(J
Department
No.
Material
Material
Expense
Labor
Labor
Expense
Total
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Form 42. (b) Cost Sheet
9. Routine of Procedure
Even in the largest factory the procedure is simple
under this plan of cost-finding. In case a part is made
and put in stock to be later drawn out of stores and
assembled, the cost is figured just the same as that of
any other article, but the cost is charged to a parts ac-
count and when the article is requisitioned, its cost is
credited to Parts Stock and charged to Work in Proc-
310 REPRESENTATIVE SYSTEMS
ess account. In the case of a very large job, such as a
central office switchboard for the telephone exchange
of some city, there would, of course, be a great many
requisitions and time tickets, so that their posting, the
application of the overhead, and the final determination
of cost would take considerable time. Nevertheless, the
process is the same. When the jobs are finished they
are credited to Work in Process account at cost and
charged to Finished Goods account. This entry takes
them out of the manufacturing section of the ledger
and transfers them to the trading section.
10. Cost Accounts
In putting a production-center job order cost sys-
tem into operation, it is necessary to place the costs
under complete accounting control. The accounts re-
quired for this are shown in the chart of cost accounts
(Form 43). Accounts 1 to 5 inclusive are inventory
accounts. Account 6, Machine Expense, comprises the
overhead expense applicable to production centers,
which are for the most part machines. This is shown
subdivided according to groups of machines. By means
of this subdivision the total cost of each group is deter-
mined. Before the total cost of a group can be deter-
mined, however, the various service accounts or miscel-
laneous cost accounts must be closed into Machine,
Stores, Drafting, and Selling Expense accounts. The
reason for this is that when operating a production-cen-
ter cost system it is not possible to make a distribution
of expenses such as coal, supplies, and non-productive
labor directly against machines; such charges have to
be debited to miscellaneous accounts such as shown on
PRODUCTION-CENTER JOB ORDER COSTS 311
chart in Form 43. Thus the various groups of ex-
penses or service charges are assembled. Then it is a
problem to find a satisfactory basis on which to make
an apportionment of the balances in these miscellaneous
accounts to the production centers. For example, ad-
ministration expense, which covers the cost of supervi-
sion, can be distributed on the basis of the number of
operators working at each group. Building Expense
is divided up between machine groups on the basis of
space occupied, power expense according to horse-power
used, and so on, as explained in previous chapters of
Part VI.
11. Journal Entries
The following entries and accounts illustrate the
characteristic bookkeeping procedure in the production
center method. The first three journal entries distribute
the supplies, repairs, depreciation, insurance, taxes, and
indirect labor to the proper cost accounts in accordance
with the chart of cost accounts (Form 43) . The fourth
and fifth entries close the miscellaneous expense ac-
counts out to production-center or machine expense as
called for by the chart. The sixth entry transfers the
material and drafting expense to the proper accounts
as shown. Following the journal entries are the corre-
sponding ledger accounts. From these entries and ac-
counts the interlocking of the costs with the general
ledger inventory accounts may readily be seen. Pur-
chases are distributed on the purchase journal from
which they are posted to the proper ledger accounts at
the end of each accounting period.
To simplify as much as possible the description and
312
REPRESENTATIVE SYSTEMS
1. RAW MATERIAL
2. PIECE PARTS
3. MANUFACTURING (WORK IN PROCESS)
4. SUPPLIES
5. FINISHED GOODS
Class A
Machines
6. MACHINE EXPENSE
7. STORES EXPENSE
8. DRAFTING EXPENSE
9. SELLING EXPENSE
Class B
Machines
Class C
Machines
Etc., etc
Purchases
Depreciation
Insurance
Taxes
Pay-Roil
Building Expense
Lighting
Purchases
Supplies
Pay-Roll
Rent
Lighting
Purchases
Sundries
Building Expense
Power
Lighting
Fixed Charges
Tools
Sundry
Administration
Building Expense
Power
Lighting
Fixed Charges
Tools
Sundry
Administration
Building Expense
Power
Lighting
Fixed Charges
Tools
Sundry
Administration
Form 43. Chart of Cost Accounts for a
PRODUCTION-CENTER JOB ORDER COSTS 313
MISCELLANEOUS
COST ACCOUNTS
CLOSED Our TO MA-
CHINE, STORES, DRAFT-
ING, AND SELLING EX-
PENSE ACCOUNTS
10. BUILDING EXPENSE
11. POWER EXPENSE
12. LIGHTING EXPENSE
Purchases
Supplies
Repairs
Depreciation
Insurance
Taxes
Pay-RoU
Power
Purchases
Waste
Oils
Coal
Belting
Repairs
Depreciation
Insurance
Taxes
Pay-Roil
Building Expense
. Lighting
Purchases
Waste
Repairs
Depreciation
Insurance
Taxes
Pay-Roil
Power
14. TOOLS EXPENSE
15. SUNDRY EXPENSE
16. ADMINISTRATION
EXPENSE
Taxes
Purchases
Waste
Belting
Repairs
Pay-Roll
Rent
Lighting
C Purchases
I Depreciation
| Taxes
L Pay-Roll
f Purchases
Stationery
-I Pay-Roll
Building Expense
[ Lighting
Production-Center Job Order Cost System
314 REPRESENTATIVE SYSTEMS
illustration of the principles involved, the journal en-
tries have been condensed and the accounts limited to the
fewest possible number. Expense can readily be ana-
lyzed in great detail by opening the requisite accounts
in a subsidiary ledger. Building maintenance, for ex-
ample, may be subdivided into care of land, maintenance
of office building, warehouse building, power plant
building, factory building, and the like; superinten-
dence may be divided into factory and general adminis-
tration ; part of the last-named expense may be charged
to sales; and so on. No method can be devised to suit
all requirements, nor can any particular method be ap-
plied without intelligent modification. But with a clear
conception of the framework which must be constructed
before financial expenditures can be shown on the books
as manufacturing cost and expense, no difficulty should
be experienced in analyzing expense in any degree that
seems practical and worth the clerical labor involved.
The explanatory matter follows each entry in order
to make the procedure clear.
No. 1
Building Expense $ 1,200.00
Supplies for Cleaning $ 200.00
Repairs to Building 1,000.00
Power Expense 15,750.00
Supplies Waste 250.00
Oils 600.00
Coal 12,000.00
Belting 900.00
Repairs to Power Plant 2,000.00
Lighting Expense 260.00
Supplies Waste 50.00
Repairs to Lighting System. 210.00
PRODUCTION-CENTER JOB ORDER COSTS 315
Tools Expense 1,800.00
Supplies Waste 100.00
Belting 1,200.00
Repairs to Machine Tools .... 500.00
Administration Expense 500.00
Supplies Stationery 500.00
Drafting Expense '. . 1,600.00
Supplies Photographic .... 800.00
Blue-Print 300.00
Drafting 500.00
To Supplies $17,400.00
" Manufacturing 3,710.00
Distribution to the factors of expense of
the various kinds of supplies used and
repairs made, the sources of the entry
being supplies requisitions and stand-
ing order cost sheets.
No. 2
Building Expense $1,590.00
Depreciation $1,000.00
Insurance 300.00
Taxes 290.00
Power Expense 2,850.00
Depreciation 2,000.00
Insurance 500.00
Taxes 350.00
Lighting Expense 265.00
Depreciation 200.00
Insurance 25.00
Taxes 40.00
Fixed Charges on Machinery 5,880.00
Depreciation 4,000.00
Insurance 1,000.00
Taxes . 880.00
316 REPRESENTATIVE SYSTEMS
Sundry Expense 175.00
Depreciation 100.00
Insurance 50.00
Taxes 25.00
Stores Expense 1 ,050.00
Depreciation 700.00
Insurance 250.00
Taxes 100.00
To Depreciation $8,000.00
" Insurance 2,125.00
" Taxes 1,685.00
Distribution to the factors of expense of
fixed charges for depreciation, taxes, and
insurance on buildings, machinery, and
equipment, per schedule of fixed charges
and statement of expenses.
No. 3
(Direct Labor,
Manufacturing $50,000.00
(Indirect Labor)
Building Expense 10,000.00
Power Expense 2,000.00
Lighting Expense 300.00
Tools Expense 100.00
Sundry Expense 300.00
Administration Expense 3,000.00
Stores Expense 600.00
Drafting Expense 2,000.00
Selling Expense 3,000.00
To Pay-Roll $71,300.00
To show the productive labor charged
to product and the non-productive
labor charged to expense, per pay-roll
analysis.
PRODUCTION-CENTER JOB ORDER COSTS 317
No. 4
Building Expense $ 100.00
Power Expense $ 100.00
Power Expense 180.00
Building Expense 1 10.00
Lighting Expense 20.00
Lighting Expense 900.00
Power Expense 900.00
Tools Expense 25.00
Building Expense 20.00
Lighting Expense 5.00
Administration Expense 3,500.00
Building Expense 3,000.00
Lighting Expense 500.00
Stores Expense 1,150.00
Building Expense 1,000.00
Lighting Expense 150.00
Drafting Expense 820.00
Building Expense 300.00
Lighting Expense 20.00
To Building Expense $4,430.00
" Power Expense 1,000.00
" Lighting Expense 695.00
To show the proportion of the charges for
building maintenance, power, and light
applicable to each of the factors of ex-
pense.
No. 6
Machine Expense $50,000.00
Building Expense $12,600.00
Power Expense 20,335.00
Lighting Expense 1,050.00
Fixed Charges on Machinery . 5,880.00
Tools Expense 1,960.00
Sundry Expense 675.00
Administration Expense 7,500.00
318 REPRESENTATIVE SYSTEMS
To Building Expense $12,600.00
" Power Expense 20,335.00
Lighting Expense 1,050.00
" Fixed Charges on Machinery. . . 5,880.00
" Tools Expense 1,960.00
" Sundry Expense 675.00
Administration Expense 7,600.00
Manufacturing 53,000.00
To Machine Expense 50,000.00
" Stores Expense 8,000.00
Showing the accumulation of expense for
the period and charging it to produc-
tion.
No. 6
Manufacturing $ 55,000.00
To Raw Material $ 80,000.00
" Piece Parts 25,000.00
Piece Parts 20,000.00
To Manufacturing 20,000.00
Finished Goods 125,000.00
To Manufacturing 120,000.00
" Drafting Expense 5,000.00
Cost of Sales 140,150.00
To Finished Goods 140,150.00
Finished Goods 10,150.00
To Cost of Sales 10,150.00
To charge finished goods with the raw
material and piece parts used, and
the drafting expense for the period,
and to transfer to stock the value of
the piece parts made.
12. Ledger Accounts
In the ledger accounts shown below, the numbers
of the journal entries are given in the folio columns.
PRODUCTION-CENTER JOB ORDER COSTS 319
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PRODUCTION-CENTER JOB ORDER COSTS 327
To make up the balance sheet and profit and loss
statement at the close of the period, the balances of the
inventory accounts are set up on the balance sheet and
the Cost of Sales account is closed out to the Profit and
Loss account.
REVIEW QUESTIONS
1. What is the production-center method of cost-finding? How f
does it differ from other methods?
2. What purpose is served by the machine expense account?
3. Of what factors is machine expense composed?
4. How is drafting expense handled?
6. How is overhead expense apportioned to jobs under the pro-
duction-center method of cost-finding?
6. Show the pro forma expense accounts affected by a distribution
of expense in a production-center cost system.
7 . Is the production-center system adapted to an automobile manu-
facturing plant? If so, why?
CHAPTER XXV
PROCESS COST SYSTEM CLAY
PRODUCTS
1. Account Classification
Cost-finding in all process plants or factories is
t)ased on the simple principle of segregating costs by
processes. Department accounts are opened on the
general ledger to collect the cost of those phases of pro-
ductive activity which it is desirable to show separately
in the financial or other periodical statements.
In a plant or mine of considerable size the details
of the general ledger accounts are usually recorded in
a cost ledger in which separate accounts are, as a rule,
opened to analyze and show in detail the items making
up each general ledger account. Thus, to take an ex-
ample from one of the extractive industries, the cost of
copper mining is usually segregated on the general
ledger under the heads of Underground Expense, Sur-
face Expense, Hoisting, Transportation and Hauling,
Stamping, Construction Work, and so on. "Under-
ground Expense" in its turn is divided on the subsidiary
ledger into Sinking, Drifting, Stoping, Timbering,
and other technical mining operations. "Surface Ex-
pense," "Hoisting," and other expense items are sim-
ilarly divided. Thus, the cost of any phase of the work
is recorded in summary form in the general ledger and
in detail in the cost ledger.
The foregoing classification is used by an enterprise
328
PROCESS COST SYSTEM CLAY PRODUCTS 329
with expenditures totaling millions of dollars annually
and with hundreds of accounts. A small organization,
of course, would not find it necessary to subdivide its
accounts in this way. The subsidiary ledger might be
dispensed with and entries be made direct to the general
ledger process accounts from the purchase journal and
pay-roll. Supporting documents to show the distribu-
tion of the fixed and other prepaid or accrued charges
would then be all that was required to segregate costs
by processes.
2. Preliminary Information
To illustrate the general method of process cost-
finding, a system used in the clay products industry is
presented in detail.* This system has been selected
both because it is typical of the simple procedure of proc-
ess cost-finding employed in the extractive industries
and at the same time embodies the features of manufac-
turing as well as of mining.
The operation of the system of cost-finding is com-
plicated by the fact that, while the major part of the
product is composed of a regular 9-inch brick, the cost
of which can easily be averaged, orders are occasionally
received for bricks of a special kind, the cost of which
has to be separately computed. As it is impossible to
keep the cost of the special kind separate from that of
the common kind of brick through all the stages or proc-
esses of manufacture, means have to be devised to esti-
mate this cost. Of course, if an order for a special type
of product is large enough to employ the entire services
of the plant for a definite period of time, as a week or
*The system presented is substantially that used by the American Face Brick
Associafjpn,
330 REPRESENTATIVE SYSTEMS
more, the complication referred to no longer arises. But
usually these special orders are included in the regular
flow of production. The method of calculating the cost
as shown here will be found suggestive as to the means
to be employed in solving the chief and perhaps the only
difficult problems of process cost-finding.
3. Production Details
The bricks regularly produced by the plant under
consideration are made from clay and a certain propor-
tion of broken bricks (technically known as "bats")
which are crushed and ground in the proportions of 3
or 2 of clay to 1 of bats, depending upon the grade of
brick required. The clay is extracted from a clay pit
or bank and the cost of this process is worked out on
the ton basis. If the pit is leased a royalty per ton is
usually paid ; if owned by the manufacturer a depletion
charge replaces the royalty charge.
A certain amount of breakage takes place during
the drying and burning processes, but the quantity of
broken brick thus secured is not as a rule sufficient for
the needs of the plant and therefore purchases are made
from outside. An average cost per ton of the bats used
in manufacture is figured from month to month and is
shown separately in the final cost calculation.
The cost of crushing and grinding is also computed
on the ton basis, while the cost of the remaining proc-
esses (consisting of molding the regular bricks by ma-
chinery, or the special kinds by hand, and drying them
in the tunnel preparatory to setting and burning them
in the kiln) is computed per thousand bricks handled.
When an order is received for bricks of a special
PROCESS COST SYSTEM CLAY PRODUCTS 331
kind, the cost of making the molds and molding the
bricks by hand has to be computed separately, after
which the cost of drying and burning the green brick is
found by measuring the proportion of space occupied
by the special brand on the floor of the drying tunnel
and within the kiln.
To illustrate, a standard size of kiln holds 140,000