THE LIBRARY
OF
THE UNIVERSITY
OF CALIFORNIA
LOS ANGELES
BRANCH
UNIVERSITY Of CALIFORNIA,
LIBRARY,
LOS ANGELES, CALIF.
")>
~\y.
A/i ^ VOLUME III
*&
COST ACCOUNTING
By
DeWITT CARL EGGLESTON, M.E.
Certified Public Accountant; Assistant Professor of Cost
Accounting, The College of the City of New York;
Author of "Municipal Accounting" and "Problems in
Cost Accounting"; Member of American Institute of
Accountants and American Statistical Association
Second Printing
NEW YORK
THE RONALD PRESS COMPANY
1921
400G6
Copyright, 1920, by
THE RONALD PRESS COMPANT
All Rightt Reserved
Bus. Admin.
Library
HF
.
EDITORIAL PREFACE V, 3
Ten years ago almost any contribution to the liter-
ature of accountancy would have been welcomed.
Today, however, with the increasing number of excel-
lent publications, it is incumbent upon one who puts
forth a new accounting work to justify his action.
Much more is it necessary to explain the publication
of a set of accounting books. Hence it is desirable to
state at the outset the purpose of "Business Account-
ing" and to outline its scope and general methods of
presentation.
While many books have been published on account-
ing topics, in almost every case they are unrelated vol-
umes. In some few instances, a volume on accounting
has logically followed another by the same author, but
with these few exceptions every one published has been
written without connection with, or adjustment to, any
of those already existing. Under these conditions, the
student of accounting, to get any connected and logical
knowledge of his subject, must find one of his books
here, another there, a third somewhere else, and bridge
over the gaps between them as best he may. The proc-
ess is difficult, and the accounting knowledge he obtains
is not always well co-ordinated and logically developed.
The volumes of "Business Accounting" are intended
to meet this situation. They cannot, it is true, provide
a course of study in the sense that prescribed readings
are recommended, written answers to questions required,
and personal instruction given. Neither do they con-
iii
iv EDITORIAL PREFACE
stitute an encyclopaedia of unconnected and isolated
articles. Rather are they an attempt to present in
simple, non-technical language the basic principles of
account-keeping and their application to various lines
of business, together with general directions for prepar-
ing, analyzing, and interpreting accounting statements.
One who starts at the beginning of Volume I and
works faithfully through to the end of Volume IV, and
then solves the problems and examines the solutions of
Volume V, should acquire some real understanding of
the theory and practice of accounts a knowledge that,
supplemented by experience, should enable him success-
fully to stand the test of practical work in any ordinary
business office and furnish a foundation for going as
much further into the study of accountancy as he may
desire.
It may be noted in passing that the volumes of
"Business Accounting" have been indexed in such a
way as to provide many of the features of an encyclo-
paedia, so that the person desiring the practice on a
particular point or accounting ideas of suggestive value
in particular lines of industry will be able to use the set
to advantage.
Taking up the volumes of the set in order Volume
I presents the fundamental principles of account-keep-
ing and statement preparation. Upon these basic prin-
ciples all systems of account are built. Volume II ex-
plains the principles governing the development of the
simple accounting procedures described in Volume I
to meet the needs of more complicated and more exten-
sive systems of financial accounting. Volume III ex-
plains in much the same way how the basic principles
EDITORIAL PREFACE v
have been applied to factory or cost accounting. Hav-
ing thus traced the fundamental principles into more
elaborate financial and cost accounting procedures, Vol-
ume IV treats accounting principles and practices
which are more advanced than the basic ones described
in Volume I. These advanced principles are in most
cases subject to differences of opinion, as to their nature
or application, among persons qualified to deal with
them, and it is for this reason that their discussion is
confined to Volume IV. Supplementing the illustra-
tions of accounting principles and statement prepara-
tion, there follows in Volume IV a practical discussion
of the methods of verifying accounts and statements and
of their interpretation and analysis.
The set closes with Volume V, which gives a num-
ber of problems of a practical nature, together with
their solutions. The working of these problems will
not only clarify the reader's ideas but in many cases
will provide models upon which he can base accounting
procedures and build statements to meet concrete situa-
tions arising in his own work.
The readers to whom this set will appeal most
strongly may be divided roughly into two classes. There
will be, on the one hand, business and professional men,
bankers, office managers, and other executives who feel
the need of understanding in a general way the methods
of modern account-keeping and statement preparation.
There can hardly be excuse nowadays for them to con-
sider bookkeeping methods and accounting statements
as too complicated to understand or of such slight im-
portance as to merit no attention. They need a grasp
of the subject so that they may judge for themselves
vi EDITORIAL PREFACE
whether bookkeepers and other persons who keep ac-
counts for them and render statements to them are
giving information which is accurate, adequate, and
presented in the most intelligible form. The entire
tendency of modern business and civic life is toward
more exact accounting, of which the accounting re-
quirements of the present income tax legislation are but
one indication. Any person having substantial inter-
ests at stake should be able to appraise intelligently
the stewardship of those to whom his interests are in-
trusted and the volumes of "Business Accounting" will
give him the technical information this demands.
The other class of persons to whom "Business Ac-
counting" will appeal is composed of those whose duty
it is to keep accounts and to prepare statements. They
should find in this set an inspiration and an aid to more
intensive study, which in turn will result in improved
accounting ability and an enhanced wage. The careful
and intelligent use of these books will lead beyond ques-
tion to increased power of service to employer and com-
munity.
HAEOLD DUDLEY GREELEY,
Editor, Business Accounting Set.
New York City,
April 1, 1920
PREFACE
\
More interest is shown in cost accounting today than
ever before, especially in the United States. On every
hand, groups of manufacturers and merchants are dis-
cussing methods of figuring costs, devising uniform cost
systems, and seeking the best way of ascertaining their
manufacturing and selling expenditures. The rapid
growth and increasing complexity of modern business
and the requirements of competition have rendered a
good cost system a necessity.
The manufacturers of clay products in Ohio and Vir-
ginia are continually discussing in their association the
methods of figuring cost. The manufacturers of news-
print paper in the northwestern part of the United
States and in Canada are spending much time in at-
tempting to solve their cost problem satisfactorily. The
makers of furniture in Michigan and northern New
York met recently to discuss the best system of cost-
finding for certain specific articles of furniture. The
publishers of the Middle West at their recent convention
discussed a cost system for newspapers. In Providence
and the Attleboros, the jewelry manufacturers have
formed a special cost committee to work on their prob-
lems. The associations of the Portland cement manu-
facturers, the horticulturists, the printers, implement
makers, woolen and worsted manufacturers, and the
makers of leather belting, barrels, and boxes have all
adopted so-called uniform systems of cost accounting.
There is scarcely a trade paper, whether it be the
Bakers' Weekly., Textiles, or Printing Art, which does
viii PREFACE
not carry articles on cost accounting. The convention
number of .practically every such paper devotes a large
amount of space to cost reports. As a whole, the trade
papers of the United States have devoted more space to
articles on cost systems during the last ten years than
has ever been given to the subject in books and other
literature. More than twenty colleges give courses
devoted entirely to cost accounting, thus recognizing the
subject as worthy of separate treatment in the curric-
ulum.
The aim of this book is to present those features of
cost accounting which are essential to every cost system
and to connect them in such a way that the student can
obtain the greatest amount of information with the least
"lost motion." Beginning with the structure of the
general accounting system and the interlocking of the
cost accounts with the financial accounts appearing on
the balance sheet, the student is carried along to the
details of accounting for material, labor, and overhead
expense, and finally to the assembling of the elements of
cost necessary to ascertain the cost of a unit of the
product. For all this the author has drawn on his lecture
material at the College of the City of New York and his
experience as a cost accountant during the past fifteen
years in various industries throughout the United States.
Sufficient illustrative examples are given and forms
presented to make clear the plan of operation.
While this work is intended primarily for students
of cost accounting, it is also designed for the use of the
busy executive who may wish to learn what a cost system
is, what it accomplishes, and how it looks in operation.
Not all cost problems can be solved within the scope
PREFACE ix
of a single volume. The author will gladly endeavor
to answer, however, any specific questions on costs which
his readers may wish to ask. He will also appreciate
any comments, criticisms, or suggestions that may be
helpful in preparing revisions of the present volume.
D. C. EGGLESTON
Mount Vernon, New York
April 1, 1920
CONTENTS
Part I General Principles
CHAPTER PAGE
I COST ACCOUNTING IN MODERN BUSINESS ... 3
1. Importance of Cost Accounting
2. Definition
3. Distinction Between Cost and Commercial Ac-
counting
4. Function of Cost Accounting
5. Costs as an Aid to Price-Fixing
6. The Cost System as an Indicator of Profitable Lines
7. The Cost System as an Aid to Efficiency
8. The Perpetual Inventory, Its Uses and Advantages
9. When the Cost System Is Necessary
10. Process Method of Cost-Finding
11. Job Order Method of Cost-Finding
12. Complexities of Cost-Finding
II ELEMENTS AND PRINCIPLES OF COST ACCOUNTING 16
1. Elements of Production Cost
2. Direct and Indirect Charges
8. Cost Determination
4. Illustrative Items of Cost
5. The Cost Period
6. Stores Work in Process
7. Finished Product Finished Parts
8. Manufacturing and Trading Costs
Part II Cost Accounting Procedure
III ROUTINE OF COST ACCOUNTING 29
1. The Cost Mechanism
2. Production Orders
3. Requisition for Material
4. Time Tickets
5. Expense Distribution
6. Cost Sheets
IV COST ACCOUNTING METHODS SIMPLE PRODUCTS 41
1. Order and Process Methods
2. Process Costs Routine Processes
xii CONTENTS
CHAPTER PAGE
3. Process Costs Varying Processes
4. Process Method vs. Order Method
5. Combined Order and Process Method
6. Order Method of Production
V COST ACCOUNTING METHODS COMPOUND PRODUCTS 64
1. Order Cost Accounting
2. Combination Production Orders
3. Combined Production Order and Cost Sheet
4. Production Controlled by Coupon Order
5. Procedure under Coupon Order Method of Production
6. Estimated Costs
7. Estimating Cost Systems
8. Cost-Finding for Multiple Parts Products
9. Component Parts Orders
10. Complex Production
Part III Relation Between General Ledger and
Cost Accounts
VI FINANCIAL AND COST ACCOUNTS 78
1. Financial Accounting and Cost Accounting
2. Cost Accounting for Trading Concerns
3. Manufacturing Cost Procedure
4. Factory Records Controlled by the Ledger
5. General Ledger Controlling Accounts
VII ENTRIES TO GENERAL LEDGER CONTROLLING
ACCOUNTS 81
ORDER METHOD
1. Raw Material
2. Work in Process Account
3. Finished Goods Account
4. Finished Parts
PROCESS METHOD
5. Raw Material Costs
6. Supplies Account
7. Labor
8. Overhead Expense
9. Department Process Account
10. Closing the Work in Process Account
11. Finished Goods Account
12. Direct Distribution of Manufacturing Costs
13. Control of Labor Costs
14. Comparison of Job Order and Process Methods
CONTENTS xin
CHAPTER PAGE
VIII INDIRECT EXPENSE ACCOUNTS 98
1. Recording Indirect Expense
2. Accrued Expense Account
3. Prepaid Expense Account
4. Non- Productive Department Accounts
5. Productive Department Expense Accounts
IX CLOSING THE CONTROLLING COST ACCOUNTS . . 106
1. Journal Entries for Controlling Cost Accounts
2. Closing Balances
3. Profit and Loss Account Manufacturing Section
Part IV Material Costs
X STORES AND THE STORES DEPARTMENT . . . . 115
1. Definition of Stores
2. Stores Routine
3. Purchasing Department
4. Stores-Room Arrangement
5. The Stores-Keeper
6. The Perpetual Inventory
XI STORES ACCOUNTING AND RECORDS 122
1. Subdivisions of Stores
2. Importance of Accurate Stores Accounting
3. Stores Received Book
4. Stores Ledger
8. Control of Stores Ledger
6. Control of Issues
7. Bin Tag as a Means of Stores Control
8. Stores Requisition
9. Bill of Material
10. Stores Issued Book
11. Material Returned to Stores or to Vendor
12. Periodical Adjustments
XII STORES PROBLEMS 142
1. Complications in Determination of Material Costs
2. Fluctuations of Price
3. Fluctuations in Weight or Volume
4. Waste of Material
5. Defective and Spoiled Material
6. Scrap and By-Products
7. Material L T sed "as Needed"
8. "Loss and Gain on Estimates" Account
9. Material Wastage and Handling Expense
xiv CONTENTS
CHAPTER PAGE
XIII CLASSIFICATION OF STORES 153
1. Relation to Cost Accounting
2. Necessity for Stores Classification
3. Advantages of Classification
4. Systems of Stores Classification
5. Numerical Classification Code
6. Dewey Decimal Code
7. Mnemonic System of Letter Classification
8. Combination Code
9. Important Points in Devising a Code
10. Stores Catalogue
Part V Labor Cost*
XIV RECORDING THE COST OF LABOR 165
1. Labor Cost Problems
2. Labor Costs Under the Process Method
3. "In and Out" Time
4. Job Order Labor Costs
5. Time-Work
6. Piece- Work
7. Pay-Roll Form and Procedure
8. Accuracy of Records
XV TIME AND PAY RECORDS 175
1. Individual Job Tickets and Time Reports
2. Making the Time Record
3. Non-Mechanical Daily Time Cards
4. Mechanical Time Recorder
6. Daily Time Sheet
6. Piece-Work Records
7. Pay-Roil Records
8. Pay-Roil Statements and Graphs
XVI WAGE SYSTEMS 195
1. Variations in Wage Systems
2. Labor Costs under Day-Rate System
3. Piece-Rate Method
4. Fixing the Piece Rates
5. Differential Piece Rates
6. Calculation of Differential Piece Rates
7. Premium Wage System
8. Calculation of Premium Wage System
9. Task and Bonus System (Gantt System)
10. Graduated Premium Wage System
11. Summary
CONTENTS
Part VI Indirect Expense
CHAPTER
XVII GENERAL CONSIDERATIONS OF EXPENSE .
1. Problem of Expense Distribution
2. Classification of Expense
3. Purchase Journal Analysis
4. Subsidiary Expense Ledger
5. Expenditures Inside Expense Service
6. Supplies Chargeable to Expense
7. Plant, Machinery, and Equipment
8. Summary of Expense Analysis
XV
PAGE
211
XVIII INDIRECT LABOR AND SUPPLIES
226
1. Indirect Factory Activities
2. Standing Expense Orders
3. Standing Order Time Tickets and Supplies
4. Numbering of Standing Orders
5. Advantages of Numerical Arrangement
XIX FIXED CHARGES RENT, TAXES, INTEREST, ETC.
1. Fixed Charges
2. Schedule of Fixed Charges
3. Rent
4. Building Expense
6. Insurance and Taxes
6. Water, Gas, and Electricity
7. Interest on Investment
8. Interest as a Cost Factor
233
XX DEPRECIATION
1. Wasting Assets
2. Obsolescence
3. Depreciation of Auxiliary Equipment
4. Depreciation Rates
5. Fixing Depreciation Rates
6. Depreciation Schedule
244
XXI EXPENSE DISTRIBUTION 253
1. Sources of Expense Charges
2. Expense Distribution Sheet
3. Allocation of Non-Productive Department Expense
4. Merger of Minor Department Expense
6. Allocation of Expense to Minor Departments
6. Stores Expense "Short-Cut"
7. Department Expense Accounts under Job Order
Method
8. Expense Accounts under Process Method
xvi CONTENTS
CHAPTER PAGE
XXII EXPENSE DISTRIBUTION OVER PRODUCT . . . .271
1. Overhead Rates
2. Methods of Distributing Expense over Product
3. Percentage of Labor Method
4. Applicability of Percentage of Labor Method
5. Productive-Hour Method
6. Applicability of Productive-Hour Method
7. Machine-Rate Method
8. Calculation of Machine Rate
9. Sold-Hour Method
10. Applicability of Sold-Hour Method
11. Material and Prime Cost Methods
12. Applicability of Prime Cost Method
13. Overhead Adjustments
14. Reserve for Overhead Account
15. Overhead Adjustment by Flat Percentage Charge
XXIII MACHINE-HOUR RATES 287
1. Departments and Production Centers
2. Departmental and Production Center Charges
3. Computing the Machine Rate
4. Building Expense or Rent Factor
5. Power Factor
6. Depreciation, Insurance, and Taxes on Machinery
7. Tools and Repairs
8. Administrative and Sundry Expense
9. Schedule of Machine Rate
10. Charging the Machine Rate
11. Checking the Machine Rate
12. Idle Machine Time Supplementary Rate
13. Machine Expense Account
14. Summary
Part VII Representative Systems
XXIV PRODUCTION-CENTER JOB ORDER COST SYSTEM . 301
1. Preliminary Statement
2. Cost Formula
3. Stock Lists
4. Production Orders
5. Material Cost
6. Labor Cost
7. Statement of Expenses
8. Cost Summary Form
9. Routine of Procedure
10. Cost Accounts
11. Journal Entries
12. Ledger Accounts
CONTENTS
XV11
CHAPTER PAGE
XXV PROCESS COST SYSTEM CLAY PRODUCTS . . . 328
1. Account Classification
2. Preliminary Information
3. Production Details
4. Daily Time Slip
5. Setting and Drawing Reports
6. Daily Record of Production
7. Daily Record of Broken Bricks
8. Record of "Bats"
9. Kiln Record
10. Financial Records
11. Fixed Charges Sheet
12. Cost Ledger
13. Service Departments
14. Process Accounts
15. Summary of Cost
XXVI ESTIMATED COSTS 849
1. Nature of Estimating Cost System
2. Application of Estimating Cost System
3. Use of the Estimating Cost System
4. Basic Principles
5. Estimate of Cost
6. Opening Inventory
7. Actual Manufacturing Cost
8. Closing Inventory
9. Cost of Goods Sold
10. Factory Ledger
11. General Ledger Account
12. Summary
XXVII TEXTILE COSTS MANUFACTURE OF YARN . . . 868
1. Nature of Problem
2. Manufacture of Yarn
3. The Weaving and Knitting of Fabrics
4. Dyeing and Finishing Processes
5. Departmental Divisions
6. Material and Supplies Account
7. Waste Account
8. Stock in Process in Dye House Account
9. Mixes in Process (Picker Room) Account
10. Cost of Mixes Made
11. Yarn in Process (Carding and Spinning) Account
12. Calculating the Cost of Yarn
XXVIII TEXTILE COSTS WEAVING AND KNITTING . . . 880
1. Cloth in Process (Weaving) Account
2. Cloth in Process (Knitting) Account
3. Cost of Cloth Knit
xviii CONTENTS
CHAPTER PAGE
4. Cloth in Process (Wet and Dry Finishing) Account
5. Calculating the Cost of Finished Cloth
6. Finished Cloth Account
XXIX TEXTILE COSTS GENERAL EXPENSE .... 393
1. Expense Accounts
Part VIII Graphic Presentation of Cost Data
XXX USE OF GRAPHIC CHARTS 405
1. Graphs vs. Statements
2. Difference and Ratio Charts
3. Difference Charts
4. Illustrative Difference Charts
5. Limitations of Difference Charts
6. Ratio Charts
7. Use of Ratio Charts
8. Illustrative Ratio Charts
FORMS
FUNDAMENTAL COST AND PRODUCTION FORMS
FORM PAGE
1. Production Order Job-Printing House 32
2. Requisition for Material 34
3. Simple Form of Time Ticket 35
4. Simple Form of Expense Distribution Sheet 37
5. Cost Sheet Jewelry Factory 39
6. Weekly Production Report Process Costs 45
7. Production Order Foundry 51
8. Combination Production Order, Requisition, and Cost Sheet Hat
Factory. (a) Requisition for Material. (b) Outside Work
Order, (c) Combined Production Order and Cost Summary . 57
9. (a) Production Order with Coupons 69
(b) Labor Summary 60
10. Stores Ledger Card 78
11. Finished Goods Stock Record 78
STORES AND INVENTORY FORMS
12. Inventory Sheet Automobile Factory 120
13. Stores Received Book 125
14. Stores Ledger 128
15. Stores Ledger 129
16. Bin Tag 133
17. Stores Requisition 134
18. Bill of Material 135
19. Stores Issued Book 137
TIME AND PAY-ROLL FORMS
20. Time Card Machine Shop 178
21. Time Card, showing Five-Minute Intervals 178
22. Time Card Brick Plant 180
23. Mechanical Time Card 181
24. Individual Daily Time Sheet Printing Plant 183
25. Piece-Work Slip 184
26. Piece-Work Tag Suit and Cloak Industry 186
27. Pay-Roll Record 188
28. Pay-Roll Record 189
29. Pay-Roil Record Simple Form 190
30. Chart showing the Average Hourly Wage for Piece-Workers
and Day-Workers 192
31. Chart showing Productive and Non-Productive Labor and Ratio
of Non-Productive to Productive Labor 193
xix
xx FORMS
FORM PAGE
OVERHEAD EXPENSE FORMS
32. Chart showing Classification of Expense Accounts Worsted
Mill 214-216
33. Subsidiary Expense Ledger 219
34. (a) Standing Order Time Ticket 228
(b) List of Standing Order Numbers 230
35. Schedule of Fixed Charges 235
36. Depreciation Schedule 250, 251
37. Overhead Distribution Sheet 254, 255
38. Expense Analysis Sheet Machine Shop 258, 259
39. Expense Analysis Sheet Novelty Goods Factory .... 262, 263
PRODUCTION-CENTER JOB ORDER COST SYSTEM
40. Chart Showing Routine of Cost-Finding in a Job Order Cost
System under the Production-Center Method 303
41. (a) Stock List 304
(b) Production Order 306
42. (a) Statement of Expenses Production-Center Job Order Cost
System 307
(b) Cost Sheet 300
43. Chart of Cost Accounts for a Production-Center Job Order Cost
System 312, 31J
PROCESS COST SYSTEM CLAY PRODUCTS
44. Brick Setting Report 333
45. Kiln Drawing Report 33;}
46. Daily Brick Production Record 334
47. Daily Record of Broken Bricks 335
48. Monthly Bats Record 337
49. Kiln Record 338
50. (a) Pay-Roll Record Brick Manufacturing Plant 340
(b) Schedule of Fixed Charges Brick Manufacturing Plant . . 342
51. Cost Ledger Administrative Account 344
52. Cost Ledger Process Accounts 346
53. Cost Ledger Summary of Costs . 348
GRAPHIC CHARTS
54. Chart showing Labor and Expense per Yard Silk Mill . . . 408
55. Chart showing Average Selling Price and Average Cost of Sales
per Pound Silk Mill 408
56. Ratio Chart showing Production, Labor, and Expense Silk Mill 413
57. Chart showing Labor and Expense per YardSilk Mill . . 416
58. Ratio Chart showing Direct Labor and Shipping Expense Silk
Mill 418
Cost Accounting
Parti
General Principles
CHAPTER I
COST ACCOUNTING IN MODERN BUSINESS
1.. Importance of Cost Accounting
Accurate and efficient records are quite as impor-
tant to a business as are the charts and compass to a ship
at sea. They, too, show the location of the rocks which
menace disaster, and also the channels in which the
water is deep and safe, and they point surely and stead-
ily the course to be followed. In any large and success-
ful business the accounting department is looked upon
as one of the most important factors of success. The
larger the operations, the greater is the care that must
be taken in maintaining an adequate and effective sys-
tem of accounts. In manufacturing undertakings this
is especially true.
Among the accounts of the manufacturer none are
of more importance than those that show his production
costs. From these he learns the how and the why of
factory expenditures and is enabled to judge whether
they are normal or excessive, and, if excessive, to dis-