financial Ledger) Debit with: a. All expenses chargeable to Executive Dept. b. All expenses that are general to the Company's business as a whole and not directly chargeable to other accounts. Credit with: Any items that should result in diminishing the charges to this account. Charge Factory Operating Account B with the proportion of J2 that belongs to the factory. Balance: Represents Net Executive Expense. Acct. Symbol Account J3 SALES EXPENSE (Financial Ledger) Debit with: All expenses connected with maintaining the Selling Depart- ment. Credit with: Any items that should result in diminishing the charges to this account. Balance: Represents Net Sales Expense. J4 CLAIMS AND ALLOWANCES (Financial Ledger) Debit xrith: Allowances to customers for product returned, claims allowed, etc., at the same time credit Accounts Receivable. Credit with: All adjusting entries which will represent debits to stock and scrap accounts for salvage value of material returned; debiting General Plant Expense for manufacturing loss sustained, and debiting the proper sale accounts for loss of profits thereby. Balance: Will represent the volume of claims and allowances not dis- posed of. J5 FREIGHT PREPAID AND ALLOWED (Financial Ledger) Debit with: Freight prepaid and allowed on shipments. Credit xrith: Correcting entries if any affecting previous debits. Balance: Represents Net amount of Freight prepaid and allowed on shipments. J6 INTEREST PALD (Financial Ledger) Debit xrith: All interest items on Notes Payable. Credit xrith: Any adjusting entries. Balance: Will represent the amount of interest paid. Kl PROFIT AND LOSS (Financial Ledger) Debit with: a. Such items of expense as cannot be properly chargeable to any other account. b. With closing entries at closing periods. Credit with: a. Such items of expense as cannot be properly credited to any other account. 6. With closing entries at closing periods. Balance: After all closing entries have been made the balance in th.'s account will represent the Net Profit for the period and should be transferred by Journal Entry to Surplus Account. 160 BOOKKEEPING AND COST ACCOUNTING Acct. Symbol Account Acct. Symbol Account SUB ACCOUNTS OF LEDGER ACCOUNTS To be kept in Subsidiary Ledgers and closed into the Controlling Accounts in Operating and Financial Ledgers at end of each month. B14-1 PAINTS B14-2 REFRACTORIES B14-3 ELECTRICAL MACHINERY AND SUPPLIES B14-4 PIPE FITTINGS B14-5 MISCELLANEOUS STORES B14^6 OILS AND GREASES B14 -7 LUMBER B14-8 STATIONERY B14-9 MISCELLANEOUS CASTINGS B14-10 ROLLS B14-11 PATTERNS B14-12 MACHINERY AND EQUIPMENT B14 13 NEW CONSTRUCTION B12-1 ANTHRACITE COAL B12-2 BITUMINOUS COAL B12-3 GAS COAL B12-4 COKE B12-6 COKE DUST B12-6 WOOD B12-7 FUEL OIL B12-8 CITY GAS (Inventory Ledger) Analysis of Entries Debit with: a. Cost of materials purchased. 6. Cost of Inbound Freight on materials purchased. Credit with: Disbursements made during month, established from Stock Keepers' requisitions and special reports of materials used, to be priced and extended by General Storekeepers' office and forwarded to Cost Dept. in shape for distributing to cost accounts. Balance: Represents the cost of materials on hand in each sub account. Note: There will be no balance left in the four accounts B14-10, B14-11, B14-12, B14-13, as all items charged thereto will be immediately credited out to the final account to which they are chargeable, being first charged to a Store or Inventory Account as a convenience in accounting for all receipts through Stores Account, B14. B15\ STOCK ADJUSTMENT (Inventory Ledger) Debit or Credit with: Such adjustments as are caused by overruns and shortages of raw materials, process and finished products. Balance: Will be closed out to Profit and Loss at closing periods. B16b BILLET PRICE ADJUSTMENT (Inventory Ledger) Debit with: Stock Preparing Expense and credit as outlined under heading " Stock Preparing Expense " Account, P70 to P710. X20 to X216 LABORATORY EXPENSE (Expense Ledger) Debit with: All charges for Pay Roll and other Expense. Credit with: Proper proportion of Laboratory Expense chargeable to various other Expense Accounts. Balance: This account will close out at end of each month. Note: The distribution of this expense will be based upon the service rendered the various Operating Depts. and other accounts, and the detail distribution sheets should show separately the charges for Chemical, Metallurgical, Physical Testing and Open-Hearth Chemical Laboratories. X30 to X320 PAY, COST AND ACCOUNTING EXPENSE (Expense Ledger) Debit with: All charges for clerical and other Office Expenses in connection with the Pay Roll and Cost Keeping. Credit xeith: Proper proportion of charges to various other Expense Ac- counts. Balance: This account will close out at end of each month. Note: The distribution of this expense will be based upon the service rendered the various Operating Depts. and other accounts as near as it can be established, and may be covered by per- centage rates varied as occasion may require. X40toX434 GENERAL PLANT EXPENSE (Expense Ledger) Debit irith: All charges for Salaries, Pay Roll and other Expenses that are not charged to Departments. Credit with: Proper proportion of charges to various other Expense Ac- counts. Balance: This account will close out at end of each month. Note: The distribution of this expense to other Expense Accounts, will be in proportion to the service rendered, as near as it can be determined; certain items at times can be charged directly to specific Operating Expense Accounts, the balance may be distributed by percentage ratios varied as occasion may re- quire. X50 to X514 GENERAL STORE HOUSE EXPENSE (Expense Ledger) Debit with: All charges for Salaries, Pay Roll and other Expenses. Credit with: Proper proportion of charges to various other Expense Ac- counts. Balance: This account will close out at the end of each month. Note: The distribution of this expense will be prorated to the other expense accounts in proportion to the value of materials, etc., issued to each during the month. MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 161 Acct. Stmbol Note: Account P60 to P68 WAREHOUSE EXPENSE (Expense Ledger) Analysis of Entries Debit with: All charges for Pay Roll and other Expenses. Credit with: Proper proportions of charges to various Cost of Sales Ac- counts. Balance: This account will close out each month. Note: The basis for distribution of this expense will be in proportion to service rendered for storing and shipping steel, the general items being prorated in proportion to the direct distribution and charged to the proper cost of sales accounts H5 to H12. P70 to P710 STOCK PREPARING EXPENSE (Expense Ledger) Debit with: All charges for Pay Roll and other Expenses. Credit with: Charges to Billet Price Adjustment Account. Balance: This account will close out each month. Note: As this expense is practically an addition to the cost price of billets, it will be covered lay adding arbitrary amounts per ton to all billet prices, establishing different arbitrary prices for various kinds of billets as past experience indicates to be proper. A sub account Billet Price Adjustment will be kept in the Inventory Ledger and this account will be charged with Stock Preparing Expense and will be credited with the amounts established through the use of the arbitrary prices per ton that have been added to the cost of billets handled by this department during the month. The arbitrary prices used will be adjusted from time to time as the balance in Billet Price Adjustment Accounts shows need thereof. P80 to P812 INDUSTRIAL RAILWAY EXPENSE (Expense Ledger) Debit with: All charges for Pay Roll, Fuel and other Expenses. Credit with: Proper proportion of charges to various other Expense Ac- counts. Balance: This account will close out each month. Note: The distribution of this expense will be based upon service chargeable to various other expense accounts. P90 to P910 ELECTRIC LIGHT AND POWER EXPENSE (Expense Ledger) Debit with: All charges for Pay Roll and other Expenses. Credit with: Proper proportion of charges to various other Expense Ac- counts. Balance: This account will close out each month. The distribution of this expense to other Expense Accounts will be based upon meter readings for power furnished, and service given that cannot be metered will be prorated to ex- pense accounts chargeable therewith on a basis furnished by Chief Electrician at the end of each month. Acct. Symbol Account P110 to P1112 Debit with: All charges for Pay Credit with: STEAM EXPENSE (Expense Ledger) Roll, Fuel and other Expenses. Proper proportion of charges to various other Expense Ac- counts. Balance: This account will close out each month. Note: The distribution of Steam expense will be in proportion to steam furnished to various departments, and the basis for distribution will be furnished by the Master Mechanic at the end of each month. P120 to P1226 CRUCIBLE DEPT. (Expense Ledger) Debit with: All charges for Pay Roll, Productive materials, Fuel and other Expenses. Credit with: Ingots and scrap produced. Balance: At the end of each month the total cost of Crucible Dept. will be charged against the Product turned out during the month. As ingots will be credited to Crucible Dept. during each month at certain fixed prices determined in advance, there will be a debit or credit to Cost Adjustment Account covering the difference between this fixed price and the actual cost as established at the end of the month. If the debit or credit balance becomes abnormal a revision in the fixed price will be in order. Note: A monthly cost and expense exhibit will be made out covering the month's operation of Crucible Dept. P140 to P 1420 P150 to P1512 P160 to P1620 P170 to P1710 P180 to P1812 P1820 to P1830 P190 to P1910 P200 to P2010 HAMMERS Nos. 1-2 HAMMERS Nos. 3-4 HAMMERS Nos. 5-6 16 IN. ROLL TRAIN 10 IN. ROLL TRAIN 12 IN. ROLL TRAIN 8 IN. ROLL TRAIN ROLL TRAIN No. 2 MILL (Expense Ledger) Debit each account with: All charges for Pay Roll, Productive materials, Fuel and other expenses. Credit each account with: Productive stock and scrap produced. 162 BOOKKEEPING AND COST ACCOUNTING Balance: At the end of each month the total cost of each Hammer or Mill Dept. will be charged against the product turned out by each during the', month. As the product from the departments will be credited during a month at certain fixed prices determined in advance, there will be a debit or credit to Cost Adjustment Account covering the difference between this fixed price and the actual cost as set up at end of month. If the balance becomes abnormal a revision in the fixed prices used will be in order. JVole: A monthly cost and expense exhibit will be made out covering the operations of each Hammer and Mill Dept. Acct. Symbol Account Acct. Symbol ACCODNT P210 to P2112 ANNEALING AND TREATING EXPENSE (Expense Ledger) Analysis of Entries Debit with: All charges for Pay Roll, Fuel and other expense. Credit with: Such portions of this expense as is established by using the arbitrary rates per ton adopted to cover them and charge to Cost of Sales Account H5 to H12. Balance: After charging out to Cost of Sales the amount based upon tonnage of shipments, the balance will be debited or credited to Cost Adjustment Account. Note: Some annealing expense will be chargeable to Wire Dept. and the balance to Cost of Sales H5. The remainder of the expense will be distributed to such division of Cost of Sales Account as work was performed for. P220 to P226 ROLL TURNING EXPENSE (Expense Ledger) Debit with: All charges for Pay Roll and other expense. Credit with: Proper proportion of Roll Expense chargeable to various sizes of Rolls handled, this amount to be charged to the Reserve for Rolls Account. Balance: This account will close out at the end of each month. Note: The detail of Cost on New Rolls and Repairing and Changing Old Rolls will be entered on a card record for each roll. P230 to P239 ENGINE ROOM EXPENSE (Machine Shop) (Expense Ledger) Debit with: All charges for Pay Roll and other expense. Credit with: Proper proportion of charges to other expense accounts to which power is furnished. Balance: This account will close out at end of each month. \ote: The distribution of this expense will be based upon data as to power consumed, furnished by Master Mechanic. P240 to P2424 MAINTENANCE EXPENSE (Expense Ledger) Debit with: All charges for Pay Roll and other Expense. Credit with: Proper proportion of Maintenance Expense chargeable to other expense accounts. Balance: This account will close out at end of each month. Note: The detail distribution of Pay Roll, General Stores, etc., charge- able to this account will be kept in separate detail for Machine Shop, Pattern Shop, Blacksmith Shop, Bricklayers and Pipe Fitters, so that proper distribution can be made of this expense to the other expense accounts chargeable therewith. P290 to P2918 INSPECTING EXPENSE (Expense Ledger) Debit with: All charges for Pay Roll and other expense. Credit with: Proper proportion of charges to the various classes of material on which inspection was performed. Balance: This account will close out at end of each month. Note: The distribution of this expense will be based upon Pay Roll reports of time spent by inspectors on the various classes of material inspected. P300 to P3064 WIRE DEPT. EXPENSE (Expense Ledger) Debit with: All charges for Pay Roll, Productive materials, and other expenses. Credit with: Productive stock and scrap produced. Balance: At the end of each month this expense will be closed out to Process Stock BIO and Finished Stock Bll in accordance with the Dept. Inventory and shipment reports. Note: A monthly cost and expense exhibit will be made out covering the month's operations. P400 to P4024 OPEN HEARTH DEPT. EXPENSE (Expense Ledger) Debit with: All charges for Pay Roll, Productive materials, Fuel and other expenses. Credit with: Ingots produced. Balance: At the end of each month the total cost of Open Hearth Dept. will be charged against the cost of producing ingots B3. As ingots from the Open Hearth Dept. will be credited thereto during a month at certain fixed prices determined in advance there will be a debit or credit to Cost Adjustment Account covering the difference between this fixed price and the actual cost set up at end of month. If the balance becomes abnormal a revision in the fixed prices will be in order. Note: A monthly cost and expense exhibit will be made out covering the month's operations. MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 163 TRIAL BALANCE— BALANCE SHEET— INCOME STATEMENT The following are typical forms of trial balance, balance sheet and income statement for a steel works. The titles of the accounts, and the symbols are different from those used in the foregoing list of accounts. Balance Sheet as of — Continued Trial Balance as of Debits Balance Sheet as of Credits Al Real Eatate 2,000 00 A 2 Buildings 8,000 00 A3 Machinery 20,000 00 A4 Furniture and Fixtures 2,000 00 A5 Miscellaneous Tools 3,000 00 Bl Cash 1,250 00 B2 Petty Cash 250 00 B3 Accounts Receivable 35.000 00 B4 Bills Receivable 6,500 00 B5 Prepaid Insurance 260 B6 Prepaid Taxes B7 Outside Securities B8 Cash Advances 1,500 00 B9 BIO Branch Accounts Receivable 2,450 00 CI Merchandise 1 2,000 00 C2 Raw Materials 20,000 00 C3 Work in Process 25,000 00 C4 Finished Product 16,000 00 C5 Supplies 2,000 00 Dl Capital Stock 1 00,000 00 D2 Surplus 15.000 00 El Accounts Payable 25.500 00 E2 Accrued Taxes 450 00 E3 Accrued Pay Roll 1,500 00 E4 Income Tax Deductions E5 FI Reserve for Depreciation 5,000 00 F2 Reserve for Bad and Doubtful Ac- counts 1,500 00 Gl Sales of Factory Product 135,000 00 G2 Sales of Purchased Goods 75,000 00 G3 G6 Discount on Purchases 47 00 G7 Interest Received 35 00 G8 Sales to Branches (Consigned Goods) 7,500 00 HI Cost of Sales, Factory Product 1 22,000 00 H2 Cost of Sales, Purchased Goods 71,000 00 H6 Claim Adjustment 900 00 H8 Cost of Sales, by Branches (Con- signed Goods) 7,250 00 Jl Discount on Sales J2 Sales Dept. Expense 3,410 00 J3 Claims and Allowances 3,701 00 J4 Freight, Prepaid and Allowed 500 00 Kl Profit and Loss Total 561 00 366,532 00 366,532 00 Assets: Fixed Assets: Real Estate and Buildings Machinery, Tools, etc. 10,000 25,000 00 00 00 00 30,000 Total Less: Reserve for Depreciation 35,000 5,000 Total Fixed Assets: 00 Trought Forward Current Assets: Cash Accounts Receivable Bills Receivable 35,000 00 6,500 00 1,500 40,000 260 1,500 00 00 00 00 30,000 43,260 75.000 2,450 00 Total Receivables Less: Reserve for Bad Ac- counts 41,500 00 1,500 00 Prepaid Insurance Cash Advances Total Current Assets: Inventory Assets Miscellaneous Assets 00 00 00 Total Assets 150,710 00 Liabilities: Capital Stock 100,000 00 Surplus 15,000 00 Current Liabilities: Accounts Payable 27,000 00 Accrued Taxes 450 00 27,450 Total Current Liabilities 00 Profit and Loss 8,260 00 Total Liabilities 150,710 00 Income Statement for Ending Gross Sales to Outsiders: Mill Product 135,000100 Purchased Goods 75,000 00 210,000 00 Total Gross Sales to Outsiders Gross Sales to Branches: Mill Product 5,000 00 Purchased Goods 2,500 00 7,500 00 217 500 Total Gross Sales 00 Less: Allowances: Returned Goods 1,500 00 Price Adjustment 1,000 00 Def. Matl. and Work 500 Oil Business Policy 500 (III Poor Service 201 00 3,701 213,799 00 Total Net Sales 00 Cost of Sales: Factory Product 122,000 00 Purchased Goods 7 1 .000 00 Sales to Branches 7.250 00 Claim Ajustments 900 DO 201,150 00 Gross Profit on Sales % 12,649 00 Deduct: Selling Expenses 3,910 00 Net Operating Profit % 8,739 00 Deduct: Discount on Sales Charges to Profit and Loss 561 00 561 00 Total less Deductions 8,178 00 Add: Discounts on Purchases 47 10 Interest Received 35 00 Credits to Profit and Loss* ! 82 DO Net Profit for Period 8,260 00 * These items are debits and credits to Profit and Loss that have not been charged or credited to manufacturing accounts. They usually represent adjustments affecting matters not directly connected with operations. 164 BOOKKEEPING AND COST ACCOUNTING FORMS USED BY MR. WALTON IN STEEL WORKS AND OTHER ESTABLISHMENTS Form Wl. — Schedule of Parts and Operations This sheet is used in developing a routing and scheduling system in a heavy hardware and tool factory where the first requisite is to obtain a systematic record of what is manufactured, arranged in Bill of Material form and containing neces- sary data as to operations in each department and their usual sequence. From NcMO-lOW-ll-SO-lS (Loose Leaf Binder Sheet Size t: x if in.) >made article UNIT OF QUANTITY SHEET OF (50 lines. 6 dct inch) Number MATERIAL USED Bought Outside and Price LIST OF OPERATIONS Economical Quantity to Order REMARKS AND FINISHED WEIGHT of Piec !fl NAME OF P ART Kind Size and Qumntitr OPERATION Imaurk DopMNbere Done Form W2. — Requisition Card (5 x3 in.) / Pa. Order No. This is Req. No. Subject N. Received Origin DEPT. 12 Issued to Dept. 13 Date Supplier Needed Ordered in above Nam, Daw Date Wanted (2 lines, s per inch) iwe Specifi cations Remarks 3 lines Requisition to Purchasing Dept. The other side of this card has columns and ruling (5 per inch) and headings as below: Date Hurried Date Promised Date Hurried Date Promised 1 Form W4. — General Store Room Card For rough and unfinished parts carried in store rooms. RECORD OF UNFINISHED STORES Name Mat'I Sec. No. Symbol Assembly Weight Each No. per L'nit | When stock is _Pcs. [Down to Pes. ICarry(Repairs_ For ■< (Production p cs , Border_ RECEIPTS AND DELIVERIES 0. Amount Wbcn Bal. I-uo So. | Ordered Rcq"d on Order (22 lines, 4 pJr inch ) [Size 5 i s in.) (Reverse of Card) ORDERS RECEIPTS AND DELTVERIES I P. 0. 1 S. 0.1 Amount Dltfl | No. No. Order*! When Ecq'd EaL. Due on Onto Date P. 0. No. S. 0. No. Ant. Rec'd A-Tlt. Da lance on Hand X.27 lines, £ per inch Form W3. — Requisition for Supplies (5x3 in.) / Form 06. 2M. 11 AP 00 / Contract No. Structure No. Pc No. ^y Origin DEPT. 12 For details see Each Dept On Fnrwa ""•" Money Value each MM Date Remarks Forwarded Material O.K. and Req. Forwarded to Origin Date From 12 Date To 73 Date Material Requisition—Supplies Form W5. — In and Out Stock Card Designed to hang in front of bin. / (Size 'hi * « in.) / Part No. Q (Brast t yelet ) Name Location BIdg. Floor Row Shelf Bin Condition Unit of Measure Minimum Date Received Date Issued Balance (■'3 Ui\cs\ Gfler tnc u Column he ad it I L» ■;■ tn ( ruin •is cot tn tied or rei'erse side) III = MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 165 Form W6— Time Study Blank for General Machine- shop Use (Site j x I in.) TIME STUDY Name ol Part Symbol Operation {6 lines, 6 per inch) Type of Ma chine Machine No. No. Pes. Machined Kind of Steel (23 lines, 6 per inch) Speed Feed Cut pie: Total Time in Minutoe Total Gang Hours _ (iO lines) Name of Operator or Leader Time Study N_Oj_ Approved by Schedule No. Form W7. — Combination Clock and Time Card Individual job tickets are preferable to these one-day time cards, but for some classes of work this card is well arranged. f- X X H (St» 5 X * 3* in.) D AILY TIME CARD |>f.p ri Time From Week Ending Rate To Order No. Name Pattern No. Operation Hours Pieces Amount l« ines * per inch) The reverse of the card with columns for the clock-stamp record is as below. Time Hours Rate Amount Regular Overtime *j (meal I i Morning Afternoon Overtime In Out In Out In Out i ~ (? lines i per inch) O.K. Form WS— Job Time Ticket (Size 5x3 in.) Tickets of the same size and style, printed on different- colored paper, are used for different departments. The printing varies with the kind of work done. ^/contract no. STRUCTURE NO. PC. NO. N. MONEY VALUi: DEPT. 8 MACHINE NO. OPERATION HOURS QUARTERS DATE MAN NO. REMARKS (6 tinea, s per inch) Samples of the printing on some other cards are shown below. These are group cards, used when more than one man works on a single job. / CHARGE NO. DATE OPERATION DEPT. 37 MACHINE NO. MONEY VALUE No. of Pieces in Lot No. Pes. Fin- ished this day Weight ol Pes. Finished HOURS Ol' AR TERS REMARKS (5 lines) ' , , TOTAL TIME O.K. TIME FOR DAY HOURS QUARTERS GROUP CARD (See other side) D-S-G--FORGE SHOP The reverse of this card is headed as be'.ow: / Man No Name Time for This Card Total Time lor Day Rate Money Value Hrs. Qrs. Hrs. Qrs. Smith Helpers 1 ' Department No. 29 has the same card except that the word " Leaders " is printed instead of " Smith." Dept. No. 47, Sheet Iron Dept., is similar except that the third line is as follows: HOLES IN EACH TOTAL HOLES PIECE PUNCHED HOURS I QUARTERS and on the reverse side " Punchers " is used instead of " Leaders." An individual time and job card for the same department has printing as follows: Form W9. — Job Time Ticket / 25.1 Date Man No. 201G Name J. Paris Money Value 1 Operation Drilling Dept. 47 Machine No. B2G Hours Quarters 1 No. Pml Fin- ished ITiifl D..J Total No. of 401 Size of Holes l" Ihfukiuss ol Work Rate Remarks {s lines) D-S-A--SheetIron Dept. Particular attention is called to the value of the information that is obtained from Form W9 with a minimum of clerical work. It not only credits the workman with 7| hours time and charges order No. 25.1 with the same amount of time, but it shows that in that time on machine £26 451 holes 1 inch diameter were drilled in metal I inch thick. If this latter statement is posted on a card headed Drilling 1-inch Holes it forms a basis for estimating the cost of future work in which the drilling of holes is an important element. A drawer containing cards for each kind of operation that can be done on each class of tool is a most valuable aid to the estimator in making predeterminations of costs of any machine or operation. 166 BOOKKEEPING AND COST ACCOUNTING Form W10. — Pay-off Sup {Sizes xi in.) p AY OFF SUP CASHIER please pay .191. Man Ncw___„„„„_Name «_____—. Worked in Dept Wages due on last pay period ending «__•_ Wages due this pay period ending ——■„■•. Total earnings ..... . .......... Less deductions ...... Net amount due Head Timekeeper Received payment for all wages due to date Witness NOT NEGOTIABLE Form Wll- -Typical Pre mium Ticket {Size l x 6 in.) PREMIUM WORK Operation Premium Limit Order No. Name of Part Symbol Number Pieces Finished Def. Pes. SUMMARY Date Pes. Hours Date Pes. Hours (« lines & per inc. Premium Time Time Saved Bonus Time Rate Bonus Arm. Figured Checked Totals Credited Key Number Name O. K. f< >r Pieces Finished NOTE:- All Records on these ticke to be made by the Timekeeper, ant Inspector left at done machin until It e wher s finish i work •d. s beii E Timekeeper The reverse side of the card has the following: PREMIUM SYSTEM REGULATIONS 1. Each employee shall be guaranteed his regular day's wages for all time at work. 2. A limit once set and worked upon shall not be reduced except through the introduction of new methods in process of manufacture. 3. No limit shall be placed upon the amount of premium an employee may earn and receive; large premium earnings on the prescribed limits shall be desired. 4. All premiums earned shall be paid on regular pay days of the Company. 5. This card is for use of the men during the progress of a job, and shall be left at the Operator's Machine. Time should be checked daily by workman, and errors rectified with the Timekeeper and Foreman before cards are forwarded to the Office. No claim for errors in time can be allowed after card is sent in for payment. 6. All defective parts must be reported to Foreman imme- diately on discovery. Day rate only will be paid on such parts. Form W12. — Production Card (see holder, on next page) Card No, %73 Part No. 1384 Chopper # 10 Body Date June 1, 1916 "A" Find in 46 Store in Pieces in Track 600 Issued by Job No. No. NATURE OF JOB Pea. on Gate-2 Opertt Ito'b No. Prion per 100 Pij for 10310 4 Moulding ion 11 Grinding 672 10. 500 1042 11 Belting 896 9. 498 8479 1 Boring 754 17. 496 2480 7 Turning Out Side 692 6.5 496 92 7 Drill for CI. Screw 688 8.5 496 Size of Card *X * 6 '""■ S* Une$, 8 per inch >od pieces Cooditioo Transferred from Card No. % Inspector Job v.. Last Operation Job ISo. H here Defective X o REMARKS and Foreman's Signature Loss Quan- tity Price per Fleet Total 1042 1042 / Belted Out 2 2479 2479 • Missed Boring ■J Box h of Card 9K *x i» /9 lines* Sper inch Form W13. — Shop Order Card. Suitable for machine shops. '{Size 3% xlin.) Order No. Date Issued Date Wanted Make — Pieces. For Dept. Symbol_ Operation Plane Shape No. Pieces No. Pieces Finished Defective Inspected by 13 Additional lines, & per inch, with prin Bore, Turn, Face, Mill, ScrSw Macfu, Drill Polish, Erect or Fit, and four blank space; . Key No. side heads, Spindle, THIS TICKET MUST BE CAREFULLY PRESERVED AND SENT TO COST DEPT. WHEN WORK IS FINISHED. {Reverse Side) Pieces Delivered To Store Room To Erecting Floor Date No. Pes. Date No. Pes. S tines i per inch, -M in blank space at bottom MODERN ACCOUNTING SYSTEMS FOR STEEL WORKS 1(17 Card No. 4. 7 g 2 - Data i^rfetit-^ /JV C Part Nt 'B2 MILL #5 REV. GRAN. GRINDER Find in &b? $/S~0 " } .., , [i rnicl Store in i£ /* X/04*KnrtM Slore and report A ' '■"•R<™~ ■ *' Issued by . y ■? , JOB Ho. ""■' NATURE OF JOB PCS. ON GATE-2 ! Ih 1 1 0206 1**M0ULDING ISUgia; LAPPING 1ST MAN |AI6U8l8f*LAPPING 2ND MAN |B|8Uai8| LAPPING 3RD MAN Il7l2l|20 WASHIMG AFTER LAPPING ^A5" >•■■ INSPECTING JOB #1378 7 Form W15. — Operation and Part Cost Card Enabling any combination of costs to be obtained by gathering together the required cards covering a particular assembly, a complete engine or machine, etc. Where interchangeable parts are used on different sizes of engines or machines it saves duplication of cost cards. An entire cost system has been introduced successfully on this card basis in plants making hundreds of different types and sizes of engines, pumps, etc. (D, day work; P, piece work.) {Size «J4 x 7 in. Printed on both aides) Part Symbol Used on Wt. Each Mnf Operation {Five more touble column; i No. Made Cost Each No. Made Cost Each No. M...1.- Cost Each No. 1 Cost M.i, If 1 1 I: D P D (liepel tfor s ifmcs, tieo lines for totals, the % repeat c P more times an'd two lines for totals) 1 J I 1 -I ] JJ Form WIG. — Comparative Record of Costs of Opera- tions and Parts at Different Dates Symbol B42G Part A | Wt. 4.5 lbs. Mt'l CaBtlron Date 1-1 .- .-.- i/s/is 4/11/15 Order No. Wort 2891 Utile V.",'. ... N n d. ts, So v. ,:. viV'i'.. Con No \:„i: Co»1 1 .. ',: ,'i'.. K-..n No Vi.'l, CmI r ,. ! No. I Co.i ~ D.W. Turn p-.«. 1HIJ ,02 H)!l .ll'J Drill D - T - U P.N. 1.1,1 .on:! 100 ,003 II. \*'. 98 .011 Ml " P.iv. .IBS R 1tmV ' P.W. 97 .":: 'IS .025 Key D.W. Seat P.rt. 97 CBS '.is ■ 1 i 1 (8 lines for i oth Size 6K x iX t~r operationi in. Printed, on both sides . D.W.,Day Work. P.W., Piece Work.) Total Cost 97 1261 98 [lH8 Fig. 10. — Walton's Card Holder. (See description on page 151.) Form W14. — Pattern Cost Card (Issued by Supt. of Pattern Shop.) (Sizes 1 x i<4in.) Symbol Date Issued Key No. Note:-Send this stub to Cost Department when issued. PATTERN COST CARD Symbol- Workman _ KeyJS'o- For Dept _D ate 19 1 Material Used Total Hours_ Rate Send this to Cost Dep t. the day pattern is finished Cost of Material, $_ Cost of Labor, J_ Expense, $ _ Total Cost, S_ Form W17. — Request Sent to Foreman To explain why costs of operations have increased. (Size 7 * 6% m.) COMPARATIVE LABOR REPORT Date 19 Symbol. Part. Operation. Mr. Please note Labor as given below. °«e "igo"!^ Name of Workman \ JjZ'J **£, *"«l E.Vhl *»"'" (3 lines, % in. spacing) Remarks Previous Records show (J lines) 1 (' in! space) Cost iie|.t. 168 BOOKKEEPING AND COST ACCOUNTING Form WIS. — Material Used from Stock Record of structural shapes, bars, etc., in plants where a well-arranged stock yard system is in effect. (Silt -« x 7 in Req. No. .) MATERIAL USED FROM STOCK >. Drawing No... _ Shop Bill Page Sketch No. Date 19 Order N MATERIAL WANTED Cut From Ret'd to Stock Weight of Material Used Price Amount Item No. No. Pieces Shape Section Length No. Pieces Length No. Pieces Length Ft. In. Ft. | In. Ft. In. (/- lines, % in. spacing) _ 1 ' 1 Form W19. — Inventory Ticket This ticket reduced the work of taking and recording an accounted for. The details will of courses vary a the class inventory. The tickets are numbered consecutively on a of material varies, numbering machine, so that every ticket issued may be (Size ?!-i'x $% in.) No. 17 INVENTORY TICKET Symbol No. Pieces Bin No. Room No. Depr. Drawing No. Rough KIND OF MATERIAL Full Desc. of Part Steel Finished U lines, H in. space) Ma..'! . Iron Part finished (Give operations below) ...II. .T ■Mild Steel Cold Rolled Malleable Plate Yellow Brass PART OF MACHINES \S eight Each Tire Plate Red Brass Steam Engine Hull'r J Alf Total Weight Fire Box Bronze Separator Feed. | Clov. Quantity Struc .-.I. >.]. L -a Misc. Mat'ls Iron Pipe Lull, Feeder Wattr Hi;cn Size Galvanized Sheet Brass Ti.lt.' Hand Feeder ou Wagon Ulmifc Sheet Drop Bulkr B TJlue Antic. Sheet Rolled Bmm Grain Grader Oil C W roupbt Wind J Sep. Eng. E Special t (Qi V e kind) Materials! l ' Stack. | Hull. F Lumber (Give grade and kind) Special (Givo name ) Counted by (i lines) Count Checked by l\< St. 'par.itr Mi n't-, f.>r 1 inished, Partly Finished, and Kongh Parts Form W20. — Requisition for Small Tools (Sizesxxtxin.) REQUISITION ON SMALL TOOL DEPT. FOR TOOLS OR EXCHANGE Note: Foreman must sign requisition and see that proper description is given of tools required . Sec. Dept. No. Time Ch'k Name Page No. Tool Book (Are Tool Checks Required Yea or No ) Files Drills Taps Dies Miscellaneous Bin No. Quan. | Length Style Out Bin ■ a a tu •a e3 > =350 o3o -2 3 £$*>]! rt rt 0) . 3 1> o -on^-t- WE H ej_ o3cjiaoeJ as £ z Q O r m O _ ft flE3 ti b« fc& ft 23 32 c 4 »{3 ■x fa O ft m rf) rfi rn so St S w ^ a g H-5 5 S S SH H §1= - qS° 2 «j7j = 00303 a gpj MS 5 3_J — „ t- hf t; C x_ rrfaffl^hO fa 2 ES w o - m 3 S3 -- :5^ Ss 2g2 dgq So* J= 3 C M sii, S 9 2 71 -7 r 3 5* Lii: oi— « . Ll-.z. :gcT.~ 3 Q3 . ?! So So 5 o as m§ a" a, 1 * v a J >8 =0 jjjj — 6B rt a =1 O § 3 . § §* £ aoj g »J i 50 1 2 . i 1° a v w PQ OS ■fa P J'J2 H.HJ 5 • 3 in,) 1 1 1 (Back of Form!) Customer 23 C/l ■a 8 1* Molding Foreman's Comment on Equipment — Form BF1 Piece Work Card The Piece Work Card is used for piece work, it being advisable to use a different color from that of Day Work Card. CUSTOMER Pattern Number Address Kind of Pattern and reason for changing Date O.K. Rate (Size G x 3 in.iruled lines ) ' \ . ■ Form No. Form BF2 Piece Rate Card for Pattern Changes The Piece Rate Card is the office record of the piece rate set by the Superintendent for any particular pattern. DAILY MOLDING REPORT Date Customer Pattern Number Shop Order Number Molder's Number Number Castings Made Cored or Solid Piece Work Time Alloy Foreman's Comment Plated Gated Loose {Size % x 10 in , 2* ruled lines) Form BF3 When an employee is transferred from one department to another, as from Melting (4) to General Labor (5), during the day, notice of the transfer is sent to the Pay Roll Clerk by the employee's foreman. DAILY CASTING REPORT Date Customer Pattern Number Shop Order Number Molder's Number Total Castings Good Castings Bad Castings Cored or Solid Piece Work Time Alloy Pieces Pounds Pieces Pounds Pieces Pounds (Size 8% x to in , 2£ ruled lines) . Form BF4 The Daily Molding Report is made out each day by the Foundry Clerk, one copy going to the Superintendent, one to the Inspector, and one to the Cost Clerk. Time is entered in hours and tenths of an hour as 1.5. Piece-work must be indicated by a check (V), so that the Inspection Department may go over the piece-work castings first in order that the pay roll record may not be delayed. The Daily Casting Report is made out each day by the 176 BOOKKEEPING AND COST ACCOUNTING CORE CARD Customer Pattern Number Date Ordered Alloy Number Date Wanted Shop Order Number (Size 3 X 3tn.) Number of Cocet Wanted Form BF5 CORE ROOM Piece Work Report Customer Pattern Employe's, Pieces Number Number Made Piece Rate Amount Hours P.W. Hours D.W. (Size 8% x5 y 4 ii .;/? lines) 1 ! _ Form BF6 Inspector. One copy goes to the Foundry Clerk, who from it makes out a Work Card (Day or Piece), for the required shortages; one goes to the Cost Clerk; and one to the Pay Roll Clerk, who checks the piece-work time against the Time Cards and Day Work Cards, to find the wages due each molder. MANUFACTURING EXPENSE CARD Customer Alloy Number 1 Plated 1 Changes in Pattern Gated | Loose Pattern Number Date Run Shop Order Number Good Pieced Made Weight Good Pieces Average Weight Molders Time Molders Rate Amount Molding Cost Per Pound Core Makers Time Core Makers Rate Amount Total Amount Productive Labor Cost Per Pound (Size 8% x t in., /-i ruled lines) Form BF7 SUMMARIES Date From To Good Pieces Made Weight Good Pieces Amount Molding Time Molding Cost Per Pound Amount Core Making Time Cora Making Coat Per Pound Metal Per Pound Overhead by Tonnage Overhead by Molding Overhead by Core Making Mfg. Cost Per Pound Manager's Comment (SizeS^. ! -H in., 5 r tied lines) Form BFS The Core Card is made out by the Pattern Clerk, and goes with the core box to the Core Room Foreman. The Piece- rate Card is used to register the piece rates on cores, being rubber stamped Cores Only. The number of good cores made is reported to the Pay Roll Clerk by the Core Room Foreman, on the card Core Room: Piece-work Report. Manufacturing Expense Card. It is considered best to col- lect the costs by customer, since his business must be treated as a whole, regardless of the fact that some particular pattern may run at a loss. To do this, the details are collected by pattern number. The Manufacturing Expense Card is sum- marized from time to time, to note the effect of tonnage, and particularly to note the effect of a revision in pattern as indicated by a comment in the space Change in Pattern. When a change is made, a new card should be started. In order that this card may check with the books the actual cost of metals consumed for this alloy for the month must be used. This is true also of the overhead ratios or per cents. The sum of all the costs shown on these cards, for any month must check, within close limits, to the books. The metal loss will be the average metal loss for the alloy in question. The Requisition Slip is used by the foremen, for supplies, as sand, coke, shovels and tools. A summary of the Requi- sition Slips shows the supplies used for any period. REQUISITION FOR SUPPLIES To Storea Clerk Date_ Kindly Supply the following: Department (Size S x 3 hi.;G lines) Form BF9 Date PLANT SUB-ORDER N", Description of work to be done, in detail (Size «l'it in.) Copies to Authorized by Signed by Form BF10 The Plant Sub-Order shows the labor expended on Build- ings and Equipment, covering reconstruction and changes, as well as repairs and renewals. FOUNDRY COSTS 177 Form BF11 Distribution of Items of Expense. On this sheet the daily or weekly expenses are summarized to complete any selected period, as one month. Accounts 2 and 3 are pro- ductive labor accounts. Accounts 4 to 10 are known as the Tonnage Group. Accounts 11 to 20 take the proportion of account 24 and the depreciation of account 25 that account 2 shows of the total of accounts 2 and 3. Accounts 21 to 23, in the same manner take account 3's proportion of pro- ductive labor. Accounts 24 and 25 do not form part of the total cost except as distributed in this way. The proportion of accounts 2 and 3 is first determined. Account 24 is then distributed to its proper places. Depreciation of account 25 is distributed in the same way. This distribution would then summarize as follows: Accounts 21 to 23 Account 24 Account 25, 400.00 @ 10% Total Account 24 and 25 % Molding Labor 75.0 % Coremaking Labor 25.0 Share of Accounts 24 and 25 To Accounts 1 1 to 20 Share of Arcounts 24 and 25 to Accounts 21 to 23 Revising this we have: Molding Labor Coremaking Labor Tonnage Group (4 to 10) General Expense: Molding (11-20) General Expense: Coremaking (21-23) Month of DISTRIBUTION OF ITEMS OF EXPENSE Pounds Good Castings Day Molding Labor Acct. 2 Core M'k'g Labor Acct. ' 3 Total of Melting Accts. Acct - 2&3 * General Labor Acct. 5 Repair Labor Acct. 6 Crucibles Acct. 7 Fuel Acct. 8 Charcoal Acct. 9 Refraction Acct. Id Total of Accts. 4 to 10 | Columns J or other (Size of form (9 x *H in.) tit: ft. Foremen 12. Clerks 1 (Headings Continued) % Acc| No 2 % Acct. No. 3 <3. Cleaning U. Inspection Molding's Share of General Exp. Acct. 20 Total Acct. II to 20 Core Room Foremen Acct. 21 Core Room Supplies Acct. 22 Core Making Share General Expense 23 Total of Accts. 21 to 23 Overhead Acct. 24 Buildings and Equipment 25 Total '•*. Repainnen Its. .. 17. Holding Sand ts. other Supplies 19. " ■■ (2/ ruled lines) Totals Accts. 24 Per Lb. Ratio of Accts. 1 1 to 20 to Acct. No. 2 Ratio of Accts. 21 to 23 to Acct. No. 3 500.00 600 00 40 00 640 00 480.00 160.00 $1,500 00 500 00 1,000.00 1,680 00 1 . 50(* per lb. 50f( per lb. 1 OOff per lb. I .68fi per lb. 660 00 0.66iperlb. Good Castings made Molding Labor Account, No. 2 Coremaking Labor Account, No. 3 Accounts 4 to 10 Accounts 1 1 to 20 100,000 lbs. $1,500.00 500.00 1 ,000 00 1,200 00 Total $5,340.00 5.34$! per lb. Ratio General Expense: Molding, to Molding Labor Coremaking, to Coremaking Labor .12 .32 WORKS MANAGERS DAILY REPORT Date Alloy Gross Product Weight of Good Castings Weight of Bad Castings Total No. of Pieces Made No. of Good Pieces No. of Bad Pieces % Loss by Weight % Loss by Pieces Average No. of Men Per Day Average Wt. Per Man Per Dav Average Wt. Per Caatine (Size 8% x tVi in., /9 ruled li ties) Total 1 .. i Form BF12 The Works Manager's Daily Report is made out daily, by the Cost Clerk, from the Daily Casting Report. The Metal Requisition is sent to the Store Room Clerk by the Metal Room Clerk. Through these requisitions the Store Room Clerk makes the necessary deductions on his stock cards, which gives him a perpetual inventory on each class or group of metals. This Metal Requisition is also used by the Cleaning Room Foreman who delivers scrap back to METAL REQUISITION Date Pounds Description (Size 8 x 2)4 in ; 5 ruled lines) Received by Checked by Form BF13 178 BOOKKEEPING AND COST ACCOUNTING the metal room, and gets a receipt for the amount. This enables the Metal Room Clerk to carry an inventory of each alloy, on the metal room stock card. Furnace No._ Alloy No. HEAT TICKET Heat No. - Pounds Wanted . Remarks (Size % x 3 in.;i rated lines) Form BF14 The Heat Ticket is issued by the Melting Foreman on the Metal Room Clerk, for each heat wanted. Each heat ticket is passed through a time clock conveniently located, as the heat is sent to the melting department. METAL REPORT Heat Number Furnace Number Alloy Number Total Class All . «. .Class A 2 COPPER Charge Metals Metals Metals Lot No. | Pounds (Size of Form 2' x 8 in.; (Ten additional 2i ruled lines) for Tin, Lead, Zinc, Phc s Copper, Phos.T in and-AS-Meta-Lbs-)~ Form BF15 The Metal Report is made out each day, by heats, and is summarized for the week or month. It shows every pound of material that goes into the furnace. The net metal con- sumed during the period is arrived at as illustrated in the following example: In Metal Room December 1st From Store Room From Cleaning Room Total Issued on Heat Tickets In Metal Room December 31st Lost in Melting Total 40,000 lbs. 15,000 lbs. 10,000 lbs. 65,000 lbs. 40,000 lbs. 23,000 lbs. 2,000 lbs. 65,000 lbs. Each alloy must be handled in this way. General. To make a success of any Cost System the mechanical details of handling and recording operations must be closely followed. Stock cards must be carefully kept; bins must be provided in the store room and metal room. Defective castings and gates and risers and other scrap must be returned to the metal room, and the proper records kept of the return. Cleanliness and orderliness must be main- tained. Records must not be allowed to fall behind. The accompanying cost forms (here reduced in size to save space) may be obtained, with prices, from the Service Bureau, National Founders' Association, 29 South La Salle St., Chicago. Caution in Regard to the Use of Forms. The Cost of Goods does not Include the Cost of Selling them. (Extracts from "Efficient Cost Keeping," by E. St. Elmo Lewis.) Great care should be taken in the introduction of a cost system in a factory. A firm manufacturing a specialty and employing about 1200 men in the factory, introduced a system that ulti- mately required nearly 250 printed forms. When these forms were rearranged and a proper system was installed, all but 23 of them were discarded. The saving, of course, was tremendous. Before installing a cost system, it is important to decide what you want it to tell you. Analyze your conditions closely, then see that the cost system fits these conditions. Over-systematizing generally comes as a result of "letting the system work out itself," instead of having some specialist come in and work out a complete plan of cost keeping, coherent, logical, thorough, with definite objects in view. Mere forms do not make a system; nor does an adding machine, a typewriter, or a few clerks make a system. They are simply the physical expression of a system. No form should be put in operation until it has been carefully considered, both in its relation to the specific thing that the form is to record, and in its relation to every other form in the system. Put on the form just as many data as you consider necessary. Don't use any one form for entirely different classes of data. The cost of goods when placed in the shipping room does not include the expense necessary to market the product. Selling expense varies even more than manufacturing cost. Selling expense is often several times the complete manufacturing cost. Manufacturing costs and selling costs are two separate and distinct propositions and must not be confused with one another. The cost system should fit the business. A system well adapted to meet the needs of a machine-tool concern would not fit a dairy and vice versa. "Improving the system of management means the elimination of elements of chance or accident, and the accomplishment of all the ends desired in accordance with knowledge derived from a scientific investigation of everything down to the smallest detail of Ixbor, for all misdirected effort is simply loss, and must be borne cither by the employer or employee."* — H. L. Gantt. COST AND PRICE OF COAL f Four general items of cost normally control the price of coal to the Consumer: 1. Resource cost (the amount charged as the value of the coal in the ground); 2. Mining cost; 3. Transpor- tation cost; 4. Marketing costs. Under usual conditions each of these items includes a margin of profit. The cost of mining is divided between labor, 70 to 75 per cent; material 16 to 20 per cent; taxes, less than 1 per cent to 3 per cent for bituminous coal, and 3 to 7 per cent for anthracite; selling expenses, nothing to 5 per cent; workmen's compensa- tion for injuries may reach 5 per cent for bituminous coal. The census of 1909 indicated an average mining cost of SI a ton for bituminous coal and $1.86 for anthracite. The taxes in West Virginia last year (1915) levied on coal lands and coal mine improvements were equivalent to nearly 3 cents per net ton of coal produced. The average selling cost for bituminous coal is probably 5 to 10 cents per ton, and for anthracite coal the usual charge of sales agencies is 10 cents a ton for steam sizes and 15 cents for the prepared sizes. In interstate traffic, both rail and water, bituminous coal probably pays an average freight of §2 per ton; the average for anthracite is higher. The cost of handling the coal, exclusive of freight, from the time it leaves the producer until it is in the consumer's bin, may be termed the marketing cost. Coal that gets a long way from the mine may pass through many hands before it reaches the consumer, and it not only pays commission all along the line, but is subject to shrinkage and deterioration. The margin in the retail business between cost on cars and price delivered is from $1.25 to $2 per ton, and is not more than nnough to give on the average a fair profit. *Or passed along, by means of increased selling prices, to the final consumer. — W. K. fThe reference to the authority for these statements has been mislaid. COST AND PRICE OF COAL 179 The resource cost, what the operator lias to pay for the coal in the ground, is expressed as a royalty or depletion charge. One of the latest leases by a large coal land owner (the Girard Trust of Philadelphia), provides for the payment of 27 per cent of the selling price of the coal at the breaker. This is equivalent to $1 a ton tribute paid to private ownership. The present average rate of royalty on anthracite is probably between 32 and 35 cents a ton on all sizes, which is from 12 to 14 per cent of the selling value at the mine. The tendency is still upward. At the begin- nign of the last century the great bulk of the anthracite lands were patented by the State of Pennsylvania for $2 to $4 an acre; in the middle of the century the price of the best land rose to $50 and in 1875 to $500. Now, S3000 an acre has been paid for virgin coal land, and little is on the market. The present average resource cost of bituminous coal is not much over 5 cents a ton or about 4 per cent of the average selling value at the mine. In the Pocahontas and Pittsburg districts the royalties are much higher. The prospects of relief from high prices of coal are not prom- ising. The prices of labor and material for mining tend to advance. The mining methods are far less wasteful than for- merly, the average recovery in anthracite mining being 65 per cent as against 40 per cent only 20 years ago. Not much further improvement can be made in this direction. The increased safety of mines and the workmen's compensation laws add some- thing to the cost of coal. Reduction in the cost of marketing is possible; it is stated that the delivery of coal is costing the retail dealers 50 cents a ton more than is necessary. Exact mining costs cannot be determined until the operators have accomplished their reform of standardized accounting. Too often the operator includes in his account only the two largest items, labor and material. When the market for bitu- minous coal is dull, the company whose land costs little or noth- ing is able to set a lower limit of price than the company whose coal must stand a charge of 5 or 10 cents or more, be that charge called royalty, depletion or amortization. The analysis of the cost elements that enter into the price of coal, emphasizes our lack of specific facts which can be supplied in the future only through the "installation of uniform cost-keeping methods and uniform and improved accounting systems," to quote from the declaration of purposes of the Pittsburg Coal producers. With the results of such bookkeeping in hand, more definite reply can be made to the public's appeal for relief from high prices. Cost of a Ton of Anthracite Coal from Mine to Cellar * A ton of anthracite of stove coal (2240 pounds) delivered in the coal bin in New York District at $7.25 averages at the mine $3.55 and yields a return on the investment of 20 cents. * From an advertisement signed by the leading anthracite coal operators. Philadelphia Press, Feb. 14, 1916. Retailing Coat (Average) per ton: Rent of office and yard; lighterage, handling at yard, breakage, cartage, administration expenses, and re- tailer's profit per ton $2.15 Transportation (Average) per ton: Freight from Lehigh and Schuylkill regions to New York harbor 1 . 55 Production cost (Average) per ton: Colliery cost, per ton, labor (approximately $1.80), materials of all kinds, royalty, taxes, depreciation of coal lands and equipment, administration expenses, and accident indemnities per ton 2.40 Loss on small sizes of coal sold at less than cost of pro- duction .95 Operator's earnings, available for return on investment (Latest report of U. S. Census shows less) .20 $7 25 Anthracite coal as it comes from the mine is a mixture of all sizes, from lump to dust, and contains a certain amount of rock, slate and bone. The report of the U. S. Geological Survey for 1914 gives the amount and percentage of each size produced in that year in the entire field. By using these percentages and by assigning to each size of coal the average receipts at the mine realized by some of the larger companies it is determined that each 100 tons of coal dumped into the breaker would produce the following average results: Tons Average Price Realized Total Value Domestic sizes sold above the cost of production in 1914 Sizes sold below cost of production in 1914. Lump and broken Egg Stove Chestnut Pea Buckwheat Rice Barley 5.30 12.40 20.60 23 00 II .80 13.40 6 80 6.70 $2.95 3 45 3.55 3.75 1.30 $15.63 42.78 73.13 86.25 50.31 100.00 268 1 Average value per ton, $2.68. Losses from shrinkage, storage and rehandling bring the price down to about $2.60 per ton at. the mine, to which adding loss in small sizes sold below cost of production (95 cents) makes a total of 3.55 per ton. The anthracite operator gets from 55 cents to $3.75 per ton for his coal, selling 40 per cent of his output below the cost of production. CHAPTER XVIII HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS ACCOUNTING SYSTEM IN A LARGE HARDWARE FACTORY A large factory employing over 4000 men makes a great variety of hardware and other metal products. Its cata- logues list over 40,000 varieties of product and the machining and other manufacturing operations required are stated to be over a million in a year. What follows is largely taken from the " accounting code " of this factory and from ex- planations kindly furnished to the author by the manage- ment. By request the name of the factory is omitted. The accounting and other clerical work having relation to records of production and of costs is divided into three divisions: Accounts, Statistics and Costs. The accounting system records the results of the business by classes of product and as a whole, the statistical system furnishes additional information required by the management, and the cost system is designed to furnish approximate costs per unit of each kind and size of finished product. Productive Classes and Departments. The whole prod- uct of the factory is divided into " Productive Classes," rep- resented by the letters A, B, C, etc., and the different manu- facturing departments in which the work is done are repre- sented by other letters or by numbers of rooms, these letters, both of product and departments, and room numbers being used as accounting symbols. The principal departments are Forge, Iron Foundry, Brass Foundry, Press Shop, Rod Shop, Machine Shop, Plating Department, Power Plant; and minor departments are assembling and inspecting rooms for different products, stock rooms, japan shop, pattern shop, tool shop, and drawing, packing, shipping and other rooms. All work done in, and all material used in, any department is charged directly as far as possible to the Class Accounts, A, B, C, etc., and all expenditures that cannot be so charged are either charged to the department or to one of several factory or other expense accounts or to a betterment or a special account. Charges to department or to expense accounts are summarized monthly and apportioned to the several class accounts according to definite rules established by the Account ing Bureau. Accounting Symbols. The terms used in the accounting system are defined as below, and each is given a letter symbol. Direct Labor: All labor spent directly on salable products. Material. All material that becomes part of the salable products. Indirect Labor: All labor that cannot be charged directly to one or more classes of product. Supplies: Articles other than " Material " used in the plant. 180 Shop expenses: Indirect labor, supplies, salaries and other items charged to expense accounts. Stores: Stocks of materials and supplies (not finished products). Betterments: Additions to and betterments of property. Divided into three groups (1) Real Estate and Buildings, (2) Power Plant, Equipment and Fixtures, (3) Machinery, Tools, Patterns and Flasks. The Expense accounts are subdivided into fifteen groups, each with a symbol number, viz.: 1. Indirect Wages, including foremen, machine setters, time-keepers, time-study men, route-board men, order clerks, stock handlers, watchmen, inspectors, yard laborers, cleaners, sweepers, janitors, errand boys and other miscellaneous labor. 2. Bonus payments for overtime. 3. Welfare work. 4. Freight and express. 5. Slippage, difference between estimated and actual labor costs. 6. Shop stationery. 7. Maintenance of existing equipment and fixtures. 8. Maintenance of machines, tools, patterns and flasks. 9. Maintenance of real estate and buildings. 10. Water. 11. Gas and electricity. 12. Works salaries, general. 13. Wages paid to injured employees, and pensions. 14. Spoiled work. Lost labor and material on work scrapped. 15. Miscellaneous supplies and charges not otherwise pro- vided for. Stores accounts are subdivided into several sub-accounts, each with its appropriate symbol, such as SC, Central Scrap Store; SE, Plant Supply Store; SP, Press-shop Metal; SS, General Supply Store; SU, Power-house Fuel; SV Other Stores. Stores Records. Stores records are kept in the Stock and Order Department on Perpetual Inventory or Balance of Stores Cards, size 7jX4^ in. The headings on the end of each card are printed as below: WHERE STORED ACCOUNT LIST No. PART No. 1 Shelf Max. Econ. Quan. Sect. Drawer | Min. a s Form HF1. Balance of Stores Card. HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS 181 And the heads of columns are printed on a long side, as made on a long paper strip, giving the Clock No. of the work- follows: man, and the In and Out time, a.m. and p.m. Each morning the clock records of the day before are transcribed to Time Summary Tickets, one for each man, on which his total hours for a week are added up. ORDERED I RECE-TED nSn IcEi-rPERED ALLOTMENT RECORD ALLOTED SHIPPED ttehj (mutty ..... Quantity Quantity !|.,i. Quantity Data Number Quantity |u»i*| Quantity Balance (-f linea --. oer inct] ) "| ! 1 1 Entries are made on these cards from purchase invoices or other records as goods are received, and from Stores Tickets, signed only by authorized persons, when goods are delivered. In the stores connected with the iron and brass foundries and with the fuel supply (other than steam fuel) charge books are kept. At the end of each month the Accounting Bureau summarizes the entries in these books and makes proper credits and debits, and extends and summarizes the Stores Tickets, crediting and debiting the proper accounts. On all stores tickets are entered the symbol of the room in which the materials or supplies delivered from the stores are to be used, also the charge account symbol, which is the class symbol, A, B, C, etc., if the materials are to be used directly in one class of product, or a department symbol, M, N, P, etc., if they are to be used in a department on more than one class, or the symbol X to show that they are to be used for general purposes and cannot be charged either to a Class or to a Department, or a Betterment Account symbol XA, XC, etc., if they are to be used for betterments. Every expense charge is indicated by a numerical symbol (1 to 15) followed by the symbol of a Class, or of a Depart- ment, or by X. Example. Miscellaneous supplies (15) for the Press Shop (P) would be charged to 15P if they were to be used on work of various classes. A repair part (8) for a press used in Class A goods exclusively would be charged to SA, but, if for a press used for more than one class of work, to SP. Expense Charges. Indirect (or so-called " Non-produc- tive ") labor is charged on labor or job tickets in the same way that material is charged on store tickets. For example a charge for the wages of a bus-foreman who spends all his time on Class A work is 1A; if he spends half his time on Class A and half on Class C, the charge is § 1A, 5 1C. If his time cannot be charged directly to a class or to a department then the charge is IX. In this particular factory, accounts are kept for selling and administrative expenses and with branch offices and stores. Each is subdivided, with numerical symbols representing salaries, traveling expenses, rent, stationery and supplies, telegrams, postage, etc., to which any expenditure on behalf of these accounts is charged. Thus, if Chicago office (53) sends a telegram (117) about Class A goods the charge is 53A, 117. Time-keeping. Credit to Workman on Pay Roll. Verification of Pay Roll. The time of each employee is registered by a Day Clock Recorder, which is placed in each room or group of rooms occupied by from 100 to 250 employees. The clock record is flTFTI *-ig 00 M Time Summary Ticket Name Date A.M. P.M. Total Hrs. Irregularity (9 lin •s l \ per inch) | ChecUrA A r pro 1 Form HF2. Time Summary Ticket (5X3-in.). The work done by each man during a week is reported to the Pay Roll Room by jobs, as each job is finished, on Day Work Credit and Piece-work Credit Tickets. If a man's job is not finished at the end of the week a new job ticket is issued to him or to his foreman for the next week.* |HF 3 I 1-10 1 ' 2UOJW Day Work Credit Ticket Fin. Total Hours Amount Start Room Dept. Clock No. Name Chg. Acct. Mach. No. O.H.S. Part No. Order No. Day Rate List No. and Description of Work Hours Pieces Value Rate Value Form HF3. Day Work Credit Ticket (5jX3i in.). A similar ticket of a different color is used for piece work. ^ ' 6IKW") Room No— Dept Piece Work Credit Slip Clock_No_ Work .Cut No- Name_ Chargc _ Acct. _ Order No: -Rate_ Date Mach. No. Started (s lines 5 per inch) Time in Hours Pes. Finished Approved _ Duplicate printed in red ink below the crease line, on the reverse side. Form HF4. Piece-work Credit Slip (5jX3 in.). * In this factory a "week" is a pay-roll period, the month being divided into four periods ending respectively on the 8th, 15th, 22d, and the last day of the month. 182 BOOKKEEPING AND COST ACCOUNTING These tickets are made in duplicate, by carbon paper, and one copy is kept in the office for record and the other goes to the workman, who hands it back when the job is complete. As the tickets are returned to the Pay Roll room, the time clerks place them in the order of the Clock Nos., by depart- ments, and file them along with the Time Summary Slips until the end of the week. They are then tabulated on a Burroughs adding machine for Clock Nos., Hours and Wages for each job, and Total Hours and Total Amount for the week, for each man. The total hours thus found are checked against the total hours on the man's Time Summary Ticket. If any discrepancy is found it is investigated and the error corrected. The Pay Roll Sheets for each room are then made out. Stencils with the names of the men and their clock numbers, in the order of the numbers, are put hi an Addressograph machine, and thus printed on the sheet, and the hours and amount are entered on it by a recording and adding machine. On pay day each man's money is put in a pay envelope ou which his name and number are printed, the envelopes are arranged in the order of the numbers and put in cases for each room and sent to the rooms. The men form in line in the order of their numbers and as they march past the pay window, and are identified by their foreman who stands by, each receives his envelope from a clerk. The Hollerith Tabulating Machine Record. When the Day Work and Piece-work Credit Tickets have been checked against the Time Summary Tickets the records on them are punched on Hollerith Tabulating Cards for use in the Hollerith sorting and tabulating machines. (For description of these machines see page 135.) The information given on the punched cards consists of the following items: Year, Month, Week, Room, Clock No., Productive Piece Work, Expense Piece Work, Special Shop Orders; Expense or Operation No., Class Letter (kind of product), Order No., Betterment or Repairs, Hours, Pieces, Amount. 1 Mo 1 m 131517 YEAR Special Clock Special OJ4 Operation Charge Acct. Order Number i w ! d I 0* Betterment or Repairs i4 Pieces Amount 2 2 3 141618 5*X OOOOOjO 0:0 X o;o X 3 ROuM 4 4 1 1 1 1 1 1111 1 1 1 1111 1 1 1 1 1 1 111 1j1 1 1111 1 1 i;i 11111 1 1 1 1 5 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 212 22 2 2 2 2 2 2 22 2 2 2 2 2 2 2 2 2 in 6 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3J3 3 3 3 3 3 3 33 3 3 3 3 3 3 3 3 3 7 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4|4 4 4 4 4 4 4 4 4 44 4 4 4 4 4 4 4 4 4 8 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5;5 5 5 5 5 5 5 5 5 5 9 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 10 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 77 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 ' 11 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 12 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9^9 9 9 9 9 9 9 9 9 9 Form HF5. Card for Tabulating Machine. (Full size.) All the cards are kept in piles by rooms or departments until the end of the month. There may be as many as 100,000 of them. The sorting machine is then used to sort them in any way that may be desired for statistical or accounting purposes, such as by departments, classes of product, order numbers, etc., and after subdivision by this machine the tabulating machine is used to add up the totals of hours, pieces and wage amounts of any subdivision, for example, the monthly total of hours, pieces and productive day work on Class A in Room No. 104. The total figures thus obtained are written down in the columns of statistical sheets for the use of the statistical, cost and accounting departments. Monthly Statistical Sheets Derived from the Hollerith Cards, Pay Roll Distribution The Hollerith cards, punched according to the records on the Day Work or Piece-work Credit Slips, are arranged in piles representing producing rooms or groups of rooms, or departments, about 40 piles in all. Each pile is then run through the sorting machine and divided and tabulated so as to give the total hours and amounts, which are entered in writing as the machine shows the total figures, on a long statistical sheet which has hours and amount columns for each of the following headings: HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS 1S3 11 FC STATISTICAL DISTRIBUTION OF PAYROLL FOR MONTH OF 1916 Room or Oept. PRODUCTIVE PIECE WORK TOTAL PIECE WORK PROD. DAY WORK BETTERMENTS SPECIAL TOTAL PROD. Regular Operations Special Operations Hours Amount Hours Amount Hours Amount Hours Amount Hours Amount Hours Amount Hours | Amount 21-41 B. Group C. " Power Transportation Messengers Sweepers Yard General [About so lines in all) 1 „_, TOTAL EXPENSE WORK REGULAR EXPENSE NOS. {Seven other number colums) TOTAL PAYROLL 1 2 Hours Amount Hours Amount Hours Amount Hours Amount 1 Form HF6. Statistical Distribution of Pay Roll. This sheet distributes the total pay roll, giving both hours and amount of wages, whether day work or piece work, by rooms or departments, whose symbols are given in the column at the left, and by the different kinds of work named in the headings of the hours and amount columns. A second sorting and tabulation of the cards is made for the Accounting Department, giving amounts only and not hours of labor, dividing the labor into Direct and Indirect, and subdividing each into classes of Product, as A, B, C, for so much of the labor as can be directly charged to such products; into labor for making different kinds of supplies, SE, SF, etc., for betterments XA, YC, etc., and for special orders not otherwise classified. One large sheet is made for Direct (or so-called " Productive ") Labor, and another for Indirect or " Non-productive." Of the latter, as much as is possible is entered in the " Class " columns A, B, C, etc., on the basis of special studies made by the management of the Accounting Department (for example, part of the time of a foreman in the Press Shop might be charged to one or more of the classes, and part to the Press-shop symbol, P), and the remainder, called the " Residuum," is charged to the various supply, betterment, department, or room expense symbols. When the " Residuum " columns are added up their totals have to be apportioned in some way to the several classes of products, A, B, C, or to supply or betterment accounts, or to special orders which do not come under these headings. The prin- ciple upon which this apportionment is made is to charge the " Residuum " of any department to the different classes in proportion to the direct labor done in that department for these classes. For example, if 30 per cent of all the direct labor of department M is done for Class A, and the total " residuum " of department M for a given month is $1000, then $300 of that amount would be charged to Class A. Accounting Distribution of Pay Roll This distribution shows charges against Classes or De- partments. It distributes from rooms into classes. The figures are amounts only, not hours, taken from the second running of the cards through the tabulating machine. Productive Rooms or Dept. Class SE SF I SS ST Special Better- N. Y. Total Mfg. Rooms (Twelve columns) Total (Four columns for different kinds stores or Orders ments Office Prod. Rooms 64-66 A, B, etc., to L) supplies) Dept. C Dept. D Dept. L etc. * Other Rooms (Headings continued on Second Page) Non-Phoductive Rooms or Dept. Residuum Total Non-Pro- ductive (Twelve columns Mfg. Rooms L, M, N, 354, P, R, T, U, V, SF, etc. Others A to L) ( 1 5 columns) Form HF7. Accounting Distribution of Pat Roll for Month. 184 BOOKKEEPING AND COST ACCOUNTING The Non-Productive (or indirect) Labor is charged directly as far as possible to the Classes of Product, A, B, C, etc., on the basis of special studies by the manager of the Account- ing Bureau: thus the time of the foreman of the Press Shop would be charged as far as possible to Classes A, B, C, etc., and the amount not so charged is called Residuum, charged to Press Shop or to any other department to which the fore- man rendered service. This Residuum is charged at the end of each month, by journal entry, to the Classes in proportion to the productive labor done in that department for these classes. J. E. No. 201 Feb. 1916 Posted to Works Ledger Journal Entry Subject Distribution of Pay Roll as shown in sheets " Accounting Pay Roll Distribution." Con- Class Description trolling or Detail Account Dept. Dr. Work in Progress, Labor 100,000 15,000 30,000 etc. Dr. Work in Progress, Expense 100,000 20,000 40,000 etc. Dr. Residuum Expense 20,000 L 4,000 M 6,000 N 2,000 etc. Dr. Power Plant 2,000 Dr. Betterments 1,000 YR 200 Dr. Special Shop Orders 3,000 YT 800 Dr. Stores 2,000 £E 500 SS 600 etc. Dr. Melted Metal 10,000 MP Iiod 6,000 MT Brass 4,000 Dr. Priyate Ledger (Charge for some work not pertaining to Factory Product.) 100 Cr. Priyate Ledger (for sum of Dr. entries 238,100 Journal Entry J. E. No. 202 Feb. 1916 Posted to Works Ledger Subject Materials purchased, as shown in Invoice Record Sheets Con- Class Description trolling Account or Dept. Detail Dr. Stores 50,000 SA SB etc. 20,000 20,000 Dr. Expense Supplies 10.000 SC etc. 5.000 2,000 Dr. Power Plants 10,000 F D 9,500 500 Dr. P.etterments 5,000 Y R Y T 3,000 2,000 Cr. Priyate Ledger 75,000 By the above entries Private Ledger Acct. (which is the same as "Company" or "New York Office") is credited with everything that the Company does for the factory in the way of sending checks to meet its pay rolls and paying its bills for purchasing of all kinds, and the debit entries divide the total sums thus credited among the several principal controlling accounts and subordinate accounts kept in the Factory Ledger. Numerous other journal entries are made each month from other statistical sheets, distributing the "residuum ' expenses of departments M, N, P, etc., the several subor- dinate store accounts, melted metal, expense supplies, power plant, repairs, crediting these accounts and chargii g maintenance and other expense accounts, the several pro- ductive classes, betterment accounts and special accounts, such as Experiments, and Adjustment Accounts, which are used to spread over a year or longer certain charges such as Insurance, Taxes, Extraordinary Repairs, which should not be charged against the product of the particular month in which they are incurred or are paid for. The object of all these entries and counter entries is finally to distribute and post in the Factory Ledger all the monthly cost of running the factory (which in the first two entries has been credited to Private Ledger Account) to the cost of producing the several classes of goods, and to better- ment and other accounts which represent assets. The journal entries are not made in a book, but on loose sheets. They may originate from the statistical clerks who make the sheets for distribution of labor, stores, and expense accounts, or from an officer of the company who has au- thority to determine, for example, whether a certain expend- iture shall be charged as a betterment or as a repair, or what adjustments shall be made for changes in value of material, but all journal entries before being posted are verified and passed upon by an auditor or other authorized person. Works Ledger The Works Ledger, into which the Journal Entries are posted, is of an unusual form, designed especially to mini- mize clerical labor, and to get a great amount of informa- sion recorded in a small space where it may easily be found by officers who may have occasion to use it. Each account, whether controlling or subordinate, is given a single page, which lasts usually a whole year, except Residuum Account, which has a page for each month, as there are many cross-entries and adjustment entries to be made in this account. The ruling of the ordinary accounts is as follow- : Works Ledger 1916 Labor Expense Material Other Accounts Total Jan. Feb. etc. to Dec. - — — - - - Total HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS is;, A page of Residuum Expense Account, which contains the remainder of the expenses and supplies that have not already been distributed to the Classes of Products appears as follows (the actual page, of course, has many more en- tries, and the amounts are not round figures, as here shown). Works Ledger January, 1916 Residuum Expense Total Jour. Mfg. Rooms Rooms Dept. Dept. All Entry Acct. 7-16 22-31 L (Several Cols.) Other No. Rooms 18,700 01 1400 4000 8000 5300 2,900 OS 100 200 1000 800 800 20 36 20 500 55 500 16,320 1300 300 20 3000 7200 4600 The figures italicized above are written in red ink. Black figures are debits and red figures credits to Residuum, except the red ink figures at the bottom, which are the net credits (difference between black and red figures) of the accounts named at the head of the columns. The red ink total, 816,320, is the debit balance of Residuum which remains to be distributed by a journal entry to Manufac- turing Acct. (a control account) and to its Class subdivisions, A to L, which entry will close Residuum Account for the month, leaving no balance. The distribution is made on the following principle, the Residuum of Mfg. Acct. ($1300) is apportioned to the Classes in proportion to the ratio which the productive labor charged to these classes bears to the total productive labor, and the residuum of the rooms and departments is apportioned to the classes in the ratio which the productive labor charged to the several classes from the rooms and departments bears to the total productive in these rooms and departments, with the exception of the balance of the last column, "AH Other Rooms," including Power Plant and other rooms in which little of no productive labor is done, which is treated in the same way as Mfg. Acct. For example, if the total productive labor charged from the several departments and rooms to the classes is 8100,000 for the month a statement is made showing its subdivisions as below, using round figures in thousands of dollars for convenience. Productive Labor Total Mfg. Accounts. Rooms 7-16 Rooms 22-31 Dept. L Other Depts. Other Rooms 100 10 20 20 15 20 15 A B Thousands of Dollars II) 1 15 20 3 10 5 20 4 10 4 10 7 6 1 4 5 2 4 2 3 4 2 1 1 6 4 3 1 2 1 4 4 1 The residuums are now to be divided in the proportions of the figures up the several columns A to L to the figures in the total columns, as in the statement below. D 1STRIBUTION of Residi-cm Total A B c D E F G H etc. Mfg. accounts 1,300 130 390 520 260 Rooms 7-16 300 50 190 50 50 50 Rooms 22-31 20 10 6 A Dept. L 3,000 400 800 400 600 800 Other Depts. 7,200 720 360 2160 1080 720 1440 360 360 Other Rooms 4,500 300 1200 300 300 1200 3814 1210 1200 16,320 1600 1170 3850 1386 1420 1870 A journal entry is now made and posted crediting Re- siduum $16,320 and charging the several classes the figures at the foot of the respective columns. After all the posting for the first month of the year is done a trial balance taken from the Works Ledger would show a credit balance of Private Ledger account which would be the sum of the inventory of raw material and supplies Jan. 1, of the invoices of material received during the month, which have been certified to the Company for payment, and of the sums received from the Company for the pay rolls. All the other accounts would have debit balances, representing the charges made to the several productive class accounts, to betterments, special orders and adjust- ments. The debit balances of the class accounts represent all the charges made against these accounts during the month for material, supplies, labor and expense, whether the work done exists at the end of the month in the shape of work in process, finished goods in the warehouse, or goods shipped. In the succeeding months the debit balances of these accounts and the credit balance of Private Ledger increase, no counter entries for goods shipped being made, and at the end of the year the balances are a summation of all the work done during the year. The Works Ledger has nothing to do with commercial accounts, but is concerned only with total monthly cost of production by classes. The three departments of Accounting, Statistics and Costs are in this factory kept separate. The Accounting department furnishes, as above stated, the total costs by classes. The Statistics department furnishes records of men, hours, materials, etc. The Cost department furnishes unit costs of product, piece rates, etc. Determination of Costs. In the factory referred to costs are determined by a special invest'gat on of each piece and of each operation. The raw material for a piece or a given number of pieces of the same kind is weighed and it is priced (for " Recorded Cost ") at the average price of a five-year period. The product of the weight and price per pound less the value, at a standard price, of the scrap returned from the operations is recorded as the Cost of Material. On small work it is commonly figured per 100 pieces. The direct labor cost is determined by a time study of each operation, which is made for the purpose of fixing piece rates. The sum of the costs of material and of direct labor so found is called the Prime Cost. The overhead expense added is a percentage on direct labor which has been determined for 136 BOOKKEEPING AND COST ACCOUNTING the department or rooms in which the operation is done, or for the Class of Product. A " Part Cost " card is made for each part or piece. The material is entered in the first line below the headings and the several operations in their regular sequence below. If the department or room overhead is used it is figured sep- arately for each operation, but if Class overhead is used all the direct labor cost of the several operations is added together and the percentage applied to the sum. It is recognized that this method of figuring overhead is not as accurate as the machine-rate method, but, as the articles made are generally of light weight, and the machines used in a given department or room, or for a given class, do not vary greatly in first cost or in cost of upkeep, it is considered that the error of the method is not great enough to warrant the use of a more accurate method which would cost more for clerical work. The amount of the standard percentages to be added for overhead in the several classes or departments is determined by the Accounting Department from the statistics of one or more previous years. The sum of the standard costs of material, labor and over- head is what is known as the " Recorded Cost," (Shop Cost) which is entered on the " Part Cost " card for permanent use. When a " Present Cost " of any article or part is needed for any purpose, the Part Cost card is taken from the file and its record is copied on a Present Cost Estimate, on which there is added to or subtracted from the recorded or standard figures any " Adjustments " or changes that have taken place in prices of material or labor or in overhead ratio, the amounts of such changes being determined by the Accounting De- partment and furnished by it to the Cost Department monthly. When the annual inventory is taken the values are figured on the " Recorded Cost " basis, and are then adjusted to correspond with the present costs. The standard overhead percentage, or ratio, added to the direct labor cost is based on statistics of indirect labor and other actual expenses, not including depreciation, but in. figuring present costs adjustments are made for depreciation, and for " slippage," which latter term in defined as follows: Slippage is the difference between estimated labor costs as shown on the unit cost cards and actual labor costs. Exam- ple: A unit cost card shows an operation covered by a piece rate based on manufacturing in large quantities. The opera- tion is performed on a small quantity at day work rates, which results in a labor cost in excess of that shown on the unit-cost card. The difference in cost is termed slippage and is included in shop overhead expenses. An allowance for spoiled work, determined for each class or department from statistics of previous years, is also made in figuring the overhead cost. Because of the clerical labor involved in rewriting all the cost cards at one time, changes in actual cost of labor, due to a general increase of wages are not made on the Recorded Cost cards except by stamping on them with a rubber stamp. (For example, Dir. Labor Inc. 5 per cent, Jan. 1, 1915.) Group Cost Cards. — Group costs are made by adding the separate totals of the Part Cost cards to the labor and over- head cost of assembling the group. Cost of Finished Product Cards are made up from the Part and Group cards and from the labor and overhead cost of assembling and finishing the cost of the completed article. A total is made showing the cost in a " no finish " condition, and the cost of finishing is then added. Comp'd by Datp COST OF FINISHED PRODUCT Des List Dep Cat. Cost SO Revis'd by Article Changes Date Based on Nn. Metal per Auth'n No. SUMMARY FINISHES Original Revised Revised Labor Overhead Material Total No Fin. Finish Total No Fin. Finish Total No Fin. Finish Total Total Total Add Finish Total No Finish. Total No Fin. Finish Total No Fin. Finish Total No Fin. Finish Total Cost Total Total Total Part or Group Nos. Description Weights, \ Prices and EDept. Opn Nos. Hours Overhead Labor Overhead Material Labor Overhead Material Sym. Rate (ss ruttd tinea, i per inch) 45 on other aide of cord.) Form HF8. Cost of Finished Product. HARDWARE TACTORY AND MACHINE-SHOP ACCOUNTS 187 The unit costs of products that are regularly made and for which piece rates have already been established are found by examination of job and material tickets for operations, parts, groups, and assembled product, and adding the de- partment or class overhead computed by the accounting department. For new products time studies are made and the first orders are watched in their progress through the shop to obtain actual labor and material costs. For esti- mates on a product not yet made, the product is analyzed into its component parts for weights of raw material and of finished piece, and the labor of making and assembling together with the overhead, are estimated on the basis of recorded costs of similar products, and a figure is added for a factor of safety. A sample of an estimate of cost is given below. Records of actual cost are kept on cards which are filed b»» ESTIMATE OF COST Name Estimate No. „_ naiwc PRESENT RECORDED Article /^^^c-U^o^e'Cn^/ (/~!£clZ&- Cost per C<5 >J 100 COST /OO Finish A%ro > 1 1 1 sAAjUS- Ostmtel/ Labor <+MW_ . 2. 92.d' '' 2./ -f i 1 } Patterns, Tools & Drawings recorded ■ tZud 2 9.2 2. /(,.7jL * ffi dshxesh tELAsvAd/ — -Z*3 -~- *&— V 130 10 @- g RE-INFORCING COLL AR J&/t*r2as id&iz/- j&ze£ 3d ^Sv (S>.OS 5 1 ro TH/MBLE .„-*" ^ •AAu/' (3Sisa4-a / y* t- ^ V- ' 0.C )0 3 F 6o ^ ^° ** \l b- ■' 110 b &-&~9- ■ rsrvtx&AAsaJ, bi 5o a J'-jMstftt^^w c*kz/~o£- 7-na OA& ■£ootCh*rviA' ) \ £> J' If / (hx, M&L& cvn*i/ cl*r aMo-Wwyi/, f Jtn/ tAz, A&cu <0~Vh> st4 •CLJ— X&e> *>GSisCL>fis Tya^OtM &ds -&*?' *d^yyh>€*s6£' 1 Form HF9. Estimate of Cost. for convenient reference. Small cards giving total cost of an article at different dates and with different finishes are also kept. The system described appears to be fairly satisfactory for a large factory that makes a great variety of goods. To carry it on with any degree of accuracy requires the division of the product into classes, that each class receives its proper apportionment of burden, and that careful records and statistics are kept of base or normal costs as established in a year of normal business or deduced from average results of a number of years, and of the variations in wages, in cost of material and supplies, and in selling prices or discounts. Original and Revised Costs A revision of the Cost of Finished Product is required when new schedules of raw material prices and overhead expenses are issued from the Treasurer's office (usually at yearly intervals, but monthly when market prices are rap- idly fluctuating), and also when changes of method of man- ufacture are reported by the planning room. Orders for 188 BOOKKEEPING AND COST ACCOUNTING changes of method are referred to the Cost Bureau if the changes affect the cost of product. Estimates on Special Work; Cancellation and Changes of Orders; Spoiled Work; Defective Returned Goods In making estimates for special work outside of the regular line of products special charges are made for each setting up of machines, to cover office work on each order. The Cost Bureau estimates the office time required to make cancellations and changes of orders, and makes a fixed charge per hour for clerical work. When any work is spoiled tickets are made out by the foreman, and the Receiving Room makes out tickets for all defective work returned. These tickets are sent to the Cost Bureau and to the Ac- counting Bureau for record, and are used to furnish data for modifications of estimated costs of finished articles and for proper charges to the several classes of product. Annual Inventory Inventory cards are issued to the foreman the clay before beginning to take the inventory. The cards are serially numbered, and verified when returned to see that none are missing. They are priced by the Cost Bureau on the "re- corded cost" basis, for material and labor, and the totals are then modified by the latest changes in "revised costs." Expense ratios for different classes of product are furnished by the Accounting Bureau to the Cost Bureau. The expense ratio is applied on the productive-labor cost. Method of Charging Supplies Issued by Stores A fine example of the use of modern labor-saving methods in the accounting methods of this factory is shown in the use of a tabulating machine card which serves the combined purpose of a requisition on Stores for material, a bill from the stores for the material delivered and a tabulating card which when passed through the tabulating machine with other cards will give the monthly total of the kind of material as to quantity and price, the total charge for supplies to the charge account and its subdivisions and the total credit to the Stores. The punched figures on one such card and their meaning are as follows: 0016, branch of the power depart- ment; 53, the numerical symbol for U, meaning Power Plant; 0131, the kind of material; 70, room No.; 0010, 10 lbs.; Lb., 0020, 20 cents; 65, symbol for SE, a credit supply account. By different settings of the tabulating machine any com- bination of groups of two or more items may be sorted and their monthly totals obtained, for example the total amount of supplies delivered by store room SE to the Power Plant, or the total weight and price of asbestos cement delivered by the storeroom. Statistical Reports The department of Statistics prepares from the large statistical sheets of distribution of labor, material and expense, and from the Works Ledger such monthly and an- nual statistics as are desired by the officers and directors of the Company for their information. They are usually tabulated on 6X9 in. cards, ruled with columns for months. One of these cards gives the statistics of a single class of product or a single account of any kind, by months, for several years. A line at the bottom of the card gives the monthlj' average for each year. A monthly wage report is made on a card ruled with col- umns for months and side heads as below: mt-ni MONTHLY WAGES REPORT 19 Mn OPERATING HRS. Jan. Feb.! Total No. of Op. Hrs. Total Wages per O.H. Piece Work •■ Day Work Indirect Wages " .0 I J MEN, HOURS s-l Total No.of Men Hrs. Average No. of Men -?.5 i Total Wages perM.H. g~ Piece Workers per M.H, r Day Workers •• " s£ Indirect Wages •* " •is i£_ ^ Ratio Indirect Wages toi £ Total Wages Ratio Piece to Direct 1 Total Wages $ Form HF 14. Monthly Wages Report (9X6 in.). Statistics of wages and salaries are also kept by weeks and by rooms, and the men-hours are analyzed by rooms, productive and non-productive work. Purchases and in- ventories of raw material and of supplies are reported on monthly by classes or kinds, and betterments are classified and tabulated. Reports are made of the expenditures for fuel, labor, supplies and repairs of the power plant, of the daily and monthly consumption of metal and fuel in the foundries and their product in castings and scrap, also of the weight of sheet metal used and of product made in the press shop. Labor Turnover One interesting bit of statistics is furnished by the Em- ployment Bureau. It is called the Labor Turnover, that is the number of new men employed each month to take the place of those who have left or been discharged, and the percentage this turnover bears to the total laboring force. Records are kept for each department or group of rooms. Although it does not appear in the accounts this labor turnover has an important influence on costs of manufac- ture, for every time a new man is hired it costs something to "break him in," and until his output is equal to that of the man who left, the machinery is not being operated with its usual efficiency. HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS 189 Monthly Estimate of Increase or Decrease of Inventory, and Profits or Loss A monthly estimate is made by classes of products on the assumption that the ratio (found from the statistics of a preceding year) between the manufacturing cost (material, labor and factory expense) of the goods sold of a given class and the sales of that class remains practically constant for each month of the current year. Thus, if the sales of a cer- tain class of goods amounted in 1915 to $1,000,000 and the factory cost of these goods was §700,000 then the ratio is 0.70. If the sales of this class in a certain month in 1916 amount to 1100,000 then it is assumed that the goods sold cost 0.70 of $100,000 or 870,000. If during the same month the total charges for manu- facturing this class of goods is $90,000, the estimated in- crease of inventory is found by subtracting $70,000 from $90,000, giving $20,000. If the charges are only $60,000 the decrease of inventory is S70,000-$60,000 = $10,000. If the sales of Class A in March, 1916 amount to and the estimated cost at 70 per cent of sales is The difference i3 called " gross profit " If the selling and administrative expense, and the extraordinary expenses of every nature, chargeable to the class sales total of $100,000 amount to 100,000 70,000 30,000 20,000 The estimated net profit for the month is 10,000 Adjustments in these figures are necessary if there have been changes in prices of materials and in ratios of shop expenses to direct labor. The amount of these adjustments will be found from the Material Adjustment Account in the Works Ledger and from a memorandum Expense Ad- justment Account kept outside of the Ledger. The adjustment accounts represent the difference be- tween the actual expenditures in the current year for material and shop expense over the established prices of materials and expense ratios on which shop costs (unit cost cards) are based and the inventory is computed. An actual inventory is taken at the end of each year, the prices being taken from "unit cost cards." The prices of ma- terial on these cards are average prices for a five-year period. The labor cost on these cards is taken from lists of es- tablished piece rates. The shop expense ratios on these cards (ratios to direct labor) are based on the actual operations of a certain year. Having taken the inventory and priced it on the unit cost card basis its value and the cost of sales for the year are to be adjusted in order to get values to be entered in the private ledger. Method of Making a Monthly Estimate of Increase of Inventory and of Profit and Loss without a Monthly Inventory. When a factory makes hundreds or thousands of different articles the cost of clerical work for making and tabulating an inventory oftener than once a year, even when a perpetual card inventory is kept in the stores and the warehouse, becomes prohibitory. The method described below of making a monthlj estimate of increase (or decrease) of inventory and a monthly profit and loss estimate, or a modification of it, is in use in some large factories. The total product of the factory is divided into a limited number of classes, say six to twelve, and the monthly totals of charges to Manufacturing Account, including .Material, Direct Labor and Burden, are apportioned to the same classes. The monthly total of sales is likewise divided, as are also the selling and administrative expense connected with the sales department, together with a margin allowed for minimum profit, the sum of these three being designated by the abbreviation SAP below. The sales of any given class minus S A P is called the "Cost of Sales" of that class. From the statistics of each month an estimate is made for each class, charging it with the total expenditure for manufacturing and crediting it with the cost of sales. If the former is greater, the excess is taken as the increase of inventory, provided there has been no change in selling price or in the cost of materia! labor and burden. Suppose the total charges against Mfg. Acct. for a given class in a certain month is $1000, that the sales of that class amount to $1200 with S A P = $300, leaving the cost of sales $900; then the increase of inventory is $1000— $900 = 8100. To illustrate this method we will take an example, using small figures for convenience. Assume that the statistics of production and sale for a certain class in a normal year show an average production and sale of 1000 articles per month, a cost for labor $250; for expense, $350; for ma- terial $100, total factory cost $700. Sales $1000, leaving for expenses and normal profit, S A P, $300. We will for the present assume that for the first three months of the following year complete statistics of the number of articles made and sold each month are available and that an inventory is taken at the end of each month, the figures being as follows: Inventory Jan. 1. 2000 pieces at 0. 70 = $1400 Jan. Feb. Mar. Total Production, pieces 1200 600 1200 3000 Cost of Production: Direct Labor $330 $180 $360 $870 Expense 360 300 360 1020 Material 144 72 144 360 Total 834 552 864 2250 Cost per piece $0,695 92 72 Advance in wage rates per cent 10 20 20 abov< normal Advance in price of material, per cent ;o 20 20 abov i normal Relative cost for expense, per piece 7 e 7 (As compared with normal expense cost of 35 cents per piece. The expense per piece in February is high on account of the small product.) Total Sales, pieces Advance in selling price, per cent Sales price SAP Apparent Net Cost of Sales Jan. Feb. Mar. 1500 1000 1000 10 15 20 $1650 $1150 $1200 400 300 320 1250 850 880 3500 $4000 1020 2980 190 BOOKKEEPING AND COST ACCOUNTING The SAP includes the actual costs of selling and admin- istration plus the normal minimum profit from the previous year's statistics; with these data it is now required to find the increase or decrease of inventory (pieces and value) at the end of each month, and the profit (or loss) as compared with the normal profit. The result may be tabulated as follows: Jan. Feb. Mar. Pieces made Pieces sold 1200 1500 600 1000 1200 1000 Inventory Inventory at end of month Dec. 300 1700 Dec. 400 1300 Inc. 200 1500 s \les Account Net Charges Credits SAP Cost Pieces Pieces Inven- tory 2000 % x 5 in. is ruled Unci Punched for I oose leaf book —— -i Form HF17. Details of Returned Goods Ticket. FUNDAMENTAL PRINCIPLES a. Make the cost of manufactured products made for sale during a certain period equal total expenditure of the business for the same period.* b. Connect the costs with the general bookkeeping. c. The books must keep perpetual inventories accounts of raw material on hand — totals only. Expense 1. Direct Expense 2. Construction 3. Indirect or Overhead 1 a. Labor charges may be . . 6. Material incurred by ... ,, . i c. Miscell. charges (not a or 6) . d. Two classes of overhead expense : 1. Shop Expense. That which attaches itself to the running of the- machinery. 2. General or Business Expense. That which is incurred by the Business or Administration and which has no con- nection with Manufacturing. e. Two compartments for filing cost data: 1. For current period, not yet entered on the Cost Records. 2. Finished data, entered on the Cost Records. WAGES RECORDS — TIME CARDS Time Cards (three kinds): The first card is issued when a job is given out. It con- tains blanks for a complete record of the job except as to the material used in it, which is entered in a "Stores Issue" card (Form P4). If the job is not finished in one day, a Con- tinuation card is issued on each succeeding day. It does not contain as much information as the first card. The record on the successive continuation cards is transferred to the first card when the job is finished. (Forms PI, P2, P3.) 931-9 In Out FIRST TIME CARD n AND BONUS RECORD Total e Wages ^ Operation Symbol Mach. Time Time Allowed Bonus Time Bonus Wages No. Pes. $ Or. No. If Job Is Not Finished r- Scratch Out This £^- If Job Is Finished vie Scratch Out This^^ 1 ^ 17 Mach. No. Day Total Pieces Finished Time Units Workman's 1 Name .la 3o n's No. A I Have Checked These Entries and Believe Them To Be ( Signed by Hrs. X Cost No. 1 Foreman rrect. Route Sheets Pay Sheet Cost Sheet Bonus Earned Bonus Not Earned The Above Work Has Been Inspected And Found O.K. Defective * This "principle" is fundamentally a wrong one. of it on page 200. See a criticism Form PI. First Time and Bonus Card Daily Entries on Fay Roll. The pay roll clerk sorts all cards according to the men's numbers. Duplicate Earnings Record. Make out each man's earnings record, filling in the man's name, number and date, and the amount of time on day's work and on bonus work. The slip is laid aside to be completed later by listing the bonus jobs that are completed. The original goes to the man; the duplicate is kept for the shop record. (Form P5.) Sort time cards and bonus and inspection records accord- ding to the Charge Symbol "C." Enter time on the respective bonus records; check fin- ished work with Inspection Card and Order, Bonus earned and not earned. Day-work time cards are set aside until it is time to enter the value of labor and the Relative Cost Factor (explained later). HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS 193 In Charge Symbol Out \J Department DM Day Rate If Job Is Not Finished Scratch Out This ZW F If Job Is Finished Scratch Out This $3T" NF Operation No ot PloMS Finished Mao's Time Machine Time Machine No. Workman's Name Man's No. DM I Have Checked These Entrie s and Believe Them To Be Correct. Signed by Foreman or his Representative Route Sheets Bud us R*cord Pay Sheet Cost Sheet Mao's Machine BONUS WORK Jj™ D.H.5 Form P2. Continuation Bonus Time Card IN OUT r \j DEPARTMENT D M If Job is not finished Scratch out this try F DAY Rj \TF If Job is finished Scratch out this E3?" N F Operation No. of Pleoas Finished Man's Time Machine Time Machine No. (5 tinea, i per in.) Wnrlrmnn'n Namo Man'" No. D M I have checked these entries and believe them to be correct: Signed by Foreman or his Representative Rout* Sheets Pay Sbeet Cost Sheet Man's Machine DM1 1 JAY WOl j Storekeeper or hla Representative Form P7. Worked Materials Issued Loss on Goods Shipped, No Charge, and Expense for Out- side Work charged against salable products, constitute miscellaneous charges. As these accounts are controlled by the Business Department, the bookkeeper knows the proper distribution and can make the debit and credit entries without help from the Cost Department. However, the cost-keeper has the detail cost of all products, and this detail must balance with the totals kept in the books. The bookkeeper sends to the cost-keeper a detail distribution of Miscellaneous Expense. ASM Stores Tag No. Credit Order No. Quantity Unit Total Weight Lbs. Total Value STORES CREDIT Month Day Y.- ir 19 „„h (3 lines) and charge to- Rem.irks The Storekeeper will enter Value of Stores on this Card Tag Bilanoo Sheet Coot Sheet ;»rd O.K Shop Offioa Slg. df Inspector ir bo del Wen Goods to Stores Signature of Storekeeper or his Representative Form PS. Stores Credit 196 BOOKKEEPING AND COST ACCOUNTING Worked Materials Tag No. Credit Order No. Quantity Unit Total Weight Lbs. Total Value WORKED MATERIAL CREDIT Month Day Year 19 PI. ....... r.rrdit Work M aterinls Order No. (5 lines, 5 per inch ) The Balance of Stores Clerk will enter Value of Worked Materials on this Card Stoics Sheet Balance Sfabtft Cost Sheet CardO.K Shop Office Sig. of Inspector goods to Stores Signature of Storekeeper or his Representative Form P9. Worked Material Credit The Journal entries each month include the following: Stores to Accts. Payable, for materials purchased. To Stores, for purchased materials issued. To worked materials in Store for stored mate- rial on which work has been done. Work in Shop (or Worked f Material in Process) .... Mdse. Sales to Stores, for stores sold. Worked Material in Process to Accts. Payable, for Pay Roll. Miscellaneous Expense to Accts. Payable, for expenses other than those charged to stores or to work in shop. Worked Material in Process to Miscellaneous Expense. Stores to worked material in Process, for materials on which work has been done, whether finished or not, returned to the stores for safe-keeping. Worked Material in Stores to Worked Material in Process, for finished or partly finished product. (The fin- ished product, ready for shipment, might be charged to Warehouse or to Finished Product). Entries made once a month from a list of values of each product finished, made out by the cost-keeper. As part of the product is turned into the store room as Partly Finished or Stock Parts, it is necessary to transfer a certain amount of Worked Material back to the shop, therefore a distribution of total materials transferred to and form the stores has to be made each month. Both debits and credits of worked materials must be taken from the shop records. In recording credits the cost-keeper must note from which worked materials in Stores Account the goods were issued, and the total amount credited to Worked Material in Stores must equal the total debit to Worked Material in Process Account. Worked material issued and charged to one of the indirect expense accounts B or DM is credited to one of the subdivisions of the worked material in stores accounts, depending on the kind of material issued. We may draw from Worked Material in Stores a product belonging to one class which is necessary to complete a prod- uct of another class. Thus if a bolt classified under is M needed for G the entry would be Worked Material in Process, G, to Worked Material in Stores, M. Entry for worked materials drawn from stores: Dr. Worked Materials in Process Cr. Worked Materials in Store B 20 G 1,100 DM 190 L 550 G 1,010 M 12,070 L 500 P 1,200 M 13.000 R 400 P 200 T 2,000 R 400 T 2.000 17,320 17,320 Worked material drawn from stores for the purpose of returning it to the shop does not constitute an expense for the current month if it is chargeable to a direct product. In case worked material is drawn from stores and charged to an indirect or overhead expense account, then it must be charged in with the other classes of indirect expense when this expense is distributed to the direct product. The indirect expense accounts B and DM are charged to the several classes of direct product, Worked Material in Process, and to Construction, by means of the Expense Distribution sheet heretofore described, Form P15. If the distribution is correct the B and DM accounts will balance. A list of Worked Materials Finished during the month is made out, giving the cost of each lot and the unit cost (taken from detail cost sheets) and sent to the Balance of Worked Materials clerk. The total of each class of product is sent to the bookkeeper who debits Worked Material in Stores and credits Worked Materials in Process. (Form P10.) Products shipped to customers are charged to Accounts Receivable for each class of product sold, and the total of this account is credited to Mdse. Sales. For debits to this account and corresponding credits to Worked Material in Stores the bookkeeper gets from the cost-keeper the cost value of the products shipped, and the account is balanced into Profit and Loss. The Balance of Worked Materials in Stores (Form Pll) shows the cost value of worked materials on hand. When the general ledger is posted and proved by a trial balance, Monthly Statements are made out, including the following : Expense Analysis Sheet, a detailed analysis of each class of expense for the current month and for the preceding month. This analysis enables the administration to observe the class of expenditure which needs attention. (Form P12.) Finished Materials, showing the cost of each lot, unit cost, and best previous cost of each article finished during the month. Each class of product is kept separate and the total cost of each class given. Income Account, a sheet showing the amount and source HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS 197 {Sheet tS x U in. Ruled ■« tines, in blocks of a) EXHIBIT A. WORKED MATERIALS Finished during the month ending Day of 191 Tn nins«PQ Description or Name of Article or Cost Sales Symbol Quantity Total Cost of Worked Materials Finished during the Month COST PER UNIT Remark* This Month Last Month Average this Your to Date Avonga 1*3 1 Year to Date Best Previous Cost Amount Month Year 1 1 , Form P10. Worked Materials Finished {Size t~ x n in. including s in. margin for binding') BALANCE OF WORKED MATERIALS DESCRIPTION NOTE:- When the Material is in Process of Manufacture in the Shop, the Quantity must be added to Columns 1 and 4. After it has been delivered to the Stores, add the Quantity to Column 2 and subtract from Column 1. When it is apportioned, add Quantity to Column 3 and Subtract from Column4. In all cases bring down Balance on Hand, in each Column affected. 1.- Shop. Worked Materials. I.E. Worked Materials in Process of Manufacture in the Shop 2.- Stores. Worked Materials. I.E. Worked Materials Temporarily in Stores awaiting further use Date Started in Shop Lot No. No. of Pieces or Quantity Cost Date Received from Shop W.M. Lot No. No. of Pieces or Quantity Cost Rate of Cost per Piece Issued for Order No. (^ Inn ■ ' /"' inch) Headings Contit ued) When ouantitv available falls to as a 3.- Apportioned Worked Materials. I.E. Worked Materials Apportioned for Orders, but not yet Issued 4.- Available Worked Materials. I.E. Worked Materials in Stores and Shops not Apportioned Date Appor- tioned to an Order Lot No. No. of Pieces or Quantity Order No. for which Apportioned Date No. of Pieces or Quantity Remarks i__ ZJ Form Pll. Balance of Worked Materials in Stores AP45 {Sheet « AS tines * n in. linled in blacks of 3 ) r\FT A TT A TVT A T VCIC r\T? rYPI7\TCrC Sheets. Sheet No. For Month of 1Q1 Name or Symbol of Account THIS MONTH TOTAL AMOUNTS REMARKS Wages Salaries Total Stores Misc. Worked Materials This Month Last Month Average This Month to Date Same Monti Last Year Average Last Year Form P12. Expense Analysis Sheet (Sheet is x ti ,'„. FYHIRIT R Sheets, Sheet No. 2 Sub-Divisions of INCOME ACCOUNT for Worked Materials and for Stores Sold Month of 191 Description Symbol Average Cost per Unit Average Selling Price per Unit Quantity Sold During the Month Total Cost of Merchandise Sold During the Month Total Selling Price of Merchandise Sold During the Month Profit Loss Total Sales of ( Class of Product (7 Classes here listed with from 3 to 9 lutes allowed for each. ) _JJ Form P13. Income Account for Worked Materials and for Stores Sold 198 BOOKKEEPING AND COST ACCOUNTING (Sheet *sxu in.) rVTII _._ _ , Sheets. Sheet No. 1 rXlllnl 1 r> Month of 191 rhTtf-iSYMi? a *"*-**"*¥ rKTT* ^ '* *" ^ rofit anil ' oss account) for month, giving summary. INCOME ACCOUNT o( sa|es for the month and actU al cost and selling price. TOTAL SALES ( *-£* Shipmentslof merchandise delivered during the month, and delivery and erection work billed during "2 a "9 « TOTAL COST Of merchandise shipped during the month. r - *i 5 a » 1 ° a <£, e TOTAL EROEIT On merchandise Bold, and from delivery and erection < - c | 3 TOTAL PROMT From other sources TOTAL LOSS On merchandise sold, and from delivery and erection ? TOTAL LOSS From other sources NET PROFIT - NET LOSS TOTAL COST Of merchandise finished during the month Si, i "? TOTAL ORDERS For merchandise on our books at end of month K Classes of Merchandise sold and profit derived from same THIS MONTH LAST Cost Selling Price Profit Cost 1st worked materials rwelve i his.mon olunui , in four groups. 2nd stores sold t year each with l ,hree colun ns'- Worked materials are subdivided as follows 26 lines follow for and their subdivisions MH Hinge machines MJ Jarring machines Form P14. Income or Profit and Loss Account of Profit and Loss with comparisons and averages for pre- vious and corresponding periods. (Forms P13 and P14.) The selling price for each class of product sold is entered in the Register of Accounts Receivable, which is divided into columns for each class. At the end of the month this register is totaled and the total of each class is transferred to the Income sheet. The cost of each article shipped is entered on the Stores Issue orders, which are checked with the Register of Accounts Receivable to see that each article is billed to the customer. The totals of each class are trans- ferred to the Income sheet and the Profit or Loss figured. GENERAL LEDGER BALANCE SHEET Form P16 shows a balance sheet which is the conclusion of the bookkeeper's work for the month. The first five lines under the headings Total Assets and Total Liabilities give the general condition of the business at the end of the month, with comparisons with the preceding month and with January 1 and July 1. The remainder of the sheet subdivides the figures of each of these five lines into details. PROOF OF THE COST SYSTEM The Instruction Book, from which the matter on the pre- ceding pages has been abstracted, contains the following: The bookkeeping system offers the only means of proof of the cost system. The general ledger balance sheet offers the only representation of the condition of the business. For Droof of this note the second division on the Dr. side of the balance sheet; there you will find the important part of Industrial Accounting. These accounts give the actual cost of all material bought from outside and of all manufactured product. The bookkeeping system is no proof of the cost system. It is merely a method of condensing and recording in double- entry form the original data which are found in the wages cards, stores-issue cards, salary lists and bills for miscellaneous expenses grouped in the cost-collecting cards, transferred to the expense analysis sheet, entered in the journal, and finally posted in the ledger. If the original cost data contain errors, if errors are made anywhere in the cost- collecting cards, or if the theory upon which the expense distribution to cost of product is an erroneous one, all these errors are carried forward into the ledger where they are effectually concealed in Section 2 of the debit side of the balance sheet, in the "actual costs" of Stores, Worked Materials in Stores and Materials in Shop, and in the errone- ous figures of Profit and Loss, on the credit side. "The general ledger balance sheet offers the only rep- resentation of the condition of the business." But in a tune of business depression it may not show that the "actual cost" of Stores was the cost at which they were contracted for six months before and that the market price of them now is 25 per cent lower, that the "Materials in Shop," "Cost to Date" were also purchased when prices were high, and that the "Worked Material in Stores" was made when the shop was running on half time and when the shop ex- pense, DM, was double, and the business expense, B, was three times the normal rate. The Profit and Loss account is made up by inventorying all the materials at their inflated "actual costs," not deducting anything for shrinkage in the market value of the raw material or for loss due to idleness in the factory during the months of depression. Such is the HARDWARE FACTORY AND MACHINE-SHOP ACCOUNTS 199 = o ' a X H ! ■ « o O — 2 H V5 7) & c C v £ Old O O fc *0 ^3 3 s."-- 3 H 5 ^ <5> ^ ^. H §■8 11 a- *3 i £ 5 *» J ■ i il i< 31 5t> On -2 • J" f 2 Q ii si Is. 52 ^ ii x t it- f" 1 5 Is B S° » » + + El W W n CO S3 o H P s 5 H a 200 BOOKKEEPING AND COST ACCOUNTING THE JOHN DOE MANUFACTURING COMPANY General Ledger Balance Sheet for Month of 191 Compared with Preceding Month, Etc. DEBIT CREDIT TOTAL ASSETS The Total Assets are Divided on the next five lines below into-- TOTAL LIABILITIES The Total Liabilities are divided on the next five lines below into:- 1. PLANT AND OTHER FIXED ASSETS {Four columns I. LIABILITIES TO STOCKHOLDERS ( Four columns) 2. MATERIAL IN STORES AND IN SHOP headings: This 2. MISCELLANEOUS 3. CASH AND OTHER OU1CK ASSETS Month, Last 3. EXTERNAL LIABILITIES 4. UNAPPORTIONED EXPENSES Month, Jan. *. *9I6, 4. EXPENSES APPORTIONED IN ADVANCE 5. MISCELLANEOUS July t, 19*6) 5. INCOME. OR PROFIT AND LOSS ACCOUNT These groups are again subdivided as follows:- These groups are again subdivided as follow s-- I, PLANT AND OTHER FIXED ASSETS 1. LIABILITIES TO STOCKHOLDERS Construction(Depreciation Deducted) Capital Stock Patents Surplus Fund Real Estate Dividends Unpaid Buildings 2. MATERIAL IN STORES AND IN SHOP 2. MISCELLANEOUS Stores Actual Cost Worked Material Stores Actual Cost Materials in Shop Cost to Date 3. CASH AND OTHER QUICK ASSETS 3. EXTERNAL LIABILITIES Cash in Hands of Cashier Cash in Bank Notes Payable Accounts Receivable Accounts Payable Individuals and Co's. Miscellaneous Individuals and Co's. Miscellaneous Stock of other Co's. Mortgage Notes Receivable 4. UNAPPORTIONED EXPENSES 4. EXPENSES APPORTIONED IN ADVANCE Insurance Interest Adjustment Account Adjustment Account Depreciation Royalties Accounts in Suspense 5. MISCELLANEOUS 5. INCOME OR PROFIT AND LOSS ACCOUNT Consignment Profit for Current Month Previous Balance Form P16. General Ledger Balance Sheet result of following the "fundamental principles": "The cost of manufactured products made for sale during a certain period equals the total expenditure of the business for the same period," and "Connect the costs with the general bookkeeping." "There you will find the important part of Industrial Accounting!" DISTRIBUTION OF GENERAL BUSINESS AND SHOP EXPENSE The instruction book used in the accounting room of the Philadelphia concern, after showing how the total busi- ness expense of a month is distributed over the cost of the product in proportion to the wages or direct labor cost on each productive job, continues as follows: While this method of distributing General Expense is as proper for that class of indirect expense as any that can be devised it would not be proper for Shop Expense. Two lathes, one 100 in.X50 ft., on large forgings, 25 cents an hour wages, the other 16 in. X4 ft., on fine work, 50 cents an hour, high skill needed. Now, on the basis of wages the work in the small lathe would have twice the amount of shop expense that would be charged to the 100-in. lathe. The work done on the larger machine should have charged against it 20 times as much for these items as is charged against the work done on the smaller machine. HARDWARE, FACTORY AND MACHINE-SHOP ACCOUNTS 201 Large Lathe Small Lathe Wages Machine Burden lOhrs. ©0.25 lOhrs.® 1 .00 10 hrs.® .25 $2 10 50 00 10 hrs. @ 500 10 hrs. @ 50 10 hrs. @ 500 $5 00 50 Business Expense $12 2 50 50 $5 5 50 00 $15 00 $10 50 these amounts are added up and the actual shop expense is divided by the total of the machine hours X the respective machine rates. This (jives our Shop Expense Hate for the month, by which we must multiply the machine hour times their rates charged against each productive job, and enter the amounts of shop expense chargeable to the various jobs on their respective cost sheets. Kx ami'I.i; Large Lathe SmMl Lathe Why should a day's work on large forgings be charged with business expense only $2.50, and a day's work on small pieces $5.00? The large forgings may be sold in small lots to a hundred customers, and may require expensive advertising and traveling, much clerical work and great effort of the sales manager, while the fine work may all be contracted for to a customer across the street, involving a minimum of business expense. Perhaps a better division of the $7.50 business expense among these two jobs would be: heavy forgings, $7.00; fine work, 50 cents. There appears to be less reason for apportioning business expense as a percentage or direct wages than there is for apportioning shop expense on that basis. The instruction book then proceeds to say: The Shop Expense Rate is a figure by which the product.of the machine hours on any producing job and relative cost num- bers must be multiplied in order to find the amount of shop expense chargeable to that job. The total amounts thus charged to the various producing jobs must equal the total shop expense for the month. The machine time is multiplied by its hourly rate and the amount entered on the cost sheet. At the end of the month Large Lathe Wages Av. cost of burden based on 2500 hrs. per year Burden this month 10 hrs. ©250 10 ® $1 00 $2 10 50 00 Hrs. Xcost No. 1 00 X 1 00 $12 $100 50 00 | 1 10 hrs. @ 500 Based on 3000 hrs. pel \ oai 10 @ 50 250 his. X0.5 »5 $5 [12 Total hours Xcost Nos., both lathes $1 12.50 Actual shop expense $225.00 DM rate 225 -M 12.50 -2 Wages Shop Burden 100 hrs. X0. 25 100X1.00X2 $25 200 $225 nil 250 hrs @ 50 250 X. 05X2 $125 25 $150 no If 10 pieces or units are made, Average cost, large lathe, $22.50. Average cost of 10 units in small lathe, $15.00. Let us consider this example under two widely different con- ditions, say those of July and August, 1914. In July the shop ran full tune and the shop expense was normal; DM rate=l. In August it ran only half time, and there were extraordinary expenses for repairs, making the DM rate 2.5. Small Lathe Wages Wages Burden 10 units made, average cost 5 units made, average cost 100 hrs. @ 250 50 hrs. @ 250 100@$1.00XI 50 ® 1.00X2.5 1 July Aug. $25 00 12 50 100 00 125 00 $125 00 $137 50 12 50 27 50 250 hrs. @ 500 125 hrs. @ 500 250 hrs. ® .05 XI 125 hrs. ©.05X2.5 10 units average 5 units average July $125 12 $137 13 Aug. $62 15 $78 12 62 These figures if carried into the inventory lead to over- valuation, and they hide the fact that the factory lost money in August on account of idleness. The wages + burden cost per unit of forgings made in the large lathe advanced from $12.50 to $27.50, while that of the Large Lathe fine work made in the small lathe advanced only from $13.75 to $15.62. Suppose we abandon the "DM rate" and figure this example on the basis of the average or normal yearly bur- den, $1.00 per hour for the large lathe and 5 cents per hour for the small one. Small Lathe Wages Wages Burden Burden 10 units, average cost 5 units, average cost Normal burden on this lathe Burden earned Unearned burden 100 hrs. ® 250 50 hrs. ® 250 100 hrs. © 1.00 50 hrs. © 1.00 1 mo. ©$2500 per yr July Aug. $25 00 $12 50 100 00 50 00 $125 00 $62 50 12 50 12 50 208 33 208 33 100 00 50 00 108 3? 158 33 250 hrs. © 500 125 hrs. @ 500 250 hrs. @ 50 125 hrs. @ 50 10 units, average 5 units, average Normal burden Burden earned July $125 12 $137 13 Aug. $62 6 $68 13 12 6 25 202 BOOKKEEPING AND COST ACCOUNTING The balance of unearned burden at the end of the year is to be charged to Profit and Loss. The costs for labor and burden at which the products may be entered in the inventory according to these several ways of figuring, although the cost of material and the rate of wages are unchanged, are as below: Large Lathe Small Lathe D M rate =2 D M rate = 1 D M rate =2 5 22 12 27 50 50 50 15 13 15 00 75 62 The figures $22.50 or $27.50 may be "true costs" for the purpose of the bookkeeping system, which is to make the books balance at the end of each month, " tying the costs to the general books," but they are utterly useless for any other purpose. They cannot be used either as inventory values, as a basis of profit and loss estimates, or as a basis for fixing future prices, nor are they of any use as statistics which may indicate to the management any way of reducing costs. The charging of business expense to cost of product by the "B-rate" method, dividing the total business expense of the month among the whole product in proportion to the direct labor cost of each job makes the cost-keeping system still more inaccurate. Take the labor and burden costs of the large forgings per unit in July and August, as given above, by the DM rate method, $12.50 and $27.50, add to them the cost of material $10.00, and apportion to them the business expense on the basis of the labor cost $2.50 multi- plied by the B rate, 2 for July and 4 for August, and we have: July Aug. Material 10 00 10 00 Labor 2 50 2 50 Shop Burden 10 00 25 00 Business Burden 5 00 10 00 Total Recorded Cost 27 50 47 50 Selling Price 32 50 32 50 Profit 5 00 Loss 15 00 By this method, if the goods made in August, 1914, are not sold until January, 1915, the loss of $15.00 which should have been charged to Profit and Loss in 1914 as part of the loss due to idleness of the factory is wrongly carried over as an asset until 1915, and the loss of $15.00 will then wrongly appear as a loss on the business of the year 1915. Another source of error in the use of this method is the charging to the cost of the work done in August, whether the work is finished or not, the business expense of the same month, when a large part of the business expense re- lated to this work, such as advertising, traveling, sales- men's salaries, etc., may not be incurred for several months later. The salesmen's expense in August may be partly for working off an accumulated stock made in preceding months, and partly for getting orders to be executed several months later, with possibly none of it for selling the goods worked on in August. A large part of the total business expense may be in- curred in selling a minor portion of the product or in intro- ducing a new product, while the greater part of the product is sold with a relatively small business expense. It is not good accounting to charge to the cost of production of one article any part of the business expense of selling another article. A considerable portion of the business expense of a con- cern consists of the salaries of the president and general manager. In a properly organized business scarcely any of their time is spent in connection with the work of the current month in the factory; but nearly all of it on work to be done in the future. If the factory is running on half time during the current month the whole of their salaries should not be charged to the cost of product of that month, thereby increasing the inventory value of that product. The only right way to treat business expense of the selling department is to divorce it entirely from factory costs, and to treat it as an expense of a mercantile business which is separate from the factory, CHAPTER XIX COSTS IN A WOODWORKING SHOP; A BAKERY; A TEXTILE MILL; A POWER PLANT COST ACCOUNTING FOR A WOODWORKING SHOP The Time-Study Method Suppose a shop is making doors and sash of standaid sizes for regular stock, also doors and sash of irregular sizes for special orders, and is cutting, planing, grooving, gluing and finishing a multitude of shapes and sizes, some on large and some on small orders; what sort of cost system can be devised for it which will at the same time be reasonably accurate and not too expensive? It is manifestly impracti- ccble to use the complete job ticket sj'stem that is applicable to a machine shop or factory working on metal products, for the reason that for many of the small orders the cost of the clerical work of the job ticket, cost summary and distribution of burden would be more than the value of the product. The apportionment of the labor cost also is a matter of great difficulty, for on some orders the pieces would pass in sequence from one machine to another, some machines being operated by one man, some by two, and some by three, including the man engaged in passing the lum- ber from the car or pile to one of the men at the machine, and in the case of a very small order the actual labor cost of the work done by one man might be only a fraction of a cent. For example, in making one sash, for a single plate of glass, to specified dimensions, from 1| inch stock, the opera- tions would be: 1. Getting a board from a pile or car of kiln lumber. 2. Planing it on both sides. 3. Sawing it to the length of the longest dimension of the sash. 4. Returning to a pile the piece not used. 5. Sawing four strips, the top and bottom strip of different widths, the two side strips of one width. 6. Flat-edging one side of the top and bottom strips. 7. Edging and grooving one side of each of the side strips. 8. Molding the inner edge of all four strips. 9. Cutting four mortises and four tenons. 10. Drilling holes for corner pins. 11. Gluing and assembling. The recording of the cost of lumber for each separate order or job also involves more clerical work than it is worth. The waste of lumber in cutting boards into the different widths and lengths of pieces required for the several orders differs with the sizes of the boards and of the pieces, and also with the quality of the lumber as regards its freedom from knots and cracks. The Accounting System of a woodworking establishment may be made comparatively simple. In the General Ledger Factory Plant is charged with the appraised value of the real estate and equipment. Factory Operating account is charged with the appraised or inventory value of the material and supplies on hand at the beginning of the year including work in process and finished work ready for shipment, also with monthly disbursements of cash for pay roll and other expenses, with accounts payable certified by the factory for payment, and a monthly charge of one-twelfth of the annual cost for interest on the total investment in the factory, insurance, taxes, and reserve for depreciation. The account is credited, and Sales Department charged, with the invoices rendered by the factory for goods shipped, at " factory cost " or the prices agreed upon between the factory and the sales department as to what shall be considered factory cost. On the Factory Ledger, Company account is credited with the charges made in the General Ledger against Factory Operating account, Cash, Lumber, Supplies and Burden being charged. Cash is credited with cash payments for Labor, Supplies and other expenses. Lumber is charged, and Labor and Burden credited for expenditures connected with the handling, storage and drying of lumber. Work in Process is charged with the cost of manufacturing operations, Lumber, Labor, Supplies and Burden being credited. A Power account may be kept, charging it with labor in the power plant, with fuel and other supplies, and with burden, for its proportion of interest, taxes, insurance, etc., crediting it by Lumber, for the value of the steam used for drying and by Work in Process for the remainder of the monthly expenditure for the power plant. Company account is charged and Work in Process credited with shipments of finished product. At the end of the year, when an inventory of Lumber, Supplies and Work in Process has been taken these accounts may show either gains or losses. The apparent gains in Work in Process may be done to the charges to Company for the products shipped being higher than their real cost, and the gains in Burden to the sum of the monthly credits to Burden and corresponding charges to Lumber and to Work in Process being higher than the charges against Burden during the year. The apparent losses may be due to idleness or inefficiency, to excessive wastes of lumber, or to errors in the costing of finished product that lead to under- charges to Company for the goods shipped. All of these gains or losses are to be closed into Company account at the end of the year. 203 204 BOOKKEEPING AND CCST AOCOUNTING Statistical records and charts should be made, with monthly entries, showing the principal facts of the progress of the business. They may contain the following items: Lumber received — Feet B.M. Cost. Lumber delivered to factory — Feet B.M. Cost. No. of men employed — Man-hours. Payroll. Credits to Company — Cash, Accts. Payable, General Charges. Coal used in Power Plant. Total Cost for Power. Cost of Drying per 1000 feet B.M. Machine Record — Hours each machine ran per month. Total Charges to Work in Process. Total Credits to Work in Process (shipments). Increase or decrease of Inventory (estimated). Apparent gain or loss in Work in Process account. Charges and Credits of Burden account. Apparent loss and gain in Burden account. The recorded gains and losses should be scrutinized monthly to learn whether they are due to bookkeeping or costing errors, to undercharging or overcharging of burden or other costs, to bad planning of work or other inefficient manage- ment, to idleness of machinery, to unusual waste of lumber or other cause. Gains may be made, when the factory is crowded with orders, by planning the work so as to bunch orders and minimize the time required for setting tools, blades and gages and for starting and speeding up the machines, and so as to lessen the waste of lumber, also by running machinery overtime, so as to decrease the propor- tion of burden to direct labor cost. A study of the losses may show that the chief loss is caused by idle machinery and that this is due to inefficiency of the sales department. Steps may then be taken to remedy this condition. Cast Finding by the Time-Study Method. It being impracticable to use the job ticket system, obtaining the mate- rial, labor and burden cost of every operation on every part or piece of the product, the best method of determining the costs at which the several sizes and styles of product are to be billed to the sales department or entered in the inventory is to obtain by systematic measurement, time study and analysis the standard labor, material and burden costs of selected representative articles, and from them to compile price schedules and charts from which the standard factory cost of any size of any given style may be quickly ascer- tained. The cost of material for sash, for example, may be obtained by measuring the number of feet, board measure, of lumber required to fill orders for several different sizes of one style of sash. When the figures are plotted on a curve showing the relation of amount of lumber to size of the sash, the cost of material for any intermediate size may be readily de- termined. For the labor costs, studies must be made of the time required for each operation on several different styles and sizes of sash. For this purpose time-study cards should be prepared, as below, and a stop-watch with a long hand indicating hundredths of a minute should be used to obtain the elemental times of each operation. TIME STUDY MACHINE NO. DATE Operation Rip Sawing. For Sash. Size 36 XSO inches Driving Shaft Revs, per min, 4£0. No. of Blades or Tools in Use 4- ^ and . } 16 ft. in 0.80 min. Ft. per min. 20. Automatic I Size of Plank, 16 ft. X12 in. XI H in. Makes material for 5 sash. Waste 30 per cent. Feed { Test No. Operations. . Oiling machine. . . . | Setting tools & gages. Starting & speeding j Total preparing Placing material Feeding material . . < Removing material Total operating time 1 2 3 4 5 Start and Fin. Hr. Min. Time Min. - — - - 7.01.10 02.00 04.15 04.25 04.50 0.90| 2 15 0.10 0.25 04.50 04.70 05 90 06 20 3.40 0.20 1.20 .30 1 70 Aver. Time Min. 3.20 I 65 The result of the above time study shows that the actual operating time on a single plank is 1.65 minutes, on the aver- age, including the time for placing and removing the material, but that it takes 3.20 minutes for getting the machine ready for doing the work. This preparing time would be the same for a hundred planks, if they were all cut to the same sizes, as for one, and it is part of the burden which must in some way be distributed over the product. Burden Distribution The first step in planning the method of distributing the burden is to make a schedule of the annual burden pertaining to the use of the machines, and to deduce therefrom an hourly burden charge, or machine- hour burden, in the manner customary in metal-working shops. The burden not pertaining to machine hours, but rather to the material handled, must be estimated separately. These estimates may result in statements like the following: Estimated Annual Machine Burden Machine A B C D E F G H, II, Ha Total Int., Ins., Tax Dep'n, Rep's. $300 $280 $240 $180 $160 $120 $ 80 $ 60 $40 $20 $1480 Rent of Space. . 120 90 90 60 45 45 45 45 30 30 600 Cost of Power. 300 240 180 150 120 60 30 30 30 30 1170 Indirect Labor . 220 220 170 170 120 70 50 50 50 50 1170 Total $940 $830 $680 $560 $445 $295 $205 $185 $150 $130 $4420 Est. Hours per 2400 2400 2200 2000 2000 2200 1800 1500 1500 1300 Burden Charge, Cents per hr . 40 35 32 28 22 14 12 12 10 10 Burden on Material, not chargeable to machine hours. Storage, space 2000 sq.ft. at $2. Int., Ins., Tax, Dep'n, 15 per cent.. $600 Handling, Piling, etc., 2 men at $900 1800 Supervision, Clerical Work, Watchman, Insurance on Material, Interest on Investment in Material, etc 3600 $6000 COSTS IN A WOODWORKING SHOP 205 This $6000 is to be apportioned in some way to the cost of the finished product, but it is directly proportional neither to the quantity of material used in an article, to the direct labor cost, to the man-hours or to the machine-hours. The best way of distributing it is probably a combination of material burden and job burden. An order for a single sash involves as much clerical work as an order for a hundred sash of the same size, as much time for setting gages and tools in the machines, nearly as much supervision, and a far greater amount of storage space relatively to the quantity of material. Suppose the amount of material handled is two kiln-car loads, of 8000 feet B.M. each, per day, or a total of 4800 thou- sand feet B.M. per year, and that the number of job tickets or orders is 30 per clay on the average (one ticket for one article or any number of articles of one kind and size), or say 9000 job tickets per year, a charge of SI per 1000 feet B.M. would make $4800 per year, and a charge of 20 cents for each job ticket would make $1800 per year for job burden; the total, $0600, is 10 per cent more than the estimated burden on material, and these charges may therefore be considered fair and safe. In a large factory a greater refinement in the distribution of the bur- den not chargeable to machine hours may be desirable, but it should not be undertaken until after an analysis of a year's statistics of burden costs and charges has been made. When the method of making burden chaiges has been decided upon and enough time studies have been made to obtain fair average operating times, Cost Estimate Cards may be made out as follows: Cost Estimate. 36x30-inch sash. Style A. Plank, 16feetxl2xlj inch =20 feet B.M. makes 5 sash, average 4 feet B.M. each. 1000 feet B.M. makes 250. Per Sash Cost for Material at $30 per M. 30-=- 250 12 00 cents Material Burden. $ I per M . 40 ! Standard Operating Time per Plank. . . 165 min. Add 20% for rest periods and delays. . .35 2.00 min. No. 1. Time per sash 0.4 min. at 40 cents per hour . . 27 Machine Burden, 30 cents per hour X0. 4 ^60 0.20 Operation / (Add Labor and Machine Burden for each of the No. t other operations) ' Total Add Job Burden = 20 cents divided by the number of sash of one size on one shop order. (Example: If an order was for one sash the addition would be 20 cents, but if it was for 40 sash of one size the addition would be 20-^40 = 0.5 cent. When cards like the above have been made for several size of one style of sash a large Price Schedule Card (from which charges from the factory to the sales department are made) may be prepared as below: FACTORY COST OF „. Width, In. SASH, STYLE A 20 22 24 tl 46 48 •20 10 22 IS 24 IS ■17 41 46 48 36 The blank spaces on the card are filled in from time to time as results of time studies on the work going through the shop accumulate. Charts of curves may be made from such figures as are available, and they may be used for estimates of costs of intermediate sizes, time studies of which have not been made. The same time studies may be used in the preparation of cards showing the cost of machine operations independent of the size of the sash, such as cost of sawing strips, of plan- ing and grooving, of cross-sawing, of assembling, gluing, etc. These will be useful in making estimates on new orders for unusual sizes, and for giving data to the management which may lead to reduction of cost of some of the operations. All of the cards should be filed in such a manner that they may be readily accessible. A good way of filing the large factory cost schedule, for example, is to put it under a heavy glass plate covering the billing-clerk's desk. Planning and Scheduling Work for the Shop. This is usually done by a planning or production clerk, and is not the work of a cost accountant, but as in a small shop one man may perform the functions of bookkeeper, cost clerk, production clerk and correspondent, it may not be out of place here to suggest to him how he may shorten his own work and at the same time save some of the labor of the shop foreman and some of the time required for adjusting the gages and cutting tools of the machines when changing from one dimension of product to another. By doing this he is qualifying himself to be some day the manager of a large shop. A schedule of dimensions for sawing strips, and for planing and grooving them, for the several standard sizes of sash, may be made as below, and copies of it tacked to posts near the rip saw and the strip planer. Widths of Strips fob Standard Sash Sash Widths. 20 to 28 30 to 36 38 to 44 46 to Heights Saw 20 to 28 PI. B T 2S 2K IJi 2H 2'A \M 2 B T 2S 3 2 1% 2% \% 2 B T 2S 3>i 2'4 2M 3 2 2'j B T 2S 3K 2)4 2H 3H 2X 2\i 30 to 36 same same 38 to 44 46 to B, bottom strip; T, top; 2S, two sides. PI., plane and groove. "Same" means the same dimensions as above. A card for the length of strips should be prepared for the cross-saw as follows: Lengths of Strips for Standard Sash Form WW. Schedule of Factory Cost of Sash Sash Widths. 20 22 24 26 Heights 20 BT 2S 24 24 BT 2S 26 24 22 24 26 26 26 24 24 28 26 28 26 206 BOOKKEEPING AND COST ACCOUNTING Shop Order Cards may be sent into the shop, reading about as below: Office Order No. 724. Customer. Date Job Orders. 43 1 7 1 sash 20 X20 standard 43 1 8 4 sash 30 X30 standard 4319 4 sash 36X30 standard 4320 2 sash 46 X36 special, see sketch These cards should be made in triplicate, on different colors of paper, say manila for the strip sawing, white for the planing and grooving, and yellow for cross-sawing and subsequent operations. The yellow card follows the work through the shop to the shipping room where it meets the shipping order, or to the finished product storing room where the sash is stored. In either case it is returned to the office, where the invoice may be made from it, after the " factory costs " of the several sizes, taken from the standard cost schedules, are written upon it, or it may be filed in the inven- tory of stored goods. The total of the values entered on all these cards during the month is the figure for the monthly credit to Work in Process account. The Timekeeping System used with this method of cost- ing may be the simplest possible. It may be an ordinary time book, with the number of hours each man works in each day being entered upon it, or a clock system with " in " and " out " cards or other kinds of record. In either case a symbol should be used to show whether the man is working on production, in which case his time is charged to Work in Process, or whether his work is " indirect labor," in which case it is charged to Burden. Use of the Cost System in other Businesses. The time- study method of costing above described is applicable to many other kinds of factories than woodworking, and it may be used in certain departments of large factories in which other systems, such as the job ticket and machine-hour system, are used. Each department of a factory should have the cost system that is best adapted to the needs of that department. COST ACCOUNTS FOR A BAKERY A bakery may make loaves of bread of different sizes and qualities, rolls, pies, cakes, etc. A job ticket should be made daily for each style, quality and size, giving the number required of each. The following form may be used: Date Make 300 Loaves XXX Bread Material Amount Cost Flour 1 bbl. 5.50 Yeast 1 H lb. .30 Lard 3 lb. .36 Sugar 2 lb. . 10 Salt 3 lb. .03 Incidental .40 Total Material 6 69 Labor, total per day 6.30 Proportion for this order one-third 2.10 Oven and Fuel: Total this day 2.40 Proportion one-third .80 General Expense for day 5.40 Proportion one-third 1.80 11.39 Number loaves made 290 Cost each .03 The proportion of the total daily labor, oven and expense cost which is to be apportioned to the several job tickets is to be estimated on any basis that may seem most equitable such as on the number of pieces, weight of product, or selling value. A daily cost card may be made, summarizing all the job tickets of the day in the following form: Date. . . Kind Bread XXX Bread X Cake A Cake B Total Material Labor Oven General Expense 6.69 2 10 .80 1 80 Total 11.39 No. of pieces Cost each 300 03 The cards for a month may be added together and entered on a monthly cost card, on which the total material may be compared with the bills for material purchased, the total labor with the pay roll, and the total for oven and general expense taken together with the actual payments on expense accounts. On this card also may be entered the cost of selling and delivering, the charges and receipts from sales and the monthly profits. TEXTILE COST ACCOUNTING* Cost Estimates and Cost Records. Consider that an order for a fabric has been received, conditioned on a certain price. The records show that this fabric was previously made at a certain cost. It obviously would not do to accept this order without taking into consideration all changes in conditions that have taken place since the former production. Wages may have increased, automatic looms may have re- placed plain looms, the price of raw niaterial may have ad- vanced, and a number of the elements of cost may have changed, which would alter the previous cost. Consequently an estimate is made, based on the known facts taking these changes into consideration as accurately as possible. The order is accepted because the estimate indicates that, pro- vided the conditions considered therein hold true, a profit should result from the sale. During the actual manufacture of the order, however, alterations of conditions occur which were not anticipated. The production decreased, the per- centage of second quality goods increased ; perhaps a number of such cost factors varied. In consequence the anticipated profit becomes doubtful, and it is evident that the estimate cannot be used as a guarantee of profit. After the fabric is completed, the cost is carefully compiled and the true cost, regardless of the existing conditions, determined. This affords a proof of the accuracy or inaccuracy of the prelim- inary estimate, determines whether or not the order has been profitable and becomes a basis for estimating more accurately on future orders. * Condensed from a paper by C. B. Annett and C. F. Cunning- ham. Trans. A. S. M. E., vol. 35 (1913), p. 555. COSTS IN A TEXTILE MILL 20^ The general storekeeper should have charge of and be responsible for all raw materials, semi-finished and finished stock wherever located. This does not necessarily imply that all stores should be centralized in one place, but it does imply that one person should be held responsible for its proper care and for correct reporting of the receipts and disburse- ments of all materials. Lot Costs. There are two general methods of collecting cost data: (a) By definite lots or orders; and (6) by opera- tions. The first method provides for the determination of the cost, of definite quantities of product and is applicable only to cases where the material can be processed in definite lots and kept intact through the several operations. These requirements render this method impracticable in such textile mills as largely manufacture what are known as staple products. The production in such cases is so continuous that it cannot be readily segregated into lots or batches. Production orders should be issued as the authority for processing all materials entering directly into the product. They should be numbered serially and all expenditures of labor and material on account of them should be charged to these numbers. It is not essential that an order should cover the complete process from raw material to finished product, but it is necessary that it should cover a complete stage of production. All disbursements of materials from stores should be priced at cost and charged to the proper order number. For collecting labor cost data, timekeepers should be sup- plemented, so far as possible, with mechanical recorders which can neither err nor misrepresent. Distribution of expenses may be divided into two parts: First, the distribution of the general expense of the mill, together with power, heat and light to the producing depart- ments; and second, the apportionment of the total depart- mental expense thus obtained over the product passing through the departments. Power should be distributed on the basis of power con- sumed, depreciation on the basis of the value of the plant and equipment used by the department. In a similar manner each item of general expense should be taken up, and the most equitable method of distribution determined. The total departmental indirect cost thus obtained may be apportioned over the product by any one of several methods. It is generally desirable in textile mills, however, to use the machine hour basis or its equivalent, as the machine is largely the unit of production. The cost of direct material and direct labor can be deter- mined as soon as the order is completed, but the exact amount to be added for indirect expense cannot be ascertained until after the close of the period. It is, therefore, common prac- tice in figuring current costs to use the rates based on the results of previous periods. While this is the only prac- ticable method to pursue when immediate cost figures are required, it nevertheless is liable to error and should only be used when it is not practicable to wait until the close of the period. Operation Costs. The second method, that of operation costs, as the name implies, provides for the determination of the cost of individual operations. Given the total cost of each operation and the loss by shrinkage of material from operation to operation, the total cost of any product, or the cost at any desired stage of completion may be found by combining these costs. They must, however, be combined only with a full knowledge of the shrinkage and the exact, order in which the several operations were performed. This method is applicable to mills in which the production is con- tinuous, and, therefore, is adapted to a large class of textile mills, especially those manufacturing staple cotton goods. The foundation of operation costs rests upon an accurate knowledge of the shrinkage from operation to operation. There are in use several methods of measuring production, but none of them are entirely satisfactory. Because of the fact that the majority of the fibres used in the manufacture of textiles are subject to a considerable variation in weight, due to the rapidity with which they absorb and discharge moisture, if weight is used as the unit of measure it is subject to a corresponding variation. The most practicable unit of measure for yarn, both finished and semi-finished, seems to be the pound. Cloth may be meas- ured either by the pound or the yard, whichever is the more convenient. The collection of the cost data under this plan differs from that used in the first plan, in that there is no special produc- tion order number against which the various expenditures of labor and material can be charged and it is, therefore, neces- sary to use the operation as the unit of cost. It is essential to this scheme that the various operations be definitely deter- mined and designated by a number. The several different kinds of product should also be numbered. All disbursements of direct material from stores should be priced at cost and charged in the mill ledger to the first opera- tion through which the material passes, classified to kind of raw material. Provision should be made for accounting for the value of the waste made in each operation. The direct material accounts should be subdivided as to kind of raw material, rather than kind of product, as it is usually imprac- ticable to obtain a report of waste classified as to kind of product. Each operation and each kind of material should be credited with the proper amount for waste. Shrinkages are constant only in so far as the cause is either natural or due to mechanical appliances, and shrinkages due to " human elements " are subject to wide variation. Considering that the waste in woolen mills is over 50 per cent of the raw material and in cotton mills over 15 per cent, it seems well worth while to give this problem serious consideration. All direct labor should be analyzed as to operation and kind of product and charged in the mill ledger to the proper account. The total indirect cost for each operation should be determined in much the same manner as explained under lot costs. It should then be apportioned to the several kinds of product and charged to the proper accounts in the mill ledger. At the close of any period, the unit cost of any operation may be determined by dividing the total expendi- ture on the operation for the period by the total amount of product which has passed through the operation during the same period. 208 BOOKKEEPING AND COST ACCOUNTING The total cost of any given product cannot be determined simply by adding together the several operation costs, con- sidering the shrinkage from operation to operation. To obtain the cost of any operation in the completed product, it is necessary to increase the operation cost, in reciprocal proportion to the shrinkage from the end of that operation to the finished product. For example, if the cost of an opera- tion is S0.015 and the shrinkage of product is 25 per cent, the operation cost in completed product would be in nir/ okct- = SO. 02. It would be possible to determine the total cost of product by this method, except for the fact that the exact sequence of operations is not readily ascertainable, making it impossible to determine accurately the amount of shrink- age, especially in a mill making a variety of products. A more satisfactory method is to build up the total cost, operation by operation, beginning with the first operation and charging forward to each succeeding operation the cumu- lative cost of all preceding operations. In many cases, the product of one operation is made into a number of different kinds of product in a succeeding opera- tion. For example, one size of roving may be spun into several sizes of yarn and it is necessary in such cases to appor- tion the amount charged forward from the previous operation to the succeeding operation, based on the total production of each kind of product in the succeeding operation. By this method of cost finding, the inventory of product in process is automatically priced and, further, it is possible to determine the cost of the product shipped during the period. The operation cost method not only provides for obtaining the detail costs by operations, but also the total cost of all kinds of product. A mill or inventory ledger should be opened, designed to collect and control the various facts regarding the manufac- turing costs and inventory records. This should be done regardless of whether costs are determined by means of the definite lot or operation plan. The mill ledger at the close of each period should be in balance with the controlling account in the private ledger. The various items of expense not distributed or applying to product in process, should be so segregated that they can be easily checked against uncompleted costs and the uncom- pleted costs in turn checked against the product in process account. By this means at the close of each period, be it one or four weeks, or one or several months, the accuracy of the costs compiled during the period is demonstrated. STANDARDIZATION OF POWER PLANT OPERATING COSTS * The cost of manufacture of power or any other commodity is the chief criterion upon which the market price, range of use, legislation, future developments, social welfare, etc., are depending. Few if any of these questions can be intelligently answered from the knowledge of actual costs, * Abstract of a paper by Walter N. Polakov, presented at the Meeting of the New York local section of The American Society of Mechanical Engineers, January 11, 1910. owing to the effect of an unknown factor — degree of per- fection of the actual performance. A cost report should tell : a What the power costs. 6 What it should cost. c Where the loss has occurred. d Why the loss has occurred. These questions answered, elimination of waste is a com- paratively simple engineering problem. Estimates of probable future expenses are usually based either on past performances modified by expectations, or on data obtained from actual performance of another plant considered as similar. The accuracy of such estimates de- pends at least on the following conditions: a How reliable were the cost records used. 6 How near the possibilities were realized. c How close is the similarity of the equipment of plants under consideration. d What effect the location has. c What effect the nature of load has. / What effect the labor market produces. g How completely the future factors were foreseen. Since there is, however, no assurance that in the sample plant the operating methods are perfect, neither is it reason- able to expect that another plant is in every respect identical to the sample plant. Table 1 presents examples of a typical effort to make use of cost data comparing monthly cost reports of seven central stations. Their equipments are widely different; no two of them use the same grade of coal; the arrangement of machinery requires in some cases double the number of attendants. There are differences in characteristic of current, distribution of load and peaks during the day, etc. Under such circumstances we cannot say from these data that one is operating more efficiently than another. Even if all factors are fully accounted for, the fact that two plants are equally economical does not tell how far each of them is from the possible degree of perfection. Proper tabulation and distribution of costs is of less importance than a satisfactory method of analyzing the data collected. CLASSIFICATION OF EXPENSES All expenses incurred in the course of power production fall under analysis into two main groups: a Constant (within a certain range) for any output. 6 Variable in some direct proportion with the output. Expenses that are independent of volume of output are at the same time independent of each other and do not characterize the efficiency of processes performed in the power plant. Their effect on unit cost is represented by a parabolic curve decreasing with the increase of output. They are exemplified by interest on investment, depreci- ation, sinking fund, insurances, management, pay roll (in some cases), taxes, etc. Expenses that vary with the output of the plant charac- terize, other conditions being constant, the efficiency of operation, and their elements stand together in dependent COSTS IN A POWER PLANT 209 Comparative Cost of Operation and Maintenance of Power Plants— June, 1915 A B C D E F G Cents Cents Cents Cents ( Ynt^ Cents Cents ] > ll;il -, per. Dollars, per Dollars, per Dollars, per Dollars, per Dollars, per Dollars, per Total kw- Total kw- Total kw- Total kw- Total kw- Total kw- Total kw- hr. hr. hr. hr. hr. hr. hr. 2,233 036 1,639 .056 2.686 .025 4,967 0195 3,076 0318 3,283 0855 1,133 .052 u 1,116 .018 679 .024 1,682 .016 3,156 0124 1,471 0153 1,472 0383 756 .035 — 1,080 .018 522 .018 536 .005 982 .0039 1,105 .0114 264 0120 144 .007 - Superv. — Janitors and Watchmen 563 .009 531 018 601 .006 1,230 .0049 460 0048 1,061 0276 149 .007 Total Operating Labor 4,993 .081 3,374 .116 5,506 .052 10,336 .0407 6,113 0633 6,281 .1634 2,184 101 Coal 20,535 .335 7,338 .252 29,945 .285 73,803 .2908 35,260 .3648 11,820 3075 8,587 .395 < 675 .011 59 .002 16,18 .015 475 .0019 1,353 .0141 789 0205 30 .002 a - 84 .002 61 .002 44 001 226 0009 270 .0028 135 0035 68 .003 O - Miscellaneous Material 194 .003 157 .005 27 .000 2,043 0080 35 .0004 555 .0145 149 .007 S Miscellaneous Charges 20 .000 Cr. 1 .000 757 .007 129 .006 Total Operating Material 21,510 .351 7,614 .261 32,394 .308 76,549 .3016 36,920 .3821 13,300 .3460 8,966 413 Total Operation 26,503 .432 10,989 .377 37,901 .360 86,886 .3423 43,034 .4454 19,582 .5094 11,150 .514 40 001 129 .004 190 .002 1,312 .0052 140 .0015 77 0020 2 .000 291 .005 319 Oil 703 .007 641 0025 751 0078 279 0073 139 .006 Boiler Room Auxiliary Apparatus 173 .003 268 .009 594 .005 520 0020 280 .0029 66 .0017 31 002 t- Turbines 1,055 017 27 .001 328 .003 55 .0002 361 .0037 286 0075 1 .000 X Auxiliary Apparatus 142 .002 21 .001 561 .005 322 0013 176 .0018 334 0087 6 .000 J Electrical Apparatus 9 .000 1 .000 399 .004 119 0005 353 .0037 85 0022 1 000 85 001 54 .002 389 .004 433 0017 119 .0012 131 0034 136 .006 a •< Miscellaneous 49 001 55 .002 132 .001 55 0002 396 .0041 1 0001 23 .002 — Total Maintenance Labor 1,847 030 876 030 3,299 .031 3,460 0136 2,580 .0267 1,263 .0329 343 .016 Building 212 .004 99 004 799 .008 3,490 .0137 2 0000 29 0008 15 .001 Z Boilers 295 .005 66 .003 895 .008 1,389 0055 702 .0072 169 .0044 457 .021 < s Boiler Room Auxiliary Apparatus 50 .001 40 .001 836 .008 529 0021 88 .0009 73 .0019 36 .002 ad Turbines 78 .ooi .000 739 .007 27 0001 18 .0002 78 0020 5 .000 2 Auxiliary Apparatus 41 .001 8 .000 1,344 .013 68 0002 143 0015 1,300 0338 28 .001 Electrical Apparatus 14 .000 .000 138 .001 766 0031 137 0014 162 .0042 Piping 20 .000 7 .000 220 .002 574 0023 81 .0008 200 .0052 149 .007 Miscellaneous 8 .000 2 .000 127 .001 82 0003 209 .0022 60 .003 Total Maintenance Material 720 .012 226 .008 5,100 .048 6,927 .0273 1,383 .0143 2,013 .0523 752 .035 Total Maintenance 2,568 .042 1,102 .038 8,399 .079 10,387 .0409 3,963 .0410 3,276 0852 1,095 .051 Total Labor 6,841 .III 4,250 .146 8,805 .084 13.797 .0543 6,693 .0900 7,545 .1963 2,527 117 Total Material 22,230 .363 7,841 .269 37,495 .356 83,476 .3289 38,303 .3964 15,314 .3983 9,718 .445 Total Labor and Material Power Station Proper 29,072 .474 12,091 .415 46,300 .440 97,273 .3832 46,997 4864 22,859 .5946 12,246 .562 Other Items Charged to Power Sta- tion Accounts 676 .011 676 .023 294 .003 2,024 .0080 966 .0252 255 .013 (m Total 29,748 .485 12,768 .438 46,595 .443 99,298 .3912 46,997 .4864 23,826 .6198 12,502 .575 ■< s Net Output in kw-hrs. (thousands) 6,133 2,915 10,509 25,286 9,664 3,844 2,171 Total Power Generated (thous.) 6,211 2,941 10,625 25,385 9,781 4,043 2,171 ai Lb. Coal per kw-hr. 2.68 2.72 2.18 2.062 2.682 3.78 3.40 Cost of Coal per 2000 lb., Dollars 2.50 1.85 2.613 2.803 2.72 1.61 2.33 Load Factor — Machine, Per Cent 59.6 74.5 64.56 73. 17 86.6 49.0 64.0 Load Factor — 15 Min. Max., Per Cent 45.3 23 8 36 37 90.44 58 1 35.0 112.0 B.t.u. per net kw-hr. Output 38,289 33,513 30.716 29,561 38,046 43,627 49,300 Form Pol. 1. Cost of Operation and Maintenance of Power Plants 210 BOOKKEEPING AND COST ACCOUNTING sequence. If represented graphically, they show very ir- regular shaped curves peculiar to each set of equipment. Unit cost has a tendency to drop with increased output, as the efficiency of boilers, turbines, etc., tends to improve with increased load; yet as with higher degrees of overload the efficiency decreases, the unit cost rises. With further increase of load when an additional unit is started, the effi- ciency again begins to improve until their cumulative effi- cient capacity is exceeded, when the unit cost commences to increase again. Such waves are sometimes very pronounced and generally, throughout the range of the plant's capacity, the number of waves on the unit cost curve is equal to the number of generating units installed. The criterion of economy is formulated by the interplay of three factors, time, product and cost. When only one factor varies, its effect on economy can easily be foreseen. Thus greater product, without change of time required or cost, increases the economy. Increase of either time of production or cost of production reduces the economy. To determine the economic limit reached by continuous increase or decrease of influential elements is by no means an easy problem, but unless it is solved we are in the dark not only as to ichat economy can be obtained, but also what changes in conditions and methods are essential. STANDARD COSTS It is relatively unimportant whether the maximum limit of economy is determined empirically by rigorous obser- vations, tests and analyses of all influential elements, or calculated from the principal data already available. It is imperative that such study be made and the economy limit established, as this is the only criterion for judging the actual performance. Unless standard costs are established there is no measure of existing losses or exact knowledge how to elim- inate tliem. In the determination of standard operating cost, such factors as inherent efficiency of equipment, its efficiency under different loads, prices of fuel and supplies, necessary and sufficient number of attendants and their compensation, etc., are taken into consideration for a given plant. Any deviation observed between the actual operating cost and this standard cost indicates that some of the necessary conditions were not lived up to and, if standardization has been carried out in sufficient detail, it leads directly to the allocation of the loss to operating methods. On the other hand, any change in the basic data used in determination of the standard cost being known, adjustment of the stand- ard cost can easily be made before the blame is put at the door of the operators. The efficiency of the thermo dynamic process should be made a subject of a thorough inves- tigation to ascertain first the maximum efficiency limit of each partial process, and then the result of their interplay. When this is accomplished, the entire process will be re- studied for the purpose of standardizing methods and ad- justing for such a balance of efficiencies of partial processes as will secure the maximum profit or economy from the expenditure of time, energy and money involved. It is sometimes found that the most economical thermal effi- ciency is somewhat below the maximum obtainable, as the slight additional gain in efficiency necessary to reach the maximum is not warranted by the expenditure required for its attainment. When these limiting conditions are studied and determined, a method can then be defined for each member of the working force, prescribing his duties and the conditions he must maintain to secure the most profitable degree of efficiency. Upon the conclusion of these studies, the best efficiency of each unit and their combination being known for any load, the standard cost for any output in a given time unit can be conveniently represented in graphical form. The principles of determining the standard cost of main- tenance and upkeep of the plant and equipment are sub- stantially the same; the method of study, however, is some- what different. It involves a study of design and construction of all elements of equipment ; minute records of their service and cost of maintenance may lead to a modification of design, use of cheaper renewable parts, etc. Next, the stand- ardization of supplies, beginning in the laboratory and followed by actual service tests, helps to determine not alone the purchase price, but the lowest service cost. Finally, time studies embracing schedules for inspection, routes for maintenance men, standardization of tools, motions, methods, etc., conclude the investigation. The criterion is, of course, not the wages of the employee, but freedom from accidents, breakdowns and the lowest attainable cost of upkeep per unit of the plant's output. CURVES OF STANDABD COSTS Upon conclusion of this double analysis of the maximum economy obtainable, the graphs of standard cost of power production may be drawn. Curves may be conveniently arranged in the coordinates of cost aDd product per unit of time. Figs. 1 and 2 represent curves of standard operating costs. It is evident that any number of curves may be plotted following the above method, each curve representing an itemized standard cost according to the adopted classifi- cation. Fig. 1 is thus prepared for a medium size public utility central station. Fig. 2 illustrates a few characteristic curves of standard cost per kilowatt-hour for various rates of output of a large central station feeding the lines of an electrified trunk rail- road. USE OF STANDARD COST CURVES The entire cost record visualized by graphical represen- tations of the items of account is found very convenient. An example of such a graph is seen in Fig. 3, wherein the actual unit cost and the standard unit cost are plotted to the same scale, the deviation of one from the other suggesting at a glance the degree of perfection of the performance. The total expense curve and the cumulative expense curve may be shown on the same graph to a suitable scale; the latter curve is found serviceable for comparing these items COSTS IN A POWER PLANT 211 0.0070 a o. of 0. O.OOOf. a 4 \% - \V- z lM\JS B AW :: v]> * s « w ^ 3 n\ ^ \ - t — ^ Total Cost of One Kw.- ir Except *-.s t . Lnb >r and Supervision 1 -- V *^1! 'V »«u ; iJuuricante luil Supplies ■o« »7 ^^ | |_ WrKwi-hr. '/i - s s Kilowatt-hours i«r Day Fig. 1. — Curves Showing Variation in Standard Costs of Operation in a Public Utility Central Station. 1 \ \ -0.8- \ S ja ^Afi O \ _0.o 1 \ \ \ ~^i I'i ..1 Sg 1 ji W O .,1 A 3. s *-h hi, in| O 1 ' \ \ 8. ( (r v ~>. I, I r 1 -, - B - lili r I loo i'i-L.i Plant 1 Exp me 'S _ — 48 96 141 192 240 288 336 3(41 432 480 528 576 624 682 •^-Production-Thousands of Kw-hr. per Day Fig. 2. — Curves Showing Variation op Standard Costs of Power Production at an Electrified Railway Central Plant. .0.06 1 t 0.05 ^0.01 |o.03 s J^ <* E 30,000 a "o 25,000 ^ t£ * ft , s!s p r 15,000 | s "7.D # 1.0 0.9 0.8 .0.7 ^0.6 "0 5 900,000 % 700,000 2 <^ >_ 1 "5 1 b ao * 14 Other Miscellaneous Expense 1 ¥ SO .o / H- n ^5"0 15 13 ■3 16 s ■ 17 _J_ V 3 l? 30 18 J^ria/- otesyUAaJl (S^ulm&e/ / 3 7 :.- » 19 Total Selling Expense. 1 (, / 7 ■g *20 Total Stock Handling and Shipping • - ? - H • s 21 Total General Expense 2 - V ' ■' 22 Total Department Cost without Generil Expense / 3 & S ■■'.- £ 7 2 '■/ 5 •+ :: // ? ? c ! 77 23 Distribution of Ceneral Expense i t ^ r\ *t oi- (Pro-rated oo basla of Department COST ) .//- Wages of K.-y board "pontors oo Misn.-llaneou = Total Waces of KejUoarii "iieruivrs iv-Iubivi of Time Outside of Keyboard Dcpt. Tutal \\s;cr if ErybuoiJ iterators utlueive of Time Outside of Keyboard Dcpt. Total Em* Bet Machine Depreciation ttn t -, i'.. ; i I', r 1 -■ L.mu Maintenance Ems Per Htur on Cou.p<.sition Power Minutes for Correction Per 1000 Ems Light and Heat Total Correction Cost Per 1000 Eiub Kent (Floor Spcce) MACHINE ACCOUNT MAINTENANCE Interest Net Value Keyboard Plant as oh own In Last H.unth's Keport Monotype li-.VLiii'i- Ni'>. K,ij Ih.»u i l'n|" r Misc. Insurance Lbs. Cost Part Monotype Invoke No. Additions Taxes Pi oof Reading Ems at Cts. Per 1000 Proportion of Composing Room Lxpenee Proportion of General Expense A Total Keyboard Lipensc \\ ithout Corjeutlons [> Total Hours on Composite u Cost per Productive Hcur Without CorrectioLs A-VB a Total Keyboard Expense Vt Ithuut Curreotiuns TUal Correcting Cost Totals f Total Keyboard Expense Including Correction; "Ill *, Total of above Expenses Q Total Hours on Composition Date Misc. Expenses* Cost per Productive Il.>ui Including l'orrt,.iii>i : CH-B p\ "irtal Ems Composed Net Value Coat per 101X1 Etna Uncorrected A-fD Amount to le Charged for Dcpreotatioii this Month Cost per 1000 Emfl Corrected C-rD Net Value to be Carried t« Neil Mouth's !.., Total Maintenance KEYBOARD SUMMARY: MACHINE NOS. MONTH OF 191 OPERATOR KEYBOARD NO. Day of Montb OPERATOR KEYBOARD NO. Time Summary for Each Day Total Gross Total W ages Time in Minutes Total Correction Cost Time Summary fur Each Day Total Gross Ems Total Operator's Wages Correction Time fn Minutes Total Correction Cost | sttion Changes Misc. Time Off Keyboard Total Ccmpo- Changes I Time Off Misc. _ . | Keyboard (S/ lines t one for each day) 1 1 1 J 1 i s 1 Totals Per Cent of Total Grots Ems Per Hour on Composition Minutes for Corrections l'.r Ihi.l) K mB l'.r Cent of Total Hours Gross Ems Per Hour on Composition Minutes Tor Corrections Per 10U) Ems Total Non- Productive Changes * Mlaa. (Size of blank it x *V Percentage Non-ProductiTS Hours to Total Time of Keyboard in. including margi Wages Par lOuO Ems i for loose leaf i Correction Cost Per iooo Ems inder) Total Non- productive Hours = Changes + Mlao. Percentage Non -Product! vo Hours to Total Time of Keyboard Per 1000 Ems Correction Cost Per 1U00 Ems Form LM1. Efficiency Records for Keyboards number), Time Commenced, Time Left off, Hours charge- able and non-chargeable. Form 3MC. Machine Compositor's Daily Time Ticket. Form 3P. Pressroom Daily Time Ticket, with names of pressman and feeder and number of impressions. Form 3B. Bindery Time Ticket. Form 4. Department Pay Roll. Contains names of work- men, columns for hours chargeable and non-chargeable for six working days, total hours (C. and N. C.) rate, amount, and cost of non-chargeable hours. At the bottom there are figures of total department pay roll, total chargeable hours, average pay roll, cost per chargeable hour, and ratio of non-chargeable to total pay roll. Form 5. Monthly Record of Department Chargeable and Non-chargeable hours, with lines for each day in t he month, and columns and figures for hours (C. and N. C.) for Hand and Machine Composition, Cutter, Folder and Bindery C, Bindery D. Form 9H. Statement of cost of production for month. This form is here reproduced (with columns for Small Cylinder, Cylinder Press, Cutting, Machine Folding, Bindery C and Bindery D omitted). There are two criticisms that may be made of this state- ment of cost of production. The first is that Selling Expense is added into General Expense and distributed or pro-rated on the basis of department cost. There is no necessary re- COSTS IN A PRINTING SHOP 221 lation between the costs of the work done in two depart- ments, say hand composition and linotype, and the cost of selling the product of these departments. If each depart- ment produced $1000 worth of work in a month the cost of selling the work of one might be $20 and that of the other S200. The second is that it takes no account of the loss due to idleness of a department through failure to get orders for it. Suppose that there was no work and no pay roll for the linotype, its departmental expense ($292.30— $201.86 = $90.44) and its share of the general expense ($143.43) would have to be distributed to the productive hours of the other departments, unduly increasing the apparent cost of the productive hour or net cost per chargeable hour in each of the departments. If a linotype failed to get any work in a given month there is no reason why the loss incurred thereby should go to increase either the cost or the selling price of hand composition or press work or binding. The loss should appear in the accounts as "unearned burden," and if that account had a debit balance at the end of the year it should be charged to Profit and Loss. The errors in cost estimates due to these two depar- tures from the principles of the best accounting systems are, however, probably not serious in any well-managed printing establishment, and it may not be worth while to keep an unearned burden account in order to avoid them. Monotype Cost Records. The Lanston Monotype Machine Co., Philadelphia, issues a pamphlet entitled " Monotype Cost and Efficiency Records " with sample blank forms. Profit and Loss Statement for Month of 191 Classified Items See reverse side for explanations Totals Labor Departments Office and Shipping Dept. Paper Stock Ratio of Total Hand Com- position and Mono- types Linotypes Cylinders and , % Stockroom Job Department Bindery not charge- able to Expense Com- position Platens and % Stockroom otherwise unprovided for The classified items printed in the column with this heading are as follows: Advertising Allowance Bond Interest Cartage (Includes Motor Truck) Commissions Depreciation Discounts on Sales Expense Ink t / Fire Insurance \ T . ,.,., I Liability Interest and Note Discounts Legal Expenses Light Maintenance — Electrical Work Oil Power Pay Roll Total— $ Labor Departments Maintenance Office Salesmen (if on salary basis) Shipping Department Stock Handling Electric Gas Rent Repairs Rollers Salary — O fficera Spoiled Work Stationery Taxes Telephone Type Washes Uncollectible Accounts Water Supply Wire and Bindery Supplies Wrapping Paper and Twine Office Column Total Same Pro-rated (Per Total Ex- pense) Totals, Including Overhead Merchandise Purchases Electros and Engravings Metal Outside Labor Paper Stock Publication Bulk Postage, etc. Totals Grand Total Cost of Departments Inventory First of Month Inventory Last of Month Total Decrease (Add to Costs) Total Increase (Subtract from Costs) Net Increase — Decrease Total Net Costs (Everything to this point includes all expenditures) Income Metal Publication Postage, etc. Sales (other than classified above) Total Sales Discounts on Purchases Depreciation Reserve Interest Total Income n -o cA /Deduct Total Net\ Gross Profit / _, , _ , \ « T M Costs from Total 1 Gross Loss IV. / \ Income Net Profit Equivalent to % of Net Sales % on Net Costs Departmental Ratio to Net Costs Comparative Statement Addendum Profit Profit Month of Net Sales Total Income Total Expense Net Profit Percentage of Net Sales Percentage on Net Costs 191 191 Increase Decrease Summary From 191 To 191 From 191 To 191 Increase Decrease Form LM3. Profit and Loss Statement 222 BOOKKEEPING AND COST ACCOUNTING The object of this system is to furnish the necessary blanks (5) to enable the Monotype user, First, to determine the Productive Hour Cost of both keyboarding and casting in accordance with any of the standard cost system methods; Second, to increase production by furnishing data as to the efficiency of both the keyboarding and the casting departments; that is, (a) the efficiency of individual operators (their output per hour and its cost, including cost of corrections) and (b) the cause of non- productive time (lack of work or delays in operating). The system is a compilation of the best features of a number of sys- tems in actual use. A statement is made of seven principles upon which the system is based. The first two are of especial interest to cost accountants. First. The object of a cost system is to show the manager what work costs in his shop under any given conditions. A cost system that gives only total costs, without any explanation of excessive costs, serves much the same purpose as the lock on the front door; it keeps work out of the office. Second. While the first object of a cost system is to furnish information as to prices to charge for work, it is almost as im- portant that it point the way to increasing efficiency and reducing production costs so that work may be sold at greater profit. Forms LM1, LM2 show the printing on the blanks used for efficiency records of keyboards and casting machines (reduced in size). Profit and Loss Statement All expenses that can be positively identified with a depart- ment should be charged to that department and all others charged to Office, to be finally pro-rated over each department. For instance: Compositors' tickets printed for the Composing Room should be charged as "stationery" expense against that department, but order tickets, although used by all the depart- ments, should be charged to Office. The most equitable pro-rata distribution to the other depart- ments of the Office and Shipping Department expense is on the ratio that each individual department (pay roll included) bears to the total expense. EFFICIENCY RECORD AND COST ACCOUNT FOR ALL CASTING MACHINES: MONTH OF 191 Day of Month Time Summary for Each Day Total Eras Total Lbs. Type Wages COST SUMMARY Changes Delaja Waiting Tjpe TUnkin; Operator Runners 1 Wages Composition 1 (3/ l in "3, '< />'•!• inch) 2 Delaj ^ 3 4 Waiting 5 Type Mi-Unf 6 Total Wages 7 8 Machine Depreciation (See Over) 9 Metal ■* ( ■■ " ) 10 Maintenance 1 12 Power 1 13 Gas 14 Water 15 . Light and Heat 16 17 Rent (Floor Space) 18 Interest 19 Insurance 20 21 Taxes 22 23 25 Proportion Comp. Room Expense 1 26 " General 27 Total ■ ' .i s t i n ■ ■ Room Expense 28 Credit by lbs. of type made in hours at cents per hotir 29 30 31 Total Productive Hours Percentage 1 of Total Hours [ Net Ems pel Composition Lba. Tjpc per Hour Total Wages Cost per Productive Hour Total Ems Composed duotive Changes t WftHii r Delaja Nod- Prod Hours to Total Hoi in Composi- tion per 1000 Ems per Lb. Sorts Cost per 1000 Ems Size M x S H including margin Form LM2. Efficiency Record of Casting Machines CASTING MACHINES NOS. MONTH OF 191 MACHINE ACCOUNT METAL ACCOUNT MAINTENANCE Net Value Casting Machine Plant as Shown in Last Month's Report. Net Value Metal on Hand as Shown in Last Month's Report. Monotype Invoice No. Caster Parts Mold Repairs Matrix Replace- ments Misc. Monotype Invoice No. Additions Items Date Poundf Purchased From Cost (13 lines) I {fl lints) 1 1 " Deduct Discarded Material at Depreciated Value (5 lines) Dadnct Amount Rnhad ttatal DruU Sold Totals 1 Total of Above Expenses Date Misc. Expenses Net Value Net Value [10 lines) Amount to be Charged I'm Amount to be Charged for Depreciation This Montb Net Value 1o be Carried to Nest Month's Report Net Value to be Carried to Next Month's Report Total Maintenance Reverse of Form LM2 COSTS IN A PRINTING SHOP 223 In this statement, labor is divided into six classifications, viz.: Hand Composition (including all processes done by "hand"), Linotype Composition, Cylinder Presswork, Job Composition (department for "job" work as distinguished from publications, etc.), Platen Presswork, and Binding. In our plant, the Mono- type machines are used so extensively for making type for hand use, that while separate records are kept, the cost is included in Hand Composition. See Form LM3, page 221. Titles and Definitions op Accounts Advertising. All items of publicity promoting expense that can be so classified, viz.; Advertising in trade journals, news- papers, etc. Allowances such as shortage or overcharge are charged to the department at fault, otherwise to Office. Bond Interest. Interest on bonded indebtedness, pro-rated to departments according to value of departmental invest- ment. Cartage and Express. Charged to departments incurring it, otherwise to Office and Shipping. Commissions. Money expended for obtaining business. Pro-rated to the departments on the basis of the departmental proportion of the salesmen's monthly total sales. Depreciation. Fixed percentage or proportion is included in the costs of every department each month, and deducted from the value of the Machinery' and Fixtures account. Discount on Sales. Pro-rated to departments on basis of their proportion of the total sales on which discounts were granted. Expense. Charged as much as possible direct to depart- ments. Items which cannot be included under Repairs or other classifications. Ink. Total amount purchased for each department, adding to, or deducting therefrom, the difference between the value of the ink inventory at the beginning and at the close of the month. Insurance — Fire. One-twelfth the year's expense and pro-rated as per investment. Insurance — Liability. Includes Workmen's Compensation and Public Liability. — Pro-rated on basis of monthly pay roll at the premium rate. Interest ind Note Discounts. Interest or discount on notes given or discount on notes received. Not for interest on invest- ment, which is purposely not included. Legal Expense. Charges for collecting accounts and other legal services. Light. Charged to departments according to use, on the basis of meter readings. Maintenance — Electrical Work. New work that makes a real and tangible asset is considered a Machinery and Fixtures account item. Most electrical work is not an asset and, there- fore, considered an expense to be charged to the department incurring it. Oil. Charged to departments according to use. Pay Roll. The pay roll sheets are arranged so that each depart- ment shows not only its productive labor, but such non-productive labor as foreman, distribution, boys employed in the department, even floor sweeps or porters for that department. The gross amount of pay roll is classified and labor not wholly chargeable to one department, such as proofreading, is divided and charged to departments in proportion to service rendered. Office and Shipping, although individually itemized, are finally pro-rated to the other departments. Power. Charged to departments according to use on the basis of meter readings. Gas used for Linotypes and Monotypes is charged to them as power expense and not as light. Rent. Charged to departments on the proportion of space occupied by them. Repairs. Charged to departments incurring them. When actual costs for a month are unusually low, a reserve is established for future additional cost. Rollers. Charged to departments according to use. When actual costs for a month are unusually low, a reserve is estab- lished for future additional cost. Salary — Officers. For officers of the company; not included, in the Office Force pay roll. Spoiled Work. — Billed at cost and charged to the department incurring it, or to the Office, if the Office is at fault. Includes also those allowances which have to be made because of spoiled or inferior work. Stationery. Distributed to the departments incurring the expense. Taxes— City Personal. The estimated total for the year pro rated monthly and apportioned as per investment. Federal Income Tax pro-rated to the departments on the basis of their monthly earnings. Telephone. — Charged to Office. Type Washes. Charged to departments using them. Per- centages of use are established and the cost divided accordingly. Uncollectible Accounts. Reserve for bad debts established and charged to Office. Water Supply. Monthly proportion of yearly cost pro-rated to departments on the basis of number of faucets in each depart- ment. Wire and Bindery Supplies. Includes also such purchase: - silk, cloth, paste, glue, etc., adding to, or deducting therefrom, the difference between the inventory value of these items at the beginning and at the close of the month. Wrapping Paper and Twine. This is part of the Shipping expense, adding to, or deducting from the total purchases for the month, the difference between the inventory value of these items at the beginning and at the close of the month. In cases where wrapping paper and twine is billed to a par- ticular department, the cost thereof is charged to that depart- ment. The blank lines following may be used for other accounts desired. Office and Shipping Department Total. Pro-rated to the other departments as per ratio of total expense, including pay roll. Totals Including Overhead. By using the chargeable hours in any department as the enumerator, these totals will give cost per hour (exclusive of interest on investment, which is purposely not included). To obtain the true costs per hour, it is absolutely necessary to keep accurate records of the chargeable hours in each department for the month. All the accounts classified above are such as are incurred directly in connection with manufacturing, in distinction from such as electros and engravings, and paper stock, which are not labor items, and labor purchased outside, which cannot properly be interjected in hour costs. Merchandise Pchchases Electros and Engravings. Total cost of all electrotyping, engravings, original designs, etc. Included in the Composing Room costs because that department is credited with the value of the sales thereof. Metal. Total amount billed each month and credited to the Metal account through Sales Book. Separate and distinct from metal purchased for increasing the supply. Outside Labor. Total cost of manufacturing done outside, because of lack of special facilities required, or necessitated by overtaxing capacity. Charged to departments that otherwise could have done the work, as these departments receive due credit through the Sales Book. Paper Stock. Total purchases for "print" paper, excluding wrapping, tympan, slip-sheets, make-ready, proof paper, etc., which items are charged to the departments using them. Publication Bulk Postage. Value of Bulk Postage, prepaid stamps, expressage and freight that is chargeable to customers. Must not be confused with Cartage. Inventory. At the end of each month, an inventory of work in process is taken from the Office record tickets and figured at 224 BOOKKEEPING AND COST ACCOUNTING -actual -average costs. To their respective departments is added the inventory value of electros and engravings, papeT -stock, sup- plies, etc., on hand, and the difference between the total inven- tory at the end of the month and that at the beginning of the month in each department, added to or subtracted from the Grand Total Cost of Departments, produces the Net Costs. Income means sales and any other money or accounts received not properly included therein. The term "Sales" covers almost everything sold, even waste paper and paper stock cases, which are billed to the purchasers. Does not include proceeds of old or •discarded machinery sold. Discount on Purchases. Received for cash payments and pro- rated to departments on basis of their total purchases. Does not include so-called "trade discounts." Depreciation Reserve Interest. Interest accrued monthly on Depreciation Reserve on deposit in bank and pro-rated to departments on same basis as the charge for Depreciation. The bla:ik lines which follow may be used for Bank Balance Interest. Received quarterly or semi-annually from Bank for interest on daily balances. Pro-rated in proportion to individual departmental profits for those particular periods. Bills Receivable Interest. Received on promissory notes and pro-rated to departments on the basis of their proportion of the total sales for which the notes were received. The Net Costs deducted from the Total Income will produce the Net Profit or Loss, both in gross, and detailed by depart- ments. Federal Printing Co. (with which is consolidated the Green- wich Printing Co.), New York. This is a large establishment making a specialty of printing, binding, and mailing weekly and monthly technical and trade journals. It has a recording cost system similar to that of the United Typothetse. The blank forms for reporting the time spent by the workmen on the several jobs have been designed with great care so as to furnish the desired information with a minimum of clerical labor. Reproductions of the principal forms (greatly reduced in size), together with some notes concerning some of them, are given in the following pages. Made by Checked by Salesman {Size of Sheet SJj x II a in.) FEDERAL PRINTING COMPANY ESTIMATE Previous Yes_ No Date For Address Description^ _L91 X-K SPECIFICATIONS- Give Details Consisting of Trimmed Size Inside ■ • •• Cover . Inside Printed in . Pages and X No Cover Cover -Flush -Ext. Oblong Upright Exten. Flush 1st & 1th Cover Printed in_ 2d & 3d _ Bound Delivery to be made _ COMPOSITION Inside — Type Page- .Pp. Ems to Page Mono. Lino. Picas " Inches . Per Page _ Hours Time Work ©_ Imposition^ [Three more columns for totals etc.) Foundry— EXTRAS Cover Lock-up EXTRAS From Pages Page Forms- Pages Size . Unblocked Blocked X . Per Pp. . % Mis. ENGRAVINGS Quantity HALF - TONE- Size LINE - X -DRAWINGS In. 8 . STOCK - INSIDE Ours Supplied Reams | Sheets Size — Weight STOCK. - COV£.t # Mis. " Ours Supplied Cutting INSIDE— PRESSWORK. ■ CYLINDERS Copy- Holding Miscellaneous For Work Unclassified For Office Use - > 1 - > < a 01 > - < (S Ch'ge able Non- Ch'ge- able Co pr • unmsfur Order •cede these colut .ces for time clo. ins fcs and Customer or Publication , and they are followed by tauipsi Form F5. Proof Room Ticket Form P5 and P7 are the same size as Form P6. Under Working Time the hour and minute figures are printed, from 8 a.m. to 5.30 p.m. on the Day Ticket, and from 5.30 p.m. to 2 a.m. on the Day Overtime Ticket. Size of Ticket IQ\ x 9% in.) COMPOSITION TICKET Name 0WU X In tb« column tbat «bu-8 tbo kit dof work 1 'in' mi 1 draw a im.- thwusu time term tl.r page t o Correc- Altera- • lor Office Size tions 5 » a. r 3 -3 - ^ Fur Reglaloi or M T3 c -r M U J Corrections on fron, NuB- Adv. lion Z c • s = = r z SojobL, Handling Cb're- Chf* X -1 - sp j 2.J Cute, Etc. KtLb 8.00 " 1 8.12 0.2 8.18 0.3 2 8.24 0.1 8.30 O.S T a J) o 8.36 0.6 . a-5- 1 3 3 i 3 1 8.42 8.18 0.7 0.8 », -'.- SK = I I Jf : ~ J 8.:">l 9.00 0.9 1.0 - a « ■y -, -^ 4 B.UU I.I 1 ft 2 9 1 f J 9.12 9.18 9.21 1.2 1.3 1.4 s5^ 6Sg i i 3 § I 3 3 S.30 9.3C 9.42 1.5 1.6 1 7 ^ .■; S, B ■fi •S ■n 9.48 1.8 *- | J S 2 3 1 § 9.61 10.00 1.9 2.0 ~ 3 • " | 1 U 10.00 10.12 10.18 10.24 2.1 2.2 2.3 2.4 o 10.30 2.5 * 10.30 2.6 10.42 2.7 10.48 2.8 10.54 2.9 11.00 3.0 11.06 3.1 11.12 3.2 11.18 3.3 11.24 3.4 11.30 3.5 11.36 3.6 11.42 3.7 11.48 3.8 11.51 3.9 12.00 4.0 (and 30 oh, until S.JO or y.- ttr$.) If you have taken up a partly set adv. or have one unfinished at close of day, or have someone helping you. state the frac- tion you set, which with the other fraction makes the whole Totals 1 Gross adv. Thus, "Size of adv. *4 page" "Propoportion you set, .'6 P*Se" This leaves the remaining % to be reported elsewhere. Working j 8.00 A.M. 12.15 P.M. ~ . v Use Overtime Ticket Hours ( 1.00 P.M. 5.30 P.M. UA ^ for all Overtime Please read and observe instructions on reverse side (A similar ticket, but printed in red, is used for overtime, the times running from ff.50 P.M. to 2 A.M. or S.S hrs.) Form F6. Composition Ticket LINOTYPE No. Daily Record. Name Hours Use an X Id tbe column that shows tbe tiad of work done and draw a line through time ooroBL, the page If aorreotlng some- For Office a S Cor. onBolau'a original oom posit ion, Alt. OP a = Picas Wide Total Ems Ch'ge Non- O indicate wti ■ . t > able Ch'ge able 8.00 P 3 8.0(1 0.1 § 8.12 0.2 s n S.1S 0.3 S 9 S.2I 111 5*8-2 1 „ 8.30 0.5 •s 8.36 0.6 - A, s 8.12 0.7 #«-= t. a 8.48 0.8 ►i ■§ 8.54 0.9 B&& u a 9.00 1.0 i 9 9.00 1.1 '.-.- £• 9.12 1.2 £ 5 9.18 1.3 a 3 9.24 1.4 w s 9.30 1.5 & 9.36 1,6 s 9.42 1.7 o 9.18 9.54 10.00 10.06 10.12 10.18 1.8 1.9 2.0 2.1 2.2 2.3 For Office Usa 1^ Totals Text Totals Border Gross Form 17. Linotype Daily Record 228 BOOKKEEPING AND COST ACCOUNTING iSize «>i x »« ii '' CYLINC Dlock No ER PRESS TICKET Press No. Use X for Auto Date HI natic and for Make-Ready and Running: Draw a line through the Order No. A U T O Customer or Publication Folios of Form and No. pp. Color Ink and Quantity M R Y R I N Miscellaneous Smash, Camp, on (Headings Continued) time across ihe page (up to"For Office Use"coIurnn) in taking up each new order. H Counter at Start Counter at Finish Net Run For Office Use Ch'ge- able Non. Chee- ablc Laid Off 5.30 5.36 6.42 5.18 5.51 6.10 6.06 0.1 0.2 0.3 0.1 0.5 0.6 Form FS. Cylinder Press Ticket This ticket is for day overtime, first shift, 9.5 hours from 5.30 p.m. to 3 a.m. The reverse side of the ticket contains Instructions to Foreman and Pressmen, as follows (somewhat abridged) : Machines must be started at the ring of the starting gong, and shall not stop until the gong rings for stopping. Each press has its own ticket each working day, whether run- ning or not. For overtime or night work, only the presses that run use tickets. A pressman running two machines repeats his name and time on each ticket, and each ticket shows only the actual time of the feeder. If more than one feeder is employed, give names of each and their time. In starting work draw a line through the commencing time straight across the ticket up to, but not through the column " For Office Use." In changing from " make ready " to " run- ning," put an X in the column to indicate the operation and draw a line from and through the column straight across and up to column " For Office Use." In changing to a new order, draw a line clear across the ticket and up to column " For Office Use." If no help is employed on a machine write " Laid Off " in Miscellaneous column and indicate the length of time. Waiting for form is not to be charged to an order unless the foreman so instructs. When a form is lifted, say so and give the reason, and when reinstated start the counter where you left off and indicate that it is a " lifted form." Delays or interferences that seem to the foreman to be on account of customer are to be referred each day to the office, and if chargeable, the word " charge " is to be recorded, and such words used in its description as would be clear to the customer if so billed. If there is a smash, or cut pulls off, mark page num- ber and always pin a proof of the page to the ticket. Where extra help is required, such as slip-sheeters, state how many were employed and their time. Make out your ticket as completely and as concisely as you know how and upon completion of each individual operation. Be very careful that every entry be absolutely correct, and be as neat as you can. Do not wait until the end of Ihe day and have to trust to your memory. If you are in doubt as to the method of filling in this ticket, ask your foreman. A similar ticket, 85 Xl3 in. in a different color, is used for day overtime. The back of Form F9 contains instructions, some of which are given below, also a " Kind of Work " Index and a wage- calculating table which are here given in full. (See page 234.) This ticket is for payroll purposes, so that it is absolutely necessary that you fill in the headings carefully, giving date, your name and clock number. Do no work without getting an order number to charge to. Be careful, particularly if you are a pieceworker, to get the exact quantity you have produced, and be sure you have the right order number and name, the number that properly indicates the kind of work you have done, the correct rate per hundred, and the correct total charge. All your time tickets must be deposited at quitting time in the basket provided for that purpose. Should your ticket lie lost, report immediately to forewoman, otherwise you can not receive credit on the payroll for the work you have done. SCALE OF WAGES From I to 8 Hours — Basis 8 Hour Day H lurs Fractions Rate per Week 1 2 3 4 5 6 7 8 .02 .04 *4 4 00 .08 .16 .25 .33 .41 .50 .58 .66 06 4 50 09 .18 .28 .37 .46 .56 .65 .75 .02 .04 .07 5 00 10 .20 .31 .41 .52 .62 .72 .83 .02 .05 07 5.50 .11 .22 .34 .45 .57 68 .80 91 .02 .05 .08- 6.00 12 .25 .37 .50 .62 .75 .87 1 00 .03 06 .09 6.50 .13 .27 .40 .54 .67 .81 .94 1 08 .03 .06 .10 7.00 .14 .29 .43 .58 .72 .87 1.02 1. 16 .03 07 . 10 7.50 .15 .31 .46 .62 .78 93 1.09 1 25 .03 07 .11 8.00 .16 .33 .50 .66 .83 1.00 1. 16 1 33 .04 08 .12 8.50 .17 .35 .53 .70 .88 1.06 1.23 1.41 .04 06 .13 9.00 .18 .37 .56 .75 .93 1. 12 1 31 1 50 .04 09 .14 9.50 .19 .39 .59 .79 .98 1.18 1.38 1 58 .04 09 .14 10 00 .20 .41 .62 .83 1 04 1.25 1.45 1 66 .05 10 .15 10 50 .21 .43 .65 .87 1.09 1.31 1.53 1 75 .05 10 .16 11.00 .22 .45 .68 .91 1.14 1.37 1.60 1 83 .05 11 .17 11.50 .23 .47 .71 .95 1.19 1.43 1 67 1.9.1 .05 II .17 12 00 .25 .50 .75 1.00 1.25 1 50 1 75 2 00 .06 12 .18 12 50 .26 .52 .78 1.04 1.30 1 56 1.82 2.08 .06 .13 .19 13 00 .27 .54 .81 1.08 1.35 1 62 1 .89 2 16 .06 .13 .20> 13.50 .28 .56 .84 1.12 1.40 1 .68 1 96 2 25 .07 .14 .21 14.00 .29 .58 .87 1 . 16 1.45 1.75 2 04 2 33 .07 . 14 .21 14.50 .30 60 .90 1 .20 1.51 1 .81 2 II 2 41 .07 .15 .22 15.00 .31 .62 93 1 25 1.56 1 87 2.18 2.50 .07 .15 .23 15.50 .32 .64 .96 1.29 1 61 1.93 2.26 2.56 .08 16 .24 16.00 .33 .66 1.00 1.33 1 66 2.00 2.33 2 66 .08 .16 25 16.50 .34 .68 1 03 1 37 1 71 2 06 2.40 2 75 .08 .17 .25 17 00 .35 .70 1 .06 1.41 1.7/ 2 12 2 47 2 83 .08 .17 26 17.50 .36 .72 1 .09 1.45 1.82 2 IP 2.55 2 91 .09 .16 .27 18 00 .37 .75 1.12 1 .50 1.87 2.25 2.62 3 00 .09 .18 .28 18.50 .38 .77 1.15 1.54 1.92 2 31 2 69 3.08 .09 .19 .28 19 00 .39 .79 1.18 1.58 1 .97 2.37 2 77 3 16 .09 19 29 19 50 40 .81 1.21 1.62 2 03 2.43 2.84 3 25 .10 .20 30 20 00 .41 .83 1.25 1.66 2.08 2.50 2.91 3.33 .10 .20 31 20.50 .42 .85 1 .28 1 .70 2.13 2 56 2.98 3.41 .10 .21 .32 21.00 .43 .87 1.31 1.75 2.18 2 62 3 06 3.50 .10 .21 .32 21.50 .44 .89 1 34 1.79 2.23 2 68 3.13 3.58 .11 .22 .33 22 00 .45 .91 1.37 1.83 2 29 2.75 3.20 3.66 .11 .22 .34 22.50 .46 .93 1 .40 1 87 2.34 2.81 3.28 3.75 .11 .23 .35 23.00 .47 .95 1.43 1.91 2.39 2 87 3.35 3.83 .11 .23 .35 23 50 .48 .97 1.46 1.95 2.44 2.93 3.42 3.91 .12 .24 .36 24 00 .50 1 00 1.50 2.00 2.50 3.00 3.50 4.00 .12 .25 .37 24 50 .51 1.02 1 53 2.04 2.55 3.06 3.57 4.08 .12 .25 .38 25.00 .52 1 .04 1 56 2.08 2.60 3 12 3.64 4.16 i .13 .26 .39 (Note on Form F9. Bindery Daily Time Ticket.) COSTS IX A PRINTING SHOP 229 [Size *Ji x ** in.) Bindery Daily Time Ticket - Employee 191. Clock No., "Kind of Work" Column must be filled in, using numbers Etcfj time Jtn chin'' [obi or kin 1 of work drat *2J£ in. including COMPOSITION RETURNS Description n^tP FntPrpH 1Q1 Indicate Second Shift BOOK ROOM Cross ^o^not'apply 6 '*" 118 JOB ROOM Date 191 Name of Compositor Totals of Reports Com- position Corrections Alterations Handling Make- Up Lock-Up Lock-Up Foundry Register Engraver Misc. First Stone Press First Stone Press No. Hours Reg. Over Reg. Over Reg. Over Reg. Over Rag. Over Reg. Over Reg. Over Rag. Over Reg. Ovtr Reg. Over Reg. Over Reg. Over Reg. Over Reg. Over Reg. Over Brt. FwJ. i*s rule 1 i n S3, in T ,»• C8 >f nv eT 1 1_ ■ 1 ■ 'Totals * See over for Recapitulation of Totals ih. QrderNo MACHINE WORK ONLY. NO HAND WORK. LINOTYPE MONOTYPE Totals cf Reports KEYBOARD CASTER Date ^ . Totals of Rep's Composition Correct Ions A Iterations Body Ems Exclude Alt. Date 191 Operator Compos It Ion Alterations Ems Eiolude AIL Operator 191 No. Hours R*g. Over Reg. Over Reg. Over Reg. Over Reg. Over Brt. Fwd. Brt. Fwd Coin mi under s same as Keyboard Totals | Totals Totals M ttSf B " RECAPITULATION OF TOTALS BOOK-JOB Cross out whichever healing does not apply LINOTYPE MONOTYPE KEYBOARDS CASTERS Hours Regular Hours Overtime Hours Regular Hours Overtime Total Ems Hours RepuJar Hours Overtime Total Ems Hours ' Regular Hours Overtime Total Ems Composition Alterations Form F12. Composition Returns, and Recapitulation COSTS IN A PRINTING SHOP 231 (ShttC ti * IS in/or Loose-leaf binder, ruled on both widest 25 lines to a pane.) COMPOSING ROOM PAYROLL FOR WEEK Employee Friday Saturday Monday Tuesday Cijwge [ha CllfcTgC Cborga Nun Chut* Moo Chug* Chirjc Charge Amounts brought forward 1 — 1 — {Headings Continued) Sheet No 1 ENDING 191 I Wednesday Thursday Total Time Rate Per Week Total Amount Paid on Account Amount Due Remarks Overtime Obaxga Nod Charge Non Form F13. Composing Room Payroll PRESS RETURNS Name Description DATE Press No. A U T o Folios of Form and No. pp. INK If i::.. k leatfu vacant QUANTITY COUNTER AT START COUNTER AT FINISH NET RUN MISCELLANEOUS SuuiBh. Cmp. od Purm, etc Plat. Cyl. Size of Sheet' l!% x /.' in-. ■ '' nth 1 tinea beneath the' heaiti 1 -:<,;{ b„ RECAPITULATION Totals | Cylinders Platens IMPRESSIONS MAKE-READY RUNNING SPECIAL Regular Over Double Regular Over Double Enter time for Two-color Cylinders and Autopress in red ink. Sheet No. {Headings continued) REPORTS Date Cylinders Two-Color Platens Order No - TIME CYLINDERS PLATENS Make-Ready Running Make-Ready Running Ro-ular R Over Ni-bt N 0«er Regular ROver NUjht NOvcr I.. -.il:tr Over Hiyilar Over - Form F14. Press Returns 232 BOOKKEEPING AND COST ACCOUNTING Sheet f^H x 'J in. for loose lea/binder Printed and rnhd on one si le unit/ RECAPITULATION CYLINDER AND PLATEN PRESS RECORDS - Month of . 19_ FIRST SHIFT Press No. TOTAL IMPRESSIONS CHARGEABLE HOURS Make -Ready Running NON- CHARGEABLE Laid Oft No. of Forms t'nd' r "i''r-:>s .\<>-" are printed the figures: 1 to i^/or cylinder presses, with a ruled tine i ■ •■■uii It. kkH ikjs are »si I for Second Shift an I I or Platens, The "Press" column under I'l it>. ns contains ?J tetters A to Z tvtth a rule t tine fur each. On the same sheet, below the totals of the Columns there are printed the foflmvin -j instructions and additional forms. INSTRUCTIONS Overtime to be entered at actual time. The total hours recorded for the month should be equal to the regular working hours of the first shift, multiplied by the total number of presses, plus the overtime hours of the first shift, plus the hours represented by the presses running on the second shift. The presses NOT RUN- NING on the second shift on which no labor is employed are not considered in this record. Observe carefully the distinction between "NON CHARGEABLE" and "LAID OFF" time. Include under the classification "NON-CHARGEABLE" the time of those presses that are standing temporarily for any reason that.is NOT CHARGEABLE TO CUSTOMER. Include under the "LAID OFF" classification the time of those presses on the FIRST SHIFT ONLY that are standing being either out of commission on account of repairs, or because of no work, THERE BEING NO LABOR. EMELOYED ON, THEM.. .Indicate in the column. provided for that purpose the number of COMPLETED forms'produced.. TO ASCERTAIN ITEMIZED TOTAL COST Obtain figures from PROFIT & LOSS STATEMENT ITEMIZED COST PER CHARGEABLE HOUR- Use TOTAL CHARGEABLE HOURS as a divisor, dividing total cost of each item. ITEMIZED COST PER THOUSAND IMPRESSIONS-Use TOTAL IMPRESSIONS as a divisor, dividing total cost of each item., BLACK INKS COLORED Itemized Total Cost Itemized Cost per Chargeable Hour Itemized jCost per 1000 Impressions Cylinders Platens Cylinders Platens Cylinders Platens Depreciation "Light payroll Repairs TOTALS Cylinders Platens Totals Average Cost per lb. Total Cost Average Cost per lb, SUMMARY CYLINDERS PLATENS Total Hours Per cent of Total 100.0 Chargeable Non -Chargeable Laid Off Grand Totals Total Impressions Average Impressions per Running Hour Per cent of Total Avorage Impressions per Haul Including Make-reaffly_ Average Impressions pec Running Uouc on Automatics _ Form Flo. Recapitulation Cylinder and Platen Press Records PAY VOUCHER Fill in this voucher carefully and accurately as it is used as your statement of wages due. No wages can be paid without it. __ Clock No. Name... No , Department _. __ g** For week ending 191 PAY RECEIPT f-. Fill in this receipt carefully and accurately £; giving totals of time and wages as shown td oo^our pay voucher. fcd TEAR OFF AND RETAIN THIS PAY RECEIPT * AND PRESENT TO PAYMASTER WHEN YOU > RECEIVE YOUR ENVELOPE, AS IT IS ACCEPT- 2* ED AS YOUR RECEIPT (SUBJECT TO CORRECT- w ION IN THE EVENT OF ERROR) FOR WAGES RE- 2 CEIVED. NO WAGES CAN BE PAID WITHOUT IT. HOURS WORKED (Indlestoil in hours and Unths) z SUMMARY OF TIME AND WAGES til Regular Overtime Special $ lit Special Time Totals . 5 Received the amo unt stated above, subject to correction in the event of error. fe Clock Total Hours Checked by rotal Amount Due $ NiKht Form FIG. Pay Voucher and Pay Receipt COSTS IN A PRINTING SHOP 233 _ . „ [Sheet, » X «Jf inohea) l«1 m'\rr»E'D"v p Escdptio liliMI PIECE WORK Stitchins Folding Gathering Inserting Mailing Covering lip Strip Silk Sewing H ;t 2'l .1.1 58 J6 40-41 42 Total Cost @ & @ @ ® @ @ (3 @ @ @ @ @ @ @ »% £ j. tl Jfa IS | (Siic of Sheet, > < x /-'!<; ine hes so mile i lines, eeerii Jiftli lint heavy rul no) 3 C-r m5; El - 'Headings Continued) SHpm TM RETURNS Bindine Make -Up: TIME WORK Stitching Folding Gathering Inserting Covering Mailing Stamp Tip Strip Silk Sew Carry Pad 64-65 14 15-16 28 68 29 30.51-32 33 34-35 36 37-38-39 58 59-63 43-44 40-41 42 S5 67 66 Quantity Cost Cost Cost Cost Cost Cost Cost Cost Cost Cost Cost Cost Cost Cost Cost Cost Cost Coat Cost E O l3, 5 | c_ * 3 J4. ' .' > -i. ;j; ft l| I . MACHINE WORK Cut-trim Folding Cleveland Jobber Covering Chain Stitching Gathering Stitching Oatberiag St lU'foitis-Covcr.og Smash 23 1-2-3 4-5-6 7-13 69-71 L7-18 72-74 19-21 22 27 Total Cost Cost Cost Quant. Cost Quant. Cost Quant. Cost Quant. Cost Total Cost Quant. Cost Quant. 75-77 Cost Cost Cost Cost! « •2* u -ill £*a S £$a "rj 8 "! 3&s I i* 4&s ir ■5 s '. ?5d J-K-S, a -2 3 Form F17. Bindery Returns 234 BOOKKEEPING AND COST ACCOUNTING Form F17 contains also an index of the " Kind of Work costs. The items of the recapitulation are as below: and a "Recapitulation" with columns for quantities and Cutting 1 Cutting flat stock. 2 Trimming pamphlets, etc. 3 Seybold trimmer. 4 Seybold trimmer helper. 5 Jogging. 6 Carrying. Machine Folding: 7 Operator. 8 Helper. 9 Box tending. 10 Hand feeding. 11 Refolding. 12 Bundling machine. 13 Carrying from folders. Cleveland Jobber 69 Operator. 70 Feeder. 71 Box tending and carrying. Wire Stitching 14 Operator — Piece. 14 Operator — Time. 1.5 Taking off. 16 Carrying or jogging. Machine Covering 17 Operator. 18 Helper. Chain Stitching 72 Operator. 73 Taking off. 74 Carrying or Jogging. Machine Gathering — Stitching 49 Operator. 20 Helper. 21 Carrying. RECAPITULATION Machine Machine Gathering — Stitch — Cover 75 76 77 Operator. Helper. Carrying. Other Machine Work 22 23 24 25 26 27 Smashing. Perforating. Punching. Round cornering. Numbering. Eyeletting. Hand Work 28 28 68 Folding — Piece. Folding — Time . Refolding. Gathering 29 29 30 31 32 Gat hering — Piece . Gathering — Time . Laying up. Jogging. Carrying. Inserting 33 33 34 35 Inserting — Piece. Inserting — Time. Jogging. Carrying. Covering 36 Covering — Piece. 36 Covering — Time. 37 Carrying. 38 Re-covering. 39 Taking off covers. Miscellaneous Hand Work 40 Tipping. 41 Stripping. 42 Silk sewing. 43 Stamping. 44 Postage stamping. 45 Tabbing. 46 Taking apart. 47 Gumming. 48 Counting. 49 Interleaving. 50 Stringing. 51 Reinforcing. 52 Tissuing. 53 Metal clips. 54 Paper seals. 55 Carrying. 56 Errands. 57 Wrapping and tying. (not mailing). 67 Padding. 78 Cancelling. Mailing 58 Wrapping. 59 Inclosing — turn in flap. 60 Inclosing — sealing flap. 61 Tying. 62 Counting. 63 Helping. Press Room Charges 64 Smut sheeting. 65 Bronzing. 66 Jogging flat sheets. Total Wages. Form F17o. Reverse of F17. Machine Work in Bindery {Size >s% x ft in ELECTRIC rom LIGHT AND POWER METER READINGS 191 Tn 1Q1 Taken by LIGHT POWER Meiers and Location Department Readings Department Charged to, with Per cent. to each Department Charged to, with Per cent, to each Readings Center West Wall 3d Floor Comp. Room Cylinder P. R. Platens Bindery Office Maintenance Press Room 10 ^ Previous Reading Consumed Office 3% (Similar record \for meters in eleven other locations) Form F1S. Electric Light and Power Meter Readings COSTS IN A PRINTING SHOP 235 (Sheet U x is in ruled on Ki.'Sw&toSS&S PRESS ROOM PAYROLL No Employee Fri. Sat. Mon. Tues. Wed. Thur. Amounts brought forward {Headings Continued ) WEEK ENDING 191 Total Time Rate Per Week Total Amount Paid on Account Amount Due Remarks Overtime Form F19. Press Room Payroll Page M x in in. SH ruled lined SALES FOR THE MONTH OF 191 Order No. NAME DESCRIPTION >> Total Charge Composing Room and Monotypes Amounts brought forward 1! 1 — Headings Continued Linotypes Cylinders Two Color Cylinders Job Department Bindery Paper Stock Publication PostaRe, etc. Metal True Cost Comp. Room Platens Autopress _ 1 i Form F20. Sales for the Month Ratine b SALES LEDGER Name Credit Limit Address Date 191 Order No. Quantity DESCRIPTION (Loose leaf Ledger Sheet fi x 12% in.Ruled M lines to the page) Stud No. Folio Debits Credits Folio DESCRIPTION Date 191 Form F21. Sales Ledger 236 BOOKKEEPING AND COST ACCOUNTING u Ize »% x II rder 1 in For tf in.) ered Rilled COST TICKET Salesman S.B. Page Order No. Rilled Former Nos Estimate: N \ M ^ !le rtiVerse "/this *-'"St Ticket Address r , ll ,^,,,„« ,, i^iij,,,, n,>*,'r/..//.)n o - Yes r\ No. Pages ( ,o. The headings art and r--^.,^. (.without *"* Trimmed Size X Total Ems Set } Lino,ype Caster Record if Mono. ( Monotypi Hours Kit ha <3 COST BILLED M L a 2< Composition Overtime Alterations ELECTROS - ENGRAVINGS - DRAWINGS Overtime Monotype -Key Overtime Date From Description Price Casters CLi u en Ed - H- V. Overtime Alterations £ e * Cnet- Overttme Electros ^Engravings LinotvDe Overtime Alterations PAPER STOCK - Some,'* Lj Dale From j Rms. Shts. Size Wl. Description Price OS Cd y I- y - /. - Id s g >• X -J a 1 V. gg 1) 1 c Cover Gross Impressio Hours, Regular H Slipsheeting or • k Black INK Composition Overtime Alterations Overtime PI a tens- Forms MISCELLANEOUS ITEMS Gross Impressic Hours, Regular Slipsheeting or Bronzing 1 ,_ t Blaok POSTAGE. CHARGEABLE EXPRESS OK FREIGHT, CARTAGE, ETC. description u ^ fl Cutting DELIVERIES - (ENTER RECEIPTS EACH DAY) Dale Quantity Date Quantity Date Quantity Net P-L Stamps, Bulk Postage or Chargeable — Total SPECIAL NOTE: Order No. Form F22. Cost Ticket and Billing Record Bill Issued BILLING DESCRIPTION ITEMS TOTALS \*oo ■ >u,i uoihUi ";■>(! »AV »*!S ■8»qs saiH iiji 'j 1 ajca >so3 □oqdu *s.*(j UIOJJ a»B<] ^IDOXS >IHdVd Form F22a. Billing Description (Reverse of F22k CHAPTER XXI REPORTS TO STOCKHOLDERS; EDUCATION OF ACCOUNTANTS; COST OF IDLENESS; MISCELLANEOUS FORMS; BIBLIOGRAPHY REPORTS TO STOCKHOLDERS OF LARGE CORPORATIONS The forms in which printed annual reports 01 large corpo- rations are made by the president or the directors to the stockholders are illustrated below. Particular attention is called to the statements concerning maintenance, depre- ciation and reconstruction in the report of the American Telegraph and Telephone Company. The report of the General Electric Company is notable as an extreme example of "writing off" expenses of all kinds and charging them to "cost of sales." The company ha regularly paid S per cent dividends for several years, in both good and bad times. If it had paid 10 per cent some of the stockholders might have been gratified, but the result would have been a much poorer annual report for the year 1916. The "sound and conservative" policy of "writing off" has been fully justified by the splendid con- dition of its finances to-day. "The company has no note payable." It is Surplus rather than Capital Stock that earns Dividends. The reason usually given for the accumulation of a large surplus instead of paying large dividends to stockholders is that it is a necessary and proper provision against the vicissitudes of business, fluctuation in demand, depression in trade, obsolescence both of plant and of product, and for the need of new capital to ensure the steady growth of the business which is needed to supply increasing demand. Another good reason is that it provides a fund which may be used to purchase the latest improvements in labor-saving machinery, the use of which will earn large profits. A con- cern with a million dollars capital, all invested in plant, stock in trade, bills and accounts receivable, with no surplus, may have all it can do to earn the bare interest on its in- vestment, but if it had a quarter of a million surplus it might invest that in improved machines which would earn 20 per cent per annum on their cost. A statement of earnings might then show: Old Plant $1,000,000 @ 6% New Machinery 250,000 @ 20% Total $60,000 50,000 $110,000 "It is the straphangers that pay the dividends," the president of a street railway corporation is reported to have said. Extract from the Report of the Directors of American Telephone and Telegraph Company New York, March 12, 1917 Bell Telephone System in United States comparison of revenue and expenses, 1915 and 1916 (All Duplications including Interest, Dividends and other Payments to American Telephone and Telegraph Company by Associated Companies are Excluded.) which is 11 per cent on the capital stock, or 8.8 per cent on the sum of capital and surplus. 1915 1916 Increase Exchange Revenues Toll Revenues Miscellaneous Revenues $169,155,944 62,929,980 2,338,431 $188,888,149 72.971,668 2,715,463 $19,732,205 10.041.688 377,032 Total Operating Revenues $234,424,355 $264,575,280 $30,150,925 Depreciation Current Maintenance Traffic Expenses Commercial Expenses General and Miscellaneous Expenses $ 44,586,841 31,171,272 45,785,432 23,583,274 11,049,191 $ 49,631,966 34,923,549 53,748,707 25,698,913 11,902,470 $ 5,045,125 3,752,277 7,963,275 2,115,639 853,279 Total Operating Expenses $156,176,010 $175,905,605 $19,729,595 Net-operating Revenues $ 78,248,345 $ 88,669,675 $10,421,330 Uncollectible Revenues Taxes $ 1,703,210 13,001,903 $ 1,480.502 14,916,448 $ 222,708* 1,914,545 Operating Income Net Non-operating Revenues $ 63,543,232 6,022,932 $ 72,272,725 7,080,384 8,729,493 1,057,452 Total Gross Income $ 69,566,164 $ 79,353,109 $ 9.786,945 Rent and Miscellaneous De- ductions Interest Deductions $ 3,384,407 18,095,643 $ 3,735,470 18,378,931 $ 351,063 283,288 Total Deductions $ 21,480,050 $ 22,114,401 $ 634,351 Balance Net Income Deduct Dividends $ 48,086,114 32,897,065 $ 57,238,708 35,160,119 $ 9,152,594 2,263,054 Surplus Earnings $ 15.189,049 $ 22,078.589 $ 6,889,540 ; Decrease. 237 238 BOOKKEEPING AND COST ACCOUNTING Combined Balance Sheets, 1915 and 1916 (Duplications Excluded) Dec 31, 1915 Dec. 31, 1916 Increase Assets: Telephone Plant $ 880,068,520 $ 946,293,248 $ 66.224,728 Supplies, Tools, etc. 15,951,582 24,032,099 8,080.517 Receivables 43,518.625 66,029,580 22,510.955 Cash 45.716.330 80,692,829 34,976,499 Stocks and Bonds 72.652.646 81.815,476 9,162,830 Total $1,057,907,703 $1,198,863,232 $140,955,529 Liabilities: Capital Stock $ 440,711,200 $ 463,101,569 $ 22.390,369 Funded Debts 353,236,464 422,586,617 69,350,153 Bills Payable 2,404,920 3,738,451 1.333,531 Accounts Payable 29,039,127 38,280.436 9.241,309 Total Outstanding Obligations $ 825,391,711 $ 927,707,073 $102,315,362 Employees' Benefit Fund 9,114,329 9,151.000 36,671 Surplus and Reserves 223.401,663 262,005,159 38.603,496 Total $1,057,907,703 $1,198,863,232 $140,955,529 ! 1 Maintenance, Depreciation and Reconstruction During the year 884,906,000 was applied out of revenue to current maintenance and depreciation, an increase of §8,846,000 as compared with 1915. Current maintenance increased 83,752,000, averaging 3.9 per cent on the average plant in service, which compares with 3.7 per cent in 1915. The provision for depreciation of plant during the year was S49,983,000, an average of 5.6 per cent of the cost of plant and an increase over 1915 of 85,094,300. Plant which originally cost about 844,000,000, but which had reached its limit of serviceable life, was removed and replaced by new and improved construction, or sold, as compared with S42,000,000 in 1915. After deducting this amount less salvage from the provision for depreciation, the balance, about 825,000,000, increases the reserves for such depreciation and obsolescence, which must be provided for out of current expenses, but cannot be currently deter- mined or expended. As stated in last year's report, it is the continuing policy of the Bell System to provide out of earnings each year amounts as represent the estimated wear and tear, obsolescence and inadequacy of plant accruing that year, so that when any plant comes to be retired suf- ficient reserve has been gradually acquired to meet the loss of capital due to such retirement. This is the sound and conservative policy for the protection and guaranty of the future of the plant, and it is the only way by which telephone users pay for the wear of the plant incident to or concurrent with their use, instead of passing this cost on to the future users. Lack of recognition of this principle has caused many failures in all industries, and particularly in the tele- phone business. This principle is now generally accepted and the practice is firmly established by the accounting rules of the Interstate Commerce Commission and the various state commissions. Extracts from the Report of the General Electric Co. April 16, 1917 Value of Orders received for electrical machinery and supplies in 1916 $167,169,058 00 (50% greater than for the largest previous year, 1913) Amount of sales billed 134,242,289 69 Less cost of goods sold, including all operating, main- tenance and depreciation charges 118,948,198 58 Net Profit on Sales 15,294.091 41 Income from other sources 3,866,881 95 Total net income 19,160,973 36 Less Interest on debenture bonds 571,444.96 Dividends on Stock 8, 1 2 1 ,646 00 8,693,090 96 Carried to Surplus 10.467.882 40 Surplus at January 1, 1916 23,692,871 03 Surplus at December 31, 1916 $34,160,753 43 Capital Stock issued 101,512,500 00 Number of employees in the factories and offices of the Company and subsidiary companies, about 79,000 The Company has followed its customary practice in writing off against income its total expenditures during 1916 for patents, applications for and licenses under patents and other outlays relating thereto, amounting to S891,SS0.30. The patent account is carried at 81.00 as in previous years. The Company has no note payable, nor is there any paper outstanding bearing its indorsement. On January 31, 1893, the book value of your manufac- turing plants was During the 24 fiscal years to December 31, 1916, addi- tional expenditures have been made aggregating $ 3,958,528 88,634,909 21 55 Total Written off during the twenty-four years 92,593,437 62,688.673 76 44 Book value of all plants at December 31, 1916 $29,904,764 32 Net Book Value Jan. 1, 1916 Additions During Year Written Off Net Book Value Dec. 31, 1916 Real Estate and Buildings Machinery Patterns Furniture and Fixtures $20,038,337 9,524,992 1 1 31 21 00 00 $1,860,729 5,732,187 113,888 1,121,450 25 13 06 36 $2,452,875 4.798,608 113,888 1.121,450 44 14 06 36 $19,446,191 10,458,571 1 1 12 20 00 00 Total $29,563,331 52 $8,828,254 80 $8,486,822 00 $29,904,764 32 REPORTS TO STOCKHOLDERS; EDUCATION OF ACCOUNTANTS, ETC. 239 Assets Patents, Franchises and Good Will $ 1 00 Cash: 12.167,706 92 Stocks, Bonds and Other Securities $33,773,678 08 Notes and Accounts Receivable 26,816,297 28 Advances to Subsidiary Companies 4,739,818 68 Installation Work in Progress 4,196,020 35 69.525,814 39 Merchandise at Factories 43,963,220 49 At district offices, on consignment, in transit, etc. 7.197,418 98 51,160,639 17 120,686,453 56 Manufacturing Plants 29,904.764 32 Real Estate, other than Manufacturing Plants 863,187 70 Furniture and Appliances (other than in factories) 1 00 30,767,953 02 Liabilities Debenture Bonds $163,622,114 50 $12,047,500 00 Accounts Payable $7,874,872 89 Accrued Taxes 1,149,256 36 Accrued Interest on Debentures 196.518 68 Dividend payable January 15, 1917 2,030,154 00 11,250,801 4.650,559 93 Advance Payments on Contracts 14 Capital Stock Issued 101,512,500 00 Surplus 34,160,753 43 $163,622,114 50 Extract from the Report of the Westinghouse Electric and Manufacturing Co. Report of the Auditors New York, May 8, 1917. To the Board of Directors, Westinghouse Electric & Manufacturing Company, New York. We have made an audit, for the year ended March 31, 1917, of the books and accounts of the Westinghouse Electric & Manufacturing Company, and the following proprietary companies, viz.: Westinghouse Lamp Company, Westing- house Lamp Corporation, H. W. McCandless & Company, The Bryant Electric Company, The Perkins Electric Switch Manufacturing Company, R. D. Nuttall Company, Westing- house Electric Export Company and Westinghouse Elec- tric & Manufacturing Company of Texas. We have verified the Stocks and Bonds owned, the Cash and the Notes Receivable, by count or by proper certi- ficates from the depositaries. The investments in Stocks and Bonds of other Companies are conservatively valued on appraisals made by us from market quotations and financial reports and other available data as to operating results. We have examined the Accounts Receivable and in our opinion the reserves created therefor are sufficient to cover probable losses. The inventories of Raw Materials and Supplies, Finished Parts, Completed Apparatus, and Work in Progress of the subsidiary companies were taken under our general super- vision and valued at cost or less. No inventories were taken at the Works of the Westinghouse Electric & Manufacturing Company because the demands upon the Company for further certify that harmony therewith. production were so great that it was not considered desirable to close the works for this purpose. We have, however, carefully reviewed the book accounts and, based on such examination and past experi- ence (the book records under the comprehensive system of accounting followed having been found by such experience to be reliable) together with the reserves created to provide for possible shortages, we be- lieve that the inventory values are conservatively stated, and WE HEREBY CERTIFY that, in our opinion, the ac- companying Consolidated Gen- eral Balance Sheet of March 31, 1917, and Consolidated Statement of Income and Profit & Loss for the year so ended are correct; and we the books of the Companies are in (Signed) Haskins & Sells, Certified Public Accountants. Westinghouse Electric & Manufacturing Company and its Proprietary Companies in the Uxited States (Except New England Westinghouse Company) Consolidated General Balance Sheet Assets March 31, 1917 Property and Plant: Factory Plants — Real Estate, Buildings, Equip- ment, etc. $22.701,1 10.02 Investments: Stocks, Bonds, Debentures, etc., of other Com- panies $18,156,577 43 Current Assets: Cash Notes Receivable Accounts Receivable Total Current Assets $12,625,574 67 4,935,511.06 32,757,631.71 50,318,717.44 Working and Trading Assets: Raw Materials and Supplies, Finished Parts and Machines, Work in Progress, Goods on Consignment and Apparatus with Cus- tomers, Inventoried at Cost or less Other Assets: Patents, Charters and Franchises Insurance, Taxes etc., paid in advance Total Other Assets Total $31,934,594.79 $4,286,206.51 145,604 80 $4,431,811.31 $127,542,810 99 240 BOOKKEEPING AND COST ACCOUNTING Liabilities Capital Stock: Preferred Common Total Capital Stock Collateral and Long Term Notes Real Estate Purchase Money Mortgage March 31, 1917 $ 3,998,700 00 70,813,950.00 $ 74,812,650 00 $ 2,803,750.00 $180,000 00 Current Liabilities: Notes Payable — Bank Loans $15,100,000.00 Accounts Payable 5,988, 1 80 . 82 Interest, Taxes, Royalties etc., Accrued, not due 2,470,164.29 Dividend on Preferred Stock, payable in April 69,977 . 25 Dividend on Common Stock, payable in April 1 ,239,244 . I 3 Unpaid Debenture Certificates, Bonds, Notes and Interest and Dividends 149,254.32 Total Current Liabilities $25,016,820.81 Reserve: Against Inventories, Notes and Accounts Re- ceivable, etc. $ 6,624,291.52 Profit and Loss — Surplus Total $18,105,298.66 $127,542,810 99 Consolidated Statement of Income and Profit and Loss for the Year Ended March 31, 1917 Gross Earnings: Sales Billed $89,539,442.09 Cost of Sales: Factory Cost, including all Ex- penditures for Patterns, Dies New Small Tools and Other Betterments and Extensions: also depreciations of Prop- erty and Plant, Inventory Adjustments and all Selling, Administration, General and Development Expenses and all Taxes 72,077,751.53 Net Manufacturing Profit $17,461,690.56 Other Income: Interest and Discount, Divi- dends, Royalties, etc. 1,386,546.57 Gross Income from all Sources $18,848,237. 13 Deductions from Income: Interest on Bonds and Deben- tures, Notes, etc. 768,348.30 Net Income Available for Dividends and Other Purposes $ 1 8,079,888 . 83 Profit and Loss Credits: Profit and Loss — Surplus, March 31, 1916 9,246,707.03 Gross Surplus $27,326,595.86 Profit and Loss Charges: Dividends on Preferred Capital Stock $ 279,909.00 Dividends on Common Capital Stock 3,750,000 02 Appropriations to Reserve Ac- count 5,000,000.00 Miscellaneous ( Net) 191,388. 18 9,221,297 20 Surplus, per Balance Sheet $18,105,298 66 COLLEGE EDUCATION IN ACCOUNTING * 1. What kind of accounting is meant. The accounting here treated is the work of the expert accountant, who aids materially in the management of business by furnishing financial statements and data, after the work of the entry clerk is complete. 2. The education of a person desiring to become an account- ant. The accountant should receive just as ample an edu- cation as the manager. This is to enable him to execute his duties with the greatest sureness and effectiveness. His education must be accomplished in a much shorter time and through different routes from that of experience. 3. The necessity for such an education. The public and high schools furnish no education of help to the accountant, as the commercial courses in these schools only give instruc- tion in typewriting and bookkeeping, in which he is not interested. Little knowledge is obtained in the lower schools that is of real value to the student, and it is the author's opinion that the curricula of American schools should be greatly changed, so as to really furnish a practical instruction. 4. It should be a college education. As the accountant must be able to cope with the mature mind of the management of the firm, it is necessary for him to have a mature educa- tion, and this can only be received in a college. f 5. The methods of teaching the subject. The greatest diffi- culty is to make the courses as practical as they will be found in actual business. The author suggests a method similar to the clinic service of the doctor. He suggests letting the student work under guidance on the books of charitable institutions and small business concerns. The progress would be much greater and the knowledge obtained more profound. 6. The qualifications of the stude7it. Before beginning the study of accounting, the student should possess a thorough general education which will enable him to understand the use of technical terms and fully grasp the instruction offered him. Accounting can not be fruitfully taught before the third year of a collegiate education. 7. The postgraduate course seems better. The postgraduate course seems more adequate to prepare a man for this work as only a graduate possesses that knowledge of the world so lacking in the college man. The subdivisions of the courses in accounting in general may be enumerated as follows: Philosophy of accounts; practical accounting; accounting procedure; accounting sys- tems; simple accounting problems; advanced accounting problems; auditing; advanced auditing; private auditing; accountants' reports; corporation finance; accountancy of investments; and cost accounting. * Extracts from a paper by John G. Geijsbeek, presented at the Second Pan-American Scientific Congress, December, 1915. Bureau of Education Bulletin, 1916, No. 25, "Commercial Education," p. 58. See also the Proceedings of the Congress, Section IV, Part 1, page 532. fThis is too broad a statement. The education obtained in American colleges is often anything but " mature," and the "mature mind of the management " commonly comes from an education in the " college of hard knocks." REPORTS TO STOCKHOLDERS; EDUCATION OF ACCOUNTANTS, ETC. 241 TECHNICAL EXPERIENCE NECESSARY TO THE ACCOUNTANT Even in those engineering concerns which have installed much up-to-date machinery and which are well on the road in improved methods of production there does not seem to be sufficient recognition of the fact that the status of practically all the so- called commercial staff must be regulated by the shop organi- zation. Systems, routine and nomenclature are now originated in the shop instead of in the office. This surrender of control on the part of officials like the accountant is not an easy task. It will not be consummated until our so-called bookkeepers in engineering offices are made to qualify for this task by having served a practical course in the productive departments. This work should consist partly of manual work and partly in the "works" accounting and costing departments. This technical experience is absolutely necessary to the commercial accountant to make him realize that his work must harmonize with the details of the productive departments. This harmonious working is a necessity to make clear statements and returns which interlock with " factory " returns. Confusion and discrepancies are sure to be the rule if this is not accomplished, and patehed-up incongruous statements of accounts and results will be continu- ally presented to those who need exact statistics for their guidance and information. — From an article on " The Training of our Industrial Forces," by H. F. L. Orcutt, in Engineering (London), Sept. 7, 1917. AN ENGLISH VIEW OF COST ACCOUNTING The following extracts are taken from an editorial in Engineering (London) Oct. 12, 1917. From these it appears that British manufacturers are still in the dark ages of cost accounting, but they are beginning to see light. If any firm, through ignorance of the principles which should govern the ascertainment of true costs, underestimates the cost of competitive work, and secures an order through incorrect calculations, not only that firm, but also its competitors, must suffer While trading and cost accounts should be made interde- pendent there should also be a clear distinction between them. . . . The trading accounts indicate what has happened and refer to the past, whereas cost accounts are for the purpose of future estimate, improvement and effort. The interdependence of the trading and cost accounts may be sufficiently effected by opening records in the trading accounts to represent different productions, for instance — separate ac- counts for each process, class of manufactures or contracts, or in the case of similar productions — if convenient — accounts for grouping a number of processes, manufactures, etc. Arranging the trading accounts in this manner provides a check assuring the accuracy of the cost accounts, and shows the correct value of "work in progress" (stock).* Apportionment of "Establishment Expenses" (On cosf).f — This item presents the greatest difficulty in arriving at "pro- duction costs." Various plans have been tried, each no doubt justified by certain considerations and open to equally sound objections. The "machine rate" occasionally employed in connection with engineering work is a case in point. If a machine can be used regularly doing work of constant value, a machine rate for distributing on-cost may be satisfactory, but there are few producing concerns that could maintain this condition. Irregular and variable employment is more general, and in these ♦The error of this statement is shown on page 124. — W. K. t" Establishment, charges " and "on cost" are terms used by English writers to mean the same thing that is called " overhead " or " burden " in the United States. circumstances any attempt to apportion the total establishment expenses on this basis must take into account many elements of uncertainty, and therefore introduce complications too cumber- some for practical purposes. "Permanent Charges." — Ground, buildings, plant and machinery, administration and permanent staff, advertising and traveling. Each of these expense items, though more or less a standing charge, differs in each department, in relation to out- put, according to the conditions of production. It is therefore more convenient to slump [lump?] the lot and decide a fixed rate of distribution based on normal output, at which the rate alloca- tion should be made in proportion to production units for any period. Fluctuating Charges.— Building repairs, plant repairs, loose tools upkeep, indirect labor, stores consumed in the course of manufacture, and material scrapped, should increase or decrease in the same ratio as the production units, but as these charges are frequently subject to irregular variations, they should be entirely allocated as they occur (say monthly) so that they can be scanned and accounted for immediately any change takes place. It does not follow that the distinction between permanent charges and fluctuating charges makes it necessary to use two rates in apportioning on-cost. One rate, made up of a fixed figure (permanent charge) plus a changing figure (fluctuating charge) is sufficient- It is unfortunate that those engaged in engineering business have not arrived at something approaching general agreement on the subject of estimating and costing. To a large extent this has been due to conservatism originating with the man- agement and transmitted to officials. Practically all initiative has been suppressed, consequently little progress has been made in the direction of adopting new ideas. The manner of pre- paring cost records has, to a large extent, become obsolete, and continues to vary considerably in many concerns. The financial accountant in his view of costing becomes too academic, and the technical man is handicapped by inexperience. Sir Robert Hatfield, in the discussion on Professor Ripper's paper read before the Royal Society of Arts, remarked: "As to costing it was necessary to specialize upon this as it was upon engineering problems. Many firms had little idea what their products were actually costing." Too frequently there is a tendency to follow "the law of average" — a polite way of describing "rule-of-thumb"— in costing. . . . The misunderstanding that often exists respecting the purpose of cost accounting leads to further reliance on the " law of average " . . . whether averaging is adopted or whether records made under varying conditions are used to estimate the cost of repeat jobs, the results must involve considerable specu- lation, and in any case procedure of this kind is tantamount to working backwards. Normal cost records are surely a more definite basis, for upon these the effect of any change of circum- stances can be estimated more accurately. TO WHAT ACCOUNT SHALL THE EXPENSE OF IDLENESS BE CHARGED?* In determining the cost of a manufactured article, should we include all the expense incurred while that article is being manufactured, or should we include only those expenses which contribute to its production? There is a great variety of opinion as to what the "burden" charge on any particular work should be. This overhead or "burden" may be divided into two parts: a. That which is incurred through simple ownership or rental of the plant and keeping it ready for operation. * Extracts from a paper on " Expenses and^Costs," by H. L. Gantt. Journal of the Amer. Society of Mechanical Engineers, Dec, 1917. (See also Idleness Charts, page 105.) 242 BOOKKEEPING AND COST ACCOUNTING b. That which is incurred by operating the plant, exclusive of direct labor and material. The first part is made up of ownership or rental of a number of machines or work benches, properly housed. The second part consists of such items as power, oil, waste, repairs, etc. We are able to determine for each machine in the factory both an idle- and an operating-expense rate. Any article manufactured on a machine should undoubtedly bear the operating-expense rate for the time during which the machine was operated on it. The expense of maintaining the machine in idleness during the time it was not operated cannot legitimately be charged to the work done while it was operated, and should be put into another account. In every plant there are to be considered two kinds of burden : a. That which produces goods and which can legitimately be charged to the cost of those goods, and 6. That which produces nothing, and must be put into some other account. A careful consideration of the expense incurred while the plant is idle leads to very fruitful results: first, an attempt to find out why the plant is idle, and then an attempt to eliminate the causes of idleness, which are lack of work, lack of help, lack of material, repairs, etc. The accountant has looked upon costs as a bookkeeping prop- osition, whereas, in truth, costs are much more closely connected with engineering and production than with the subjects of book- keeping and accounting. Money spent without any corresponding production must be kept separate from that which was productive, either directly or indirectly. The following question is put to us by the accountant and financier, "What are we going to do with this expense of idle- ness?" they having never before realized that it cost something to be idle. My frank answer to that is that I do not know. Moreover, I don't care, provided they do not charge it to me in the products which I buy from them. My recommendation, however.would be that they see how they can eliminate such expense by proper managerial methods. Mr. Gantt is on the right track when he says frankly "I do not know." Confession of ignorance is often the beginning of wisdom. In scientific management it is the substratum below the foundation (see the " pyramid," page 119), whose bottom courses are "I want to know" and "I am going to know." But when he says "I don't care" he takes the position o' the selfish consumer, who thinks he should not pay any portion of the cost of the business risks which the enterprising manufacturer assumes when he provides facili- ties for meeting the fluctuating and intermittent demands of his customer i. One of the risks is that of idleness of some part of the machinery for some part of the time, even when business conditions are normal. This risk the ultimate consumer pays for, just as he pays for insurance against fire and other accidents in the factory and for all the usual losses that are due to lack of "proper managerial methods." Mr. Gantt seems to assume that the engineer, the financier and the accountant are three different persons, with different and possibly antagonistic opinions. In fact the manufac- turer is often financier, engineer and accountant combined, and he regards the question of cost as equally one of book- keeping, of production and of finance. Let us apply Mr. Gantt's question "What are we going to do with this expense of idleness?" to a concrete hypothetical case, and endeavor to find an answer. A certain factory puts in an expensive machine, or group of machines, to make a product for which there is a limited and fluctuating demand. The extent of the demand will depend to a large extent upon the price which the consumer is asked to pay for the product, and upon the activity and the expenditure of the selling department. If the factory charges the article to the sales department at too high n "factory cost" there may not be enough margin between this price and the price asked of the consumer to warrant any great expenditure by the sales department in an attempt to increase the demand, and consequently the factory will be insufficiently supplied with orders If, on the othe hand, the factory does not charge enough to cover the cost of material, labor and burden, the factory will be run at a loss. The thing to be done is to make a careful estimate of the probable burden under different assumed conditions of demand, and try to fix a standard burden per unit of product or per machine hour, to be used in establishing the "factory cost," which is defined as the warehouse value" oi the price at which the article is to be billed to the sales department. It is, as nearly as can be ascertained, the cost of reproducing the article at the present prices of material and labor, with a normal burden charge, that is the estimated burden per machine hour or per unit of product when the machinery is run at the expected normal number of hours per year. Example. Let the cost of the machine, or group of ma- chines, be $10,000 and let the yearly burden estimate be as follows: Fixed Charges Interest on investment, at 5% Reserve for depreciation due to obso- lescence of machine or product Sinking fund, 20 years, 5% Taxes Insurance Rent of space occupied Variable Charges Number of hours the machine runs $500 302 100 50 200 1152 1000 2000 3000 Supervision, indirect labor, small tools $500 $600 $700 $800 Power 100 150 200 250 Light 40 60 80 100 Repairs, oil, waste, etc. 100 200 300 Depreciation due to wear and tear 100 200 300 640 1010 1380 1750 Total burden, fixed and variable 1792 2162 2532 2902 Burden per machine hour $ $2 16 $1.27 >0 97 When the machine is idle for the whole year the burden charge against it is $1792. It receives no care from the superintendent, and uses no power and no light, but charges have to be made against it for these items because it has been provided with facilities for their use. The $1792 is the fac- tory loss due to idleness. The loss of the business may be far greater, for the sales department may have incurred REPORTS TO STOCKHOLDERS; EDUCATION OF ACCOUNTANTS, ETC. 243 expenses without making sales, and there are no profits, which might have been made if the space in the factory had been occupied by other machinery making products for which there was an active demand. The management, with this estimate before it has now to consider what is the probable number of hours per year that the machine will run under normal conditions of busi- ness, and normal activity of the sales department, and what is the corresponding normal burden that must be added to the cost of material and of labor to qbtain the factory cost, at which the product is to be billed to the sales department or valued in the inventory. Suppose 2000 hours is selected as the most probable time, and SI. 27 as the most probable normal burden charge. The factory may run 3000 hours, but this machine is idle one- third of the time. The cost of the 1000 hours of idleness is included in the $1.27 per hour, and thus it gets charged, through the sales department, to the consumer. But sup- pose that through inactivity of the sales department the machine is called on to run only 1000 hours per year. The total burden according to the table is $2162, but burden account is credited and factory product is charged only 1000 hours at $1.27, or $1270, leaving an extra cost of idle- ness of $892 which remains as a debit balance of Burden account, to be charged later to Profit and Loss or "some other account." If, however, a great demand for the article should spring up, causing the machine to run 3000 hours per year then Burden account would show the following: Dr. Total burden, as per table $2902 Cr. Burden charged to cost, 3000 hours at $1.27 $3810 Overearned burden due to extra activity (which is to be credited to Profit and Loss) $908 The question "what are we going to do with this expense of idleness?" is thus easily answered if we adopt the principle of the normal machine-hour burden or the normal burden per unit of product. Burden account is charged with the sum of the fixed and variable burden expenditures, and credited (cost of product being charged) with the normal burden — so many machine hours at so much per hour, or so many units of product at so much per unit. The cost of product thus includes a charge for a normal amount of idle time of the machines. If the idle time exceeds the normal amount the cost of the excess of idleness will appear as a debit balance of Burden account. If it is less than the normal amount then there will be a credit balance of Burden account, which will finally be transferred to the credit of Profit and Loss. There is nothing new in this method of treating the expense of idleness. It was described by Gershom Smith in his article in Engineering Magazine of June, 1909, quoted on page 150. He says: Where owing to trade conditions the machines do not operate sufficient time to absorb the total expense, if there is no reserve to draw upon I prefer to show the deficit as a charge against the department income or profit and loss account, thus keeping the costs on a normal basis. Mr. Smith seems to have used the method in connection with machine-hour burden rates as early as 1902. The present author used it in the same way in 1909, as mentioned in his article in the Iron Trade Review, Feb. 4, 1909, quoted on page 79, but he had used it in connection with the old- fashioned method of charging burden as a fixed percentage on direct labor, as early as 1887. Manufacturing account, in the factory ledger, was charged, and Factory Expense credited, with a percentage on direct labor, and in the cost ledger the same percentage on direct labor was charged to the cost of individual articles. Factory Expense was charged with all the factory burden, and if at the end of the year it showed a debit balance, this represented the unearned burden, including the cost of idleness in excess of the normal amount, and it was closed into Profit and Loss. BLANK FORMS USED IN COST ACCOUNTING In the preceding chapters numerous blank forms used in the production, accounting and statistical departments of various industries have been given. On pages 164 to 169 will be found reproductions of several forms contributed by Mr. Albert Walton, which have been found useful in metal- working establishments. An index to all the forms in this book will be found on page 259. Several cards used in dif- ferent factories are shown below, viz.: In an automobile factory, six forms: WORKMAN'S ABSENCE REPORT LEFT WORK YM RETl'RN CLOCK NO. Mill RETURN EXPLANATION:- Absences or Lates are allowed:- When causing No Overtime Work. When No Lot Urgent Tags ahead of Man. When Workman arrarrges "with Foreman for Workman's job to go on without delaying Production. REMARKS:- Specify condition of work ahead of Man:- DEPT. FOREMAN Mo. I>nj Vr. Signed D M Clerk (NOT) ALLOWED Mo. Day yr, Signed FCmploy. Sup'v'r. CHECKED WITH WORKMAN'S RECORD Mo. Da j Y Signed Emp. Dept. Clerk Form AU1. Workman's Absence Report (Size 4| in. sq.) 244 BOOKKEEPING AND COST ACCOUNTING Form A-1257-Mfg. WORKMAN'S RATING REPORT NAME CLOCK NO. OLD RATE NEW RATE NEW RATE BEGINS Mo. Day Yr. CONTINUES UNTIL Mo. Day Yr. REPORT ISSUED Mo. Day Yr. PERIOD BEGINS PERIOD ENDS TERIOD LENGTH Hrs. KAI mit EXPLANATION Rl | ORTJ STAMHRU e Per cent of task time earned P. absence per hour worked Pa 1 time spent on day work P, s Average cost of spoiled work per hour N No. of major processes can do y Years of continuous service c Conduct and co-operation REMARKS: the workman, one for the paymaster, a7id one to the tickler) Your record through the current period will increase or decrease your rate for the coming period. AUTHORIZED APPROVED APPROVED Production Manager Superintendent Dept. Foreman Returned Form MANS _. NO. D M Issued NAME IDLE TIME Hrs. 10b C T H p«-r. N Operation Name Drill A Tap Original Pieces Issued Machine for this Operation Machine Work'd on this Opr'n Machine for next Operation 14 DP DG M 20 DP D2 M No. of Good Pes. . claimed Finish ed on this Job Rel. No. If Job is nJt finished r ^- If Job is finished »-t*- ^ NF Inspected D.M.H. Route Sheet Man's Cost Mach. Cost Man's Job Card DAY WORK B Pram. Limit C-AB Time Time Saved E=C-D G = D + F Man's Rate .40 Earnings (Coupons for Inspector and Move Man) I have inspected the first and found them O.K. pieces on this job Drawing No. Lot No. Form A-1077 Signed by Stan's Man's |-» M Name No. Piece Symbol Oper. No. | Operation Name Original Pieces Issued Machine for this Operation j Machine Work'd on this Opr'n Mate- rial Data Means Star- ted Fin- ished Machine for next Operation Returned Drawing No. Lot No. A-1077-A Issued Man's Man's r* M Name No. Piece Symbol 1 Oper. No. Operation Name Original Pieces Issued Reasons Machine for this Operation Pieces Spoiled Wt. Material Machine Work'd on this Opr'n Pieces Defective Machine for next Operation Pieces for Repair Mark off Machines Not worked on Good Forw'rd'd Moved to Mo. Day Hour Rec'd by Route Sheet Moved by 1st Inspected by Moved by 2nd NO. OF PIECES DATE ORDER NO. NAME MATERIAL OPERATION Dopl. MACH. First Lot BftGIN Second Third Lot Lot Fourth Lot 1 (5 lines, i per inch) 1 . —i ! 1 ... . I 6 Sinilpfip'.T K, 1 7 Poli-h 8 Stump ,. 9 Drill Id 10 Fill ,. 11 Brush ,, 12 Trim 13 R.polish K3 14 Clean K7 15 Pack 16 ('0 lines, down to line SI) ,, 5m C-1G Form B 115 SHOP ORDER Reverse DEPT. P < OPERATION RECEIVED Date Daily Total Daily Total Daily (Five addit onal double columns] , I Form CE1. Shop Order. Name | Pieces for | Machine Pirt Mo. Material A 8 Operation Dep't SI a No. Clin. Ko. T....I LoMttea ,£W., HoTTinxkS {tsltnea, £ per inch) 1 MASTER ROUTE CARD Date ir/te reverse side has the same printing, omitting the top heading) Form CE2. Master Route Card RET'D ISS'D Part and OrderNo. Mans Name Man's No. Time Allowed Time Taken Finished Not Finished Bonus Hourly Rate Transferred Breakdown Pay for Wages Caught Up Machine No. Machine Expense Man Expense Name of Part or Job Operation Name Oper No. Amount Finished Rate Wages {'-< lines) Entered in O K for Quality O.K. for Quantity Dm*. Clerk Schcd. ule Record Roll I'odt 8140 PRODUCT ION CARD Form AU5. Man's Job Card Form CE3. Production Card. 246 BOOKKEEPING AND COST ACCOUNTING Order No. Article Ojwr. No. Taken Amount Hui*wi PUm lUte Wnitcs Uleadinaa on the reverse side of Card CE 3.) {13 lines, t per in.) Form CE3. Production Card, Reverse) RET'D Dept. ISSD Man's No. Man's N Hourly Rate Machine No. Machine Expense Man Expense Name of I'arl or Job Order No. Operation Name Opor. No. Time Tak on A nut Flnliuctl Rftte Wages (.* itnui t per in.) Entered In O.K. for Quality O.K. for Quantity Do]*. CI, ,k Hatai i- III.' \ IU'i ul il P%3 Run fort \U: ....I »W* PRODUCTION CARD(Ovcrtlmc) Form CE5. Production Card, Overtime (Size » * 11 In.) Date Ordered 4/19 1017 Article 1871. RECORD OF PROGRESS No. of Pieces 600 Order No. 250 Operation Name Murk Handsaw Cut Flat Edge Round Edges Turn Pocket Dole- M IF, 1 1,1 Product Wages Product Wanes Product Wages Product Wages I'roduct Wages li, i; H 5 a E c = 0' 9 | S 5 S'b m Apr. i'.i 000 .:, (50 2 III! ■jip 130 ... 150 2 Ml ■.■I 150 1 ... St ■", cm H .... 50 1 ,'.ii s< ill • 3 lill Form CE4. Record op Progress of an Order Ree'd Unish'd Machine Symbol Charge Symbol Repair Order No. Operator Partly - Totally Disabled Montli Dm .,., _A.M P.M. Parts Broken Work In Machine at Time Please make above reparlrs by Mo, D. T Y... Oi Machine nvallahle for repairs on This order must be sent to Repair Office im Brts-wo-BiM REPAIR ORDER I oremun ( The reverse aide of this Card is printed as below) Oper. No. Operation (..Inc.* ■■( Work Workman Rate 1 {in tinin. ! ;•• r ••>.-!, ) 2 1 1 II l W a ties Expense Material Expense Total Charges I .. I., Kepi l>\ Repu r Office Form CE6. Repair Order Iss'd Rec'd From Dept. To Dept. Order No. Pieces or Quantity Name of Part IYi In. apace O.K. (or Quantity Issued O.K. (or Quantity Received TO BE SENT TO MFG. OFFICE FORWARDING TICKET ORDER NO. Pieces or Quantity Tills coupon must remain with material (or Identification Identification Coupon Form CE7. Forwarding Ticket and Identification Coupon REPORTS TO STOCKHOLDERS; EDUCATION OF ACCOUNTANTS, ETC. 247 Form LS is a Job and Time Ticket used by Lodge & Shipley Co., Cincinnati, Ohio. (Size of Card 6 x 4 in.) Operation: Shop No. Name of Piece Sym. & 1\ N.. I Ouan. Pwm. tlluw. Frr to 1 Tracer* Check Prtmluto l'»l'i To Detach Come Defective Spoiled Man No. Workman: ■0 IT) Stop Start Previous Time on thia Job Man No. Tl™ M«n N ■ Ilm. Total Allow O.T. Rate Earnings Actual Time Prem. N'ot.V FlnishcJ or not Finished 0--.7 BMtrum* Man No. THIS SIDE OUT < — ^£ Put Card In Receiver To These Marks ^^ >. Day Present Absent Late Overtime Notes Thur. 1 Form LS. Job and Time Ticket. (Lodge & Shipley Co.) Form PR is a common form of Pay Roll. Forms NE 1 and 2 are two cards used for general machine work by Nash Engineering Co., South Norwalk, Conn. (SUo JX ■ *X '"-< Date 1 H e g B A.M. z z P.M. Z - z iSpaceB for 'lays) (Total at br ttom) A.M. . *1 Form NE1. Clock Time Card This time card is Form L38, furnished by Simplex Time Recording Co., Cardner, Mass. £."«.« JOB CARD Job No. List No. Dwg. No. Operation Rec'd Fin. Def. Elapsed Time (« IfMS) IN OUT Form NE2. Job Card. (Size 3£ X8| in.) lS*ia»'tf*'SXin.) Examined and Registered PAY ROLL Week Ending Pay Sheet Dept. Approved for Payment Number of Sheet Total This Dept. Name No. Rate Total Time Pay Deduct Net Pay & lines '< per inch III £E Form PR. Common Form of Pay Roll COST RECORD Date Issued Order No. Pieces Ordered Pieces Received Material Labor Expense Total Coat Total Cost Rate of Expense I OI.il Per Total Per Iota] Per P.- i ft tinea) Form CR. Cost Record. (Size GjX3 in.) Forms CR, PW are a Cost Record and a Plant Work Job Card which are found useful in many shops. 248 BOOKKEEPING AND COST ACCOUNTING PLANT WORK JOB CARD w „ v Workman No. (. 2 Direct Labor. c 3 Indirect Labor. O Eli 7 Repairs, Patterns. w 9 " Machines, Tools and Equipment. 9 Errors and Experimental. m 10 General Expenses. 22a Direct Labor, Molding. e* 226 Coremaking. 23a Indirect Labor, Cupola. p 236 Anneal Furnace. o ft, 23z " Sundry. c 27 Repairs, Patterns. 1- 28 " Machines, Tools and Equipment. 29 Errors and Experimental. 30 General Expense. 42a Direct Labor Lathe. Alb " Screw Machine. A3c " Punch. Aid " Bench and Teat. Ale " Buffing and Polishing. >■ 42/ " Plating. +* 43a Indirect Labor, Lathe. d 43b " " Screw Machine. m 43c " " Punch. 3 43d " " Bench and Test. CQ 43e 43/ 43fl 43z •• » Buffing and Polishing. Plating. Lathe and Bench Dist. Other Distributive. Ala Repairs, M. T. and E.— Lathe. 476 11 *' Screw Machine. Correct . 47c Repairs, M. T. and E. — Punch. Aid " Bench and Test 47c " " Buff, and Pol. 47/ " " " Plating. 50 Errors and Experimental. 51 General Expense. 62a Direct Labor, Lathe. 626 Bench and Test. >> 63a Indirect Labor, Lathe. c 636 Bench and Test. 63z Distributive. In 67a Repairs, M. T. and E. — Lathe. O 676 Bench and Test. & 67* Distributive. 70 Errors and Experimental. 71 General Expense. 81 Labor. * 83 Repairs. &H 84 General Expense. 91 Packing and Shipping Expense. 92 Stable Expense. 93 Drafting Expense. 94 Laboratory Expense. > 97 Accounting Costs, Timek'g and Orders. ~ 100 Repairs, Machines, Tools and Equip. "£- 101 R. R. Maintenance and Repair. 5 103 Repairs, Real Estate and Buildings. 104c Sundry Expense, Rec'g. St'ge, Transp'n. 104c Pattern Shop. 104. Tool Room. I04t Tool Storage. Approved . 104/ Sundry Expense, Cleaning and Sweeping. I04ff Japanning. 104ft " Emp. Club Room. 104/ " Inspection. \0AI " " Police and Fire Pro. 104m " " 25% Bonus, Pr. Lab. I04n " " 50% Bonus, Pr. Lab. 104.: " " Miscellaneous 112 Pattern Making. 1 13 New Tools in Process. 1 14 Stock Tools in Process. ■*» 0) 133 Sherardizing Labor. U 134 Expense. J3 CG 136 Equipment Repair. 154 Advertising. M 155 Salesmen's Salaries. 158 City Sales Department. CO 160 Exhibit Expense. 161 Miscellaneous. 162 Salaries of Officers and Clerks. c- C c 163 Stationery Department. 165 Office. 169 Restaurant. c 170 Automobile. 171 Donations. 172 Miscellaneous. < III Labor — Credit Total Form LC3. Pay Roll Distribution Voucher REPORTS TO STOCKHOLDERS; EDUCATION OF ACCOUNTANTS, ETC. 249 ANALYSIS OF PAY ROLL (Column Headings ) The Lunkenheimer Co., Cincinnati, Ohio. Hours Wages No. of Men Av. Rate per Hour Compared with Descriptive No. of Men Inc. Dec. Rate Inc. Dec. Under Descriptive are the following: 1 Floor and Bench Molders. 2 Machine Molders. 3 Core-Makers, Day-work. 4 Core-Makers, Piece-work. 5 Molders' Helpers. 6 Sundry Core-room Laborers. 7 Refining Laborers. 8 Furnace Tenders. 9 Sand Shovelers. 10 Grinders. 1 I Cleaners, Filers and Sprue Cutters. 12 Sand Blast Operators. 13 Testers — Rough Castings. 14 Foremen. 15 Miscellaneous. 1 5 1 Briquetting. Total— Brass Foundry Total — Iron Foundry 27 Foremen, Factory Productive Departments. > 28 Tool Room. -*3 29 Pattern Shop. 3 09 30 Power Plant. 31 Millwrights. 32 Blacksmiths. ed Z P- 1 O >> 33 Janitors. 34 Truckmenand Elevator Operators 35 Receiving and General Stores. o 36 Brass Casting Stores. es 37 Iron Casting Stores. 38 Finished Stores. 39 Tool Storage. 40 41 Painting. 42 Japanning. 43 Inspection. 44 Wrapping. 45 Shipping. 46 Stable. 47 Watchmen. 48 49 50 Miscellaneous. Total — Factory N. P. Depts. (Size of sheet, 16^X11, divided in two parts No. 56.) Total — Iron 3 c u a P4 55 Machine Hands, Day-work. 56 " Piece-work. t Total — Punch 51 Machine Hands, Day-work. 52 Piece-work. 53 Bench Hands, Day-work. 54 " Pieee-work. 57 Machine Hands, Day, Brass Valve Dept. 58 " " " Lubricator Dept. 59 " " Cock-P. V. Dept. 60 " " " Injector Dept. - a Total CQ 61 Machine Hands, Piece, Brass Valve Dept. = 62 " Lubricator Dept. ■~ 63 " " Cock-P. V. Dept. •i. 64 " " Injector Dept. Total <-. 65 Bench Hands, Day, Brass Valve Dept. 66 " " Lubricator Dept. 67 " " Cock-P. V. Dept. 68 " " Injector Dept. Total 69 Bench Hands, Piece, Brass Valve Dept. 70 " " " Lubricator Dept. 71 Cock-P. V. Dept. 72 " " " Injector Dept. Total Summary — Brass Valve Dept. Lubricator Dept. Cock and Pop Valve Dept. Injector Dept. Total — Brass, Lathe and Bench * .5 a -a 73 Machine Hands, Day-work. 74 " " Piece-work. 75 Automatic Machines. Total Screw Machine 76 Machine Hands, Day-work. 77 " " Piece-work. Total — Milling Machine « 78 Polishing, Day-work. 79 " Piece-work. 80 Buffing, Day-work. 81 " Piece-work. 82 Total — Buffing and Polishing 83 Testers — Finished work. 84 Plating. 85 86 87 88 Total — Other Departments Total — Factory Prod. Depts Total — Manufacturing Depts. 89 Sherardizing Dept. 90 Administrative and Selling Depts, Total — Miscellaneous Grand Total of Pay Roll Form LC2. Analysis of Pay Roll After the job cards of the several departments have been sorted by workmen's numbers and the time and wages entered on the pay rolls they are sorted by piece and opera- tion symbols and entered in cost ledgers. These are large loose-leaf books, and there is a large number of them, each containing about 2000 pages. They are indexed by depart- ments and by piece symbols, and from them can be obtained all the detailed information of the labor cost of each opera- tion on any lot of pieces that has been worked on. The Joseph & Feiss Co. Clothcraft Shops. Form JF is a multiplication table (here reduced in size, only the corner portions being shown) devised by the Joseph & Feiss Co., of Cleveland, Ohio, to save the labor of calculation of wages due on piece work. A separate blank is printed for each piece-work rate used in the shop. The labor of making a garment is subdivided to the utmost. A sewing machine operator may be given a pile of from 100 to 500 sleeves to have one or two seams run on them, with one of these job tickets. When the job is finished the inspector marks on the ticket the number of pieces done, and the wage figure is seen immediately. The operator's name and address are printed on the ticket by means of an addressograph. If a man does more than one job in a day separate tickets are issued each day. The route clerk so plans the work as to keep the number of tickets or slips as few as possible. At the end of the day the slips are handed in and they are posted to the pay roll. Each operator has a ruled book in which he records his earnings each day. The pay-roll clerk keeps a yearly pay-roll record giving each man's daily earnings. 250 BOOKKEEPING AND COST ACCOUNTING .No. In r>Rpt. n»v Price .()( )(',.-> Operation 1 00C5 2 on 3 0195 4 026 5 0325 6 039 7 0455 8 052 9 0585 19 065 11 0715 31 2015 32 203 33 2145 34 221 35 2275 36 234 37 2105 38 247 39 2535 40 26 41 2^95 61 3005 62 403 63 4095 M 416 65 4225 66 429 67 4355 68 442 69 4485 70 455 71 4615 91 5915 92 598 93 G045 94 611 95 G175 96 624 97 0305 98 637 99 6435 100 ■55 101 6565 121 7805 122 193 123 7995 124 806 125 8125 126 819 127 8255 128 832 129 8385 130 645 131 8515 451 2.9315 452 2.938 453 2.9445 454 2.951 455 2.9675 4S6 2.964 457 2.9705 458 2.977 459 2.9835 4(.0 2.99 461 2.9965 481 3.1265 482 3.133 4»3 3.1395 484 3.146 485 3.1525 486 3.159 487 1.1055 488 3.172 489 3.1785 490 3.135 491 3.1915 ■ Slipo 20 13 21 1365 22 143 23 1495 24 156 25 1625 26 169 27 1755 28 182 29 1885 30 196 50 325 51 3315 52 338 53 3445 54 361 55 3575 56 364 57 3705 58 377 59 3835 60 39 80 52 81 6265 82 633 83 5396 84 546 85 5525 86 559 87 5655 88 572 89 5785 90 686 no 716 111 7215 112 728 113 7345 114 741 115 7475 116 754 117 7605 118 7G7 119 7735 120 78 140 91 141 91G5 142 923 143 9295 144 936 145 9426 146 949 147 9555 148 9G2 149 0685 150 976 470 3.055 471 3,0016 472 3.068 473 .3.D745 474 3.081 475 3.0875 476 3.094 477 3.1005 478 3,107 479 3,11*15 480 3.12 500 3.25 Form JF. Piece Work Job Ticket. The Joseph & Feiss Co. (Size 8x5 in.) The author wishes here to express his thanks to Messrs. Joseph & Feiss for the courtesies extended in his visit to their shop and his gratification in seeing the evidences of their success in handling the labor problem in such a way as not only to increase wages and at the same time to decrease pro- duction costs, but also to greatly reduce the " labor turnover," that is, the percentage of the total working force replaced during the year. (Sfce a xS%in.) To. REPORT OF DELAYS Shop. Date .191 Turn. Number of Machine Electrical Mechanical Hydraulic Nature of Delay Hrs. Mm. Hrs. Min. Hrs. | Mln. Hrs. Mln. VI ruled lines) . - Note:-Report fully and accurately. Foreman Form W23. — Report of Delays. — (Albert Walton) Mr. Walton says of this form : Of value especially in a shop operating high-priced machine tools, but like all such reports it is useless unless followed up; in other words, when there has been a delay that was avoidable something should happen, otherwise it is of no use to report it. In cases where the work is upon special contracts and the work not standard, consideration must be given to the time within which each department must do its share of the work, calculating from the given delivery date. This time should be entered upon the Special Stock Tracing and Cost Sheet. The cost entries are made from the workmen's time tickets. The headings of the column of the sheet are as follows: Operation. Quantity. Depart- ment. Date Delivered. Should be Finished by Date Returned. Time Consumed. Hrs. Min. Bonus Time. Hrs. Min Actual Labor Cost. Work- man. Machine No. No. of Pieces Lost. Why. .Form CC— Special Stock Tracing and Cost Sheet.— (C. U. Carpenter) Other items on the sheet are: Total, Order No., Material, Purchase Requisitions 3 Weight, Cost, Name of Stock, Total Cost, Box No., Date, Purchase Orders 3 Should be finished by. Report of Material received 3 Other Forms. Elbourne, Factory Administration and Ac- Stock Record— Raw Material 3 counts, gives 145 "Routine Forms to assist the reader in Production Order 5 settling routines to suit his own particular forms, and pos- Material Requisition 3 sibly to guide him in designing his own forms." Each form Bill of Material 1 is accompanied by an explanation of its use. Report of Material delivered 2 Nicholson, Factory Organization and Costs, gives 73, Time Tickets 5 which are classified as below with the number of different Payroll and Labor Distribution Sheet 7 Styles in each class: Production Reports 2 REPORTS TO STOCKHOLDERS; EDUCATION OF ACCOUNTANTS, ETC. 251 Stock Records — Finished Product 3 Cost Records 6 Defective Work Reports 1 Statement of Factory Expenditures 2 Operating Ledger 1 Billing Systems 2 Register of Sales and Costs 6 Accounts Payable Voucher 1 Register of Accounts Payable 3 Check Voucher 2 Cash Systems 2 Drawings, Pattern and Equipment Records . . 4 Monthly Financial Reports 3 BIBLIOGRAPHY Books on Cost Accounting. — The first important book published in the United States describing the modern sys- tem of cost accounting was that of Captain Henry Metcalfe, U. S. A., the first edition of which appeared in 1885. It is still a standard work and is now in its third edition.* It contains reprints of Mr. Oberlin Smith's paper on "No- menclature of Machine Details," read before the American Society of Mechanical Engineers in 1881, and of Captain Metcalfe's paper on " The Shop Order System of Accounts," read before the same society in 1886. The book describes at length the organization of the United States Arsenals and their old and unsatisfactory methods of bookkeeping. The author proposes a new system, based on cards instead of books, which is the foundation of the best systems that are now in common use. It includes order, labor, material (or service), requisition and correspondence cards, abbre- viations and symbols, signatures by punching, stamps, racks, pigeon-holes, trays, methods of sorting cards, and of making journal and ledger entries. Forms HM1 and 2, page 93, are reproductions (greatly reduced in size) of two of Captain Metcalfe's cards. Between the years 1900 and 1917 Engineering Magazine made a specialty of publishing articles on cost accounting and scientific management, many of which were afterwards published in book form. From 1908 to the present time many other books on these subjects, and on accounting in general, have appeared. The following list contains most of them: The Complete Cost Keeper. H. L. Arnold. Some original systems of shop cost accounting. Advantages of account keeping by means of cards instead of books. 3d edition. Eng. Mag. Press, 1903. Describes systems used by Strieby & Foote, Hyatt Roller Bearing Co., De Laval Sepa- rator Works, Struthers, Wells & Co., National Switch & Signal Co. Practical Cost Accounting for Accountant Students. Clinton E. Woods. 2 vols., 6X8f in., 119 and 258 pp. Uni- versal Business Institute, New York, 1908. The Proper Distribution of Expense Burden. A. Hamilton Church. 5^X7! in., pp. 116. Engineering Magazine Co., New York, 1908. ♦The Cost of Manufactures and the Administration of Work- shops, Public and Private. By Captain Henry Metcalfe, Ordnance Department, U. S. A. (Retired). Third Edition, 1907. 6X9j in. pp. 366. New York, John Wiley & Sons. Accounts, Their Construction and Interpretations. W. M. Cole. Houghton, Mifflin & Co., Boston, 1908, pp. 345. Factory Organization and Costs. J. Lee Nicholson. Half leather, 8jXllj- in., pp. 410. Kohl Technical Publishing Co., New York, 1909. The Cost of Mining. James Ralph Finlay. McGraw-Hill Book Co., New York. Cost Keeping and Management Engineering. A treatise for engineers, contractors and superintendents engaged in the management of engineering construction. H. P. Gillette and R. T. Dana. M. C. Clark Publishing Co., Chicago, 1909. Production Factors in Cost Accounting. A. Hamilton Church. Eng. Mag. Co., 1910, pp. 187. Cost Keeping for Manufacturing Plants. S. II. Bunnell. D. Appleton & Co., New York, 1911. Good description of machine-hour rule. Factory Costs. By F. E. Webner. Cost Accounting Specialist. New York, 1911. Ronald Press Co., pp. 611. Cost-keeping and Scientific Management. Holden A. Evans. McGraw-Hill Book Co., New York, 1911, pp. 260. Lecture Notes on Business Administration. Alex. C. Hum- phreys. 6X9 j in., pp. 565. Published by Stevens In- stitute of Technology, Hoboken, N. J., 1912. (Especially good on Depreciation.) Applied Methods of Scientific Management. F. A. Parkhurst. John Wiley & Sons, 1912, pp. 325. Contains numerous forms used in timekeeping, storekeeping and cost accounting, also a discussion of different methods of wage payment. Factory Accounts. C. E. Hathaway and J. B. Griffith. Amer- ican School of Correspondence, Chicago, 1912, pp. 208. Cost Accounting Theory and Practice. J. Lee Nicholson. The Ronald Press Co., New York, 1913, 6X9 in., pp. S41. With numerous forms and diagrams. The Science of Accounts. A presentation of the underlying principles of modern accounting. H. C Bentley. Ronald Press Co., New York, 6\ X9£ in., pp. 393. Cost Reports for Executives as a Means of Plant Control. B. A. Franklin. Eng. Mag. Co., pp. 149. A Method of Determining Costs in a Cotton Mill. H. W. Nichols. E. Anthony & Sons, New Bedford, Mass., 1915, 6X9 in., pp. 115. General Factory Accounting. F. H. Timken, Efficiency Engr. Trade Periodical Co., Chicago, 1914, pp. 171. Efficient Cost Keeping. E. St. Elmo Lewis. Burroughs Adding Machine Co. 3d edition, Detroit, 1914, 5JX7i in. pp. 256. Auditing and Cost Finding. Seymour Walton and Dexter S. Kimball. 5|X9 in., pp. 480. Alexander Hamilton In- stitute, New York. Problems in the Principles of Accounting. W. M. Cole. Har- vard University Press, Cambridge, Mass., 1915, 6X9 in., pp. 102. Predetermination of True Costs. Frederic A. Parkhurst. 6X9i in., pp. 96. John Wiley & Sons, New York, 1916. Cost Accounting and Burden Application. By Clinton H. Scovell. 5^X8 in., pp. 328. D. Appleton & Co., New York, 1916. How to Find Factory Costs. C. Bertrand Thompson. 6jX9| in., pp. 191. A. W. Shaw Co., Chicago, 1916. Shop Expense Analysis and Control. Nicholas Thiel Ficker. Eng. Mag. Co., 1917, 6X9 in., pp. 236. Cost Accounting for Oil Producers. Clarence G. Smith. Bulle- tin 158 of the U. S. Bureau of Mines, 1917. Pamphlet, 6X9 in., pp. 123. The following works deal entirely with English practice which, in many respects, differs widely from the American: Factory Accounts. Garcke & Fells. 6th edition, 1911. Crosby, Lockwood & Son. Deals with principles. 252 BOOKKEEPING AND COST ACCOUNTING Factory Administration and Accounts. Edward T. Elbourne. Large 8vo, 6jX9J in., pp. 638. Longmans, Green & Co., London, 1914. Advanced Accounting. L. R. Dicksee. Gee & Co., London. Accounting Theory and Practice. George Lisle. Wm. Green & Sons, Edinburgh. Books on Scientific Management and Industrial Engineering Profit Making in Shop and Factory Management. Chas. U. Carpenter. Eng. Mag. Co., 1908, pp. 146. Factory Organization and Administration. Hugo Diemer. Eng. Mag. Co., 1910. Principles of Industrial Management. John C. Duncan. D. Appleton & Co., New York, 1911. The Principles of Scientific Management. Fred W. Taylor. Harper & Bros., New York, 1911, pp. 77. Shop Management. Fred. W. Taylor, with an introduction by Henry R. Towne. Harper & Bros., New York, 1911, pp. 207. Motion Study. A method for increasing the efficiency of the workman. Frank B. Gilbreth. D. Van Nostrand Co., New York, 1911, pp. 116. Primer of Scientific Management. Frank B. Gilbreth, with an introduction by Louis D. Brandeis. D. Van Nostrand Co., 1912, pp. 108. Efficiency as a Basis for Work and Wages. Harrington Emerson. Eng. Mag. Co., pp. 171. Work, Wages and Profits. Henry L. Gantt. D. Appleton & Co., New York, 1916, pp. 328. Industrial Plants. Charles Day. Eng. Mag. Co., 1911, pp. 234. Maximum Production in Machine Shop and Foundry. C. E. Knoeppel. Eng. Mag. Co., 1911, pp. 400. The Human Factor in Works Management. James Hartness, McGraw-Hill Book Co., New York, 1912, pp. 200. The Psychology of Management. The Function of the Mind in Determining, Teaching and Installing Methods of Least Waste. Lillian M. Gilbreth. Sturgis & Walton Co., New York. 8vo, 2d edition, 1917. $2.50. Fatigue Study: A First Step in Motion Study. Frank B. Gilbreth and L. M. Gilbreth. Sturgis & Walton Co., 1917. 12mo. $1.60. Applied Motion Study. Frank B. Gilbreth and L. M. Gilbreth. Sturgis & Walton Co., 1917. 12mo, pp. 220. $1.60. Red Tape of the Interstate Commerce Commission. The price of a round-trip ticket between Los Angeles and Pasadena is 25 cents. If the return coupon is not used within ten days after the printed date of the outbound ticket the conductor will refuse to receive it and tells the passenger that he can get a refund of 10 cents for it on presentation at the ticket office in Los Angeles. When it is presented the refund clerk carefully fills out a blank form with a description of the ticket which the passenger signs with his name and address, and then gets the 10 cents. In case the conductor has in- advertently punched the ticket before handing it back to the passenger the clerk refuses to receive it, but states that it may possibly be redeemed in the Traffic Manager's office up-stairs. In that office the clerk fills out a claim blank, which the passenger signs; then he fills out a check-book stub and a regular bank check, printed on safety paper, which the passenger may deposit in his own bank or collect it from the refund agent as he may prefer. The bank check is reproduced below. The agent explained that the Railway Co. was not to blame for this red tape, as it was enforced on the Company by the Interstate Commerce Commission. Several better ways of transacting this business may be suggested. The tickets might be marked " good until used," or " not good after 30 or 60 days," and in that case the con- ductor might be authorized to receive the ticket as good for 10 cents in part payment of a single fare, 15 cents, or of a round-trip ticket, 25 cents. 5i^v Form 5451 KWm\ PACIFIC ELECTRIC RAILWAY COMPANY Traffic Department In settlement of- Claim for Refund of Fare Filed with this Con If Presented for Payment within Ninety (90) Days from Date Her THIS DRAFT NOT VALID IF DRAWN \E0ftMflftE THAN FIFTY D0LLAR8 qllect through Farmers & Merchants National BanJct^Los^Afigeles, Cat. ble only when Countersigned by D. W. PONTIUS, ur *• E> GlanCy 'o, A. SMITH, or H. D. PRIEST, Traffic Manager. j^eto l^orfe {Erttmne april 20, 1917 (By permission) Airit It a Grand and Glorious Feelin? By BRIGGS AFT5R You HA\>E BegnJ VJoRKtrJG OM A Trial. "BAUAtfJce. amD Vbu vajork ovERTd^e TTajo or Three mights and ThinIGS LOOK "BLUE AMD SuMMiMG UP FlMD That The THING Does NOT Balance - |F ALL of a SvjPDEK You AtClDEMTALLV TURM OVER A PAGE -ADD UP A COLUMN -Amd FIMD The ERROR ?? An/D VoU 6ETTLE DOvvm FOR A LOfJG HUMT Through Pages and vaGES OW-h « Ain't it a AMD Glor-e Yus Ciei/eL*""} Rather undignified for a serious book, but " a little nonsense now and then is relished by the wisest men." This man did not use the self-balancing Column Ledger. 253 TOPICAL INDEX PAGE Account Current: Account Sales 12 Accounts, Classification of. .12, 131, 152, 170 Accounts for Retail Merchants 22 Accounts in a Printing Shop, Titles and Definitions 219, 223 Accounts Receivable 8, 14 Payable 8, 14 Titles and Definitions of 6, 23 Accountant and Efficiency Engineer, Relation between 5 Accountant, Technical Experience Nec- essary 241 Accounting, Statistics and Costs Depart- ments Separated 19.5 Accounting Code 12, 39, 45 Accounting, College Education in 240 Accounting System, a Simple 41 Accounting System, Condensed 32 Accounting System. Diagram of 103 Accounting System for a Steel Works. . 151 Accounting System in a Hardware Fac- tory 180 Accounting System, Starting a 50 Accounting versus Cost Keeping 49 Accrued Expenses 1 1 , 56 Adjustment Account, Material. . . . 153, 189 Adjustment, Profit and Loss 30, 44 Advance Payments, Accrued Expenses . 1 1 Aluminum Foundries, Cost-finding in.. . 172 American Telephone and Telegraph Co., Report of 237 Amortization (see Depreciation Reserve). Amortization of Power Plant 88 Appraisal and Perpetual-inventory Values 89 Appraisals, Depreciation for Insurance Purposes 91 Appraisals of Manufacturing Property.. 91 Arsenals, Causes of High Cost in 112 Assets and Liabilities 39 Auditor's Report 44, 46 Axioms Concerning Costs 127 Bakery, Costs Account for a 206 Balance of Stores 54 Balance Sheet 20, 23, 27, 32, 163 Balance Sheet, Commercial and Factory Ledgers 96 Balance Sheet, General Ledger. . . . 198, 200 Balancing Bills Receivable and Payable 10 Balancing Property Accounts 11 Bell Telephone System, Report to Stockholders 237 Benefactor to the Race, a 124 Betterment Accounts 45 Bibliography 251 Bill Book 9, 15 Bills, Payment of 2 Receivable and Payable 9 PAOE Blacksmith Shop Costs 70 Blank Forms (see Index of Forms) 259 Blast Furnace, Weekly Report of Ill Blotter or Day Book 3 Books on Cost Accounting 251 Bookkeeper, Accountant and Engineer. 5 Bookkeeper, Work of 195 Bookkeeping at. an Iron Blast Furnace. 140 Bookkeeping at a New Jersey Blast Furnace 143 Bookkeeping by Machinery 135 Bookkeeping, Elementary Principles. . . 1 Single and Double Entry 2 Bonds and Stocks, Investment in 11 Bonus, Effect of on Profits 59 Method of Figuring 58 Bonus System of Wages 124 Brass, Bronze, and Aluminum Foundries Cost-finding in 172 Burden Charging, a Problem in 77 Burden, Example on Three Machines. . 72 Example of Department and Class. . . 73 Burden, Distribution of 34, 36, 46, 65 Supplementary Rate 46, 77, 78 Burden Distribution Book 55 Burden Distribution in a Printing Shop. 213 Burden Distribution in a Woodworking Shop 204 Burden Distribution in Column Ledger. . 98 Burden Distribution, Error of Old Meth- ods of 112 Burden Distribution, various methods, viz: Percentage on Direct Labor 65 Man-hour Method 65 Department Method 66 Class of Product Method 67 Machine-hour Rate 67, 150 Modified Machine Rate 69 Job Rate 69 Department and Class of Product. . . 72 Burden fallacies 80 False and correct theories of 80, 81 Burden in Minor Departments, viz: Blacksmith Shop 70 Carpenter and Paint Shop 70 Foundry 71 Polishing and Plating 71 Grinding Room 72 Burden, Last Word on 81 Standard, per Unit of Product. ...... 81 Burden, Machine-shop, Calculation of . . 68 Normal or Standard 72, 75 Table 70 Burden Rates, Comparison of. .63, 67, 72, 73 Burden, Supplementary Rate Method . . 78 Burden, Unearned and Overearned. . .117, 243 Business Expense 194 Business Expense, Distribution of. . 200, 202 Business Expense, Error of Charging to Cost 202 255 By-products, calculation of profits from 109 By-products, Difficulties in Costing ins, 149 C Calculating Machines Lis Capital Stock 6 Card Holder, Walton's 151, 167 Card Ledger 1 Cards for Production and for Costs. . . . 55 Cards used instead of Books 93 Carpenter Shop Costs 70 Cash Book 1,13 Discount and Interest Column in. ... 14 Cash Book, Sample of 141 Chart of Iron Works Statistics 106 Charting of Costs 103 Charting of Statistics 103 Check Register 54 Church, A. Hamilton, Supplementary Rate 7S Classes and Departments in Hardware Factory 180 Classification of Accounts 12, 131 Clerical Work on Tickets 60 Coal, Cost and Price of 178 Code for Accountants 12, 39. 45 College Education in Accounting 240 Column Cash Book 15 Journal 15 Column Ledger 17, 29, 31, 40 Column Ledger, Advantages of 95 Commission Business 12 Company Books separate from Factory- 35 Company or Private Ledger 36, 40, 45 Comparative Cost Record Card, Form NM. 2 100 Condensed Accounting System 32 Consignment Accounts 12 Controlling Accounts 8, 121 Corporations, Reports to Stockholders of 237 Cost Accountant, Functions of the 122 Cost Accountant, the Chief 122 Cost Accounting 49 Cost Accounting in a Woodworking Shop 203 Cost Accounting in Government Shops 92, 94 Cost Accounting, Old School 140 Cost Accounting, Problems and Dif- ficulties 60, 77, 108 Cost Accounting, Textile 206 Cost Accounting for a Bakery 206 Cost and Price of Coal 178 Cost and Value of Disks Made from Scrap 108 Cost Cards, Piece and Finished Product 55 Cos»-collecting Cards 194 Cost, Definition of 121 Cost Estimates in a Woodworking Shop 205 Cost Factor, Relative 193 Cost-finding by the Time-study Method 204 Cost Finding in Brass Foundries 172 256 TOPICAL INDEX Cost-finding Methods 57, 60 Cost Formula, Emerson's Ill Cost, high, of Work in Government Shops j 12 Cost Keeping in a Rolling Mill 150 j Cost Keeping, Objects of 120 Cost Keeping versus Accounting 49 Cost of Idleness 105 Cost of Iron when By-products are made 149 Cost of Operation of Power Plants 20S Cost of Pig Iron 145 Cost of Silver HO Cost Periods, Weekly and Monthly 100 Cost, post-mortem 49, 53 Cost Statement of a Foundry 173, 174 Cost Statistics, Conclusions from 120 Cost Summary, Finished Product 113 Cost System, Reducing the Cost of . . . . 112 Cost System Separate from Accounting System, Advantages of 149 Cost Systems that Failed 126 Cost Systems, Bad 126 Cost System, Devising a 123 Cost System, Functions of the 95 Cost, System, Objects of a 109 Cost System, Bookkeeping not a Proof of 198 Cost System for Printers, a Standard.. . 216 Cost Systems in Government Shops. ... 92 Cost System, Investigation of a 114 Cost System, Modification of 115 Cost and Efficiencies in Power Plants. . 211 Costs, Axioms Concerning 127 Costs, Causes of too high 112 Costs, charting of 103 Costs, Commercial, have no relation to Factory Costs 127 Costs, Curves of Standard 210 Costs, Determination of, by Estimates. 185 Costs, Factory, Uses of 109, 120 Costs, Foundry 171 Costs, How to Reduce Ill Costs in a Printing Shop 213 Costs of Labor and Material without Burden 76 Costs, Original and Revised 187 Normal 3g Costs, Predetermination of Ill Costs, Predetermined : 126 Recorded 35 Costs, Standard HI Costs, Standard in Power Plants 210 Costs, Subdivisions of 127 Costs tied to the General Books 146 Costs, Uses of 49 Costs, Uses of and Opinions on 120 Costing Difficulties when By-products are Made 10s Depreciation, definition of 86 Depreciation due to Obsolescence of Product jig Depreciation, Effects of at Different Rates, Tabie ss Depreciation, Four Methods of Calculat- es S6 Depreciation, Need of a Rule for 89 Depreciation not properly determined by Appraisal Companies gg Depreciation, Relation of to General Expense gg Depreciation, Standard Rates of, adopted by Manufacturers 90 Depreciation Table 87, 88 Diagram of Annual Exhibit, Fig. 2 104 Diagram of the Accounting System .... 103 Discount Column in Cash Book 14 Discount on Purchases 6 Disks made from Scrap, Cost of 108 Distribution of Burden (see Burden). Dividend g 45 Double-entry Bookkeeping 2 E Education of Accountants 240 Efficiency Engineer and the Accountant .5 Efficiency, not measured by low ratio of non-productive labor 112 Engineering, Industrial, Books on 252 Elapsed Time Recording Machine 138 Equipment, Record of 133 Errors, checking of 20 Establishment Expense (see Burden).. . 241 Estimate of Present Cost 1S6 Estimates, Cost, and Cost Records, PAGE Flow of Values, the 124 Forms, Caution in Regard to Use of. . . 178 Forms Used in a Foundry 175 Forms used in a Hardware Factory . 180-192 Forms used in Printing Shops 214-236 Forms used in a Machine Shop 192 Formula for Costs, Emerson's Ill Formulas for Profit and Loss 33 Foundry, Burden Distribution in 71 Foundry Costs 171 Foundry Reports, Monthly 173 Fundamentals of a Cost System, by Federal Trade Commission 94 Functions of the Cost Accountant 122 Gantt, H. L., Idleness Chart 105 General Charges, Distribution of 98 General Electric Co., Report to Stock- holders 238 Government Arsenals, Causes of High Cost in 112 Government Shops, Cost Systems in . 92, 94 Graphical Presentation (see Chart) . . 103, 106 Grinding Room, Costs in 72 Hardware Factory, Accounting System . 180 Hollerith Tabulating System 135, 182 I 206 Textile Estimates of Cost when By-products are Made jqs Exception Principle, The 103 Expense (see also Burden). Expense Accounts 1 1 Distribution 33 Expense Accounts, Subdivision of 180 Expense, Business, Distribution of. .200, 202 Expense Distribution Sheet 194, 199 Expense Supplies 45 Expenses, " Writing Off." 237, 238 Experiments, Cost of 128 Expert, Work of the 114 Daily Record of Work in Progress 99 Day Book or Blotter 3 Debit and Credit 1,2 Debtor and Creditor 1,2 Deferred Profit and Loss Items 32 Departments in a Hardware Factory. . . 180 Depreciation 28, 30, 47, 118, 238 Depreciation and Repairs, Method of Treating 85, 157 Depreciation Appraisals for Insurance Companies 91 Factory Accounting 35 Accounts, Subdivision of 36 Books Separate from General Books. . 35 Operation Account 35 Products, Continuous, Single, Varied. 35 Factory Books, Opening a Set of 37 Cost and Selling Prices 33 Journal and Ledger Entries 38 Ledger 41, 45 Factory Ledger, Condensed 98 Factory Orders (see Orders) 50 Fallacy of the Old School of Account- ants 80 False Theory go Federal Trade Commission's System: for Retail Merchants 22 for Factory Costs 94 Filing and Indexing 134 Idleness, Cost of 105, 241 Idleness Chart, H. L. Gantt's 105 Improvements suggested in Trade Com- mission's System 28 Income or Profit and Loss Statement . . 48, 163 Indexing and Filing Cards, Fig. 9 134 Industrial Engineering, Books on 252 Insurance Accounts 11, 23, 30 Int. rest Account 10 Interest Charged to Cost, Example 128 Interest on Investment Charged to Cost 128 Interest, Rate of, Charged to Cost 128 Interlocking the Cost and General Accounts 124 Inventory 43 Inventory, Annual, Method of Taking. 188 Inventory, Checking the Continuous. . . 53 of Partly Finished Work 53 of Warehouse and Stores 53, 180 Perpetual 55 Inventory, Perpetual, Value of, and Appraisal Value 89 Inventory, Estimate of Increase or Decrease of 129 Inventory Values differ from recorded costs Hg Inventory of Tools, Form N 1 134 Inventory Increase and Profit and Loss Estimates without an Actual In- ventory 189 Investments in Bonds and Stocks 11 Invoice Book, Invoice Ledger 4 Register 14 Iron Foundry, Cost of Castings 171 Iron Works Bookkeeping 140 Iron Works Statistics 106, 146 J Job, Definition of 62 Job Orders, Job Tickets 50, 54 TOPICAL INDEX 257 PAGE Job and Time Tickets, Combined.. . 57, 113 Job Tickets, Use of 57, 59 Job Tickets, Information on 61, 63 Sorting and Filing of 64 Journal Entries at a Blast Furnace 143 Journal, The 3, 15 Journal Entry of Pay Roll Distribution. 184 Journal-Ledger, Advantages of 95 Journal-Ledger, Combined (see Column Ledger). Journal-Ledger Entries 1(11 Journal-Ledger for Iron Works 148 Journal of Accountancy, Editorial in. . . 129 Journalizing, Examples 13, IS, 25, 42 rules for 3 L Labor Book, Summary of Pay Roll .... 142 Labor Charges 50 Labor Costs, Chart of 107 Labor, Direct and Indirect 45 Labor Report of Pay Roll, Form NM 5 100 Labor-saving Methods 2, 28 Labor Turnover 188, 250 Ledger Accounts at a Blast Furnace. . . 141 And Journal Combined (see Column Ledger). Ledger Accounts in a Steel Works 152 Ledger 2 Column (see Column Ledger). Invoice 4 Sales 4 Safeguard 16 Ledger, Commercial and Factory 97 Ledger, examples of posting in, 13, 18, 25, 42 Ledger, Factory (see Factory Ledger). Company (see Company Ledger). Ledger, Iron Works, Monthly 147 Ledger, Works, in Hardware Factory. . . 184 Liability, Contingent 48 Limitation of the Cost Accountant 56 Loss and Gain (see Profit and Loss). Lot Costs, Textile 207 M Machine-hour Rate for Distribution of Burden 68. 150 Man-hour Rate 65 Machine Shop Burden, Calculation of . . 68 Machine-Shop's Cost System, a 192 Machine Shop Practice, Symbols used. . 131 Machines for Bookkeeping 135 Machinery, Bookkeeping by 135 Machinery, Valuation of 87 Maintenance,' Depreciation and Recon- struction 238 Management, Scientific 119 Manager of the Future, the 122 Manufacturing Account 37 Marchant Calculating Machine 139 Material Adjustment Account 189 Material, Procuring and Accounting for in Government Shops 92 Merchandise Account 6, 28 Merchandise Returned 7 Merchants, Retail, Accounts for 22 Merchants' Selling Prices 33 Mnemonic Symbols 131 Monotype Cost and Efficiency Records. 222 Monroe Calculating Machine 138 PAOE Month, divided into four periods 181 Monthly Record of Progress 100 Monthly Report of Parts Made 100 Monthly Summary of Business 22 Monthly Column Ledger (see Column- Ledger) . Expense Ledger 31 Statements of Bills 54 Monthly Totals of Journal- Ledger 101 Mortgage Indebtedness 11 N Navy Yard, Brooklyn, Cost Accounting in 94 Nomenclature of Machine Details 132 Normal Cost 36, 146 Notes Receivable; Notes Payable 9 O Obsolescence, Depreciation due to 47, 85, 238 Obsolescence of Product, depreciation due to 118 Old-school Cost Accounting 140 On-Cost (see Burden) 241 Opening a Set of Factory Books 37 Operation ( iosts, in Textile Mills 207 Orders, Standing 50 Office 50, 61 Production 50 Small 50 Job 50, 61 Operation 61 Organization, Cost of 128 Over, Short and Damage Account 121 P Patents and Patent Litigation 128 Pay Roll, Accounting Distribution of.. . 183 Pay Roll, Analysis of, Lunkenheimer Co. 249 Pay Roll Distribution 182 Pay Roll Distribution Voucher 248 Pay Roll Periods 100 Pay Roll, Subdivisions of 51 Pay Roll, Verification of 181 Percentage Classification of Expendi- tures 76 Periodograph Time Card 138 Perpetual Inventory 55 Piece Cost Card 62, 113 Pig Iron, Cost of 145 Planning and Scheduling Work for the Shop 205 Polishing and Plating Costs 71 Posting in Ledger, Examples 13, 25, 42 Post-Mortem Cost 49, 53 Power Plant, Classification of Expenses. 208 Power Plant Operating Costs, Stand- ardization of 208 Power Plants, Comparison of Costs in.. 209 Power Plants, Protective Charges in. . . 211 Predetermined Costs 126 Premium System of Paying Wages 124 Premium System Regulations 166 Prime Cost, Material and Direct Labor. 1S5 Printing Shop, Costs in a 213 Private Ledger (see Company Ledger). Problem, Cost of Steam Engines and Turbines 115 Problem in Burden Charging 77 Problem in Cost Finding 60 Problems and Difficulties in Accounting. 108 TAOE Product, Finished, Cost Summary 113 Product, Monthly Report of, Form NM4 100 Production Order 54, 113 Productive and Non-productive labor, ratio useless and misleading 112 Profit and Loss Account 4, 6 Statement 24, 48 Adjustment 28, 30 Profit and Loss, Estimate of, Monthly. 189 Profit and Loss, Formulas for 33 Profit and Loss Statement of a Printing Shop 221 Profit due to Increase in Value 52 Profits, Calculation of, from By-products 109 Proof of the Cost System 198 Property Accounts 10 Purchase Account 7 R Ratio of Productive to Non-productive Labor 77, 112 Record of Progress in a Factory 102 Records of Operations, Daily and Monthly 99 Recorded Cost 35 " Red Tape," and "Systems" 92 Use of 92 Reducing the Cost of the Cost System.. 112 Rent Income Account 24 Repairs and Depreciation, Method of Treating 85 Reports to Stockholders of Corporations 237 Requisitions for Material 55 Reserve for Contingencies 157 Reserve for Extraordinary Repairs . . 85, 146 Residuum in Pay Roll Distribution.. 183 Residuum of Mfg. Acct. Distribution of 185 Retail Merchants' Accounts 22 Returned Goods, Accounting for Inn Returned Merchandise 7 Rolling Mill, Cost Keeping in a 150 Rules for Journalizing 3 S Safeguard Ledger 16 Sales Account 7 Allowances 7 Sales Expense not Part of Factory' Cost 202 Scheduling Work in a Woodworking Shop 205 Scientific Management 119, 252 Scrap, Cost of Disks made from 108 Scrap, Problem in Cost and Value of. . . 108 Scrap, Utilization of 108 Selling Prices, Merchants' 33 Shop Expense Rate 194, 201 Single-entry Bookkeeping 2 Silver, Cost of 110 Slippage, difference between Estimated and Actual Cost 186 Spoiled Work, Accounting for 188 Standard Burden per Unit of Product. . 81 Standard Cost Ill, 126 Statistical Distribution of Pay Roll. . . . 183 Statistical Records in a Woodworking Shop 204 Statistical Reports in Hardware Factory 188 Statistical Sheet, Mfg. Accounts 46 Statistics, Charting of 103 Statistics, Conclusions to be drawn from 120 258 TOPICAL INDEX PAGE Statistics, Iron Works, Chart of 106 Steam Engines, Problem in Cost of 115 Steel Works, Accounting System for. . . 151 Stock on Hand and in Process, Form NM 1 99 Stocks and Bonds, Investments in 11 Storekeeper's Records 61 Stores Credit Card 55 Stores and Supplies 45 Stores Records ; 180 Stores System 50 Stores System in a Machine Shop 194 Stores, Valuation of 52 Supplementary Rate in Burden Charge. 77, 78 Surplus 6, 30, 48, 158 Surplus rather than Capital earns Dividends 237 Suspense Account 10, 44, 4S Symbols, Accounting in a Hardware Factory ISO Symbols, in Machine-shop Practice. . . . 131 Symbols, Letters versus Numbers 132 Symbols, Mnemonic 131 Symbols, Qualities of good 133 System-mad, Manager, the 92 "Systems" and "Red Tape" 92 T T- u PAGE Tabulating Machine Record 182 Tabulating Machine, Stores Records. . . 188 Tabulating System, the Hollerith 135 Taxes, Advanced and Accrued. .. .11, 23, 30 Textile Cost Accounting 206 Theory, a False so the Correct si Theories of Costs 122 Time and Job Tickets 57 Time Keeping in a Hardware Factory. . 181 Time Keeping in Government Shops . . 92, 94 Time Keeping in a Machine Shop 192 Time-keeping Systems 113 Time Studies 114, 16.5 Time-study Method of Cost-finding. . . .' 203 Titles and Definitions of Accounts. 6, 23. 152, 153 Trading Account 7, 24, 28 Transfer and Balancing Entries 39 Trial Balance, Errors in 4, 253 Example 13 Factory 39 Turnover, Labor 188, 250 Turnover, of goods and of Capital 34 Tying-in the Cost Records to the General Accounts 124, 149 V PAGE \ aluation of Machinery 87 Valuation of Stores 52 Values, the Flow of 124 Variable Factors of Burden Charge .... 66 Volume of Business, Diagram of 104 Voucher Checks 54 Voucher, Weekly Pay 58 W Wages, Bonus System of 124 Wage Scale, Table 228 Wages Report, Monthly 188 Wage System of Cincinnati Milling- Machine Co 124 Warehouse Accounts 153 Westinghouse Electric & Mfg. Co., Annual Report 239 Woodworking Shop, Cost Accounting in a 203 Worked Material, Accounting for 196 Workmen's Yearly Record 59 Works Ledger in Hardware Factory . . . 184 Y Yearly Record of Workman 59 INDEX OF FORMS AND BLANKS PAGE M Miller Lock Co. M 1 Combined Time and Job Ticket. . 57 2 Weekly Pay Voucher 58 3 Workman's Yearly Record 59 Capt. Metcalf's Cards at Frank- ford Arsenal Service and Material Cards 93 NM 4 National Meter Co. 1 Record of Work in Progress 99 2 Competitive Cost Record 100 5 Labor Report of Pay Roll 100 W. Sailes WS 1 Record of Individual Equipment. 133 H. M. Norris N 1 Standard Plant Ledger 134 2 Special Plant Ledger 134 Pennsylvania Steel Co. PS 1 Time Card of the Machine Shop. 137 2 Requisition on Storekeeper 137 Schedule of Accounts 170 W Mr. Walton's Forms used in Vari- ous Establishments W 1 Schedule of Parts and Operations 164 W 2, 3 Requisition Cards 164 W 4 Store Room Card 164 W 5 In and Out Stock Card 164 W 6 Time Study Blank 165 W 7 Clock and Time Card 165 W 8, 9 Job Time Tickets 165 W 10 Pay-off Slip 166 W 11 Premium Work 166 W 12 Production Card 166 W 13 Shop Order Card 166 W 14 Pattern Cost Card 167 W 15 Operation and Part Cost Card. . . 167 W 16 Costs of Operations and Parts at Different Dates 167 W 17 Requests to Foremen to Explain Increased Cost 167 W 18 Material Used from Stock 168 W 19 Inventory Ticket 168 W 20 Requisition for Small Tools 168 W 21 Tool and Pattern Requisition 169 W 22 Suggestion Card 169 BF Brass, Bronze, and Aluminum Foundries BF 1 Piece Work Card 175 2 Piece Rate Card for Pattern Changes 175 3 Daily Molding Report 175 4 Daily Casting Report 175 5 Core Card 176 6 Core Room Piece Work Report. . 176 7 Manufacturing Expense Card. .. . 176 8 Summaries of Mfg. Expense 176 9 Requisition for Supplies 176 10 Plant Sub-order 176 11 Distribution of Items of Expense. 177 12 Works Managers' Daily Report.. 177 13 Metal Requisition 177 14 Heat Ticket 178 PAGE BF15 Metal Report 178 HF Hardware Factory HF 1 Balance of Stores Card 180, 181 2 Time Summary Ticket 181 3 Day Work Credit Ticket 181 4 Piece Work Credit Slip 181 5 Card for Tabulating Machine.. . . 182 6 Statistical Distribut'n of Pay Roll 183 7 Accounting Distribut'n of Pay Roll 183 8 Cost of Finished Product 186 9 Estimate of Cost 187 10 Requisition for Parts 191 .1 Requisition for Bronze Castings. . 191 12 Returned Goods Report 191 13 Operation and Route Record. . . . 191 14 Monthly Wages Report 188 15, 16 Ticklers 191, 192 17 Details of Returned Goods 192 P Philadelphia Machine Shop P 1 First Time and Bonus Card 192 2 Continuation Bonus Time Card. . 193 3 Day Work Time Card 193 3a Day Work Time Card of Belt Man 193 4 Stores Issue Card 193 5 Duplicate Earnings Record 193 6 Detail Cost of Worked Materials 195 7 Worked Materials Issued 195 8 Stores Credit 195 9 Worked Material Credit 196 10 Worked Materials Finished 197 11 Balance of Worked Materials. . . . 197 12 Expense Analysis Sheet 197 13 Income for Worked Materials and Stores Sold 197 14 Income or Profit and Loss Account 198 15 Expense Distribution Sheet 199 16 General Ledger Balance Sheet . . . 200 WW Woodworking Shop Time Study Blank 204 Estimated Annual Machine Bur- den 204 Factory Cost of Sash 205 Cost Accounts for a Bakery Job Ticket 206 Daily Cost Card 206 Power Plant Costs Pol. 1 Cost of Operation and Mainte- nance 209 Figs. 1-3. Curves of Standard Costs. . . 211 PP Plimpton Press PP 1 Record of Work on Composition and Press Room 214 2 Record of Work in Bindery 215 3 Stores Issue Card 216 4 Stores Credit Card 216 5, 6 Worked Material Issue and Credit Cards 216 Printer's Standard Cost System 9 H Monthly Statement of Cost of Production 218 259 PAOB LM Lanston Monotype Machine Co. Efficiency Records for Keyboards 220 Efficiency Records for Casting Machines 222 Monthly Profit and Loss State- ment 221 F Federal Printing Co. F 1 Estimate 224 2 Proposition 225 3 Order Ticket 226 4 Weekly Time Ticket 227 5 Proof Room Ticket 227 6 Composition Ticket 227 7 Linotype Daily Record 227 8 Cylinder Press Ticket 228 9 Bindery Daily Time Ticket 229 10 Maintenance Ticket 229 11 Daily Composing Room Returns. 230 12 Composition Returns, Recapitu- lation 230 13 Composing Room Payroll 231 14 Press Returns 231 15 Recapitulation Cylinder and Pla- ten Press Records 232 16 Pay Voucher and Pay Receipt.. . 232 17 Binder Returns 233 17a Index of Kind of Work in Bindery 234 18 Electric Light and Power Meter Readings 234 19 Press Room Pay Roll 235 20 Sales for the Month 235 21 Sales Ledger 235 22 Cost Ticket and Billing Record . . 236 Miscellaneous Forms ATJ 1 Workman's Absence Report 243 2 Workman's Rating Report 244 3 Idle Machine Record 244 4 Idle Time Record 244 5 Man's Job Card 245 6 Premium Carry Over Card 244 C 1 Shop Order 245 2 Master Route Card 245 3 Production Card 245 4 Record of Progress of an Order . . 246 5 Production Card, Overtime 246 6 Repair Order 246 7 Forwarding Ticket and Identi- fication Coupon 246 LS Job and Time Ticket 247 NE 1 Clock Time Card 247 NE 2 Job Card 247 PR Common Form of Pay Roll 247 CR Cost Record 247 PW Plant Work Job Card 248 LC 1 Buffing and Polishing Job Ticket. 248 2 Analysis of Pay Roll 249 3 Pay Roll Distribution Voucher . . 248 JF Piece Work Job Ticket 250 W 23 Report of Delayu 250 CC Stock Tracing and Cost Sheet. ... 250 INDEX OF AUTHORITIES QUOTED Annett, C. B., and Cunningham, C. F.. 206 B Babcock, Geo D 119 Burton, F. G 123 C Carpenter, C. U 120, 123, 124 Church, A. Hamilton 120, 123 Cincinnati Milling Machine Co 124 Collins, James H . . . 110 Crozier, Gen 94 E Elbourne, E. T 110 Emerson, Harrington Ill, 126 Engineering (London), Editorial in, 119, 241 Engineering Magazine, Editorial in. . . . 124 F Federal Trade Commission 22, 94, 129 Federal Printing Co 224 Franklin, B. A 92, 120, 121 G Gantt, Henry L 105, 123, 241 Geijsbeek, John G 240 General Electric Co 128, 238 Gilbreth, Frank B 92, 103 Godfrey, Hollis 124 Gunn, J. Newton 120, 122, 123 Haas, H 88 Hale, R. S 122 Hathaway, H. K 131 Hearne, R. J 90 Humphreys, Alex. C 86, 92 Hurley, Edward N 94 J Joseph & Feiss Co., The 249 K King, Major O. M 93 Kirchhoff, Chas 106 Knoeppel, C. E 122 Lanston Monotype Machine Co 221 Lewis, E. St. Elmo 92, 121, 122, 178 M Metcalfe, Capt. Henry 92, 251 Miller Lock Co 57 Miller, W. M. S 126 Milliken, J. B 91 Morse, John G 91 N National Meter Co 99 Nicholson, J. Lee 102, 120, 121, 123 Norris, H. M 86, 121 Orcutt, H. F. L 119, 241 P J-AOE Parkhurst, F. A \iJ Pennsylvania Steel Co 170 Piez, Charles 89 Plimpton Press 214 R Polakov, Walter N 203 Roland, Henry 121 S Sailes, W 133 Scovell, Clinton H 120, 122, 124 Smith, Gershom 48, 84, 120, 150 Smith, Oberlin 88, 132 Stevenson, Chas. R 122 Stratton, Geo. F 92 Sturgess, John 123, 127 T Taylor, Frederick W 131 Thompson, C. Bertrand 92, 120 Towne, Henry R 107, 120, 127 W Walton, Albert 151, 164, 171, 173 Webner, F. E 122 Wheeler, Col. C. B 112 Wheeler, S. S 120 Westinghouse Electric & Mfg. Co.. 128, 239 261 UCLA-GSM Library ' HF 5686 M3K4 HI L 005 028 550 1 SOUTH E UC SOUTHERN REGIONAL LIBRARY FACILITY II IMII III Mil III D 000 583 290 2 ... KA^'>*'-,. ■•■:•;■» 5.-,-: fe- $-,. ■ ••-.■; :I ■_..,■■ :'-.;, '■■,. J , is - AH